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Posted at 5:00 PM ET, 01/21/2011

It's harder to pay workers well in America

By Ezra Klein

I've been trying to wrap my arms around the question of "where on earth are middle-skilled middle-class jobs supposed to come from if not from manufacturing" lately, and though I don't really have any answers, I do have a couple of thoughts.

The big one is that I'm growing more and more disillusioned with the distinction between "manufacturing" and "services," or even "goods-producing" and "services." If you work on the Google search engine, for instance, you're working on a service, not a good. Being a doctor is classified as working in the service sector, and so too is being a lab technician. I think that people tend to think of the "service sector" as low-wage, low-skill, and the goods-producing sector as somewhat higher wage, and appropriate for many skills. I'm not sure it's as clear as all that.

So then the question is why were manufacturing jobs traditionally high-wage jobs? There seem to be a few answers to this (unions, industrial policy, capital intensity, etc), but the one that I've found most persuasive is that they could be. To a degree I really didn't understand before picking through the endless tables and graphs in 'Where Are All The Good Jobs Going?', high wages were a choice that businesses could make. Some of them were forced into making that choice through unions and some of them were lured into making that choice because they wanted the best workers. But a lot of them just made that choice because, well, they could. This was a period in American history, after all, when CEOs regularly warned against the consequences of "ruinous competition."

Of course, now we're in a period when we not only venerate competition, but actually have to compete. The financialization of the economy means more managers have to answer to shareholders, and shareholders don't want to see high labor costs unless it's clear they're getting a return for them. Foreign competition has made the wage gap between different sorts of workers vast: Paying American workers a good wage while the other guy pays Thai workers a bad wage leaves you at much more of a competitive disadvantage than paying American workers a good wage while the other guy pays American workers a mediocre wage. Unions are partially in decline because of policy, but they're partially in decline because these forces make it very hard for them to survive. Bottom line? It's hard to pay workers well in America now, even if you want to.

It's easier to pay them well, of course, if you have to. Without getting too deep into the methodology of the book, it's fairly persuasive on the idea that the good jobs aren't going away so much as they're sorting themselves by education and ability. At the same time, the pace of educational attainment in America has slowed considerably. So the percentage of good jobs that require credentialed workers has increased, but the percentage of credentialed workers hasn't. That's probably a big part of this story, and it speaks to the need for much, much more investment in the workforce.

I'd really like to find an answer that's more interesting than "education" here. And maybe I will. I'm toying around with the idea that we're in a weird interregnum period in which a lot of other countries have become rich and educated enough for their workers to compete with our workers but not quite rich and educated enough for their workers to begin buying things from our workers, and that this'll largely sort itself out as time goes on. But I'm not sure that's right, and even if it, it's also not very comforting.

By Ezra Klein  | January 21, 2011; 5:00 PM ET
Categories:  Economic Policy  
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Comments

Um, let's think hard about that. We have grossly neglected the national infrastructure for at least 30 years. Other countries are fast pulling ahead of us. We need 30 years of catch-up, and that means 30 years of work demanding millions of workers doing real work -- permanent jobs -- that the country desperately needs. Those workers will be paid good wages because -- because the Davis-Bacon Act requires it.

I know this is truly complex rocket science, but it can be done with effort. Oh, gosh, the deficit. Guess we might as well give up.

Posted by: urbanlegend | January 21, 2011 5:05 PM | Report abuse

Ezra

Good Jobs are indeed going away.

I worked as a SW engineer at Cisco in Santa Clara.

Cisco is steadily moving its operations to India.

And I had more foreign workers in cubicles around me than Americans. Ostensibly this was because it was hard to find enough educated Americans. Maybe originally it was, but with the recession and the constant mandate to cut costs it's now just about profits.

Posted by: lauren2010 | January 21, 2011 5:18 PM | Report abuse

The part about education may be passe, but it's true. We still have plenty of good jobs in this country, they are just less stable and the educational price of entry is higher. In general industries (in the Western world) are more capital intensive and more specialized, and this requires workers with more specialized skills.

But for people who have skills, this pays off. And yeah, it leads to the obvious solution that greater investments in human capital (education and other skill developing processes) is the way to go.

Don't buy the conventional wisdom that there was some time in the past when everyone without skills had great jobs. It was easier to get an average job without a college degree in the immediate post-war era, for example, but they still had unemployment, and the standard of living for the "average" worker was much lower then. We can't return to that time, but we shouldn't want to.

Posted by: sanjait | January 21, 2011 5:31 PM | Report abuse

it's a simple idea- tariff goods made by workers who aren't paid as the American worker is paid.
Get Europe to agree to this also , and we'll see a middle class again.

