The Forgot-Teen Generation

There is widespread evidence that poor children in the US do not have a fair start in life. By age 2, there is a 6 month gap between children of low and high socioeconomic status in processing skills that are important for language development. By age 4, children in very poor families will have heard 30 million fewer words than their better-off peers. These differences persist. Variations in high school test scores between low and high-income children can be predicted from elementary school performance. As a result, many campaigns have focused on the importance of early years intervention in improving a child's life chances.

In addition, academic research into the high returns to investing in young children has influenced a policy shift.  James Heckman, a Nobel-prize winning economist, has argued that if the foundations of cognitive and non-cognitive development are not set early on, there will be nothing to build upon in teenage years.  He points to the seminal Perry pre-school project, an early intervention program designed to improve the outcomes of disadvantaged African-American youth in the 1960s.  The return to intervening at such a young age is estimated to be between 7 and 10 per cent, calculated as the sum of private gains (e.g. staying on in education and earning a higher wage) and social gains (e.g. costs saved from reduced crime rates).  President Obama has therefore emphasised the importance of early intervention in reducing inequality.

But there is a danger that such rhetoric leads to older children being forgotten. This blog does not dispute the evidence that early years intervention is important. But the US is not at the point at which all children start school equal. Furthermore, some schools are failing to help them catch up. An emphasis on mainstream standardised testing is detrimental to those who are not used to such discipline. Disadvantaged students are more likely to be disengaged, and have less drive, motivation and self-belief, leading to higher drop-out rates.
   
In addition, things are getting worse for older children, who neither appear as cute as babies nor as vulnerable as the elderly in advocacy campaigns. As mentioned in last week's blog, if you are a high-school drop out, your chance of being employed is at its lowest level since records began (in 1970). The likelihood that you are out of the workforce altogether is at its highest level for over a decade. Worse, the US schooling system is not even equipping its average student with the skills necessary to succeed in today's information economy. In a wider test of attributes of 15 year olds - the Programme for International Student Assessment - the US ranked 27th out of 34 countries. US students are, it would appear, unable to "think outside the box".
    
What we need to do is borrow the early years philosophy - which focuses on cognitive development - and apply it to young people, disadvantaged or otherwise.  The standardised testing approach leaves little room for the development of critical thinking and challenge. Finland, by contrast has all but eradicated standardised tests, opting for a more equitable and relaxed school experience. If we made school more enjoyable and inclusive then, in theory, students from every background could flourish, not just those who benefited from early years intervention. By doing so, we can increase the likelihood that all students finish high school more equally than they started.

The $haring eCONomy

The sharing economy can be considered as both a response, and a possible solution, to rising inequality. The distribution of ownership of assets may be unequal. But the distribution of access can be made more equal. It also allows for new employment opportunities in the form of the micro-entrepreneur. Your Uber driver. Your Airbnb host. Your TaskRabbit handyman. All products of a new economic paradigm.

There is emerging evidence of its positive economic impact. In a global study, Airbnb found that one-half of hosts were of low to moderate income and that hosting enabled them to earn sufficient money to stay in their own homes. In San Francisco, Airbnb guests stayed for approximately 2 days more than hotel guests and spent 25 per cent more on their trip, much of it in areas not typically frequented by tourists. Uber drivers talk about putting themselves through higher education or saving to start a business of their own. In the future, a city full of such drivers might eliminate the need for cars entirely. Abandoned car lots could be turned into much-needed affordable housing or open space in over-populated cities.

In addition, and perhaps more importantly, the sharing economy builds social capital. In an era of growing individualism, these companies are bringing people closer together again, driven by values such as collaboration, trust, empowerment and community.* Companies like Airbnb and Uber have created a platform based on these values. Feedback on performance creates transparency and accountability.** Ties are formed between previously unknown individuals. Consumers are confident enough to enter into financial transactions with people that they may never even meet.

In doing so, traditional marketplaces and ways of thinking are disrupted. This is music to the ears of the "Millennial" generation - those that think power is concentrated in the hands of the few, that existing companies cannot be trusted, who look for job opportunities that may pay less but are rooted in social justice. 

But let's be clear that what we are seeing is the growth of a new type of "big business", based on renting, not sharing. In a recent round of fundraising, Uber secured $1.2 billion of new capital, valuing it at around $17 billion. Power is shifting to those that can harness new marketplaces. This includes existing players. In 2013, Avis Budget, one of the largest car rental firms, bought Zipcar, a car-sharing company. In addition, one-half of Airbnb hosts are not of low to moderate income. These are not the people who have been negatively affected by rising inequality.

