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Faulty Labor Economics at the NYT

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Saturday, 28 June 2014 07:45

Kevin Carey has an interesting piece in the NYT's Upshot section which notes evidence that U.S. college grads seem to perform markedly worse on standardized exams than their counterparts in other countries. While this discussion is interesting his conclusion is completely wrong.

He concludes by telling readers:

"This reality should worry anyone who believes — as many economists do — that America’s long-term prosperity rests in substantial part on its store of human capital. The relatively high pay of American workers will start to erode as more jobs are exposed to harsh competition in global labor markets. It will be increasingly dangerous to believe that only our K-12 schools have serious problems."

Actually economists would believe the exact opposite of what he asserts. If college graduates in other countries are better educated than our college graduates, and therefore more productive, then this will make us richer as a country. We will be made richer by the fact that we can get the goods and services they produce at a lower cost than would be the case if their college graduates were less educated than ours. This is good news in standard trade models.

Of course the implication is that college grads in other countries will be wealthier than college grads in the United States, but we are made better off, not worse off, by the fact that other countries have well-educated college grads. An editor at the NYT should have caught such a basic mistake.

 

Note: I see from comments that many are convinced that higher productivity elsewhere makes us poorer. This should not in general be true. Whatever we purchase from abroad is almost by definition better or cheaper, or we wouldn't be buying it. That makes us richer. There is the issue of unemployment created by increased imports. In the standard model (which most economists adhere to far more religiously than I do), the rise in imports should lead to downward pressure on the dollar, which will lead us to export more and import less of other goods and services. That will bring us back to full employment.

There is a distributional issue, the people displaced will make less than they had previously while everyone else will in principle earn more. Note that this displacement goes the opposite direction of displacement in prior decades when trade was structured to put our manufacturing workers in direct competition with lower paid workers elsewhere. This tended to put downward pressure on less-educated workers, whereas implicitly we are seeing a story here where our college-educated workers may suffer in international competition.

It is also worth noting that nothing about this story can drive our wages to developing country levels. There are different ways we can tell this story, but perhaps the simplest is to point out that 80 percent of what we consume is produced here. The fact that we can get some items at very low cost due to cheap labor in the developing world is not going to lower productivity for the portion of our economy responsible for this 80 percent of our consumption. Unless you have a story about redistribution from wages to profits that is about 10 times as large as what we have actually seen there is no way that we would see developing country wages.

Comments (11)Add Comment
New Dumb Down Standard for Trade
written by Last Mover, June 28, 2014 8:22

What? Dumb down your own country and buy more from other smarter countries to be better off?

New Pareto standard: Make at least one person better off by being dumber, as long as no one else is made worse off by being smarter.
...
written by foosion, June 28, 2014 8:39
This reality should worry anyone who believes — as many economists do — that America’s long-term prosperity rests in substantial part on its store of human capital.

Trade is not a very large percentage of US GDP. Less productive workers will hurt prosperity and we don't trade enough to make it up.

The relatively high pay of American workers will start to erode

You appear to support this when you write: "Of course the implication is that college grads in other countries will be wealthier than college grads in the United States"

Where's the disagreement?
The Point Is...
written by Larry Signor, June 28, 2014 9:29
A better educated international workforce is more productive hence wealthier. This lowers the cost of imports and enhances the US export market, improving our trade balance.

Now, about that over-valued dollar...
Nothing in Carey piece suggests a threat to "America's long-term prosperity"
written by Dean, June 28, 2014 10:35
He describes a situation where we might be falling relatively, not absolutely.
...
written by skeptonomist, June 28, 2014 1:29
The education level is not the deciding factor, unless it is hugely different. What makes the difference is the comparative standard of living. If India can educate people even to the same level as US graduates, then the jobs will flow to India since Indians are willing to work for much less. Globalization in general means leveling standards of living throughout the world. If the standard of living of US workers is not to be immediately dragged down to the common standard, some degree of protection is necessary. Education alone won't protect American jobs. There is no point in educating more US citizens to some high standard if foreigners at the same approximate level are going to work for much less. In fact US college graduates are not currently fully employed.
How?
written by Yoram Gat, June 28, 2014 1:46
Let's say that a US factory owner decides to employ a foreign worker instead of a US worker. In return the US maker pays the foreign worker part of the product of the factory to the foreign worker.

