June 28, 2014
Kevin Carey has an interesting piece in the NYT’s Upshot section which notes evidence that U.S. college grads seem to perform markedly worse on standardized exams than their counterparts in other countries. While this discussion is interesting his conclusion is completely wrong.
He concludes by telling readers:
“This reality should worry anyone who believes — as many economists do — that America’s long-term prosperity rests in substantial part on its store of human capital. The relatively high pay of American workers will start to erode as more jobs are exposed to harsh competition in global labor markets. It will be increasingly dangerous to believe that only our K-12 schools have serious problems.”
Actually economists would believe the exact opposite of what he asserts. If college graduates in other countries are better educated than our college graduates, and therefore more productive, then this will make us richer as a country. We will be made richer by the fact that we can get the goods and services they produce at a lower cost than would be the case if their college graduates were less educated than ours. This is good news in standard trade models.
Of course the implication is that college grads in other countries will be wealthier than college grads in the United States, but we are made better off, not worse off, by the fact that other countries have well-educated college grads. An editor at the NYT should have caught such a basic mistake.
Note: I see from comments that many are convinced that higher productivity elsewhere makes us poorer. This should not in general be true. Whatever we purchase from abroad is almost by definition better or cheaper, or we wouldn’t be buying it. That makes us richer. There is the issue of unemployment created by increased imports. In the standard model (which most economists adhere to far more religiously than I do), the rise in imports should lead to downward pressure on the dollar, which will lead us to export more and import less of other goods and services. That will bring us back to full employment.
There is a distributional issue, the people displaced will make less than they had previously while everyone else will in principle earn more. Note that this displacement goes the opposite direction of displacement in prior decades when trade was structured to put our manufacturing workers in direct competition with lower paid workers elsewhere. This tended to put downward pressure on less-educated workers, whereas implicitly we are seeing a story here where our college-educated workers may suffer in international competition.
It is also worth noting that nothing about this story can drive our wages to developing country levels. There are different ways we can tell this story, but perhaps the simplest is to point out that 80 percent of what we consume is produced here. The fact that we can get some items at very low cost due to cheap labor in the developing world is not going to lower productivity for the portion of our economy responsible for this 80 percent of our consumption. Unless you have a story about redistribution from wages to profits that is about 10 times as large as what we have actually seen there is no way that we would see developing country wages.
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