Globalization Can Be Good for American Workers

By Milton Ezrati

Monday, August 07, 2017

Note: The following piece originally appeared in City Journal.

No matter how much politicians promise to protect us, technology and globalization will continue to transform the American workplace, driving the U.S. economy to abandon simpler, labor-intensive production processes, turn increasingly toward more mechanized, digitized, high-value efforts, and, accordingly, demand an ever-better-trained workforce. Though these trends should generally create prosperity, they will also bring significant social disruptions. Indeed, they already have: Income disparities between rich and poor have widened, with the skilled and educated seeing enhanced earning opportunities and the less skilled and less educated finding their options constrained. Less and less is left of the old, stable middle class, the product of an era when the semiskilled could maintain security in a job for life. Unless we can better prepare workers for this dramatic economic shift, social decline will worsen.

One popular response, obviously given prominent voice in the 2016 election, would seek to block globalization and otherwise search for ways to force up wages for the less skilled. It’s an understandable reaction, but whatever Washington thinks of its powers, it can neither turn back the clock nor repeal economic laws. Trade protections and legislated wage supports will not only fail to protect the vulnerable; they will also inflict broader economic harm. Policymakers would do better to accommodate the impact of globalization and technological innovation, refocus the economy accordingly, alter the nature of the workplace, and train (and retrain) the labor force. Only in this way can the United States ease social frictions and ensure a healthy new middle class for the 21st century.

In many respects, the disruption that the American economy is experiencing is an old story. Technological advancements have pressured economies in one way or another since the Industrial Revolution. Each innovation and each advance in world trade have more thoroughly mechanized production processes and moved them to cheaper, more efficient venues. And each economic development has demanded more of workers.

The first spinning machines and power looms required training for people with no experience operating equipment beyond driving a horse-drawn reaper or working a hand loom. No doubt a search of commentary from the period would reveal a familiar anxiety over the fate of workers who either would not or could not learn the new techniques — and perhaps also about growing income disparities between those who could adapt to these new challenges and those who could not.

The pace of change has quickened since the end of World War II. Even as American manufacturing enjoyed its heyday during the 1950s and 1960s, technological advances helped managers produce more with fewer workers, slashing costs. Rudimentary computerization enabled offices and other service industries to follow suit. Industrial output exploded, rising almost 4 percent a year, on average, but the creation of well-paying jobs lagged, expanding at a mere 0.8 percent annual rate. Meantime, Europe and Japan leveraged their then-lower wage scales to compete increasingly with American production and American workers.

Though the middle class was doing well at the time, the 1950s film The Desk Set reflected popular fears of how computerization would vaporize formerly secure, well-paying office jobs. The film ended happily for all, but computers really would supplant workers. Foreign competition, even at this early stage of globalization, cost jobs, too. By the 1960s, American trade representative Michael Blumenthal was warning that, for every car that Detroit sold abroad, Americans were buying three foreign imports. President John F. Kennedy, noting the effects of both import competition and automation, warned of the “dark menace of industrial dislocation, increasing unemployment, and deepening poverty.” By the 1970s, AFL-CIO president George Meany was complaining loudly about the rising market share of imports. Describing free trade as “a joke and a myth,” he demanded “tighter restraints on imports.”

By the 1980s, Japanese gains had trade hawks riveted. Lost market share, especially in autos and steel, meant layoffs in Detroit and Pittsburgh. Elsewhere, manufacturing kept using technology to shed workers. While industrial production rose some 20 percent over the course of that decade, manufacturing employment fell 7.4 percent. In services, computerization and automation advanced to the point where the fears expressed in The Desk Set started to become reality. Answering machines replaced thousands of telephone operators across the country. Word processing made many typists redundant. Automatic teller machines, even as they gave millions of people access to their own money outside bankers’ hours, put others out of work. Most found alternative employment. The country increased jobs overall during this time — 18 million over the course of the decade. But the new jobs, not as secure as the old ones, often paid less.

As the 20th century drew to a close, the rise of emerging economies, mostly in Asia, presented more aggressive wage competition than ever: Workers in these economies get paid as little as one-hundredth of what Americans earn, a much greater gap than ever existed with Europe and Japan. Because these economies have focused their production on simpler, labor-intensive processes, where their relatively low literacy rates and skill levels matter less, the impact on semiskilled and unskilled American workers was profound. Once-reliable sectors for low-skilled American workers — textiles, clothing, shoes, the assembly of retail electronics, retail call centers — all but vanished from the U.S. economy. Those finding alternative employment have suffered wage declines of between 15 percent and 40 percent.

