Lack of skilled IT workforce, but they do not raise wages

Question

In my country, Portugal, many IT companies are always complaining in media regarding the lack of skilled IT workforce, but they do not raise wages. We have statistical data from the government that proves what I am saying.

• Companies are paying less in 2016 than in 2011 for IT workforce (-10.2%). GEP/MTSSS
• From 2014 to 2017 there is a decrease of IT workforce from 110.900 to 104.300 employees. Eurostat - Employed ICT specialists

So, the facts:

• Companies are paying lower salaries
• The number of it specialists also decrease (probably emigration).

If there is a shortage of workers, as the companies saying, why the law of supply and demand does not apply in this specific labor market?

Answer 1

The factual observations you've listed fit neatly with the law of supply. You've seen that wages (price) have fallen, and during the same period, supply has gone down.

The fact that companies publicly complain that there aren't lots of cheap, highly skilled workers available is not the same as companies being willing to convert that into effective demand by raising wages.

One common reason companies moan about things publicly, for instance, is that they want the government to intervene to help them. In this case, perhaps they want government to provide more subsidised IT training, or permit more immigration in the sector, either of which could lower wages further or prevent them from rising.

Answer 2

Developing a point made in Dan's answer, it is important to distinguish between a movement along a supply curve and a shift of the whole curve, in this case the supply curve for skilled IT personnel.

When a company decides what wage (price) it will pay, it is making a judgment about its preferred position on the supply curve it faces. In other words it is choosing, from among the combinations of price and quantity of personnel available to it, the combination which it considers will maximise its profits.

When a company moans that there is a shortage of skilled personnel, it is doing something very different. It is expressing concern that its profits are less than they could be if more skilled personnel could be hired at any given price, that is, if the supply curve were shifted downwards. But the position of the supply curve is likely to be wholly or largely outside the control of any one firm. So it may also be seeking government intervention with measures to shift the supply curve downwards.

From the point of view of a profit-maximising firm, therefore, there is no inconsistency in holding the wage constant while complaining about a shortage of personnel.

Answer 3

There is a possible hazard to raising wages. It does two things:

1. Draw more workers to your company.
2. Increase the cost of your existing workers.

The first should be obvious. If you increase wages, you can attract workers from other companies. More workers for you.

The second is less obvious. You don't necessarily have to raise the pay of your current workers if pay can be differentiated. But if you start drawing away workers from other companies with higher pay, the natural tendency is for other companies to raise their wages. Now they are drawing away your original workers. So you have to match their offers and wages for your original workers are up too.

A third result is that paying higher wages reduces your profits. If it reduces your profits past the zero point, you will eventually go out of business. This is especially problematic because in the beginning, what you have is some higher paid workers. But you have no work for them at the higher pay. Because all the other competitors are paying less and charging less. You paying more and charging more win no bids and get no projects.

One reason this is especially dangerous in IT is that it is comparatively easy to work remotely. So one firm might hire a Brazilian in Brazil to do the work, taking advantage of lower Brazilian wages. This sets something of a ceiling on how much firms can charge. There is extra coordination cost to working remotely like that. The Brazilian employee can't attend meetings in person, etc. But there is a limit to how much of a premium one can charge for avoiding that.

To put all this in economic terms, the demand for domestic IT labor is elastic. As prices increase, the quantity demanded decreases sharply. Foreign IT options create a natural substitute.

TL;DR If the pressures limiting how much companies can charge are stronger than pressures limiting how little they can pay, companies will not charge more to pay more.

Answer 4

If, as they claim, there is a lack of skilled IT workers in Portugal, They have 4 options:

1. Raise IT salaries.
2. Import IT workers.
3. Export IT jobs.
4. Tolerate existing conditions.

Another thing to consider - where do the skilled IT workers in Portugal go? Are they perhaps leaving Portugal for other countries? If Portuguese companies are training entry level people, who then move to another part of Europe after they get experience, then they could have both a shortage of IT workers and a decrease in the overall skill level of their workers. This could cause both a labor shortage and a decrease in wages.

Answer 5

• Companies may complain that are not enough cashiers in supermarkets or seasonal workers in fields but it does not mean they will get significantly higher salary because of that
• It's quite usual that companies complain about shortage because it may help to attract students in some field
• It depends on company field - if it's outsourcing company, has limited budget, its competitiveness is based on price so ability to raise salaries or earn more money may be complicated. If a company has its own successful product then it can spend more on talented engineers
• There is Warren Buffett saying "If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy." - the same applies in hiring world - you should know who and how is making money. If you don't know, you are probably losing.