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Tuesday, April 22, 2008

Ezra Klein is favorably impressed by an article by Robert Kuttner. I am not.

Ezra K


Not to offend any of my wise, decent, just and learned editors, but the headline for Bob Kuttner's in the latest Prospect, "Good Jobs for Americans Who Help Americans," sound like two 527s got drunk and ran into each other at a bar. The essay, though, is a smart exploration of how to imbue service sector jobs with the dignity, wages, and work conditions that the Labor movement once won for American manufacturing:

Ezra K's excerpt of Robert K

Many economists once thought that widening income inequality was caused in part by the shift to a service economy. Factory jobs, the argument went, tended to pay above the median wage because each job added a lot of value. The more productive and capital-intensive the machinery became over time, the more value each job added. So by the mid-20th century, industrial workers could command middle-class wages and good fringe benefits. By contrast, human-service jobs were hands-on and labor intensive. A nursing-home worker or a pre-k teacher was low-tech. So the pay was low, too.

We now know that this picture was highly misleading. How do we know? Just look at the global economy. Autoworkers in Mexico* use the same production technology as workers in Michigan, but their pay is about $2 an hour. In China, autoworkers may earn 50 cents a day. American autoworkers were paid middle-class wages not because of something inherent about making cars but because the United Auto Workers had the power to negotiate good wages. Conversely, Scandinavia has no low-wage human-service workers because it has made a decision that everyone who takes care of the sick, the old, or the young is a professional or at least a paraprofessional and is compensated as such.

Since most human-service costs are paid socially, choices about how to compensate workers are social decisions. In the United States, with our meager social outlay, we define these human-service positions as low-wage, casual jobs. In the Nordic countries, the people who work in pre-kindergartens or child-care centers are either teachers or apprentice teachers. In France, to work in a crèche maternelle, you need more qualifications than a public school teacher -- additional courses in child development and public health.

Robert W on Robert K

I agree about the title, but I'm not so enthusiastic about the article. The reference to auto-workers in Mexico and China is just silly. First Kuttner is using current exchange rates to convert and pretending that purchasing power parity holds . It doesn't (and not just because of the People's Bank of China's interventions in currency markets, which amount to about one year of Swedich GNP by now). Second, no one ever claimed that factor endowments don't affect wages.

Kuttner is setting up a straw man in which to argue against the claim that wages differ systematically by sector, he refutes the claim that they depend on nothing else. The is awful economics and isn't even good rhetoric. Here is Kuttner's accurate statement of the claim he is trying to refute "Factory jobs, the argument went, tended to pay above the median wage." Here is his absurd effort at refuting it
"Autoworkers in Mexico use the same production technology as workers in Michigan, but their pay is about $2 an hour. In China, autoworkers may earn 50 cents a day." What is missing ? Ah yes, he says nothing about the median wage in China or Mexico. His data have nothing to do with the hypothesis which he claims they refute. This is economic analysis at the level of Donald Luskin**.

A semi serious argument would compare wages of autoworkers in Mexico to wages of service sector workers. Kuttner doesn't do that, because he is trying to pull a fast one (in fact he is pulling a very slow one).

Kuttner seems determined to make sure that no one who actually knows economics ever takes him seriously (you, I am sure, have decided not to notice the silliness because his conclusion is reasonable and doesn't depend on it).

As to Sweden, I think a neologism might be useful "nordtopian". Utopian means planning on something that can never happen. Nordtopian means pretending that other countries will ever act like Nordic countries. The USA economy is and will remain based largely on market mechanisms. Swedish wages are not.

Also Kuttner neglects to mention the rough patch when the Swedish system of wage setting broke down for a while (with unemployment rising to normal non Swedish levels among other things). It happened when miners who worked North of the arctic circle went on strike, because they didn't think that secretaries in Stockholm should earn as much as they did.

It is also notable that one of the wonderful things about Sweden is (and was before the temporary breakdown) the excellent recreational facilities in factories. That is, given the effort to make wages equal, factory workers were being paid with fringe benefits.

The USA won't be Sweden. Even Sweden has trouble being Sweden.

Finally, as for France, Kuttner seems determined to achieve French levels of unemployment in the USA. If the qualifications required of pre-k teachers in France are really related to taking good care of kids, we might adopt them. If they are good, as Kuttner suggests, because they imply high wages for pre-K teachers by protecting them from competition from the unemployed, one might consider the interests of the unemployed too (doesn't Kuttner care about inequality ?). For the kids, given how much the US is willing to spend on child care, demanding highly qualified pre-k teachers would imply keeping qualified kids out of head start as there are no places (as we do) and/or having one highly qualified person trying to deal with huge numbers of little kids (which implies either crushing them with discipline or leaving them to their own devices).

In general Kuttner refuses to accept the idea that there might be any costs due to increasing wages paid to workers. This means that his analysis is just silly. Wages and working conditions are not determined by supply and demand. Wages, working conditions and unemployment rates are.

Now, you want to argue that the US should spend more on publicly provided services and that this will, by the way, cause an increase in the wages of low wage workers, I agree with you. However, that has almost nothing to do with Kuttner's article.

* evidently there were no manufacturing workers in Mexico when the theory was developed in the mid 80's. I mean the global economy has been global for a few centuries now.

** I mean that quite literally. Neglecting to divide by the median wage is very similar to neglecting to multiply by the foreign price level when calculating a real exchange rate. That is, as far as I know, the most glaring proof of Luskin's utter ignorance of economics. However, even Luskin didn't quote the incriminating phrase "foreign price level" in his case "median wage" in Kuttner's, immediately before leaving the corresponding number out of his idiotic calculation.


Anonymous said...

Nordtopian is an excellent term. But when it comes to achieving French levels of unemployment, that may seem to be happening by itself: In February the French unemployment rate stood at 7.8 percent, down from 8.5 percent a year earlier, in the USA it is currently at 5.1 percent, up from 4.5 percent a year ago.

Pål Sletten

Robert said...

As my heroic countrymen said when liberating Paris "Lafayette here we come".