Too Many Well Educated Workers: a Global Problem and a U.S. Policy Dilemma

SEVEN ITEMS FOR YOUR CONSIDERATION

Chart-Tertiary Education enrollment ratiosData source: Global Education Digest 2009: Comparing Education Statistics Across the World, UNESCO Institute for Statistics, 2009.

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Chart-Tertiary Education enrollment by regionData source: Global Education Digest 2009: Comparing Education Statistics Across the World, UNESCO Institute for Statistics, 2009.

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“Companies no longer need to divide their skills strategies between high-cost ‘head’ nations employing-high skilled, high-waged workers, and ‘body’ nations that are restricted to low skilled, low waged employment. This change has come about via a combination of factors including the rapid expansion in the global supply of high skilled workers, in low-cost as well as high-cost economies, advances in information technologies, and rapid improvements in quality standards in emerging economies, including the capability to undertake research and development.”

Phillip Brown, Hugh Lauder, and David Ashton, Education, globalisation and the knowledge economy, Teaching and Learning Research Programme and Economic and Social Research Council, September 2008.

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“Unemployment is running at 14 percent and record numbers of people are emigrating in search of work. … Ireland’s pitch to China was its usual combination of low corporate tax rates, a well-educated work force of English speakers and ready access to the European Union’s market of 500 million people. The country’s technological skill, particularly in agribusiness and education, was also emphasized.”

Douglas Dalby, Ireland Makes Pitch to Official From China, New York Times, February 20, 201.

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“More people are losing the same gamble as a 33 percent jump in U.S. graduate school enrollment in the past decade … runs headlong into a weaker job market.”

Janet Lorin, Trapped by $50,000 Degree in Low-Paying Job Is Increasing Lament, Bloomberg, Dec 7, 2011.

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[IBM] stopped providing a geographic breakdown of its employees in 2009. At the end of 2008, U.S. staff accounted for 115,000 of its 398,455 employees, according to its annual report that year.

Beth Jinks,  IBM Cuts More Than 1,000 Workers, Group Says, Bloomberg, February 28, 2012.

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“Tech drives the economy, but it doesn’t drive employment. ‘We are a 100-person company and we serve 50 million people. That kind of leverage has never existed before,’ said Drew Houston, co-founder of the start-up Dropbox, a service that stores and shares digital files.

Nick Bilton, Disruptions: In Davos, Technology Moves Center Stage, New York Times, January 29, 2012.

COMMENTS

The assertion that a major impediment to economic growth and reducing unemployment and underemployment is a mismatch between the knowledge and skills most workers have and the knowledge and skills corporations are seeking is repeated often in the media and is widely accepted as true.  Thus, calls for investing in the higher education programs that will create a workforce with the newer and higher end knowledge and skills the corporations want are also common.

The policy experts who make the skills mismatch assertion base it on reports by business leaders that they have a hard time filling certain positions.  Unfortunately, those policy experts make the mistake of generalizing from a sample of workforce recruiting situations that is not at all representative of the larger population of U.S. recruitment situations.

Three reasons shortages of high end workers are not representative:

  • They are almost always geographically localized, concentrated in particular industries, and relatively short term
  • They evolve and move from place to place, but they never disappear; they develop when and where innovation is successful and reflect the nature of the innovation
  • On an ongoing basis, they account for only a small part of the overall demand for high end workers.

Those policy experts also make the mistake of drawing artificial national and sub national boundaries around workforce recruitment activities, ignoring the fact that a growing proportion of the world’s corporations, including smaller domestic corporations now recruit globally.  (And new evidence shows that corporations, not small businesses, account for the bulk of job creation and job destruction — see Floyd Norris, Small Companies Create More Jobs? Maybe Not, New York Times, February 24, 2012. )

The Global Problem

For the world economy as a whole, the salient shortage is the other way around: high end workers face a shortage of opportunities to put their educations and skills to work in good jobs (living wages and adequate benefits, safe working conditions, socially beneficial products and services).  And this mismatch between the supply of high end workers and the demand for their knowledge and skills is getting worse.

