What to do about wage polarization?

I like this Paul Krugman column, but I would have given it a different ending.  Krugman writes:

So if we want a society of broadly shared prosperity, education isn’t the answer – we’ll have to go about building that society directly. We need to restore the bargaining power that labor has lost over the last 30 years, so that ordinary workers as well as superstars have the power to bargain for good wages. We need to guarantee the essentials, above all health care, to every citizen.

What we can’t do is get where we need to go just by giving workers college degrees, which may be no more than tickets to jobs that don’t exist or don’t pay middle-class wages.

I would suggest three different points of emphasis:

1. Trade unions, even if they could become strong again (which is hard to see), would likely accelerate this process of substituting capital for labor, rather than counteracting it.  A one-time union wage premium, even if it does not come at the expense of other workers, will put only a small dent in the long-term trend.

2. Let's reform education, so people either make effective teams with computers, or they specialize in areas where computers are not effective.  The nature of "education" is not carved in stone, even if the sector is hard to reform.

3. I have never seen it suggested that this "hollowing out" process will lead to lower output, quite the contrary.  Those gains go somewhere.  This is a reason to encourage the ownership of capital and on a quite broad basis.  Let's start by repealing Sarbanes-Oxley, but along these lines there is much more we could do.  How about low-load mutual funds backed by claims to intellectual property or whatever else will prove the scarce input for the future?  Identifying that scarce input is the key to making progress on this issue.

Comments

the gains go somewhere is exactly the point...

a negative income tax solves the redistribution problem probably in its entirety...anyone earning under the threshold just gets bumped up to the desired minimum income, but can still work for $1 an hour if they choose...

Hey do ya mind not posting for a week? I'm trying to organize an online information hiatus so I can catch up on the backlog of crap and not get swamped in more. I'm sure others will appreciate my request.

REITs. Eventually.

How does repealing SOX enter the agfument Tyler is making? I didn't understand the reasoning. Any pointers?

With real interest rates as low as they are at present, encouraging capital ownership is unlikely to do much good. Instead, we should identify likely sources of economic rent and shift the tax system onto these rents. For instance, we could tax raw land values, mineral extraction rights, spectrum allocations, pollutant emission rights, fishing quotas etc. (Artificial sources of rent should be addressed by gradually improving policy, at least in the most egregious cases.) The revenue from such taxes could supplement and mostly replace current taxation on income and consumption, although some tax should still be levied on high incomes for the sake of overall progressivity and to offset positional externalities.

Guess: SOX increases the cost of being a public company which allows shares to be owned by the non-rich. It would be ironic if this measure partly caused people to pile into housing.

"We need to restore the bargaining power that labor has lost over the last 30 years.."

Like maybe by making sure the labor supply curve in not horizontal? How Dr. K feel about border enforcement?

Possible mechanism for unions enriching the entire working class: unions negotiate higher wages for its workers. Employees seeking higher wages want to either obtain a union job or organize into their own unions. Employers seeking to discourage unionization or labor mobility improve their own working conditions and wages. Not as much as unions would demand, but enough to create improvements across the working class.

Also, unions seek to drive up its wages not at the expense solely of non-union workers, but management. Saw a good anecdote on this. An executive, a union member, and a non-union member need to divide up 12 cookies. The executive takes 10, then tells the non-union member, "Look out for that union guy ... he wants part of your cookie."

It could make sense if you assume that the unions would spread the wealth capture from the top to trickle down (although I doubt they'd use those terms), but as Lou so eloquently puts it, I assume that the top earners are rich because of globalization.

And you kind of have to assume that unions have been oppressed by powerful interests, while I assume they just became passe`.

How does repealing SOX enter the agfument Tyler is making? I didn't understand the reasoning. Any pointers?

There are none that aren't of third-order importance. TC is merely using this opportunity to lobby for deregulation. Incidentally, PK is lobbying for increased bargaining power through labor unions for essentially the same reason. It isn't economics. It's advocacy.

So the solution to people being replaced by cheaper workers and cheaper capital is to make their cost (wage) more expensive?

I suppose we hollowed out the blacksmith profession at one point too, but it made us richer. These people will have to get new jobs. Many will take a pay cut, but those purchasing their goods at lower prices will have more money to spend on new industries that will create jobs.

