Skills Setback

“The economists don't know what they're talking about.”

Granted, this may seem like an odd opening for a piece by two economists, but the guy who said this -- a member of a focus group probing Americans' experiences in the current economy -- has a point.

Policy-makers are waxing ever more enthusiastic about how great things are. In response to the most recent report on the gross domestic product, the research director at the Federal Reserve Bank of Minneapolis quipped, "It's kind of boring around here because the economy looks so good.”

That all depends on who's doing the looking. Virtually every poll on the subject shows much more dissatisfaction with the economy than you'd guess either by looking at the “top-line statistics” (GDP, productivity, factory orders, and so on) or by listening to the cheerleading emanating from the White House.

A recent Wall Street Journal/NBC News poll reported, for example, that public approval of President Bush's handling of the economy fell from 47 percent in January to 39 percent in July. A CBS News poll from the first week of August found that 52 percent disapproved of Bush's handling of the economy, while 42 percent approved. A Washington Post/ABC News poll showed that when the recession ended in November 2001, 13 percent said the state of the economy was poor. Last week, that was up to 21 percent.

We've heard two major reactions to these results. The first is to keep swimming in that favorite river of the out-of-touch, de-Nile. These commentators argue that people actually feel fine about the economy, but their worries about the war are spilling over into other areas.

But there's no evidence for this claim, and plenty of reasons to believe that respondents are truly reflecting their economic reality, like the fact that while productivity has soared, the inflation-adjusted wages of most workers are just about where they were when the recovery began.

The other common response, like the one from Treasury Secretary John Snow, is to blame the victims -- the “less-educated people,” in his words -- whose lack of skills and smarts have blocked them from cashing in on an otherwise broad-based recovery. Opportunity abounds, according to this argument, if you've got the gumption and education to grasp the brass ring. Snow's undersecretary, Randal Quarles, amplified the point. "If the country as a whole is going to undergo economic growth,” he said, “then the population has to be able to take advantage of opportunities.”

Sounds reasonable, given the constant drone by economists, policy-makers, and central bankers (e.g., Alan Greenspan) about the skills deficits of the U.S. workforce. But there are two fundamental problems with this view.

First, it's not true. If it bothered to look at the actual trends in employment rates -- the share of a given population at work, and a proxy for that group's job opportunities -- the skills crowd would learn that since the last economic peak, March of 2001, they're up for one educational group (high-school dropouts) and down for everybody else, including college graduates.

This doesn't mean we should all become dropouts. Obviously the more education you have, the better off you'll be. But even with its recent uptick, job creation has been persistently weak in industries that hire lots of college graduates, like information technology. The Congressional Budget Office also made this point in its recent analysis of the problem.

Moreover, college-educated workers have not escaped the broad deterioration over the last few years in real wages. According to Bureau of Labor Statistics figures, college graduates' weekly earnings grew 0.9-percent less than inflation did in 2004.

Second, when economists talk about people who are “less-educated” or “less-skilled,” they're not just talking about high-school dropouts; they're typically including others who have not completed college, a group that constitutes 71 percent of the workforce. It's a critical distinction, because it doesn't sound nearly so bad if a few “less-educated” workers are failing to get a boost. In fact, though, they're the majority.

So if skill enhancement isn't the answer, what will it take to reconnect the economy to the people in it? To figure that one out, you'd have to look beyond the supposed shortcomings of the workforce and identify the forces channeling income growth upward. You'd have to look at offshoring, our trade deficit, declining union power, the value of the minimum wage, and the remaining shortage of jobs, particularly jobs with good wages and benefits.

Or you could just shed a tear for the “less-educated people” and make the tax cuts for the wealthy permanent. Want to place a bet?

Jared Bernstein is a senior economist at the Economic Policy Institute (EPI). Lawrence Mishel is EPI's president.

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