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Home Publications Blogs Beat the Press How Does Greg Mankiw Know that Wage Inequality Is Due to Technology?

How Does Greg Mankiw Know that Wage Inequality Is Due to Technology?

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Sunday, 10 February 2013 06:30

As opposed to alternatives like macroeconomists who lack skills in running the economy? Mankiw asserts as a fact that technology is responsible for the upward redistribution of income over the last three decades, but it is not clear that the evidence supports his story. After all technology had a much larger impact in increasing productivity in the decades from 1947 to 1973 yet workers shared in these gains more or less equally.

If technology explains the shift those who try to explain the timing of the process, like M.I.T. professor David Autor, have had a difficult time making their case. The villains that some of us would point to are anti-union measures by government and businesses that have weakened workers' bargaining power, trade policy that was designed to put less-educated workers in competition with people in the developing world while largely protecting the most highly educated workers, patent and copyright policy that increased the rents pulled out of the economy for these monopolies, and macroeconomic policy that has led to more unemployment in the last three decades than in the early post-war period. High unemployment tends to disproportionately hit less educated workers, both by having more impact on their probability of being unemployed and reducing their wages.   

It is easy for Harvard economic professors to assert that technology is the cause of inequality. It is much more difficult for them to produce the data to prove their case. 

Comments (23)Add Comment
FInance also contributes to inequality
written by Robert Salzberg, February 10, 2013 6:01
Finance has increased as a share of GDP over the past few decades but profits from finance as a percentage of total profits is where the real action is with around a third of total profits going to finance.

Finance is skimming the cream and screwing the workers out of a big chunk of their wage growth both directly through fees and indirectly through other financial transactions large and small.


http://blogs.reuters.com/felix-salmon/files/2011/03/percentage.png



Whoops!! Correct Financial Profits Link
written by Robert Salzberg, February 10, 2013 6:06
Harvard could save money on Mankw's salary . . .
written by Rachel, February 10, 2013 8:07

Gred Mankiw could be replaced at Harvard by many other economists, even many American economists, who could teach the concepts as well as he, and perhaps with better habits of providing evidence for their hypotheses.

It is true that he has good connections and good name recognition in his favor. So Harvard may be paying for that. (I've always assumed that that's why UC Berkeley pays so much for Robert Reich) But that's different than paying for talent and skills.

In other words, Mankiw benefits from one kind of market clout. And over the river from Harvard, the hospitals are known to profit handsomely from another kind of market clout.

Of course in medicine in general, many people profit out of proportion to their skills and effort, partly because other people have been denied the ability to gain skills and work hard. And some are deriving excesss profits from discoveries paid for by the taxes of others.

Similarly, especially in recent decades, many people in finance have been accruing profits far out of proportion to their skills and talents. Technology has had an effect, but not because it makes finance more efficient.

At the same time, so many ugly factors have combined to push manufacturing out of the country.

Now Mankiw does have enough education to be aware of some of these causes of inequality. And with his connections and name recognition, he could, if he wished, even contribute to a better understanding of why America becoming more unequal. But instead, he chooses to talk piffle, crowd-pleasing, nonsensical piffle. Leaving the hard labor to people like Dean.
Competition as the Last Refuge of a Scoundrel
written by Last Mover, February 10, 2013 8:57
In the article, Greg Mankiw writes about the claimed virtues of competition, especially that associated with immigration, how most economists endorse it and how (some) economists themselves are disciplined by it to the benefit of those consuming their services.

Technology is mentioned almost as an afterthought, as if it were obvious that wage inequality is a particular kind of supply side problem of insufficient skills to meet growing demand. Certainly not the problem of economic rent extraction through market segmentation, combined with effective competition carefully limited to be faced by lesser classes as demonstrated by Dean Baker.

Thus the usual assertion that more education would close what is effectively argued by Mankiw as a structural unemployment gap, something mindlessly echoed by the likes of Tom Friedman et al. Never mind the great recession and lack of demand, or for those who do have long term permanent jobs, the more education and skills possessed, the more likely the insulation from competition itself.

As Samuel Johnson said in 1774 on false patriotism, it's the last refuge of a scoundrel. So goes Greg Mankiw on the false virtues of competition. It's not that competition can't work. It's that in most areas where it can work, it is systematically blocked by the very hypocritical free marketeers who wear it as a badge of false economic freedom. It's good for everyone else but them.
Mankiw seems to be managing his message in fealty to the wealthy
written by John Wright, February 10, 2013 9:18
There are two incidents in Mankiw's past that are interesting.

