The downside of trying to soften the US labor market

Low-income workers are those who have come from the fringes to fill many of the recent job opportunities, especially in leisure and hospitality. And they may be the ones most likely to increase labor productivity in the future. For example, people with less education seem to benefit from a tighter labor market. During the current recovery, wage growth for workers with a high-school degree or less has consistently been higher than for workers with a college degree or more. And the least educated were the only group whose wage growth outpaced inflation.

A look at longer-term data shows how unusual the recent wage relationship between the two groups has been. Typically, wage increases for workers with high-school degrees are lower than those for workers with college degrees. This gap widens over time, reducing the incentive to work, and inequality affects millions of Americans. According to Census Bureau data, the percentage of the US population with a high school degree or less is about 40%, or about the same as the population with a college degree or more.

Wage growth among the less educated is related to a broader set of socioeconomic issues. The troubling decades-long trend of declining labor force participation has been observed most strongly among those with a high-school degree or less, especially men. Furthermore, higher mortality rates are associated with lower education. In any case it is not about going to school for a few more years. It’s about more opportunities and higher pay – advantages of a very tight labor market, albeit in a sustainable way.

Even with the relatively rapid growth in recent years, there is still room for further growth. Long-term solutions should focus on increasing their marketable skills without asking individuals with high-school degrees to go to college, which isn’t the best path for everyone; Apprenticeship and training programs are often better.

The expansion of apprenticeship and training programs is at the heart of the Biden administration’s new initiative ‘Raise the Bar: Unlocking Career Success’. The three major areas of training are Manufacturing, Automotive and Cyber ​​Security. The goal is also to connect K-12 schools, colleges, employers and workforce development programs. The idea of ​​bringing all these stakeholders together is to ensure that the training that the students receive is of high quality and aligned to the actual job requirements. The plan will help regional assemblies share what worked and what didn’t.

But as promising as apprenticeship programs and similar programs sound, they don’t always perform well. Active labor market initiatives have only a mixed record of driving better employment outcomes; Research summarizing hundreds of evaluation studies found no effect in the short term, although some occurred after a few years. The type of plan matters. Those who focused on skill-building did better, but they also had a modest effect. This underlines the need for careful design of training programmes, particularly collaboration with employers, to determine which skills are in demand.

Unions are another option for boosting the skills and wages of workers with high-school degrees. They are often successful in negotiating compensation contracts for their employees, including those with less education. Skills matter rather than academic degrees. The unionization of fewer than 10,000 Starbucks employees and one Amazon.com warehouse in recent years hasn’t been enough of an institutional change to sustain wage increases for those at the bottom. During Covid, the rate of unionization continued to decline (down to only 10% in 2022). Unions may be active in some areas, but they are too small to influence the US labor market as a whole.

Finally, businesses must assess the productivity of employees hired at higher wages during labor shortages. Do they work harder per hour? Has turnover dropped? Those factors affect business costs, profits and productivity. But the outcome of these changes is difficult to predict. A study published in late 2022 by the Kellogg School of Management on the impact of raising the minimum wage found a decrease in profits from higher wages. That said, the recent labor shortage is very different. If it is profitable, businesses may consider practices such as solid growth and predictable schedules.

Claudia Sahm is the founder of Sahm Consulting and a former Federal Reserve economist.

Updated: June 26, 2023, 12:50 AM IST