Friday, September 13, 2013

Is the economy producing too many low quality jobs?

There are a lot of stories like this and this that fret over the low quality of new jobs coming out of the recession.  The notion is that there are millions of qualified workers clamoring for work, but firms are not investing in high wage jobs.

FRED GraphInvestment did take a big hit in the recession, but it is recovering pretty normally.  Still, the deep plunge could have caused a lingering lack of investment for high wage labor.

But, still, if firms were being slow about reinvesting, wouldn't high wage production bring more value-added than low wage production?  It seems just as likely that we should expect a dearth of low wage jobs.  Of course, in that case, we would have higher unemployment among the poor, which doesn't seem any better.

But setting labor demand aside, there is also supply.  I'm afraid that we acquiesce to the sort of vulgar Marxism of populist economics by assuming that labor markets are directed only by demand, and that workers must find a place to plug in to the fixed set of labor opportunities that firms decide to provide.  But, labor markets in the US are clearly directed by both.  Labor supply is going to look like this, with a lot of older, experienced workers leaving the workforce and a large number of twenty-somethings just getting their first serious jobs.  If labor supply were the directing force, workers might be forcing firms to develop a lot of new entry level jobs to replace a lot of senior jobs.

Looking around the world, clearly the best way to create high wage labor demand is through functioning markets.  In fact, I think we have evidence that there has been a surplus of middle wage labor demand in the US.  We know what an economy looks like where there is a shortage of labor demand.  It's the kind of economy where you get in a cab and discover that the driver has a masters degree in mechanical engineering, or where you see a guy with a little table on the sidewalk, selling dish soap and tube socks, or some such.

So, we have a good indicator to watch to see if the American economy is under-demanding good paying, middle class jobs.  At this point, almost every young middle class adult is attending some form of post-secondary education.  The community colleges and state universities provide broad, roughly interchangeable access to a wide range of career opportunities, and the cost of the education does not depend on the path of study.  An engineering undergraduate will typically pay the same as a sociology undergraduate.  So, once a student is enrolled in college, there are many paths of study that can be taken that all share a similar cost, but that have vastly different earning potential.

In an economy with a shortage of mid- and high- wage labor demand, I would expect to see an arms race within the student population to compete for the degrees that require more effort, but that will offer higher income.  Students seeing a bifurcated economy would be fighting to get into the better half.  This would lead to a surplus of graduates prepared for high wage work, and if the economy was dysfunctional, we might see a bunch of middle class graduates with STEM degrees driving taxis.

Instead, US universities have to fill their STEM programs up with immigrant students because there are few American students who consider them to be worth the effort.  I consider this evidence that there is, in fact, nothing in the middle class job market that is motivationally lacking for young workers.  And, it's not just schools.  If you have a sizeable engineering office in flyover country, it's likely populated with engineers from Vietnam and India.

I think we should look more closely at labor supply before we come to any conclusions on these matters.

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