Our current labor market is behaving a way that goes against traditional expectations. According to the Wall Street Journal, we are in a "Low-Hire, Low-Fire" environment. While job creation has slowed and hiring rates for new graduates have stalled, layoffs remain remarkably low because firms are engaging in "Labor Hoarding. Labor hoarding is the practice of keeping workers even when current demand doesn't fully justify their payroll costs. Firms that struggled to find workers during the 2022-2023 labor shortage are now reluctant to let them go, mostly in fear that they wont be able to re-hire quickly if the economy rebounds.
This dynamic provides a real world challenge to the Neoclassical Theory of Distribution, specifically when a firm maximizes profit by hiring labor until the marginal product of labor equals the real wage under standard competitive assumptions. In contrast, labor hoarding suggests that firms are currently operating at a point where the MPL may actually be lower than the real wage. With this scenario, firms are accepting short-term inefficiencies, effectively overpaying for the current marginal output of their staff.
This is a great example of how real-world labor markets don’t always follow neoclassical assumptions. Labor hoarding shows that firms may temporarily accept paying wages above the marginal product of labor to avoid future hiring costs and uncertainty. It highlights how frictions and expectations can push firms away from short-run profit maximization.
ReplyDeleteWhile the economy has been in a recent state of Labor hoarding, it seems that it is heading away from that due to increased lay offs. Recent graduates have struggled to get jobs with the labor hoarding trends, so it will be interesting to see how that changes especially around the time that we are post-grad and entering the labor market.
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