The relentless advance of computer technology has disrupted entire industries in the 21st century. By making it possible to prepare and send documents electronically, computer technology has eliminated countless office and retail clerical positions, for instance, as well as messenger and delivery jobs. By enabling the “just-in-time” monitoring and maintenance of warehouse inventories, computerization has eliminated scores of positions in retail and wholesale operations. Robots, long used in auto assembly and other heavy manufacturing to eliminate thousands of assembly-line jobs for the semiskilled, now enhanced with artificial intelligence, will soon threaten jobs in myriad fields.

Businesses are doing more with fewer and fewer workers. Since 1990, the economy has increased its production of real goods and services some 85 percent, but we’ve seen overall job growth of only 31 percent. Many have gained spectacularly from these advances, but that is cold comfort to displaced workers.

All this change was certain to cause social frictions. But by offering enhanced benefits to top earners, the new economy has intensified the frictions. Productivity advances from labor-saving innovations have accrued to this class — workers with the training to run the new systems and equipment and the managers and shareholders of the more efficient and more profitable operations. But in addition to this pattern, which held in previous technological periods as well, globalization now offers the added boon of easier access to global markets and command of greater productive resources — natural, capital, and labor — especially overseas. Instead of dividing revenues with relatively expensive American labor, those at the top can now accrue a huge surplus by producing in the cheapest place and selling to the world.

National income and tax statistics capture the cumulative effect. The richest tenth of the population has seen its income grow five times faster over the last two decades than the bottom fifth. The earnings of the top 20th during this time have risen some 9 percent a year, while the bottom 20th has suffered a 2.5 percent rate of decline. The top quarter of earners has gone from making ten times the pay of the bottom quarter in the 1970s to some 15 times today. The IRS notes that the wealthiest 1 percent of income-tax payers commands some 22 percent of the total income subject to tax, while the bottom 50 percent commands less than 13 percent — both greater extremes than ever before recorded.

Yes, many analyses have called into question the precise import of these statistical comparisons. Some point out how such figures fail to account for much more generous public benefits than existed 20 years ago. These data also fail to account for mobility between income cohorts; those at the bottom seldom stay there but instead often rise through the income distribution over time. Others argue that what matters most is whether most people are better off than they were, not how much richer the rich get. These contrary points are valid and warrant attention. Still, they cannot change the picture of a much less equal workplace and one in which the old middle class, with its once-large component of semiskilled workers, seems on the way to extinction.

As these pressures increase, a broad constituency has formed to demand, usually of government, an end to the pain. Merchants and local governments in the regions most affected have joined the outcry as they have lost business and tax revenues to factory closures and layoffs. Their representatives in Washington have tallied the votes in favor of relief and picked up the call, as has the media. The backlash has focused more on one cause of the woe — globalization — than on another — technology — probably because Americans are culturally disposed to cheer technological advancement. The emerging robotics may test that inclination.

Donald Trump, of course, has been the most prominent voice of antiglobalization, promising to protect American jobs with an average 20 percent tariff on all imported goods and a 45 percent tariff on Chinese imports. He also touted a 35 percent levy on goods entering the country from the Mexican operations of U.S.-based firms. Some of his Republican rivals for the nomination spoke out against free trade, too. On the Democratic side, Bernie Sanders bragged that he had voted against every major trade agreement since he entered Congress and promised to resist all efforts at trade promotion. During her campaign, Hillary Clinton turned against the two pending trade agreements, the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Partnership. She also reprised her positions from her 2008 run for the Democratic nomination, when she sharply criticized the North American Free Trade Agreement with Canada and Mexico and otherwise called for a “time out” on trade deals.

Other efforts to address the problem have focused more on symptoms than on presumed causes. The widening use of food stamps, for instance, aims at restoring a living standard that many less skilled workers can no longer secure with their paychecks. Renewed efforts to increase the minimum wage would, advocates claim, boost incomes for the less skilled. Alternatively, government has tried to protect jobs and push up incomes artificially through subsidies to struggling industries. Direct cash transfers are less popular in the U.S. than in Europe. Here, both federal and state governments prefer special tax breaks to accomplish the same ends.

All these notions, however well-intentioned and emotionally understandable, constitute a cure worse than the disease. Certainly, minimum-wage hikes can do little to bolster the beleaguered middle class. Politicians and even some policymakers might believe that ordering management to pay a regulated wage will raise incomes, but no business, large or small, can pay people more than they produce, at least not for long. Complying with such laws would force marginal firms out of business, costing jobs. Others would defray the increased wage cost by installing robots and other labor-saving devices. The few workers left to manage the equipment would do better, but most others would lose out entirely.

