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Does technology create jobs?

Red Herring Magazine, January 1, 1997

Yes, for everyone but the unskilled

Paul Krugman and I agree that as long as wages are flexible--and we agree that in the United States they are--technological change cannot destroy jobs on net. The reason: even if the demand for labor falls, wage rates can and will fall, keeping workers employed. The one exception would be very unskilled workers, some of whom would be priced out of work by the minimum wage. Krugman and I also agree that "capital using" technological change can reduce real wages for workers.

It's true that real hourly wage rates for employees have fallen gradually over the last 23 years. Based on data from the president's Council of Economic Advisers, I compute that the average real wage for production and nonsupervisory workers in the private sector peaked in 1973 at $14 (in 1996 dollars) and is now about $12.13. But these data have two big shortcomings; the effect of both is to understate current real wages.

First, over the last 23 years, an increasing portion of workers' pay has taken the form of benefits--pensions, health insurance, etc.--none of which are counted in hourly wages. Although the Bureau of Labor Statistics reports overall compensation for all employees, not just for production and nonsupervisory workers, the data are illuminating. Since 1980, real benefits, valued at the employer's cost, have risen by 20 percent. Average real employee compensation, including benefits valued at cost, has risen by about 4 percent.

The second problem with the standard data on real wages is that the consumer price index (CPI), used to adjust for inflation, overstates inflation. According to the 1995 Report by the Advisory Commission to Study the Consumer Price Index, between 1987 and 1995 the CPI overstated the inflation rate by between 1 and 2.7 percentage points annually. The CPI does not adjust for the fact that people buy more of those goods whose price has fallen and less of those whose price has risen. It also fails to adjust for quality improvements and to capture the "Wal-Mart phenomenon"--that consumers can now purchase goods at large chains for lower prices than they used to pay at local mom-and-pop stores. These three factors alone, according to a recent study by Northwestern University economist Robert J. Gordon, bias the CPI upward by about 1.2 percent a year. Assuming this same 1.2 percent bias for every year since 1973, real hourly wages have actually increased from $14 to about $16.50, and real employee compensation has increased by about 40 percent. One of the main reasons for quality improvement, incidentally, is the revolution in technology that has improved cars, made movies available on demand at a fraction of the previous cost, and slashed transportation and communication costs.

Of course, fringe benefits should not be valued at employer cost because they are typically worth less. The employer's portion of social security taxes, for example, is mandated by the federal government and is less valuable to employees than the cash that they could have invested in stocks and bonds. Benefits that are not mandated, such as health insurance, are probably worth less than their cost but are provided because they are a form of tax-free income. Therefore, the picture I painted of rising real compensation is rosier than the reality. But let's put the blame where it lies: not on the information revolution, but on actions like the federal and state governments' increase of social security taxes.

More government spending on schools is not the solution. The government's approach to schools is the problem. What are we to think of a president of the United States proudly stating his ambition for every student to know how to read by the end of the third grade? Only about half of the nation's high school seniors have mastered eighth-grade skills, the study's authors note. When a firm has only a 50 percent success rate on the basics, most of us think the customer should go elsewhere.