Arnold Kling  

The Myth of the Median Worker

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Russ Roberts continues to engage with Tyler Cowen on whether there has been stagnation.

A lot of the argument is over what has happened to the median worker. But that may not be a useful construct.

Let us continue to think through what I call the myth of the macroeconomy. Suppose that instead of thinking in terms of homogeneous workers and consumers, we treat heterogeneity as important.

Think of the economy as consisting of lots of escalators. Some are headed up, and some are headed down. If you are a student in computer science at Stanford, your escalator is racing up (and you already may be pretty high). If you do work that can be replaced cheaply by machines or by foreign labor, your escalator is going down.

Some of the people have ridden the down escalators close to the bottom, in the sense that they will never again be employed in a job that they consider worthy of their dignity. The same thing happened in the 1930s. Then, there were Bonus Marchers. Today, there are Occupy Wall Streeters. (Maybe trying to draw a parallel is a stretch.)

People have some ability to switch escalators, but that ability is limited. To get onto an up escalator, you need to acquire better human capital, physical capital, or organizational capital. I am not sure that has ever happened. Between 1930 and 1950, a lot of the least-educated workers aged out of the labor pool and were replaced by a more modern work force.

There is no doubt that people riding a down escalator are sensing a threat to their relative status. However, setting this aside for the moment, I am inclined to give Russ the point that someone lower down in the income distribution has it better today than thirty years ago. The prices that have gone up the most are for private education and non-acute health care, which I would argue are status goods, not necessities. I suspect that if we measure how far a worker's income goes in providing food, clothing, shelter, and basic durable goods, we would see a notable improvement, even for those who have been riding down escalators.

People who have ridden the escalators up enjoy more confidence in their economic status. They have financial assets. Their human capital is valuable. They can send their children to private schools and expensive colleges. They can afford to have all of their ailments looked into, not just get medical care when they break a bone or have a heart attack.

Tyler wants to raise a challenging hypothetical. Suppose that economic growth had been as strong in the past thirty years as in the previous thirty years. How much better off would we find the typical worker? This question is hard enough to answer with aggregate data. If you agree with me that the concept of a typical worker is part of the myth of the macroeconomy, the question becomes even more difficult to answer.


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COMMENTS (10 to date)
John Nye writes:

Arnold,

I've made the point before (see my Econlib essays on inequality) that precisely because the West is much richer, positional or status goods are consequently more important. The struggle over status goods can be masked when you have rapid growth and a lot of mobility. But ultimately, middle and upper middle class people DO care more about health care, location of housing, and elite schooling than poorer people.

This is not just frivolous. For example, as the rich buy up housing in the most prestigious locations (think nicer parts of DC or NY) those who grew up in adjacent areas or who wanted to live there will get pushed out.

You may SAY that their homes in the far burbs are better. But if they want to be in the "center of the action" they are much disappointed.

Similarly, it doesn't comfort many to know that a good second tier school has as many resources as some Ivies from the 1960s if their star kid can't get into UVA and higher.

And when you get into the question of which jobs are more prestigious, it gets worse still.

So yes, objectively speaking, people are a LOT better off on many dimensions, but people's utilities are such that status goods and positional goods will make conflicts in periods of stagnation really vicious.

Charles R. Williams writes:

It is also necessary to distinguish between cross-sectional analysis and longitudinal analysis. It is possible for median income to decline and at the same time for each generation (in a given family) to be better off than the previous generation.

Tom West writes:

I suspect that we're simply moving towards a new equilibrium, closer to that of developing countries. We've been bouncing around for decades to put off that fundamental change, but I think we've finally run out of options.

In other words, the number of down escalators has been outnumbering the number of up escalators for years (countered temporarily by assorted unsustainable booms and greater and greater debt.)

Is there any fundamental reason why 80% of North American workers earn more than $5-10,000 a year except that they currently serve people who are wealthy? (Of course, as in developing countries, I expect basic living expenses to collapse until $5,000 is a sustainable living salary.)

The world is going to become a lot more equitable, I don't think I'm going to have much fun at all watching it become so.

Paul writes:

What has the average income for all workers in the world done over the last 50 years? Trade is good for all but not necessarily for a specific group.

Paul

Noah Yetter writes:
To get onto an up escalator, you need to acquire better human capital, physical capital, or organizational capital. I am not sure that has ever happened.
(emphasis added)

...really? You wanna take a guess at how many software developers work for me that switched careers in their 30s and/or have degrees in unrelated fields?

To "get onto an up escalator" (I do like the metaphor) you need:
1. to realize you are on a "down" escalator now
2. decide to make a change
3. be capable of making that change (most people are)
4. have the resources to do so

Any or all of these could be a problem for someone, but I expect #4 is the most common sticking point. If you have major obligations like children and a mortgage, it can be difficult to find time and/or money to go back to school or otherwise equip oneself for a career change. Difficult, not impossible.

R Richard Schweitzer writes:

The escalator metaphor (or concept) also has its serious limitations - a form of determinism

There is a "time-stream" involved; yet some caught in the external movements or currents do turn.

There is the matter of motivations and aspirations. The observer who sees those as typical fails to perceive individuality.

Commonaliities of perceived actions, assumed motivations and responses to circumstance do not confirm typicality. What does?

Tom West writes:

a form of determinism

And I will say that is a serious problem. One thing that is interesting is the number of the Wall St. occupiers that *did* follow the up escalator, and are still out of luck.

And of course, because they've never been told that there's every possibility that despite studying hard, working hard, keeping up to date, following the market, etc., they'll still end up on the floor, they feel cheated and *angry*.

I really do think we need to tell students in school and higher education that the world isn't fair. You can do everything right, and still, through no fault of your own, be completely toast. (Especially given the trend to avoid hiring people who've been unemployed for any length of time.)

Make certain they know that making the right moves vastly increases the chance of success. But just like the guy who who exercises every day and then drops dead of a heart-attack, there are no promises.

kyle8 writes:

I really like your construct of the escalators, it is very useful to explain changes in the economy and the personal hardships that some people experience due to change.

A major problem in the near future will be that an increasingly older set of workers will be riding down escalators.

If you are over the age of fifty, your chances of changing careers and learning new skills is greatly diminished. There is also the very real specter of age discrimination in hiring.

Craig writes:

It's tough, well, impossible, actually, to invent a science based on conceptual abstracts. The macro-economy no more exists than does society.

They are linguistic conveniences which prevent us from having to rattle off 310 million names every time we speak of something to do with the United States. To make more of them than that leads to error.

Arthur_500 writes:

What is the 'typical' worker? I would like to know as it may go a long way towards explaining our unemployment situation today.

We have people unemployed for 99 weeks. How do they do that? Don't they have to pay for shelter and food?

I heard a woman the other day state that she is unemployed, taking Yoga classes, and paying for Health Insurance. Ignoring my savings, I could not afford to pay for health insurance with just unemployment payments.

Maybe it is just my geographical location but I don't understand how people can remain unemployed. I would need a job.

Macdonald's is hiring. It may suck to me but it would be better than no job. I see advertisements for janitors, potato pickers (in season), fish processors (in season), etc. I simply could not afford to be unemployed for 99 weeks and then rally in Washington for extended benefits.

So what is the 'typical' worker? I assume it is someone who makes enough money that when they become unemployed they can afford not to work.

Or,

Maybe there is no 'typical' worker.

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