Now, instead of having the entire product of the factory consumed by US nationals, some of it is consumed by a foreigner.

So the owner of the factory is richer, and the foreign worker is richer, but the US as a whole is consuming less. No?
Good for the soul
written by Dave, June 28, 2014 5:16
Turn it off and stop reading. I've spent more time away from TV news and internet news than I have in many years, and I don't miss it one bit. Garbage, all of it!

I got myself kicked of the NYT site, and I'm happy about it. I've given them much more over the years than they have given me. All I ever got from them was a headache and nausea.

What this article really means is that the press believes that most economists believe that global competition hurts workers. Under today's system it does because our executives control the government and make it so. Many economists like TF of the NYT jump on board until they lose their fortune and realize they are dumb as dirt -- but they get to keep their jobs somehow, while the educated workers are oppressed by idiots.

Garbage, all of it. Every paper, every news site, every tv news program. Garbage.
...
written by LSTB, June 28, 2014 5:19
Yes, Carey's argument is oddly paranoid. We are better off if the world is more prosperous and educated. It's as if he thinks it's possible we can end up with comparative disadvantages in everything if Americans don't all go to college.

My beef is with his blather about the alleged "college premium." U.S. colleges and universities are probably the most expensive in the world on average. Our public higher education institutions aren't subsidized by the government, and nowhere else in the world do large percentages of college graduates start their careers with ~$30,000 in student loan debt.

To say that our grads' outcomes are no better than those of other countries should be raising alarm bells. What are the students paying for? How long until D.C. think-tank elitists like Carey admit that maybe higher education is really mostly about signaling?
I don't get it
written by Doug O'Keefe, June 29, 2014 12:11
Isn’t one of the main arguments against NAFTA and the like that, yes, imports get cheaper, but we also lose our manufacturing sector, so, on balance, it’s not worth it? Isn’t the same logic at work here? Sure, other countries’ greater productivity lets us buy their better, cheaper, stuff, but at the same time, our graduates are going to have a harder time finding jobs, because the stuff will be made elsewhere. I don’t see how the “standard trade model” makes Carey’s position untenable.
Who attends?
written by jonny bakho, June 29, 2014 8:15
Many European and Asian countries test pre-college students and only those who score high enough are admitted to college. Students who don't make the cut are diverted to trade schools or the workforce. In the US anyone can be admitted to some college. It is questionable whether the US approach is the correct one, but it is what we do in part because instruction in trades can be more expensive than a "cheap" college with low standards.

The US does suffer because our K12 system has vast inequities in pay and working environment.

The US has benefitted by importing talent from other countries who use their expertise to create jobs in the US. At one time, over half the Silicon Valley startups were by Asians.
...
written by Alex Bollinger, July 06, 2014 5:55
"Isn’t one of the main arguments against NAFTA and the like that, yes, imports get cheaper, but we also lose our manufacturing sector, so, on balance, it’s not worth it?"

Yes, that's the argument, but few mainstream economists make it. Hence the problem with the NYT's "economists" - there are people who make this argument, but economists generally avoid it.

I would also point out that your "on balance" requires numbers. Sure, manufacturing jobs were lost, but how many? What were they replaced with? Are the new jobs worse to the point where the minority's loss of good jobs outweighs the majority's access to foreign goods? It's a numbers issue, and my instinct is Americans as a whole were made better off if we look narrowly at wages of these specific jobs and the prices of these foreign goods.

If you're referring to Dean Baker's argument about NAFTA and other trade agreements, it's quite different from the one you're making. He usually says that these laws, at most, put workers in competition with foreign workers while increasing protections for professionals, which decreases the political will to offset the trade deficit through, say, devaluing the dollar.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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