Cafe Hayek

Workers and Employers

Let's reflect on an implicit presumption -- indeed, I'm sure, a presumption held unawares -- that undergirds many familiar discussions of workers' relationships with employers.

This common presumption is that employers generally are philanthropic benefactors of their employees.

Consider that many pundits, politicians, and ordinary folks believe that workers are expendable - that one of the surest and least-painful ways for firms to cut their costs and improve their bottom lines is to fire workers.  This belief make sense only if workers contribute little to firms' profits.  Put differently, this belief make sense only if, in employing workers, firms don't expect much in return.

In short, this belief makes sense only if most workers are overpaid.

A worker who is not overpaid is a worker whose compensation reflects pretty accurately that worker's contributions to his employer's revenues.  So if a firm fires workers who are not overpaid, that firm suffers a loss of revenue at least equal to the compensation that that firm would have to pay those workers in order to keep them in its employ.  Such properly paid workers are not expendable; firing them is not key to improving the firm's bottom line.

Of course, if workers are underpaid, the above holds true with special ummpphhh.  An underpaid worker is one who contributes more to his employer's revenues than that employer pays to keep that worker on the job.  So firing underpaid workers is an especially bad deal for their employers.

So in this view – what we might call the “Progressive” view - workers are seen as contributing little to their employers (which is why employers can so blithely fire workers).  At the same time, employers are seen as contributing enormously and philanthropically to their workers.  “Enormously” because the presumption is that the typical worker’s next-best employment option would pay him or her much less than he or she makes in the current job, and “philanthropically” because the presumption is that the worker is paid more than he or she is worth to the employer.

Strange economics.

The Least Attractive Jobs

The latest EconTalk is a monologue by me on the following question: does our standard of living require people at the bottom to do the lousy jobs that we don't want to do? This question was posed to me by a news correspondent for a national network. He assumed it was true. That is, he assumed that to keep people comfortable at the top of the income distribution requires an underclass. Implicit in this argument is the idea that our standard of living is a zero-sum game. In the podcast I discuss why this isn't true--why our standard of living isn't a zero-sum game and how the jobs at the bottom of the economy have evolved over time.

The Goal Is Consumption

I sent this letter a few days ago to the Washington Post:

Emily DeRocco complains that "The April 9 Business article 'Don't Blame NAFTA for Downturn, Many Economists Say' quoted politicians, economists and labor representatives but not a single manufacturer - those at the heart of this wrenching debate" (Letters, April 12).

She's mistaken. Those at the heart of this debate aren't manufacturers (or politicians, economists, or labor representatives).  Those at the heart of this debate are consumers.  Or, those at the heart of this debate should be consumers.  Unfortunately, consumers are too large in number and too disparate in interests to organize effectively for political purposes.  The result is that consumers' interests in trade discussions are largely ignored, even though an economy's success is measured not by how well that economy satisfies the wishes of producers, but exclusively by how well, over time, it satisfies the demands of consumers.

Sincerely,
Donald J. Boudreaux

Producers exist to satisfy consumers; production is the means and consumption is the end.  Protectionism is a policy built on the premise that consumers exist to satisfy producers.

Mark Perry on Krugman and the Jobless Rate

Carpe Diem's Mark Perry carefully investigates and clearly explains -- much better than I do here -- the likely source of Paul Krugman's mistaken claim, in yesterday's New York Times, that "the percentage of prime-working-age Americans without jobs . . . is historically high."

Mark reached the same conclusion that I reached: Krugman mistook "men" for "all workers."

Using what is likely the same data source used (but carelessly so) by Krugman -- and looking at the jobless rates of both men and women -- Mark concludes

Krugman says "the percentage of prime-working-age Americans without jobs is historically high," which is clearly not accurate. It would be more accurate to say that it is close to being historically low.

Krugman's Peculiar Sense of History

Paul Krugman makes a claim in his column (appearing in today's New York Times) that is both wrong and misleading.

The column features his familiar theme that ordinary Americans are suffering terribly as a result of the decrepit shape of America's current, GOP-ransacked economy.  Krugman's offending statement is the one in bold:

Our [that is, ordinary Americans'] bleakness partly reflects the fact that most Americans are doing considerably worse than the usual economic measures let on. The official unemployment rate may be relatively low — but the percentage of prime-working-age Americans without jobs, which isn’t the same thing, is historically high. [emphasis added]

Sounds ominous.  But what does this figure mean?  The closest statistic that I can identify to "percentage of prime-working-age Americans without jobs" is to start with (one minus) the labor-force-participation rate of Americans aged 25-54.  Then adjust that figure for the unemployment rate of Americans in that age group.

For example, if 90 percent of Americans between the ages of 25-54 are participating in the labor force (that is, either have or are seeking employment), then ten percent of Americans in this age-group are without jobs by choice (some, for example, are stay-at-home parents).  These ten percent of Americans without jobs are not "unemployed," for they are not in the labor force.

Then, to determine the actual number of prime-working-age Americans who are "without jobs," we must add to this 10 percent of Americans, in this age group, who are without jobs because they aren't in the labor force whatever percentage of the remaining 90 percent of Americans aged 25-54 are unemployed.  BUT because there's no reason to suppose that unemployment is hitting workers in this age group today significantly any harder or less hard (relative to workers in other age groups) than in the past -- and because, by Krugman's own admission, today's unemployment rate of 5.1 percent isn't especially high -- we can ignore this unemployment rate for my purposes.

So what am I getting at?  This: Krugman's statement that "the percentage of prime-working-age Americans without jobs, which isn’t the same thing, is historically high" is, as I said above, both wrong and misleading.

