Larry Mishel puts not too fine a point on it as you see in this WSJ review of his talk at the Boston Fed inequality conference. Some of those same points show up in this American Prospect piece I did on the topic a few weeks ago.
Larry’s comments are much in the spirit of the “don’t give up the hole” theme I’ve been trying to develop in recent weeks, where the hole is wage growth (it’s a golfing expression: don’t be so finessed on the green that you forget that the goal is to sink the putt).
The first thing to know is that hourly wages, long a focus at EPI, are the building block of the living standards of low- and middle-income families and they’ve lost ground for many workers across the education scale (even for college-educated workers, as Larry stresses) in recent decades. Taxes and transfers matter too, especially at the bottom, but if hourly wages aren’t beating inflation, and they generally haven’t been for many workers for decades, there are only three ways for families to get ahead.
They can work more hours, get more transfers (and/or pay less in taxes), or borrow. Working families have tried all of the above, but each is constrained. Families can only work so many hours without incurring serious difficulties balancing work and family. Also, this option depends on robust demand for labor, a key missing ingredient in much of the US labor market in recent decades.
Transfers have made a real difference for low-income families, especially the EITC, but this too is limited by political constraints and tends not to reach up to the middle of the income scale, at least for working-age households. Also, there are valid concerns about the extent to which such transfers subsidize low-wage employers, who are able to pay lower market wages leaving the tax-supported transfers to make up the difference in the post-tax wage.
As for borrowing—well, all’s I can say here is that borrowing against stagnant earnings or bubbly house prices is a recipe for disaster. QED.
Second, while educational earnings differentials—the pay gap between workers at different education levels—are large, they’ve not grown much in recent years. That’s one of the factors behind this provocative assertion by Larry:
“The intellectual basis for [skill-biased technological change, SBTC] in my view has collapsed. It has very little to contribute to the understanding over inequality over the last 20 years, and is not the basis for thinking about the future so much.”
I explain and track this claim in the Prospect piece above. Here’s an extended excerpt from that piece emphasizing both my conclusions and the key roles that skills and technology have played over time. But they are not what’s behind weak wage growth today, and thus Larry’s point about the limits of relying solely on human capital policies are well taken.
If you hear a bit of an edge in his argument, it’s because a) he was speaking at the Federal Reserve which has a lot to do with full employment and a lot less to do with education policy, so do the math, and b) he strongly believes that some analysts hide behind the apron strings of “social mobility” which is a lot easier to argue for than wage-boosting market interventions like minimum wages and more union power.
Dude has a point, no?
Technology and employers’ skill demands have played a critical role in our job market forever, but they turn out to be of limited use in explaining the depressed incomes of today, or of the past decade.
Consider: The demand for college-educated workers has actually slowed quite sharply since 2000 and their real wages have been flat. If that fails to surprise you, you may well be someone who’s recently graduated and looked for work. If that does surprise you, you may well be a high-level economic policy maker.
Before I go any further, allow me to assert the following, and not just to inoculate myself, but because I really believe it: Technology is a hugely important force in economies across the globe. Neither I nor any economist I know would question that we should want the most skilled workforce we can get, not to mention the best educated electorate. There’s no question that those with more education earn more than those with less—the college wage premium is as high as it’s ever been. No question that the upward mobility of far too many disadvantaged children is thwarted by unacceptably high barriers to attending and completing college. No question that way too many people lack the skills they need to make it in today’s job market.
But a number of important new studies show that it’s not technology-driven skill deficits that are depressing wage and job growth. It’s the weak economy, not yet recovered from the Great Recession, it’s persistently high unemployment robbing workers at almost every skill level of the bargaining power they need to claim their fair share of the growth, it’s terrible fiscal policy, it’s large and persistent trade deficits, it’s imbalanced sectoral growth as finance booms while manufacturing lags.
The policy implications that flow from these findings are profound. Improving workers’ skills is obviously insufficient. Supply doesn’t create demand. In fact, there’s evidence that as demand for college-educated workers has tailed off, they’ve been moving down the occupation scale, displacing workers with lower education levels.
If we want to improve the quantity of jobs, we’ll have to do more to promote labor demand. We’ll need to worry less about robots and more about austere fiscal policy, imbalanced trade, weak capital investment, and bubbles and busts. If we want the jobs we create to be of higher quality, we’ll have to do more to lift workers’ bargaining power, by enforcing labor standards, raising minimum wages, and leveling the playing field for collective bargaining. Supply-side solutions targeting workers’ skills may well help the targeted individuals, but they won’t help raise the number and quality of jobs.