Larry Mishel and the wage message: “Don’t give up the hole!”

October 21st, 2014 at 9:25 am

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.

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6 comments in reply to "Larry Mishel and the wage message: “Don’t give up the hole!”"

  1. Robert Salzberg says:

    Great post. Glad you’ve added the sector disparity favoring finance to the reasons why wages have stagnated.

    Dr. Bernstein must play with different sorts of golfers. Every time I’ve heard the expression”don’t give up the hole”, it has meant play the break inside the hole because the putt is fairly straight. Perhaps in DC, since politicians frequently forget the goal of government is to govern, they forgot why they play golf too.

  2. urban legend says:

    We were making rapid progress towards genuine full employment and strong wage gains in 1999-2000, with a relatively small blip from that brief and shallow recession. It’s hard to escape the conclusion that Republicans including Greenspan deliberately prevented that from continuing, being opposed to high wages to satisfy the party’s corporate owners who actually aren’t too bright — unless to them it’s actually the class differential that matters more than their absolute financial well-being that actually improves when the middle and lower class workers get higher wages. I guess millions of people suffering makes them feel better, like, as they say, thinking that instead of being born on third base they hit a triple.

    • Smith says:

      I think there is strong evidence contradicting the assertion for corporate owners about “absolute financial well-being that actually improves when the middle and lower class workers get higher wages.” If corporations are currently posting record profits, how does that show they’d be better off in absolute terms if middle and lower class workers got higher wages? The party’s corporate owners are actually quite bright. Effective corporate tax rates are at historic lows, negligible for some entities, and the effective tax rates on personal income for the top 1% have not increased despite a doubling of their share of national income.
      It is not the class differential that matters, but income differential does, not because of the ability to show off, or sense of relative accomplishment, but because the differential has real economic effects. Anyone who’s bid on a house (or rental apartment in urban areas) and lost out to “someone with money” knows this. Nobody deliberately sets out to make people suffer, it’s just a byproduct of self interest. Instead of blaming Republicans, ask yourself why there are no Democrats campaigning to throw out obstructionist Republicans who keep the economy under performing by blocking stimulus. Could their party not also be incorporated?

  3. Charles E Lewis Jr says:

    In the ten years I have focused on rising economic (income and wealth) inequality, few if any economists include Reagan and Bush’s supply-side tax cuts in the discussion. So while tax rates for the middle class remain fairly constant, stagnant wages will reduce the disposal income they have. Although I am not an economist (one year of micro in my doctoral program at Columbia) it would seem to me that reducing the income tax on high earners (job creators) particularly taxing capital gains at such a low rate shifted more on the burden on the middle class. I imagine other taxes (state, property, sales, etc.) would eat at disposal income as well. And let’s not forget Reagan raised the payroll tax to secure the Social Security Trust fund which the government spent.

    So it seems rational to me that raising taxes on high income earners who have garnered much of the economic benefits in the past decade or so which includes raising taxes on capital gains, coupled with reducing the tax burden on middle class earners would put more disposal income in the hand of the hands of the middle class that could be spent on products and services that would create jobs. I am willing to bet that it would also unleash an entrepreneurial boom that would create even more jobs. This, to me, would have a greater chance of getting to full employment than waiting for corporations to stop sitting on trillions of dollars in profit. This would reduce the slack in the labor market and and lead to wage growth.

  4. Larry Signor says:

    Yes, a great post about those marginally deprived of the benefits of education. In the meanwhile we have thousands of jails filled with 20 something young folks who have no resources or chance of obtaining the minimal factors needed for life in America. Not ashamed yet? Most of these young folks have mental issues that the system will never address, thus consigning them to a hell of incarceration and non-productiveness. Most of them are begging for help, but we care about the marginal factors of productivity, not the Pareto out come we should embrace. The best basketball player in the US is not in the NBA, but perhaps jail. Great outcome.