April 16, 2001
A few years ago, economists worried whether less skilled workers could still find jobs that paid well in the new economy. The problem was that wages for less skilled workers (the 70 percent without college degrees) had been largely stagnant over the prior two decades, preventing most workers from sharing in the gains from economic growth. Many economists argued that these workers didn’t have the skills demanded by the new economy, and therefore could not expect to share in the gains from growth.
Some of these concerns have faded recently, as the relatively low unemployment of the last few years led to widespread wage gains. Even the least educated workers saw rising real wages in the period from 1997 to 2000, indicating that the previous wage stagnation may have been due to high unemployment, not lack of new economy skills.
However, the recent downturn in the economy and the stock market should give us a new perspective on this issue. It turns out that there are many extremely well paying jobs out there, we just didn’t realize that they were held by people with low skills.
Let’s start with the CEO’s of major corporations. These folks make plenty of money. For example, take William T. Esrey, the chief operating officer at Sprint. He walked away with $53 million last year. This comes to $13,250 an hour, assuming that Mr. Esrey puts in an 80-hour week. He got this pay even though the stock of his company lost 65 percent of its value, costing its shareholders more than $40 billion.
Steve Jobs at Apple also had a good year, even if his company didn't. He made $90 million ($22,500 an hour), while Apple's stock fell more than 70 percent from its peak last year. James C. Morgan at Applied Materials walked away with $48.2 million in compensation ($12,050 an hour). His company's stock fell by close to 40 percent. Looking at stock performance, these people rank near the bottom of the skills ladder. It would be hard to do worse than this crew, or worse than many other CEOs who were paid millions of dollars last year, while their stocks tanked.
Is it unfair to judge these people by the performance of their stock in a plunging market? The CEO’s all told us that they should be judged by the performance of their stock back when the market was soaring. If it was true then, it must be equally true now.
It’s not just the CEOs who seem to possess few skills, now that the market has plummeted. There were all those stock market analysts who thought the market could only go up. Some of these people got paid huge salaries for providing worthless information. For example, some of the more well known “bulls” among the analysts, such as Abby Joseph Cohen and Henry Blodgett, reportedly earned more than $10 million a year. Surely it doesn’t take much skill to make absurd predictions about stock prices. There are many busboys and custodians who could do at least as well.
In addition to the headliners with their eight figure salaries, there are tens of thousands of stock brokers and analysts, most of whom couldn’t see a stock bubble staring them in the face, who pull down well over $100,000 a year. Certainly the cashiers and waitresses of the world could give no worse advice.
Finally, to get close to home, we have the economists. Economists are supposed to know something about the economy. But how many of them foresaw the stock market crash and the current economic downturn? Answer: almost none. In a report issued on September 10th of 2000, the average forecast of the Blue Chip leading 50 forecasters was that the economy would grow by 3.6 percent in the fourth quarter. The 10 most pessimistic of this group placed 4th quarter growth at 2.7 percent.
The economy actually grew by 1.0 percent in the fourth quarter. We're not talking about long-term predictions here. The 4th quarter began on October 1. Less than a month before that, none of these top 50 forecasters could even imagine a downturn happening. Basically, these economists predict that the future will be like the past. This is generally true, but we shouldn’t have to pay someone a six figure salary to tell us that. In short, there isn’t much evidence of skill in this work either.
In sum, we can find many places in the new economy where people without apparent skills are able to command very large salaries. While the custodians, waitresses, and even truck drivers and manufacturing workers may not be getting pay increases in the new economy, it’s not because they lack skills. They’re just in the wrong jobs.