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Tuesday, May 02, 2006

Hot Under the Blue-Collar

Blue-collar workers are not optimistic about their futures, something that is reflected in polls showing a divergence between measures of economic performance and worker anxieties. However, neither political party has been able to find a set of policies that address the problems in economically and socially defensible ways so as to attract a wide constituency. "Everybody complains about the weather, but nobody does anything about it" to shield workers from the economic storm:

Blue-collar US sees a precarious future, by Edward Luce, Commentary, Financial Times: ...By most conventional measures, Americans have never had it so good. The economy is entering its fifth year of high growth and is close to achieving full employment. Yet Americans tell pollsters they have rarely felt so anxious about their future. Nearly 70 per cent say they believe their country is heading in the wrong direction. ... a narrow majority believe their children will be worse off than they are. ...

The paradox derives from the fact that median incomes have been flat or declining, over a period when average incomes have grown robustly in line with equally impressive productivity growth. Since 1998, America’s economy has expanded by more than 25 per cent. But the median wage – the middle fifth of Americans in employment – has declined by 3.8 per cent. In fact, barring a few years in the late 1990s ..., wage stagnation stretches back to 1973.

Most Americans do not just feel poorer. Many also appear to believe this will continue to be their fate in the years ahead. “There is a social compact in America which says each generation will be better off than the last,” says Martin Baily, at the Institute of International Economics in Washington. “But it appears to have been broken in the last 10 to 20 years...”

Stagnating wages have been accompanied by soaring inequality... The growing disparity in earnings might not be such a large problem if those in the bottom 90 per cent had a decent chance of moving in and out of the top brackets ... – in other words if there was significant class mobility. But ... the chances of Americans remaining in the same bracket as their parents is higher than in every other developed country barring the UK...

The gap is not marginal. People in Denmark and Norway are one-third as likely as Americans to be in the same bracket as their grandparents. Lack of upward mobility is matched by declining downward mobility. Over the last generation, an American child born in the bottom-fifth income group had just a 1 per cent chance of becoming rich ... whereas someone born rich had a 22 per cent chance of remaining rich as an adult. ... “Ordinary Americans are not anti-rich – but they increasingly feel that the rules are stacked against them,” says Andrew Stern, president of the Service Employees International Union...

Economists are divided in their explanations. A large number attribute widening income disparities to the increasing returns that skills and education ... with the use of new technology. ... Meanwhile, access to the world-beating Ivy League universities is increasingly expensive for those from poorer backgrounds – and access is not always on the basis of merit. An estimated 12–15 per cent of students at Harvard are the children of those who have bequeathed legacies to the institution.

Others point to the effect of low-wage competition from China, South Korea and India. The ... emergence of information-technology-enabled offshoring in services has reduced the bargaining power of many US workers. The globalisation of production has been accompanied by a sharp decline in the level of union membership in the US.

Although America’s job-creation machine remains as dynamic as ever, many of the new jobs are at the low-wage and low-skill end of the non-unionised service sector – on the checkout counter at Home Depot or delivering Domino’s pizzas. Often those are replacing secure jobs at places such as General Motors or Ford that traditionally provided generous wages and full health and pension cover. ...

Other economists point to the increase in unskilled immigration over the past two decades. Studies estimate that the 500,000 immigrants who enter the US illegally each year have depressed wages in low-skilled jobs by anything from 1 per cent to 8 per cent. ...

In reality, America’s growing in­equality probably derives from a combination of all these influences. Yet – in part because of this complexity – neither of its two main political parties has yet addressed the issue squarely. “There is no simple solution to the problem of economic insecurity, so the Democrats have preferred to target more easily definable problems such as health insurance and education,” says Douglas Schoen, a senior pollster for the Democrats.

Outside the political parties, by contrast, concern is growing that rising inequality could lead to a populist backlash against America’s open- market economy. Last year Alan Greenspan ... warned Congress that stagnating incomes were storing up trouble: “This is not the type of thing which a democratic society – a capitalist democratic society – can really accept without addressing,” he said.


One clear danger is that people will increasingly cast around for scapegoats. This is reflected in the rising populism on Capitol Hill as midterm congressional elections approach ... Last December the House of Representatives passed a bill that would create felons out of the 11m illegal immigrants in the US and build a 700-mile wall along part of the Mexican border. Some of the more punitive elements may be removed when the Senate votes this month. But much is likely to remain.

Congress is also considering making it tougher for foreign groups to take over US companies... Again, the bill could be diluted. But what emerges is still likely to tarnish US economic openness. Likewise, concerns about the rising US trade deficit with China and the tide of outsourcing to India have raised the chances that Congress will refuse next year to renew the administration’s fast-track trade negotiating authority. This could prove fatal to the chances of enacting any settlement from the Doha round of world trade talks.

“Unless the defenders of the open-market economy find solutions to the problem of growing inequality we are in real danger of succumbing to a rising tide of protectionism,” says Robert Rubin... “We should start by recognising that government has an important role to play in tackling this problem.”

Mr Rubin’s recommendations... may qualify as good policies. But in terms of politics, Democrats are still reluctant to talk about inequality or strengthening the role of the state. “There is a deep-seated Democrat fear of being accused of class warfare by the Republicans,” says Mr Schoen.

That fear is arguably well-founded. Although on many measures Americans are increasingly pessimistic, a large proportion support the abolition of the estate tax (on inheritances) even though fewer than 1 per cent are liable to pay it. ... Most Americans also retain faith in income mobility. According to New York Times polls, 80 per cent agree with the proposition that “if you are poor and work hard you have a chance of becoming rich” – up from 60 per cent in 1980. ...

But ... the often contradictory attitudes of Americans to economic inequality and to their own future prospects makes it far riskier for Democrats to address declining mobility than for centre-left parties in other countries. Meanwhile, the Republican strategy seems to be to focus on non-economic issues in the build-up to November.

“It is clear from all the numbers that people no longer believe the Republicans when they correctly point out how healthy the economy is – there is a lot of anger out there,” says Frank Luntz, a leading Republican pollster. “The one emotion that trumps anger among voters is fear. The best Republican strategy would be to work on fear.”...

That is scary.

    Posted by on Tuesday, May 2, 2006 at 01:30 PM in Economics, International Trade, Unemployment | Permalink  TrackBack (1)  Comments (12)


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