Friday, September 10, 2004

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Michael Moskow on wages and the current economic recovery

As the economy began to generate positive (but not stunning) job growth, and as data on jobs lost due to offshore outsourcing came out, claims that outsourcing or globalization more generally were having a massive job-destroying effect began to ring hollow.

At this point, much of the criticism shifted to the quality of the jobs being created. Even if employment is on the rise, the argument runs, if all the jobs are at Wal-Mart then it's a very hollow recovery. Since even trade theorists acknowledge that an open economy does affect the composition of jobs that are created, and since the numbers suggest that more low-wage jobs were being created than high-wage jobs, this is a critique that cannot be easily dismissed.

On this point, Federal Reserve Bank of Chicago president Michael Moskow has a Financial Times op-ed today (subscriber-only) on whether this economic recovery is different from other economic recoveries in terms of the mix of jobs that are created. The highlights:

A great deal of public debate has focused on the wages for jobs created since US employment finally began to grow in earnest this year. Since real, or inflation-adjusted, wages are the key to how fast living standards improve, they deserve scrutiny. However, much of the recent analysis says little about the long-term prospects for wage growth or the policies that would support faster wage growth.

Daniel Aaronson of the Federal Reserve Bank of Chicago has found, as several analysts have, that job growth in the last six months has been slightly more concentrated in low-wage industries. But Mr Aaronson also points out that the mix between high- and low-wage job growth is tied to the business cycle. High-wage job growth tends to be more rapid than low-wage job growth when labour market conditions are strong; the reverse is true when labour markets are weak or in the earlier stages of improvement. We have every reason to think this normal business cycle pattern will continue.

Rather than focusing on the wage mix of jobs created in the past half-year, we should keep our eyes on more important factors while assessing the prospects for real wage growth. Productivity is the main driver of wage growth. The news here has been positive: productivity growth has been very strong over the past decade and is likely to remain solid. This bodes well for average real wage growth.

But not all US workers have benefited equally from increases in productivity. Workers with more education and skills have generally seen their real wages rise substantially; those with less education have seen little increase and perhaps even a decline.

Much of the increase in the wage premium for education and skills is due to technological change that has increased demand for highly educated workers. Another portion is due to factors such as deregulation and globalisation, which have increased competition in both product and labour markets. Workers with only a high school education were once able to find jobs in industries so insulated from competition that they could expect a lifetime of secure employment and high wages. But such jobs are disappearing....

We must improve the graduation rate. At-risk children need special resources, and research suggests that the benefits to society from investment in these children can be sizeable. But additional spending is not enough. We must develop appropriate standards of accountability for teachers, with incentives properly designed and high achievers rewarded. We must also find ways to inject more competition into the education system.

Human capital investment is not limited to schools. Cognitive and non- cognitive skills development begins at birth and continues well after we turn in our last exam paper. Early intervention programmes can help children get off on the right foot - especially in economically disadvantaged neighbourhoods. And in our dynamic economy, in which technology, international trade or other developments can displace even good workers, retraining needs must be met. The record of government-sponsored training programmes is far from uniformly positive. Still, it will be increasingly important to provide retraining that is efficient, effective and sensitive to labour market needs.

By training workers, rather than protecting jobs, we can take full advantage of the gains from technological advance and international trade. Researchers continue to evaluate society's investments in human capital. Even in an age of sizeable budget deficits, we should invest in programmes for which this research shows the benefits clearly outweigh the costs.

Here's a link to the FRBC press release of the paper by Daniel Aaronson and Sara Christopher, and here's a link to the actual paper. The key paragraph:

We find that the share of job growth in higher-paying sectors typically responds favorably to overall employment growth and, conversely, falls when labor markets weaken. Recent history falls squarely in this pattern. Recent estimates of higher-paying industry job growth have rebounded over the past year and currently stand about where we would expect given the state of the labor market.

posted by Dan on 09.10.04 at 12:23 PM


I have an equation that has worked great for over 10 years of live time use and that goes as far back as the average hourly earnings data -- the 1960s -- that makes wage growth a function of inflation expectations, the unemployment rate and capacity utilization. It has worked fine this cycle and has wage growth bottoming right about now but it is not showing a significant pick up in wage growth. Based on this anyone making an argument that wages are acting different this cycle is off base. This is especially interesting since the sector with no employment growth is the high wage tech sector while employment growth in the rest of the economy is picking up modestly.

posted by: spencer on 09.10.04 at 12:23 PM [permalink]

Maybe the more interesting question that does relate to this is why are we seeing such a wide spread between nominal GDP growth and personal income growth. Normally they grow at almost the same rate, but this cycle nominal GDP growth is exceeding nominal income growth by about two percentage points -- a very, very unusual development.

Also, in the 1980s and 1990s real income growth did tend to match productivity growth fairly closely, but so far this cycle real income growth has lagged extremely far behind productivity growth.

I suspect these two divergences are related.

posted by: spencer on 09.10.04 at 12:23 PM [permalink]

More blah, blah, blather about education and blather for more spending.

Must get all the illegals out of here and their dropped off birthings. Then, no govt. benefits to all who haven't been here as citizens for 15 years. (They even cost you more a few thousand more each than the regular kids.) Also, make the sponsors, churches, synagogues pay up for their special interests immigrations-- for all ages and consequences.) More than time for those who actually pay taxes for schools to be able to take their kids out of the cess pools and and social engineering to have separate schools if desired (non-religious certificates ).

posted by: Alex on 09.10.04 at 12:23 PM [permalink]

As far as I can tell from the quotation, Moskow's analysis doesn't differ at all from standard DLC prescriptives. So we know that following a Clintonesque domestic policy would be better - after 3.5 years of GWB, where's the news in that?

posted by: SomeCallMeTim on 09.10.04 at 12:23 PM [permalink]

That great source of economic information, Time Magaziine, says in this week's issue that while Kerry is "addressing the heart of the problem: workers are expensive" his plan probably won't solve the problem. But, says the magazine, economists "are much less excited about Bush's tax cuts, which could fire up some consumer spending, but not enough to add jobs, and would worsen the deficit. 'We can't afford them anymore,' says Diane Swonk, chief economist at Bank One. Shrinking the deficit or making big changes to the health-care system, the experts say, would do more to shore up business confidence and boost hiring." The article backs Kerry's plan more than baby bush's but basically says neither has a winning plan on the economy.

posted by: chuck rightmire on 09.10.04 at 12:23 PM [permalink]

All good points but he leaves out the elephant in the room. The fiscal trainwreck of Bush's unfunded "give you your money back" as he increases government pork has lowered the national savings rate to the lowest level since World War II. So with less capital accumulation, real wage growth will suffer.

posted by: Harold McClure on 09.10.04 at 12:23 PM [permalink]

You speak of a wage premium for education and skills -- it's been a while since I took an economics course but it sounds to me like these are euphemistic way of describing rent seeking by guilds. Unchecked immigration, fear of civil rights laws, and the need to quantify merit "objectively" has led to hiring or paying people based on hoity toity credentials rather than ability or value of the labor performed for unregulated jobs in the bottom half of the economy; the top half is dominated by backscratching boards of directors confiscating all productivity gains for the top 1%, a few mafiosi unions, like the longshoreman, getting $100K plus for dropouts, and guilds like the medical industrial complex or the legal system.

posted by: topcat on 09.10.04 at 12:23 PM [permalink]

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