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Sunday, June 18, 2006

Kevin Drum writes

"At the same time, it's just a plain fact that a huge number of jobs are basically unskilled or semiskilled, and we need to address the question of what happens to the people who fill them. Education really won't help here,"

I disagree.

Supply and demand Kevin, supply and demand. More education means higher supply of highly educated people. There is overwhelming empirical evidence that this leads to a lower wage premium for the highly educated which implies a more equal wage distribution.

In other words, more formal education means a reduction in the number of unskilled workers competing for the jobs which do not require formal education. This has, in the past, caused an increase in their wages.

Now I admit that the past in question was the early 70s when a huge number of people went to college to dodge the draft. The low economic return to their diplomas obviously had something to do with the fact that many majored in occupying the deans office.

Nonetheless when I arrived at college in 1978, an amused graduate student teaching introductory economics explained that it was more profitable to start working and save the tuition money than to go to college. This was really true then. Later we got lower enrollment and a huge increase in wage and salary inequality.

Outside of the USA there are countries with anomolously equal income distributions given their level of development, notably Taiwan under Chiang Kai Sheck and Sout Korea under Park Chung Hee. The did not get equality by banning unions (which they did) but by sending huge numbers of people to college.

They also got extremely rapid economic growth and, making the dictators roll over in their graves, democracy. Believe me, there is very strong evidence that a simple story based on supply of and demand for diplomas explains trends and international differences in inequality.

econgeek has left a new comment on your post "6/18/2006 01:53:00 AM":

Beaudry, Paul and David A. Green. "Wages And Employment In The United States And Germany: What Explains The Difference?," American Economic Review, 2003, v93(3,Jun), 573-602

Has pretty strong counter point to the traditional supply/demand explanation you propose. Any opinions on it ?

I haven't read the paper, but I can say what Larry Katz (big supply and demand for diplomas guy) said in 1989 or so.

In continental Europe there are national wage guidlines with the force of law. Wages negotiation between the unions and the association of firms are binding on firms and workers who had nothing to do with the negotiations. Firms can pay more than the guideline but not less. In Germany, these guidlines are different for different lander. Thus relative wages are determined centrally and not by supply and demand.

The shift in supply and demand of human capital story goes as follows. There has been a huge increase in demand for workers with some technical knowledge (read not scared of computers). There has not yet been a corresponding increase in supply. Therefore, if relative wages are determined by supply and demand, wage inequality has increased enormously. If relative wages are not determined by supply and demand, youth unemployment has increased enormously.

Notably since then, some continental countries have seen sharp declines in unemployment and some contries with highly centralised wage bargaining (read Austria and usually Sweden) never had a prolonged period of extremely high unemployment. I haven't talked to Katz in a while (my huge loss) so I don't know what he thinks now.

Germany has high unemployment, the labor market is very far from clearing. It is not possible to determine the market price of skill in Germany from German wages.

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