The key factors:

  • Global demand for highly educated workers is growing very slowly because the world economy as a whole is growing very slowly;
  • The global supply of highly educated workers is increasing rapidly as nations, states, provinces, and cities invest in education as a way of competing for the business investments that generate good jobs
  • Businesses of every size and in every economic sector pursue competitive advantage by investing in newer technologies than can now do the kinds of communications, evaluation, and decision-making work that most college educations prepare people to do.

Education is a good in and of itself, but global investing in higher education will not solve the long term problems of high unemployment and declining wages and benefits in the world economy.  Public investments in education address the supply side of the global labor market equation, but unemployment and underemployment in a world with an expanding population of workers, including well educated workers is fundamentally a demand side problem.

U.S. Public Policy Dilemma

Again, education is a good in and of itself, but more U.S. investments in higher education will not pay off in better jobs and growing incomes for U.S. workers.  The reasons are tied to extensive U.S. engagement in the world economy:

  • Investments in higher education produce high end workers who become part of the global supply of high end workers; the skills and knowledge of those workers are available not only to U.S. corporations but to the competitors of U.S. corporations
  • Those investments also put more downward pressure on high end wages and benefits in the U.S. because they add to an already excessive global supply of high end workers available to U.S. corporations
  • Investments in programs that increase the demand for high end workers (big government investments in transitioning to green energy sources is often proposed) don’t increase demand only for U.S. high end workers; not only do U.S. corporations outsource work and recruit lower cost workers from other countries, so too do government agencies.

U.S. workers will get more employment opportunities and wage growth from investments in higher education only if the global demand for high end workers is brought into balance with the global supply.  U.S. policy makers, acting alone, cannot cause this to happen.  A much higher level of global management of investments in higher education, investments in job creation programs, and investments in income supports for working people whose labor is not needed is required.

A good model for this is offered by federal government management of the supply and demand for workers in the in the U.S. 1950’s and 1960’s.

In those decades, federal investments in higher education increased substantially, but it also made large investments in job creating programs – notably, investments in the development of military technology, in an ambitious space program, in research across the spectrum of intellectual fields, in new regulatory programs, and in community jobs programs.  It also expanded income supports for workers not easily absorbed into the labor force because of disabilities, age, and skill limitations.

Thus, while higher education investments increased the demand for high end jobs, other government investments increased the supply of high end jobs, low end jobs in both the public and private sectors, and moderated the overall demand for jobs.

U.S. policy makers could and should lead in implementing this model for managing labor force development in the world economy as a whole.  That would serve the interests of U.S. working families.  But they cannot even fully participate in such an effort because American voters believe strongly in American exceptionalism and have an associated strong dislike for multinational government institutions (and for government involvement in economic matters in general).  And that is a real dilemma.

What Happens In Vegas Doesn’t Stay In Vegas: National Policies Have Global Consequences

“Thus, national policies affecting capital flows can transmit multilaterally. This transmission has not been fully appreciated by national policymakers. Further, they may not have incentives to take full account of the cross-border effects of their policies. Looking ahead, the upward trend in the volume of capital flows can be expected to continue, making it ever more important to address the associated cross-border risks.”

The Multilateral Aspects of Policies Affecting Capital Flows, International Monetary Fund, October 13, 2011.

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“These two-way capital flows created a complex web among markets and institutions, some regulated and some not. Against this background, case studies were prepared for European banks and U.S. money market mutual funds (MMMFs) and for German banks and U.S. mortgage-backed securities (MBSs). Another important case is that of the near failure of the American International Group (AIG), which turned out to have complex and systemically cross-border linkages with other global institutions and markets.”

The Multilateral Aspects of Policies Affecting Capital Flows – Background Paper, International Monetary Fund, October 24, 2011.

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“Why might we expect a rise in U.S. bond yields to raise bond yields in other countries? First, openness of financial markets and arbitrage opportunities may mean that interest rate shocks are transmitted across economies. Second, a closer real integration of two economies may imply that a monetary policy shock or an inflationary shock in one economy may lead investors to expect similar developments in another, thus inducing a significant transmission of shocks in bond markets and money markets.”

