The "Why" in Wage Segregation

[Torie]

This is an interesting article. It's easier now to separate the wheat from the chaff, so the chaff end up getting the shaft.

[muon2]

Interesting indeed. It gives some rationale for this analysis I posted last year. I was looking at it much as the sources in the article looked at income growth compared to educational attainment. What is new in the article for me is the idea of sorting between firms, not just the rise of new jobs connected to high-skill professions where productivity and wages grew most.

It also reinforces what I've been telling colleagues since I looked at this data. The problem of income inequality is deeper than a problem of the 1% and tax code. It's a problem of an educated workforce in the information age. What I can now add to my explanation is that the information age itself as aided the employer in creating the income spread.

I'm cross posting this from US General Politics since it seems relevant here, too. This chart should help guide one's attempts at a solution. The drift of the upper three quintiles away from the lower two quintiles has been generally slow and steady over the last 35 years. The decade before Reagan isn't appreciably different than the decade after, despite considerable differences in national policy.

It seems clear that wealth has migrated towards the skilled professions, even in the middle class, as the global information age has progressed. The greater the skills required, the more rapid the increase in wages. To me that suggests the most effective changes would direct more resources towards education for the skills needed in the current economy, not large scale wealth redistribution or an investment in jobs in less skilled sectors from economies of the past.

Here's a better chart in response to Ernest. This is also from the historical household income data at the US Census. I found that the top of the second quintile (40%) was the most stable in real dollars, only increasing 5% from 1969 to 2014, so I used that to compare the other quintiles. The bottom quintile remained almost unchanged compared to the second quintile during that span of years and is very close to half the second quintile.

The growth is in the upper three quintiles. The middle quintile grew about 17% compared to the bottom two quintiles. Since the bottom two quintiles had little growth in real dollars, that 17% is close to the growth in real dollars since 1967.  The fourth quintile grew at 35% compared to the bottom two quintiles, or about double the rate of the middle. The limit for the upper 5% grew at 54% compared to the bottom two quintiles, or about triple the rate of the middle. My apologies for the year sequence which looked fine until the software rendered it to a bitmap.

[Torie]

Indeed. That is why I am so militant about the quality of secondary schools in poor neighborhoods, where the kids are trapped. It is to me the great civil rights issue of our time. Pity the victims don't rise up. They should. I see the nation going in a very bad direction, given this growing income inequality, and educational inequality, and family stability inequality. We have the top 20% doing spendidly, with educational opportunities second to none on this planet, and then the rest, where things are going downhill. It is very disturbing.

[muon2]

I run into too many parents who say they want their kids to get a good career, so I tell them they have to push at home and at school for the basics of English and math. Not just as they were taught, but as those subjects are now applied in the information age. I then hear about how they weren't any good in those subjects, but they got a job anyway. The economic connection between the foundational skills in school and the 21st century workplace is often lost at the time when it is most needed.

[Associate Justice PiT]

I run into too many parents who say they want their kids to get a good career, so I tell them they have to push at home and at school for the basics of English and math. Not just as they were taught, but as those subjects are now applied in the information age. I then hear about how they weren't any good in those subjects, but they got a job anyway. The economic connection between the foundational skills in school and the 21st century workplace is often lost at the time when it is most needed.

     I think this is the key part; it was easier to get a good job in the past without any special skills. The golden age of manufacturing jobs have come and gone and people today need a variety of hard and soft skills to get ahead. I agree that school is an important means by which to teach these skills, and this goes well beyond memorizing dates and earning A's. Being good at school is not sufficient to reap this benefit.

[Foucaulf]

Whoever wrote that piece did not fully get the Song, Price, Guvenen, Bloom, von Wachter (SPGBW) paper. The whole point of the Stiglitz "imperfect information" papers in the seventies was to show how usual conceptions of a market fall apart when you add information asymmetries. The whole point was that models of imperfect information made better sense of the world than the stuff you saw in undergraduate textbooks.

It is total revisionism to say something like

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Since the whole point was that separating equilibria were the more natural state of affairs (the more intuitive example being job signalling by investing in education). You would expect a libertarian to call out the unions for compressing the wage distribution, but I guess we're all too young for that now.

The theory of sorting in the labour market is not new: it's been around since Becker in the 60s. But it is also subtler than just saying "it's all education's fault," which has been around since the productivity slump in the 70s. It certainly isn't totally explained by "the end of asymmetric information" - if that were the case, why do smart undergrads spend so many hours trying to beat Google's interview questions?

What the new paper's results do show is that firms, particularly firm technologies, matter. It's no longer a story of "if you're smart you can make it anywhere" - every job you get is a red circle on your ability and potential, or provides you with necessary social capital to succeed.

If you were a real radical about this, you would think the ideal policy is to literally shift funding away from higher education, and use it to subsidize the most profitable firms developing their own curriculum teaching what their business needs. Worst case, a student comes out of the curriculum and wants to be a startup entrepreneur.