Meanwhile, the emergence of the micro-entrepreneur reflects the concurrent increase in young people ill-equipped to join the mainstream workforce. If you are a high-school drop out, your chance of being employed is at its lowest level since records began (in 1970). The likelihood that you are out of the workforce altogether is at its highest level for over a decade.  So the migration to sharing-economy employment makes sense. But employees of such firms do not have access to the standard benefit structure offered by mainstream employers, such as healthcare, pensions and human capital investment. This is designed to improve the well-being and productivity of the workforce, producing private and social gains. In that respect at least, sharing is not caring.

* For a thoughtful discussion of the origins of sharing norms, see Deaton (2013) on hunter-gatherer societies. At that time, individuals had no way of storing leftovers from a hunt. Instead, they shared their spoils with their neighbours, in the hope that next month, their neighbours would reciprocate. "Our current deep-seated concerns with fairness, as well as our outrage when our norms of fairness are violated, are quite possibly rooted in the absence of storage options for prehistoric hunters" (pp76).

** Accountability is a big thing. Uber provides credits almost instantly if something goes wrong with your journey. Airbnb promises to cover any damage caused by unruly guests and guarantees alternative accommodation if you turn up to a castle and it turns out to be a caravan.

Machine Age II: Dawn of the unemployed

US retailers donate excess clothing (made cheaply in Asia and shipped back) to homeless charities to help down-and-out Americans. There is no denying the generosity of such an act. But what is this chain of events telling us? That emerging economies have "taken our jobs"? Or that the US has failed to adapt to a changing world economy and create new job opportunities?

Over the past 20 years, some middle-skilled jobs did migrate to countries that were able to provide labour at a lower cost than at home. At the last count, China accounted for 40 per cent of all clothing imports into the US. Such a shift was unsurprising. Making clothes required some skill but relied on repetition across dozens of lines. A Chinese middle-skilled labourer was in all ways identical to a US labourer except one - cost. Wages paid to Chinese workers were lower than their US counterparts.* In order to increase profits, firms chose to locate production in an area with the cheapest operating costs. Thanks to globalisation, which reduced geographical barriers between countries, it no longer mattered where in the world that was.

But other middle-skilled jobs have disappeared because of technological progress - particularly in IT - that automates tasks and renders the job obsolete. Sales assistants at grocery stores have been replaced by self-checkout kiosks. Secretarial pools have been replaced by computers. The speed of such change feels rapid. The US Bureau of Labor Statistics predicts that it will continue to be so - some of the fastest falls in occupations between now and 2020 will be in middle-skilled occupations.

Source: Tuzemen and Willis (2013)

The gap left behind in the US labour market has not been filled by equivalent jobs. Instead, there has been a rise in the share of high-skilled jobs - professional and managerial roles - that computers cannot yet perform because of the cognitive and non-cognitive skills they require. This is known as skills-bias technical change** because securing these jobs requires advanced qualifications and so favours those who have - or can obtain - such skills. Between 1983 and 2012, the share of high-skilled jobs in the US labour market increased from 26 per cent to 37 per cent (Figure 1). These skills earn a premium in the form of higher wages.

There has also been an increase in the share of low-skilled jobs (Figure 1). These tasks are manual and service orientated (think cleaners, waiters, security staff) and today cannot be automated or relocated offshore. But because these jobs require fewer skills, they are open to more people, including those who would have previously taken on middle-skilled jobs. Competition has increased, reducing the wage premium (see last week's blog for a discussion of trends in low wages). Inevitably, this will lead to some people being out of work. Worse, it might lead to people dropping out of the workforce altogether. Indeed, the participation rate - the fraction of people aged 16 and over actively looking for work - fell to 63 per cent in May from a high of 66 per cent prior to the last recession.  

Looking ahead, some think that the speed with which the US economy could be upended by technological change might be even faster than in previous years. The dawning of the so-called "second machine age" would eliminate the need for many more occupations, perhaps even some low-skilled ones. The idea that everyday tasks will be completed by a robot may be a bit far-fetched today. But 20 years ago, it would have seemed strange to think that we wouldn't talk to a cashier while they scanned our groceries or dictated a letter to a secretary to print, sign and send by post.

To keep pace with such change, and to prepare our future workforce, we must adapt our learning environment today. This includes investing in K-12 and higher education. But it also means embracing new forms of online learning, like mass open online courses, that open up high-quality education to the whole population. This will enable the future generation to have the right skills to participate in the "second machine age". Not doing so risks leaving an increasing share of the population behind. Who knows where their clothes will be made.

* Though given a rising middle class in China, labour costs are creeping up, which is leading to shifts in production to other parts of Asia.
** Link to earlier publicly-available version.