Social Democratic America (21 page)

But forced togetherness is not an optimal solution here. We don't limit the number of grocery stores in a town in order to force people to shop together. By the same token, we shouldn't try to mandate togetherness by limiting the choice of schools. A better path is to strive for excellence in public service provision so that middle-income and wealthy users—a sizable share of them, at any rate—voluntarily select the public option. In addition, we might consider requiring a year of national service after high school as an alternative mechanism for achieving social mixing.
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At the same time, we shouldn't go overboard in embracing choice. Education and medical care are much more complicated and consequential than toothpaste. Most of us have little expertise, and even the most knowledgeable among us can make poor selections.
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Allowing choice in elementary and secondary schooling doesn't mean we should offer parents a menu of “education plans” with various combinations of subject coverage or different options for sequencing math classes. We should simply allow parents to choose which school their child will attend. In healthcare, the most sensible approach is similar. It doesn't ask citizens to choose among dozens of healthcare plans. Government pays and offers a small number of plans, perhaps even just one, and citizens choose their providers.
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Imports, outsourcing, and immigration have contributed to job loss and wage stagnation for Americans in the middle and below. Should we reduce them?

No. This shouldn't be even a minor part of a strategy for improving economic security, opportunity, and income growth, much less its chief focus. Trade, investment abroad, and immigration tend to benefit people in developing nations, most of whom are much poorer than even the poorest Americans.
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It's true that globalization enriches some rapacious corporations and despotic rulers and that vulnerable workers are exploited. But access to the American market and to employment by US-based transnational firms has improved the lives of hundreds of millions of Chinese, Indians, and others in recent decades. And moving to the United States almost invariably enhances the living standards of immigrants from poor nations. It would be a bitter irony if American progressives succeeded in making a real dent in the country's wage and jobs problems at the expense of the world's poorest and most needy. We should look elsewhere for solutions.
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That doesn't mean we should sit idly by and let globalization have its way with Americans who lose their jobs or suffer falling wages. We should cushion the fall and enhance their ability to adapt via policies such as wage insurance, better unemployment compensation, portable health insurance and pensions, support for retraining, and assistance with job placement. Indeed, these types of policies are attractive not just because they blunt the adverse consequences of globalization, but because they do so for economic change in general, whether it's a product of technological progress or geographic shifts of industries and firms within the United States.

Arguing for limits on globalization directs our attention away from these policies, making their adoption less likely. Paradoxically, we then end up with the worst of both worlds: marginal trade
limits, half-hearted steps to curtail investment abroad, confused and ineffective immigration policy, and too little support and cushioning for successful adjustment.
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For persons with limited education, a job in manufacturing is one of the few paths to decent and rising pay. Protecting existing manufacturing jobs, bringing back lost ones, and creating new ones is a perennial aim of the left. Is this a viable strategy?

No, it isn't. As
figure 4.22
shows, since the 1970s, manufacturing employment has been shrinking steadily in all rich nations. As in agriculture, this employment decline is due partly to automation. It owes also to the availability of low-cost production in poorer nations. Neither is likely to abate. Two decades from now, manufacturing jobs will have shrunk to less than 10 percent of employment in most affluent countries. Here in the United States, they may well be less than 5 percent.

FIGURE
4.22 Manufacturing employment

Manufacturing employment as a share of total employment. The lines are loess curves.
Data source
: OECD, stats.oecd.org.

Labor unions ensure that employers pass some of their profits on to workers in the form of pay raises. They improve economic security by negotiating for employer contributions to health insurance and pensions. And they enhance opportunity for the less advantaged by tying pay raises and promotion partly to seniority instead of solely to performance.
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In principle, a revitalization of unions could reduce the need for government intervention in the United States, especially with respect to income growth. For US workers at the median and below, inflation-adjusted wages have barely risen since the 1970s. If unions were strong enough to help change that, as they were in the 1950s and 1960s, there would be less need for government to step in.

But it is extremely unlikely that US unions will return to their previous size or strength. Among private-sector employees, the unionized share is down to just 7 percent.
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Indeed, union membership has been falling in most affluent nations.
Figure 4.23
shows unionization rates since the 1970s in the United States and nineteen other rich democracies. Only five now have rates above 40 percent, and in four of those (Belgium, Denmark, Finland, and Sweden), access to unemployment insurance is tied to union membership.

