In The Age Of Global Competition, Whither American Labor?

Paul Krugman is not my favorite columnist, and the last two sentences of his Op-Ed piece today, entitled"The Big Squeeze," are a good illustration of my problems with him. His subject is the squeeze on American wages and he ends the piece with an alarmist metaphor followed by a call to action, presumably by government:

America's working middle class has been eroding for a generation, and it may be about to wash away completely. Something must be done.

Given Krugman's agenda, the "wash away" metaphor is effective, evoking both the destruction wreaked by the Katrina flooding and the conviction that the government should have done something to prevent or at least mitigate that destruction. But it is a tad melodramatic don't you think? American workers are being squeezed, there's no doubt about that. But washed away? For all of their problems, American workers remain the best paid in the world, and I doubt seriously if any of them are or will soon look longingly at the wages and working conditions "enjoyed" by the Chinese and Indian workers with whom they are competing.

Still, the phenomenon Krugman describes is real and its causes and implications are well worth thinking about:

There was a time when the American economy offered lots of good jobs - jobs that didn't make workers rich but did give them middle-class incomes. The best of these good jobs were at America's great manufacturing companies, especially in the auto industry.

But it has been a generation since most American workers could count on sharing in the nation's economic growth. America is a much richer country than it was 30 years ago, but since the early 1970s the hourly wage of the typical worker has barely kept up with inflation.

The contrast between rising national wealth and stagnant wages has become even more extreme lately. In 2004, which was touted both by the Bush administration and by Wall Street as a year in which the economy boomed, the median real income of full-time, year-round male workers fell more than 2 percent.

Now the last vestiges of the era of plentiful good jobs are rapidly disappearing. Almost everywhere you look, corporations are squeezing wages and benefits, saying that they have no choice in the face of global competition. And with the Delphi bankruptcy, the big squeeze has reached the auto industry itself.

Labor is a commodity, and, like any commodity, the "value" of labor (i.e. the price a labor consumer is willing or able to pay for that labor) declines as the supply increases and/or the demand decreases. This is not to say all labor is the same. Far from it. Just as sugar is not a substitute for diamonds, so too an autoworker is not a substitute for a brain surgeon. And, like diamonds, brain surgery is more "valuable" than auto repair precisely because brain surgeons are rarer than auto mechanics. (This difference is due only in part to the fact that the abilities required for brain surgery are rarer and the knowledge more difficult to obtain than are the abilities and knowledge necessary for auto repair. The supply of brain surgeons is also constrained by shortages of medical schools, licensing requirements, and immigration restrictions while demand for brain surgery is kept high by heavy subsidization in the form of insurance. But that is a subject for another time). Even within a given labor sector there are differences. A worker who can make 10 widgets per hour with $10 of capital, is worth considerably more than a worker who can make 1 widget per hour with $5 of capital. But the point is still obvious: Whatever the goods or services, if worker A can produce output comparable to worker B at a lower total cost, then worker A's wages will tend to rise and worker B's will tend to fall, unless there is some impediment that prevents worker A from competing with worker B.

During the period of American history to which Krugman devotes his nostalgia, the supply of labor available to American manufacturers was constrained by geographical factors and the demand was enhanced by relatively low productivity. This has now changed. Advances in technology, communication and transportation have vastly increased the available supply of labor at the same time that increases in productivity have reduced demand for it. It doesn't take a Nobel Prize in economics to realize that these factors -- especially in combination -- are going to put a squeeze on the best paid of the workers in the labor pool -- Americans -- while giving a boost to the wages of comparable laborers who are currently paid far less -- the Chinese and Indians for example. The net effect is that, absent political interference, global wage inequalities will tend to diminish. That is bad news for American workers, but it is very good news for Chinese workers.

If this equalization were occurring between sections of the United States itself, we would not be all that concerned. In fact, exactly that sort of a realignment did occur in the United States as manufacturing jobs steadily left the Rust Belt for the Sun Belt beginning in the 60s. But when the equalization starts crossing international boundaries, the whole issue gets bound up with nationalism. The question Krugman is actually asking is how do we maintain the artificially high wages of American workers while keeping the wages of comparable Chinese and Indian workers artificially low. Nationalism prevents him from even thinking about whether that is a worthwhile goal.

Krugman rightly fears the political implications of this trend:

What if neither education nor health care reform is enough to end the wage squeeze? That's the possibility that makes free-trade liberals like me very nervous, because at that point protectionism enters the picture. When corporate executives say that they have to cut wages to meet foreign competition, workers have every right to ask why we don't cut the foreign competition instead.

I don't know whether workers have the "right" to ask for protection, but I certainly do agree that they will ask for it. Indeed, they are asking for -- and in some cases getting -- it already.

Protectionism is a very bad idea. But even the most compelling economic arguments are not going to be enough to meet the political demand to protect American wages. So, in the end, Krugman's question is a valid one: what do we do to prevent a continuing squeeze on wages from triggering a political reaction that ends in protectionism or worse?