First, in January 1989, he and David Weil wrote a paper titled "The Baby Boom, The Baby Bust, and the Housing Market" in which he predicted real housing prices will fall substantially over the next two decades.

Second, in 1998, in his book "Principles of Economics", he wrote

pp. 29-30: "An example of fad economics occurred in 1980, when a small group of economists advised presidential candidate Ronald Reagan that an across-the-board cut in income tax rates would raise tax revenue. They argued that if people could keep a higher fraction of their income, people would work harder to earn more income. Even though tax rates would be lower, income would raise by so much, they claimed, that tax revenue would rise. Almost all professional economists, including most of those who supported Reagan's proposal to cut taxes, viewed this outcome as too optimistic. Lower tax rates might encourage people to work harder, and this extra effort would offset the direct effects of lower tax rates to some extent. But there was no credible evidence that work effort would rise by enough to caues tax revenues to rise in the face of lower
tax rates. George Bush, also a presidential candidate in 1980, agreed with most of the professional economists: He called this idea "voodoo economics." Nonetheless, the argument was appealing to Reagan, and it shaped the 1980 presidential campaign and the economic policies of the 1980s.... Congress passes the cut in tax rates... but the tax cut did not cause tax revenue to rise... tax revenue fell... government began a long period of deficit spending... largest peacetime increase in the government debt in U.S. history. Fads can make experts seem less united than the actually are... when the economics profession appears in disarry, you should ask
whether the disagreement is real or manufactured... [by] some snake-oil salesman who is trying to sell a miracle cure."

In both cases, Mankiw stated opinions that made powerful groups unhappy, the real estate industry in the first and then the Republican supply siders in the second.

He removed the "fad economics" comment from later editions of his text book.

Mankiw may be simply adjusting his "message" with an eye toward a comfortable retirement as he remembers being marginalized during his government service to George W. Bush.

Perhaps the Upton Sinclair quote needs to be modified, with the added "appear to" words below:

"It is difficult to get a man to (appear to) understand something, when his salary depends upon his not understanding it!"


If only economists were exposed market forces
written by Jennifer, February 10, 2013 9:23
Such a silly article. The idea that international hiring practices have brought down college professors' salaries is a new one--and if true has not reduced tuition in any way but good to know it "could be worse". He brings out the usual tropes about increasing education for everyone but the data shows that most wages are stagnating and that most people graduating from college are in professions--service primarily--that do not require college degrees. There probably has been some effects of technology in hollowing out the middle but the tremendous gain at the top can be explained pretty persuasively by policy choices.
...
written by watermelonpunch, February 10, 2013 10:28
I'm not knocking the list of villains in this blog post, as they're certainly very real.

But I think some very big villains in this come from the rise in the financial industry, out of proportion enormous pay, for people who basically just get paid big money to move money around & around... and the people who benefit enormously, from having their money moved around & around.

Among those who don't benefit, by design, are the government itself, and the average American citizens.

So is this guy saying that it's technology that's to blame for making the markets favour people who move numbers around?

The answer seems simple then - let's get rid of THAT technology, or shift it to another place, because there doesn't seem to be any proven societal value to using it there.
It's even worse than going to waste - it's driving a degradation of civilization and the planet.


RE: the skills / education topic
What is too often missing from this picture is what Jennifer points out in above comment.

How can they prove that education/skills is really what improves job prospects and earning potential, when often, if it does, it's just because a college education might improve someone's chances of getting a job that doesn't not require that education anyway.
If all education can be counted upon to do, is improve one's chances against the job applicant who has no such education... when competing for an unskilled services job...

To me that's not proof that education is key to better earnings, by virtue of having needed education/skills.

It's just proof that there's not enough jobs, and demonstrates how tough the competition is for low paying jobs.

When I stop seeing low-paying part-time clerical receptionist job ads that state they either require, or prefer, applicants with degrees, then I'll believe that education is actually being put to good use in our society.

Until then, any arguments claiming that education itself is desperately needed, or that education itself leads to significant economic advancement, are just whistling Dixie into a delusional vacuum.
I would consider anyone who makes those arguments to be either dishonest or ignorant.
More Beer
written by David, February 10, 2013 10:53
A more fundamental circularity concerns a truly tena- ciously held belief, which means that contradictory evidence will be attributed to quite different causes. Witness the contention that market forces in free competition can be expected successfully to regulate an economy. This policy is inherently unstable, and can cybernetically be guaranteed not to work. But if we are assured by authority that it does work, instability will be put down to other factors. Because of the underlying instability, there will be many contenders.


