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Saturday, August 8, 2009

WHAT EXPLAINS THE GROWING WAGE-INEQUALITY IN THE US SINCE 1980?

Today's Buggy Topic

Until the mid-1970s, low-skilled labor in the USA had a long record --- stretching back throughout most of the 19th century --- of unusually high-wages, at any rate if measured against the equivalent wage-levels abroad in Europe or East Asia.  As late as 1939, on  the eve of WWII, the American wage-level was about 2.0- 2.4 times higher than in Britain or elsewhere in West Europe.  By the end of the 1970s, that lead had narrowed in parts of Northwest Europe --- Scandinavia, Germany, Belgium, Holland, France, and yes, also also in slow-growth Britain, mainly owing to what's called convergence catch-up growth. 

Convergence Catch-up Growth Means What?

It means that countries with good legal, political, and business institutions --- plus, a labor-force able to work effectively with up-to-date technologies (mostly innovated and diffused first in the US since the late 19th century; and still the case today) --- will, once they are launched on a sustainable growth-path, grow faster in productivity and per capita income than the lead country on the technological frontier. 

There are several reasons why.  They have more investment opportunities; have lower-priced labor; can attract the technologies from the lead country by multinational implants or licensing (or piracy as in much of China today);. and can then diffuse the technologies across various sectors of their economy . . . and all at relatively low costs, compared to the R&D that American firms invested, the US the leader on the technology frontier for about a century since the 1890s.  In the late 1990s, for instance, the information and communication technologies US firms had innovated had cost about $500 billion.  European or Asian firms could purchase these ICT breakthroughs for something like $25 billion.

Meanwhile, the lead country's economy has, usually, a larger capital stock; and if its firms don't continually innovate, sooner or later diminishing returns on capital investments will set in and the growth-rates in productivity and per capita income will fall off.   In the end, on this view, those countries that have proper institutions and skill-levels diffused among their populations will end up with similar levels of productivity and per capita income.

Enter the Big Structural Changes in the US Economy Since the Mid-1970s

The two biggest changes have been radical technological innovation and globalization . . . the two inter-connected: the big breakthroughs in information and communication technologies, including the Internet, have facilitated the rapid movements of capital and multinational enterprises around the globe; then, eventually, as the pace of globalizing influences picked up --- including the bursting economic growth of East Asia and especially China --- the competitive pressures on US corporate business intensified and speeded up the need to move swiftly up a technological ladder.

The outcome here?

Among other things, there has been a marked relocation of standardized manufacturing out of the US (and to an extent out of West Europe) to China and elsewhere, with multinational firms operating multi-level production and using disciplined low-wage Chinese labor for much of their low-end and mid-level production.  That has entailed the loss of about 4 to 5 million unionized jobs.  At the same time, advanced manufacturing production has enjoyed a tremendous burst of growth in productivity --- so much so that today in chemicals, airplanes, pharmaceuticals, automobiles, big machinery, and the like the level of labor productivity is 3 to 4 times higher than in the late 1970s.  In the upshot, millions of more high-cost labor have been laid off.

In effect, the US has shifted to an overwhelmingly service-industry economy, with manufacturing output only about 15% of American GDP and manufacturing employment down to around 10% of the overall labor force. 

Another good measure of the change?  About 75% of the US Fortune 500 giant firms in the late 1990s didn't exist 25 years earlier. 

Enter the Problem of Growing Wage Inequality

The skill-levels needed in various service-industries vary markedly.   Americans with university degrees have done generally quite well . . . though those in the highest income levels have also enjoyed huge windfalls in their stock-market investments (with ups and downs, and no doubt downs in the latter part of this decade).  By contrast, Americans with only high-school education or less have done poorly.  Their wages have either stagnated for almost three decades (except for the late 1990s dot.com ballooning economy and unemployment around 4.0%) or actually fallen.

This trend, moreover, has been aggravated by other changes in the US economy since the late 1970s:

  • A large growth of the low-skilled labor force owing to immigration, legal and illegal.
  • A reinforcement of this growth of low-skilled workers as women flooded the job-market starting in that decade.  With, to boot, high-skilled women marrying high-skilled men and thus increase wage-inequality that way.
  • The big lag in educational lev els of Hispanic and African-Americans compared to European-Americans and Asian-Americans (especially those from East Asia and India).

What To Do?

There are no easy solutions , far from it --- no silver bullet to end this complex of mutually reinforcing causal influences.  Still, as you'll see if you click here, prof bug sets out a more systematic analysis of these trends and comes up with some policy-suggestions that --- superficial as they might seem --- at least underscore the changes needed to improve the wage-prospects of low- and mid-skilled Americans.

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