Deficiency Wages

So there is no mystery for the source of my title, next week in my Economics of Organizations class we're covering Efficiency Wages a la Shapiro and Stiglitz.  My old word play self can't leave well enough alone.  But it's other things I've been reading that prompted this post.  I'll get to those in reverse chronological order - according to when I read them.

First is Nate Silver's latest column on tax bubbles.  I did not like that column for the following reasons.  First, he doesn't try to distinguish marginal tax rates from average tax rates in much of what he discusses.  He disses a proposal for tax reform that perhaps should be dissed, but he doesn't entertain the possibility that the proposal is sensible given the constraints, namely that working class and middle class tax payers should continue to receive the Bush tax cuts, but starting at income of $250,000, those tax payers should pay the same average rate as they paid under Clinton.  The only way to achieve both of those, I fear, is to have the tax bubble that Silver so detests.  The problem of the bubble would disappear if we simply reverted to the Clinton rates across the board.  I understand that for economic stimulus, keeping the Bush cuts for lower and middle income people makes sense as a near term measure.  But it seems to me that Obama Administration position is to keep those rates at the Bush level permanently.  Moreover, this position seems to be moving toward a Liberal consensus.  Why?  Is it a good idea or not?  That's what this essay is about. 

Next consider Matt Miller of the Washington Post.  His column today is about the virtues of government spending in terms of rebuilding America.  If we're talking about infrastructure investment, support for research and education, cleaning the environment and other public works then I'm completely on board.  But his last item was this:

And while we’re making a non-elderly wish list, I’d also add bigger wage subsidies — via, say, some kind of mega-earned income tax credit — so that full-time work (and especially in-person service-sector work that can’t be offshored) offers a reliable path to the middle class.

Where did this come from?  Unemployment insurance, yes.  Payments to keep people living in poverty from going hungry and having decent housing, yes.  But subsidizing a middle class lifestyle for the non-poor who work?  I don't get it.  There's an issue here but in my humble opinion this is going about finding a solution in the wrong way.

The last piece is a Tom Friedman Op-Ed from the Sunday before last.  It was about welding job, but those that also require enough science and math knowledge to understand what is going on with welding, along with the certification to prove the point.  There are plenty of people who can weld but apparently there is a shortage of welders with the appropriate math and science background.   Friedman interviewed a CEO of a small company, Wyoming Machine,  named Traci Tapani.  She was grappling with this shortage problem.  I was struck by these lines:

Welding “is a $20-an-hour job with health care, paid vacations and full benefits,” said Tapani, but “you have to have science and math. I can’t think of any job in my sheet metal fabrication company where math is not important. If you work in a manufacturing facility, you use math every day; you need to compute angles and understand what happens to a piece of metal when it’s bent to a certain angle.” 

My question is this.   Is $20 per hour a good wage for for a high skilled manual labor job?   On a forty hour week that works out to $800 per week so that for 52 weeks (since vacations are paid for) that amounts to $41,600 per year.  Is that a good job?  In my way of thinking about this, it is okay for a starting wage or for a single person who is a little further along.  It is low for a head of household with a family of four.

If that is right, my next question is why is it for skilled labor that is scarce wages are nonetheless so low?  Put another way, why doesn't the market bid up the price of these folks, say to $30 per hour?  If that wage really were higher, wouldn't more people who can weld try to get the necessary math and science background?  The market seems to be failing here.  Employers appear to prefer the low wage approach even with scarcity of skilled labor.  Is that myopia on their part?  Is it stinginess? 

The story in the late 90s and early 2000s is that the savings rate went to pot for working class and middle class America because there was no other way to maintain the middle class lifestyle.  Very few people seemed to be asking about why wages were so low then; they simply took it as a necessary consequence of globalization.

If skilled manual labor earned a decent wage (like plumbers do) then for lightly skilled service jobs where the wages are more modest you don't want to do what Matt Miller is suggesting and subsidize them.  You want those jobs to have the reserve army of the unemployed low wages, precisely so people have a reason to rise above it.  But when they do so rise if they are still paid rather little then the system doesn't seem to be working.

There is the further point that 40 or 50 years ago workers tended to stay with the same employer for a very long time.  They had job security and lifetime income security as a result.  Nowadays if there are good jobs but where those are and what skills those require change over time, then employees will have to change employer and/or the work they do multiple times during their careers.  If they mainly self-insure for those times when change comes, they need to make enough so they can create a stash for the self-insurance purpose.  If that happens the labor market might work reasonably well.  As we have things now, those welders who have the math and science they need are banking on their profession being in short supply well into the future.  If not, even if they are good employees now, they'll join the ranks of the unemployed.

That would be a shame.