The Decline and Fall of the Low-Skill Labor Market

I've finally gotten around to drawing some diagrams that help explain why the bottom half of the income distribution in the US is (quite rightly) so fearful, angry, and... well, Trumpy.

For convenience, I'm going to divide the job market into low-skill (you can get the job and work immediately if you have a couple of years of high school), medium skill (you don't need book smarts, but you do need to be trained or at least practice your trade to get good at it), and professional (you need extensive training and theory before even being hired, and then you need substantial experience on the job to get good at it).

Here's a chart of the three labor markets, ca. 1980, and how they got their labor, and how that labor eventually flowed up and out of them:

In 1980, all three of these segments functioned well, because there were numerous pathways between the low- and medium skill markets.  High school kids or low-skill immigrants would start with a job that would give them the work habits they needed either to get promoted into a medium-skill position or to find a medium-skill job based on their resume.  Because the low-skill market was a stepping stone, it had high turnover, supply matched demand pretty well, and wages were stable.

Only people with a reasonable chance of completing higher education went to college.  The best of them got professional jobs.  Those that finished or almost finished could expect that their major mattered a lot less than the credential, and could expect to be ushered into at least a decent medium-skill job.

By the oh-oh's (I'm still flogging that one over the "aughts"--it seems to capture the basic mood considerably better), some bad things were starting to happen to the low-skill labor market, and they're really kicking in right now:

The root of all of these problems is that automation kicked in first in the medium-skill jobs.  All of those knowledge and clerical jobs got their productivity boosted enormously be automation.  They may not have been done completely by a robot, but some hunk of software allowed the job that used to be done by ten people to be done by one or two.  The other eight or nine joined the ranks of what I think of as the "previously skilled":  they're people who have good work habits and demonstrable ability to learn a medium skill job, but there simply aren't enough medium skill jobs to go around.

Some of them got repurposed into organic job growth, or into new niches that opened up as businesses changed.  That's just the old "creative destruction" dynamic and, while it's uncomfortable for the displaced worker, it's not a disaster.
What is a disaster is that when the medium-skill labor market isn't growing very well, there's no need to go fishing for new recruits from the low-skill market; the ones you have will do just fine.  So suddenly, the best that the high school grads, the low-skill immigrants, and the previously skilled can hope for is to hang onto the low skill job that they landed.  Mobility up into medium-skill positions dries up.

The dearth of medium-skill jobs has had another effect:  All of those college kids that graduated with a philosophy degree or a BA in English Literature?  There are people floating around in the medium skill pool who have better qualifications for the remaining jobs than they do.  What growth there is in that market can be filled by explicitly hunting for grads who are trained in the fields that they need.  No need to pay any attention to those "well-rounded" applicants.  So even workers who graduated find themselves playing Chutes 'n' Ladders into the low-skill pool, with no way out.  Maybe we should call these people the "inappropriately skilled".

But it gets worse still.  Not only have we clogged the outlet from the low-skill pool but we've also added in new sources of bodies, in the form of the previously- and inappropriately-skilled.  So we have the supply of low-skill labor exploding and, while demand in the market is growing at a pretty normal rate, it can't possibly keep up with the supply.  That means that that low-skill wages are going down.

Note that the upper end of the job market--the professional jobs and the medium-skill ones that consume experienced workers or appropriately educated grads--are still working just fine.  But the low-skill pool is in terrible distress.  Those jobs don't provide a living wage and they are now truly dead-end jobs.

The only way out is through some sort of retraining, but retraining is expensive.  And how do you support yourself while you're in school?  Even worse, the odds of a retraining program actually helping you aren't great.  If you're coming from the high school track, you may not have the study skills necessary to learn something new.  Humans start to lose their plasticity in their twenties, so suddenly becoming a good student if you weren't one already is not a very good bet.  And even if you are retrained, the medium-skill pool is still in flux; there's no guarantee that the job you're training for won't be automated by the time you're competent to perform it.

If you're in a dead-end job that doesn't pay a living wage, social problems start to set in.  You start losing jobs, because they're all equally dismal and all equally non-remunerative.  You go through periods of unemployment, which makes it even less likely that you'll climb back into the medium-skill stuff.  Eventually, you may drop out of the labor market entirely.

