The Curious Task

by Russ Roberts on September 6, 2011

in Curious Task, Work

Paul Osternman, who is in the Sloan School of Management at MIT writes in the New York Times (HT: Real Clear Politics):

On Thursday, President Obama will deliver a major speech on America’s employment crisis. But too often, what is lost in the call for job creation is a clear idea of what jobs we want to create.

What jobs we want to create? Who is “we?” What does “create” mean? A clear idea? No one has a clear idea of how the government can create good jobs.

The next paragraph:

I recently led a research team to the Rio Grande Valley in Texas, where Gov. Rick Perry, a contender for the Republican presidential nomination, has advertised his track record of creating jobs. From January 2000 to January 2010, employment in the Valley grew by a remarkable 42 percent, compared with our nation’s anemic 1 percent job growth.

But the median wage for adults in the Valley between 2005 and 2008 was a stunningly low $8.14 an hour (in 2008 dollars). One in four employed adults earned less than $6.19 an hour. The Federal Reserve Bank of Dallas reported that the per capita income in the two metropolitan statistical areas spanning the Valley ranked lowest and second lowest in the nation.

Leading a research team to the Rio Grande Valley strikes me a bit strange. But never mind. The implication is that sure Perry can create jobs. But he doesn’t know how to create good ones.

Who does, Professor Osterman?

Do you really think Governor Perry just had his JobCreationMeter on the wrong setting, the crummy low-wage setting instead of the high-tech high-wage information economy setting and that’s why the Rio Grande Valley isn’t doing so well? And you’re writing this piece to make sure the President gets the setting right?

The next six paragraphs are about the challenges of living on low wages in the Rio Grande Valley. I guess the goal of the research team was to discover how hard it is to be poor in Texas. I knew that already.

So what’s the solution? Here is the rest of his piece:

Must we choose between job quality and quantity? We have solid evidence that when employees are paid better and given more opportunities within a company, the gains outweigh the costs. For example, after a living wage ordinance took effect for employees at the San Francisco International Airport, in 1999, turnover fell and productivity rose.

Contrary to the antigovernment rhetoric, there is much that the public sector can do to improve the quality of jobs.

A recent analysis by the Economic Policy Institute reported that 20 percent of federal contract employees earned less than the poverty level for a family of four, as opposed to 8 percent of traditional federal workers. Many low-wage jobs in the private sector (notably, the health care industry) are financed by taxpayers. The government can set an example by setting and enforcing wage standards for contractors.

When states and localities use their zoning powers to approve commercial projects, or offer tax incentives to attract new employers, they can require that workers be paid living wages; research shows this will not hurt job growth.

Labor standards have to be upgraded and enforced, particularly for those employers, typically in low-wage industries, who engage in “wage theft,” by failing to pay required overtime wages or misclassifying workers as independent contractors so that they do not receive the benefits to which they are entitled.

Americans have long believed that there should be a floor below which job quality does not fall. Today, polls show widespread support for upgrading employment standards, including raising the minimum wage — which is lower, in inflation-adjusted terms, than it was in 1968. It’s time for the federal government to take the lead in creating not just more jobs, but more good jobs. The job-growth mirage of the Rio Grande Valley cannot be our model.

So government just needs to pay more than the market will bear and force private employers to do the same. You might think this would reduce employment, but don’t worry, “research shows this will not hurt job growth.” I am comforted by this waving of hands.

Here is something else research shows–wages are determined by your productivity. Your productivity is a function of your skills, your investments in knowledge, your work ethic, and the capital that you have to work with. Laws that mandate higher wages don’t affect any of these things. They just make low-skilled workers more expensive.

Remember your Hayek:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

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{ 60 comments }

Speedmaster September 6, 2011 at 5:19 pm

Scary to realize that allegedly well-educated people, educating others no less, think this way.

Dan H September 6, 2011 at 5:28 pm

Well, I just crossed MIT off of my list of prospective B-schools. I’ll take my incredible GMAT score somewhere else. Maybe George Mason! :-)

Anotherphil September 6, 2011 at 10:10 pm

Skip B-School altogether!

Dan H September 6, 2011 at 10:36 pm

Good call.

Methinks1776 September 7, 2011 at 7:30 am

huge waste of time and money. Unless you’re itching to be an investment banker or management consultant, that is. But, you don’t seem brain dead enough for that.

Dan H September 7, 2011 at 7:36 am

“But, you don’t seem brain dead enough for that.”

