Sagging job growth: It's not just a skills gap

Many economists believe the rise in inequality can be explained by factors that have increasingly rewarded college-educated workers over those without a college degree. This "skills premium" has caused the middle class to shrink and polarized the labor market. The solution to these problems is the often-heard call for improved education and retraining programs that will give workers the skills they need to thrive in modern economies.

Employment in manufacturing industries has been hit particularly hard over the last few decades, and economists have pointed to work by David Autor, an economics professor at MIT, and others suggesting that this has resulted more from technological change than from globalization and declining bargaining power of workers (e.g. due to the power of unions).

According to this view, outsourcing is not the main problem. Instead, technological change is the largest driving force behind sagging employment and income trends for workers in the middle and lower half of the income distribution. Often supporting this argument are statistics showing that while manufacturing employment has dropped considerably, the total value of manufacturing production has not. Just as much or more is being produced, but by machines instead of people.

However, new work by Autor and several prominent co-authors calls this into question as the primary explanation for employment trends since 2000. Their more recent work finds that competition from China was a major force behind the slow growth of employment since 2000.

As the authors note in the abstract to their paper, "The U.S. employment 'sag' of the 2000s is widely recognized but poorly understood. ... We find that the increase in U.S. imports from China, which accelerated after 2000, was a major force behind recent reductions in U.S. manufacturing employment and that, through input-output linkages and other general equilibrium effects, it appears to have significantly suppressed overall U.S. job growth."

This finding has important policy ramifications. It implies that education alone is unlikely to solve the problem of declining employment opportunities and rising inequality. Education is part of the solution, but we'll also need to modernize social insurance protections -- a new and improved "New Deal" -- for workers who, through no fault of their own, are harmed by the forces of globalization.