March 17, 2013
The Dismal Future for Workers With Few Skills
The Dismal Future for Workers With Few Skills-Becker
During the past 30 years the market for workers with few skills has been weak pretty much everywhere. The reason is that economies, including developing economies, have increased their demand for knowledge workers at the expense of low skilled workers. The future is not likely to be any kinder to workers with little education and few other work skills.
Various forces have favored skilled workers during the past several decades; indeed, many of them began much earlier. Technological changes and automation, including the development of computers, the Internet, and electronic controls, have reduced the demand for certain types of skilled workers, such as secretaries and clerical workers. They have increased the demand for workers who command considerable knowledge, and who know how to access any additional knowledge necessary to perform various tasks. The growth in the stock of complex machinery has also raised the demand for workers who know how to effectively use such machinery.
These trends toward greater reliance on knowledge workers have been powerful not only in richer countries like the United States, but also in developing countries like China and India. In China, for example, enrollments in universities during the past twenty years have boomed because the demand for educated workers and other skilled workers has sharply risen due to technological transfers from Japan, the US, Germany, and other countries, foreign direct investments, and the growth of exports.
When increased demand for more educated and other skilled workers is matched by increased supply of these workers, the net gain from becoming educated and skilled does not increase. Put differently, under those conditions, the earnings of less skilled workers would not fall relative to skilled workers. This is more or less what happened on balance in the United States during the first 80 years of the twentieth century. But during the past 30 years, supply has not kept up with demand, so that the real earnings of low skilled workers have fallen relative to those of skilled workers. Perhaps even low skilled earnings have fallen in real terms.
This fall in the relative, and perhaps also absolute, earnings of high school dropouts and other workers with limited skills has been associated in the US and some other developed countries with a large decline in the labor force participation of males with less than a college education. Some have interpreted this decline in participation as evidence that there are not enough jobs any longer for workers who do not have considerable marketable skills.
Yet both theory and evidence contradict this overly pessimistic view of employment opportunities. Theory states that the number and kinds of available jobs depend not only on demands from producers and consumers, but also on the cost of different worker types. When the cost of less skilled labor is low enough, more workers are used to help with gardens, clean homes, help consumers find the goods they want in retail establishments, and in countless other ways. Essentially, the number of jobs that can be created is virtually limitless, and it is mainly constrained by the cost of the labor.
Of course, obstacles like the minimum wage and "fair" wage laws. Like the Davis-Bacon Act in construction, may prevent wages from falling to levels that allow workers with lesser skills to find work. More importantly, some persons with limited education and other skills may choose not to work or to work only sporadically even when they can find jobs. The reason is that they can collect enough benefits from food stamps, unemployment compensation, subsidized housing, Medicaid, "disability" pay, and other welfare payments to enable them to do almost as well financially, and perhaps even better, than they could if they worked and had to forgo most of these benefits. Note the low unemployment rates of unskilled illegal immigrants, who do not qualify for most of these welfare benefits. Their earnings also tend to be above minimum wage levels.
In the longer run, the solution to the economic plight of high school dropouts and other low skilled persons is, as I have argued in previous blog posts, to ease the obstacles to boys and girls from poorer backgrounds that prevent them from finishing high school and getting additional training after high school, such as learning to drive trucks or work with computers. In the shorter run, it would be desirable to replace the welfare benefits that discourages many low skilled individuals from working with an expanded earned income tax credit that does the opposite and encourages them to work.
Automation and Employment--Posner
The question I consider is whether automation, technical progress, outsourcing, and the increasing complexity of products and services—all closely related phenomena—are reducing demand for workers, especially but not only those who do not have a high IQ.
