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The New York Times Magazine had a short article on jobs and wages in manufacturing in the United States. The description of the situation was interesting. Businesses are trying to keep costs down. They are therefore finding it hard to hire workers — one CEO found 10 suitable employees from over 1,000 applications. Potential job candidates, meanwhile, are looking at the options available and choosing other work. Technology is also changing, so employees need to be better skilled:

Running these machines requires a basic understanding of metallurgy, physics, chemistry, pneumatics, electrical wiring and computer code.

Somewhere in the middle was this:

Manufacturers, who face increasing competition from low-wage countries, feel they can’t afford to pay higher wages. Potential workers choose more promising career paths. “It’s individually rational,” says Howard Wial, an economist at the Brookings Institution who specializes in manufacturing employment. “But it’s not socially optimal.”

I’m struggling with this. The businesses and workers are weighing up the options and making the best decisions they can — optimising their private welfare. Wial maintains that this is not socially optimal. What would cause this gap between private and social welfare?

One possibility is that some third party is being hurt. Who could they be? Other employers aren’t being hurt. It’s not like a subsidy story, in which subsidies for manufacturing jobs create costs for others. Other employees aren’t being hurt. There are still job openings and wages aren’t collapsing. A worker can invest in training and ‘will probably have a job for as long as he or she wants one’. Consumers aren’t being hurt. Prices of manufactured goods are falling, which is creating the problems. It doesn’t look like there’s any significant externality.

A second possibility is that poor information and uncertainty are creating extra costs. Poor information could cause businesses to miss out on work or cause candidates to avoid manufacturing jobs. Uncertainty around technological change and international trade could cause the industry to hold back — to limit investment in machinery and skills to limit exposure to risk. These things do create costs. But these costs have associated benefits: more certainty and less stress, and people keeping their options open for future opportunities. In addition, there’s no indication that manufacturing is any different from other industries.

Just because people aren’t satisfied with the situation doesn’t mean it isn’t socially optimal. An employer would love to have a smart, capable person willing to work cheaply. The problem is that smart, capable people tend to have other options. A worker might find a manufacturing job interesting, but as a society we place more value on being manager at a fast-food outlet.

Why have I spent so much time on this? For two reasons:

  • In New Zealand, we must accept that prices — wages and final prices — are telling us something about what’s valuable and what isn’t. Saying that we ‘should have’ a certain number of jobs in manufacturing or that wages ‘should be’ at a certain level requires a solid, sensible explanation.
  • This article quotes an economist from a well-known organisation saying something that sounds sciency and authoritative, but is really just a feeling dressed up in jargon. Maybe it was a throw-away line to him, but the rest of us economists now have to be janitors, cleaning up behind him.