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http://magcdn.lrp.com/MAGDATA/servlet/DataServlet?fname=PeterCappelli106x106.jpgWhy We Aren't Going to Get 'Good' Jobs

There are steps the nation can take to create better jobs, but don't expect them to be taken any time soon.

Monday, June 12, 2017
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I'd like to pause for a moment from one all-consuming Washington news story to focus on a back-burner item that directly concerns voters: What can we do to bring back good jobs to the U.S.?

The decline of good jobs is an issue that many observers thought drove the last U.S. election -- and is partly responsible for creating such problems as the opioid epidemic, men withdrawing from the workforce, and rising disability rates.

The answer, unfortunately, is nothing. There may be things we could do, but we're not going to do them. To see that requires a little -- and only a little -- refresher course on the most basic law of economics: supply and demand.

The genius of the British economist Alfred Marshall was to conclude that there was nothing about any particular item in a marketplace that made its price high. Water was far more valuable to people than diamonds, but water was far cheaper. The reason? The supply of water is huge and the supply of diamonds is tiny. Wages are higher in situations where demand is high and labor is in relatively short supply.

Good jobs are those that pay enough for the earners to support a family above the poverty line, which is an objective measure of well-being. In the current environment, such a job also has to provide healthcare, since it is very difficult to get health insurance otherwise. It's just about impossible to have anything like a normal life as an adult without healthcare. It would also be nice if the jobs were stable enough that the individuals could do some life planning, such as taking out a mortgage on a house with the expectation they would be able to pay it off over time.

The idea that we are going to raise wages by raising the amount of skilled labor is simply wrong. Wages aren't determined by the level of skill jobs require. Being able to write a coherent paragraph requires a great deal of skill, and indeed two hundred years ago, being a "clerk" -- basically someone who could write and do simple arithmetic -- was a very good position. That's not the case today because we have universal public education, and a great many people can write, many coherently. The supply went up; the value, wages and status went down.

Confusion about the primacy of supply and demand leads to fuzzy policy recommendations. Engineers make good money, so if more people become engineers, the argument goes, more people will have good jobs. That's true if the number of "more" is small. But if millions of additional engineers entered the labor market, their wages will fall. If you don't think so, look at what has happened to the wages of new petroleum engineers, who have been pouring out of colleges at record rates. They've collapsed. Yes, demand fell sharply because of the oil glut, but the sharply rising supply also had something to do with it.

It's true that many skilled jobs pay very well. Lawyers and doctors, for example, are highly skilled positions, but they are also jobs where the labor market is not exactly open. The requirements to become doctors and lawyers are very difficult, which keeps the supply down. (The fact these positions require licenses also restrict the supply.)

We seem to think of manufacturing jobs as good jobs in the U.S., but we also think of them at workplaces such as the giant Foxconn factory in China as miserable jobs. Why is that? The supply of potential factory workers in China has been huge, so wages and conditions there can be lousy. Why is it that U.S. manufacturing jobs, including those in the auto industry, pay so much better than service jobs, such as those in hotels? It's not because of the skills required, and it's not even because of the potential supply of labor. It is because the auto jobs were unionized, which essentially restricted the supply to employers. We fail to acknowledge this, but the past jobs everyone is pining for today were union jobs or were in companies that paid well to keep the unions out.

So what are the policy options?

Expanding the demand for labor would help, but we've been trying to do that for some time now by getting growth rates up with no real success. Removing regulations on employers essentially lowers the price of labor, and, to the extent that generates more hiring, it would push up wages only if the labor market was already tight. Removing protections on jobs and workers -- which is what appears to be happening in Washington -- just means we'd get slightly better-paying jobs with fewer worker protections.

Restricting the supply of labor would raise wages, but that also means fewer people get jobs and wages. We could regulate more labor markets -- and, to some extent, that has been happening at the state level with more jobs requiring licenses.

Limiting immigration does restrict supply and should affect wages if we did enough of it.

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What else helps? Government mandates that force employers to provide health insurance, and require them to pay higher wages, do create better jobs. But those efforts also suppress demand by making labor more expensive, leading to fewer jobs -- perhaps not to the extent that people on the right claim, but still more than those on the left acknowledge.

Unions represent another way to create better jobs, basically by restricting the supply of labor to employers: "You can only deal with your current workers on our terms."

There is no country in the world that has good jobs that does not have highly regulated labor markets; most of those countries, especially in Europe, also have job shortages.

Employers are under considerable pressure to keep labor costs down. In public companies, that comes from investors. The recent Wall Street complaints that wage increases were giving away profits owned by shareholders is but one example. They also have all of the money and political clout to lobby on these issues, especially in a Republican administration. As a result, no policies are going to be introduced that will raise wages. Indeed, so far, all of the policy proposals are about lowering labor costs.   

The only possibility for better jobs that won't be blocked politically is if the economy starts growing so fast that wages rise. The only time this has happened in the last 40 years was the very short period around 1999-2000. Now, there will be lots of political pushback on the monetary side to prevent inflation driven by rising wages and on the employer side, to allow more H1-B and immigrant workers to work in the U.S. So the current political stalemate means that nothing is even on the horizon that will lead to better jobs.

Peter Cappelli is the George W. Taylor Professor of Management and director of the Center for Human Resources at The Wharton School of the University of Pennsylvania in Philadelphia. His latest book is "Will College Pay Off? A Guide to the Most Important Financial Decision You'll Ever Make."

 

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