Post-pandemic labour markets in West now have backward bending supply curve

Travellers across the world — most notably in Europe — are seeing their plans being disrupted by long delays at most major airports. Everyone has a horror story to tell. 

The reason for this is a severe shortage of ground staff. A major reason for this is a concept in economics: the backwards bending supply curve.

The irony is that this backward bending-ness was thought to be the defining characteristic of primitive labour markets like, say, the ones in Bastar in the old days. But now even Europe is seeing it. 

What happens is this. In normal circumstances, the supply of labour increases with an increase in wages. But the backwards bending supply curve occurs when incomes earned are seen to be high enough. Then people lose the incentive to work as hard — they are making more than enough by doing less work, so why work hard?

Simply put, the financial aid provided by governments to help people during the pandemic is dis-incentivising people from re-joining the labour force to the full extent that they can.

This is because since the pandemic, the definition of income has expanded to include not just wages but also the significant dole handed out by governments.

During the pandemic and even as it wanes, countries around the world loosened their purse strings significantly and started handing out dole to their citizens as a way to help them survive during lockdowns. 

Welfare payments in the UK, for example, increased by 18.3 billion pounds in 2021, a manifold increase over the previous years, and is projected to increase by an even larger 20.5 billion pounds in 2023.

So as the economy opens up but welfare payments are not rolled back, you have a situation where low-wage earners are simply deciding not to go back to work — they get enough aid from the government to do well enough without actually working. 

Try to fly through Heathrow or Charles De Gaulle and you’ll see this in real time. There’s virtually no ground staff there. 

Countries hit by the backwards bending supply curve have a tough decision before them. They can force companies to significantly increase wages at the bottom, which will further fuel inflation — already at decadal highs in several European countries. 

Or they can cut back on the welfare payments which will be highly unpopular politically.

India knows it 
 

India followed a similar approach, except its dole was in the form of free food. Apart from the cash transfers it did during the first few months of the national lockdown in 2020, the government has been and will be providing 5 kg of free food grain to 800 million people every month for 2.5 years, till September 2022, under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY). 

Mind you, this is over and above the highly subsidised food they receive under the National Food Security Act.

Free food essentially counts as income since people no longer need to spend money on food; they can spend it on anything else they need.

Anecdotal evidence is starting to show that this kind of support is leading to people in rural areas turning down labour-intensive jobs such as house painting, construction, and cleaning since they don’t really need the work to live a relatively comfortable life. 

In fact, reports are emerging that people are selling their free food at mandis at the Minimum Support Price, thereby earning actual money without having to do any work.

The latest phase of the PMGKAY runs till September 2022. While the backwards bending supply curve is still a nascent phenomenon in India, limited to anecdotes, the government should think long and hard about whether it wants to extend the programme further.