The tricky problem of sticky wages

by Alex Tabarrok on October 7, 2005 at 7:12 am in Economics | Permalink

Rick Hartenstein is the Pharmacy Director at Ochsner Clinic Foundation in New Orleans. He writes me with a question:

An article in our local paper this morning discussed the phenomenon of sign-on bonuses at fast food restaurants. Since this will almost certainly drive up wages in the area, and hospitals are highly dependent upon low wage jobs, I was wondering what you would advise our Human Resources VP to do. I am an almost daily reader of MR and really appreciated the blogs during the hurricane (I was here at the hospital for 8 days). Any other observations on wages and prices for us? One thing is sure – the areas of the city that housed the majority of lower wage workers are obliterated. We have massive vacancies in these types of jobs as do other employers.

My response was as follows:

The rise in wages is a good sign because it means that employers are trying to draw workers back to New Orleans. If employers were packing up and leaving then wages would be falling so there is some hope. For the hospital Human Resources VP I would suggest that the situation is probably temporary so rather than higher wages he or she may want to follow the lead of the restaurants and offer "signing bonuses" and/or bonuses to be paid after say 6 months on the job. The reason for this is that it may be very difficult to reduce wages later on – reducing wages typically causes a lot of discontent. Furthermore, if you keep the wages of older employees constant but, as wages fall, offer newer employees lower wages you will have two people doing the same job being paid different wages. That is not good for morale either. In addition, to signing bonuses the hospital might want to think about what it can offer in terms of relocation services, housing, transportation and so forth. Again, these would be useful temporary measures to draw workers to the hospital without creating a permanent expectation of higher future wages.

Comments are open if you have other suggestions for Rick.

28 comments

joshg October 7, 2005 at 8:07 am: I guess the obvious problem would be those who take the money and run. If people were’nt willing to take a job at a certain wage, are they going to be willing to continue working the joba t that wage? I suppose their are mostly (non-monetary) costs associated with starting a new job so some signing bonus of less than those costs is a good idea, but there’s an upper limit to what they can offer that will increase their work force.
Peter October 7, 2005 at 10:31 am: I’m not so sure that fast food restaurants and hospitals are even competing for the same workers. Fast food employs mainly part-time workers, especially teens, mothers of small children and sometimes retirees, while most hospital jobs are full-time.
Derek Scruggs October 7, 2005 at 12:01 pm: > If employers were packing up and leaving then wages would be falling so
> there is some hope.

Really? I would think the opposite. If they were staying, the labor pool would be bigger and bonuses wouldn’t be necessary. Then again, if everyone is leaving, there probably isn’t a business anyway. Then again again, the labor pool does not necessarily represent the customer pool. The waiters at nicer restaurants probably don’t eat at them very often.
neil October 7, 2005 at 12:25 pm: Interesting to see just how much more the fast food giants can afford to pay their employees without making business prohibitively costly. Here’s hoping that the wages -do- stick.
spencer October 7, 2005 at 4:22 pm: One of the biggest bottlenecks to attracting labor back into the area is the lack of living spaces. If the hospital has unused rooms, wings, offering free temporary housing might
be a very good way to attract labor.
Noumenon October 8, 2005 at 9:10 am: Dave, your lifestyle is highly dependent on low-wage jobs, so don’t pick.

How about some economics of what size signing bonus to offer, must you compete for the largest or will a smaller one seem to show that your jobs are more desirable to begin with? How about the elasticity of supply of labor after disasters? Ever been studied?
Randall Parker October 9, 2005 at 12:49 am: When labor costs more that is the market’s way to tell you to find ways to get the same work done with less labor.

A hospital should look for ways to reduce the amount of human labor needed to get work done. Management’s job is to find ways to more efficiently use labor and capital. Well, managers faced with higher labor costs should look for ways to change procedures and add in capital to reduce the need for labor.

How about bigger and faster automated floor sweeping machines?

How about hand held electronic devices to send for prescriptions?

How about other electronic communications systems that reduce the need for humans to walk or run to other humans and ask for help?

How about a database that keeps track of labor needs and routes cleaners, drug delivery workers, nurses, and other personnel that allow them to get more done in a single trip through a hospital?
Noumenon October 10, 2005 at 11:06 am: Randall: I’ve never had the diamonds and water paradox thrown at me in that way before. I’ll have to think on it.

Would that make the statement “America’s economy is heavily dependent on cheap oil” self-contradictory?
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