As early as the 18th century, it was clear to the father of modern economics, Adam Smith, that selfish behavior by individuals is to the benefit of society as a whole.
The entrepreneur, driven by an egoistic pursuit of profit, is “guided by an invisible hand in order to promote a purpose that he in no way intended to fulfill”, according to his standard work “Wealth of Nations” from 1776. “Not from We expect what we need to eat from the benevolence of the butcher, brewer and baker, but from them looking out for their own interests.”
In the 20th century, the economists Kenneth Arrow and Gérard Debreu derived the first law of welfare theory from these early findings, according to which in a competitive equilibrium nobody can be better off without someone else being worse off.
Such a market equilibrium is then “efficient”. The decisive link between a basically unlimited demand and a scarce supply is the equilibrium price, i.e. the price at which supply and demand are in harmony. By definition, there is no shortage in this model world.
The same is true of the shortage of skilled workers that many companies are complaining about today – at least according to the head of the Institute for the Study of Labor (IZA) in Bonn, Simon Jäger. “The thesis of a shortage of skilled workers is not correct,” Jäger said in an interview with “Spiegel”. “If a company lacks skilled workers, it can change that on its own. If it offers higher wages or better working conditions, it becomes more attractive.” This is a “simple free market solution”.
Prof. Bert Rürup is President of the Handelsblatt Research Institute (HRI) and Chief Economist of the Handelsblatt. For many years he was a member and chairman of the German Council of Economic Experts and an adviser to several federal and foreign governments. More about his work and his team at research.handelsblatt.com.
Ifo boss Clemens Fuest, who otherwise argues in a differentiated manner, agrees. “Lack is a situation in which you are willing to pay the price, but get nothing,” said the economist on Bayerischer Rundfunk. But now the following applies: If you can’t find enough skilled workers like in nursing at the current prices, you have to increase wages. In a market economy, goods that are scarce must be expensive. “The most important answer to the skills shortage is raising wages.”
Now, in isolation, calls for higher wages where workers are most productive are by no means wrong. If all workers were to work where they made the greatest contribution to gross domestic product, overall economic performance would probably be greater than it is today.
Consequently, those companies that are less productive and therefore unable to pay the higher wages would have to disappear from the market. Perhaps then only high earners would be able to afford a haircut in a hairdressing salon, and in many restaurants there would be vending machines instead of staff.
Pure theory doesn’t help
However, good political advice must not only reveal the view through one’s own theoretical glasses; it should also be evidence-based, i.e. on the basis of empirically collected and evaluated scientific findings. Otherwise, from the point of view of a microeconomist, every problem could be solved by flexible prices: with mass unemployment, wages are just too high and with a shortage of skilled workers, they are just too low.
However, reality shows that today there are around 2.5 million unemployed and at the same time around 1.8 million job vacancies. Obvious reason: work is not a homogeneous good. This eliminates a central economic model assumption. Rather, every employee is unique in terms of qualifications and performance.
Moreover, labor supply is by no means a mathematical function whose only variable is wages. In the past twelve years, for example, the German population has grown by a good four million to 84.3 million people due to immigration, which also increased the number of potential workers.
On the other hand, the aging surge that is still starting in this legislative period will mean that the number of employable people will fall rapidly. Even if all employees were used efficiently, companies would have to close without immigration; entire sectors of the economy might be marginalized. The German economy will then grow noticeably more slowly, if not shrink altogether – with fatal consequences for public finances and social security.
Labor market policy should therefore be growth-oriented – and that means more than ensuring the highest possible wage-controlled mobility on the labor market. On the one hand, it is necessary to mobilize the existing hidden reserve.
>> Read also: Ways out of the misery of skilled workers – and their limits
According to the Federal Statistical Office, according to the latest data for 2021, a good 3.1 million inactive people aged 15 to 74 would like to work. After all, that was around 17 percent of all those who were not gainfully employed – the hidden reserve includes people without work who are not actively looking for work but are nevertheless not averse to pursuing a job. Higher wages could help to mobilize some of these people. But that alone will not be enough.
The spouse splitting should give way
It is also important to set incentives for people to work longer and stop the trend towards part-time work. While 14 percent of employees still worked part-time in 1991, by 2021 it was already 29 percent. Almost every second employed woman works part-time today – although the educational participation of women is now higher than that of men.
Measures to mobilize this potential would be all-day schools, better childcare options, abolition of the current marriage splitting and qualification measures. In this way, the range of jobs could be expanded, since working becomes more attractive.
In addition, there is an expansion of the workforce potential due to immigration. Alleviating staff shortages in this way has a long tradition in Germany. At the end of the 19th century, the high demand for labor in the Ruhr area made Germany the second largest immigration country in the world.
>> Read also: According to the study, immigration will not be enough to remedy the shortage of skilled workers
In the mid-1950s, the first labor migrants from Italy came to what was then the economic boom. In 1961, Germany signed a recruitment agreement with Turkey and in 1971 one with South Korea for nurses. And during the euro crisis at the beginning of the last decade, thanks to the EU’s freedom of movement for workers, numerous workers from the southern crisis-hit countries moved to Germany – which spurred the upswing here.
Average estimates now assume that the German labor market will need an additional 400,000 workers per year to replace the baby boomers who are gradually retiring from the workforce. This high number raises questions about the housing situation and social integration. But even a smaller number of migrants will contribute to strengthening economic power.
The attractiveness of Germany does not only depend on the wage level. The market alone will not fix it. Politicians must properly shape the conditions under which nationals and migrants live together. And that is more than a question of payment.
More: The immigration illusion – why more immigration won’t save us from labor shortages