That is why I am so militant about the quality of secondary schools in poor neighborhoods

Why secondary school? Why not primary school? James Heckman has been arguing the former for decades.

[Beet]

This article is a nice little bit of nonsense. What they don't address is that in the mid-20th century, employers didn't price labor naively; labor really was relatively equal in terms of individual productivity. On an assembly line, one person might be able to install 8 widgets an hour while another person might only install 7, but there's not that much difference. In a world where everyone has a subscription to the Washington Post, the marginal productivity of the foreign service bureau really wasn't that much different than the domestic bureaus because everyone bought the same paper, and would have had it delivered no matter what. It's not like today where each individual article drives or fails to drive traffic based on hits. One writer may go viral and get 50k hits, while another struggles for a measly 500. That's a big difference between 8 versus 7 widgets per hour.

In other words, it's not the measurement of productivity that changed, it's the productivity itself that became more unequal.

Which is why things like improving education won't fix the problem (although education in underprivileged areas certainly needs to be improved). The "skilled labor" marketplace is inherently unequal and fails to provide the kind of mass stability and cohesion that the former unskilled labor marketplace did. It is, by its very nature, geared towards winners and losers, often on a large scale. It is not geared for social or individual stability.

My view is that it would be better to invest in higher wages and protections for unskilled service professions. Unionize the Wal-Marts and the McDonald's and the janitors of the nation, and have these jobs pay living wages. The brilliance of the mass manufacturing (or farm) labor was that even a D student could make a good living.

[muon2]

This article is a nice little bit of nonsense. What they don't address is that in the mid-20th century, employers didn't price labor naively; labor really was relatively equal in terms of individual productivity. On an assembly line, one person might be able to install 8 widgets an hour while another person might only install 7, but there's not that much difference. In a world where everyone has a subscription to the Washington Post, the marginal productivity of the foreign service bureau really wasn't that much different than the domestic bureaus because everyone bought the same paper, and would have had it delivered no matter what. It's not like today where each individual article drives or fails to drive traffic based on hits. One writer may go viral and get 50k hits, while another struggles for a measly 500. That's a big difference between 8 versus 7 widgets per hour.

In other words, it's not the measurement of productivity that changed, it's the productivity itself that became more unequal.

Which is why things like improving education won't fix the problem (although education in underprivileged areas certainly needs to be improved). The "skilled labor" marketplace is inherently unequal and fails to provide the kind of mass stability and cohesion that the former unskilled labor marketplace did. It is, by its very nature, geared towards winners and losers, often on a large scale. It is not geared for social or individual stability.

My view is that it would be better to invest in higher wages and protections for unskilled service professions. Unionize the Wal-Marts and the McDonald's and the janitors of the nation, and have these jobs pay living wages. The brilliance of the mass manufacturing (or farm) labor was that even a D student could make a good living.

If this is so, shouldn't we be able to model the current labor situation on that from the 18th or 19th century? In the pre-assembly line era there were also larger differences in productivity, since more of manufacturing depended on personal ability. I would also suggest that there were fairly large differences in productivity in pre-mechanized agriculture. The rates of production between two crop pickers could be quite different, even a factor of two or more. That's much more than the 7 vs 8 widgets of the assembly line.

[Beet]

This article is a nice little bit of nonsense. What they don't address is that in the mid-20th century, employers didn't price labor naively; labor really was relatively equal in terms of individual productivity. On an assembly line, one person might be able to install 8 widgets an hour while another person might only install 7, but there's not that much difference. In a world where everyone has a subscription to the Washington Post, the marginal productivity of the foreign service bureau really wasn't that much different than the domestic bureaus because everyone bought the same paper, and would have had it delivered no matter what. It's not like today where each individual article drives or fails to drive traffic based on hits. One writer may go viral and get 50k hits, while another struggles for a measly 500. That's a big difference between 8 versus 7 widgets per hour.

In other words, it's not the measurement of productivity that changed, it's the productivity itself that became more unequal.

Which is why things like improving education won't fix the problem (although education in underprivileged areas certainly needs to be improved). The "skilled labor" marketplace is inherently unequal and fails to provide the kind of mass stability and cohesion that the former unskilled labor marketplace did. It is, by its very nature, geared towards winners and losers, often on a large scale. It is not geared for social or individual stability.

My view is that it would be better to invest in higher wages and protections for unskilled service professions. Unionize the Wal-Marts and the McDonald's and the janitors of the nation, and have these jobs pay living wages. The brilliance of the mass manufacturing (or farm) labor was that even a D student could make a good living.

