Tuesday, March 18, 2014

Why the Unskilled Labor Market is Broken


The supply of unskilled labor far exceeds the demand so employers have immense bargaining power in this market.  One reason the supply of unskilled labor is high because the search cost of finding such jobs is low (in terms of time, money, and effort).  Individuals in dire need of money to pay living expenses will resort to unskilled labor, thus increasing the supply (even if they are qualified for something better but are out of options in the near term.)  By managing one's finances prudently, one can hope to better avoid a situation where taking on unskilled labor in the short term is necessary to pay the bills (say after losing a professional job.)


Do you know someone who used to make big money until the recession and then went back to working a minimum wage job?  You would think they have some skills and savings, yet they tell you they are struggling to make ends meet at the moment.  What is going on here?

Ever since the Great Recession of 2007-2009, an increasing number of skilled professionals with college and higher degrees have lots their jobs and had to resort to working unskilled labor jobs to pay living expenses.  Let's face it, very few people dream of flipping burgers at McDonalds, ringing the register at Walmart, or scrubbing cars under the blazing sun as their career.  But why is the supply of such labor so high and the pay so low?

Who Works Unskilled Labor

Group 1: People with little/no marketable skills.

  • High school students.
  • High school dropouts.
  • College students.
  • Other people who don't have skills and can't or don't want to learn new skills.

Group 2: People who need cash quickly.

A professional making $50,000 a year and living paycheck to paycheck with little savings suddenly loses his job..  what happens next?  Most likely he/she will get unemployment benefits which are a fraction of his pay at his former job.  Being used to his old extravagant lifestyle, he starts using credit cards to make ends meet.  Now his unemployment benefits end and he still hasn't found a new job and his savings are gone.  He starts getting desperate as there are bills to be paid, so he takes a job at McDonalds as that's the only employer that'll hire him on the spot.  Problem is now, he has to work 60-80 hours a week with the measly pay to make ends meet.  At $10/hr for 80 hours a week, that's only $3200/mo or $38400/yr, still a fraction of his former glory, not to mention leaving very little free time to search for his next professional job.

The Economics of Unskilled Labor

Unskilled labor jobs don't require much training which means an employer can hire pretty much anyone for the job.  This makes it a last resort option for even the skilled professional who lost his job but desperately needs cash to keep the roof over his head and food on the table.  These people are also competing against the students and dropouts who don't have many other employment options.  I'm no economist but when the supply is too high, employers can demand low wages - that's exactly what happens.

I don't have official statistics but I'm willing to bet that the vast majority of people working these jobs hate them and do not want to be there, but due to their desperate financial situations, they have no other choice, whether in the short term or long term.

The Importance of an Emergency Fund

It may seem far fetched if I tell you that irresponsible spending among the population will lead to an increase demand for survival jobs and unskilled labor.  If you lost your job and had only $1000 in the bank left and your rent of $800 is due in a week, would you be doing everything you can to find another source of income, even if it's minimum wage?  I bet you would.  Now if you had $20,000 or even $50,000 in the bank and just lost your job and can survive on $1000 - $2000 a month, would you take a survival job?  Hell no!  There's no way you'd go work 7 to 12 hours a day at some $8-12/hr job at some depressing fast food or department store when you could be spending that time applying for jobs and networking!  So please, get your financial house of cards in order so you can focus on moving on to your next job if you lose your current one rather than suffer at some survival job just so you won't lose your house and car!


Professionals with skills in demand shouldn't be working survival jobs, period!  Do something useful for the world with your skills, and if you're unemployed, live off of your savings until you find your next professional job!  Stop living paycheck to paycheck and save up some cash so you don't need to work at Walmart to pay the bills if you suddenly lose your job.  Hopefully, by reducing the supply of unskilled labor, the unskilled folks will see their wages increase as well instead of having to lobby for minimum wage hikes.

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