A tale of two tales

... mathematical models must begin with precise assumptions about economic activity. In great measure, the conclusions and insights offered by the model are restricted or even determined by the initial assumptions.

- Gary R. Evans

At HBR: The Great Recession Drastically Changed the Skills Employers Want. Shown here on a light-blue background:

The employment shift from occupations that require mid-level skills toward those at the high and low ends is one of the most important trends in the U.S. labor market over the past 30 years.

"The past 30 years". That brings us back to 1987. Or, say, to the 1980s.

Since the 1980s, some people say, our anti-inflation policy has been to suppress wages. If that is true, then maybe that policy explains the trend the article describes. That, and globalization policy.

Previous research has suggested that a primary driver of this job polarization is something called routine-biased technological change (RBTC), an unfortunate mouthful whereby new technologies substitute for repetitive, middle-skill jobs and complement analytical, high-skill jobs. Think of word processors replacing typists or engineers using AutoCAD software.

Here's a peek at labor income since the Great Depression:

Graph #1

Flat in the 1970s. Trending downward since.

Maybe the Fed is responsible for the decline. Maybe not. Either way, with labor income trending down there is going to be more competition for that particular share of income. But the HBR article manages to tell its story without even noticing the decline of labor income.

Until recently, economists thought of this trend as a gradual phenomenon that didn’t depend much on the ups and downs of the economy.

However, studies dating back to Joseph Schumpeter’s coinage of the term “creative destruction” suggest that adjustments to technological change may be more episodic. In boom times, companies may face adjustment costs that deter them from adapting to technological change. Recessions, in contrast, can produce large enough shocks to overcome these frictions.

A recession is a disturbance in the Force. Recession provides an opportunity for the economy to reorganize itself in response to the pressures created by declining labor income and its consequences.

Whether adjustments to new technology are gradual or sudden is important for policy and for our understanding of economic recoveries.

Note that the article attributes the "employment shift" of the past 30 years to "new technology". Not to the decline of labor income.

The recoveries from the last three U.S. recessions (1991, 2001, 2007–09) have been jobless, meaning that employment was slow to rebound despite recovery in total economic output. If adjustment to new technology is sudden and concentrated in downturns, large numbers of displaced workers may be left with the wrong skills as the economy recovers.

Note that the article attributes the employment shift to new technology, observes that employment shift occurs "in downturns" and recoveries have been "jobless", then makes up a story to explain jobless recoveries, a story based on "new technology". Not on the decline of labor income.

There is more to the article, and they make a good case. And I would not deny that their story makes sense. But I wonder how things might have gone differently if labor income was not in decline for the last thirty-odd years, or if it had continued to increase. And I wonder how their story might have changed, if they had considered declining labor income in the article.