Subsidies or tax breaks to affected industries are another long-term dead end. Taxpayers wind up footing the bill, either funding the amount handed over or making up for the taxes not paid by those getting the breaks. Such burdens would then impede general economic progress by shortchanging other worthy government projects, such as making infrastructure improvements or bringing the unemployed back to work through retraining or using a general tax cut to promote economic dynamism and encourage hiring. Worse, by making others pay, subsidies not only strip from the favored few the incentive to adapt but also rob the unfavored of the means to do so. And for all this cost, history shows that subsidies rarely protect jobs or boost worker incomes. The industries receiving them seldom pass the benefit on to their employees, whom they often replace with labor-saving technologies, anyway. Management, not the broader workforce, tends to gain from such policies.

Full-scale antiglobalization measures would be extremely damaging. Protected firms and their workers might benefit, but other firms, denied access to inexpensive imports, would be less profitable, and production cutbacks and layoffs would follow. If these firms instead were to pass on the increased cost of inputs through higher prices, consumers would take the hit. Price comparisons between imports and domestically produced goods and services during the last 20 years show that, were it not for relatively free trade, the cost of living in the U.S. would have risen half again faster than it has. The Peter G. Peterson Institute for International Economics estimates that trade’s downward pressure on living costs over this time has cumulatively given every man, woman, and child in the United States as much as $3,300 a year in additional buying power. These benefits would disappear under a protectionist regime.

Businesses and unions are well aware of these issues. All would love subsidies and protection from foreign competition, but none seems willing to pay the price for others to receive them, as two brief anecdotes illustrate. When, some years ago, the AFL-CIO advocated trade restraint, the carpenters’ and Teamsters unions dissented. Though happy to relieve others from foreign competition, they were unwilling, they made clear, to force higher living costs on their own members. And when, in 2002, President George W. Bush placed tariffs on imported steel, he immediately faced opposition from domestic steel users — the makers of appliances, autos, and the like. All objected strenuously to the need to pay more for a vital input. Even the United Auto Workers complained, seeing the threat to its members’ jobs. The president eventually bowed to the pressure.

Avoiding the onerous costs of protectionism should not mean ignoring the plight of displaced workers, passively watching the destruction of the middle class, or suffering social instability. On the contrary, with will and thought, the United States can prosper by retooling the skills and orientation of its workforce.

The first step would be to acknowledge that the labor-intensive industries on which the lower middle class once depended will not return, at least in their old form. Wage competition from emerging economies is simply too intense for domestic operations to compete in the labor-heavy production of shoes, toys, textiles, and the like. Robotics and other technological applications may render domestic operations in these areas viable again, but they will not bring a massive number of low-skilled jobs with them.

The economy we need would instead embrace the turn toward digitized, mechanized processes and focus more on the production of sophisticated, high-value-added products. Only these can support jobs at middle-class wages. The U.S., which enjoys a comparative advantage in these areas, should be able to make the transition. The average American worker, for instance, has 20 times the productive equipment and computing power at his or her disposal than workers in China — and more still than workers in India, Brazil, Vietnam, or Indonesia. And American workers have other advantages. Adult literacy in the United States exceeds 99 percent, compared with 91 percent in China, 90 percent in Indonesia and Vietnam, 89 percent in Brazil, and only 61 percent in India. For all we hear about impressive engineers and other professionals from China, India, and other emerging economies, the average worker has just 6.4 years of formal education in China, 5.1 years in India, and 4.9 years in Brazil — compared with 13 years for workers in the U.S.

Market forces already have been transforming the American economy along these lines for a while. The American chemical industry, for instance, has moved the production of standardized products overseas but has kept more complex, high-value, and customized activities at home. IBM decided as early as 2004 that the production of personal computers had become standardized and sold that division to the Chinese producer Lenovo. In announcing the sale, IBM also mentioned its domestic shift to sophisticated consulting services. General Electric has divided its massive power-equipment division, sending its routine, low-value assembly and parts manufacturing to emerging economies, while reserving for its costlier but better-trained American workforce the more demanding areas of power-plant design, construction, and installation. Even the clothing and textiles industry, while sending conventional woolen and cotton spinning, weaving, cutting, and assembly work abroad, still makes expensive specialty products in the U.S., including the highly mechanized production of synthetic industrial fabrics.

The nature of the workplace has also begun to reflect the new realities. The emphasis on higher-value product is shifting management’s focus from standardized mass production to quality control, planning, and design. Because so much high-value product is customized, at least to a degree, employee communication skills, both internally and with customers, are increasingly prized by management. The growing preponderance of better-trained workers, with responsibilities for sophisticated equipment, systems, and client communication, has begun to create different management styles. Hierarchies have become less rigid. Labor Department surveys of how firms apportion employee functions capture these changes. The proportion of positions in straight supervision has dropped 5.5 percent over the past decade, even as the proportion of those involved in planning, design, quality control, and related areas has risen some 22 percent. These shifts are happening even in such seemingly traditional industries as paper, autos, aircraft, and railroad equipment.

