There exists a belief, perpetuated by the political right, that social entitlement programs are creating an environment where there is little incentive to work because everyone believes the government will redistribute incomes to near equality (Obama is a socialist, and America is either going to become Communist Russia or Greece if we don’t start cutting entitlement programs). This will kill the incentive to work, explaining persistent unemployment and sluggish economic recovery. If only we could cut entitlement programs, these people argue, then people would get back to work and the economy would thrive. Even better if we could reduce tax rates on top earners, then more people will want to be top earners too!
Snap back to reality. Government nonmilitary expenditure as a share of GDP is at relatively low levels, as are income tax rates. Far from transfer payments closing the income gap, inequality has been steadily rising in recent U.S. history. There is no historical evidence to support raising taxes on the wealthiest will cause the economy to contract. There is also high unemployment despite corporate profits having fully recovered from the recession—businesses are making enough money, there just not hiring…why?
There are the obvious explanations. Globalization has certainly led to “outsourcing”; many jobs being shipped to low-wage countries. Technology has lead to “automation” of many jobs, replacing the work of people with machines (as evidenced by a dropping share of income to labor). These are, to a certain extent, facts of the modern global economy. Policy can curb some of these effects, but largely these forces cannot be changed and instead we must adapt to meet these challenges.
One explanation–about a cause that CAN be addressed–is that there is a “skills gap” between what employers need and what employees can offer. This mismatch causes unemployment, but it is argued companies really are willing to hire, they just can’t find the skills they need. Again, false. What we have in America is stagnant wages. Over the years, worker productivity has far outpaced worker compensation. Understandably some productivity gains are due to advances in technology, but the gap is alarmingly large.
As a recent NYT article stated, what we have is not a skills mismatch, but a labor market where employers can be so picky about who they hire (because there is so much surplus labor), that they can pay people below the value of their skills. This is highlighted by this list of jobs which employers now require a BA for, which just 5 years ago no such requirement existed. If there was a skills shortage, wages would be going up for skilled workers, but this simply is not happening. As concluded in a study by the Boston Consulting Group “Trying to hire high-skilled workers at rock-bottom rates is not a skills gap.”
There is not a skills shortage in America. There is corporate greed; companies create bidding wars between cities for taxpayer dollars, trying to get the best incentives despite record corporate profits. Capital gains cannot continue to be taxed at preferential rates while hard earned income is taxed at higher rates and wages are systematically lower. I do not believe there is mass collusion on the part of big business, but I do believe the government has to step in to defend the helpless worker who no longer has any economic incentive to go into any industry other than finance—no wonder there was a housing bubble!
More money needs to go from Wall St. to Main St (and more specifically, to the school closest to Main St.). This is not an issue of class or cultural warfare; it is an issue of economic sustainability, income inequality and intra-generational social mobility.