Look at Figure 1B on this page from the San Francisco Fed.  (HT Russ.)  It does not show the labor-force-participation rate for all Americans aged 25-54; rather, it breaks down the participation rate for Americans in this age group by sex.

Look at the labor-force-participation rate of men (aged 25-54).  That rate is indeed lower than in the past.  For the full time period reported in this Figure, that rate is indeed at an all-time low.  It peaked in 1953, and has been declining ever since.

Now look at the labor-force-participation rate of women (aged 24-54).  Not surprisingly, it has surged in recent decades, although leveling off a bit since around 1990 and even declining a tiny bit since around 2000.

It's highly unlikely that, given that today prime-working-age women participate in the labor force at rates vastly higher than was true even in, say, 1975, that the percentage of all Americans aged 25-54 who are "without jobs" is today lower than it was thirty or even twenty years ago.

Whatever is the percentage of prime-working-age Americans who are today "without jobs," it surely isn't -- contrary to Krugman's hysterical claim -- "historically high."

One possibility is that Krugman saw these, or similar, data and confused "men aged 25-54" for "all workers aged 25-54."  If so, then he's correct that the percentage of men in this age group "without jobs" is "historically high" (where "history" here is confined by the data that go back no farther than the late 1940s).  But today's "historically high" figure is part of a trend that began during the first year of the presidency of Dwight Eisenhower.  At that time, George W. Bush was seven years old.

(Note also that, although the labor-force participation rate of prime-working-age men has been declining for a half century, the trend is slight.  Even today's "historically" low figure is pretty darn high.)

So, to summarize.  Krugman is simply wrong to assert that the percentage of Americans of prime-working-age without jobs is "historically high" -- and misleading to suggest that, whatever this percentage might be today, that it is evidence of some major economy malady.  A rise in the percentage of prime-working-age persons "without jobs" might just as well reflect greater middle-class prosperity -- resulting in more years of schooling or early retirement -- as it reflects economic hardship (such as workers so discouraged by their futile job searches that they just call such searches to a halt).

BTW, this post from Megan McArdle on labor-force-participation is worth reading.

Always looking out for the little guy

You know how politicians are--always looking out for the little guy. Always ready to protect the little guy from the evil corporation. So why does Chicago only have one Wal-Mart? To protect workers from being exploited. You get two Wal-Marts and they're sure to drive down wages. So the government has to protect the workers. Doubt me? Read this story from the Chicago Tribune. The picture and headline at the top says most of it. But read the whole thing. It's a beautiful example of how politicians only care about the general good:

Prosperity and making stuff

Harold Meyerson thinks we've become a nation of shoppers rather than a nation of producers:

If 19th-century England was a nation of shopkeepers, the United States today is a nation of shoppers, and our role in the world economy is to buy what other countries -- or U.S.-based corporations with factories in other countries -- make. It was not ever thus. In the four decades following World War II, our largest employer was General Motors; for the past decade, it's been Wal-Mart.

It's a fact. Sort of. Actually, the federal government is the largest employer—1.7 million employees and that excludes the Post Office. Does that mean we've become a nation of bureaucrats because a little over 1% of all employees work for the government? Does it mean we're on a perilous downward path where instead of making things, we regulate things? That would be a silly statement. It is equally silly to conclude that because Wal-Mart is the largest private employer we've stopped making things.

Actually, making things is not the road to prosperity. The road to prosperity for a nation is to use the skills of its citizens wisely. The wise use of those skills depends on the skills and desires of people in other nations. Sometimes that means making stuff. Sometimes it means providing services in exchange for making stuff.

And as it turns out, we do make a lot of stuff here in the United States. Manufacturing output is dramatically greater today than 30 or 40 or 50 or 60 years ago, the halcyon era that Meyerson imagines once existed. Manufacturing output has almost tripled since 1970. What has happened over the last 60 years is that productivity in the manufacturing sector has increased greatly. That has allowed the US manufacturing sector to produce a lot more stuff with  roughly the same or even a declining number of employees.

Wal-Mart is a red herring. It's success hasn't come at the expense of the manufacturing sector. The trends in the manufacturing sector go back 60 years, long before Wal-Mart existed.

Meyerson continues:

GM followed in the footsteps of Henry Ford, who by 1913 had concluded that he needed to pay his workers enough that they could afford to buy a new Ford. Wal-Mart, by contrast, pays its workers so little that they are compelled to shop at Wal-Mart.

But even if Wal-Mart weren't a downward force on wages throughout much of the economy,

Sorry to stop the quote in mid-sentence, but it's such a great stopping point. Wal-Mart is a downward force on wages throughout much of the economy? What does the word "much" mean in that sentence? I think it's a hedge for the author. It covers a lot of ground. It would be absurd to argue that Wal-Mart lowers wages in Manhattan so maybe it's a geographical qualifier. It would be absurd to argue that Wal-Mart lowers wages in baseball or journalism or the computer industry, so maybe it's a sectoral qualifier.

But where is the large part of the economy (much, after all, means a substantial part) that Wal-Mart does affect wages in a downward fashion? Is it in certain geographical areas where Wal-Mart stores have opened, like say, in DeKalb county, outside of Atlanta? When Wal-Mart opened a store there recently, 7500 people showed up for 400 jobs. Did Wal-Mart attract those people by offering LOWER wages than were being offered elsewhere?

And how is it that a company that employs slightly less than 1% of the labor force affect wages in much of the economy, however you define "much?"

But Meyerson has a worse problem to explain. How does a nation of shoppers thrive when incomes are stagnating, as he believes they are?

