Inequality and the Changing Labor Market

By Mike Koetting                 June 28, 2017

This is the first of a series of posts on what I consider the three most pressing issues of our time—inequality, the environment, and the nature of work.  As I will argue, these are linked.  Today’s post looks at inequality through the lens of labor market changes.

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By now even Inspector Clouseau has figured out that there is an inequality problem.  Perhaps, however, the conversation could be helped by making a few distinctions about the nature of inequality.  Policy-making requires clear understanding of the sources of the problem.  There seems to be some blurring of issues in the current conversation.

I want to suggest there are two dynamics of inequality, labor market changes and top down inequality.  They are related, but, at the same time, they are distinct dynamics.   (Racism is a separate case of top down inequality that will get some specific attention.)

Automation

The structure of labor markets is not static.  In 1820, 72% of all American workers were farmers.  By 1910 that had dropped to 32% and now hovers just over 1%.  Looking back, this seems to most of us as pretty inevitable—and, generally, progress.

The loss of manufacturing jobs is largely the story of a shift in the technology of production.  Society’s desire to explain major changes in terms of specific villains—trade deals and immigrants in this case—is understandable.  But all published evidence suggests that, at most, these are smaller factors.  The major culprit is automation.

There are a ton of sources on this, but one excellent summary is at a report from the Ball State University Center for Business and Economic Development, “The Myth and the Reality of American Manufacturing in America”.  (docs.google.com/viewer?url=http%3A%2F%2Fprojects.cberdata.org%2Freports%2FMfgReality.pdf)

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Ball Manufacturing

A side-note that in some ways illustrates what’s going on.  Ball State was named after the Ball brothers, who made a fortune manufacturing and selling their reusable jars, back when “putting up” vegetables was a routine activity for the still large agricultural sector.  In the early 1900’s, they saved the teachers college in their hometown of Muncie, Indiana, when it went bankrupt.  It was subsequently named after them. Today, Ball Corporation no longer makes these jars, has relocated his headquarters to Colorado, is an investor owned company and has facilities all over the world.

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The Ball State University report shows the notion that manufacturing is in decline in the US is simply wrong.  While manufacturing output slowed during the Great Recession, it has come back and continues a long pattern of persistent growth.  For instance, the United States has never made more steel than it is currently producing.  2015 (the last year for which data is available) saw the greatest US manufacturing output ever.

What has changed, however, is the productivity per worker, or, stated another way, the amount of automation.  On balance, the report estimates, 88% of the job losses in manufacturing have been due to productivity increases.  As we know, the lost jobs were reasonably well-paid jobs, often unionized and almost certainly with good benefits.

 

Combine that with loss of coal mining jobs, the ups and downs in petroleum, and automation changes impacting white collar workers (between 2007 and 2013 the US shed more than 2 million clerical jobs), and it is obvious there have been structural changes that have taken a serious toll on jobs that provided decent wages and benefits but did not require college.  And, unlike the transition from farming to early manufacturing (which had very low barriers to entry level positions and people’s expectations were low), there is not a ready pool of jobs with equivalent pay to which people without college educations can transition. And they carry over expectations from their previous jobs.  It is small wonder that these folks feel existentially threatened.

While each specific increase in automation follows from decisions made by the automating corporation, the fact is the changes taking place are not part of a conspiracy or of deliberate policy choices to eliminate jobs.  The increases in automation are, rather, a macro-market changes that is more or less inevitable.  And the degree of inequality in the US has risen because there is no obvious way to replace the income (including benefits) from these eliminated jobs with the other available jobs.  We can not get to sustainable policy solutions without recognizing that these changes will not be reversed.  In fact, are likely to accelerate.  (A recent New York Times piece addressed that the issue of automation is starting to impact even places like China, where increasingly robots are being used to manufacture cars.)

I can’t help but notice that although the Republicans have made “job-killing” into an all-purpose adjective—job-killing Obamacare, job-killing regulations, job-killing environmental protections—I have never heard a Republican talk about “job-killing automation”.  That might have something to do with the fact that returns from automation accrue to capital, not workers.  Which is why the next post will address how top down inequality worsens these problems.

Globalization

In much of today’s discussions, globalization is addressed primarily in terms of trade deals.  Understandable; they are not irrelevant.  But the fundamental fact of globalization is not caused by trade deals.  Trade deals are more symptom than cause.

Globalization is in fact the collection of technological changes—predominately in communication and transportation—that dramatically increase the odds that what happens in one country impacts what happens in other countries, far and near.  There is flow between more developed nations and less developed nations.  But no nation wants to stay less developed.  And they can use technology to speed up their trajectories vis a vis the more developed nations.

No doubt trade deals accelerate the process.  But phenomena like outsourcing are not totally dependent on trade deals.  Outsourcing is a result of competitive pressures that are likely to manifest themselves one way or another.  It is possible to erect tariff walls sufficiently high to keep other country’s products out of our market, but it is not clear this approach is sustainable and it is even less clear that the common wealth is well served.  It increases prices, slows innovation and depresses exports.

Most research shows that the impacts of globalization are on average moderately positive, at worse break-even, when viewed in terms of the whole country.  Unfortunately, what is true on average is not necessarily true in subgroups.  Globalization has materially contributed to certain pockets of net losers.

So where now?

No easy road.  These jobs aren’t coming back and we don’t really have good ideas what to do to help the people who have, through no fault of their own, been losers in the restructuring of the labor market.

Being realistic would be a start.  False promises merely deepen already Grand Canyon sized cynicism.  There is probably not a lot that can be done for older former workers.  A robust set of public projects might contribute.  Giving people meaningful jobs not only provides income but keeps them invested in the larger society.  But an honest solution will probably have to include a generous welfare or wage supplementary program based on previous earnings. Perhaps substantial investments targeted at younger workers can help them prepare for jobs that will be there.  The real investment needs to be in kids still in school.  It doesn’t have an immediate payoff, but it probably gets the most return for the expenditures.

Although realism and long term payoffs are not the strong suit of politicians, they may be running out of choices.  The issue won’t go away by great rhetoric about the old solutions.  Have you noticed that when Trump holds a rally to announce some great job saving, weeks or months later the company still announces layoffs?  Maybe fewer than would otherwise have been, but layoffs nonetheless.

There is no sensible reason to believe that automation or globalization will abate—or even that they should abate.  Unless we believe society can prosper with increasing inequality and greater alienation from the workforce, we need a reality-based plan.  Or better yet, a vision of a society not based on the idea that whoever can grab the most is entitled to it.