James Freeman’s Wall Street Journal column opens with two flat statements, both of which are BS:
The United States faces two significant challenges: too few workers in a private economy with millions of open positions and too many workers in a public sector generating an expected federal deficit this year of $804 billion. If only there were an obvious solution that could somehow address both problems.
There is no labor shortage in the United States. There is a wage shortage. We have far too many low wage jobs and far too many people competing to claim them. Wages in STEM are not rising—something you would expect if there actually were a shortage. If there is any skill mismatch it is in high skills requirements for some blue collar jobs. There is virtually no demand for art history majors, communications majors, or interest studies majors.
And the number of federal employees has been flat for decades as you can see from the graph above. Since the population has tripled over the period depicted, that means that the ratio of federal employees to population has plummeted. There’s an argument to be made that federal employees are too highly compensated (I’ve made it myself) but that’s not the argument that Mr. Freeman is making.
The real problem in government is that non-wage compensation is growing too quickly and it’s pushing up the cost of government. Most of that is health care.
“There is no labor shortage in the United States. There is a wage shortage.”
Lets not once again throw microeconomics out the window. Let me relate a widespread phenomenon here in Alaska. The notion often posited at GE is that if we just kept raising wages Americans would suddenly reach that magic point where they would take the jobs on offer, the products in an industry could be priced accordingly (or producers would eat the profit loss) and consumers would buy.
Not so fast. My point has always been that products will get priced out of the market, reducing demand, perhaps to zero.
Because of its transportation issues it is quite costly to get certain products here in AK to market. I’ll use dairy for this example. It could hardly be more of a staple. A gallon of milk has been variously quoted at places we have visited at $6-$8 per gallon. Show of hands for those who believe people simply pay the going rate. Nope. They curtail expenditures on dairy tremendously. The stores don’t carry that much, and its because the people won’t pay. Just ask them. And try to make a profit and stay in business at lower 48 retail milk prices.
The same phenomenon will occur in produce if Americans would even accept employment at, say, $50/hr, in the hot Florida sun. (they won’t) Who’s buying $7 tomatoes and $12 cucumbers? And so on and so forth.
Its a vexing problem for sure. But let’s not engage in academic fantasies about American worker’s pliable wage elasticity, producers running loss producing charities or consumers with unlimited bank accounts.
Looking at the graph, I am left wondering what happened in 2001-2002 that got rid of so many local government workers.
For the life of me, I cannot remember anything happening that should have had that affect. There was 9/11, but I don’t see how that would have changed things there.
Anyone have any guesses, memories?
Guarneri:
For the last several decades, maybe even the entire post-war period, the U. S. has had an implicit policy of maximizing the number of minimum wage jobs. The Germans even have a name for the policy: they call it “the American system”. The policy has been successful but that success has come at a cost.
You mean other than the recession? The U. S. economy was in recession from March 2001 to November 2001. Keep in mind that most state governments have hard spending limits and most of their expenses are either wages (present or deferred) or Medicaid. When there’s a recession, they cut employees.
Dave,
There have been other recessions — much of the early 1980s, for instance — and they aren’t nearly as visible as that.
And the state governments basically kept the same number of workers during that time, so this is really just the local governments — city, county and town.
Local governments get some of their funding from state governments and grants, so that is part of it.
But if this is just the recession, I have to wonder what happened between 1980 and 2001 that made the local governments so vulnerable. Or between 1992 and 2001 as there was a moderate recession around then that barely shows.
They increased staffs greatly, particularly in education. Spending on education has tripled over the last 25 years in constant dollars. Most of that is due to increased staffs.
“From 1977 to 2004, Federal aid to cities declined from 15 percent to 5 percent of total city revenues. In addition, aid from States was reduced $2.3 billion in fiscal year 2004 from fiscal year 2003, a sharp contrast to the past, when downturns were marked by a slowing rate of revenue growth, not an actual reduction in revenue. Localities took various measures in response to reduced funding. For example, according to the National League of Cities, nearly half of the 328 cities surveyed in 2003 increased fee rates, 30 percent reduced city employment, 29 percent imposed new fees or charges on services, 21 percent reduced actual levels of capital spending, and 11 percent reduced city service levels. The deteriorating fiscal conditions eventually affected employment. During 2002, half as many jobs were added in local government as were added in 2001, and by 2003 growth had come to a standstill.”
“Besides the added costs of implementing the [No Child Left Behind] Act, the States’ budget crises had a detrimental effect on local education employment. From 1990 until 2001, local education averaged an employment increase of 147,000 a year. But during 2002, schools added 118,200 jobs, and by 2003, growth in local education came to an abrupt halt. (See chart 6 [ which actually shows a loss of local education jobs in 2003])”
https://www.bls.gov/opub/mlr/2004/10/art3full.pdf
I had some time today, so looked up the FRED data:
https://fred.stlouisfed.org/graph/?g=l5yg
The original article talks only about federal workers. As I said, the number of federal workers has been practically unchanged for decades even as the U. S. population rose. Whatever you think of federal spending, the number of federal workers has little relevance to the deficit.
“From 1977 to 2004, Federal aid to cities declined from 15 percent to 5 percent of total city revenues. In addition, aid from States was reduced $2.3 billion in fiscal year 2004 from fiscal year 2003, a sharp contrast to the past, when downturns were marked by a slowing rate of revenue growth, not an actual reduction in revenue.â€
Ugh. And, so when there is an economic downturn, it hits the government at the levels that are not allowed to run a deficit (which the Federal government really only should do during recessions… grr), and jobs are cut, and the recession is amplified.
Ugh, again.
I know, Dave. But it doesn’t change the point. Customers will tell you your price, at any quantity demanded. You can’t force the wages or profit levels you desire or consider fair. And you can’t, without dramatically reducing the size of an industry, force an American to take a job on offer if the wage demanded is incongruous with volume. You can only pursue workarounds like automation or smaller producer footprints serving smaller markets.
BTW – I’ve always suspected your view derives mostly from the IT world. I’m not well versed in that world, but have no reason to not believe that (Indian) workers have intentionally been recruited to manage wages. I just can’t imagine the people and skills do not reside here. But it seems to me, even if its business behaving badly, that it is empowered by government, like so many market distortions. Your beef might be best directed there.