The oligarchy will hate this idea

Posted by: newagent99 | January 21, 2011 5:39 PM | Report abuse

Also, don't buy the conventional wisdom that manufacturing jobs = good while service jobs = bad. Perhaps this is true if you just look at low-skilled workers, comparing a union factory line job to working in a restaurant or something. But in both manufacturing and services, education and skills matter. This was true in the post-war era and it's true now. People with certified skills can make bank in manufacturing (underwater welding or engineering, for example), and people with certified skills can make bank in services (nursing, for example).

The challenges are that skills acquisition and education are typically very costly up front and pay off slowly over time, and that technological and economic change means that demand for any particular skill is tenuous. For both of these problems, the federal government would seem the appropriate agent to help build human capital by acting as a financier and risk mitigater.

Posted by: sanjait | January 21, 2011 5:42 PM | Report abuse

that interregnum period idea is actually quite interesting, and encouraging to me. why is it discouraging to you?

Posted by: jfcarro | January 21, 2011 5:50 PM | Report abuse

I recently met a brilliant guy who does "aerospace medicine" for a living. Basically, he's an expert on medical issues related to people in high G or no G environments (eg, jet fighter pilots, astronauts, etc.) He's very scared of losing his gov't job because, outside of the gov't, he says there are only about 2 positions in the country that value that sort of knowledge.

This gets at something I've been thinking about recently. Many of the skills we want people to have are very specific skills that take years of training (and probably a huge student loan burden), and are skills that are probably not that transferable. We're telling the youth to dedicate the better part of a decade to master a highly specific task with no promise that it'll even result in a stable career. In short, its a high risk situation with very high costs. Increasingly, the responsible mature decisions a student could make probably have about the same chances of success as trying to become a rock star.

Posted by: Nylund154 | January 21, 2011 6:00 PM | Report abuse

Conservatives have their nostalgia for the 1950s, and so do liberals. The left sees it as a golden age when blue-collar manufacturing jobs paid great wages, but really that just reflected the unique historical circumstance of World War II having wiped out foreign competition for a long time. American manufacturing had the field to itself in a lot of areas, and consequently it made so much money that there was plenty to pay to the unions. Moreover, it was worth it to pay the unions what they wanted and avoid labor strife precisely because it was all so lucrative.

Those special conditions don't hold anymore. US companies have been pushed to the limit by resurgent overseas competition, and it's no longer true that everyone involved is making great money.

Posted by: tomtildrum | January 21, 2011 6:07 PM | Report abuse

sanjat, I disagree. As lauran2010 has pointed out, goods jobs are going moving to where the cost of labor is lower because a lot of jobs are fungible. This is why despite education wages have stagnated even in professions like engineering and software and except in a few areas, like finance. And jobs that pay well in finance in this country aren't so much due to education or skill as the fact that finance is simply centered here because the law and culture is much more amenable to finance being here. There are also few other sectors, like health care or the law, where the jobs simply are not fungible, they cannot be exported or exchanged.

But it gets worse. It is simply not possible to build an economy on specialized industries. By their nature they are few and far between, thus the "specialization" (otherwise they wouldn't be so special). A broad based economy requires a broad base of jobs, including the type of un-skilled or semi-skilled jobs that have either been exported or replaced due to production efficiency. The Chinese certainly understand this which is why they give lip service to free trade while practicing industrial and mercantilest polices. Its why they require partnerships and technology transfer for foreign companies to operate within their borders. The eventual, inevitable, result is Chinese companies replacing and terminating the partnership while blocking continued business from the foreign company and Chinese economic dominance.

How the US, and US based companies, expect to survive given that they are fully complicit participants is beyond me. It's like the old story of the frog and the scorpion. Only this time, the scorpion survives and the frog still dies.

Posted by: elkiii_2008 | January 21, 2011 7:00 PM | Report abuse

'I'd really like to find an answer that's more interesting than "education"'

Sometimes the best answers aren't all that "interesting".

Posted by: RichardHSerlin | January 21, 2011 7:25 PM | Report abuse

I don't know what you're talking about, Ezra.

Education is sexy.

These days excellent educational opportunities seem open primarily to the already well-off upper middle class and above.

Posted by: will12 | January 21, 2011 7:41 PM | Report abuse

Wait a minute! Part of the answer is simple math. The people in the upper 1 or 2% are sucking up vast amounts of money compared to what they used to suck up. They just aren't paying their employees as much because they want to hoard all the money for themselves. This is more true in the U.S. than in other countries where people seem to feel it is immoral to be this greedy, but here it is looked upon as being successful.