Krugman points out that it's harder to make money these days versus our peers than the Golden Age of Middle Class Equality, then says the way to achieve the kind of equality we used to have is for everyone to get less education and bargain harder for wages.

Sounds like a great way to achieve the Dark Age of Lower Class Equality. Thanks Paul.

Barry,

You are dealing in notions and emotions. Just because politicians claim there is a lying CEOs and CFO under every accountaint and their pet legislation will fix it doesn't make either of those notions true.

Would repealing SOX make it easier to lie, or easier to tell the truth? It has pushed a lot of potentially public companies into privacy. It also didn't stop banks from imploding, and accounting is their spesheeality. Accounting is a model. As Keynes said, it's better to be roughly right than precisely wrong. Sometimes the cost of precision is deducted out of accuracy.

If a firm doesn't have market power vs its customers, then it can't pass on higher labor costs, and organized labor is all about the distribution of revenues among labor, managment, and ownership, a Coasian bargain that those with no interest in the firm can be ambivalent about. And in this case it is in principle possible for laborers in every firm to benefit from organization.

If a firm does have market power vs its customers, all that changes.

Lou, I did say that the valuations at banks were the problem. (Although I do not know the status of the Bear Stearns litigation and I don't know if SOX really addresses valuation issues if you have 20 MBAs and a credit agency saying X is valued at Y, but you don't get someone saying that the sub loaning to the sub is unreported). You didn't see the collapse of other corporations that were just as tied into the economy as you did in the last recession. Sorry, you didn't see it, but when you don't see it, that's the success. If you look at financial disclosure litigation filings, as a proxy for financial disclosure failings over a business cycle, you can see my point, and if you compare that to 2000, or even earlier, you will see it again.

As to Andrews point, does SOX make it easier to lie or to tell the truth?

Just to be crystal clear for all the economists out there -- it's not just The Dismal Science, it's a dishonest one, unless we count ALL economic costs honestly, and allocate payment fairly.

Wage polarization is but a symptom that something is hugely wrong on the balance sheet.

Like Bernie Madoff's Ponzi scheme ... the numbers show that something's not being measured right, the accounting is off, and the results stink.

Just to be crystal-clear for the economists out there ... it's not The Dismal Science, it's the dishonest science, unless ALL the costs are accounted for in the equation, and payment allocated fairly.

Wage polarization is a symptom that this hasn't been done. Like Bernie Madoff's Ponzi scheme ... the numbers show that something's not right, the outcome is skewed, this has been going on for awhile and not getting better, and the results stink.

Ignore this, or argue theory?

@krugginator: It's not zero sum.

@John "Why are comment [sic] by Krugman worth considering": Just because you have taken a particular path to improve your life doesn't mean it is the best path for society, or even the best path for you.

No, Krugman's point is good. Too many people are becoming lawyers in the first place because they thought there was always going to be demand for lawyers. There have been at least one Volokh post and at least one NYT article about the lack of demand for lawyers if they have gone to a third-rate school, much less the ability of computers to read documents. The number of people with law degrees is an excellent example of the fetishization of education as a prestige machine.

Oh come on.

The post is about "THE GREAT WAGE POLARIZATION"

Tyler drops a crumb (and this is all he says) : "Let's start by repealing Sarbanes-Oxley, but along these lines there is much more we could do."

Without any support.

And the ravens pick up the crumb and fly with it.

"Well, golly, did those computers and algorithms just make themselves, or were there other highly educated workers--engineers not paralegals--who built them?"

But it requires less work of engineers to create the algorithms than the work it replaces (if it was not that, it wasn't economical viable to replace paralegal by algoritms)

I have never seen it suggested that this "hollowing out" process will lead to lower output, quite the contrary. Those gains go somewhere.

Yes, but they don't go to the general population, or if they do, it is only by political, not by economic means.

If "where we need to go" is "a society of broadly shared prosperity", output is the wrong variable to look at. "Encouraging the ownership of capital" sounds nice, until you realize that many people don't have the *means* to accumulate capital. Incentive structures can't overcome a lack of ability. How are people barely getting by paycheck to paycheck supposed to start accumulating capital -- especially if their real wages actually fall?