Here's the full quote:

But even if Wal-Mart weren't a downward force on wages throughout much of the economy, consider the implications of a nation whose chief economic activity is personal consumption -- more particularly, personal consumption at a time when incomes are stagnating. The only way such a nation can get along is to go into debt, which is precisely what Americans have done.

Do you see the problem? How can a nation of stagnating incomes get to enjoy so much stuff? It must be debt. We're living beyond our means. We're borrowing to support a lifestyle we can't afford.

Debt is up in recent years, but so is wealth. I'd like to see evidence that the prosperity of say the last 25 years is due to borrowing. The prosperity of the last 25 years is real. It has been driven by productivity increases in manufacturing and the service sector, created by an explosion of innovation in how we handle information.

Meyerson's solution to our alleged economic crisis is to elect either Hillary or Obama:

One of the crucial differences between the two parties this year is that Hillary Clinton and Barack Obama have both revived the idea of a national industrial strategy -- better late than never -- while John McCain still acts as if banks and corporations, left to their own devices, would revive our economy through their investments. Problem is, we've left banks and corporations to their own devices for decades, and they've funded the rise of low-wage, high-profit East Asia . Nonetheless, McCain calls for across-the-board corporate tax cuts, though that money may well be bound for Shanghai. Clinton and Obama, by contrast, call for the public sector to take up the slack created by the private sector's reluctance to invest in the United States.

Ah, that's the ticket. Let's try the Japanese economic strategy. And what does he mean by the private sector's reluctance to invest in the United States? Everybody wants to invest in the United States. Foreign governments, foreign investors, American investors and American companies. The money flows in because the United States is the most productive economy on the face of the earth. Would someone let Harold Meyerson in on this secret?

Living Beyond Our Paychecks?

Former Secretary of Labor Robert Reich recently contributed this confused and confusing op-ed to the New York Times.  Here's the letter that I sent in reply:

At least a full-sized op-ed is required to address the many wrong-headed presumptions, factual errors, and non sequiturs that mar Robert Reich's "Totally Spent" (February 13).  The most blatant mistake, however, is Mr. Reich's assertion that women entering the workforce, and people working longer hours, are examples of how Americans "live beyond their paychecks."

When more family members work, and when those who work do so for more hours per week, families' paychecks increase. Working more might be good or bad - it might be evidence of underlying economic problems - but it emphatically is not a means of living beyond a paycheck.

Sincerely,
Donald J. Boudreaux

Evil Wal-Mart

A lot of people think that when Wal-Mart comes to town, wages fall along with the quality of life. Wal-Mart jobs are low-paying which drains money from the community. Wal-Mart jobs don't have enough benefits along with the low wages. Wal-Mart jobs exploit workers because Wal-Mart workers aren't unionized.

Here are 7,500 arguments on the other side.

From the Atlanta Journal Constitution:

They came in droves — high school students, retirees, young moms, the unemployed — all for a shot at a job at a new Wal-Mart on Memorial Drive in central DeKalb County.

In just two days, and with virtually no advertising or even any signs, a staggering 7,500 people filled out applications for one of the 350 to 400 available jobs.

The point about minimum wages

Some people seem to have misunderstood the point about this post on minimum wages. The point was simple. A lot of people I speak to, not just "regular" students, but legislators and journalists who I sometimes teach, think that only regulations or unions keep businesses from exploiting workers. They are shocked to discover that less than 10% of the private work force is unionized and that somehow, most workers, something over 96%, maybe closer to 99%, manage to make more than the minimum. Usually half of these groups when I survey them think that at least (at least!) 20% of the work force earns the minimum wage or less and that only legislation keeps it from being lower. But legislation turns out to be relatively unimportant compared to supply and demand—that is, competition. if you try to pay less than the going rate for the skills you want to hire, you can't attract workers.

Meanwhile, Tim Worstall points out something I missed:

Unfortunately, on the page he’s taken his information from he’s missed one thing which makes his case even stronger.

Nearly three in four workers earning $5.15 or less in 2006 were employed in service occupations, mostly in food preparation and service jobs.

That’s your waitron units and barkeeps folks. And what do we know about people who do these sorts of jobs? Well, perhaps you have to have actually done them (as I have, everything from the graveyard shift in a Denny’s to tending bar around the corner from this guy’s place): they all make tips. In fact, so much so that there is (or at least used to be when that BLS report was prepared) a special minimum wage for those in such jobs, one lower than the official Federal minimum wage.

For example, way back when, the min. wage was $3.35 an hour. Waiters got $2.01. You didn’t really care because even serving pancakes at 5 am you made another $25-$30 a shift ($50-$150 in a decent place). Barkeeps got $3.35 plus tips.

The BLS numbers are reporting what employers paid employees, not what people are actually earning. So we might in fact say that while the number being paid the minimum wage or less is 2.2% of the workforce, the number actually earning that figure is more like 0.5%.

What sets wages

I often ask students or people attending my lectures to guess the proportion of the US work force that earns the Federal minimum wage or less. The median guess is usually around 20%. In 2006 (the latest numbers available), the BLS reports that the answer was 2.2%:

According to Current Population Survey estimates for 2006, 76.5 million American workers were paid at hourly rates, representing 59.7 percent of all wage and salary workers.¹ Of those paid by the hour, 409,000 were reported as earning exactly $5.15, the prevailing Federal minimum wage. Another 1.3 million were reported as earning wages below the minimum.² Together, these 1.7 million workers with wages at or below the minimum made up 2.2 percent of all hourly-paid workers. Tables 1-10 present data on a wide array of demographic and socioeconomic characteristics for hourly-paid workers earning at or below the Federal minimum wage. The following are some highlights from the 2006 data.