Posted by: AuthorEditor | January 21, 2011 7:50 PM | Report abuse

I read this hand-wringing about how do we create good, high-paying jobs when there's all this low-wage competition and I think, well, what does Germany do?
I think a lot of our problem with job creation and protection is self-inflicted.

Posted by: RZ100 | January 21, 2011 7:53 PM | Report abuse

This is a joke. Really. Education? Check your post on the legal profession a month or so ago. How many art history majors does it take to pour your starbucks? Are there many grad students from NOVA at the post?

No? Is it their education?

Ruinous competition? Isn't it obvious. You economists may go the way of manufacturers, farmers, news people, writers, car people, lawyers, and the rest if you don't collude soon.

Really, I refuse to believe you are this insulated.

Posted by: comma1 | January 21, 2011 8:03 PM | Report abuse

elkiii_2008, don't be so sure that jobs exist that can't be exported. As a programmer I of course spend a lot of time thinking about this, and it's the driver of my interest in macroeconomics.

Legal footwork, document review and such is already being sent to India. Medical work like X-ray review is also being sent there. Even in jobs that have a strong physical-presence requirement (like primary care medicine), one could imagine having minimum-wage techs doing the local part, supervised by telepresence from India.

The hope I have is that it will take longer for the world to become flat than it does for the low-wage countries to get richer enough that offshoring jobs there is no longer a no-brainer.

Another hope specific to my industry: As standards of living come into balance, well, Indian programmers' standard of living is not that bad.

Third potential hope: Singularity, eliminate scarcity, yadda yadda yadda.

Posted by: mutterc | January 21, 2011 8:06 PM | Report abuse

elkii, a few things:

First, wages have stagnated mostly because health care costs have gone up. Total compensation in recent decades slowed a bit but still gained. The reason we don't feel it is because it never materializes in paychecks once health insurance eats it up. Now there is a lot that can be said about that topic, but the point here is we actually are getting compensated more for our greater, education-driven productivity, despite globalization. We also had, until the financial crisis, consistently low unemployment over a couple years of rapidly increasing globalization, so the actual data flies in the face of the conventional wisdom that says all the good jobs are leaving.

The explanation is two fold. On the one hand, many jobs can't leave (like you said). ON the other hand, the creative-destructive market economy tends to find new uses for labor when jobs are lost (unless you are in a strongly disiflationary environment with interest rates stuck at 0%, unfortunately...). If you look at any given job title (like Cisco software engineer for example), there is a great chance it will become outdated or outsourced with the passage of time. But looking at the economy as a whole, we see that we still manage to get along by being at the forefront of the creation of new industries.

You can point to China as a model, but look at the jobs there and tell me which ones actually qualify as even middle-class in the United States? Are we really so sad about losing low-skilled manufacturing to the Chinese? Or are we going to remember that over the history of this country, we've lost many industries to technology and trade that used to employ major masses of people (farming and textiles come to mind), and we've always come out better for it?

That does remind me though to add something to my list of ways to improve the plight of the middle income American worker. In addition to investing in human capital projects (ie education and job training), we also must find a way to control health care costs.

Posted by: sanjait | January 21, 2011 8:15 PM | Report abuse

Also, even if we wanted to, how would we stop the migration of something like a Cisco software engineer job to India? I could see how taxing imported goods would preserve at least some manufacturing jobs here (at a not insignificant cost to the quality of life of every other American, in the form of higher prices). But we're already a mostly service-based economy. If a multinational company sees an opportunity to get labor cheaper elsewhere, how could we prevent it?

I'd argue that we shouldn't want to (comparative advantage, yada yada), but I also am failing to see how we could prevent globalization of service labor even if we wanted to.

Posted by: sanjait | January 21, 2011 8:23 PM | Report abuse

Once again, when it comes to preserving the wealth of the top 1% there are an infinite array of policy fixes, but when we're trying to create broad prosperity, somehow, some way, the invisible hand of the market scuttles everything.

Posted by: falsedichotomy | January 21, 2011 8:30 PM | Report abuse

I'm pretty sure one could say of ANY country that "it's harder to pay workers well" (than it used to be).I mean, even China is facing pressure from leaner, hungrier competitors. Dealing with the rising cost of labor is a relentless and difficult task anywhere and everywhere, because the market is a remorseless adversary, and it therefore means being maniacal about constantly improving productivity.

The stall-out in educational attainment in the US is a big problem. Real median wages have been stagnant for years, that's true. But I wonder what real median wages have done over the last 40 years for college grads? For holders of graduate degrees? I bet healthcare costs and the slow down in educational attainment can explain much of the problem.

