I think that might be part of it, but I am inclined to guess it has more to do with people being either bid away from the job market (by unemployment payments or other pandemic related support programs) and perhaps a lowering of the social penalties for not being in the job market. I don't know how much either of those contribute, but I'd bet that your point of the type of worker (how much their supply curve bends backwards in mathy econ terms) contributes a fair bit in both cases. If you can get by on minimum wage working 20 hrs a week because you are getting state payments, or if you aren't really working at all because saying you are scared of COVID is enough for your parents to let you stay with them, either way you aren't doing much.
This is somewhat tangential to your larger point. But it strikes me in reading your post that the word "shortage" is probably understood differently by laypeople and economists. My lay understanding of how economists use the term "shortage" is something like a temporary mismatch between supply and demand, where supply is below demand (for some reason or reasons). But I would imagine that the majority of the lay public would interpret the term not as something that can work itself out through price changes (or other macro levers?), but rather as something like an underlying physical fact that is not necessarily temporary. It is viewed as an input, rather than an output, such that the question, "if we had more, why wouldn't we just produce/hire/buy more?" is rhetorical. I.e., "There IS no more oil, there ARE no more workers, three IS no more toilet paper--if those things existed, they would be here right now." As opposed to an economist, who would interpret the question "why wouldn't we just produce/hire/buy more" with supply-demand-price explanations. Does that make sense? I guess my point is, to the average person, I think "shortage" means "alarm bells" much more so than it does to an economist. And I guess that is warranted, because the average person is just worried about whether there is toilet paper on the shelves RIGHT NOW, because right now they are in the empty toilet paper aisle and they're out of scrap paper.....
Hmmm I replied and Substack ate it, or I fat fingered "Cancel" instead of "Post." They should move those a little farther apart.
Shorter version: You are quite on point. Economists don't spend nearly enough time asking why a shortage happened for price increases to fix. Laymen tend to ask the right question of "Why the hell is there no bread on the shelves these days?" to which "The market clearing price is now 5$ instead of 1$," is only a partial answer. It explains perhaps why the shelves are still empty, but it doesn't explain why the hell the market clearing price jumped to 5$ all of the sudden, which is really the problem to be solved.
This is a nice explanation. And maybe there are two problems to be solved, the first of which is much more important to the everyday consumer, and the second of which is much more imporant for economists. Problem 1: solve the immediate shortage--get bread on the shelves (probably by raising prices). Problem 2: Figure out why the market clearing price jumped so high, so as to avoid such things in the future (to the extent that is desirable).
Exactly. Higher prices is the short term solution, but is a long term problem to be solved; otherwise the solution to satisfying people would just be "raise prices until they don't want to buy anything else."
In reality high prices are the signal to people to figure out how to produce more and lower prices again. High prices are better than wasting scarce resources on lower valued uses, but not better than increasing supply overall. When supply decreases we want to ask how to increase it, not just raise prices.
I saw an interesting news piece that was basically a rant from an entitled woman claiming that the worker shortage was bullshit because she had applied to a bunch of jobs with no response. All I could think was that all those places were fortunate they could smell the entitlement wafting off her resume.
The thing with price adjustments is that they happen differently on the wholesale side than on the retail side as there is still more competition on the retail end. Shrinkflation is a good example on how the end user has to be tricked into accepting higher prices to reduce loss of brand loyalty.
Customers are funny on how they view price increases. I had a builder who didn't say a hint of a grumble as his door prices more than doubled in 2021 but threw a fit when I increased install price per door by $50.00.
Yea, customer psychology is really odd. I am no exception; I definitely have balked at paying 50$ for something only to spend like 75$ plus labor getting bits to make it myself from scratch. Some prices just seem insulting out of all proportion to what they actually are, for no apparent reason. I suppose there are marketing researchers that look into that, but I don't know that I trust those guys... always trying to sell you something... :)
I will use this in my microeconomics class. I have been trying to emphasise this exact point that the equilibrium point is not what is important, it is the direction of adjustment that matters. I would actually be a bit more forceful in your fourth footnote, in any large market there are always changes going on that require adjustments (some people die, some are born, some input becomes more expensive, some law changes) such that it is very hard to imagine an equilibrium ever existing for any significant amount of time.
Glad to hear it! I always hated how cold and sterile economics modeling was when I was an undergrad, and how much it emphasized a static market. When teaching I really emphasized the organic nature of the processes, and how much everyone is constantly trying to figure out what is going on. The notion that we are always working backwards, starting with known S&D curves and figuring out equilibrium instead of observing real world P&Q combinations and finding curves that fit always bugged me too, but that was something only a few first year students seemed to grasp fully, so I never emphasized it.
Let me know how the teaching goes! Always interested in how things are going!
Interesting! What sort of revamp are you all looking to do? The school I used to teach at was looking to revamp, largely because they couldn't get enough econ majors to hit the minimum threshold for intermediate classes. They weren't really serious about it, though, considering I was their most popular professor by far and they decided to HR lynch me... but the way we teach intro courses these days is just ridiculous. It's basically just watered down intermediate math econ courses, and no wonder students hate it.
I was quite influence by Bryan Caplan's 'The case against education'. I had always had the idea at the back of the mind that what we are doing in higher education just isn't very useful but that really hammered it home. So what I wanted to do (to the degree I can influence the process) is try and teach some genuine skills alongside the economics ideas, stuff like coding, teamwork, presenting, data visualisation. We also have a proposed regulatory change to UK higher education that links funding to the number of skilled graduates your course produces, which incentivises a certain type of course. I will write something on this I think as there will no doubt be perverse incentives at play however they try to measure it.
