High-Wage America

This Prospect special report has demonstrated that America is needlessly generating a disproportionate number of low-wage jobs, and that other paths are possible.

Low-wage America is a nation of hard-working people struggling to make ends meet -- and a nation of politically disaffiliated and disempowered citizens. These two realities are related. As Christopher Jencks suggests in his introduction, an America with a different constellation of political forces could be an America with a different structure of wages and career opportunities -- as, indeed, our country has been in the not-too-distant past. The story is therefore less about technological inevitabilities than politically determined social arrangements.

This collection of articles should also lay to rest two related, powerful myths. The first is that it's natural and desirable just to let many manufacturing and service jobs go to lower-wage countries, and that American ingenuity will simply replace them with better jobs. In truth, the trading system, like the domestic economic system, is based on a set of politically determined rules. The current trading system serves investors over workers and undermines a more egalitarian social compact at home and overseas. But the present trade regime, like its domestic counterpart, is not the only possible system.

The second myth is that the widening wage inequality and proliferation of low-wage jobs are primarily the result of a skills deficit, which has been intensified by increased demand for "knowledge workers" in an era of corporate restructuring. The old, stable firm with its paternalistic responsibility for workers has been replaced by shifting and contingent loyalties. In the new economy, supposedly, what protects workers is their "employability" -- the skills, and capacity to learn new skills, that they can bring to a succession of employers.

This story rings true for some workers in some industries. However, this special report demonstrates that in diverse fields, workers with exemplary skills are being displaced into lower-wage jobs; that many jobs combine advanced technologies with low-skill work; and that advanced workers in America are increasingly in head-to-head competition with one another, and with equally competent, cheaper foreign workers. Some of the most highly skilled workers of all, such as doctors, are experiencing salary reductions and intensified work demands because of revisions in social arrangements that have nothing whatever to do with skills or learning capacity.

Better education and training per se will not ensure that bad jobs are replaced with good ones. Certainly America needs better systems of basic education and lifelong learning, for civic reasons as well as economic ones. Broadly speaking, a well-educated workforce is the source of an affluent society and an effective democracy. But the allocation of that affluence is also a result of social arrangements that can be either friendly or hostile to wage and salaried workers. So the distribution of earned income reflects not just distribution of skills but of political power. Improving the human-capital side of the employment equation will produce only frustrated, overeducated workers unless there is a rendezvous with good jobs. The idealized progression of an America steadily shedding bad jobs and adding good ones requires supportive policies; it will not just happen spontaneously.

If the story is not primarily one of skills deficits, what is it then? The low-wage job problem is mainly the consequence of a new social contract strikingly different from that of the post-World War II boom. Without romanticizing that era, which mostly excluded blacks and women from good jobs and careers, it's worth recalling that the ground rules from the mid-1940s to the mid-1970s included stronger regulation of industries and of labor markets, broader acceptance of trade unions, and more insulation of the domestic economy from speculative international capital flows and low-wage competition. Consequently, ordinary wage and salaried workers had more bargaining power to command more of the total economic product. The earnings distribution actually became slightly more equal between 1947 and 1973, a period also noted for robust gross domestic product growth and relatively tight labor markets. So this more highly regulated and socially just form of capitalism coexisted happily with an efficient economy.

The period that followed removed each of these props. Labor regulation was weakened. Industry began aggressively resisting unions. As business regained political power in the 1970s, both parties also dismantled economic regulation, with the net effect of reducing worker bargaining power. For example, a regulated telephone or electric monopoly does not compete by reducing wages; a deregulated one does. The era that began in the 1970s was also one of slower growth and accelerating import penetration, which also undermined domestic wages. As the system stopped delivering for lower-wage workers, they increasingly stopped participating in politics. By the time high rates of productivity growth returned in the late 1990s, they did so in a radically transformed institutional and political context.