Vivian Z. Yue and Leslie Shen, International Spillovers on Government Bond Yields: Are We All in the Same Boat?, August 01, 2011, Blog at website of the Federal Reserve Bank of New York.

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“The trend toward greater diffusion of authority and power occurring for a couple decades is likely to accelerate because of the emergence of new global players, increasingly ineffective institutions, growth in regional blocs, advanced communications technologies, and enhanced strength of nonstate actors and networks.”

Global Trends 2025: A Transformed World, National Intelligence Council, PDF version, November 2008.

———————–Comments———————–

The words in the quotes above are dispassionate, but the realities to which they refer get in our faces every day.  The mix of global economic processes and competitive and uncoordinated national policy making creates a bubbling soup of chaotic change.  (Go-it-alone economic policy making by sub-national and regional governments surely contribute to this soup of chaotic change as well.)

This environment makes decision making and planning very difficult and prone to error for the majority of the world’s investors and business owners and managers. It destabilizes the global world of work and damages the families and communities that depend on that world.  And it confounds policy experts because it is not possible to find logic in the illogical.

Moreover, this environment plays into the hands of the bad actors in the world economy, who promote and thrive on the high volumes of misunderstandings and errors that now plague economic and policy decision making at every level of organization in the world economy.

For more on this topic see my post, Fragmented and Weakened Global Governance Perpetuates the World’s Employment Crisis, September 9, 2011. Also see the topic Economics and Economic Policy (under U.S. Economic Policy heading at right).

Pending Trade Pacts Will Continue the Downward Trends in Number and Quality of U.S. Jobs

Pending U.S. – South Korea Trade Agreement

“Most strikingly, KORUS will open Korea’s service market to U.S. exports, allowing the United States to exploit its competitive advantages in financial services, education and information and communications technologies.

The agreement also will lead to increased imports from Korea, which in turn will help the United States achieve greater economic specialization. The likely effects of more specialization—and of increased Korean investment in the United States—include greater U.S. efficiency, productivity, economic growth and job growth. Meanwhile, U.S. investors will gain new opportunities in the increasingly active Asia-Pacific region.

KORUS supports market access for U.S. investors with investment protection provisions, strong intellectual property protection, dispute settlement provisions, a requirement for transparently developed and implemented investment regulations and a similar requirement for open, fair and impartial judicial proceedings.”

Pending U.S. – Columbia Trade Agreement

“COL-US improves the investment climate in Colombia by providing investor protections, access to international arbitration and improved transparency in the country’s legislative and regulatory processes. These provisions will reduce investment risk and uncertainty.

With considerable investments, Colombia would be able to compete with East Asia for these higher quality jobs, swaying people away from black markets and other illicit activities.”

Pending U.S. – Panama Trade Agreement

“Panama’s $21 billion services market for U.S. firms offering portfolio management, insurance, telecommunications, computer, distribution, express delivery, energy, environmental, legal and other professional services.

A fair legal framework, investor protections and a dispute settlement mechanism, all features of the PFTA, are almost certain to increase U.S. investments in Panama.”

All quotes from Mauricio Cárdenas and Joshua Meltzer, Korea, Colombia, Panama: Pending Trade Accords Offer Economic and Strategic Gains for the United States, Policy Brief Series, # 183, The Brookings Institution, July 2011.

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About improved investment climates.  These agreements add three more places in the world where U.S. corporations can invest with confidence.  U.S. banks, mutual funds, and other financial institutions will find it easier to use the money in our savings accounts and retirement funds to expand economic activities and create jobs outside the U.S.

By some estimates, U.S. corporations are sitting on about $2 trillion in cash and banks have returned to profitability, so a lot of money is sitting idle, waiting for profitable investment opportunities.  Economists have noted that there is considerable evidence that the growth of consumer demand is too anemic in the U.S. to spur much investment here, so the investment eye is on the emerging markets of the world where real incomes and consumer demand are growing.

