“Good Jobs” as a Source of Positive Externality

THE SOURCES OF THE EXTERNALITY

Producing good jobs is a source of positive externality for society. From an economic standpoint, the issues are analogous to those that arise in the cases of environmental externalities or research and development (R&D) external­ities, two domains on which we will draw when we develop our organiza­tional recommendations.

A firm considers labor as a production input, with the market wage as its cost. In the short run, the wage rate determines the firm's desired level of employment. In the medium run, it also determines the kind of technologies the firm invests in and the production technique—the mix between labor and various forms of capital. When wages rise, either because of greater pro­ductivity or enhanced bargaining power of labor, firms try to economize on the use of labor and adopt technologies that replace workers. From society's standpoint, the result is an undesirable trade-off between good jobs and the level of employment. Today's economies tend to manage this trade-off by allowing dualistic labor markets to become entrenched (Temin 2017): islands of productive, high-wage activities exist in a sea of poor jobs. Labor market and social policies generally determine the distance between working condi­tions in the two sectors. But a higher floor on economy-wide wages generally comes at the expense of higher unemployment and lower labor hours.

Some version of this trade-off has existed throughout history. In grow­ing economies, the tension is typically alleviated by an economy-wide rise in productivity, which suppresses the distinction between insider and outsider jobs. For example, the mechanization of agriculture during the nineteenth and early twentieth centuries created a surplus of labor in the countryside. But the workers who flooded into urban centers could be absorbed into man­ufacturing activities (and related services) where productivity and wages were even higher.

We do not view this simply as a problem of inequality and exclusion, but also as a problem of gross economic inefficiency—a case of operating deep inside the production possibility frontier, or in other economic terms, posi­tive and negative externalities.

The central distinction in an externality is between private and social costs. When private costs of production of, say, a polluting firm do not take account of the costs to society of pollution, the result is a negative external­ity. When the social benefits of, say, a location decision exceed the gains to the investing firm, the externality is positive. Communities where middle­class jobs have gone scarce suffer from a variety of social ailments. Bad jobs, by undermining the social structures that underpin economic prosperity, create enormous negative externalities.¹

In his pathbreaking book When Work Disappears, sociologist William Ju­lius Wilson (1996) described at length the social costs of the decline in the number manufacturing and blue-collar jobs, ranging from broken families to drug abuse and crime. While Wilson's focus was on racial minorities living in inner-city ghetto neighborhoods, his argument applies more broadly.

These economic and social impacts of good jobs going scarce are com­pounded by the political consequences. There is by now considerable evi­dence from a number of advanced market economies that links the rise of nativist populist political movements to adverse labor market developments. In the United States, the China trade shock had a significant impact on polit­ical polarization (Autor et al. 2017). Holding constant initial political condi­tions in 2002, districts that experienced sharper increases in import compe­tition were less likely to elect a “moderate” legislator in 2010. New legislators elected in hardest hit areas tend to occupy more extreme positions on the ideological spectrum, especially on the right. Districts initially in Republi­can hands were substantially more likely to elect a GOP conservative. What is perhaps the most intriguing implication of this research is that the labor market disruptions stemming from the China trade shock may have been directly responsible for Donald Trump's electoral victory in 2016. Autor et al. (2017) undertake a counterfactual analysis in which they assume the growth of Chinese import penetration is 50 percent lower than the realized rate over the 2002-2014 period. Their estimates on the electoral consequences indi­cate that a Democrat instead of a Republican presidential candidate would have been elected in 2016 in the swing states of Michigan, Wisconsin, and Pennsylvania.

Another paper on Sweden traces out very similar political consequences, even though the shocks that led to labor market disruption were of a dif­ferent nature (Dal Bd et al., 2018). A series of reforms after 2006 under a conservative-led coalition reduced social insurance and transfer benefits while lowering taxes, increasing the disposable income gap between “in­siders” and “outsiders”—those with steady jobs and those who were either unemployed or relied on temporary jobs. The post-2008 financial crisis and recession helped widen the gap. The main beneficiary appears to have been the right-wing, anti-immigrant Sweden Democrats party. The authors show that the local insider-outsider income gaps and the share of vulnerable in­siders are positively correlated with larger electoral gains by the Sweden Democrats. Exposure to immigrants, on the other hand, is not systematically associated with support for the political right. The fundamental cause of na- tivist politics seems to be decline in secure, good jobs rather than cultural or xenophobic preferences per se.

Similar results have been reported for other European countries. Analyz­ing the political realignment behind Brexit, Colantone and Stanig (2016) at­tribute a key role to the labor market impact of globalization. Using a China trade shock variable, similar to Autor et al., they show regions with larger im­port penetration from China had a higher Leave vote share. They corroborate this finding with individual-level data from the British Election Survey that shows individuals in regions more affected by the import shock were more likely to vote for Leave, conditional on education and other characteristics. A second paper by Colantone and Stanig (2017) undertakes a parallel analysis for 15 European countries over the 1988-2007 period, finding that the China trade shock played a statistically (and quantitatively) significant role across regions and at the individual level.

