Normative Narratives

Economic Outlook: Underemployment, the “Skills Shortage”, and Rising Income Inequality.


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.


3 thoughts on “Economic Outlook: Underemployment, the “Skills Shortage”, and Rising Income Inequality.

  1. That’s it… If corporate profits have fully recovered from the recession with the workforce depleted by recession cuts, why would companies bring people back? They are getting by fine…

    Meanwhile, the labor surplus is probably going to get worse, right? Jobs are disappearing (being outsourced, or outdated by technology), people are retiring later, and more and more young Americans struggle to start a life for themselves. When our parents were in there 20s they were buying houses and starting families. Most people in their 20s now live at home, or pay such a high percentage of their income in rent and expenses that they have no savings to build toward something. Will our kids live at home until they are 40? Or will the government start killing babies like China to reduce the labor surplus down the line?

    Anyway, entitlement spending does need to be reformed, but so does military spending, which the right never addresses. This incarnation of the GOP believes in a make-believe idea of small government- No social services, but extensive intervention in people’s personal/ moral affairs and unlimited military spending to build schools in Kandahar and fund Afghani policemen who shoot 19 year old American soldiers with American made weapons.

    Can the US stop trying to rebuild 3rd world countries, and use that money to improve our infrastructure at home- simultaneously training workers and creating jobs?


  2. I don’t think it has to be either, or. Building countries has long term benefits for the U.S. in trade relations and larger customer bases, natural resources, not to mention global security. It has to be done in smarter, more multilateral ways, than the Iraq war for sure, but the U.S. has a vested interest in the well-being of the developing world, as these countries tend to become our allies or our enemies–the U.S. draws a lot of attention, and people are rarely ambivalent towards U.S. culture. The U.S. has since done a good job, with the Bin Laden and Gaddafi executions, and arguably should be doing more in the Syria conflict. Programs like USAID should probably have their budgets increased by the Department of Defense.

    The point is, we can have both under the democratic budget plan. By decreasing the deficit by 1.6 trillion without closing important exemptions the majority of the country relies on or cutting social spending. Bush era tax cuts have to expire for wealthier Americans (both income and capital gains), there is no credible tax plan without this component. The DoD budget is probably going to be trimmed slightly, but it would be prudent to shift resources from traditional warfare to preventative measures of USAID.

    Unemployment for college graduates is generally much lower than for HS grads of the same age ( The surplus is shrinking, slowly, as the unemployment rate goes down. Government stimulus would certainly speed up the process, but is unlikely right now due to the fiscal cliff issue.

    There is significant deadweight loss from the recession, when you factor in how the economy would’ve grown without the recession as opposed to a recovery which is just reaching pre-recession levels GDP values and positive GDP growth.

    But this does not mean that America has to slash spending to reign in the deficit. There are two sides to a deficit / surplus, tax revenue and government expenditure. Irresponsible government expenditure turned our most recent surplus into a deficit (Bush era tax cuts, and the Iraq war to draw on the earlier point of a bloated military budget), wouldn’t it be fitting if the expiration of these same cuts was the catalyst of America’s fiscal sustainability, instead of closing loopholes and taxing the poor more.

    47% of people in a recent poll believed that going over the fiscal cliff would increase the deficit.( )The immediate contractionary element of the fiscal cliff, spending cuts, would cause the debt to go down too quickly, causing the economy to contract. People have been scared into believing there is too much debt and any day now inflation and interest rates will sore if we don’t get our spending under control. However, interest rates are up against the zero bound (U.S. pays basically nothing to issue debt) and there is a greater concern for deflation than inflation right now.

    Spending is not the issue, and interest rates and inflation are perfectly stable (and lack of inflation is actually a bad thing right now, inflation makes every dollar of debt worth less, as debts are not adjusted for inflation). Its a scare tactic by the GOP, but one that I think has just about run its course–It’s simply no longer a defensible position for a major political party to have.


  3. Pingback: Transparency Thursday: Robbing Peter to Pay Yourself « Normative Narratives

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