In my introductory post for this series I rattled off a number of topics that seemed especially interesting to me in light of the last two years of COVID, one of which being the relationship between capital and labour. A light and simple topic, obviously, but it seemed worth a post.

Standing in the shower I was thinking about my way into this subject, and then it dawned on me that my post on supply chains, and in particular the topic of supply-demand dynamics, made for a very nice segue into this topic, particularly given the conversations I’ve been having this year regarding the labour market.

I’m going to start off with a basic thesis that I suspect some might find a bit controversial, maybe even mildly offensive, but that (as I understand it) is pretty well understood in the world of economics: Labour is a market, and salaries are our price for our labour. This means that, absent government intervention, salaries are a function of supply and demand, along with all the other forces that make a market function.

This is not what anyone deep down wants to believe!1

Naively, I think we’d all like to believe that the value we pay for something reflects what that thing is, in some way, intrinsically worth.

But what makes an iPhone valuable? We know from Apple’s filings that they’re achieving something like 30% gross profit margins on their consumer devices. That means we’re paying over a third more for the device than is reflected in the total costs of raw materials, labour, shipping, and so forth. And yet people still buy those devices, believing them to be worth the additional cost.

What about, say, a collectible baseball card? Intrinsically, the card is worth pennies in paper and ink. And yet there is a market in which such a thing could sell for hundreds or thousands of dollars.

The reality is that prices reflect not just pure utility, but rather something more intangible.

To offer just a little taste of just how intangible, consider the idea of the Keynesian beauty contest:

This would have investors pricing shares not based on what they think an asset’s fundamental value is, or even on what investors think other investors believe about the asset’s value, but on what they think other investors believe is the average opinion about the value of the asset, or even higher-order assessments.

In other words, our estimate of the value of a good isn’t necessarily even based on our own idea of its intrinsic value, but rather our idea of what other people believe to be its intrinsic value.


Well, the same is true of labour, and the forces unleashed by COVID that have turned markets for goods and services upside down have had similar impacts on the labour market as well.

In what way can labour be considered a market?

As an employer, I’m looking for an individual with a specific set of hard and soft skills, with the goal of hiring someone that will in some tangible way contribute to the success of my company.

“Aha! That is the value of labour”, you say!

But what if there’s a whole lot of people out there in the world who, to me, are equally qualified for the role? Some of those people are willing to charge me less for their labour, while others will charge me more. I’m not running a charity, so obviously I’m going to pick those people who are willing to charge me less, reflecting the fact that there’s is a glut of supply to satisfy market demand.

Now I’m hiring for a different role. In this role, there are far fewer qualified candidates, and I’m competing for those candidates with other employers looking for that same skillset. How am I going to convince that candidate to pick me and not a competitor? I might offer a higher salary, a bonus structure, generous benefits, additional vacation, or any number of other perks. In effect, I’m engaged in an auction for that labour, and, all things being equal, the winner will be the highest bidder. This reflects the fact that demand outstrips supply, thereby driving up prices.

Next, let’s suppose that, in this role, I could replace the individual with a machine and a low skilled worker for which there is a higher supply in the market. That machine will come with some high initial capital expenditure, but when I do the calculation it’s clear that the investment will pay itself back in labour costs. This is an example of a substitute product, which has the effect of lowering the price of the product (labour) in the market.

In all these cases, the intrinsic value of labour is a factor, insofar as the amount I’m willing to pay for that labour is going to be reflected in the benefit I, as a company, realize. But supply and demand (among many other market forces) has an equal, if not greater, effect in how much I’m willing to pay2.

So what does this have to do with the COVID pandemic?

Well, first off, when the pandemic initially hit, many people dropped out of the labour force, and the total supply of available “goods” (labour) dropped. Initially this was in response to a significant reduction in demand (companies laying off staff), and so the effect was expected to be temporary. But as the economy has heated back up, something very interesting happened: The growth in the supply of labour has lagged the growth in demand.