The above quote is on the fifth page of this overview by Stafford Beer (1999, "On the Nature of Models: Let Us Now Praise Famous Men and Women, Too
1 (from Warren McCulloch to Candace Pert)"), found here:
http://www.inform.nu/Articles/Vol2/v2n3p69-82.pdf
A quick sketch from FRED (inspired by Salzberg's link)
written by David, February 10, 2013 11:11
Here is the percentage of corporate profits going into the financial industry, after taxes, seasonally adjusted, mapped quarterly. I didn't have time to ferret out taking out capital consumption and inventory valuation adjustments. Still, the story told is damning:

Presumably the spike in share of profits during recessions is due to the drop in profits in the non-financial sector. But the upward trend showing finance eating the economy from the inside out is clear. Business leadership is dead.
Mankiw's claims are more modest than Dean suggests
written by G Burtless, February 10, 2013 11:26
Readers should go directly to Mankiw's column before concluding he is making crazy claims about the source of increased wage inequality. The first half of the column offers some shrewd observations about why American economists, on the right, center, and left, are sympathetic with arguments for a liberal immigration regime. He then acknowledges that a liberal regime -- in particular, the immigration of less skilled workers -- probably contributes to the woes of unskilled workers born in the U.S.

Along the way he notes that the main forces driving the wage inequality trends have been technological change and to a lesser extent international trade. He doesn't say the _sole_ reason was technological change, and by clearly suggesting international trade and immigration of unskilled workers have also played roles, he leaves open the possibility that other factors have influenced the trend, too.

Good grief! The column is mainly about immigration; the role of technology is a side issue. Nor can it be said that Mankiw is expressing a particularly controversial view among economists who've studied wage inequality. Dean apparently has a strongly held view that other factors are more important than the three Mankiw mentions, but it would be as hard for him as for Mankiw to "prove" that his preferred explanations are correct. I think it would be equally hard to prove the three explanations offered by Mankiw are without merit. They are, after all, explanations accepted by many, many scholars who have studied the evidence as carefully as Dean has.
Thanks
written by David Green, February 10, 2013 11:38
For those who take the time and trouble to comment, thank you so much. I hope I speak for many people who don't comment, but profit from this general edification. Your efforts are valued and appreciated, of course made possible by Dean Baker.
Skepticism in the face of lack of evidence
written by David, February 10, 2013 11:56
I think it would be equally hard to prove the three explanations offered by Mankiw are without merit.

Jeez, I hope this isn't written by a scholar. Mankiw puts forth an argument. Then it is his obligation to prove that it has merit. But where is the meritorious evidence? Correlation does not imply causation, I presume a Harvard scholar knows that. So, prove that it's a snake, not a stick. In short, I think Dean is serving Mankiw well as a skeptic.
They are, after all, explanations accepted by many, many scholars who have studied the evidence as carefully as Dean has.
So if these scholars want the US to jump off a bridge, should we do it? What about all those scholars who disagreed with Einstein (or the myriad of less known academics who changed their field)? They were proven wrong.
...
written by urban legend, February 10, 2013 4:22
Is there a provable change in technological development that coincides with the flattening trend in wages? I think not. Technology changes all the time. That wage-flattening trend (or decline) coincides almost perfectly with the deliberate and substantially successful effort to weaken unions -- with the famous Louis Powell memo beginning to draw blood from ordinary Americans.
...
written by urban legend, February 10, 2013 6:16
How about, in addition, essential abandonment of full employment policy by the Federal Government (as to fiscal policy) and the Fed (monetary)? Wages go up when demand for labor is high. Of course, had Republicans won in 2008, we would have had massive stimulus (including public works) for as long as it was necessary, with nary a peep by Republicans about deficits. Democrats agonizing over the deficit, instead of giving absolute priority to putting Americans back to work, have done enormous damage not only to their party, but also to the country.
...
written by watermelonpunch, February 10, 2013 6:50
@ Burtless
You admit that "he notes that" technological change is one of the "main forces driving" wage inequality.

That's a statement.

I don't see any reason to believe it's true.

And he offers no proof of it.

You don't get to make pat claims like that, with some kind of expectation that there won't be critiques.


@ urban legend
Do you really think if there was a Republican president, suddenly all the anti-government anti-tax people would've been all rah-rah for government spending, public welfare & public works, infrastructure stimulus, etc?
I'm just not convinced that would fly in today's Congress of politicians who are having the poo-poo scared out of them by primary contenders. No matter who won the presidency.
Worker's Bargaining Power vs. Labor Productivity
written by NewsFromAnnArbor, February 10, 2013 8:34
Dean raises an interesting point: Labor productivity was more robust in the 1947-1973 period when Unions were stronger. Is there a casual link here? Does more expensive labor increase incentives to automate, raising productivity?
re: Worker's Bargaining Power vs. Labor Productivity
written by pjm, February 11, 2013 7:47
It can but I would think it is only one of a range of behaviors that are incentive-ized (including shielding yourself from foreign competition).

