In recent years, average wages have stagnated. Wages for some workers declined while wages for others rose. Understanding why is important for any policy discussion.
In economic theory, wages are largely determined by the productivity of workers. As productivity rises, so will wages. However, productivity in this context is how much benefit the workers themselves add to production, not just the total value of goods produced by each worker.
Imagine a highly skilled worker, such as a cabinetmaker, computer programmer or surgeon. Each has perhaps tens of thousands of dollars’ of tools and will produce goods or services worth from several hundred to several thousand dollars per day. People in these occupations spend years in education and training, and the equipment they use is impractical in the hands of an unskilled worker. So, each of these folks receives earnings principally determined by the value each brings to his or her job.
In contrast, imagine a worker in a highly robotic assembly plant, surrounded by tens of millions of dollars of machinery. This worker might also be skilled, but in this case, most of the value of the goods produced comes from the machines, not the worker.
In both examples, workers might be highly skilled and well paid, but there the difference ends. The highest share of income goes to the worker whose skills matter most to the production process. But this is only part of the story.
In the first example, there’s very little that can be done to make the machines matter more than the worker. If we want more cabinets, computer programs and medical care, we’ll need more of these skilled folks. In the second example, there’s little incentive to replace the workers because they represent such a small share of the cost of production. In each of these cases, workers will be in demand and the economy can grow as long as they are available. But what happens to unskilled workers?
Unless they are training for a new position, workers with poor skills won’t be in demand in either setting.
The result is that the American labor force is slowly polarizing. At one end are highly skilled, dependable, well-compensated workers. At the other end are workers who are not highly skilled or not dependable, so will have lower wages.
It isn’t the decline of unions or the rise of Wall Street fat cats that have caused this. It is the inevitable decline in demand for low-skilled workers at a time we have an abundance of them. Until that changes, expect more of the same.•
Hicks is the George and Frances Ball distinguished professor of economics and director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at firstname.lastname@example.org.