In the current era, firms are largely free of regulatory constraints, and managers can choose whatever path they desire. The deregulated environment has intensified competitive pressures to cut costs, which often turn out to be labor costs. The Russell Sage-Rockefeller study identified a low-wage, cost-cutting paradigm in which firms minimize the employment of permanent workers, rely on temps and contract hires, shift work to lower-wage locations, and live with barely competent workers and high rates of turnover as acceptable costs of doing business. But the study identified an alternative competitive strategy in which employees are viewed as assets, training for career progression is seen as a valuable investment, work processes are regularly reorganized (with worker input) to increase productivity and innovation (again with worker involvement) is continuous. Note that in both models, firms save costs by replacing human workers with machines. But the former strategy yields more decently paying jobs.

Suppose we could raise political participation and put the low-wage job problem at the center of national debate. What would be the most effective levers of national policy?

Unions. As several articles in this special section vividly show, unions can be forces not just for better wages and working conditions but for skills training and career paths. The resulting wage premium, often, is more than offset by the reduced turnover and increased worker productivity. The viability of unions, in turn, is the product of worker and employer attitudes, of laws protecting the right to organize, and of the competitive environment of the firm and the industry. A Las Vegas hotel can't relocate to Bangalore. Increased labor costs of paying a living wage are passed along to tourists. Organize the whole town and the unionized hotel suffers no competitive disadvantage. On the contrary, the union hotel's better trained, paid and motivated staff attracts customers. Las Vegas is thus fertile soil for organizing. Even so, the success there took extraordinary leadership, strategy and mobilization. Similar strategies have been pursued by the Service Employees International Union, whose Justice for Janitors campaign seeks to organize the entire local building-cleaning industry and then raise wages across the board.

What's true of hotels and janitors should be generally true of retailing, health care and education, all of which stay close to customers, too. Even so, aspects of retailing (Internet sales), education (distance learning) and even health care (remote reading of X-rays by radiologists in India, back-office record keeping and billing in the Philippines) can be located almost anywhere. As we've seen, call-center organizing is tougher than hotel organizing because the work itself can so easily be moved. However, even in a global, Internet economy, a goodly percentage of the workforce necessarily stays near its customers. The biggest single boost to labor organizing would be to enforce the freedom to join a union and bargain collectively that was ostensibly guaranteed in the Wagner Act of 1935.

Economic Regulation. It is hard to imagine a full return to the regulation of the postwar boom, with regulated, shared monopolies in telecommunications, airlines, hospitals, electric power, broadcasting and several other core industries. Yet some of the deregulation introduced in the 1970s and '80s overreached and has harmed both the larger economy and the distribution of income and good jobs. More stringent financial regulation and a crackdown on options abuses could narrow the compensation spread between senior executives and ordinary workers. Tax penalties could reduce the incentives of American firms to flee to tax havens and to walk away from enterprises created with subsidies from local government. Tough pension regulation would make retirement security part of the basic employment package. The federal Davis-Bacon Act, requiring payment of "prevailing wages" in construction contracts, has long used federal procurement to ensure decent earnings (and effective unions) in the skilled trades. The government could similarly use its power as purchaser to raise wages and create career paths in child care and nursing homes. Right-to-know legislation could enlist consumers on the side of workers. Socialization of health-insurance costs would save corporations money and increase workers' basic purchasing power.

Labor Regulation. The federal minimum wage, at $5.15 an hour, is far below the purchasing power it once had (greater than $7 in today's dollars). Regulations could reduce the incentive to shift to temps and contract workers by requiring that contingent workers receive the same fringe benefits as permanent employees. Unemployment insurance increases the bargaining power of all workers to hold out for better wages. Like the minimum wage, unemployment insurance has been weakened -- fewer months of benefits, a lower ratio of benefits to wages and fewer workers covered. All of these regulatory changes would help induce employers to offer better jobs. But, as noted, the single most important regulatory reform would be modernization of the Wagner Act to require recognition of a union when a majority of workers have signed union cards, and to add serious punishments for employers who retaliate against pro-union workers (something the law already prohibits but seldom punishes).