I don't know exactly, but I do know this much: Any solution that will work has to fit the economic realities rather than fight them. The economic reality this: traditional mass production will no longer support the relative wage levels it did a generation ago. There is simply too much competition, and the global leveling of wages that results from this competition is going to inexorably and unavoidably reduce the difference in wages between American and foreign mass production workers. In the end, I think the wages of foreign workers are likely to rise faster than the wages of American workers will fall, since manufacturers in India and China will inevitably be faced with the same types of demands for higher wages and benefits and for collective bargaining that American manufacturers faced a century ago. But, the prospect for maintaining the present gap between American and foreign manufacturing wages is virtually nil. There is nothing that government can do to change that fact, and asking it to try is like asking King Canute to stop the tide from coming in.

If high American wages are to be maintained, the only real option is for Americans to find different things to do; things for which the global labor pool is much smaller. The obvious candidate is the so-called "knowledge" or "information" economy. Krugman is skeptical about this as an option:

During the 1990s optimists argued that better education and worker training could restore the economy's ability to create good jobs. Mr. Miller of Delphi picked up that argument as part of his public relations campaign for wage cuts: "The world pays knowledge workers far more than it pays manual, industrial workers," he said. "And that's what's sweeping over here."

But that's a very 1999 sort of answer. During the technology bubble, it was easy to believe that "knowledge workers" were guaranteed good jobs. But when the bubble burst, they turned out to be as vulnerable to downsizing and layoffs as assembly-line workers. And many of the high-paid jobs that vanished when the technology bubble burst have never come back, partly because they have been outsourced to India and other rising economies.

But his skepticism is based on three mistakes. The first is to write off the knowledge economy simply because that economy is not immune to layoffs. Yes, the bubble of late 90s resulted in a rate of computer and internet-related job creation that could not be sustained. But, does anyone doubt that the computer/internet industry is a huge source of job growth in America or that these kinds of jobs pay more than mass production jobs?

The second mistake is that Krugman seems to think that the "new" jobs should continue to provide Americans with higher wages than the rest of the world for a period of time comparable to what manufacturing did. This is not going to happen. Inevitably, American workers are going to face global competition even in the knowledge economy, and that competition is going to put pressure on high American wages in those areas. Further, this process is going to happen at an ever accelerating rate. Thus, if American workers are going to continue to be the best paid in the world, they are going to need to do re-invent themselves over and over again.

Finally, Krugman makes the mistake of equating the "knowledge economy" with the computer/dot com economy. Computers, the internet and dot coms are important, but they are only a very, very small piece of the knowledge economy. It is more realistic to equate the knowledge economy with the service economy.

When we talk of "service" jobs, we tend to think of people flipping hamburgers or greeting customers at Wal-Mart. But the service economy also includes doctors, lawyers, accountants, consultants, counselors, educators, carpenters, plumbers, truck drivers, stock brokers, financial consultants, financial analysts, commodity traders, bankers, scientists, engineers, designers, decorators, photographers, journalists, pundits, entertainers, etc., etc., etc. These are all jobs that will pay American workers as well or better than the manufacturing jobs Krugman pines for. Also, many of these jobs are far better insulated from competition by foreign workers than are manufacturing jobs, since most require or are at least significantly enhanced by face-to-face interactions with the consumer. It is to these types of jobs that Americans need to move to if we are to maintain a standard of living higher than any other country on earth.

What role does government have in this? Not much, frankly. Indeed the great danger is that government will get in the way. The protectionism that Krugman fears is the most obvious counter-productive response, since, at best, protectionism will only serve to delude people into thinking that America of the 1950s can be preserved. But, there is a useful role for government in three areas: education, education and education.

I am not talking solely about the type of education you get in school. A big part of what is needed to make doctors out of steelworkers or carpenters out of coal miners is to convince the people who might otherwise become steel workers or coal miners that the future lies elsewhere and that they have to ability to go to that other place. Also, we need to educate parents about education; not just the value of it but their role in assuring that their children get it. Efforts to force schools to raise the academic standards and to be accountable for failures to do so are probably necessary, but the real need is to convince parents that the key to their children's education lies not with the schools but with them.

Finally, of course, we need broader access to higher education. Without that, urging the importance of education on parents and children becomes a cruel joke. We will have created a demand that cannot be met. If we are to meet the challenge that global competition poses to those who would otherwise end up in the mass production economy, we have to provide those people with the actual opportunity pursue the alternatives. I don't have an easy answer to how this should be done, but I do think I know what needs to be done. The goal needs to be to assure that every child who wants to can get the education he or she needs to move into the knowledge economy.

In the long run, I do not think the current gap between American and foreign wages is sustainable. It is just too big. Also, one can well ask whether it is important to maintain that gap. Arguably, we should not object if other countries reach our standard of living so long as that standard of living is adequate (whatever that means). But, I do think that trying to maintain the gap is worthwhile so long as the means we use are designed to increase American wages rather than trying to prevent increases in foreign wages. Regardless of whether such efforts are successful in maintaining American wage leadership, the effort to achieve that goal will benefit us all.