• Minimum wage workers tend to be young. About half of workers earning $5.15 or less were under age 25, and about one-fourth of workers earning at or below the minimum wage were age 16-19. Among employed teenagers, about 8 percent earned $5.15 or less. About 1 percent of workers age 25 and over earned the minimum wage or less. Among those age 65 and over, the proportion was about 2 percent. (See table 1 and table 7.)



• About 3 percent of women paid hourly rates reported wages at or below the prevailing Federal minimum, compared with under 2 percent of men. (See table 1.)



• About 2 percent of white, black, and Hispanic hourly-paid workers earned $5.15 or less. Among Asian hourly-paid workers, about 1 percent earned the Federal minimum wage or less. For whites, women were twice as likely as men to earn $5.15 or less. (See table 1.)

Because this is only for workers who are paid hourly, the actual proportion is probably much lower than 2.2%.

And this does include some illegal immigrants These numbers are taken from the CPS that tries to capture a representative sample of all residents. Of course, it may not capture illegal immigrants precisely—I'd assume illegal immigrants try and find ways to avoid be surveying out of a general nervousness that it could lead to being caught.

Pretty amazing, isn't it. Over 97% of hourly workers make more than the law requires. How can that be? One answer is state minimum wage laws that require payment above the federal minimum wage. Thirty-two states require paying more than $5.15 per hour. That leaves 18 states where it's legal to pay $5.15 an hour. What is the proportion of workers in those states earn $5.15 or less?

Even in those states without a minimum above $5.15, (scroll down to Table 3), at least 96% of all hourly workers earn more than $5.15. So state minimum wage statutes can't explain why so many employees earn more than the legal minimum.

So why would greedy employers pay more than the legal minimum?

The answer is simple: competition among employers to attract workers.

Creating jobs for blacksmiths

One of the critiques you sometimes hear of the American economy since the 1970s is that since we've lost so many manufacturing jobs, it's harder and harder to join the middle class. After all, say the critics, in the 1950's, a person could finish high school (or even drop out) and still find a job in the manufacturing sector making a decent living.

There's no doubt that it's harder to make a good living if you're a high school dropout today or even a high school graduate, compared to 60 years ago.

But why would we want to reverse that trend? That trend is the result of choices and opportunities available to us. If you live in a poor country in Africa, having the strength and stamina to carry firewood or corn meal long distances allows you to be in the "middle class" of a poor country because most people have no scope or reason to develop skills that require education. The middle class in such places, is of course, terribly, tragically poor.

In America, showing up to work to work on an assembly line is no longer the road to the middle class. That's because most people have found ways to be more productive and make more money using their brains. Most people go to college. True, if you don't go to college, or worse, if you drop out of high school, it's hard to make a good living. But we don't want to fix that by creating jobs for people (or artificially high salaries) for people who have little education. We want to fix the education system and encourage more people to stay in school so they can have a good living.

Arguing that we should subsidize or protect manufacturing because it can still create good jobs for low-skill workers is about as sensible as saying that we should ban cars so that horse groomers and blacksmiths can be the high income occupations they were when we had a horse-driven economy.

Why firms?

Here is a very nice essay by Mike Munger on why markets can create firms that don't use markets to do what they do.

The Wages of Misunderstanding

Paul Krugman circa 1996 understood the point of this letter (below) that I sent yesterday to the New York Times.  Paul Krugman circa 2007 apparently doesn't:

Opposed to free trade, David Raines asks "How can it be good for workers to be subjected to competition from low-wage countries?" (Letters, December 27).  This question reveals a common misunderstanding.

Worker compensation in America is high because American workers are made highly productive by the great amounts of capital they work with.  (And by the way, America is rich in capital, in part, because she consistently runs capital-account surpluses - i.e., "trade deficits.")  Where wages are low, it is because workers in those places have little capital to work with and, therefore, are not very productive.

G.M. and Toyota continue to sell cars even though bicycles - a competing means of transportation, but one far less productive than cars - fetch much lower prices.  For the same reason, with free trade American workers will continue to sell their labor for high wages even though many workers abroad fetch much lower wages.

Sincerely,
Donald J. Boudreaux

Future Jobs

The following letter of mine is published in today's edition of the New York Times:

To the Editor:

Bob Herbert quotes the observation by Andrew L. Stern, president of the Service Employees International Union, that Americans today “cannot see where the jobs of the future are that will allow their kids to have a better life than they had.” Mr. Stern adds, “And they’re not wrong.”

But when could Americans of any generation foresee future jobs? Did the blacksmith in 1890 foresee jobs in the auto industry? Did the corner grocer in 1940 foresee his son prospering as a regional manager for Wal-Mart?

Did the telegram-deliverer in 1950 foresee his child designing software for cellphones? Did the local pharmacist in 1960 foresee his daughter’s job as a biomedical engineer?

Our inability today to see the details of the future is no more worrisome than was the same inability of our grandparents. 

Donald J. Boudreaux
Fairfax, Va., Dec. 22, 2007
The writer is chairman of the economics department, George Mason University.

Exposing a Bad Idea

Frayda Levin, of the New Jersey chapter of Americans for Prosperity, has this wonderful op-ed in today's Record.  In it, Ms. Levin explains clearly why government-mandated family leave is a foolish idea -- and a harmful policy.  Here's her concluding paragraph:

The experience of Europe tells us mandated programs result in fewer jobs, declining families and eroding work ethics. The free market approach may not satisfy politicians' need to say they solved a problem. Rather, it works quietly, over time, creating multiple solutions, with some working better than others. Over time, the bad ones are rejected and the good ones are free to further evolve.

Must Any Job Necessarily Be Done by Human Labor?

