MGI sees disaster in the US labor market and proposes to shift income from the 22% of Americans whose incomes have risen to the 71% whose incomes have stagnated and fallen.
Wednesday, August 5, 2009 at 01:14PM
Skeptic in Education, Employment, Globalization, Middle Class

Between 1991 and 2005, 71 percent of US workers were hurt by being in jobs "for which there is low demand from employers, an oversupply of eligible workers, or both," according to this recent report from McKinsey Global Institute.

The analysis showed that migration and deunionization depressed levels of compensation for labor in repetitive manual jobs and administrative support in the four lowest-earning clusters across all industries.

At a deeper structural level, global economic integration and technological advances have combined to produce permanent changes in the skill levels required to flourish in the U.S. labor market, the research concludes. . . .

[A]ppropriate education and training plays [sic] a critical role in giving workers access to more attractive jobs. . . .

We believe that the experience of the 22 percent of workers qualified for attractive jobs in industries and occupations where demand and incomes have been growing over the past 15 years points to the root cause of the problem of very sluggish income growth for the majority of the workforce: too few have the skills for attractive jobs and, as a consequence, too many workers are employed in industries and occupations where demand has been falling, incomes have stood still, or both.

The challenge raised by the 27 percent of workers in jobs where demand and incomes are both falling is to equip them with skills relevant to sectors that are set to grow in the United States, not to defend failing employers or shrinking sectors. The 44 percent of workers in jobs for which demand is growing but the pay is static pose a somewhat different question: how can rates of pay in these sectors and occupations improve? We do not have clear answers . . . .

Finally, how could we bring together these multiple drivers into coherent labor market and human capital strategies?

. . . .

Unless the mass of America's workers can develop new skills over the next ten years, the nation risks another period in which growth resumes but . . . with Americans in the bottom and middle-earning clusters never really benefiting from the recovery. The redevelopment challenge is enormous. . . . .

To highlight it, the central concern of the report is that 71% of Americans in the most depressed job categories will not benefit from the end of the Great Recession "unless the mass of Americans can develop new skills over the next ten years." Several problems here: A mass upgrading of skills may be necessary, but it would not be sufficient. It is also necessary that higher-paying jobs be created here instead of offshore. The MGI report proposes no strategy for creation of high-quality domestic jobs but assumes, against experience and evidence, that good domestic jobs will magically appear. A mass upgrading of skills of the lower tiers would increase competitive pressures on the 22% of Americans who have so far been relatively insulated from competition. (Due to data limitations, the MGI study only considered the bottom 94% of US workers; rounding presumably accounts for the difference between 93% and 94%.) In other words, incomes would become more equal at the expense of the prospering 22% and not at the expense of any foreign workers.

No Demand Side Strategy

The authors recommend against "defend[ing] failing employers or shrinking sectors," and they propose no strategy for creating additional well-paying US jobs. Perhaps the lack of a job-creating, "demand-side strategy" is because the authors adhere to the conservative view that government should not "pick winners and losers." When other governments have aggressive industrial policies to dominate the most lucrative economic niches of the future, adhering to laissez faire free-market ideology would be a disaster for America. Unilateral disarmament.

Weak, Cannibalistic, and Uncertain Supply Side Strategy

The authors propose only a supply-side, Field of Dreams strategy, upgrading the skills of US workers so they are ready when and if the demand develops for them. The authors say they have no answer for the 44 percent of workers in mid-range jobs for which demand is growing but incomes are nevertheless stagnant. Well actually they do have an answer, a redistributionist one: They propose to improve the skills of the 27 percent who are even worse off so they can compete with the 44 percent whose incomes are stagnant. And if the 44 percent improve their skills, they can compete with the 22 percent at the top who have had rising incomes.

Their notion seems to be that a generalized upgrading of skills will lower incomes in today's best job categories by increasing competition there, and—perhaps--raise the incomes of less skilled workers because there will be fewer of them. Certainly one would expect an excess supply of high-skill workers to drive down the wages for high-skill jobs, but it would not necessarily bid up the wages of medium- and low-skill jobs. If there is an oversupply of high-skill workers, some of them will have to accept lower-skill, lower-paid jobs and be unable to recoup their investment in training. Either way, compensation to high-skill jobs should decline. The MGI plan to have a potentially-overeducated workforce should appeal to those who think the wage differential between high- and low-skill jobs is too big, but it's not a plan to raise aggregate US labor incomes.

High-skill jobs are being created offshore for several reasons, but those reasons do not include a lack of adequately skilled Americans to fill those jobs at home, and the authors do not contend otherwise. Americans are simply too expensive. Under current US policies, that unfavorable labor cost differential will continue to drive new jobs offshore, and this supply-side stuff is just deck chairs. We have a choice: We can continue to push down US incomes, increasingly in better job categories that so far have been less affected by foreign competition, or we can change policies.

How close is the MGI report to Obama Administration policy?

Certainly, the MGI recommendations that place the whole burden of American economic progress on more education is perfectly mainstream and politically safe. My argument that such a limited policy is inadequate is heterodox--and correct.

According to the preface to the MGI report, "Diana Farrell, former director of MGI provided strong leadership on this project." In January 2009, she moved from MGI to the White House where she is a Deputy Director of the National Economic Council reporting to Larry Summers. She is "an advocate of offshoring and innovation to produce economic growth," according to WhoRunsGov. (I advocate pixie dust to produce economic growth, but that isn't working either.) I wonder what Obama's Middle Class Task Force, run by Vice President Biden, thinks of this.

Update on Friday, September 11, 2009 at 05:45PM by Registered CommenterSkeptic

I fixed the link rot to the executive summary of the MGI report from which all the quotations were taken.  In the course of that, I noticed that the first paragraph in the embedded quotation has been revised and the second has been deleted.  Also, my login profile at MGI no longer works, and they've stopped emailing me their news.  Hmmm.

Article originally appeared on realitybase (
See website for complete article licensing information.