Monday, March 1, 1999

Low Skilled Workers Left Behind

STANFORD GRADUATE SCHOOL OF BUSINESS—There are many cultural and economic similarities between the United States and Canada. But in at least one area, the two countries are quite different. A new study conducted by Business School economist Paul Romer has discovered that while the United States has experienced a steadily widening gap in income over the past two decades, Canada has not. "It's fairly striking how different the two countries are in this respect," says Romer. How has Canada kept the income gap from spreading? The short answer appears to be: better education policies.

In a study of the U.S. and Canadian labor markets conducted with Kevin Murphy of the University of Chicago and Craig Riddell of the University of British Columbia, Romer argues that education--with a focus on supplying better-educated labor--is the key to undoing income inequality. Romer, whose previous research has focused on the relationship between technology and the economy, reinforces the conclusion of other economists that technology is partly responsible for the recent growth in U.S. income inequality.

Romer, Murphy, and Riddell's research is set against a backdrop of two conflicting views about the history of wage gains. One traditional view, which the authors refer to as the interventionist position, contends that technology results in lower wages for the unskilled and that only government welfare policies, such as minimum wage laws and support for unions, can offset this force. The other traditional view sees technological change as a phenomenon that affects all employees like a "rising tide" that lifts all boats.

Romer, Murphy, and Riddell argue that the interventionists are right that technology can reduce wages for low-skill workers and that supporters of the rising tide view have not paid enough attention to this effect. On the other hand, they also argue that the interventionists are wrong about the sources of the large wage gains that have taken place since the Industrial Revolution. It is education, not social welfare policy, that has raised standards of living for the average worker.

To develop more evidence about the effect that technological change can have on wages, Romer and his colleagues compared the earnings of college-educated workers to the earnings of high school graduates in the United States and Canada. In the early 1980s, U.S. college-educated workers already earned 50 percent more than high school-educated workers. By the mid- 1990s, they were earning 80 percent more. At the same time that this ratio was increasing in the United States, it was falling slightly in Canada. By 1994, university-educated Canadian workers earned only 57 percent more than their high school-educated counterparts.

Murphy, Riddell, and Romer believe that differences in the demand for workers do not account for the discrepancies in income between the United States and Canada. Technological change was having the same impact on the demand for workers in the two economies. Instead, they contend that the supply of educated workers explains the difference. Wages increase whenever the availability of highly educated workers does not keep up with increases in demand. In Canada, the government had adopted a variety of post-secondary educational policies that boosted the number of workers at that level of education, resulting in the lower wage differential between skilled and unskilled workers compared to the United States.

In contrast to both the interventionists and proponents of the rising tide, the authors support an alternative view that society is in the midst of an education race. As technology continues its rapid advance, education is struggling to keep up with the need for ever more skilled workers. Thus, policy makers should start looking for ways to increase the level of educational attainment in the workforce. This is the policy that the United States used in the past 100 years. It is the one that we need to continue in the next century. According to Romer, "Investing in education is the one policy we can adopt that will make the pie grow faster and ensure that everyone gets a larger piece."

Related Information

Wages, Skills, and Technology in the United States and Canada, Kevin M. Murphy, W. Craig Riddell, and Paul Romer, in Elhanan Helpman (ed.), General Purpose Technologies and Economic Growth, MIT Press, 1998

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