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 THE STAT 26Percentage of wireless customers who use their cell phones to take picturesMore Vitals
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MAY 25, 2004
Fast Growth: Pain Now, Gain Later Part 2 of an excerpt from Michael Mandel's Rational Exuberance discusses how job creation and wages can leap in the long run Rational Exuberance: Silencing the Enemies of Growth and Why the Future Is Better Than You Think by Michael Mandel Chapter 3: How Innovation Matters Bigger Wage Gains Though the wealth of a country should be very great, yet if it has been long stationary, we must not expect to find the wages of labour very high in it.Over the long term, wages basically rise parallel with productivity. True, there is usually a bit of a lag between changes in productivity growth and changes in wage growth. When productivity accelerated in the exuberant growth period of the second half of the 1990s, it took a couple of years before those gains showed up in higher wages. Eventually, though, they did, and real earnings of virtually all workers soared. From 1993 to 2003, real wages for all workers, adjusted for inflation, rose by 9 percent, based on wage and price data from the Bureau of Labor Statistics. That's outstanding, especially when compared with a gain of only 1 percent from 1983 to 1993, the previous 10-year period. It wasn't just the well-to-do and educated who benefited. Real hourly earnings for production and nonsupervisory workers rose by 8 percent. The percentage of families living below the poverty line fell sharply, from 12.3 percent in 1993 to 9.6 percent in 2002, the last year available. By comparison, the poverty rate was flat in the stretch from 1983 to 1993. Even the 2001 recession and subsequent slow downturn seems to have eroded only part of the gains. By contrast, the periods when cautious growth has dominated have typically had very slow wage growth, adjusted for inflation, especially for the people at the bottom. For the most part, the historical record suggests that periods of innovation have generally been a good thing for the working class. For example, the question of what happened to workers during the rapid technological change of the British Industrial Revolution of the 19th century has been hotly debated. Nevertheless, from 1810 to 1850, argued Jeffrey Williamson, a Harvard economic historian, "blue-collar workers' real wages doubled." Williamson also estimated that the percentage of paupers in the population -- the extreme poor -- dropped from 15 percent in 1812 down to 10 percent in 1850 and 6.2 percent in 1867. In the 20th century, it was the leading-edge industries such as automobile manufacturing that were able to afford to pay the best wages. It was automobile pioneer Henry Ford who boosted his factory's daily wage to $5 a day in 1914, when the going wage for factory workers was less than $2.50 per day. More recently, workers in the tech sector enjoyed some of the biggest wage gains in the 1990s.
More Jobs Both logic and history suggest that it's far easier to generate highpaying, attractive new jobs in an exuberant economy, compared with a cautious one. Typically big technological breakthroughs create new and profitable industries, which need a lot of workers and are willing to pay good money. It's possible to go down the list of industries published by the BLS and identify what innovations in the past led to which jobs. Today there are perhaps 9 million workers employed making motor vehicles and airplanes, selling them, servicing them, or working in closely connected industries. Another 4 million are directly engaged in making high-tech equipment, selling it, or helping people deal with it. Another 1 million work in the electric utility industry, or building electrical equipment. Another 1.5 million or so work in the telephone, radio, and television industries. Then, of course, there are the indirect jobs that are spun off from the original innovations. Virtually the entire travel industry depends on the availability of cheap air and land travel. Destinations such as Disney World would not be economically viable if their customers could only come from the surrounding areas. Similarly, the retail and wholesale industries are absolutely dependent in their current form on the truck/air/rail distribution system. Wal-Mart, the largest private employer in the country, built its business model around effective use of information technology and far-flung sourcing of cheap products. And while it's not possible to separate out the effects of medical innovation on health care employment, there's no doubt that there would be far less money spent on health care, and far fewer health care jobs, if it wasn't for all the new treatments introduced over the last 50 years. Interestingly enough, periods of innovation and exuberant growth also seem to be the periods of the lowest unemployment and the fastest job growth. In the 1960s, when productivity was growing very quickly, unemployment dropped below 4 percent. As innovation and productivity growth slowed in the 1970s and 1980s, unemployment rose. And then, as the economy went through another innovation and productivity spurt in the 1990s, unemployment dropped below 4 percent again. Why should this be? During periods of cautious growth, companies have only one way to boost productivity and profits -- by cutting costs and trimming the ranks of workers. These surplus workers are left unemployed, or they may move into the service sector -- the dry-cleaning, health care, restaurant, retailing, and other service jobs that grow almost every year, along with the population. The problem is that these jobs don't necessarily pay well. Restaurants always need waiters and waitresses, but that doesn't mean that they can afford to pay a good wage. However, during periods of exuberant growth, both companies and workers have other options. Innovation enables companies to compete -- not necessarily by cutting labor, but by using new technology to make existing workers more productive. And when workers are laid off, there are innovative new industries that are hiring. In an exuberant economy, workers have something to aspire to -- there's unclaimed territory where smart and hardworking Americans can make their mark. Without innovation, the job market congeals and stagnates. There is no way for anyone to move up without bumping someone else down.
BW MALL
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