Here's a letter that I sent yesterday to the Baltimore Sun:

Labor-union official Valerie Long asserts that office-cleaning jobs "have to be filled by someone" (Letters, December 7).  This mistaken belief misleads many persons, including Ms. Long, to suppose that employers have no choice but to pay statutorily imposed higher wages.

In fact, no job must be filled.  Each worker is hired only when an employer gains more from hiring that worker than it costs that employer to make the hire. Even for high-priority tasks, such as keeping office buildings clean and smoothly operating, employers can substitute machines and other technologies for workers.  For historical evidence, Ms. Long might explore how a hike in the minimum-wage prompted building owners in the 1960s to speed up their substitution of automatic elevators for manual ones operated by low-skilled workers.

Sincerely,
Donald J. Boudreaux

[For the story of the minimum-wage and elevators, see David R. Henderson's fine book The Joy of Freedom (2001).]

A friend of mine, commenting on this letter, said that it's "hard to imagine" office cleaning being automated.  True enough.  It is hard to imagine.  That's one of the marvelous things about entrepreneurship in markets: all it takes is one person to imagine something that no one else can, or at least does, imagine, and, voila!, that "unimaginable" something often comes into existence -- indeed, in many cases becomes so commonplace that it is a banal piece of our everyday lives.  How many of us could have imagined (had we not encountered it) the microwave oven, wi-fi, MP3 players, a chainsaw, antibiotics, or the electric lightbulb?

I'm no building manager, so I've given very little thought to how janitorial services might be made more efficient or less necessary.  Still, using my (paltry and decidedly non-entrepreneurial imagination), I came up with this list of possible ways that building owners and managers might respond to rising wages of janitors:

- install more self-flush toilets and urinals;

- install bathroom-counter surfaces that contain anti-microbial agents;

- switch to electric floor scrubbers each of which covers a larger surface area than do currently used scrubbers;

- switch to larger, more powerful vacuum cleaners each of which covers a larger surface area than do currently used vacuum cleaners;

- install "robot" vacuum cleaners;

- install flooring that cleans more easily (i.e., faster) than conventional flooring -- or even switch from carpet to hard floor (or vice-versa) depending upon which surface requires less total cleaning time;

- redesign trash-disposal methods so that that fewer worker-hours are required to empty trash cans;

- install improved air-cleaning devices that extract and capture from the air more dirt and dust particles than do less-costly devices;

- lock more restrooms - that is, more commonly require a key for entry into restrooms, thereby reducing the frequency of restroom use, keeping them more off-limits to visitors;

- increase the penalties on tenants for undue wear and tear on rented spaces as well as for slovenliness discovered in buildings' public places.

Again, I'm no building manager, so I'm certain that persons who deal with such issues for a living could list, or discover, or imagine, dozens - perhaps even hundreds - of other ways that would reduce over time the average number of hours janitorial work is required each week.

True, it's unlikely that office cleaning can be completely automated.  But surely many steps are possible that reduce the number of hours of janitorial services that a building must hire.

The Browning of Britain?

One of the hallmarks of sound economic thinking is the ability to distinguish costs from benefits.

Tim Worstall is a darn good economist.

Employment and wages

Check out this chart (HT: The Big Picture):

There are a lot of interesting and simple things to observe in this chart. Note that the axis starts at 54%, but still, there has been a significant increase in labor force participation over the last fifty years. Most of that increase has come in the last thirty years, beginning around 1975.

The increase in the proportion of the population working beginning in 1975 coincides with an increase in the divorce rate. (I don't have the data handy but divorce rates started soaring in America in the early 1970s. A lot of the people joining the labor force in the mid-1970s were women, some (many?) newly divorced, some (many?) with little labor force experience and some of them were women who had not expected to be working. I would guess that most of these women had wage rates below the average. Adding them to the labor force was very good for them. They were newly single and suddenly had to stand on their own feet. They did. The market created jobs for them.

If I remember correctly, there was also an increase in the 1970s of labor force participation by married women. My guess is that they too, on average, earned less per hour than the existing average wage at the time.

Both of these factors reduced the measured average wage rate in the economy because of a change in the composition of who was included in the average.

Real average hourly earnings as measured by the BLS peaked in the United States in the late 1970s leading some to conclude that the average worker has made no progress. There are many things wrong with using average hourly earnings as a measure of the standard of living. The biggest reason is the mismeasurement of inflation which leads to an underestimate of earnings. A second reason is the ignoring of fringe benefits which have become an increasing part of compensation since the 1970s. A third reason is composition effects—increases in immigration and labor force participation by groups with wages lower than the existing average pull down the measured average but that doesn't imply others are doing worse.

The dwindling importance of unions

Here's the stat of the week (from this WSJ article on the auto industry): UAW membership is only 190,000 workers. That's a typical number of net jobs created for the economy. The chart shows the change since 2003. It's a dramatic decrease. But the really interesting number is 1979. In 1979 there were 1.5 MILLION UAW members. What an economic transformation, driven by productivity and Japanese competition.

Frank Talk on Status

In response to this review by Daniel Gross of Robert Frank's latest book, I sent the following letter to the New York Times Book Review:

Reviewer Daniel Gross should have asked harder questions about Robert Frank's argument that higher taxes on "the rich" will moderate individuals' quest for status ("Thy Neighbor's Stash," August 5). Monetary wealth and the material goodies it buys are hardly the only source of status.  Consider, for example, Prof. Frank's faculty position at Cornell University.  He earned this position in large part through his hard work.  By his own thesis, then, he inadvertently caused other scholars to work unnecessarily hard in their quest to win high status Ivy-League appointments -- a quest that for the vast majority of us futile.