So what happens from here?  I'd like to say that things get better, but I doubt it:

The next big, big thing to hit the beleaguered low-skill market is that, just as automation stunted demand in the medium-skill sector, it will soon do so in the low-skill market.  Add in self-driving trucks, robo-burger-flippers, and the odd construction bot, and suddenly we have the same dynamic of driving people out of the market with no way to get back in.  But now there's no place to go.  The chute drops you into unemployment, with no ladder back out.  Eventually, you become discouraged and drop out of the labor force.

Note also that the job market for new high school graduates becomes wildly untenable.  They may bull their way into the few remaining low-skill jobs, but the "unemployed" bin will always beckon.  Some of them may not even make it into the labor force at all, graduating directly into long-term unemployment.

About the only bright spot in the picture is that the education system will eventually adjust.  It's likely that it will have better success choosing qualified applicants (and the applicants will have better success in choosing a sustainable career), and better pedagogy can make the educational experience more successful.  But none of these trends is likely to halt the relentless attack of the robots.  Unless you possess extraordinary skills, you're in for a very uncertain future--one where downward mobility is unlikely to be just a temporary setback, but instead a sharp ratcheting down of one's standard of living, with little hope of recovering it.

There are four policy implications for this, three medium-sized ones and one huge one:

1. Minimum wage laws are counterproductive, because they encourage automation.  Even local minimum wage laws can be devastating, because it only takes one incentive to invent the robo-burger-flipper once in LA or Seattle to poison the entire labor pool with the innovation.  Forgoing minimum wage increases won't stop the progression of automation, but at least it can avoid accelerating it.
2. I've avoided talking about immigration above, but it's pretty clear that you need to consider low-skill immigration separately from medium- and high-skill immigration.  Yes, everybody's annoyed that evil employers are cheating on H-1B visas, but most of those are rolling into stuff that straddles the line between medium-skill and professional.  Those immigrants may displace domestic labor, but they're unlikely to send the displaced down the chute.  On the other hand, low-skill immigration is yet another inlet into the low-skill labor pool.  It's not even close to being most serious of them, but it sure doesn't help.  I can't really justify an immigration policy that makes things even worse for the most economically vulnerable natives.  At the very least, we ought to take a breather on the low-skill immigration.
3. I also haven't talked about offshoring and outsourcing above.  That's because those are really just variations on the automation theme.  It's true that we're displacing medium-skill labor with cheap overseas labor, but that labor would be useless without numerically controlled drill presses and just-in-time logistics and remote management.  If you were suddenly to repatriate all of those offshore, previously medium-skill jobs, you'd discover that they'd all fallen into the low-skill category--which is why they were able to go offshore in the first place.  Ending offshoring (or free trade, or whatever hideous Trumpian nightmare is being proposed this week) is a lot like goosing the minimum wage:  If anything, it will hasten the end, rather than making things better.
4. And now for the big one:  That circle in the upper right-hand corner of all three charts, the one that says "retired or out of labor force"?  That's just a giant entitlement sink, soaking up every possible federal and state dollar that can be scrounged--usually from things that are essential governmental functions.  We're going to need to figure out how to build a functional welfare state, or we're going to have to learn to live with a lot of our fellow citizens leading third-world existences--complete with third-world violence and the occasional armed insurrection.

That welfare state, or the lack thereof, is the thing that puts us in the direst peril.  We're almost certainly going to have to raise taxes on the functional parts of the economy, at least a little, but even more important is that we're going to have to reform the system so that we acknowledge that a whole bunch of people can't just be coerced into working if only we squeeze them hard enough.

When you actually look at how the money is doled out today, a lot of it goes to things that aren't particularly helpful in keeping one's head above water if one is unemployable.  We're spending a lot of money on Pell grants for inappropriate education (see above).  We're sending social security old-age benefits and Medicare to some people who don't need them--or at least who don't need them as much as somebody with no income or wealth at all.  And, maybe the biggest sink of all, we're spending huge sums on Medicaid, which may provide mediocre health care for poor people, but it can't keep them housed, clothed, and fed.  Somebody needs to take a long, hard look at Maslow's hierarchy and do some very unpleasant things.