Over the last twenty years tensions have arisen in the domestic labor market in response to the explosive growth of international trade. Lower trade barriers have opened export markets for American workers and created jobs in our export sectors. Meanwhile, lower import prices have served to keep inflation low and real household income high. But open markets have not automatically translated to a better quality of life for every American.
While most American workers have gained in the age of globalization, some workers — in particular blue-collar laborers — have been displaced from firms that are no longer globally competitive. The adjustment costs for these workers have been far more significant, and different, than in prior decades, suggesting the need for new approaches to this labor problem.
Private markets have their shortcomings, but public policy also can be counterproductive in a global economy. Tax and regulatory policies aimed at fixing labor problems typically alter the efficient allocation of scarce resources and end up increasing the cost of labor. When political salt is poured on labor-market wounds, more jobs are inevitably lost.
But the dynamics of the labor market in the age of globalization are relatively clear-cut, and the solutions to the problem of blue-collar displacement are not hard to discern.
The U.S. labor market remains vibrant, with more than 4 million hires each month accounting for approximately 3.5 percent of all employment. Yet, over the last twelve months, employment has declined near 12,000 jobs a month for the manufacturing sector and 1,000 jobs a month in the construction sector. In contrast, job gains have averaged 167,000 per month in the service-providing sectors.
Why the disparity? Manufacturing employment peaked in 1979, while service-sector employment has enjoyed growth ever since. These secular changes reflect, first, long-term productivity gains in manufacturing — similar in scope to gains in agricultural productivity in the hundred years prior to World War II. Second, over the last twenty years, the influence of globalization on tradable-goods production has reinforced the productivity story.
Since the passage of the North American Free Trade Agreement in 1994, it has become evident that the tides of globalization and free trade are unlikely to ebb. Therefore, workers today are faced with a stark reality: If they are to compete, they must develop and nurture those talents that can survive the continued pressures of globalization — namely technological advancements and increased productivity.
You’ve undoubtedly heard the term “income inequality” bandied about by the media. But the contrast in earnings performance among Americans reflects the ongoing evolution in the returns to labor where education is the primary driver of income disparities. Education, in other words, is the “skin” that all workers must have in the new jobs game.
Earnings growth over the last year has been superior for skilled, education-driven professions such as information, finance, and business services. In contrast, average hourly earnings in manufacturing were up a mere 2.15 percent in the period, with nondurable manufacturing earnings up a paltry 1.24 percent.
In short, mounting income disparities over time are best explained by disparities in education, and not some ill-defined political conspiracy.
Unemployment rates also vary significantly by education. Indeed, the experience of unemployment is likely to be more frequent and devastating to the lifetime earnings of workers with lower levels of education.
Unemployment also fluctuates considerably by occupation. In March 2007, unemployment varied from over 8 percent for construction workers compared with less than 2 percent for management and professional workers.
Again, the key culprit (if we are to call it that) is productivity in the age of globalization.
Productivity has steadily improved since the beginning of the Industrial Revolution.
And over the last twenty years, the productivity gains relative to communication and computerization have severely diminished the demand for lower-skilled workers.
There are additional and important factors at play in today’s labor and income shifts. In recent years, political pundits galore have focused only on wages in order to distort the economic forces of labor compensation for political advantage. In truth, since the early 1960s, the share of labor compensation going to wages and salaries has declined while that accruing to benefits has risen.
Over the last twenty years we also have witnessed a shift in job demands by region: A dual-sector labor market has failed to eliminate the structural unemployment associated with blue-collar workers in the industrial Northeast, while the Sunbelt has continued to draw professional service workers from the rest of the nation and around the globe.
Related to each of these factors, available compensation in the labor market reflects the skills required in a new position, not the historical compensation of a prior spot. This distinction becomes a dramatic shock to workers who are displaced from highly unionized jobs to non-unionized positions. Compensation is commensurate with the job — not the worker.
But overall, globalization and outsized productivity gains have combined to permanently reduce the demand for low- and semi-skilled workers. That’s right: permanently. If economic growth and prosperity are to remain in this nation’s future, there is no going back. And to head forward, we must look to the solutions that today’s labor problems have already defined.
First, we should appreciate the limits of public policy. Policy is neither in the position to guarantee jobs nor create public-sector employment. Attempts along these lines will only impose a significant tax burden on the existing workforce while distorting the allocation of resources in society.
Instead, public policy should be directed toward overcoming the barriers, or transaction costs, to adjustments in the labor market. In other words, our lawmakers must continue to commit to open global markets and free competition between markets for goods, services, and financial flows. Meanwhile, they should develop policies aimed at helping workers remain competitive — for instance, grants and loans that can help keep workers trained and competitive.
Workers need to enhance their skills often. Flexible retraining suggests that emphasis must be given to junior-college and/or part-time skill development that can meet the evolving needs of employers. Public policy should recognize that the cost of maintaining human capital, as well as physical capital, is an ongoing investment.
Job-search issues also must be considered, given the “friction costs” associated with looking for that next position. The costs related to changing jobs increase fairly quickly with the age of a worker, and remain high for workers who are poorly educated. Moreover, many workers have little recent experience looking for a new position, since they have worked in the same job for a number of years.
Finally, unemployment insurance, which is built on the traditional view that unemployment is temporary and cyclical, fails to deal with the modern labor-market issues of permanent layoffs and obsolete skills. For this reason, the program should be reformed to recognize structural layoffs, and thereby allow for longer periods of unemployment that coincide with retraining, not just job placement.
Worker assistance, however, does not mean a handout at the expense of the taxpayers who are struggling with their own careers and personal responsibilities. Instead, programs that are developed to facilitate retraining and job-search issues should impress upon workers that they keep “skin in the game” if they expect to thrive in the age of globalization.