Wednesday, May 23, 2007

Supply Factors and Stagnant Wages

Blue collar workers' real wages have stagnated because of labor supply factors. These include:

-The baby boom

They have also stagnated because of:

-Health insurance costs and
-Costs of bureaucracy due to workplace regulation.

Social stratification has increased because of:

-Urban renewal and disruption of blue collar social networks and
-Unnecessary college degree requirements.

In other words, supply factors and government intervention have caused the stagnation of blue collar real wages that the US has suffered in the past 30 years.

In recent years, a coalition of the new left and old right has found common ground in attacking freedom of exchange. Their "pro-Corn Law" argument is that trade results in poverty. But they forget about the massive starvation during the Irish potato famine that the "anti-globalization" Corn Laws caused. The argument is based on a post hoc ergo propter hoc fallacy, that because stagnant wages have followed post-war globalization, post-war globalization caused the stagnant wages. The General Agreement on Tariffs and Trade began liberalizing trade immediately after the World War II, but wages did not begin stagnating until the early 1970s when the Baby Boomers entered the workforce and immigration had begun to increase due to the the 1965 immigration law . Amazingly, liberal economists ignore these factors when discussing stagnant wages.

Post hoc ergo propter hoc is a common fallacy in social science because it is difficult or impossible to control for the effects of all variables. Hence, the validity of social science findings must always be regarded with deep suspicion. Yet, despite the lack of evidence of a causal relationship between lower wages and globalization, the mass media has given considerable air time to demagogues like Lou Dobbs, who claim that globalization causes poverty. A bit of common sense suggests that this is improbable, because although employees who lose their jobs sustain losses due to relocation of industry, millions of others pay lower prices because of the same relocation. In turn, with extra cash, consumers either save or consume, which results in renewed demand for labor.

The "golden age" of wages for which Michael Moore, Pat Buchanan and Lou Dobbs yearn was characterized by restrictions on entry of labor supply that artificially propped up wages: the low birth rate of the 1930s Great Depression; the exclusion of Blacks from the best and unionized jobs; the absence of women; and race-based limitations on immigration.

During this "golden age", the federal and state governments further created the conditions for wage stagnation with a search and destroy mission against social networks in blue collar and poor communities that had in the past propped up blue collar entrepreneurship. At the same time, tax exemptions for third party health insurance, Medicaid and Medicare boosted demand for health insurance, indirectly raising labor costs through higher premiums. The costs of these programs include a considerable premium for fraud and bureaucracy. The New York Times recently found that New Yorkers pay one billion dollars for Medicaid fraud, which is likely the tip of the iceberg. Health plans are penalized because unnecessary care and the costs of bureaucracy to control it raise health care costs dramatically. The higher medical costs reduce labor demand.

Paul Krugman, a liberal academic, does not argue that globalization causes lower wages. In an article in Rolling Stone he states the statistical facts that:


Krugman argues that inequality is because of the reduction in the power of unions, greed of corporate executives, and declining real value of the minimum wage. He also argues that American society has become more stratified than European society and he fears stagnation similar to Latin America's. However, Krugman ignores the absence of stable legal systems, the rule of law, individualism and laissez faire in Latin America. As well, he does not mention the key factor to which I allude above: the demographics of the Baby Boom, which dramatically increased the supply of labor. The Baby Boom generation was also the first to see a marked increase in the percentage of college graduation. As well, immigration increased in the late 1960s, just prior to the flattening of real wages (see George Borjas on immigration). Increased labor force participation of Blacks, Hispanics, women and other minority groups beginning in the late 1960s increased further the supply of labor around the time that wages began to flatten. Likewise, hostile state and federal regulation increased labor costs by imposing regulation, bureaucracy and paperwork in a myriad of health and human resource-related areas (OSHA, ERISA) in the early 1970s, likely without increasing workers' standard of living much (see Kip Viscusi on OSHA).