Coming from you Methainks, that certainly means a lot, :-)

B-school is my “nuclear option”. I will only go if all else fails and it is absolutely necessary. As of right now, I’m actually trying to come up with capital to move forward with that little idea I thought last week. If I can get enough to supplement my living expenses and hire a web developer, I’ll be putting in my two weeks at JPM the next day.

Carl Pham September 6, 2011 at 5:32 pm

However hard it is to live on $8.14 an hour, it’s a lot harder to live on $0 an hour. Perhaps that tidbit escaped the good professor. Also perhaps the fact that not many people who begin working at $8.14 an hour — because they have zero job skills, say — continue to earn that little throughout their lives. It’s called an entry-level job, and it’s there so you have a place to earn while you learn how to earn still more.

But I can understand why someone in a management school wants to promulgate a different paradigm, the Obama / Democrat / NPR / academic paradigm, where there are no such things as entry-level crap jobs: instead, you go to school until you are 25 or 27 to acquire your job skills, then parachute into a lovely $70,000 a year Diversity Coordinator or Loan Management or Volunteer Coordinator position as your very first job. Because, notice, in this paradigm, what is required is huge amounts of cash to pay the salaries of Professor Osternman and his colleagues, and that enormous wealth must, obviously, be extracted from people who are working and funnelled to the mighty educational machine. Jobs, jobs, jobs — for educators, for bureaucrats, for legislators and lawyers. Endless job security. Self-interest much?

Of course, it might all actually make a glimmer of sense — IF it were actually possible to educate people in college seminar rooms on how to be worth $70,000 a year — how to actually create that kind of value. Alas, it is not. The sine qua non of high-value work is EXPERIENCE. No one runs a McDonald’s well unless he’s been an assistant manager and preferably a line employee first. No one commands a fire crew well unless he’s put in his apprenticeship wielding a hose. Grim fact o’ life.

Darren September 6, 2011 at 7:20 pm

However hard it is to live on $8.14 an hour, it’s a lot harder to live on $0 an hour.

I would expect the Osterman solution would be for the government to then pay you $12 per hour.

Pom-Pom September 6, 2011 at 8:37 pm

Why not $100/hr? It really cuts down on turnover!

vikingvista September 7, 2011 at 2:30 am

But at $1 million/hour, many people would likely only work for 1 hour, and then retire. That would open up a lot of jobs for people. $1 million/hr minimum wage–it’s a jobs program.

wsanman September 6, 2011 at 5:43 pm

Jobs are not created. Value to consumers is created. The jobs just follow the creation of value.

muirgeo September 6, 2011 at 5:46 pm

“Here is something else research shows–wages are determined by your productivity. Your productivity is a function of your skills, your investments in knowledge, your work ethic, and the capital that you have to work with.”

I don’t think there good evidence to support that claim. Your wages are far more dependent on the family and country to which you are born into.

A similiarly productive worker in China makes less than 1/10th of a similiar worker in America.

Well to do people like most on this board had better start understanding that they threaten their own security if they choose to recreate a pre-revolutionary society filled with too many who have nothing to lose and could care nothing of a government that’s sole goal is to protectthe fortunes of a small wealthy elite.

JS September 6, 2011 at 6:26 pm

Actually, wages aren’t determined by your productivity. They are determined by consumers, who decide what they’ll pay for the various goods and services available. For some goods, consumers will pay so much that firms can hire even unproductive workers as well as overpay them, and for other goods, excellent productivity menas nothing of they can’t be offered to consumers at the prices they are willing to pay. In those cases, the workers will lose their jobs, using your logic, for being productive.

The reason for the lower wages in China is because the division of labor has not been allowed to intensify to western levels because of their relative statism to ours, or in other words, their absense of libertain values.

JS September 6, 2011 at 6:28 pm

Forgive the typos and misspellings, but I try to limit the investment of my time refuting Muirgeo.

Methinks1776 September 6, 2011 at 7:19 pm

Yet more evidence of your wisdom, my friend. I think you know he won’t understand any of what you write.

JS September 6, 2011 at 6:44 pm

The factor of productivity is an indirect one. Highly skilled potentially productive people with talents not demanded by the consumers fill the unemployment lines, while arguably unproductive and undisciplined kids get high paying IT jobs because that’s what the consumers are more interested in.

Kirby September 6, 2011 at 6:28 pm

Disagreeing with Marx’ Labor Theory of Value? Vader is betraying the Emperor!

JS September 6, 2011 at 6:30 pm

His was a hybrid approach that still missed the mark.

Economic Freedom September 6, 2011 at 7:42 pm

A similiarly productive worker in China . . .

What makes you say that he’s similarly productive?

