The destruction of the US middle class

The problem

Since the Oil crisis in 1974 the unemployment figures of Germany have risen significantly after every recession. From 0,6% in 1970 to an all-time high of 11.4 per cent in 1997, with one remark that this was the time of the reunification of West and East Germany. The group that’s hit the hardest are the low-skilled worker (LSW). The unemployment figures of the LWS are much higher than those of the skilled- and high-skilled workers (SW & HSW). Because of the opening of the global market there is more supply of LSW’s who are prepared to work for less than their counterparts in the developed industrial countries, like Germany.

In the period of 1984 until 1997 the share of German LSW’s has dropped with 1,1% per year. “The skill biased technical change could at least partially be responsible for the high rising unemployment rates of the LSW’s” according to Heitger and Stehn. It could be an explanation but why didn’t the share of LSW’s decline during the 50’s and 60’s? The technology didn’t halt during this period so it can’t be the main reason for the decline of LSW jobs in the developed industrial countries. The German LSW relative wages haven’t reacted in the years, it remained stagnant. That seems to be a good thing but keep in mind that the productivity has been rising every year since the 70’s. 

Because of the opening of the global market the demand for German LWS has declined. Because of the stagnation of LSW wages it also creates a incentive to get better education because SW and HSW’s don’t get effected as much as the LWS’s. We see that the wages of de LSW’s stagnate and the reason for that is that the German LSW labour market is shrinking. These are the central hypotheses which were tested by Heitger an Stehn.

Theoretical considirations

There are two hypothesizes to explain why the wages of LWS’s has dropped in the recent years. The Trade and Technology hypothesis. The trade hypothesis claims that the opening of global markets has increased the supply of cheap unskilled labor which now competes with the LSW’s of the developed industrial countries, this explains the stagnation of wages and the decline of LSW’s in the developed countries. The other hypothesis claims that not the opening of the global markets but the skill biased change due to technology is the reason for the decline of LSW’s in the developed countries. 

The authors claim that the technology hypothesis is on the winning hand due to US data but I beg the differ. There is a incentive for LSW’s to get better education because the LSW labour market is shrinking so there is less prospect for a job.

Because if the technology hypothesis would be true why wasn’t there such a development in the 50’s and 60’s? 

But that doesn’t mean is good or bad. Better education because of this incentive can be very beneficiary to society so there are two sides to the medallion. One thing which isn’t included in the data of the article of Heitger and Stehn is the comparison between productivity of good producing workers which in most cases is a LSW job. Than we see that since Nixon broke with the Bretton Woods system the productivity of goods producing workers has been climbing ever since but in contradiction to the 50’s and 60’s, the booming years of the US and it’s middleclass, the real wages haven’t rose with the productivity. The real wages in the US have stagnated for over forty years.

Source: American Bureau of Labour Statistics

So what really happened here? The authors are right to say that globalization is not the reason for the lowering or stagnation of wages. Globalisation can even be a force for good because it incentivizes people to get a better education. There are more factors that play a role. The decision of Nixon to break with the Bretton Woods system is, as we can see an important turning point in the economic history. Before the 1970’s the Bretton Woods system fixed the exchange rate. Because the most countries wanted to have control over monetary policy that meant that capital mobility was restrained, as explained in the impossible trinity. The power that finance and the capitalholders got

    

                            

from these economic policies can explain the positive effects for capitalholders and the negative effects for the workers. The benefits of the rise in productivity haven’t been evenly distributed which also explains the great increase in income inequality in the world since the 1970’s.

Income inequality US

Policy conclusion Authors

According to Heitger and Stehn, the wage-setting process is influenced by different factors: The skill biased technical and structural change have contributed to the decline of relative demand for LSW’s in Germany. Because of their conclusion that skill biased changes really influence the wage development of the LSW’s they advise to see an investment in the countries education as an economic policy. It’s important to educate more skilled and high-skilled workers because there is little future for the low-skilled worker in the developed economies. I concur with this policy advise because getting a better education is a benefit to us all.

The authors suggest that there is no credit market for the investment in education and that workers should be able to finance their education with their social security entitlements. They also conclude that a private mandatory employment insurance system would be more efficient because it harnesses market forces. What they are advising is the privatization of unemployment insurance. They base this on their believe that private entities are always more efficient than state run bureaucracies. They problem is that a private company can also become a bureaucracy and the US private healthcare insurance system doesn’t support their beliefs. US healthcare is the most expensive in the world. 

Is this the efficiency where they spoke about?

They also speak about decentralized autonomy in collective labour contract negotiations. So people can deviate from the collective contract if this means that will give more job security if 2/3 of the employees agrees to deviate from the collective contract. This could also be used by the employers to threaten to move production if they don’t accept lower wages or wage stagnation. 

They also suggest to slice the duration of benefits from 32 months to 12 months. So they advise to reduce the social welfare for those who can work but lack employability, so leave the social welfare of the sick and old untouched. At the same time incentives have to be strengthened to accept low wage jobs in lower segments of the labour market. These conclusions totally embrace the neoliberal doctrine since the 70’s. The market is always more efficient so many functions of the state should be privatized. Social security should be cut so the “competition position” of the country’s economy improves. 

So after stagnating wages the people should also accept the loss of a great part of their social benefits and accept even lower wages if they can work in a lower segment of the labour market. The picture that is presented by the authors is that the workers have too much benefits but they never talked about the enormous cut the employers and stockholders are taking. The way these authors easily ignore these facts is worrying and my main critique on this article.