More fundamentally, I think it may be actually impossible to turn everyone into a rentier. Isn't the class (and the income associated with membership in it) defined by the fact that capital is a scarce resource that most of society has no access to?

@ procon Learning a skilled trade at a union hall and/or at a community college or getting an associate degree is not something everyone can do. Neither is joining the military to learn skills on the job or earn the education benefits. Obviously you need an IQ of 105 or better. So it would not be a solution for society. We need piecework jobs that pay as much as what any teacher or engineer makes, because otherwise people will riot.

I think that we have hit an area where economists are a bit retarded. Rejiggering a middle class existence in our country is a normative and not an economic goal. We need a normative discourse that values middle class jobs. More than this, that identifies with the goals and life trajectory of a broad middle rather than a small elite. The mixture of neodarwinism and sports that has given us a superstar culture is entirely a normative, discursive disease and the task is to extirpate it. We can start by pruning the obscenity of repeated sports metaphors that continue to mar our beautiful language. We can then move on to management psuedoscience and divest those witch doctors of their magical prowess over the idols of the cult. I will say that it sucks that we have allowed the psuedoscientists to put the demystifiers into a contingent labor pool and that remedying the problem of academic adjuncts might be more important than it appears.

What if nothing proves to be the scarce input of the future? Even an emphasis on intellectual property seems pretty short term if computers start churning out IP in a few decades.

Let's just start shooting smart white and Asian males in the head while they're still young. Their pesky predecessors, with their stubborn hardwork and trailblazing innovation, have conspired to drive technology forward--enriching themsleves and rendering everyone else's jobs obsolete in a vicious cycle. We need to stop the Venture Capital-Computer Technology complex at all costs in the name of justice.

Getting a job with only 20 semester hours programming courses that makes $ 24K (at the time) was pretty shocking. Getting promoted and make 30k in about 2 years more so. Having the ability to continue self fund one's education by reading and taking more courses at community college to make even more money, I just can't see how "the man", "the system",or anyone else is keeping people down.
The only thing that gets you down is that you are on a perpetual treadmill of learning which burns up much of your free time. Whereas policy makers and upper management just say "make it so" like Picard on Star Trek Next Generation" and expect everything to work out with very little continuing education. Instead they are just engaged in influence peddling. Whereas a type of non-trades blue collar have all their free time after work. I don't have respect for any of them high or low.

reply to John at Mar 7, 2011 11:56:58 AM

Great comments. I feel like I have been going to school after work for about 10 years now -- I am now working on a doctorate in management to give myself an even bigger edge.

I predict we'll see a skilled/creative labor force where it's expected to go back and get another Master's degree every 5 - 10 years -- whether that's to change professions or to refresh your skillset.

Higher education is non-compulsory, so those who choose not to go to college fall behind. Pre-1973, you could finish up your compulsory K-12 education and go into the workforce, make a good living, support your family, and play recreational softball after work. Today, this is a one-way ticket to $14 an hour wages and a stagnating standard of living.

So we have three choices:

1. Ban college or shoot all the young white and asian males in the head, as Miley Cyrax mockingly suggested earlier.

2. Make college compulsory

3. Highly incentivize college and ensure that a higher percentage of our high school graduates are college ready.

Option #3 is clearly the most promising.

It's interesting that so many are seeing the issue in terms of labor/non-labor. But what if in the future there quite simply aren't jobs for the majority? It seems that we need something more akin to welfare than new labor unions. And perhaps rethinking welfare as support for new entrepreneurial ventures, rather than support until one can find a job.
I think the big question is still how do we recapture money from the top 1%, and I think they should be thinking about how best to do so. The middle-east right now is showing what happens when you have large out of work educated labor pool. Revolutions in the past have been surprisingly good at freezing assets and putting the ueber-rich in jail. The wage gap becomes increasingly volatile the larger it grows.

Reply to Tim at Mar 7, 2011 12:37:10 PM

Wouldn't it be wonderful if nobody had to work? If we had so much capital that robots would do everything for us?

Anybody who owned even a little bit of capital would be able to survive on dividends alone. Charity would fill the rest of the gap.

"This is a reason to encourage the ownership of capital and on a quite broad basis. Let's start by repealing Sarbanes-Oxley..."

You know what is also encourages the wide ownership of capital? Socialism. It has problems but repealing Sarbanes-Oxley won't do jack.