Invisible Backhand September 6, 2011 at 8:02 pm
John Papola September 6, 2011 at 11:32 pm

I assume your stats include total compensation including the full value of employer-provided health insurance benefits, bonuses, commissions and all of the other more flexible income schemes which have become more prevalent over the past 30 years. Right?

Anotherphil September 7, 2011 at 8:46 am

Don’t forget compliance and legal costs. Every employee is hired with the requirement to file paperwork and is a potential litigant.

Before I omit it, lets not forget the indirect costs of employment-hiring “diversity” consultants so that the government or race warriors don’t sue you.

California is actually thinking about requiring benes for babysitters.

Gil September 6, 2011 at 10:37 pm

Of course wages follow the laws of supply and demand like any other factor in the economy.

dsylexic September 7, 2011 at 3:58 am

wtf,gil -have you drunk the libertarian kool-aid?!

muirgeo September 6, 2011 at 5:56 pm

We are at a clear defining point. The economy will never improve significantly without major policy changes that stop and reverse the redistribution of wealth from the middle class to the top 1%.

Any push of policy towards libertarian leaning positions will only make the economy worse as we are seeing here and around the world with austerity measures taking their toll in each passing quarters economic indicators.

The stupidity of free marketeers is that ultimately their own injuries will be self inflicted.

time to board……

Russ Roberts September 6, 2011 at 6:07 pm

The biggest redistribution from the middle class to the top 1% is the government’s support of the financial sector. That is something that both Bush and Obama have helped with. It’s disgusting. Why do you continue to support such policies?

Kirby September 6, 2011 at 6:28 pm

Austerity measures like the $957 Obama budget cuts?

Kirby September 6, 2011 at 6:29 pm

$957bil

Methinks1776 September 6, 2011 at 7:21 pm

I think you meant $9.57

Pom-Pom September 6, 2011 at 8:40 pm

A $9.57 cut from the expected $957B increase.

Economic Freedom September 6, 2011 at 7:47 pm

reverse the redistribution of wealth from the middle class to the top 1%.

In other words, I would be much wealthier if only Bill Gates and Steve Jobs stopped filching money out of my paycheck.

Right.

Your view: “Government gives wealth to the poor and middle class; rich people like Bill Gates and Steve Jobs take wealth from the poor and middle class.”

You’re in complete denial over the failure of your ideas.

muirgeo September 7, 2011 at 10:19 am

Our current free trade agreement and low taxes are policies are a prescription that YOUR side supports and those of which I disagree.

It is your ideas put to practice that have created major inequality and thus this horrible economy.

Again watch along with me… the economy will ONLY improve if major progressive policy changes are instituted. Doing nothing or moving MORE in the direction of tax cuts and decreased spending will clear make things worse.

My position doesn’t need to be argued… my task is to get deniers like you simply to look at the real world. The real world said you were wrong in 1907, repeatedly before that. It said you were wrong in 1929 and 1934 and 2008.

Your task is to convince the majority of people to suffer harsher, poorer lives in the name of economic freedom and liberty for a small segment of the population.

Emil September 7, 2011 at 2:05 pm

“Again watch along with me… the economy will ONLY improve if major progressive policy changes are instituted.”

Yes, because it has worked so well every time it has been tried in the past…

Economic Freedom September 7, 2011 at 3:16 pm

It is your ideas put to practice that have created major inequality and thus this horrible economy.

North Korea and Cuba have no inequality and they also have horrible economies.

Clearly, then, the issue of “equality” or “inequality” is irrelevant to the success of an economy . . .

. . . unless, of course, your notion of economic success is precisely the egalitarian one of “equality of economic outcomes,” in which case, you could claim that Cuba and North Korea have “good” economies.

ccresci September 7, 2011 at 3:55 pm

Maybe you want to revisit the Tariff Act of 1930 (aka Smoot-Hawley): Unemployment peaks at 9% after the 1929 Crash. Unemployment in June 1930 is 6.3%. Tariff Act Passes 6/18/1930. Unemployment reaches 11.6% in November 1930.

veritasrex September 6, 2011 at 6:08 pm

That’s right, down with freedom! Up with totalitarianism! So it’s not that redistribution of wealth is a problem, it’s just that it’s going in the wrong direction? I’d love to know which U.S. austerity measure you are referring to. Last I checked, we might spend a billion or so less over the next 10 years. Oooooooooo….what austerity!

Chucklehead September 6, 2011 at 6:12 pm

Note there is no accommodation for the relative cost of living in the valley versus say D.C.

Kirby September 6, 2011 at 6:30 pm

um… Don covers that point when he skips about 5 paragraphs.

