The supply-and-demand model of labour markets is fundamentally broken, and that's why you're not getting a pay rise any time soon

• We have full employment in the US and UK but extremely low wage growth.
• The "gig economy" is structured to keep wage levels down even when there are shortages of workers.
• Underemployment - part-time work - has replaced the role that mass unemployment used to play in the US and the UK.
• Work now creates inequality, and workers know that they cannot get ahead merely by working.
• That has political consequences: It makes the minimum wage level one of the most important political issues.
  

Troy Taylor, the CEO of the Coca-Cola franchise for Florida, was asked at a recent conference of the Dallas Fed whether he saw pay rises in the future. The context to the question is that America has ultra-low unemployment and technical full employment. Wages ought to be rising as workers take advantage.

But Taylor said he didn't see wages going up anytime soon.

"It's just not going to happen," Taylor said. "Absolutely not in my business."

The reason Taylor can be so confident is that employers - and, belatedly, economists - are waking up to the fact that the old-fashioned supply-and-demand model of the labour market is dead. Employers have gained enough power in the marketplace to permanently hold down wages, even when unemployment is as low as 3.9% in the US and 4.2% in the UK.

The old model was simple. It stated that the price of labour was set by supply and demand. If the supply of workers was restricted, wages would inevitably rise as workers switch jobs for better-paid positions, or negotiate pay rises for staying.

Right now we are living through the most supply-restricted wage market since the 1970s. There just aren't any extra workers available. In the US, there are 6.7 million job openings available but only 6.3 million people looking for work, according to the most recent government numbers.

"I ain't gonna work on Maggie's farm no more" ought to be the national anthem

Open job vacancies in the UK are also at a record high.

So this ought to be a golden age for workers. Wages ought to be going up. Employees ought to be able to name their price. "I ain't gonna work on Maggie's farm no more" ought to be the national anthem. 

And yet, in the US and the UK, wages are stagnant.

In May, wages for workers in the US rose just 0.1%.

"We have not experienced anything like it for at least 150 years"

It's a similar picture in the UK, where year-on-year wage growth is around 2%. That's roughly the same as inflation, meaning that real wages are flat.

Economists are starting to wake up to this strange phenomenon. 

Paul Johnson, the director of the Institute for Fiscal Studies, wrote recently, "Astonishingly, real wages remain well below where they were a decade ago. We have not experienced anything like it for at least 150 years."

"The competitive supply-and-demand model of labor markets is fundamentally broken"

Noah Smith, writing for Bloomberg, believes that "Together with the evidence on minimum wage, this new evidence suggests that the competitive supply-and-demand model of labor markets is fundamentally broken."

And Martin Beck, the lead UK economist at Oxford Economics, noted that April's average pay increase was the weakest rise since last November. He told clients recently, "But that the economy has reached 'full employment' was hard to reconcile with a slowdown in average pay growth."

After inflation, some people's pay is in decline. David Frum, the Republican political writer, tweeted recently:

Uber, Just Eat, and Deliveroo can switch their demand for labour on and off, on a minute-by-minute basis

As I've noted before on Business Insider, the part-time gig economy has broken a fundamental link in capitalism that was good for workers. Pay rates no longer move upward as unemployment moves downward because companies like Uber, Just Eat, and Deliveroo can switch their demand for labour on and off, on a minute-by-minute basis. Self-employed folks making a living on Etsy, Amazon, Airbnb or eBay know their clients instantly go elsewhere if they raise their prices by even a few pennies.

Unemployment is low because a massive number of new jobs today are part-time gig economy jobs. Part-time "underemployment" has, statistically replaced the mass unemployment we remember from the 1980s. As Johnson says, "A majority of people who are classified as poor now live in a household where someone is in work. This is a complete turnaround from 20 years ago when two-thirds of the poor lived in workless households." 

In other words, in the old days when you lost your job you claimed unemployment benefits and lived "on the dole." Today, you deliver pizzas or stuff packages in an Amazon warehouse for 20 hours a week. 

This chart from the ONS in the UK (below) shows how part-time work has replaced the role that mass unemployment used to have. The number of workers who want more hours is higher now than before the 2008 crisis even though unemployment is lower:

The Atlanta Fed's John Robertson has some data here showing the same thing in the US: "The upshot is that for each unemployed worker, there are now many more involuntary part-time workers than in the past."

"The unemployed" now barely exist - and this has political consequences

Underemployment seems to have settled at a permanently higher level than a decade ago.

This has obvious political consequences. 

Working is no longer a guaranteed way of getting ahead. Instead, it may keep you poor. You cannot get rich working for Uber. You cannot get rich working for Deliveroo.

The obvious function of the part-time gig economy is to create inequality. "The unemployed" now barely exist. In their place are millions of people stuck in jobs that offer too few hours to get by, or jobs that don't come with a career ladder offering pay advancement.

In that context, the minimum wage suddenly becomes the most important political issue for workers. It's the only way to get a raise in an economy that does not create full-time jobs, or jobs with regular pay rises.

Politicians used to blame the unemployed for being insufficiently ambitious. Unemployment was regarded as the fault of the unemployed. President Ronald Reagan excoriated "welfare queens." In the same era, Norman Tebbit, the former UK Employment Secretary, once infamously suggested that unemployed people should simply get on their bikes to look for work. 

But today everyone has work, yet work no longer offers a ladder out of poverty for people willing to climb it.

From that perspective, the rise of politicians like Trump, Corbyn and Sanders seems unsurprising: In one way or another, they all represent the frustration of workers for whom work is no longer worth it.

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