Editor’s note: This is one of several guest posts related to our Liftoff & Letdown series about the fate of America’s middle class. To go with those stories, we’ve invited a wide range of researchers to weigh in on what is – and is not – holding back U.S. workers. This one is from Peter Blair Henry, the dean of the NYU Stern School of Business.
By almost every measure imaginable, the American middle class has lost ground over the last three decades. Rising inequality, long-term unemployment and decreased job security have stoked angst over eroding fortunes, and with heightened anxiety comes the impulse to point fingers.
From fears in the 1980s over Japan’s investments in American landmarks to the more recent backlash against Chinese exports, globalization has long been an easy and popular target. But globalization per se is not the cause of stagnant middle- and working-class incomes or of rising inequality.
Globalization does indeed contribute to inequality, but not in the way that people typically think. Importing apparel, electronics and other consumer goods from countries like China and Mexico that can manufacture them more cheaply does not explain why the incomes of the top one percent have skyrocketed while others’ wages have flat-lined. For that we can thank the current ratio of high- to low-skilled workers in our country and the forces of supply and demand accelerated by technology.
On the demand side, two key factors are at work. First, the inexorable advance of modern technology continues to drive up the demand for high-skilled workers (college educated and beyond), who command a premium for their abilities to transform innovations into profits. Second, in an increasingly globalized market for talent, these elite workers see their wages bid up not only by U.S. companies but by an even larger pool of foreign corporations who also seek their services.
On the supply side of the labor market, growth in the number of highly skilled workers has not increased fast enough to keep pace with rising demand. As a result, the U.S. economy has an excess supply of low-skilled workers, an insufficient supply of high-skilled workers and steadily increasing income inequality. In 1980, the average college-educated worker earned 1.4 times as much as the average high-school graduate—a wage gap that economists call the “skill premium.” Since then, the gap has widened significantly. Today, college graduates make almost twice as much as those with a high school diploma.
The solution to the globalization “problem” therefore lies in more education at home. Greater education would do three things to mitigate income inequality. First, as more people move out of the low-skill pool into the high-skill pool, the number of people earning higher incomes would increase in absolute terms. Second, augmenting the supply of high-skilled workers would slow the rapid rate of increase in their wages. And third, on the other end of the spectrum, the more education drives people into higher-skilled, higher-wage areas, the more those who enter or remain in low-skill sections of the job market stand to gain. Because their skills and contributions to the economy will be in shorter supply, their wages will actually grow at a faster rate. As a result, the gap between high-skilled and low-skilled workers’ wages will narrow.
But the lack of equal access to higher education is a major obstacle to upgrading the overall skill level of the U.S. workforce. A child born in the top quartile of the income distribution in the United States has an 85 percent chance of going to college. Born in the bottom quartile the odds drop to 8 percent. A recent study also shows that 17 percent of high-achieving high school seniors come from this lower quartile. Taken together, these numbers suggest that a large fraction of high-ability high school seniors will remain in the low-skilled part of the workforce in spite of their potential.
Providing this group of young Americans with the same access to university education as their peers in the top quartile could lead to a material reduction in income inequality and vastly improve U.S. productivity.
In decades past, lower-skilled jobs held the promise of lifetime work and rising living standards for many Americans. But focusing on prior patterns of employment will only keep our nation mired in a state of underperformance for many, prosperity for a few. Instead of blaming globalization for middle class malaise, it’s time to raise the bar on the capabilities of our workforce.
Peter Blair Henry is an economist and the dean of New York University’s Leonard N. Stern School of Business.