Many on the American left see unions as a critical part of a solution to wage stagnation, slow income growth, inadequate economic security, and unequal opportunity. But unions are too weak now to have much impact, and there is little reason to expect that their decline can be reversed. To the extent unions play a significant role going forward, it is likely to be an indirect one—as proponents of government programs and supporters of the Democratic Party.

If we can't count on steady wage increases from manufacturing jobs or unions, would profit sharing be a useful alternative? In profit-sharing plans, employees receive part of their compensation in the form of a portion of the firm's profit rather than as a guaranteed wage or salary. This has an upside for both owners and workers. For owners, the advantage is that when the firm is struggling, for example during a recession, its labor costs will fall, because workers will absorb part of the reduction in profits in the form of lower take-home pay. For workers, the advantage is that if profits rise, their pay will automatically rise. Over time, their pay will be higher than it would have without profit sharing.
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FIGURE
4.23 Unionization rates

Union members as a share of all employees. The lines are loess curves.
Data source
: Jelle Visser, “ICTWSS: Database on Institutional Characteristics of Trade Unions, Wage Setting, State Intervention, and Social Pacts,” version 3, 2011, Amsterdam Institute for Advanced Labour Studies.

The chief disadvantage for employees is that they will bear part of the cost of falling profits during bad economic times. That heightens insecurity. Then again, the enhanced flexibility in labor costs makes it less likely that firms will need to fire employees during rough times.
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In this respect workers' security is increased.

Despite its attractiveness, profit sharing is likely to be only a partial solution going forward. The idea has been around for quite
some time, yet it has made limited headway in rich nations. That could change, but the historical record suggests little reason for optimism.

Social democratic countries have a high wage floor—a high minimum wage that employers must pay, even for low-end service jobs. In Denmark, for instance, the hourly wage for a hotel room cleaner as of 2006 was about $16 per hour, making annual full-time earnings around $32,000. In the United States, by contrast, a comparable job would have yielded earnings of about $11,000. In fact, according to calculations by Peter Edelman, half of the jobs in the United States pay less than $34,000 a year, and nearly a quarter pay less than $22,000.
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There is no prospect of low-end service employees in the United States achieving Danish-level wages via collective bargaining. American unions are too weak. But suppose we raised the statutory minimum wage from its current level of $7.25 per hour to $15. Would that be a good thing to do?

Maybe not. We should care more about posttransfer-posttax household income than about individual wages, and there are ways to get to a decent income floor that don't require a high wage floor.
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The Denmark–United States comparison illustrates this. The first chart in
figure 4.24
shows the massive gap in annual earnings just mentioned for a hotel cleaner in Denmark and the United States. The second chart compares their income after government transfers are added and tax payments are subtracted. There is much less difference.

In Denmark, a significant portion of the earnings are taxed away; our hotel cleaner would pay about $10,000 in income tax, $5,000 in consumption tax, and $1,000 into an unemployment insurance fund. In the United States, our cleaner has no federal income tax payments and modest state income tax and consumption tax payments. And earnings are supplemented by government transfers. For a person with this amount of earnings and two children, the EITC adds nearly $5,000. Food Stamps add another $2,500.

FIGURE
4.24 Yearly earnings and posttransfer-posttax income for a hotel room cleaner in Denmark and the United States

As of 2006. Assumes two children. Currency conversion: 5.5 Danish kroner = 1 US dollar.
Data sources
: Center on Budget and Policy Priorities,
www.cbpp.org
; Niels Westergaard-Nielsen, personal communication.

So a high wage floor isn't the only way to get to a particular income floor. Is it nevertheless the
best
way to do so?

There are six main objections to a low or modest wage floor coupled with an EITC-style supplement. Let's consider each in turn.

1.
Low wages are demeaning
. Some feel a low wage conveys lack of respect for the work a person does. This surely is true to an extent. But if there is a tradeoff between the level of the wage floor and the number of jobs available, then the real question is whether people would rather work for a low wage or not be employed at all. The fact that millions of Americans currently choose to work in low-paying positions suggests that the former is true for many.

2.
Relying on a wage supplement forces taxpayers, rather than employers, to pick up the tab
. Mandating moderate-to-high wages for low-end service jobs forces employers (shareholders, entrepreneurs, heirs, and others) to bear the cost of assuring decent incomes for low-end households. To some that seems more desirable, on fairness grounds, than having taxpayers foot the bill.