Perhaps the most concerning aspect of the political consequences of ad­verse labor market shocks is that such shocks weaken support for democracy and foster authoritarian attitudes. The association between economic cri­sis and the rise of fascism in interwar Europe is well known (Frieden 2006). More broadly, economic stagnation or decline among the middle classes un­dermines the set of moral values and beliefs that sustain liberal democracy (Friedman 2005). There is evidence from our current moment in history that some of the same tendencies are at play. In the United States, individuals lo­cated in local labor markets that were more substantially affected by imports from China appear to have developed more authoritarian values (Ballard- Rosa, Jensen, and Scheve 2018). Similarly, individuals living in European re­gions that received more negative globalization shocks were systematically less supportive of democracy and liberal values and more in favor of authori­tarian leaders (Colantone and Stanig 2018).

In short, there are significant economic, social, and political costs of fail­ure to generate good jobs. Bad jobs lead to lagging communities with poor social outcomes (health, education, crime) and social and political strife (populist backlash, democratic malfunction). A private employer fails to take these costs into account, unless prompted to do by the state. The empirical literature suggests that these negative externalities are substantial—perhaps so great that they threaten the economic order underpinning our form of government.

Our focus on the social externality of good jobs is a key difference from approaches that revolve around firm-level practices. For example, in her well- known book The GoodJobs Strategy, Zeynep Ton advocates a range of employ­ment policies such as higher wages and benefits that she argues could help employers as well as employees. The argument, nicely encapsulated in her subtitle, is that smart companies can boost profits by investing in their em­ployees. We do not deny that such opportunities exist, and that firms may do well by doing good for their workers. But as Osterman (2018) emphasizes in a review, the evidence that profit-maximizing firms can benefit from “high road” employment practices is limited and far from overwhelming. The vast majority of firms may not be inclined to offer or expand good jobs unless the strategy is part of a concerted collaboration with public agencies in which they are offered something in return. That something could be either car­rots in the form of tailored public services or the withholding of a stick in the form of tax easements.² Put starkly, creating good jobs under current cir­cumstances makes good sense for society as a whole, but not for many firms. Given the enormous costs of badjobs, closing this gap seems almost self- evidently an urgent political task.

THE INADEQUACY OF STANDARD REMEDIES

Having established that good jobs are a source of positive externalities, we now explore why the standard remedies are inadequate. The conventional in­strument for internalizing an externality is a Pigovian subsidy, which would be a generalized employment subsidy in this case. But successful adminis­tration of Pigovian subsidies requires sufficient information about the size of the externality and (what often amounts to the same thing) a relatively static environment. In a dynamic environment with substantial uncertainty, alternative regulatory arrangements are often preferable.

In a classic article, Weitzman (1974) showed that quantity targets may dominate price instruments (such as a subsidy) under such conditions. A price instrument (subsidy) minimizes the costs of achieving a certain target, at the risk of missing the target (because of uncertainty about supply and demand responses, say). Quantitative targets, on the other hand, achieve the requisite social outcome but potentially at greater economic cost than is nec­essary. When the risks of just missing the socially optimal target—making water drinkable, say—outweigh the risks of inadvertently imposing too high a cleanup cost on producers, quantity targets are preferable to Pigovian price instruments. The analogous argument in the present context is that the risk of failing to generate a sufficient number of good jobs in a particular commu­nity may dwarf the risk of imposing too high a burden on individual firms.

Uncertainty also increases the dimensionality of the policy space. In the standard conception of externalities, there is a single quantity, with an as­sociated market price, that is responsible for the generation of the external­ity. The appropriate intervention consists of directly targeting that price (or quantity) and doing no more than that. But when there is uncertainty about behavior, technology, and the effectiveness of different policies, opti­mal policies—in the second-best sense of the term—will range over multiple margins of intervention and several different types of policy instruments. Learning about what works and what does not becomes an integral part of the policy process. Establishing mechanisms of feedback from firms to public authorities is critical to the regulatory apparatus. The relevant policy space is of much higher dimensionality.

Finally, an additional problem with standard regulatory remedies in the present setting is that they postulate clear goals (“objective functions,” in economics jargon). As uncertainty increases, it becomes difficult to specify in advance not only the costs and benefits of regulation, but also its precise objectives. The government and its agencies will often have to go further and “negotiate” improvement targets with individual firms or clusters of firms. What is a good job, how many can be reasonably created, how do technologi­cal and other firm-level choices influence job creation, what are the comple­mentary policy levers that are available, how can that set of instruments be expanded—these are necessarily local, contextual questions. They can be an­swered, and periodically revised, only through a customized, iterative process of strategic interaction between public agencies and private firms. This pro­cess is alien to the familiar, principal-agent framework of rulemaking, which assumes that goals and social benefits must be known in advance if public action is to be effective and accountable. But it is the hallmark of the new type of regulation to which we turn next.