Why haven’t U.S. wages risen in phase with shortages?

Late last June, I read an online article from a British newspaper reporting an upsurge in plumbing trade recruitment there driven by rising wages, which in turn were being driven by an acute shortage of trade workers.

The average wage for plumbers in the U.K. was cited as 25,500 British pounds. With the exchange rate a fraction of a point short of two to one in the British currency’s favor at the time, that would be the equivalent of more than $50,000 a year in U.S. dollars. Most union plumbers in the U.S. make that much and more, but it’s 10-20 percent a year more than the average earnings of more numerous nonunion U.S. plumbers.

The article also said experienced plumbers in the U.K. who run their own businesses typically earn more than $80,000 (U.S. equivalent), again significantly more than most small plumbing contractors here.

The residential market slump skews these comparisons right now. Yet we recently passed through a quarter-century of the largest construction boom ever seen in the United States, spanning both residential and commercial building, and throughout pipe trades wages barely surpassed inflation. All the while, contractors everywhere identified skilled labor shortages as their single biggest problem.

As far as I know, nobody repealed the laws of economics. They slap us in the face every day via the scary run-up in commodity prices spanning oil, metals and food. The main reason is simply because developing nations, especially China and India, the two most populous nations on earth by far, used to consume this much in the way of commodities, but have grown to use this much.

The same laws of economics govern labor markets. Graduates of high-demand specialties such as petroleum geology are commanding six-figure salaries right out of school. Where demand exceeds supply, wages are supposed to go up correspondingly, and vice versa.

So why have wages for plumbers and virtually all other skilled construction trades resisted these market forces?

For an answer, accompany me back decades in time to a college classroom in Economics 101 where I first learned about the concept of elasticity-inelasticity of goods/services and prices. Goods and services are said to be relatively inelastic when the quantity demanded does not change much with a price change. These generally are goods and services for which no good substitutes exist.

Certain medicines are a prime example. Diabetics who need insulin will buy it no matter what the price because they need it to survive and no good substitute exists. (High drug prices in general owe a lot to this explanation.) An even starker example is illegal addictive drugs such as heroin. Street prices fluctuate with supply, yet when prices peak junkies steal more to support their habit rather than do without.

Conversely, the more substitutes, the higher the elasticity, as people readily switch from one good to another in response to price increases. Many kinds of fruit have high elasticity. That’s because if bananas run up in price, many people will stop eating bananas in favor of apples, peaches or whatever other fruit provides the same dietary needs at a more favorable price.

Those of us who take pride in this industry have long held to the assumption that skilled pipe trades labor is a valuable commodity with no real substitutes. If that were the case, labor prices would be generally inelastic. People would pay whatever they had to pay to fill demand. When the supply of labor grows short - as it has been in our industry for about the last quarter-century - wages would fly high as they have with petroleum geologists. In theory, plumbers and pipefitters should be making far more than they are today.

Instead, skilled trade labor has proven to be relatively elastic. Throughout the period of labor shortages, its wage growth has barely kept pace with inflation. One explanation may be that consumers of skilled labor have found adequate substitutes. Those substitutes have been:
  • More user-friendly products. As noted in this space last month, manufacturers have responded to the skilled labor crisis by making products easy to install and operate.

  • Cheaper labor, frequently foreigners, able to perform at least some of the tasks formerly performed by skilled trade workers.

  • Automation, driven a little by machinery but mostly via prefabrication and other labor-saving jobsite techniques.

  • Shoddier construction. Evidence is mostly anecdotal, though I think more proof will come as time passes and building systems prematurely fail.