Middle Class Muddle
The fate of the US middle class has taken center stage in political and economic discussions. Donald Trump promises to bring back the well-paying jobs that he says were lost to foreign countries because of misguided federal regulations and trade policies. Hillary Clinton has joined Trump in expressing her doubts about the impact of trade agreements—“I will stop any trade deal that kills jobs or holds down wages, including the Trans-Pacific Partnership”—but she also acknowledges the need to provide the education and training necessary to qualify more Americans for the jobs of the future.
Speaking at the Center for American Progress on September 8, Vice President Biden quoted the Irish poet William Butler Yeats in describing the evolving labor market: “All is changed, changed utterly.” Biden added that one of the few things about which Democrats and Republicans agree is that twelve years of education is no longer sufficient preparation for the demands of the labor market. He added that workers need not only better workplace skills but also a better understanding of what employers expect, where the good jobs are, and how to apply for them.
Politicians not surprisingly look for political explanations for problems. Economists take a different view. Speaking on a panel following Biden’s speech, Princeton University economist Alan Blinder observed that the growing disparity in wages between the affluent and the middle class is a result of market forces, not government policy. He added, however, that the government could be doing more to offset the impact of the wage gap through tax policy and other measures. He added that government spending on infrastructure, education, and training could benefit the middle class in general by stimulating the economy and help individuals acquire the skills necessary to prosper in a changing labor market.
The prospects for the middle class are further dimmed by a decline in the rate of productivity growth. When productivity growth lags, the economic pie grows more slowly, and the competition for the slices of the pie becomes more intense. The day after Biden’s speech, the Brookings Institution hosted a conference on the “productivity puzzle” to discuss what is behind lagging productivity growth and how to revive it.
Martin Baily of Brookings presented an overview of trends in productivity and an analysis of the factors that contribute to growth. Analysis of the periods of rapid productivity growth (1948–1973 and 1995–2004) reveal that the most important contributing factor was multifactor productivity, which consists of improvements in technology, better organization of production, and higher-value products and services. Capital deepening was of somewhat smaller importance, and the labor composition (the education and experience of the workforce) made a relatively small contribution.
At first glance this would indicate that investments in worker skills would not have a significant effect on economic productivity, but Bailey argued that in this case the data might be misleading. He pointed out that a large gap exists between the performance of the most and least productive US firms and industries. He proposes that one explanation for this gap could be the lack of depth in the skills of workers and managers. This would explain why companies that can see how their industry leaders have boosted productivity are unable to implement the same techniques themselves. Advanced technology and managerial methods might require a higher level of skill throughout the workforce in order to be implemented effectively.
Emerita Berkeley professor Bronwyn Hall observed that one reason that labor composition has not made a major contribution to productivity growth is that we have not seen a large improvement in worker skills. She argues that until we make a serious effort to enhance skills across the workforce, we will not know whether it will have an appreciable effect on productivity growth.
Harvard’s Robert Barro mused about the anomalies of the feeble recovery that has occurred since the recession that began around 2008. Many economists worried that the recovery would produce little job growth because companies would implement productivity-enhancing measures rather than simply hire back workers. But there has been relatively low productivity growth and a healthy rate of hiring. Barro characterizes it as a “job-filled non-recovery.”
The experts at the Brookings event were judiciously reluctant to make predictions about the future rate of productivity growth. The loose consensus was that a return to the postwar boom years is unlikely but that the very gloomy outlook of Northwestern University’s Robert Gordon is probably too dire. So if we are heading into a period of middling productivity growth, that is not an encouraging prospect for the middle class workers who have seen their incomes stagnate. And if there will be no supercharged economy to come to their rescue, we need to look elsewhere for actions that will brighten their prospects.
A few days after the Brookings meeting, the Census Bureau released the encouraging news that US median household income increased by 5.2% in 2015, which was the first real increase since 2007. And whereas most of the financial gain in the early stages of the recovery was captured by the wealthy, the data show that households on all steps of the economic ladder had benefited. This is clearly welcome news, but it must be understood in context. The 2015 median of $56,500 is still 1.6% below the 2007 median and 2.4% below the 1999 median. Rising employment levels are the key to the 2015 gains, but this does not address the long-term need for productivity growth that will be essential for future gains.
In searching for answers to the plight of the middle class, many of the experts mentioned education and training. They observed that the nature of work is changing in virtually every sector of the economy and that the skills employers are seeking are also in flux. This presents a challenge for young people eager to acquire desired skills as well as for current workers who have well-rewarded skills that could easily become obsolete.
The United States is doing too little to address this challenge. It spends less than 0.05% of its gross domestic product (GDP) on vocational training, a far lower percentage than is found in most developed countries. Finland and Denmark spend about 0.5% of GDP, more than ten times the US rate, and France and Germany spend five times as much. The nation needs to devote more attention to developing the skills that will be required to earn an adequate middle-class living in a technologically advanced economy and to create the high-quality labor force that make a significant contribution to boosting economic productivity.
The first task is to identify the skills and the jobs that need attention, and the four articles that follow make an important start. They include an overview of the many parts of the economy where technical skills are becoming ever more necessary; a closer look at the ways that computing and information technology are transforming job requirements; a deep dive into the rapidly evolving health care industry; and a call for better information to help workers identify training, education, and job opportunities, and to enable policymakers identify the areas where government actions are needed.
To maintain the reality of the American dream, the United States needs to ensure that it provides the educational and training opportunities that its citizens can use to build rewarding careers. But the development of worker skills can do more than contribute to the economic well-being of the middle class. For reasons that we do not fully understand, advances in technology are not resulting in the same spur to productivity growth that they did in the past. It could be that worker skills, which were not a major factor in previous productivity spurts, are the missing ingredient that will complete the recipe for future productivity gains.