Seth September 6, 2011 at 11:08 pm

The solution to that is easy. We need to take on policies that increase the cost of living in the Rio Grande Valley. That’ll just drive up wages. I keep this up and the NYT will be calling me.

Tom Kelly September 6, 2011 at 6:15 pm

A good job (in the pure economic sense) is a job that provides a product or service that others are willing to voluntarily pay for. A high paying job is one that only a few can do while a low paying job is one that many can do. Therefore it is reasonable to anticipate that most good jobs will be low paying jobs.

Chris O'Leary September 6, 2011 at 6:19 pm

Russ,

I think it’s time for you or Don to challenge the research that was done by the president’s new Chief Economic Adviser, because it seems to back up the ideas contained in the OP. Krueger seems to believe that there is no cost to raising the minimum wage, and has research to back up that contention, but I looked at his study and see multiple holes in it that make me question exactly what this supposedly seminal study actually proves.

kebko September 6, 2011 at 8:51 pm

This weekend, over a couple of hours, I downloaded data from bls on unemployment rates, and I ran regressions of annual change in those rates against the ratio of minimum wage to average income – back to 1972 for black workers and 1954 for white workers (as far as the data would go). The results were striking. Across the board, increases in minimum wage correlated to increases in unemployment, and the relationship was stronger if the group was more vulnerable. White adults were the least effected followed by white teenagers, black males, and finally black teens. For each 1 percentage point increase in the ratio of minimum wage to average income, black teenage unemployment rose by about 1/2%. Of course very few workers work at the minimum wage. So, using these regressions and rough estimates of the number of workers at minimum wage, my rough review concluded that every sub-population suffers a loss of total income in addition to increased inequity as a result of minimum wage increases. We aren’t close to having a wage distribution that would increase wages enough to make up for the average number of jobs lost.

To find that the minimum wage does otherwise requires a poorly arranged study and a mountain of sophistry, but it’s clearly not impossible.

I think we should refer to the minimum wage law as the “Ensuring a Permanent Black Underclass” law. My understanding from Walter Williams is that this was one of the original intentions of the law. So, at least we have one example of a government program achieving its goals.

dsylexic September 7, 2011 at 4:02 am

was it walter williams or thomas sowell who so wonderfully pointed out that welfare has destroyed the black family -something years of slavery and anti balck prejudice wasnt able to do for centuries.72% of black children are today born to single mothers who are surely the welfare state will take care of them.
a welfare state is a decivilizing force.

Craig S September 6, 2011 at 6:24 pm

Why not simply do as Walter Williams suggested and raise the minimum wage to $100/hour then, if that’s all it tales to cure poverty?

As far as the rio grande valley, I wonder if spillover violence from the stupid drug war has any impact on quality jobs?

Kirby September 6, 2011 at 6:31 pm

Maybe, if we raise the minimum wage to $70k a year and require the market to have golden parachutes for even construction workers, we would all be better off!

Eric Nelson September 6, 2011 at 6:30 pm

Osterman: How he created jobs was with top down planning by people who use economic models to estimate what will happen given a set of assumptions.
RCP: So Howie created jobs?
Osterman: No, Rick Perry created jobs. And he didn’t harm the community in the process
RCP: Andy didn’t harm the community?
Osterman: Andy was a fat cat CEO who cares nothing about the community. The private sector bailed out.
RCP: Over Rio Grande?
Osterman: No, I don’t think I’ll ever get over Rio Grande. Those wounds run pretty deep.

Don Lloyd September 6, 2011 at 8:12 pm

Why does it feel like I’ve wandered into a Leslie Nielsen movie?

Regards, Don

JS September 6, 2011 at 6:35 pm

Hayek ” The Counter Revolution of Science”

But also read “The Perfectability of Man” by John Passmore

And “The Tyranny of Reason” by a contemporary scholar Yuval Levin

Thomas A. Coss September 6, 2011 at 6:43 pm

September 1, 2011 Solendra joined SpectraWatt and Evergreen Solar in filing Chapter 11 bankruptcy protection. Solendra is distinguished in that it received over $500M in loan guarantees from the Department of Energy.

The CEO, Brian Harrison added, “Regulatory and policy uncertainties in recent months created significant near-term excess supply and price erosion. Raising incremental capital in this environment was not possible. This was an unexpected outcome and is most unfortunate.” All of this connects to the “green jobs” promise of government policy and now adding 1,100 new unemployed to the mix.

Since when did we sign up to participate in venture markets? I may have missed that piece.

