In 2003, labor expert John Challenger confidently wrote of The Coming Labor Shortage, predicting that the graying of America’s workforce would result in too few workers and cautioning that “labor shortages may become so severe that retirement as we know it will vanish.”
This prediction was taken so seriously that the Congressional Research Service addressed the potential problem as recently as 2008, in a report entitled “Retiring Baby-Boomers = A Labor Shortage?” The document suggests that the low unemployment rate for 2007 – 4.6% -- might indeed be a harbinger of “tight labor conditions that are related to long-running demographic trends.”
If only! With 14.8 million people out of work today, you wonder: how did they get it so wrong? Some of the shift from shortage to excess can certainly be explained by the recession. But the premise was wobbly from the start, especially given the damaging, and determining, confluence of events over recent decades:
- The wholesale migration of women into the workforce
- The massive automation of factory floors, farms, banks, travel businesses, and nearly every other sort of commercial undertaking
- The rising life expectancy of workers
- And, to top it off, globalization and the increased ease of exporting output overseas.
It seems so obvious.
It is also obvious that none of these trends is about to disappear. Moreover, it is clear that policy makers in the U.S. and around the world have failed to deal with the increased challenge of creating jobs. This is not just an American problem. It is an issue in the EU, where, despite an aging workforce, unemployment currently stands at 9.5% and job production is scarce. It is also a crisis in Egypt, where nearly one third of the population is under the age of 14 and unemployment is running close to 12%. It is even a problem in China, where the ongoing (though slowed) migrations from countryside to city pressure local governments to maintain “social stability” by providing work.
The New York Times dubiously asserted last weekend that the Occupy Wall Street crowd and those protesting around the world were “united in frustration with the widening gap between the rich and the poor.” (I have listened carefully to interviews with the protesters in recent weeks and have never heard expressed such a cogent grievance.) The angry demonstrators are probably not interested in a debate about the origins of that gap, but our policymakers should be. It should be at the heart of our “industrial policy,” should we ever gear up to adopt one, and should also guide any overhaul of our tax policy.
one measure after another
that has further driven
up the cost of workers.
Economic theory would argue that the rent due to the various components of production – labor and capital –varies in proportion to the availability of, and need for, those ingredients. The cause of the widening gap between rich and poor has been not some nefarious corporate behavior but rather the increased demand for and higher rent paid to capital over the past few decades – capital that was invested in automation in part to keep our industries competitive with cheap labor abroad. Money spent on mechanized call centers, assembly lines, gas pumps, and the rest reduced but did not eliminate the pressure from countries like China and India, where workers were willing to work for far less than our own. These expenditures yielded high profits, and return on capital consequently rose.
At the same time, the availability of labor -- because of more women workers, seniors who in earlier times might have retired, and foreigners now accessible through increased communications -- outpaced demand. Bingo! The earnings attached to labor dropped relative to the return on capital.
This growing disparity, having never been recognized, has also not been addressed. In fact, our government has embraced one measure after another that has further driven up the cost of workers, unwittingly tilting the balance even further towards the use of capital to minimize labor. Rising minimum wages, payroll taxes (the Social Security tax for instance started out at 2% but is currently 12.4%), work rules that diminish productivity – these costs have improved prospects for those employed but dampened overall demand for workers.
Those unhappy that wealthy people sometimes pay less in taxes relative to income than the middle class should blame our tax policies. A greater percentage of wealthy people’s income is generated by capital gains, interest, and dividends, which are taxed at a lower rate because the government has wanted to encourage savings and investment. However, as technological change accelerated, the economic benefits of investing in labor-saving devices soared; arguably, there was no need to provide further incentives. People investing in productivity-driven profits through the stock market were handsomely rewarded.
Our society is facing great strains. Until we put people back to work, the tensions between those funding government services and those consuming them will only expand. We need to explore whether tax breaks given to investors are as important to our society going forward as policies that would reward businesses for hiring workers. Permanent elimination of payroll taxes or long-term adoption of tax credits for hiring, as opposed to temporary measures for instance, might be considered.
We are only beginning to have this conversation. Unhappily, it is wrapped up in populist politics. President Obama has done this country enormous harm by pitting one group against another; his successful efforts to whip up fury against the producing class in this country is repugnant and wrong-headed. What is clear is that all groups will have to sign on to get our country back on track and that we need a president who can embrace novel approaches -- and take the country along with him. We may not have a shortage of labor, but we are surely struggling with a shortage of leadership.