If this is so, shouldn't we be able to model the current labor situation on that from the 18th or 19th century? In the pre-assembly line era there were also larger differences in productivity, since more of manufacturing depended on personal ability. I would also suggest that there were fairly large differences in productivity in pre-mechanized agriculture. The rates of production between two crop pickers could be quite different, even a factor of two or more. That's much more than the 7 vs 8 widgets of the assembly line.

How could two crop pickers working on the same farm have a very large differential? Two to one would seem to be an upper limit if comparing a young healthy man with an older woman or inexperienced child.

Either way, both farm and assembly line unskilled work had a much lower variation in productivity potential than skilled labor. Of course, capital could and did multiply unskilled productivity, but any machine taken advantage of by one unskilled worker can easily be given to all the others, so in the end there's no firm/farm/level reason to have huge differences in pay scales. With skilled work, the source of the productivity multiplier is with the worker him or herself...

[muon2]

This article is a nice little bit of nonsense. What they don't address is that in the mid-20th century, employers didn't price labor naively; labor really was relatively equal in terms of individual productivity. On an assembly line, one person might be able to install 8 widgets an hour while another person might only install 7, but there's not that much difference. In a world where everyone has a subscription to the Washington Post, the marginal productivity of the foreign service bureau really wasn't that much different than the domestic bureaus because everyone bought the same paper, and would have had it delivered no matter what. It's not like today where each individual article drives or fails to drive traffic based on hits. One writer may go viral and get 50k hits, while another struggles for a measly 500. That's a big difference between 8 versus 7 widgets per hour.

In other words, it's not the measurement of productivity that changed, it's the productivity itself that became more unequal.

Which is why things like improving education won't fix the problem (although education in underprivileged areas certainly needs to be improved). The "skilled labor" marketplace is inherently unequal and fails to provide the kind of mass stability and cohesion that the former unskilled labor marketplace did. It is, by its very nature, geared towards winners and losers, often on a large scale. It is not geared for social or individual stability.

My view is that it would be better to invest in higher wages and protections for unskilled service professions. Unionize the Wal-Marts and the McDonald's and the janitors of the nation, and have these jobs pay living wages. The brilliance of the mass manufacturing (or farm) labor was that even a D student could make a good living.

If this is so, shouldn't we be able to model the current labor situation on that from the 18th or 19th century? In the pre-assembly line era there were also larger differences in productivity, since more of manufacturing depended on personal ability. I would also suggest that there were fairly large differences in productivity in pre-mechanized agriculture. The rates of production between two crop pickers could be quite different, even a factor of two or more. That's much more than the 7 vs 8 widgets of the assembly line.

How could two crop pickers working on the same farm have a very large differential? Two to one would seem to be an upper limit if comparing a young healthy man with an older woman or inexperienced child.

Either way, both farm and assembly line unskilled work had a much lower variation in productivity potential than skilled labor. Of course, capital could and did multiply unskilled productivity, but any machine taken advantage of by one unskilled worker can easily be given to all the others, so in the end there's no firm/farm/level reason to have huge differences in pay scales. With skilled work, the source of the productivity multiplier is with the worker him or herself...

That's why I was curious about how labor costs went in the pre-assembly line era when production used a lot of skilled labor.

[Beet]

Fair enough.

[Associate Justice PiT]

I run into too many parents who say they want their kids to get a good career, so I tell them they have to push at home and at school for the basics of English and math. Not just as they were taught, but as those subjects are now applied in the information age. I then hear about how they weren't any good in those subjects, but they got a job anyway. The economic connection between the foundational skills in school and the 21st century workplace is often lost at the time when it is most needed.

     I think this is the key part; it was easier to get a good job in the past without any special skills. The golden age of manufacturing jobs have come and gone and people today need a variety of hard and soft skills to get ahead. I agree that school is an important means by which to teach these skills, and this goes well beyond memorizing dates and earning A's. Being good at school is not sufficient to reap this benefit.

We tend to talk about how good students don't always become well-compensated employees - and around here I am sure that is what both most of us and most people we know are most threatened by - but wage stagnation and decline has more to do with people who were never good students at all because they were never able to apply the patience, interest, self-discipline, or obedience that is usually involved in being a good student. The filter of higher education still works, in other words.

I know people in both sets: The ones who "did everything right" yet have minimal career prospects, and those who were never able to thrive in school and who never managed to acquire the credentials that are all but necessary for admittance to the salaries class. Necessary, but (of course) not sufficient.

Anyway, as someone with some familiarity with both performance measurement and the workings of white collar workplaces in 2016, I find the Cowen/Tabarrok "end of information asymmetry" thesis pretty laughable. We have never had more ways of measuring and monitoring performance, it is true, but we have also never had more ways of manipulating those measures. In short, the ratio of meaning:measurement has never been more skewed. Some people are able to reap disproportionate rewards because they understand this, but this should not be taken as a sign that those people are actually supereffucient high performers.

