Monday, May 12, 2014

What happens to wages in Denver when demand for Denver housing increases?

Housing prices increase, leading homebuilders to build more houses.  This increases demand for construction labor, which increases wages.

These are equilibrium changes, modeled with simple demand and supply curves in the housing and labor markets.  

However, before equilibrium is reached, "shortages" for labor will drive up costs, which feedback into house prices, which decrease housing demand.  In addition, the difficulty of hiring labor may increase the time it takes to build a house, which reduces demand for new houses (consumers want houses built more quickly).

That shortage of skilled labor in many markets has spurred contractors to boost pay scales, often to boom-time levels and beyond—expenses that have been passed on to buyers for as long as they will tolerate the higher prices. In recent months, buyers finally have balked, resulting in sluggish sales of new homes so far this spring. 
A labor shortage tends to hit home buyers both with higher prices and expensive delays, said David Crowe, chief economist of the National Association of Home Builders. "It's a direct impact on the cost of the home because you have to pay more for the resources to build it," he said. "And it's an indirect increase because it delays final delivery of the home, and that costs money, too."

BOTTOM LINE: economists use demand and supply analysis to model equilibrium changes, but the process of reaching equilibrium can be quite messy and time consuming.    

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