About increased access to service sector markets.  The list of U.S. industries that will benefit include industries that are critical to increasing a nations competitive position in the world economy, and thereby nourish economic growth and enterprise profitability.  Thus, expansion of service sector sales will complement U.S. capital investment in South Korea, Columbia, and Panama, helping to insure the profitability of both U.S. and local investments and thus helping to insure that competitiveness and job growth increase in those nations.

About increased economic specialization in the U.S.  The impact of increased economic specialization on jobs in the U.S. will be a further narrowing of the base of industries and thus a further narrowing of the range of jobs available to U.S. citizens.  This means more workers will have to go through the emotionally painful, family disrupting, and financially costly process of being displaced and retrained for other work because their existing skills are no longer needed.

The record for career displacement and re-employment in a new industry is not good.  Far too many of the new jobs displaced workers end up with pay less and offer lower value in benefits.  Incomes and family welfare decline.

Likely Impact on Global Job Growth. Under existing global conditions of increasing numbers of competing businesses and stalled expansion of global consumer demand, large parts of the new investments to be facilitated by these trade pacts will very likely go into labor saving production, distribution, and management technologies.

Global productivity will increase, so jobs gained in South Korea, Columbia, and Panama will not be greater than the jobs lost in those nations from which South Korea, Columbia, and Panama win market shares.  More likely, the net effect on global employment will be negative.

Likely Impact on U.S. Jobs and Income.  Although jobs will be added in select U.S. industries, and thus in limited parts of the U.S., the net effect will be negative because profitability in sectors of the U.S. economy that have to contend with stronger competition from South Korea, Columbia, and Panama (and all the other nations where U.S. capital is nourishing productivity growth) will decline.  Investment in those sectors will further decline in response, putting more people out of work.

More people competing for work globally and more Americans competing for jobs in the U.S. can only put more downward pressure on U.S. wage and benefit levels.

Tax Cuts, Stimulus Spending, Low Interest Rates Do Little to Create Jobs

“In carrying out its QE2 purchases, the Fed had to follow standard operating procedure for “open market operations”: it took secret bids from the 20 “primary dealers”authorized to sell securities to the Fed and accepted the best offers. The problem was that 12 of these dealers — or over half — are U.S.-based branches of foreign banks (including BNP Paribas, Barclays, Credit Suisse, Deutsche Bank, HSBC, UBS and others), and they evidently won the bids.

…According to Scott Fullwiler, Associate Professor of Economics at Wartburg College, the money multiplier model is not just broken but obsolete.”

Ellen Brown, Why QE2 Failed: The Money All Went Overseas,  Huffington Post, July 11, 2011,

In the past 60 years, job growth has actually been greater in years when the top income tax rate was much higher than it is now. … in years when the top marginal rate was more than 90 percent, the average annual growth in total payroll employment was 2 percent. In years when the top marginal rate was 35 percent or less—which it is now—employment grew by an average of just 0.4 percent. … if you ranked each year since 1950 by overall job growth, the top five years would all boast marginal tax rates at 70 percent or higher. The top 10 years would share marginal tax rates at 50 percent or higher.

Michael Linden, Rich People’s Taxes Have Little to Do with Job Creation, Center for American Progress, June 27, 2011,

“Of particular note, we find that fiscal policy is less effective in lifting recovery growth in more open economies. In open economies, fiscal stimulus may spill over to higher growth in partner countries by increasing demand for imported foreign goods and services. This finding suggests the need for more coordination in fiscal stimulus across countries, so that the spillover to other countries is offset by equivalent increases in foreign demand for domestic goods and services.”

Cerra, Valerie, Ugo Panizza, and Sweta C. Saxena, International Evidence on Recovery from Recessions, Working Paper, International Monetary Fund, 2009.

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In the current U.S. open economy environment (put into place over decades of pro-globalization policy shifts) neither larger tax cuts for consumers nor larger tax cuts for corporations nor lower taxes for the wealthiest Americans nor Federal Reserve actions to lower borrowing costs for banking institutions have had the positive U.S. job growth effects we desire.  Millions of working people are unemployed and most U.S. families are experiencing either stagnant income levels or falling incomes.

