The Human Capital Premium and Inequality

Update: Brad DeLong here notes that there’s a bit of a straw man argument that liberals don’t care about the skills-based gap. To the extent that I am a liberal, I definitely think he is right 😉 

Timothy Noah has a new post at the New York Times arguing that the 1 percent are only half the problem. Of course, my first reaction is that their share of the problem is even more disproportionately allocated than their share of the income! Snark aside, I’m not sure organized labor is the solution to America’s “skills-based gap”. Here’s Noah:

The decline of labor unions is […] important. At one time union membership was highly effective at reducing or eliminating the wage gap between college and high school graduates. That’s much less true today. Only about 7 percent of the private-sector labor force is covered by union contracts, about the same proportion as before the New Deal. Six decades ago it was nearly 40 percent.

The decline of labor unions is what connects the skills-based gap to the 1 percent-based gap. Although conservatives often insist that the 1 percent’s richesse doesn’t come out of the pockets of the 99 percent, that assertion ignores the fact that labor’s share of gross domestic product is shrinking while capital’s share is growing. Since 1979, except for a brief period during the tech boom of the late 1990s, labor’s share of corporate income has fallen. Pension funds have blurred somewhat the venerable distinction between capital and labor. But that’s easy to exaggerate, since only about one-sixth of all households own stocks whose value exceeds $7,000. According to the left-leaning Economic Policy Institute, the G.D.P. shift from labor to capital explains fully one-third of the 1 percent’s run-up in its share of national income. It couldn’t have happened if private-sector unionism had remained strong.

Now, for the record, I think strong and healthy union membership is a good, countervailing force to the power imbalance between employer and employee (particularly in scaled, factory environments). However, it’s not the answer to our economic woes. I’m a left-leaning liberal: but a lot of this sounds more like high rhetoric than a realistic assessment of history. See the emphasized, why on earth should the wage gap between college students and high school grads be smaller

As technology advances, and capital becomes an efficient replacement for labor, we would expect – unions or not – college graduates to earn more. As America develops, adjusts to a globalized world, and realizes its competitive advantage in “knowledge” products, are we really surprised that the relative wages of a programmer is growing faster than those of a bus driver? And – as left-leaning liberals – have not those of Noah’s ilk been calling for more education this whole time? Isn’t Noah blowing away the strongest argument for government-subsidized education, especially of the poor? And without education, where on earth will the poor we care so much about find social mobility?

Most importantly, why do we think this is a bad thing, the idea that college pays? Noah squarely places a good part of the blame on the financiers and corporate executives in the 1%, but he doesn’t go far enough. When he talks about America’s “mass affluent” and the growing gap between the top 10% and middle 20% he ignores a few things:

  • The lions share of income in the top 10% (his baseline is incomes $100k or so and up) goes to its top 1%.
  • By targeting the broadly educated elite, the burden of taxation is shifted from rent-earning executives to scientists, engineers, programmers, as well as  main street lawyers and bankers. We actually want more of these people, and there’s pretty good reason to believe STEMers are woefully underpaid.
  • I’d much rather the college premium be higher and more people graduate, especially if it means fairer wages for engineers.

Further, from a distributive standpoint, incomes allocated to the 1% are significantly more important than anyone else. I would much rather the marginal tax dollar be derived from a rent-seeking executive than a run-of-the-mill college graduate. This is a false dichotomy, but helps underscore my disagreement with Noah. A mass labor movement with the simplistic goal of narrowing the college grad/non grad gap is sure to bring the former down rather than the latter up. A mass labor movement, without any aid from strong, protectionist government policy, will result in greater unemployment. At a time when companies are finally reshoring operations, it would be wrong to petrify America’s labor market. 

Of course, the United States could implement strong industrial policy with full employment as a key goal, but not without dismantling the free trade system we built. After Bretton Woods, a good part of American foreign policy was creating an international system (indeed led by the United States) conducive to free trade. 

I’m not really a proponent of the right-to-work laws that are plaguing this country, either. After all, nothing seems more coercive than the government forcing firms to provide non-union contracts. But as we move towards a far more “knowledge-based” economy, for wont of a better term, I really don’t see union-building as a way to edge inequality.

From a social perspective, the lives of the mass affluent are far closer to the middle-class than the 1%. Sure, they might have more books at home, more savings, a higher priority on education, but the qualitative differences rise at much higher incomes. Mansions on Long Beach should be of more concern.

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1 comment
  1. Florian said:

    I’d agree. First of all, looking at how the skill premium has evolved does not seem to have much bearing on the effectiveness or lack thereof of unions. The much bigger story seems to be that the wage share in basically all developed economies has been on a downward trend since the ’70s. If and how unions are part of the equation is a different topic, but it just seems like the more obvious metric. As you hinted at, unions keeping down the wage gap is just as likely to be a pretty considerable source of inefficiency, lowering the incentives to attain education rather than being a boon to the middle class.

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