Against the American model, Labor in Sweden pursued a solidaristic wage model, raising the wages of workers at the bottom of the income scale first. This was linked with an employment policy that didn't try to keep workers in a specific job but that they would have to move as low-productivity jobs got squeezed out of the economy. This strategy was a hedge against unemployment,inflation and spurred the overall productivity of the economy but it is not strategy that can be done (in the interest of workers) when important social benefits (i.e, pensions, health insurance) are tied to specific jobs.
Housing buble
written by Floccina, February 11, 2013 3:49
But wasn't it the loose monetary policy that lead to the housing bubble?

Also I would not call it anti-union policy but moving from pro union policy to a more neutral policy.

Other than that I agree with Dean but I would not to readers that pro-immigrant policy reduces wage inequality world wide, so rather than reduce immigration we should, as Dean has suggested, allow more professional immigrants to enter the USA and allow them to practice their profession (MD's particularly).
domestic vs. foreign high-tech workers
written by Tax Lawyer, February 11, 2013 4:45
I know a lot of high-tech programmers out of work because it is cheaper to hire Indians than Americans. When the labor pool for skilled labor increases four-fold, of course even skilled Americans lose ground. And an American education implies much more debt. The quality of life and job prospects of skilled American labor is being killed. I even know a lot of lawyers being put out of work by Indian (I am focusing on them because their population is so large, they speak English, they work for nothing, and don't need to be in the office). As a lawyer and CPA myself, I want my kids to go into plumbing, electrical work, or any other job that is high-paying and requires a physical presence. I can't wait to see Wall Street's big cheeses run by Indian traders. Then maybe things will change
...
written by ezra abrams, February 11, 2013 9:22
what is it about mankiw that so seems to get under the skin of liberal economists ?
is it that mit and harvard now get all the best grad students ?
is it the smirking picture or lack of comments on his blgo ?
is it all the money extorted from students by his overpriced textbook ?

this pathological mankiwphobia leads you to an error; if you had actually bothered to read the relevant paragraph of his column your lead sentance would not have been written:
quote
Over the last several decades, for the most part, the wages of workers without any higher education have stagnated, while the wages of those with advanced degrees have risen. The main forces driving these trends are technological change, which tends to increase the demand for skilled workers relative to unskilled workers, and, to a lesser extent, international trade. But the immigration of unskilled workers from abroad may be a contributing factor, and one that is all too obvious when these immigrants vie for the same jobs as unskilled workers born in the United States.
unquote
MAIN force
immigration contributing
I think given the venue - a short ny times piece - he can be forgiven for not noting othe factors; if he does the same in longer pieces then yu can criticize him

in any event, this mankiw bashing is not making YOU look good.
...
written by watermelonpunch, February 12, 2013 12:27
I'm not here to just badger people for the heck of it. I'm here because I want to find some answers.

I see a few arguments statements here in the comments that claim it's true that technology is the "main force" driving inequality...

But still, nobody is offering me any relevant reading material to answer the question I also have...

How Does Greg Mankiw Know that Wage Inequality Is Due to Technology?
...
written by liberal, February 12, 2013 10:24
Floccina wrote,
Also I would not call it anti-union policy but moving from pro union policy to a more neutral policy.


LOL. The US hasn't been "pro-union" since Taft-Hartley, which was passed in 1947.

But wasn't it the loose monetary policy that lead to the housing bubble?


It's possible that loose monetary policy "kindled" the bubble, but if you run the numbers through simple mortgage calculators, it's impossible that resulting lower monthly payments due to lower rates caused the level of price increase that was observed. It's clear that the crucial ingredient was deregulation of the FIRE sector.
Technology - Yes the primary cause
written by Douglas Hadden, February 12, 2013 12:40
It isn't just technology, eliminating work as we once knew it, it's who owns the technology.

In the good old days (1820's through 1970) our society applied technology generally for and with the benefit of our whole society. For the workers as well as the owner/shareholders. During the 1970's we began a process which has shifted the value of technology, which grows exponentially, into the hands of the owner/shareholder (elite) via political control, emphasis on finance vs production, and planned wage reduction, for the benefit of a limited segment of our society. Thus inequality has grown and continues today.

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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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