The effects of urban planning in cities like New York that destroyed functioning, racially integrated neighborhoods and replaced them with segregated neighborhoods separated by class and race lines in the early 1960s likely contributed to social stratification; this was exacerbated by the creation of a welfare-dependency culture. The urban renewal and welfare policies of the 1950s and 1960s destroyed entrepreneurial initiative and self-esteem of inhabitants, and created a psychology of welfare-dependency.

All of these factors combined, namely, governmental assaults on low-wage entrepreneurs through urban renewal, regulation and paperwork in the 1960s and 1970s, unpreventable demographic shifts (e.g., entrance of the Baby Boomers into the workforce beginning in 1969), and immigration contributed to stagnant real wages and stratification. Government added to the mess by raising social security benefits in the early 1970s; the raise in contributions further increased labor costs.

Krugman's argument about corporate greed involves the post hoc ergo propter hoc fallacy. While I agree that top executive pay increases have been excessive and too often have failed to reflect stock market-adjusted firm performance, there is no connection between the raises the top managers get and blue collar workers' stagnant wages. Most workers do not work for the large corporations that Krugman is criticizing, where top executives earn in the millions. First, according to the Bureau of Labor Statistics the median worker works in a firm with slightly above 250 employees. These are not the firms with multi-million dollar executive compensation packages. If large firms are inefficiently run, such smaller firms may benefit because the larger firms are less competitive. Large firms' poor governance may increase wages of lower-wage employees of smaller firms, i.e., the median.

Second, the wages of workers in large firms, where there are high executive salaries, are higher than the wages of workers in median firms.

Third, there is no reason to believe that the wages of executives in the large firms influence the wages of the workers in the same firms. Wages are determined by supply and demand and productivity. Firms continue to hire workers until the wage, as determined by supply and demand, equals the marginal revenue product. If the supply increases, there is downward pressure on wages, and the additional workers hired will be less productive and wages will decline. This will in turn increase profit. However, the reverse will occur should the Baby Boomers retire and immigration be curtailed.

As far as stratification, I have just finished reading David Farber's excellent Sloan Rules: Alfred P. Sloan and the Triumph of General Motors (University of Chicago Press, 2002) and could not help but notice the large percentage of automobile executives in the 1910's, through 1940's who did not have college degrees (although Alfred P. Sloan himself was an MIT graduate) but who, because of ability, worked their ways up to the pinnacle of business success. Three examples were William S. Knudsen, Henry Ford, and Walter Chrysler. Today, most inner-city youngsters with engineering talent would not be able to pursue a career in most industries if they, like Knudsen, Chrysler and Ford, failed to get a degree. An exception was the well-connected Bill Gates, whose privileged exposure to computers at an elite high school and family connections contributed to his success (along with his off-the-charts ability).

Brad DeLong of Berkeley
argues that imports are not the cause of stagnant blue collar wages, essentially agreeing with Krugman:

"The U.S. is not facing increasing competition from low-wage countries. Imports are not the principal cause of falling blue-collar wages, or falling demand for blue-collar workers. The most rapid growth in the relative share of imports occurs in the 1970s, during which blue-collar wages keep pace with productivity and with the wages of white-collar workers...

"The decrease in blue-collar job demand because we do not produce what we import is roughly offset by the increase in blue-collar job demand by export-producing firms...Blue-collar job demand in construction, machine tools, and other investment-goods industries rises because foreign capital finances more investment in America than would take place otherwise...In 1962 36% of the workforce were blue-collar 'production workers'; in 1992 26% of the labor force falls into the blue-collar category. If today we had the same occupational distribution of employment that we had in 1962, there would be 12,000,000 more blue-collar jobs. Thus 'Globalization' --trading our services for their goods--is responsible for only five percent of the relative decline in the share of blue-collar jobs in our economy over the past three decades."

What is amazing to me is that there has been so much criticism of globalization based on the claim that there is a relationship between globalization and wages, but the obvious supply factors: labor market participation, supply, demographic effects, government regulation, mandated social security and Medicare benefits, health care cost inflation and factors affecting stratification (unnecessary job requirements based on education) are not mentioned.

Does the media analyze or does it propagandize?

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