Higher taxes on the rich will do nothing to create more Ivy League faculty positions, more mansions with stunning views of the Pacific ocean, a greater number of the world's most beautiful women or most eligible bachelors, or most of the other things that confer and signal high status for those who possess them. Frankly, it is naive to suppose that muting competition in markets will mute humans' competition for status.

Indeed, given that humans are quite status-conscious, a social system in which we seek status chiefly through earning money provides what is likely the best available outlet for this proclivity -- namely, competition within private-property-based markets.  Not only does it result in new and greater quantities of goods and services for others, but it sure beats the hell out of violence and even politicking as a means of challenging others for status.

The future of work

In the latest EconTalk episode, I talk with Dan Pink about the ideas in his book, A Whole New Mind. Dan argues that technology and outsourcing will increase the economic value of various right-brain characteristics such as empathy, aesthetics, big picture and contextual thinking and so on. It's an attempt to figure out how the work place might evolve if left brain thinking becomes much less expensive due to outsourcing or less marketable due to technology.

He's on to something. And some of the examples of how the marketplace has already responded show how the pessimists such as Blinder and others are scaring people unnecessarily. I liked the book a lot—Dan writes very well. He also speaks well. Check out the podcast.

Coming next week, David Weinberger talks about his book, Everything is Miscellaneous: The Power of the New Digital Disorder.

Wages in China

Today's New York Times reports that "wages [are] rising 10 percent or more a year in many Chinese cities."

If true -- and, for the reason that follows, I find this stat to be believable -- such a rise in wages is no surprise.  Such a rise in wages is the natural result of more market-driven investment, greater commerce, and economic growth.

And if true, this stat is difficult to reconcile with those pundits and politicians who argue that strong, independent labor unions are necessary to ensure that workers enjoy the benefits of economic growth.  In China, independent labor unions are illegal.  I confess to being no expert on the realities of the operations of labor unions in China, but I suspect that this reality is not remotely close to the model that the Robert Kuttners, Harold Meyersons, Paul Krugmans, John Edwardses -- and John Sweeneys -- among us believe should be adopted in the U.S. so that American workers can prosper.

Wages generally rise -- and wages rise generally -- because of market forces that improve worker productivity and encourage economic change and growth.   Labor unions are not the source of a general rise in real wages.

Jobs in a Market Economy

Here's a letter that I sent today to USA Today:

To the Editor:

Dale Powers argues that the hiring of foreign skilled workers "wastes" the brainpower of Americans ("Don't waste U.S. brainpower by hiring foreign workers for coveted jobs," June 4).  Mr. Powers' brainpower as an aerospace engineer might be awesome, but it's weak in economics.

The number and kinds of jobs in a market economy aren't fixed.  They expand and change as entrepreneurs seek to use all available talent as productively as possible.  Consider the microchip - which, after all, is a substitute for lots of human brainpower.  If Mr. Powers' argument were correct, the advent of this device would have cast millions of smart, educated Americans into low-skilled jobs.  Instead, of course, the microchip has created for talented Americans countless high-wage jobs whose existence was inconceivable thirty years ago.

Sincerely,
Donald J. Boudreaux

Job Creation

Reader William Eilberg writes in response to this post:

As I read your piece, I couldn't help thinking about the states of New Jersey and Oregon, which prohibit motorists from pumping their own gas, even when the latest automated gasoline-dispensing equipment has been installed.  Last summer, as we were driving through Oregon, I cringed each time I saw able-bodied, competent young people doing jobs, at gas stations, that were totally unnecessary, jobs that existed solely due to legislative fiat.  A society that compels its citizens to reject technological advances, in the interest of "saving" jobs, is a society that dooms itself to poverty.

Perhaps Oregon should make it a crime to make a direct-dialed long-distance call.  That would certainly increase the demand for telephone operators.  And maybe a ban on word processors would make more work for secretaries.  The list could go on indefinitely.

I visited Oregon, for the first time, when I was 14, in 1965, and long before I had ever given any thought to the virtues of the free market.  I remember touring the state capitol, and was astounded to see a man, obviously a state employee, holding the job of elevator operator, in a fully automated elevator.  That is, his job was simply to push the buttons.  This is what they must have called a prudent use of taxpayer dollars.

William's example of the ban on self-serve gasoline reminds me of a story. An economist is visiting China and is given a economic tour of the country. At one point, he's shown a dam under construction and the economist asks why all the workers are using shovels instead of more powerful equipment. It creates jobs, the Chinese guide says proudly. The economist responds: why don't you have them use spoons?

The first time I heard this story, the economist was Milton Friedman. Before I interviewed Milton last summer, I asked his long-time assistant, Gloria Valentine, if she had heard the story. She hadn't, she said, and moreover, she doubted it was true. She didn't think Milton would ever say anything that rude to a host. I also asked Milton and he denied it as well.

But it's a good story even if it isn't true. Opposing technology or trade in the name of preserving jobs is the road to poverty.

Layoffs and Profits

James Surowiecki is surprised that CEO's keep laying off workers even though such moves no longer seem to boost profits:

In the nineteen-nineties, with U.S. corporations in the midst of what the Times called “the downsizing of America,” a new term appeared: the “seven-per-cent rule.” It was a simple formula: when a company announces major layoffs, its stock price jumps seven per cent. No one worried too much about whether the rule was accurate—it was a catchy way of expressing a basic assumption about corporate layoffs: downsizing is an easy way to make Wall Street happy.

Now, Surowiecki points out, citing recent research, layoffs lead to lower stock prices. Why do CEO's keep laying off workers? His answers are a bit bizarre:

1. CEOs notice when layoffs are successful but forget to notice when they fail.
2. CEOs have a short-term perspective. They won't be around when the full costs are paid.
3. CEOs have a herd mentality—everyone else is doing it so it's safe.

