Figuring out how to help the minority being left behind is policymakers’ most urgent challenge.
As we plunge into another presidential-election year, one key point of contention will be the state of the American worker: Are most Americans getting ahead in today’s increasingly high-tech, globalized economy, or have wages and incomes “stagnated” for middle-class and blue-collar workers?
Progressives on the left and economic nationalists on the right seem to share a common view that most American workers are worse off today than in past decades. Trade and technology, they say, are largely to blame. Their favored policy prescriptions range from import tariffs and robot taxes to spending billions more on federal job-training programs and wage subsidies.
If the pessimists are correct, then the argument that we must slow or even reverse the trends that are moving us toward a more open and technology-driven U.S. market becomes more compelling. But if the reality is more positive for a majority of American workers, then the right policy agenda will focus on helping the minority of workers who have failed to thrive in a 21st-century labor market.
The reality for most American workers in 2020 is brighter than the critics claim. The more negative view relies on data from the U.S. Bureau of Labor Statistics showing that the real average hourly earnings of U.S. workers are only now slightly above where they stood in the early 1970s. But those numbers rely on a measure — the Consumer Price Index for All Urban Consumers (CPI-U) — that systematically overstates inflation and therefore understates our real gains in purchasing power. As measured by the more realistic Personal Consumption Expenditure Index (PCEI), the average real wage for American workers actually grew by 24 percent between 1975 and 2015. Individual workers also typically experience wage gains above the average as their experience and skills increase. According to the Federal Reserve Bank of St. Louis, real worker compensation per hour, which combines wages and benefits, climbed 51 percent between 1973 and 2018.
Gains in median household income have also been more impressive than the official statistics tell us. After adjusting for the more accurate PCEI deflator and shrinking household sizes, William Cline calculates that real median household income has risen 50 percent during the past 50 years, rather than the 21 percent reported by the U.S. Census Bureau. A closer look at the data also shows that the share of households with middle-class incomes of $35,000 to $100,000 (in real dollars) has indeed shrunk during that time, but only because more households have moved up to the $100,000-plus bracket while the number of households in the under-$35,000 bracket has gone down.
Beyond financial compensation, U.S. workers enjoy a safer and healthier environment than they did decades ago. From 1992 to 2017, the rate of workplace deaths dropped by 30 percent, and the rate of workplace injuries dropped by 69 percent. During that same period, crime rates have fallen sharply nationwide, while average life expectancy has increased from 75.2 to 78.5 years. (One prominent exception to the positive trends is drug overdoses, especially involving opioids, and the attendant “deaths of despair.”)
The good news may seem surprising, but wages, incomes, and living standards tend to grow along with increases in productivity. Productivity gains, in turn, are driven by investment in capital equipment, technological innovation, worker skills, and an expansion of trade that allows the specialization of production in sectors where the United States is most competitive. Ultimately, progress has come not despite, but because of, a dynamic and changing U.S. labor market driven by technological innovation and deeper integration with global markets.
Some economic anxiety is nevertheless understandable. The changes of the past few decades have not been an unmitigated positive. Millions of American workers have been displaced from their jobs as older sectors of the economy contracted and newer sectors emerged and expanded. Much of the attendant anxiety has focused on the long-term decline of manufacturing jobs. It’s true that the U.S. economy has lost a net 5 million jobs in the manufacturing sector since 1990, but those job losses have been more than offset by the creation of almost 20 million net new jobs in higher-paying service sectors such as professional and technical services, finance, health care, computer-systems design, and management and technical-consulting services. In addition, another 1.5 million net jobs have been created for “specialty trade contractors,” primarily in the electrical, plumbing, and heating, ventilation, and air-conditioning industries.
What’s more, contra the economic pessimists of left and right, manufacturing jobs have been in long-term decline for reasons other than globalization. Automation has done more to eliminate manufacturing jobs than imports have. Even though manufacturing has been in relative decline, actual output is at or near record highs. Manufacturing value added in the United States reached $2.33 trillion in 2018, an almost 50 percent increase in real terms from where it stood in 1997.
Another major reason why a declining share of American workers are employed in goods-producing sectors, including manufacturing, is that goods are a declining share of what Americans consume. Between 1960 and 2018, the share of total consumption spending that Americans devoted to services grew from 47 percent to 69 percent, while the share devoted to goods dropped from 53 percent to 31 percent. Those who yearn for the time when a higher share of Americans were employed making goods rather than delivering services would need to reverse what appears to be a normal, beneficial, and enduring trend.
Robots and other new technologies change the mix of tasks and jobs, but they do not decrease the overall demand for labor. Automation can replace existing tasks, especially jobs involving routine manual labor, but it also boosts total factor productivity, leading to higher demand and wages for complementary workers and gains for consumers. In a 2018 study, Georg Graetz and Guy Michaels concluded that there was “no significant relationship between the increased use of industrial robots and overall employment.”
All of that said, a small but sizable segment of working-age Americans has not shared in the economic progress of the past few decades. Some have been displaced from their jobs temporarily, and we should design programs to help them transition to new opportunities. Still others have become permanently detached from the labor market, and helping this relatively small group of mostly low-skilled workers poses the most significant challenge to policymakers. The “skills-biased technological change” that reduces the relative demand for lower-skilled labor (and the incentives for lower-skilled workers to enter the labor force) is compounded by increased rates of incarceration, rising levels of opioid addiction, government-imposed barriers such as occupational licensing, and falling rates of mobility that prevent workers from moving to areas with more opportunity.
Instead of interfering in trade or technological innovation, a pro-worker reform agenda should focus on solving those problems, by making changes to unemployment-insurance, job-training, and income-support programs to better enable American workers to fill the jobs that are being created. For those more permanently disconnected from the workforce, the right policy response should include further sentencing reform, deregulation of occupational licensing, and relaxation of land-use regulations that appear to prevent displaced workers from relocating to areas with more opportunities by raising those areas’ housing costs.
The challenge in this pivotal election year should be to enhance the ability of a dynamic labor market to continue creating well-paying jobs for millions of American workers. It would be a blunder of historic proportions to impose taxes, tariffs, or regulatory restrictions on the very market mechanisms that have delivered new products, lower prices, higher productivity, and a higher standard of living for the large majority of American workers over the past five decades.
Instead of hindering economic freedom or technological change, proper policies will create the right conditions for an ever-larger circle of Americans to thrive in a modern, open, and technologically dynamic labor market.