Tyler,
I'm intrigued by this suggestion:
"Let's reform education, so people either make effective teams with computers, or they specialize in areas where computers are not effective."

Can you elaborate? Or suggest any reading material along these lines?

Thank you
Adam

@Nick Bradley:

Highly incentivize college

What do you mean by "incentivize"?

I think that the problem is the emphasis on the institution of "higher education", and the lack of emphasis on education. Since the USSC banned the use of employer-administered intelligence tests, a college degree has been primarily an intelligence signaling mechanism. "Higher education" has turned into a series of diploma factories, open to (practically) all comers. We need to put the education back into "higher education."

@reply to Blunt Instrument at Mar 7, 2011 2:59:38 PM

College will be incentivized if we let the income inequality between non-college graduates and college graduates continue to widen.

There aren't as many diploma mills as there were before. To be honest, I think it's a lot easier to get through college these days due to technology.

I can write a term paper with extensive research right from my home office. A generation ago I would have had to burn the midnight out in the campus library, photocopying books.

I can even scan for relevant data today.

@reply to Nick Bradley at Mar 7, 2011 3:45:49 PM

College will be incentivized if we let the income inequality between non-college graduates and college graduates continue to widen.

It's already pretty wide. The problem is that the difference gets eaten up by the astronomical costs of 4 years of college tution plus interest.

All colleges are diploma mills compared to 30 years ago. College is easier today because professors still teach as if it was 20 or 30 years ago.

@reply to Paul Siegal at Mar 7, 2011 3:52:26 PM

education is important for everyone in our sophisticated society

I completely agree. I just dispute the conclusion that this education must come from college or universities. We need to improve primary and secondary education so that the average high-school graduate has the education of a current college senior or graduate.

@reply to Paul Siegel at Mar 7, 2011 3:52:26 PM

Is it all eaten up? or do we subsidize the wrong fields? Also, it seems to me like we don't build college campuses any more.

I haven't heard a single politician, liberal or conservative, call for more colleges to be built -- vocational yes, but not 4-year+ colleges. Instead, we just pack current campuses to the brim with undergrads and charge them more.

reply to Bill at Mar 7, 2011 4:58:01 PM

I agree that leisure will play a bigger and bigger role in future generations -- and there is no way for national income statistics to account for that...perhaps median annual wages divided by median hours worked?

Your need to work decreases as you go up the income ladder.

What if we saw productivity per capita double of the next 40 years (which is the baseline projection) but see median incomes stay flat? That would mean that the average worker is only working 15 - 20 hours a week. Cowen would call that "The great stagnation", but most Americans would call it "fantastic".

There are plenty of trades that unskilled workers can train for such as being a plumber or electrician which pay quite well; it requires training but not four years. I don't necessarily agree that the wealth needs to be spread around and that everyone should profit equally; to me that's starting to sound like communism. In a market based economy the biggest and brightest rise to the top as they should. Hoarding money isn't a crime btw; if you've earned it you may hoard it if you like.

What I also think is interesting about the post and cooments with respect to the flattening of the education premium is that it assumes that Americans might not move to countries where there education premium is higher. Could we see emigration, just as the British left England. Hong Kong , Singapore, brazil, etc.

Haven't had time to read all the comments, but to those re: a negative income tax:

We have one, but it goes Milton Friedman one better. It's called the Earned Income Tax Credit.

It should be greatly expanded, and recipients should be educated to take their credit on their regular paychecks, as with withholding. Only about 1% of recipients do.

Sorry, gotta go.

The Alaska Permanent Fund takes money from oil companies and pays money to residents of the state. (And most residents think they are conservatives!)

That's what the USA and the rest of the world should be doing: real fees on oil/gas/coal mining/pipelines/drilling, grazing, fishing, usage of radio-spectrum, and so on that pay "we the people" who created this government, court system, and laws, that benefit corporations at the expense of private citizens.

"How does repealing SOX enter the agument Tyler is making? I didn't understand the reasoning. Any pointers? "

It would give the upper management of corporations more power to cook the books, thus leading to more money mysteriously ending up in their hands.

IOW, it's directly opposite to what Tyler is claiming as a goal, and 100% in alignment with what right-wingers want.

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