College, wages, inequality, and the implied policy agenda

March 6th, 2018 at 12:20 pm

I stumbled on a number of facts today that put me in mind of the old, venerable debate among labor economists about the extent to which educational wage premiums driven by employers’ increased demands for skills is driving overall wage inequality. It sounds obscure, but it actually has very potent policy implications. Let me try to quickly break it down.

–The gap between high, middle, and low wages has grown a great deal since the late 1970s. No secret there. In real terms, this has meant long periods of wage stagnation for middle- and low-wage workers.

–At the same time, the earnings of those with college educations have grown a lot relative to those with terminal high-school degrees. Economists interpret this as increasing returns to “skill,” or more wonkily, evidence that technological advances, like computerization in the workplace, are increasing complementary to the skills college-educated workers bring to the job.

–The policy conclusion is “get more education!”

–But while I solidly subscribe to that admonition, there’s a ton more going on under the surface. For example, anything that drives down the pay of the non-college educated, who still account for about 2/3 of the workforce, also drives up the college wage premium. So, you must try to parse out declining union power, falling minimum wages, weak macroeconomies (the absence of full employment), and more, from the skill-demand part of the story. And this, of course, has major implications for the policies we pursue to close the gap and reverse the wage stagnation for the majority of the workforce.

–Moreover, and this part is particularly notable, the college wage premium, while as high as ever, hasn’t grown much over almost two decades. The figure below was in the WSJ this AM, in an interesting piece about how, given the rising costs of college relative to incomes, some kids and their parents are taking a closer look at alternatives like technical/vocational programs. The figure makes two important points: the premium is as high as ever (wage signal: go to college!), and it hasn’t risen since 2000.

Source: Census

The next figure relates to that stable trend, and it’s kind of the punchline, in terms of the facts. It’s from EPI economist Elise Gould’s recent comprehensive wage analysis (I’ve got a piece on her minimum wage by state findings coming out soon) and it takes some unpacking. The dark blue bars of the left show a measure of the growth in wage inequality: the yearly growth of the gap between high (95th percentile) and middle (50th percentile) hourly wages. The light blue bars on the right show the growth of the college premium, adjusted for a bunch of stuff including race, age, gender, etc. (see figure note).

Basically, the figure is showing you how much of the growth in the left bar might be explained by the right bar. From 1979-2000, the answer is “all of it.” Putting aside my important caveats that it’s not just skill premiums driving the college-HS wage gap, one can certainly look at those trends in the left two bars and call it an education story.

You can’t tell that same story, however, for the bars on the right. Though wage inequality by this measure has grown at a constant pace since 1979, since 2000, something other than the college wage premium mostly drove it up. I’ve given you some candidates above, and I’d add over this period: especially large trade deficits and the rise of the finance sector.

But the larger point is policy arguments like “it’s all about education” or “if only everyone got a college degree, these wage problems would go away” are simply not supported by the post-2000 data. To be crystal clear about this, higher education remains a critical way up the ladder of opportunity, especially for those groups that are under-represented among college graduates, and robust policies to help them must be a big part of the mix. But we must also pursue policies that strengthen labor standards, worker bargaining power, and full employment. In fact, this two-sided policy mix is the essential combination for pushing back on wage inequality and stagnation.

Trump’s tariffs

March 4th, 2018 at 6:29 pm

To an extent, I join with the conventional wisdom that Trump’s tariffs on steel and aluminum will do more harm than good, but if that’s where your analysis stops, you’re not going nearly far enough: At WaPo, with more coming tomorrow or Tues (with Dean Baker; and here it is).

Probably the most salient concern here is retaliation–ie, trade partners blocking our exports–though could be mitigating factors there as well. With 12% of GDP in exports, we’re less exposed to countervailing tariffs than other advanced economies. Also, to the extent that retaliation generates a GDP drag from larger trade deficits (think about that, Trump), the Fed could raise less quickly–or pause in their “normalization” campaign.

Also, here’s an interesting wrinkle. As I note below, most of our trade partners have good reason to object to the administration’s rationale (national security risk generated by diminished capacity in sensitive industries). But since, unlike team Trump, they’re likely to be more rules oriented, they might decide to take their case to the WTO, which takes at least six months to deal with such cases.

But while the Chinese dump steel below cost on global markets, most others (Canada, Brazil) do not do so, and we buy a lot more from them than we do from China. And there is no scenario I can think of wherein Canadian exports invokes “national security” risk, which was Trump’s rationale for this.

So do not confuse my attempt to see some nuance here with support for Trump’s actions.

Stop what you’re doing and read this

February 28th, 2018 at 8:06 am

It’s my interview with David Pilling about his new book, The Growth Delusion. One can’t over-stress how important it is that instead of always blithely holding forth on the movement of this or that indicator, we look behind the curtain at what we’re actually measuring…and what we’re leaving out.

I’m not kidding, btw, when I assert that Pilling’s book is also pretty entertaining. So, check it out (the book, not the interview) and let me know if you agree with my positive take.

Spending, work, and taxes

February 27th, 2018 at 8:32 am

Ed Lazear’s oped in the WSJ this AM made both resonant and discordant points, at least to my ears/eyes.

The part that didn’t make sense to me was the idea that other countries are demonstrably worse off because they tax more and work less. Based on the data in the figure below, Lazear asserts that we in the US are better off because our relatively low taxes encourage “hard work” and “robust growth.”

He’s conflating growth with welfare/well-being. All the other economies in the figure collect 30-40% of their GDP in order to support more robust (there’s that word again) public health care, education, safety net, child care, and other public goods expenditures. These are sovereign choices made by their citizens, based on their legit preferences. Before you assert that our model is better than theirs, ask the Canadians and Europeans if they’d like to trade some tax points of GDP for our health care system.

From a welfare point of view, btw, Lazear’s argument is non-economic. In basic micro, work is a ‘bad’ and ‘leisure’ is a good. I don’t agree, for the record–life’s just more complicated than that–but elevating growth above welfare/happiness/cultural preferences/etc. can lead you astray.

The resonant part is this: “…programs that we agree are useful must be financed.” That was the point of my earlier piece on how we either raise the revenue we need to meet our spending wants/needs our just consign ourselves to seas of red ink as far as the eye can see.

Obviously, Lazear’s arguing for “aggressive cuts” in spending to meet our newly reduced revenue take. In this regard, his argument is, unsurprisingly, consistent with the R’s and Trump’s budget: we’ve cut the taxes; now we must cut the spending. But based on our aging demographics alone, simply maintaining the current services requires more, not less, revenues.

Outside the pages of the WSJ oped page, the public will not support the tradeoff Lazear touts. He’s definitely right that spending requires taxes. It’s just his solution that’s off.