Skill alone is not key to good pay packet
Few jobs require as much skill as making musical instruments, but
semi-skilled workers earn more.
Market power of employers and the high cost of errors set guidelines for pay, writes John Legge.
THE conventional economic explanation for the fact that different people earn different wages is a set of theories with no factual foundation, and those who advocate policies based on them are recklessly indifferent to the consequences. The facts behind the wage structure in a modern economy are well known and quite accessible.
James Galbraith performed a detailed statistical analysis of wages in the United States and showed convincingly that wages did not reflect the skills of the job. Few jobs require as much skill and dedication as musical instrument making; and yet semi-skilled workers on motor assembly lines earn far higher wages.
Workers in knowledge-intensive and capital goods industries earn relatively high wages, reflecting both the market power of their employers and the high cost of mistakes on the job.
A musical instrument maker who cuts a hole in the wrong place has ruined a piece of wood; if a worker at Boeing plugged some wires into the wrong hole the error could lead to the loss of a $300 million aircraft and 400 lives. Galbraith called the knowledge-intensive capital goods and service industries the K-sector.
Michael Manove pointed out the link between pay and responsibility; a worker on the minimum wage shouldn't worry much about getting the sack, because the pay will be the same in the next job that he gets; but a machinist fired by Boeing for carelessness or incompetence may find himself collecting supermarket trolleys in a car park for less than a quarter of his previous pay.
Aircraft assembly workers in China and Brazil get far less than aircraft assemblers in Toulouse or Seattle; but it is still several times the minimum wage in their respective countries and so they have a similar incentive to do their job well.
The last crash of a jet passenger aircraft in the US before September 11 involved an aircraft whose pilot was paid half the normal rate and baggage loaded by contract workers on the minimum wage.
Presented with a crate marked in large yellow letters on a red background "Do not air freight", the handlers loaded it anyway.
Galbraith found a large number of jobs, most of them low-knowledge service jobs, in what he called the S-sector. All these jobs paid the minimum wage or a little more. Workers in these jobs carried little responsibility and cost their employers little to recruit and train. Along with waiters, cleaners, and supermarket trolley herders, Galbraith found that textile, clothing and footwear (TCF) workers were in this group.
Galbraith showed that wages in consumer-oriented manufacturing and sophisticated service industries, his C-sector, ranged between those paid in the S-sector and the K-sector. At the bottom of this group were TCF workers while at the top were workers in motor manufacturing.
This finding suggests that Australians should not be complacent about the loss of jobs in industries making high-value products: the displaced workers are unlikely to find service industry jobs paying comparable wages.
American studies found that, while 80 per cent of laid-off manufacturing workers got new jobs fairly quickly, three-quarters of the new jobs paid lower wages with fewer benefits.
The American academics Alan Card and David Kreuger found that rises in the minimum wage had very little impact on unemployment. One of the reasons had been identified by Keynes 50 years before: because the low paid spend all that they earn, the increase in aggregate demand caused by the wage increase generates sufficient extra business to make the wage rise affordable.When the legal minimum wage is raised, no company loses business to its competitors and there is no need to lay anyone off.
In the US, the real value of the minimum wage has not even kept up with inflation over the past 25 years; with the result that the median wage, that earned by the typical worker, is no higher in real terms now than it was in 1980. Average incomes in America have risen in line with productivity growth, but the whole increase has been divided between highly educated professionals and corporate senior executives.
John Legge is a teaching fellow at Ballarat and Swinburne universities.