Posted by: Jasper999 | January 21, 2011 10:16 PM | Report abuse

urbanlegend has it right that the government can affect wages in an economic sector and overall. And that it takes tax dollars to create well-paying jobs to do things worthwhile. However, the government also can use its power to redistribute power (to labor) in industries where labor can't be out-sourced so easily, which would also have the desired effects. And it can change tax incentives that favor throwing cash at top executives rather than at lower-level workers.

It's not brain surgery but it's politically impossible today--solving the political problem is closer to brain surgery.

Posted by: pjro | January 21, 2011 11:27 PM | Report abuse

sanjait, I agree that rising healthcare costs have eaten some increase in wages. But, that is not the whole story. And I can agree that while creative destruction does create new jobs is doesn't mean there is economic equivalence. It's only when there is growth, not just replacement, that economic gains are made. And it also doesn't mean those jobs are created here. In fact, the movement of manufacturing to China is part of this creative destruction and so far the Chinese have been the winners.

Also, please do not make the mistake of believing that China is just a low-skilled sweatshop and that we should not mourn those lost jobs. We are now losing high-skill jobs to China. This is why 10 million cars were sold in China last year.

The fact is that there are two Chinas; one is the vastly poor 1 billion or so China that most people think of, the other 200 million or so professional and wealthy that form the Chinese version of the middle and upper classes. The sale of some 10 million cars last year is an indication that this middle class and upper class exists.

One addition point. Much of Americas technical prowess has been underpinned by manufacturing. To think that simply having an highly skilled, highly educated workforce in a purely (or nearly so) service economy is a fools errand. After all, who are we going to sell these services to, China?

Posted by: elkiii_2008 | January 22, 2011 12:44 AM | Report abuse

"The big one is that I'm growing more and more disillusioned with the distinction between "manufacturing" and "services," or even "goods-producing" and "services.""

- Ezra, you are right. Keep pursuing this line.

"So the percentage of good jobs that require credentialed workers has increased, but the percentage of credentialed workers hasn't."

- Is that Fed Member Narayana Kocherlatkota talking?

"a lot of other countries have become rich and educated enough for their workers to compete with our workers but not quite rich and educated enough for their workers to begin buying things from our workers"

- Why would they do it if we keep paying higher costs where those are not warranted like Health Care Cost?


Posted by: umesh409 | January 22, 2011 1:17 AM | Report abuse


I have read somewhere on the news that something like "Wise Health Insurance" is offering lowest health insurance rate for low and middle income families so search online and find them.

Posted by: carriemann | January 22, 2011 2:37 AM | Report abuse

"I'd really like to find an answer that's more interesting than "education" here."

There's an alternate answer which is simpler, if not more interesting. There are more workers than there are jobs, for two reasons.

First, the financial collapse triggered at recession that threw many workers out of jobs because demand plummeted. This is cyclical and can repair itself, at least in part.

Second, and more intractably, NAFTA and its brethren have made it more profitable for industries and services to be shipped across borders and overseas to vastly cheaper labor. Nothing improves a company's bottom line better than not having to pay a lot for labor. That created a greater pool of now-high-priced workers who have no hope of ever earning anywhere near their previous standards of living.

Education enters in only because many of those displaced, even if they went back top school for more skills and greater training, are older and thus unwanted. What company is going to hire someone a few years from "retirement"?

The young coming up have some hope for gaining education that might, if they are not in the financial sector, give them a decent living, but only if they guess correctly which industries and services won't be shipped out after they've joined them.

And nowadays any industry or service is fair game. What happens to Wall Street and the banks when their CEOs decide that they are paying too much for their labor and can boost their financial statements and stock prices by shipping those jobs to ... ?

Posted by: tomcammarata | January 22, 2011 3:03 AM | Report abuse

At least in the realm of software development, education is not really a factor. In the mid 90's most of the workers in software development were from the US. Now I have seen 1 in 10 and as few as 1 in 12 coworkers from the US. A few are naturalized, but most are here on visa.
I suspect that there is something other than a financial reason for companies to choose foreign workers over US workers even in this country. I do not believe it is related to education or even skill.
Perhaps it is cultural? I am only guessing.

Posted by: EducatingTheFools | January 22, 2011 9:43 AM | Report abuse

I suggest reading Jefferson R Cowie's "Stayin' Alive" which details, point by point, how unions and labor lost control of the political and economic agenda in the US. Based on his account, the process of destroying high-wage manufacturing jobs has been going on for 50 years. These jobs are likely gone forever. Some (ie dirty and dangerous manufacturing jobs) deserve to disappear. As someone said (I can't remember her name), we must invent a new form of capitalism that doesn't rely so much on these disappearing high-paying jobs.