There is a long history of exaggerated concern, rightly derided by economists, with the replacement and hence displacement of workers by machines. The idea at its simplest is that labor-saving devices whether in home or factory production, or in services, displace labor, leaving workers unemployed. The logic is simple. Over the course of my lifetime I have seen an enormous improvement in the quality of razor blades. A razor blade used to be good for one only shave; now it lasts weeks, even months. So fewer razor blades are made and therefore fewer workers are required in order to make them. The result is a worker surplus—but the logic that predicts this result is flawed. Workers made superfluous by technical advances constitute a pool of labor available to producers of new products and providers of new services. The existence of the pool places a lid on the price of labor, and therefore on the prices of the new products and services (since labor is an input into those products and services). Low prices stimulate buyer demand, which results in greater production, increasing the demand for labor. For centuries incomes have been rising in tandem with technological progress.
There has long been concern that automation of manufacturing was eliminating high-paying factory jobs, propelling the factory workers no longer needed into lower-paying service jobs. But this concern, too, is exaggerated. It overlooks the fact that higher pay for factory work is compensation for the fact that such work tends to be strenuous, monotonous, dirty or unhealthful, and dangerous. Compensation for disamenities is not a component of real income but an offset to a cost. It is the obverse of long vacations, which are an amenity of teaching and therefore a component of teachers' real income.
But there is nothing inevitable about the virtuous process whereby automation and related negative effects on particular jobs merely shift workers to other jobs that are equally or more desirable. Workers may be highly compensated for possessing human capital that is specialized to a labor market that is shrinking. We are seeing this in law today. Because of automation, outsourcing, and more efficient management practices, the demand for lawyers is down, forcing many lawyers either to drop to lower rungs in the profession's ladder or to leave the profession entirely for work in types of job which their human capital specialized to the practice of law has less, or maybe no, value to employers.
There is nothing new about this phenomenon, and in the long run labor markets adjust—fewer persons are applying to law school today and so eventually the lawyer glut will end. But at the same time there is no guaranty that labor markets as a whole will adjust smoothly to changes in demand in particular labor markets. That depends on the size and rapidity of those changes, and in turn on the size and rapidity of changes in automation, outsourcing, and management practices, all linked to technology in a narrow or broad sense: automation obviously, but outsourcing (for example of legal research to lawyers in Indiana) because of improvements in communications technology (especially online) and management practices because of advances in psychology, management science, human resources, computers, and communications.
If technological advance is very rapid, causing in turn a large and very rapid drop in demand in a large labor market, the economy may not be able to absorb the sudden surplus of labor in a short period of time. The result will be soaring unemployment that will retard normal market processes by reducing incomes and in turn production and therefore in the demand for workers. Take the case of the driverless car. This technology is advancing very rapidly and has great promise for reducing labor costs (drivers), traffic accidents (for example by eliminating drunk driving), traffic violations, and traffic jams (by optimizing speed, lane usage, and choice of routes and times). There are approximately 4 million truck, taxi, limousine, and bus drivers in the United States, not to mention gas station attendants and traffic policemen. Not all these jobs will be eliminated overnight, but they could go quite fast.
Apart from specific job categories, technological advances in products and services, along with greater outsourcing opportunities and free trade with other technologically advanced nations, increase returns to IQ and educational achievement relative to other worker qualifications such as strength, quick reflexes, and physical fortitude. The design, production, and control of robots require intellectual qualities that are not required in factory workers. Though there is evidence that IQs have increased over the last century and may continue doing so, and though some day it will be possible to increase IQ by altering brains, technological advances may continue for some time to increase the wage premiums for high-IQ workers and reduce wages of average- or low-IQ workers, thus increasing the rate at which inequality of incomes is growing. Not that the jobs of high-IQ workers are immune from the effects of technological progress; I gave the example of lawyers. Any job category involving a high degree of specialization is vulnerable. Think of the impact of photography on portrait painters, or of computers on typesetters.
These trends bear on the current debates over the size of government. Technological advances are increasing longevity, and with it an increase in the dependent population. By reducing demand for workers, and therefore employment and wages, in many labor markets, the same technological advances may be creating a second dependent population, consisting of people of working age and their children who cannot support themselves without public assistance that will either replace or augment wages. Republicans may therefore be tilting against windmills in thinking that the size of government can be reduced.