Reconsideration of Key to job growth

Key to job growth, equality is boosting tradable sector of economy

By Steven Pearlstein
Washington Post Staff Writer
Saturday, March 12, 2011; 6:02 PM

When Professors Spence and Hlatshwayo looked at what happened between 1990 and 2008 - a period of rapid globalization - two things stood out. One was that all the job growth came pretty much in the non-tradable activities, in particular government and health care, while across wide swaths of the tradable manufacturing sector, jobs declined significantly. The other thing they noticed was that in terms of economic value-added - the "output" that is measured by GDP and generally correlates with income - the tradable sector experienced a slight edge.

Put the two together - the very unequal employment growth and nearly-equal output growth - and what you get is an economic tale of two cities, one that is growing in terms of jobs but not income, another that is growing income but not jobs. In short, a recipe for increasing inequality and social and political polarization.

Find a way to tilt the market incentives so that businesses - in particular, big multinational corporations - are more willing to invest in the physical and human capital necessary to make American workers more productive, rather than simply outsourcing work overseas. ..An example of how this might work from the 1980s, was when "voluntary" auto-import quotas negotiated with the Japanese led a number of foreign companies to establish assembly plants in the United States. Although the wages paid by the "transplants" weren't up to the union wages paid by unionized American firms, they were higher than those paid in Asia at the time, and certainly above those in the Southern states where the factories were located. But thanks to extensive training and investments in the latest production machinery, the foreign automakers found they could produce quality cars at competitive prices right here in the United States. Without that little "nudge" provided by the government, the American auto industry might have gone the way of shoes and textiles.

There is a name for such "nudges" - it's called industrial policy. There's no question that sometimes governments get it wrong. There's also no doubt that governments can get it right, whether it be the lighter touch of European countries such as Germany and Finland or the heavier hand exercised by economic policymakers in China, Korea and Singapore.

What's pretty clear, however, is that continuing to do what we've been doing - pushing down wages and taxes in the hope that free markets will somehow solve this problem - is folly. Spence and Hlatshwayo have demonstrated, the future does not lie in further expanding employment in health care, government, restaurants and real estate. Our urgent challenge is to reorient the tradable sector of the economy, services as well as manufacturing, so that it creates not just wealth for investors and jobs for PhDs and MBAs, but jobs for middle-class Americans as well.

Based on Michael Spence and Sandile Hlatshwayo, "The Evolving Structure of the American Economy and the Employment Challenge," will be published soon by the Council of Foreign Relations.