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.