The problem with 1 and 3 is that they imply that James Surowiecki has more insight into running a company than the CEO. Unlikely. Possible, but unlikely. The second explanation seems irrelevant. When the company's stock price goes down, it's hard to argue that the CEO is sacrificing long-term benefit for short-term gain.

Surowiecki treats the layoff problem as a business strategy for increasing profits. But he forgets they can also be a strategy for avoiding bigger losses. He also forgets the role of stock prices in capturing information.

The reason Circuit City's stock price fell after the layoffs wasn't because investors disagreed with the CEO's strategy. The price fell because the layoffs provided information that wasn't readily apparent before. The layoffs told investors that Circuit City's fight with Best Buy was going even worse than they thought.

Pundits everywhere decried the Circuit City layoffs as a greedy corporation trying to inflate the company's profits to ever higher levels while ignoring the human costs. In fact, they were a desperation attempt to keep a company afloat. That revelation of desperation is what caused the stock price to fall. We'll see if Circuit City can survive. The stock market suggests that the odds of survival have fallen.

Creating Value

There are two kinds of people in the world.  Members of the first group think of jobs as being rather like boxes, each of which has a monetary figure on it as well as a set of levers inside.  A job-holder occupies a box, yanks on the box's levers, and in return receives pay in the amount of the prescribed monetary figure.  Lucky workers are those who land in boxes paying big money and whose levers are easy to manipulate; unlucky workers are those who find themselves in boxes paying little money and whose levers are difficult to manipulate.

The second group of people in the world understand that real jobs are a matter of creating value for buyers.  The greater the amount of value I create for others, the better -- or, at least, the higher-paying -- is my job.  In markets, your job isn't a box that you get assigned to; your job is an opportunity to perform, to help improve the lives of others and, in return, to persuade these others to help you improve your life.

And one of the most important of these performances is corporate management -- the ability to coordinate large amounts of resources, time, and workers in ways that create large amounts of value for others and that makes it easier for those of us with less vision and administrative ability to find jobs that maximize the value that each of us, individually, creates for others.

Charles Koch, CEO of Koch Industries -- and author of the just-released The Science of Success -- is one of our era's great entrepreneurs and managers.  (He is also a stalwart supporter of economic education and classical-liberal values.)  Washington Times columnist Richard Rahn has this nice overview of Charles Koch and his book.

A Note on Household Income and Women Entering the Workforce

Last May, Andrew Hacker wrote a thoughtful essay on income inequality for the New York Review of Books.  I wrote the following letter in response:

Dear Editor:

In his generally admirable essay on income inequality, Andrew Hacker discounts the significance of the 23 percent rise in median family incomes between 1982 and 2004 by saying that "this growth was almost entirely the result of the presence of additional earners, with more wives turning to full-time work" ("The Rich and Everyone Else, May 25, 2006).

True. But to the extent that women were released from housework by the greater availability of electrical appliances and better prepared foods, these gains in median household earnings represent real improvements for ordinary Americans. After all, housework - although uncompensated - has genuine and considerable value. Because much of the housework that in the past was done by "non-working" women is now done by appliances, supermarkets, and the like, the typical American household today still receives the value of housework plus the additional income women earn by working outside of the home.

I might also have added that the rate at which women entered the workforce was pretty much the same from 1982 on as it was for much of the 20th century.  For evidence, see the report mentioned here.

I'm a hack

In this piece at the LA Times, I talk about how unions have declined steadily since 1950 (from about 1/3 to less than 8% of the private sector) yet the typical worker's standard of living has risen steadily.

Yes, union defenders will point out that wages and salaries as a proportion of national income is falling. But that conveniently leaves out benefits. When you include benefits, the share of labor is steady over time.

Yes, union defenders will point out that average hourly earnings, corrected for inflation peaked in 1972. But that data series mismeasures inflation and leaves out benefits. Does anyone over the age of 50 (someone who is old enough to remember the 1970s) really think that the '70s were the golden age of prosperity for the average American? Maybe, just maybe, the data are not reliable. Other series on wages gathered by the BLS show healthy growth since the 1970s.

Median family income has risen steadily since the 1950s and the 1970s. Union defenders will argue that incomes are up only because more families have two earners. But median family income for every type of family is up.

Bottom-line: it's hard to argue that unions are the source of our prosperity. It's possible to argue that our standard of living would be even higher if unions had remained strong or gotten stronger (though I doubt it). But evidently there are other forces that keep wages and incomes high without collective bargaining.

So where does the average worker get bargaining power if unions are in decline?

The simple answer is that bargaining power comes from having alternatives. Even in the absence of unions, employers have to treat workers well to attract and keep them. In a workplace as dynamic as that of the United States, where millions of jobs are destroyed and created every quarter, a company's ability to exploit workers is greatly limited by how easy it is to find another job.

Ultimately, it is competition among employers that protects us from exploitation. Even those who would seem to be the most vulnerable — immigrants who struggle to speak English, for example — can earn much more than the minimum wage simply because of competition for their skills. Cleaning people routinely earn $20 an hour, more than most cities' so-called living wage.

Kevin Drum over at the Washington Monthly jumped on that last sentence to honor me with the title of "Hack of the Day":

Today's anti-union harangue in the LA Times by Russell Roberts is so mind-numbingly steeped in intellectual dishonesty that the Wall Street Journal's editorial board must be slapping itself on its collective head this morning for not getting their hands on it first. It's a work of art.

