Job One In America: Better JobsAaron Bernstein
WORKING UNDER DIFFERENT RULES
Edited by Richard B. Freeman x 261pp x $39.95/$14.95 paper
Russell Sage Foundation, New York
When major industrialized nations gathered in Detroit last March for a jobs conference called by President Clinton, the U.S. seemed to hold the high ground. After all, some 20 million jobs have been created in the U.S. since 1980, and the unemployment rate keeps sliding as the economy recovers. All of Europe has generated only a few million jobs since 1980, and its jobless rate hovers around 10%. Many European leaders blame their countries' high wages, generous benefits, and extensive social safety nets. They point to America's flexible labor markets as a model.
But anyone who thinks the U.S. is on the right track should grab a copy of Working Under Different Rules, edited by Richard B. Freeman, a Harvard University labor economist who also runs a comparative labor studies program at the London School of Economics. Five chapters summarizing five books commissioned by Boston's National Bureau of Economic Research for an impressive four-year project involved dozens of academics who compared U.S. labor markets with those in Western Europe, Canada, Japan, and Australia. The conclusion: The U.S. has performed worse in terms of improving standards of living than most other industrialized countries. Indeed, the book suggests the U.S. can learn as much from them as they can from the U.S.
Yes, the U.S. has created scads of jobs. But providing employment isn't enough. What matters is delivering the highest living standards for the most people--and that requires jobs that pay well. Because Europe's productivity growth has topped America's for nearly two decades, its wages and benefits have grown faster. When you combine jobs and wages and look at per-capita gross domestic product--the broadest measure of living standards--Europe has performed better over the past 20 years.
The U.S. also has more poverty and worse income inequality. In fact, the book's most startling revelation may be just how badly the poorest workers fare compared with those in other advanced economies: U.S. men in the lowest 10% of wage-earners, for example, earn half of what similar men make in Italy.
Why has the U.S. failed to deliver the goods? The book has bad news for rigid free-marketeers. It concludes that the U.S. relies too much on supply and demand in a highly decentralized labor market. One result: rising inequality. Market forces such as soaring imports and new technologies have driven up the pay of college-educated Americans and undercut the wages of less-skilled workers. The result is the biggest spurt in family-income inequality since the Depression. The same forces affected Europe, but its centralized wage-setting institutions kept inequality down.
In Germany, for instance, strong
unions that set pay patterns in national wage-bargaining have supported the salaries of less-skilled workers. France, which has fewer unions, gets similar results with minimum wages that cover much more of the work force than U.S. laws do. Europeans also have more government-mandated benefits, such as advance notice of dismissals and higher jobless benefits, that disproportionately help low-wage workers.
Moreover, the free market doesn't deliver enough worker training, the book finds. Surprisingly, it points out that the U.S. spends about the same as Europe--roughly 1.5% of corporate payrolls. But because many Americans jump companies after training, U.S. employers tend to train in job-specific skills, not the more general ones that keep the work force competitive. "The economy can become locked into a lower training equilibrium" than is needed to keep productivity growing, the book warns. One proposal: a European-style national system to certify skill standards.
Many U.S. economists will have a quick retort to all this: It's inefficient to interfere with markets, and jobs will be lost if you do. Freeman & Co. agree--to a point. High minimum wages do boost youth unemployment in France, their studies show. Generous benefits ratchet up unemployment, too. But Europe's labor markets adjust to change in ways that reduce the effect on jobs. Instead of slashing pay and firing workers when demand sours, German companies adjust each employee's hours. And many European social programs require people to work to receive benefits.
As a result, European countries have gained enough economic growth from higher productivity to more than offset higher unemployment and more costly social programs. Plus, as a result of those programs, many of their jobless fare better than U.S. low-wage workers. "Our study of a host of different programs... shows that, in general, these programs do not have major efficiency costs," says Freeman in the final chapter, "Lessons for the U.S."
Freeman is quick to note that the U.S. can't simply copy what others do. But it can adapt their ideas. The Clinton Administration is trying just that with apprenticeship and training programs. Given the conclusions of Working Under Different Rules, however, the U.S. may need to go much further to get the average American's living standards rising again.