Part One: The Basic Economics of Specialization
Basic economics is key to the understanding of pandemic fall-out. Conversations regarding testing delays, layoffs, manufacturing and shipping delays, as well as other supply chain difficulties benefit from a public possessing an understanding of key economic concepts. The cause of lay-offs and furloughs as well as the importance of direct aid and/or compensation are all functions of basic economics. However, this knowledge is not widespread.
Principles of Basic Economics
From the very beginning of 2020, I voiced concern regarding supply chain disruptions. Many components of basic economics are important to the distribution of goods and services. Key theories for better understanding the disruption include specialization, changes in demand and supply, elasticity, economies of scale and profit and loss. Additionally, both monetary and fiscal policy play a role this year. Finally, Covid-19 directly impacts poverty and income distribution.
My high school economics experience was a unit in social studies. Economics in college was an elective for non-business or finance majors. Times change. Today, financial literacy begins in kindergarten. Many states follow the Jump $tart national standards. One can view those standards by clicking here.
I sat on the state committee adopting financial literacy standards. My biggest regret stems from the absence of a required high school economics course. Instead, the emphasis is on personal finance (which I agree is much needed.) The various units are taught either in a math class or a social studies course. Perhaps, if more economic theories were taught there would be less angst surrounding the pandemic fall-out.
History of Specialization
Adam Smith, the philosopher and author of Wealth of Nations, in 1776, posited the theory of specialization. Using a pin factory as an example, he explained how productivity improves if individuals concentrate on one aspect of production. The existing method consisted of each person performing each step. This revolutionary concept remains a major factor of today’s labor input.
Specialization is important in understanding our current labor woes. First of all, we are dealing with a novel virus. Therefore, tests for the virus are also new.
A great demand for testing triggered a response by companies to create and then manufacture the test. This first response while difficult, did not strain the economic cycle. Scientists train just for this type of work. Note: In the U.S.A. early test kits failed and a deeper exploration of business theory is needed to explain how this is a normal part of the cycle.
However, the creation of tests is not causing current stress in the economy. Instead, the problem is with the manufacturing, distribution and analysis of Covid-19 tests. The latter two constraints are key. While medical testing is not a new industry, Covid-19 testing strains current capacity. The huge desire for this test translates into a demand for more manufacturing inputs, including labor.
Meanwhile, distribution is not uniform across the country. Rural areas in particular still lack the ability to test anyone for the disease. Priority for testing goes to those already exhibiting symptoms. Test results often take more than a week. Why?
The inability to process the samples is the most likely reason. Completing the process requires many technicians. Individuals trained in collecting mucus swabs are in demand. In the United States, this means medical staff. But, there is a shortage since nurses, EMT’s and doctors prioritize the treatment of Covid-19 patients.
Additionally, ordinary cotton swabs cannot be used. The cotton as a plant has its’ own DNA. So, synthetic swabs are required. An increase in production translates to a need for more inputs in the manufacturing process. This includes labor.
Furthermore, after the collection, samples need analysis. People are also needed to perform this task. Remember, this specific task did not exist just one short year ago.
Unemployment Not Equal to Needed Workforce
Specialized training takes time. Years in some cases. And even when training is shorter, new employees are needed. The hiring process is in itself time consuming. So, the end result is delays and shortages in the workforce.
An easy way to look at this inability to quickly and easily switch the workforce from one task to another may be found in the world of professional sports. Let’s look at football and baseball. Perhaps a quarterback can retrain as a pitcher. Both positions require a strong skilled arm. Retraining might take some time but the skill set is similar.
Now consider a center and a centerfielder. Centers snap the football to the quarterback and then block opposing players from reaching the ball handler. Brute strength and quickness are critical but foot speed not so much. Centers are not known for their 40 yard dash times. On the other hand, a centerfielder requires speed to cover the vast outfield. The player also needs catching ability and accurate throwing ability. Converting a center to a centerfielder is a tough task.
Retraining the Workforce
Workforce retraining for pandemic work is similar to the above example. Imagine a laid off sous chef retraining to swab noses. A further complication is that this increased demand for labor to battle the virus will be short lived either due to a vaccine or a natural (but longer) dissipation of the viral pandemic. At that point in time what happens? More retraining?
This is just the tip of the iceberg with respect to unemployment and retraining. Another issue is the availability of healthy workers. The Covid-19 associated illnesses also contribute to production and transportation delays due to absent workers. Thus the nature of a pandemic directly impacts the labor force.
In addition to specialization, elasticities of supply and demand, economies of scale and profit and loss impact the ability to “handle” the pandemic. Subsequent posts will explain the importance of basic economics in understanding the fall-out from the pandemic. No one topic nor one post covers all the factors in the current disruption of the supply chain.