  • Consumers do buy more with their tax cuts, but a large part of the job creation effect goes to other parts of the world because so much of what we consume is imported
  • Banks do increase their lending, but a large part of the lending is used to finance projects outside the U.S.
  • The corporations do use their tax breaks to increase investments in new plants and facilities, but an increasingly large part of those investments go into emerging market areas of the world
  • Wealthier Americans do use tax savings to increase stock holdings, and thus contribute to the pool of investment funds, but more and more the wealthy purchase stocks in corporations that are expanding operations in emerging markets because that is where the highest returns are being obtained.

U.S. job creation and income distribution policies are out of date.  They were designed for the affluent manufacturing nations operating in the much less economically integrated world of the mid twentieth century.  Major changes in the U.S. policy approach to creating jobs and distributing income will be required to put things right for U.S. families.

U.S. Private Sector Investment Strategies Do Not Favor U.S. Employment Growth

“At GE, our success is predicated on accurately assessing the dynamic forces that are reshaping our world and having a strategy in place to make the most of the opportunities they present.”

Our Viewpoints, GE Website

“International revenues from Industrial (ex NBCU) were $13.4 billion, up 23% representing 59% of total Industrial revenues. GE revenue for the Industrial segments accelerated in growth regions, including double-digit increases in India, China, Southeast Asia, Africa, Russia, Australia, Canada, and Latin America.”

GE Corporation Press Release, July 22, 2011, GE Website

According to a Fox Business story, GE had a worldwide workforce of 287,000 at the end of 2010, of which the U.S. share was 133,000.

Bob Sechler, GE’s Worldwide Workforce Down 5.6% In 2010 At 287,000, February 25, 2011, Dow Jones Newswires.

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Burdening the U.S. private sector with creating enough job growth to achieve something close to the frictional rate of unemployment (unemployment due mainly to brief periods of unemployment between jobs) is misguided in the current world economic context.

First, U.S. corporations are legally required to pursue the investment strategies that best serve their stockholders.  Many more opportunities for profitable investments in facilities and workforces are emerging in other parts of the world than in the U.S.

Second, neither U.S. corporations nor other U.S. businesses are legally required to create jobs for U.S. workers, except to the extent they have entered into contractual agreements to do so.

Private sector job growth must be supplemented by government programs to produce public sector jobs and/or to reduce demand for jobs by engaging potential workers in paid alternatives to private sector employment.  Such activities might include paid educational leaves, paid parental leaves for up to a year, career change leaves, longer annual vacations, etc.

Only by creating such a combination of socially recognized entitlements to income can we restore the U.S. middle class to good financial health and again produce success in reducing the number of Americans living in poverty.

Economists Discover Consumer Demand Problem. It’s About Time!

“The main reason U.S. companies are reluctant to step up hiring is scant demand, rather than uncertainty over government policies, according to a majority of economists in a new Wall Street Journal survey.”

Phil Izzo, Dearth of Demand Seen Behind Weak Hiring, Wall Street Journal, July 18, 2011

(See my post on July 14 for an estimate prepared by Moody’s Analytics of the dollars that will be drained from U.S. consumer demand by the end of this year because of changes in government programs.)

The political fight over the deficit is off target.  The political fight over the size of government is off target.  The traditional public-private system for equitably distributing the wealth we produce (a substantial level of high wage private sector employment supplemented by government employment and targeted income entitlements) is badly broken because the private sector can’t create enough jobs, much less enough quality jobs for the old system to work.

Given investment trends now at work in the world economy, and given the weakness of the labor movement, the U.S. private sector will necessarily play a much smaller role in equitably and rationally distributing the vast amount of wealth produced in the U.S. every year than it did in the past.   It will not produce enough jobs and high enough earnings to do the wealth distribution job that must be done.

Government will have to play a bigger role or we will have to give up a lot more economic security and wellbeing than we already have.