7/4/97
KUFM / KGPR
T.M. Power
Growing Economic Inequality
The conventional economic wisdom, widely shared by professionals as well as the person-on-the-street, is that our economy has been failing to generate enough "good" jobs, meaning well-paid jobs. Instead, we are told, it has been churning out "burger flipping," minimum wage jobs. Partly because of this, it is suggested that people getting more education is a joke. They just become college educated burger flippers. Because there is at least an element of truth in these assertions, they persist as statements of economic fact.
The economic reality is actually a bit more complicated than this and directly contradicts most of these claims. The fact is that the demand for highly skilled and experienced workers has been growing throughout the 1980s and 1990s. During this time period the supply of both college educated workers also expanded rapidly, but the demand for these more skilled workers grew even faster so that the reward paid for these workers’ education grew significantly. The reward for years of work experience also rose. That is, the economy was creating jobs for people with more education, skill, and experience faster than we were producing such workers. The net result was a shift in the distribution of rewards and income toward the more educated and experienced. College graduates now earn about 75 percent more than high school graduates. Twenty years ago the college wage premium was only about 45 percent. Clearly getting more education pays off now more than ever in the past.
That is the positive side of the changes, benefiting those at the upper end of the education, skill, and experience distribution. The dark side of this phenomenon is that the relative rewards for the college graduates are as high as they are primarily because the floor has collapsed under those young people who do not go to college. It is here that the minimum wage, "burger flipper," image is correct. The unionized, blue collar path to a middle class life style, regardless of educational level, has largely disappeared. Young, relatively uneducated, workers are crowded into a labor market where real wages have steadily fallen for almost two decades as the protection provided by the minimum wage was allowed to be eroded by inflation.
We have been growing a bipolar economy: Expanding opportunities and pay at the upper end, collapsing opportunities and pay at the lower end. To characterize this as an economy where we are creating too many unskilled jobs is to grossly misstate the problem: The problem is that we are not creating enough unskilled jobs and are creating too many skilled jobs. There is not enough demand for our unskilled workers and too much demand for our highly educated workers.
This is a very divisive situation, providing our fellow citizens with drastically different rewards for their work efforts. One obvious policy question is how we arrived here. Part of the answer is found in international comparisons. Among the developed economies only England has seen wage inequality rise as drastically as it did in the United States. In the rest of Europe nothing similar has happened. That is, the two economies that most quickly dismantled their welfare state apparatus and most dramatically reduced public involvement in the economy saw the highest rise in inequality. This suggests that the character of the wage setting institutions in each country has played a significant role. The decline in the real value of the minimum wage, the decline in the power of labor unions, the opening up of domestic markets to imports, deregulation of relatively high-paid industries, reduction in welfare programs, etc. have all operated to reduce the economic bargaining power of those at the lower end of labor market. It should not be surprising if wages for those workers have been falling.
The primary alternative explanation is that it has been the decline in heavy manufacturing, mining, utilities, etc. that has caused the decline in real earnings for the less educated. Those declines in the "industrial" sectors of our economy, in turn, often are blamed upon environmental regulation and other government burdens. The facts do not support this explanation. Even within those industrial sectors there has been rising inequality. There has also been rising inequality in the service sectors. That is, even if we had been able to freeze the industrial structure of our economy where it was in the 1960s, most of the increase in inequality and decline in the well-being of those at the lower end of the distribution would have taken place. Changes in industrial mix will not carry us very far in explaining what is happening to the distribution of income.
The conclusions to be drawn from all of this are not very optimistic. One is that the social welfare institutions we spent the first half of the 20th century putting in place worked to expand the range of opportunity for all Americans and reduce inequality. Too bad we are now so gung-ho to dismantle them. Another is that one set of public institutions is continuing to function, namely education. We are so used to bad mouthing our educational institutions that we have not stopped to look at what the economic payoff has actually been. It has been impressive. Yet, in our enthusiasm to enter the 21st century with a purely 19th century set of social institutions, we are now systematically attacking public expenditures on education too. It must be the destructive gale of the millennial change that is driving us collectively mad!