The Sagging Middle

WSJ David Wessel

You don’t need to be a Ph.D. economist to know something big is happening in the job market.

The salaries of Wall Street’s financial engineers are surging while wages in industrial companies stagnate. Manufacturers complain about “skill shortages” while cutting payrolls. The number of health-care jobs soars 45% over 15 years, outstripping the 25% increase in other jobs. Computers seem to have infiltrated every job, yet demand for unskilled, low-wage immigrants doesn’t abate.

For decades, employers in the U.S. and other industrialized countries sought more skilled workers as technology and the availability of low-wage workers abroad diminished the employers’ appetite for lesser-skilled workers at home. It was painful, but simple: Employers of all sorts wanted more skills and more education, and paid more to get them.

How do you think the U.S. job market is changing? Should the government do anything to respond to those changes?
It is no longer that simple. Cue the Ph.D. economists.

There is still strong demand for high-end workers — the stars of finance, software, law, sports and entertainment — as well as for the highest-skilled factory workers. The only news is the intensity of that demand, which is pushing up pay for those at the top.

But — and here’s the switch — demand is increasing for some workers at the low end of the pay scale: the ones who wipe brows in hospitals, care for kids, clear tables at bistros and stand guard in office-building lobbies. In 1980, about 13% of workers without any college education were working in such personal-service jobs, according to calculations by David Autor, a Massachusetts Institute of Technology economist. In 2005, 20% of them were.

The losers? “The sagging middle,” says Princeton University economist Alan Krueger.

As Harvard economists Lawrence Katz and Claudia Goldin put it recently, “U.S. employment has been polarizing into high-wage and low-wage jobs at the expense of traditional middle-class jobs.”

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Here’s the hypothesis evolving among these and other academics. Technology and globalization are boosting demand for the most-educated workers, those prized for abstract or conceptual skills. Top hedge-fund managers aren’t being replaced by computers; they’re harnessing them, to their great profit.

By contrast, technology and globalization are eroding demand for workers who do routine tasks in factories and offices, many of whom are high-school or even college grads. The voice-mail system does away with switchboard operators; back-office software eliminates bookkeepers; robots replace assembly-line workers. Or the work is shipped overseas to a foreign factory or an office linked to the U.S. by fiber-optic cables.

But technology and globalization are not eroding demand for personal-service workers. Those tasks can’t be done by computer or shipped offshore. The services have to be delivered here in the U.S. — and in person — either by natives or by immigrants.

Indeed, as the folks at the top make more money, more of them want nannies, gardeners, personal trainers and gourmet chefs. These workers are indirect beneficiaries of the upward flow of wealth.Their wages have been rising while those of midlevel factory and office workers, though still higher than those of many service employees, are stagnating.

Dissecting data on 741 American communities, MIT’s Mr. Autor and colleague David Dorn examined places that were particularly heavy with easy-to-automate or easy-to-outsource jobs in 1980. By 2005, they discovered, wage inequality in those communities had widened more than elsewhere. The erosion of jobs and wages in the middle coincided with increasing employment and wages for personal-service workers at the bottom of the income ladder and highly educated workers at the top.

Some economists speculate that the same economic forces are at play in Europe, but are hidden because rules and customs that restrain incomes at the top also restrain demand for personal-service workers at the bottom. That means less inequality than in the U.S., but also fewer jobs overall and more people on the sidelines, the ones who would be service workers if there were jobs to be had.

So what, if anything, should the U.S. do about this? That’s a harder question.

Economists warn that shoring up the middle by shielding manufacturing industries from imports or otherwise meddling with the market would cost consumers heavily. Some, certainly not all, suggest letting the market be, and using the tax code to transfer money from the biggest winners. Others suggest “professionalizing” personal-service jobs, perhaps encouraging unionization, to boost wages. Unlike factory jobs, advocates reason, these jobs can’t be moved offshore or automated if employers have to pay more.

The more popular solution — at least among economists — is a familiar one: Educate all workers so they are better at interpersonal or abstract skills (the jobs of the future) as opposed to dial-turning or keyboard-pounding (rapidly disappearing jobs of the past).

2 responses to “The Sagging Middle

  1. So where does thisz leave financial analysts?

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