But it's warm outside and I don't have the energy to slog through the whole sorry mess. Consider it an exercise for the reader. To get you started, though, here's one line from Roberts:

Cleaning people routinely earn $20 an hour, more than most cities' so-called living wage.

Wow!  20 bucks an hour for mopping floors!  Except, um, here's the actual data from the BLS from a few years ago:

Among janitors at all levels, nonunion janitors earned $8.60 per hour, 72 percent of the $11.98 earned by union janitors.

So not only do janitors generally make way less than $20 per hour, but in the non-union paradise Roberts recommends they don't even make 10 bucks an hour. And benefits? Please. Ask the janitors in Houston about that.

On the positive side, I didn't notice any spelling errors in Roberts' piece.  So at least the Times copy desk is on the ball.

I assume his facts are right. Only they have nothing to do with the point I was making. I didn't say that the national average for janitors was $20 an hour. I wasn't saying that it's fun to be a cleaning person. I was trying to make a much simpler point. In many American cities, the going rate to have someone come to your home and clean your house is $20 an hour.

I'm sure you can find someone for less, depending on the city you live in and the quality of the  experience. I'm sure some are more expensive. But the people in the business of cleaning houses often speak no English. They have no formal skills other than an ability to work hard. They certainly have no union. So where does their bargaining power come from? How can they earn many times the minimum wage? The simple answer is that if you offer the minimum wage or even twice the minimum wage, they won't show up. They have better alternatives.

To Kevin and others who have taken that line about cleaning people out of context, I'd encourage you to read the rest of the article and respond to the economics, particularly this indictment of the very essence of unions:

Unions help those they represent by trying to raise wages above what they would otherwise be. To the extent they succeed, they reduce the demand for labor in unionized shops. That means more workers have to find employment in non-unionized shops, pushing down wages there. That's especially tough on workers with limited skills and education. The sad irony of unions is that they can only improve the lot of their members at the expense of other workers.

A better way to increase wages is to make workers more productive. That lifts everyone's standard of living.

Russ Roberts on Unions

Russ Roberts, in today's Los Angeles Times, tackles the myth that ordinary workers owe their prosperity to labor unions.  Here's a snippet of Russ's op-ed:

But maybe unions aren't so crucial to worker well-being. When more than 90% of the private-sector labor force isn't unionized, why do 97% of us earn above the minimum wage? If our bargaining power is so pitiful, why don't greedy employers exploit us and drive wages down to the legal minimum?

The simple answer is that bargaining power comes from having alternatives. Even in the absence of unions, employers have to treat workers well to attract and keep them. In a workplace as dynamic as that of the United States, where millions of jobs are destroyed and created every quarter, a company's ability to exploit workers is greatly limited by how easy it is to find another job.

Ultimately, it is competition among employers that protects us from exploitation. Even those who would seem to be the most vulnerable — immigrants who struggle to speak English, for example — can earn much more than the minimum wage simply because of competition for their skills. Cleaning people routinely earn $20 an hour, more than most cities' so-called living wage.

Not Just (In) Deserts

As my friend Roger Meiners said when he passed along to me this news report about the consequences of Arizona's recent hike in its minimum-wage, "demand curves still slope downward" -- which means, of course, that people respond to higher costs by trying to minimize their exposure to these costs.

The Wages of the Minimum-Wage

Gary Becker and Richard Posner offer, in today's edition of the Wall Street Journal, a clear explanation of the perils of minimum-wage legislation.  Here's the economic logic, tidily summarized:

An increase in the minimum wage raises the costs of fast foods and other goods produced with large inputs of unskilled labor. Producers adjust both by substituting capital inputs and/or high-skilled labor for minimum-wage workers and, because the substitutes are more costly (otherwise the substitutions would have been made already), by raising prices. The higher prices reduce the producers' output and thus their demand for labor. The adjustments to the hike in the minimum wage are inefficient because they are motivated not by a higher real cost of low-skilled labor but by a government-mandated increase in the price of that labor. That increase has the same misallocative effect as monopoly pricing.

And here are these scholars' thoughts on the empirical evidence:

Some economists deny that a minimum wage reduces employment, though most disagree. And because most increases in the minimum wage have been slight, their effects are difficult to disentangle from other factors that affect employment. But a 40% increase would be too large to have no employment effect; about a tenth of the work force makes less than $7.25 an hour. Even defenders of minimum-wage laws must believe that beyond some point a higher minimum would cause unemployment. Otherwise why don't they propose $10, or $15, or an even higher figure?

A number of countries, including France, have conducted such experiments; the ratio of the minimum wage to the average wage is much higher in these countries than in the U.S. Economists Guy Laroque and Bernard Salanie find that the high minimum wage in France explains a significant part of the low employment rate of married women. Mr. Salanie has argued that the minimum wage also contributes to the dismal employment prospects of young persons in France, including Muslim youths, an estimated 40% of whom are unemployed.

Billboard Jobs

Once upon a time, messages on highway billboards could be changed only by workers who climbed up to each board and painted or wall-papered on new messages.  Today, increasingly, billboards are automated.  The messages these billboards portray are displayed by a series of lights and can be programmed in from a computer.

When I read this story in Thursday's New York Times about automated billboards, I recalled the very first time I saw such a thing.  It was in 1994 as I drove on a crowded highway in Dallas.  The sighting of this billboard proved very helpful to me because I was then on my way to deliver a lecture on economics.  When the subject of the minimum-wage arose during Q&A, someone asserted that most jobs "must be done," so most employers will have no choice but to raise their low-wage workers' pay up to the legislated minimum.

The billboard then popped into my mind.  Billboard-owners' ability to substitute capital for labor means that billboard workers -- the workers who once climbed