I think that might be part of it, but I am inclined to guess it has more to do with people being either bid away from the job market (by unemployment payments or other pandemic related support programs) and perhaps a lowering of the social penalties for not being in the job market. I don't know how much either of those contribute, but I'd bet that your point of the type of worker (how much their supply curve bends backwards in mathy econ terms) contributes a fair bit in both cases. If you can get by on minimum wage working 20 hrs a week because you are getting state payments, or if you aren't really working at all because saying you are scared of COVID is enough for your parents to let you stay with them, either way you aren't doing much.
This is somewhat tangential to your larger point. But it strikes me in reading your post that the word "shortage" is probably understood differently by laypeople and economists. My lay understanding of how economists use the term "shortage" is something like a temporary mismatch between supply and demand, where supply is below demand (for some reason or reasons). But I would imagine that the majority of the lay public would interpret the term not as something that can work itself out through price changes (or other macro levers?), but rather as something like an underlying physical fact that is not necessarily temporary. It is viewed as an input, rather than an output, such that the question, "if we had more, why wouldn't we just produce/hire/buy more?" is rhetorical. I.e., "There IS no more oil, there ARE no more workers, three IS no more toilet paper--if those things existed, they would be here right now." As opposed to an economist, who would interpret the question "why wouldn't we just produce/hire/buy more" with supply-demand-price explanations. Does that make sense? I guess my point is, to the average person, I think "shortage" means "alarm bells" much more so than it does to an economist. And I guess that is warranted, because the average person is just worried about whether there is toilet paper on the shelves RIGHT NOW, because right now they are in the empty toilet paper aisle and they're out of scrap paper.....
Hmmm I replied and Substack ate it, or I fat fingered "Cancel" instead of "Post." They should move those a little farther apart.
Shorter version: You are quite on point. Economists don't spend nearly enough time asking why a shortage happened for price increases to fix. Laymen tend to ask the right question of "Why the hell is there no bread on the shelves these days?" to which "The market clearing price is now 5$ instead of 1$," is only a partial answer. It explains perhaps why the shelves are still empty, but it doesn't explain why the hell the market clearing price jumped to 5$ all of the sudden, which is really the problem to be solved.
This is a nice explanation. And maybe there are two problems to be solved, the first of which is much more important to the everyday consumer, and the second of which is much more imporant for economists. Problem 1: solve the immediate shortage--get bread on the shelves (probably by raising prices). Problem 2: Figure out why the market clearing price jumped so high, so as to avoid such things in the future (to the extent that is desirable).
Exactly. Higher prices is the short term solution, but is a long term problem to be solved; otherwise the solution to satisfying people would just be "raise prices until they don't want to buy anything else."
In reality high prices are the signal to people to figure out how to produce more and lower prices again. High prices are better than wasting scarce resources on lower valued uses, but not better than increasing supply overall. When supply decreases we want to ask how to increase it, not just raise prices.
I saw an interesting news piece that was basically a rant from an entitled woman claiming that the worker shortage was bullshit because she had applied to a bunch of jobs with no response. All I could think was that all those places were fortunate they could smell the entitlement wafting off her resume.
The thing with price adjustments is that they happen differently on the wholesale side than on the retail side as there is still more competition on the retail end. Shrinkflation is a good example on how the end user has to be tricked into accepting higher prices to reduce loss of brand loyalty.
Customers are funny on how they view price increases. I had a builder who didn't say a hint of a grumble as his door prices more than doubled in 2021 but threw a fit when I increased install price per door by $50.00.
Yea, customer psychology is really odd. I am no exception; I definitely have balked at paying 50$ for something only to spend like 75$ plus labor getting bits to make it myself from scratch. Some prices just seem insulting out of all proportion to what they actually are, for no apparent reason. I suppose there are marketing researchers that look into that, but I don't know that I trust those guys... always trying to sell you something... :)
I will use this in my microeconomics class. I have been trying to emphasise this exact point that the equilibrium point is not what is important, it is the direction of adjustment that matters. I would actually be a bit more forceful in your fourth footnote, in any large market there are always changes going on that require adjustments (some people die, some are born, some input becomes more expensive, some law changes) such that it is very hard to imagine an equilibrium ever existing for any significant amount of time.
Glad to hear it! I always hated how cold and sterile economics modeling was when I was an undergrad, and how much it emphasized a static market. When teaching I really emphasized the organic nature of the processes, and how much everyone is constantly trying to figure out what is going on. The notion that we are always working backwards, starting with known S&D curves and figuring out equilibrium instead of observing real world P&Q combinations and finding curves that fit always bugged me too, but that was something only a few first year students seemed to grasp fully, so I never emphasized it.
Let me know how the teaching goes! Always interested in how things are going!
I will do, we are doing a big revamp of our programmes so lots to think about!
Interesting! What sort of revamp are you all looking to do? The school I used to teach at was looking to revamp, largely because they couldn't get enough econ majors to hit the minimum threshold for intermediate classes. They weren't really serious about it, though, considering I was their most popular professor by far and they decided to HR lynch me... but the way we teach intro courses these days is just ridiculous. It's basically just watered down intermediate math econ courses, and no wonder students hate it.
I was quite influence by Bryan Caplan's 'The case against education'. I had always had the idea at the back of the mind that what we are doing in higher education just isn't very useful but that really hammered it home. So what I wanted to do (to the degree I can influence the process) is try and teach some genuine skills alongside the economics ideas, stuff like coding, teamwork, presenting, data visualisation. We also have a proposed regulatory change to UK higher education that links funding to the number of skilled graduates your course produces, which incentivises a certain type of course. I will write something on this I think as there will no doubt be perverse incentives at play however they try to measure it.
I look forward to seeing what you write up!