Building a Workforce for the Information Economy

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view the large gains in stock prices of the past as unsustainable and thus value them less as part of the compensation package. Thus, at some very successful companies new entrants are demanding higher salaries, but total compensation may not be higher.

3.3.5 Time to Reach Equilibrium

When supply and demand are not in balance, labor markets will take some time to reach equilibrium. (Box 3.5 describes some reasons that markets may take a longer rather than a shorter time to clear.) But the argument that a labor market will eventually reach equilibrium is of little comfort to IT employers, who operate in a competitive and fast-paced environment (as described in Chapter 1) and are concerned primarily with the short term. In the short run, supply to employers as a whole is relatively inelastic, meaning that the number of workers willing to work at a particular wage does not change much when the wage is increased. However, employment needs must be met rapidly (on time scales of weeks and months, not years) if they are to be relevant to the business. How these needs are met in the short run, however, can have important implications for the long-term adjustment of supply.

In addition, economic theory predicts that there are some circumstances in which the demand for labor continually increases faster than the supply of labor, and the market does not even approach an equilibrium. In this situation, the problem is not necessarily that workers or employers cannot adjust; rather, the problem is that they do not adjust fast enough, or do not predict the future sufficiently well. ¹⁹

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Several authors have developed models of labor market equilibrium and disequilibrium. Arrow and Capron (1959) describe a situation in which demand rises (the demand curve shifts up) but supply does not rise (the supply curve does not shift), and the wage rises at a rate that is proportional to the size of the gap between demand and supply. As the wage rises, the quantity demanded falls, and asymptotically (in infinite time) a new equilibrium is reached with a higher wage and the quantity demanded back at its original value. In contrast, the present paragraph describes a situation in which demand rises, causing wages to rise, and supply also rises in response to the rise in wages. If demand eventually levels off, then supply will eventually catch up (although maybe only asymptotically). If demand continues to rise, then supply may never catch up. In the model of Radner (2000), this happens because the supply increases at a rate that is proportional to the gap between the current wage and the wage of workers in other occupations (skill categories) with comparably long education and training. As demand continues to increase, the wage gap also increases in magnitude, and hence so does the gap between demand and supply (although the gaps may remain constant in percentage terms). On the other hand, in the model of Ryoo and Rosen (1996), supply may catch up to a continually increasing demand, because potential entrants have “rational expectations” about the labor market and exactly the right number plan ahead to enter the labor market in order to equilibrate it. (For full references to the cited articles, see the footnotes to Box 3.2.)

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