Tight Labor Markets. In the late 1990s, the brief period of full employment yielded dramatic gains for the lowest-paid workers. In Europe, with its more highly regulated labor markets and more generous social benefits, higher unemployment has less effect on the wages of most employed workers. But in the United States, full employment is relatively more important as a source of higher wages.

Active Labor-Market Policies. The United States has no comprehensive strategy for systematically upgrading worker skills and creating partnerships that reward training and technology. Rather, we have a profusion of disconnected local experiments. The more that American workers are exposed to low-wage competition from abroad, the more important it becomes to create a national competitive advantage based on skills and technology. Workforce development, career ladders and technology partnerships add up to what the Swedes have long called an "active labor-market policy." Sweden's relentless and systematic upgrading of the technical virtuosity of its corporations and workers has allowed it to survive as a small, high-wage nation with an open economy. An active labor market is not a silver bullet; rather, it is one tool among many that also include wage regulation, full employment and unionization.

Global trade is the toughest issue, both conceptually and institutionally. The simpleminded case against free trade is that it exports jobs. The glib and conventional rejoinder is that increased global commerce allows capital, work and technology to flow to wherever they will be most efficiently deployed. When lower-wage workers take jobs formerly held by Americans, developing nations get higher living standards, and Americans get cheaper products and the opportunity to move to better jobs. So everyone wins, and critics are protectionist fools.

But there is also a complex case against global commerce as currently structured. The issue is less the protection of existing jobs than the protection of a hard-won social contract. Over the past century, Americans and citizens of other advanced countries have struggled to overcome the anomalies and injustices of a market economy. A laissez-faire system over-pollutes and under-invests in research, health, education, training and other social goods that benefit economic development. Laissez-faire tolerates financial manipulation and imbalances of demand that periodically result in depressions. A relatively closed system permits both the politics and economics on which citizens can build a mixed economy -- a more efficient and just form of regulated capitalism. We are voting citizens of the United States of America. There are no citizens of the World Trade Organization (WTO).

The Economic Policy Institute recently reported that in the past eight recoveries, the labor share of total income growth never fell below 55 percent of total income. In this recovery, labor's share is just 29 percent. The gap between executive compensation and worker compensation has never been wider, either. These are the results of an altered social compact and shifts in political power that have both domestic and global dynamics.

Footloose capital can flee domestic regulation by relocating to nations with lax labor laws, environmental protections, tax collections and social investments. Industry is very alert to this reality and demands extraterritorial enforcement of the laws that protect its interests (intellectual-property rights, repatriation of profits), but it is delighted to shed the laws that protect worker and citizen rights. Globalization absent social regulation, in short, allows industry to return to the political economy of the robber-baron era -- the property rights without the labor and social rights.

Preventing global trade from punishing nations and firms with decent wages and social benefits requires strategies for sustaining our own mixed economy and extending it worldwide -- as a condition of membership in the trading system. That, and not simple protectionism, is the context in which demands arise for better wages, working conditions and environmental standards in the Third World.

By the same token, there is no pure and simple definition of what constitutes free or fair trade. If a government subsidizes domestic production, that is presumably "WTO illegal." But what if it subsidizes labor costs by giving workers health benefits or an Earned Income Tax Credit? What if it subsidizes industry by offering below-market loans or the fruits of government-subsidized basic research? What if regional subsidies to depressed areas produce export winners? What if government subsidizes export industries by failing to enforce its own labor laws, as Mexico and China palpably do? All governments do these things to varying degrees. But America tends to cut nations like China a great deal of slack, partly because we need their help geopolitically and partly because the current, business-dominated administration has no problems with U.S.-based firms moving cheap production to China.

So the quest for pure free trade is an illusion. The rules are negotiable. We should be restructuring the trading system so that it supports, rather than undermines, high-wage societies in each of its member countries.

None of these policies, alone, will return America to the high-wage path. But taken together, they will produce an economy more productive and far more equal than we now have.

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