From Forbes magazine, 23 July
Will Your Children Grow Up To Be Servants And Nannies?
Reihan Salam
Why the labor market of the future will be even more polarized.
Will large numbers of today's children grow up to become servants and
nannies in the homes of the digital bourgeoisie? There is good reason to
believe that the answer is yes.
The most pressing issue of the day remains sky-high unemployment. There is,
however, almost no consensus about how to think about the the depth of the
problems facing the U.S. labor market. Many believe that the staggering
unemployment rate is purely cyclical. Karl Smith, an economist at the
UNC School of Government, has written a post on "the myth of structural
unemployment", arguing that "the structure of the American economy hasn't
changed that much in the last 24 months."
Yet one wonders if the last 24 months are the right place to look. In Wired
for Innovation, MIT economist Erik Brynjolffson and Adam Saunders of
Wharton offer an insightful portrait of how the U.S. economy has evolved
over the last decade. Their analysis strongly suggests that the shift
toward a more IT-intensive economy will lead to even more polarization of
the U.S. labor market. Brynjolffson has dubbed the "Great Recession" a
"Great Restructuring," adding gravitas to arguments advanced by thinkers
like Jeff Jarvis and Richard Florida who've argued in a similar vein. "As
growth resumes," Brynjolffson writes, "millions of people will find that
their old jobs are gone forever."
Smith is undoubtedly right that we can't neglect the cyclical dimension,
and that journalists and would-be visionaries have a tendency to grasp at
sweeping rather than narrowly tailored explanations for high unemployment.
In Smith's view, for example, construction employment will likely recover,
as the building boom of the 2000s was not out of step with the earlier
building boom of the 1970s. But consider the following counterfactual. As
Barry LePatner argued in Broken Buildings, Busted Budgets, the
trillion-dollar U.S. construction sector is unusually fragmented and
undercapitalized, and thus ripe for consolidation. Economic as well as
environmental imperatives could drive consolidation, leading to a
construction sector that is leaner, more skill-intensive and more
IT-intensive. This would mean far higher productivity. And it would also
mean that the labor market position of less-skilled construction workers
would deteriorate.
There will, of course, always be a place for less-skilled workers, albeit
at low wages. At a certain point, wages in the informal sector might look
like a more attractive alternative. Discouraged workers who've stopped
looking for work in the mainstream economy would, in this scenario, remain
on the margins. Indeed, the steady deterioration in the labor market
position of less-skilled men is one key reason why male labor force
participation has declined so markedly over the last 30 years. The pressing
question is whether we are likely to see this trend accelerate.
Between 1973 and 1995 U.S. labor productivity grew at an average rate of
1.4% a year, a rate that means living standards would take 50 years to
double. In contrast, the 2.7% growth rate in productivity from 1948 to 1972
doubled productivity in 26 years. And that earlier period is remembered as
an economic Golden Age, when working and middle class Americans saw
extraordinary progress in their living standards and the U.S. economy was
without peer.
From 1995 to 2000 the productivity growth rate increased to 2.6% per year,
almost matching the Golden Age. As Brynjolffson and Saunders observe, this
productivity boom was traced to the deployment of IT investment across a
wide range of sectors, particularly retail. The more interesting
productivity boom, however, occurred between 2001 and 2003, when the
productivity growth rate hit 3.6% per year. This productivity spike was
driven less by investments in IT than by investments in organizational
capital, a catch-all term for productivity-enhancing business practices.
The authors observe a sharp divergence between firms that successfully
transformed themselves into effective digital organizations and those that
did not. Very bluntly, digital organizations flourish while others wither
and die. Brynjolffson and Wharton economist Lorin Hitt identified the
defining characteristics of digital organizations, and the most striking
were those centered on valuing the strongest performers within an
organization: In digital organizations, employees are empowered to make
decisions and they are subject to performance-based incentives. Recruiting
and investing in top performers is a high if not the highest priority.
The logical implication is that the transition to digital organizations is
a recipe for even more inequality. In "Performance Pay and Wage
Inequality," economists Thomas Lemieux, W. Bentley MacLeod, and Daniel
Parent maintain that the increasing use of performance pay can account for
"nearly all of the top-end growth in wage dispersion". Assuming this
pattern holds, there is no reason to believe that we will see any decrease
in wage dispersion. Quite the opposite: The most skilled workers will
cluster in digital organizations, and wages at the top will continue to
expand at a healthy clip.
This raises the question of what will happen to those trapped in the low
end of the labor market. Recently, the cultural critic Annalee Newitz
offered a provocative hypothesis: "We may return to arrangements that look
a lot like what people had over a century ago," Newitz writes. As more
skilled women enter the workforce, and as the labor market position of
millions of less-skilled workers deteriorate, we'll see more servants and
nannies in middle-class homes. While this future might seem disturbing at
first, there is no reason to believe that these armies of servants and
nannies won't earn decent wages. But let's just say that this isn't the
future most of us envision for our children.
Reihan Salam is a policy advisor at e21 and a fellow at the
<http://topics.forbes.com/New%20America%20Foundation>New America
Foundation. The co-author of Grand New Party: How Republicans Can Win the
<http://topics.forbes.com/Working%20Class>Working Class and Save the
<http://topics.forbes.com/American%20Dream>American Dream, he writes a
<http://search.forbes.com/search/colArchiveSearch?aname=Reihan+Salam&author=reihan+and+Salam>weekly
column for Forbes. for Forbes.
Keith Hudson, Saltford, England
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