Thursday, June 15, 2006

Wessel on Freeman on Labor Shortages and Surpluses

David Wessel writes about Richard Freeman's work on future labor markets in his WSJ column today:

There are two strikingly different ways of looking at prospects for American workers.

One view, often heard from business organizations, is that the looming retirement of the huge baby-boom generation will create a great labor shortage. So don't worry about recent distressing trends in wages and benefits; the market will cure that. Worry about where America is going to get the workers, particularly skilled workers, needed to keep the U.S. economy humming.

The counter view is that the emergence of China, India and the former Soviet bloc as modern capitalist economies changes everything. It adds about 1.5 billion workers to the roughly 1.5 billion workers already competing in the global economy and tilts the global balance between labor and capital in favor of capital. So worry -- and worry particularly that China and India are interested not only in low-skilled, low-wage jobs, but are training platoons of scientists, engineers and researchers.

Harvard University labor economist Richard Freeman examines the facts underlying these contrasting stories in a paper to be discussed today at a Federal Reserve Bank of Boston conference. His conclusion, to skip ahead a bit, is that the second case is stronger.

It is a well written column, and the conclusion that surplus will likely outweigh shortage is more unfortunate for future workers in the United States than even this discussion suggests.

It is true that the consumption needs of a large retired population (approaching half the size of the working population) will tend to boost wages under the "shortage" view presented above. But it will boost them not just in the United States. Wages will rise around the globe, in proportion to the ability of those in overseas markets to actually deliver the goods and services. (So wages for barbers go up proportionately more than for computer programmers.) Retirees will be bribing younger cohorts around the world to give up more leisure to provide the products they desire.

But among those younger cohorts who do take the bribe, there will be an added dimension in the United States but not in those other countries that Freeman and Wessel are considering. The added dimension is the substantially higher income tax burden that they will face to pay for the entitlements of the older generations. Entitlement programs like Social Security and Medicare are funded by taxes on payroll and income. The same is largely true of our addiction to budget deficits in the General Fund. To a very large extent, the ones who pay those taxes are the ones who work. So why work, or at the very least, why work in the United States?


ChinaLawBlog said...

The United States must do everything it can to maintain its innovation edge. China's education system is generally a failure at producing innovators and as long as we can succeed at it....

Anonymous said...

I agree that we will need every job we can get as offshoring will reduce the high end and illegals will reduce the low end. Taxes will be higher and spending on military adventures will be lower but much of the cost will be exported through higher interest rates caused by greater borrowing. They will work because they have to. They aren't going to be able to retire on Social Security.

As for innovation, if we aren't doing the work, we won't be innovating at it.

Arun Khanna said...

I haven't read the paper. However, Freeman should consider using a holdout sample of U.K. regions. Examine the extent of outsourcing to India and insourcing from China in those regions compared to regions in the U.S.

Daniel Kahn said...

Prof. Samwick: you mention the "consumption needs" of a large retired population. Are the Boomers the one´s driving our negative personal savings rate right now? If so, they are left with primarily the liquidity of their homes (most American´s largest asset) and the promised government benefits that have been called unsustainable many times over. Maybe what is necessary then gets redefined to some lower level of consumption than what we now see.

Does this concern you or am I just wrong about how much spending power Boomers will continue to have as they advance into their 60s and 70s?