John Papola September 6, 2011 at 7:18 pm

More scam-artistry from the ideological camp which claims that the root failure of capitalist economies is that wages are “sticky” downward”. How do they know that wages are sticky downward? Why, because they MAKE them that way (and agitate to make them mores at every turn)!

Nonsense on Stilts.

Now, maybe this guy isn’t a Keynesian… but I’d bet $100 that he is.

Economic Freedom September 6, 2011 at 7:48 pm

I thought that MIT was still a hotbed of Keynesianism.

rbd September 6, 2011 at 7:21 pm

What will it take to finally learn the likes of Osternman that a man cannot pass a law and make every other man wealthy?

jorod September 6, 2011 at 7:41 pm

Figures don’t lie but..

There are many immigrants in Texas, very unskilled, providing low value labor. I thought Larry Kudlow thoroughly vetted this.

Workers in China are reportedly very unproductive, mostly doing low value assembling.

Don Lloyd September 6, 2011 at 8:30 pm

“Laws that mandate higher wages don’t affect any of these things. They just make low-skilled workers more expensive.”

But that’s not all they do. Every time someone gets a higher paid job, everyone else loses relative purchasing power and is worse off. Only if the person with the higher paid job increases his contribution to the market supply of goods and services can this be avoided.

Regards, Don

Jim September 6, 2011 at 9:20 pm

One could write a book on the implications of a business school professor writing this diatribe, and how difficult it will be to roll back government.

I’ve only met one free market professor in all the business schools I’ve visited. He was also the smartest person I ever met. He was denied tenure and sidelined. I found out the students didn’t like his politics, and he graded too hard.

steve September 6, 2011 at 9:52 pm

“Here is something else research shows–wages are determined by your productivity. ”

Not anymore, not for most people.

Steve

Against the grain September 6, 2011 at 10:03 pm

The thing the MIT economist missed is a substatial portion of the “low” wage earners immigrated (legally and illegally) to Texas. Based on their previous opportunities these are in no way low wage jobs.

One can also note that Texas has overcome the mis-allocation of stimulus dollars. Texans took stimulus money, but suffers from paltry returns on stimulus projects and the diversion of investment capital into T-Bills versus real investments.

Chris Bauer September 7, 2011 at 12:51 am

The Political Math Blog has an excellent post on Perry, his critics, and the public data available on the subject.

http://www.politicalmathblog.com/?p=1590

“Since the recession started hourly wages in Texas have increased at a 6th fastest pace in the nation.”

Although to be fair, the writer of the post never led a research team in the Rio Grande Valley.

Ben Hughes September 7, 2011 at 1:31 am

The argument that increasing the minimum wage doesn’t hurt job growth fails – like so many of the arguments put forth by the left – by the principle of “what proves too much proves nothing”.

This argument can be used to justify *any* increase in the minimum wage at the margin. Why not just set it to be $100 an hour? Will it hurt job growth then? If so, why would something true marginally at one end of the scale be the complete opposite of something true marginally at the end of the scale? The burden is on those putting forth this argument to explain. (NOTE: This is *possible*, but again, the burden is on them to explain this. In the words of Thomas Sowell, “such questions are simply never answered, much less asked”).

Aaron McNay September 7, 2011 at 11:44 am

I could be wrong, but I think that the San Fransisco Airport report that Paul Osternman is referring to is this one, which was put together by the Institute for Research on Labor and Employment :http://escholarship.org/uc/item/8km9s5m7. If this is correct, Osternman left out some very important information about the effect that these living wage policies have.
For example, Osternman is correct that the report found that turnover fell and measured productivity appeared to increase. However, the report also found that there was substitution of labor away from less skilled workers to more skilled workers (Page 30). In addition, the report also found that the workers also reported that they were required to work harder at their job and had greater stress on the job as well (Page 26). So, obviously the increase in productivity and decrease in turnover did not come without any cost.
What about employment? In the report, the authors do report that employment around the time of the living wage increase did actually increase. However, this occurred at the same time a new international terminal opened. So the question is, what would have happened in the absence of the living wage policy? Unfortunately, the authors of the report only attempt to answer this question by looking at total airport activity compared to total employment, which does not tell us anything about what would have happened in the absence of the living wage mandate.
Finally, the authors do report that the living wage increase is not a free lunch. The report that they expect that the cost of the living wage increases were simply passed on to the airlines and their customers (to what extent depends on the various elasticities). If this is the case, then employment in other sectors of the economy will be expected to decline as airline customers pay more for tickets and airlines face higher costs of production.
Paul Osternman seems to be suggesting that these types of living wage increases will essentially provide a free lunch. However, reports that examine Osternman’s own examples indicate that there are real costs to the policies that he proposes.

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