Posted by: bhmingus | January 22, 2011 11:09 AM | Report abuse

thanks for this post. interesting
http://www.customtermpaper.org

Posted by: write_thesis | January 22, 2011 11:25 AM | Report abuse

Is this an 'interregum' period or just the destruction of the western middle class?

From what I've seen in Silicon Valley, it is the latter. I grew up in the Rust Belt and saw industry depart for the South. Now it's going overseas: "progress".

MNC's want the backstop of the American military but they don't want to employ American workers.

You neoliberals need to come to grips with globalization. Are you selling us out, or not?

Posted by: mminka | January 22, 2011 8:44 PM | Report abuse

If U.S. is going to continue to export jobs and companies continue to hire outside labor then whats the point of people getting a college degree? College degree or not there aren’t any jobs and the jobs that are here there is stiff competition for them because so many people are out of work. Slow economy, outsourcing jobs, low wages, recession, I mean the chips are stack against everyone. Even the professional with 8 years of college is going to have a hard time finding a job in this country. What good is college degree if country is not producing jobs.

CC

Posted by: christophercampbell | January 22, 2011 11:49 PM | Report abuse

Ezra, were you a little inebriated when you wrote this column? It's not about government-promoted education. It is about business enterprises which form the basis of an economy like farming, mining, fishing, or manufacturing. Once you have that, service businesses can be supported. But entrepreneurs need free markets for credit, labor, and all of its business needs. Our markets are manipulated by special interests with the help of politicians and our economy is shutting down. There goes the jobs!

Posted by: allamer1 | January 23, 2011 1:27 AM | Report abuse

Education is, by and large, a zero-sum game. Educated people are paid well because few people have the requisite skills--and if more people had them, the jobs would pay less.

Someone has to work at McDonald's--and, ideally, they should NOT have a college degree. Keep this in mind--every person you meet at Enterprise rent a car--including the guy who "picks you up" has a college degree. It's a job requirement. In many ways, the United States is overeducated.

There is only one way for a country to become rich: to work hard, save money and have fewer kids. This increases the amount of capital available, and the number of "good" jobs that the country has.

This is one reason the US has every right to be less kind to the third world. Their high birth rates are making us poor.

Even within the US, many ethnic groups see high birth rates as a way of getting more votes and more political power--and if its at the expense of the country's wealth, so be it.

We're in a prisioner's game here. High birth rates equate to political power for countries and ethnic groups--but high birth rates also lower the capital-labor ratio and make everyone poor.

If we are to overeducate people, economics should be one of the first subjects people learn. Economics has little use for most people individually--but population that understands economics well has a better chance of becoming wealthy.

Posted by: test10022 | January 23, 2011 9:00 AM | Report abuse

"Um, let's think hard about that. We have grossly neglected the national infrastructure for at least 30 years"

That's because we have overspent on Medicaid for 30 years.

Eliminate Medicaid and a lot of problems are solved.

Posted by: krazen1211 | January 23, 2011 7:17 PM | Report abuse

Liberals are completely dishonest.

This country was much more successful when we spent $200 billion on education than it has been now that we spend $900 billion on education.

Why? Because too much money goes to wasteful spending.

Posted by: krazen1211 | January 23, 2011 7:19 PM | Report abuse

Liberals are completely dishonest.

This country was much more successful when we spent $200 billion on education than it has been now that we spend $900 billion on education.

Why? Because too much money goes to wasteful spending.

Posted by: krazen1211 | January 23, 2011 7:19 PM | Report abuse

Fercryinoutloud, Ezra, could you have written any more damning indictment of neoliberal economic policy?

"Uh, middle class jobs are important. But gosh, after 40 years of de-unionization, pension destruction via strategic bankruptcy, tax policy favoring financial shenanigans over real businesses, and one-sided support for wealthy transational corporations and elites, I can't think of what we can do. Gosh......but Free Trade is still really, really important, and gosh, it just takes my breath away how cool things are over in China. And gosh, we need as many immigrants as possible. But isn't it terrible that we have 43 million Americans living in poverty? How could that happen?"

I'll ask you a different question, Ezra: can you think of a question that is more important to the majority of Americans?

Then why the hell is this something you're just working on now? Why doesn't anybody over at DLC work on that?

Posted by: Dollared | January 24, 2011 1:08 AM | Report abuse

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