There are many theories why this is, but regardless of the underlying causes, the end result is the same: similar to the demand shocks that have crippled our supply chains, we’re witnessing a similar demand shock in the labour market. In practice, this means that the amount of available labour has gone down, and those who remain in the market appear reluctant to sell their labour at the price employers are willing to pay. This has resulted in the first real increases in salaries in the last twenty or thirty years as employers have had to accept higher prices to bring labour off the sidelines3.

The pandemic has also given rise to the expansion of remote work opportunities for labour, and that has the potential to profoundly change the nature of labour markets.

Back in the old days, before globalization and the growth of modern supply chains, the market for goods and services was much more localized. That is, a product might be produced, purchased, and consumed in a relatively small geographic area. But prices are heavily influenced by supply and demand. That meant that, in the old days, prices themselves, and the market forces that set them, were local, and you might see different prices for the same product from place to place.

Globalization upended that dynamic as production and consumption could now span the entire planet. An individual buying a chicken or a banana might now be participating in a national or international market.

Not so for the labour market.

Labour has traditionally been highly localized. The expectation that an individual would come into an office to perform their job constrained the supply of labour that an employer could bid for, and ensured that individuals were only competing for those jobs with others in their local market. Furthermore, over time, labour mobility has in general declined, only further localizing the market for labour as people have become less and less likely to relocate.

The result is that the salary a person could command depending greatly on the market for labour in their area. After all, there’s nothing inherently more valuable about an engineer hired in Silicon Valley versus Saskatoon, but the salaries between the two might differ by nearly an order of magnitude.

Remote work has the potential to completely upend this dynamic. Rather than employers competing for labour within a local market, they might be competing with employers from across the country, or even the globe. Similarly, employees suddenly have a much wider range of options for who to work for, and how much to charge for their labour.

In a very real sense, this is just the continuation of the story of globalization, save that instead of corporations shopping around the world for the cheapest place to manufacture goods, they can now participate in a global market for knowledge workers.

So how will this all play out? It’s anyone’s guess.

We know from our experiences with outsourcing that there’s real downsides to offshoring labour to cheaper markets. Whether it’s coordination costs, timezone issues, quality issues, or language barriers, offshoring is not a total panacea.

Similarly, for both employers and labour, the rise of remote work has the potential to be disruptive, but it’s not clear who ultimately the winners and losers will be.

I have, on occasion, speculated that, in cheap labour markets, we might see a rise in prices as there are more employers competing for that labour, while conversely in more expensive labour markets I would expect to see prices go down.

But these things are rarely so simple, and we may find that remote labour is not a perfect substitute product for someone local.

In any case, the pandemic has once again laid bare an important fact about the world around us that we’ve all forgotten, taken for granted, ignored, or simply denied: that the price of labour is a function of supply and demand, and that sudden changes in that relationship can have a profound effect on that price.

The interesting question, then, is what happens when labour remembers that, unlike markets for goods, it’s perfectly legal for labour to form a cartel–also known as a labour union–that can then engage in price controls for their product in the market.

But that’s a topic for another post.

  1. In fact, I’m going to be spending a lot of this post referring to labour as a “product”, which is dangerously close to calling people “resources”, a term I both loathe and use on a daily basis. Yes, calling labour a “product” is a bit reductionist and unquestionably dehumanizing, but I think it’s an important lens through which to view the employer-employee relationship. 

  2. CEO salaries are an interesting example, here. I’ve often heard the complaint that CEO salaries don’t reflect the tangible value that those individuals bring to a company; a complaint that has, at its heart, the assumption that salaries in some sense represent the intrinsic value of labour. The problem is that, a) the available labour supply for CEOs is highly constrained relative to market demand, b) the value that a CEO brings is extremely difficult to quantify, and c) there’s no real product substitute. And let’s not forget about those Keynesian beauty contests. The result is that CEOs can charge a very high price for the product they’re offering. 

  3. This hasn’t been a universal dynamic, nor a consistent one. In a lot of cases, employers have chosen to leave positions open, hoping that the price of labour will come down as more people re-enter the workforce. How this dynamic will play out is anyone’s guess, though it has the potential to impact inflation, which is a topic for a different day.