(The "Ezra Klein Voxes himself" example is telling in ways that are, at a minimum, extremely tangential to the point that the authors mean to illustrate.)

     There is some truth here: we hear about people like Einstein who did not get the best grades in school and went on to do brilliant things. Those people are a tiny minority, though. There is still a correlation between success in school and finding remunerative work after school.

     My major concern is that many young people have been told that doing well in your classes is an optimal strategy for schooling. We're gradually getting around to the point where we realize that that is not exactly the case. There is much more to get out of schooling than good grades.

     Something it took me time to realize is that just working to get the best grades in classes is in fact a suboptimal strategy. That route tends to lead you into grad school, and academia is a well that has largely dried up. If you work to do well enough in your classes, but also network and develop connections then it is much easier to move forward. Looking back in my own past, me moving forward had nothing to do with acing exams and everything to do with a student position I obtained in the university that exposed me to what would become my future career path.

[Indy Texas]

Indeed. That is why I am so militant about the quality of secondary schools in poor neighborhoods, where the kids are trapped. It is to me the great civil rights issue of our time. Pity the victims don't rise up. They should. I see the nation going in a very bad direction, given this growing income inequality, and educational inequality, and family stability inequality. We have the top 20% doing spendidly, with educational opportunities second to none on this planet, and then the rest, where things are going downhill. It is very disturbing.

Torie, I'd advise you read J.D. Vance's new book. It focuses on poor, rural whites, but many of the themes apply to all "underclasses" of America.

You could bus a child from the ghetto across town to the finest public school in the city every day. But that doesn't fix the fact that the child is going home to a household where no one can help him with his homework because no one made it past high school, where his mother just had a fight with her boyfriend so they're spending all night throwing stuff in garbage bags and leaving before he gets home and tries to hit her again, and where there is no food in the house other than Doritos and soda. You can't blame any of that on the big bad teacher's unions and all those people living "high on the hog" with their obscene $60,000 per year salaries.

One of the teachers Vance spoke to said, "We're supposed to be shepherds to these kids, but they're being raised by wolves."

[TrumpCard]

When minimum wage was at its highest in comparison with today's dollar value (1970-1974 I believe), it would be the equivalent of over $11.00 an hour.  Today worker productivity is up 20% and the minimum wage is much lower at $7.25/hour.  Combine that with the fact that the top 1% owns 30% of the wealth and the top 20% owns 80% of the wealth, there's a big gap.  I propose minimum wage go up to $10.55/hour for minors and those who work less than 28 hours a week.  Anyone working more than 28 hours a week would have a minimum wage of $11.25/hour with annual increases to keep up with the cost of inflation.  Seriously, if you look at what minimum wage was just over 40 years ago and add the increase of worker productivity, you'd have a minimum wage of over $18.00/hour!  Current minimum wage isn't even enough to raise one child and 1/5 of children in this country are living in poverty.  Our economy works best with balance and the average Joe having money in his pocket.

[Torie]

Indeed. That is why I am so militant about the quality of secondary schools in poor neighborhoods, where the kids are trapped. It is to me the great civil rights issue of our time. Pity the victims don't rise up. They should. I see the nation going in a very bad direction, given this growing income inequality, and educational inequality, and family stability inequality. We have the top 20% doing spendidly, with educational opportunities second to none on this planet, and then the rest, where things are going downhill. It is very disturbing.

Torie, I'd advise you read J.D. Vance's new book. It focuses on poor, rural whites, but many of the themes apply to all "underclasses" of America.

You could bus a child from the ghetto across town to the finest public school in the city every day. But that doesn't fix the fact that the child is going home to a household where no one can help him with his homework because no one made it past high school, where his mother just had a fight with her boyfriend so they're spending all night throwing stuff in garbage bags and leaving before he gets home and tries to hit her again, and where there is no food in the house other than Doritos and soda. You can't blame any of that on the big bad teacher's unions and all those people living "high on the hog" with their obscene $60,000 per year salaries.

One of the teachers Vance spoke to said, "We're supposed to be shepherds to these kids, but they're being raised by wolves."

Blaming parents does not solve the problem. One must compensate for what the parents are not providing. And that takes great teacher talent among other things. And it requires the restoration of a discipline regime.

[Torie]

Asking Torie to understand poverty is like asking asking a Benedictine monk to explain pop music.

I live in the middle of it these days, up close and personal. But yes, it is a learning process.

[World politics is up Schmitt creek]

I think Averroes was saying in another thread that one of the best things that could be done for children in dysfunctional or unstable situations (which, mutatis mutandis, would include a vast majority of children in most of the kinds of problem schools that public education policy is ostensibly supposed to fix) would be to lengthen the school day and/or school year. I think that might be a good starting point for a constructive engagement between his perspective and policy preferences and Torie's. (Full disclosure: My family and educational background is, roughly, J.D. Vance meets Rory Gilmore.)