Labor Day Thoughts on the Labor Market

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The most relevant and interesting post I read this Labor Day was this one by economist Jared Bernstein. He reflects on how a labor market is supposed to work vs. how it works in America today.

It’s ideally the place in the economy where working-age people, having received the education and training needed to maximize their inherent skills and intelligence, produce the goods and services that the members of the society need and want.  The output they create adds to the nation’s wealth, and they are—theoretically—remunerated commensurately.  That is, they receive their share of what they added to our economic firmament.

This statement describes three characteristics of a thriving labor market. Let’s elaborate on them:

  1. Workers have ample opportunity to develop the value of their labor through education and training. The challenges here include improving the quality of education, expanding job-relevant training, and making higher education more affordable.
  2. The goods and services workers are able to produce are in demand. Insufficient demand has been a big problem in the recent recession, but it was already a problem before the recession. One of the issues facing us is how to increase global demand for American products without just racing to the bottom on wages. Another is how much to augment the private demand for labor with public demand. If we have important public work needing to be done, such as infrastructure repair and improvement, and we have idle labor available to do it, aren’t we richer as a society if we publicly invest in that work? The alternative seems to be to waste human capital waiting for private investors to see the profit in new hiring.
  3. Wages rise along with labor productivity. As skills improve, workers should produce more per hour and be rewarded accordingly. But that hasn’t been the case in recent years, when productivity has risen far more than average pay. This is related to the issue of labor demand, since high unemployment puts workers in a weak bargaining position. But it also reflects the strong opposition to union organizing and collective bargaining in the United States, compared to most economically advanced democracies. Here higher productivity is translating into surging profits and extravagant executive compensation, but not much improvement for the average worker.

I’ve read many pieces that focus on one of these issues to the exclusion of the others. If only young people would stay in school longer. If only we could sell more cars in Europe. If only our workers were more organized. Bernstein reminds us that it takes a combination of human capital development, demand for goods and services, and labor organization to create a highly valued workforce.

Happy Labor Day!

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