America clearly will need a workforce trained to meet future needs. Education at the university level will have a role in that effort, as ever, but the crucial step will be vocational training to upgrade the skill set of new entrants to the job force as well as those displaced from old industries or old jobs. So far, Washington has missed the point. President Obama and the Beltway bureaucracy focused almost exclusively on higher education, particularly the study of science, technology, engineering, and mathematics — the so-called STEM subjects. STEM graduates will undoubtedly play a big role in the economy of the future, but they will have less to do with rebuilding the middle class. To do that, Washington needs to end its obsession with advanced degrees and instead help those who want to become machinists, robot-repair technicians, installation specialists, client-liaison managers, and other occupations that tend to require a post–high school education but not a four-year university diploma. Helping these kinds of aspirants would surely constitute a better use of the $50 billion a year that the country presently spends on benefits to displaced workers, mostly to warehouse them. As the National Bureau of Economic Research has documented, workers with marketable education and training are no less secure than their counterparts four decades ago.

Community colleges have made strides reorienting their curriculums toward vocational training. In North Carolina — particularly in counties devastated by the loss of the textile industry — community colleges have reached out to firms across the country and around the world, promising them that, if they relocate nearby, they can help write the school’s curriculum. The response has been remarkably positive. Some states have moved in this direction, as well. Michigan has had success retraining autoworkers, for example, while South Carolina’s retraining program reportedly boosts the earning power of its participants. The forging of a new middle class depends on many more such efforts, including training partnerships between government, community colleges, businesses, and private vocational schools.

The Trump administration and other policymakers would be wise to take a serious look at the German approach to equipping citizens with the skills they’ll need in tomorrow’s economy. There, vocational education is serious business, with robust programs designed for both the young and for displaced workers. Today’s German workforce boasts higher average skill levels than are found in most countries, and Germany has one of the flattest income distributions in the developed world — and one of the lowest unemployment rates.

For the young, Germany offers a well-established apprenticeship program, allowing bright young men and women to pursue vocational training while on the payroll of participating companies. Candidates in these programs are assigned mentors, who first teach so-called soft skills — the need, for example, to report ready to work and on time every day. The training then progresses to simple job skills and ultimately the high-level skills that can command good pay. Many apprentices become lifelong friends with their mentors and repay the training with strong company loyalty.

The two-decade-old Hartz reforms — named after Peter Hartz, head of a German commission on labor-market reforms — have created a number of vocational retraining initiatives for the unemployed. Participants’ unemployment benefits remain contingent on their active involvement in the plan and are limited to between six and 12 months overall. After exhausting unemployment relief, those who have still not found work see their benefits decline to the level of the country’s means-tested welfare system. Those who decline training or refuse to relocate to take advantage of suitable work likewise lose some of their benefits.

The system also holds social-safety-net bureaucrats accountable to quantitative goals. It helps them meet their targets by authorizing unemployment offices to serve as temporary work agencies. If the unemployment office fails to place a person within six weeks, it must give him a voucher to pay the fees of a private placement agency. The system successfully moves the unemployed to higher-skilled jobs that, like the country’s apprenticeship program, benefit the worker, businesses, and the German economy.

Even if the U.S. chose to emulate the German model in some fashion, another problem would remain: how to make arrangements for those cognitively or emotionally incapable of reentering the workforce. Too many displaced workers seem unwilling to seek out training opportunities. Perhaps despondent or bitter or both, they often remain on government relief and make little effort to get back into the job market. Older workers, especially, have trouble relocating to find work.

In some cases, technology can substitute for individual inadequacies — as supermarket scanners, for instance, have reduced the need for numerate checkout clerks. Some in this cohort will find work in these or other remaining low-skilled positions — though many of these jobs are being fully automated. Perhaps, as the new economy’s winners grow richer, more opportunities for the less skilled will open in service positions, though the salaries may fall short of a middle-class standard. If such positions are still too few, society will have to see to the needs of this unfortunate group. Whenever possible, government aid should be connected to work of some kind. Even if not viable in a strict market sense, this work could serve a public need and, importantly, give these people a sense of self-worth that handouts cannot provide.

Adapting to our emerging economic reality is unavoidable. The question is not whether the country will make the changes but whether it can do so with significant amelioration of pain and avoidance of social stress. Even at its smoothest, the effort presents serious obstacles. Experimentation, tolerance for failure, and attention to the experiences of others will all be required. Still, we should take heart in the fact that businesses, workers, and even governments have already begun the process, and in time, their efforts are likely to become more effective. If Washington could think outside the Beltway, for a change, it would help a lot. It would be foolish to be complacent about the country’s ability to meet the challenges of work in the 21st century. At the same time, the evidence argues strongly against despair.