Naked Economics Wheelan, Charles (books to read for 13 year olds TXT) 📖

Why? Human capital offers the most insight into this social phenomenon. The last several decades have been a real-life version of Revenge of the Nerds. Skilled workers in America have always earned higher wages than unskilled workers; that difference has started to grow at a remarkable rate. In short, human capital has become more important, and therefore better rewarded, than ever before. One simple measure of the importance of human capital is the gap between the wages paid to high school graduates and the wages paid to college graduates. College graduates earned an average of 40 percent more than high school graduates at the beginning of the 1980s; now they earn 80 percent more. Individuals with graduate degrees do even better than that. The twenty-first century is an especially good time to be a rocket scientist.

Our economy is evolving in ways that favor skilled workers. For example, the shift toward computers in nearly every industry favors workers who either have computer skills or are smart enough to learn them on the job. Technology makes smart workers more productive while making low-skilled workers redundant. ATMs replaced bank tellers; self-serve pumps replaced gas station attendants; automated assembly lines replaced workers doing mindless, repetitive tasks. Indeed, the assembly line at General Motors encapsulates the major trend in the American economy. Computers and sophisticated robots now assemble the major components of a car—which creates high-paying jobs for people who write software and design robots while reducing the demand for workers with no specialized skills other than a willingness to do an honest day’s work.

Meanwhile, international trade puts low-skilled workers in greater competition with other low-skilled workers around the globe. In the long run, international trade is a powerful force for good; in the short run, it has victims. Trade, like technology, makes high-skilled workers better off because it provides new markets for our high-tech exports. Boeing sells aircraft to India, Microsoft sells software to Europe, McKinsey & Company sells consulting services to Latin America. Again, this is more good news for people who know how to design a fuel-efficient jet engine or explain total quality management in Spanish. On the other hand, it puts our low-tech workers in competition with low-priced laborers in Vietnam. Nike can pay workers $1 a day to make shoes in a Vietnamese sweatshop. You can’t make Boeing airplanes that way. Globalization creates more opportunities for skilled workers (Naked Economics is published in eleven languages!) and more competition for unskilled workers.

There is still disagreement about the degree to which different causes are responsible for this shifting gap in wages. Unions have grown less powerful, giving blue-collar workers less clout at the bargaining table. Meanwhile, high-wage workers are logging more hours on the job than their low-wage counterparts, which exacerbates the total earnings gap.10 More and more industries are linking pay to performance, which increases wage gaps between those who are more and less productive. In any case, the rise in income inequality is real. Should we care? Economists have traditionally argued that we should not, for two basic reasons. First, income inequality sends important signals in the economy. The growing wage gap between high school and college graduates, for example, will motivate many students to get college degrees. Similarly, the spectacular wealth earned by entrepreneurs provides an incentive to take the risks necessary for leaps in innovation, many of which have huge payoffs for society. Economics is about incentives, and the prospect of getting rich is a big incentive.

Second, many economists argue that we should not care about the gap between rich and poor as long as everybody is living better. In other words, we should care about how much pie the poor are getting, not how much pie they are getting relative to Bill Gates. In his 1999 presidential address to the American Economics Association, Robert Fogel, a Nobel Prize–winning economic historian, pointed out that our poorest citizens have amenities unknown even to royalty a hundred years ago. (More than 90 percent of public housing residents have a color television, for example.) Envy may be one of the seven deadly sins, but it is not something to which economists have traditionally paid much attention. My utility should depend on how much I like my car, not on whether or not my neighbor is driving a Jaguar.

Of course, common sense suggests otherwise. H. L. Mencken once noted that a wealthy man is a man who earns $100 a year more than his wife’s sister’s husband. Some economists have belatedly begun to believe that he was on to something.11 David Neumark and Andrew Postlewaite looked at a large sample of American sisters in an effort to understand why some women choose to work outside of the home and others do not. When the researchers controlled for all the usual explanations—unemployment in the local labor market, a woman’s education and work experience, etc.—they found powerful evidence to support H. L. Mencken’s wry observation: A woman in their sample was significantly more likely to seek paid employment if her sister’s husband earned more than her own.

Cornell economist Robert Frank, author of Luxury Fever, has made a persuasive case that relative wealth—the size of my pie compared to my neighbor’s—is an important determinant of our utility. He offered survey respondents a choice between two worlds: (A) You earn $110,000 and everyone else earns $200,000; or (B) you earn $100,000 and everyone else earns $85,000. As he explains, “The income figures represent real purchasing power. Your income in World A would command a house 10 percent larger than the one you could afford in World B, 10 percent more restaurant dinners and so on. By choosing World B, you’d give up a small amount of absolute income in return for a large increase in relative income.” You would be richer in World A; you would be less wealthy in World B but richer than everyone else. Which scenario would make you happier? Mr. Frank found that a majority of