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Jul 26, 2004 11:58 am

Greenspan's Error Regarding the Wages of Unskilled Workers

Economist Dean Baker, in his newsletter (July 26, 2004), commenting on the following article:

Greenspan Says Workers' Lack of Skills Lowers Wages
Nell Henderson
Washington Post, July 22, 2004, Page A1

This article reports on Alan Greenspan's congressional testimony, in which he attributed the recent decline in wages for most workers to lack of skills. According to the article, Mr. Greenspan asserted that wages for less skilled workers have not kept pace with inflation for most of the last fifty years.

Actually, wages of less skilled workers largely kept pace with overall productivity growth (which means that they rose much faster than inflation) for most of the first three decades after World War II, until the oil price shocks of the seventies, which lowered the real wages of most workers. The gap in wages between less-skilled and more skilled workers did not begin to increase until the eighties. In the late nineties, when the unemployment rate fell to the lowest levels since the sixties, wages of less-skilled workers actually rose somewhat more rapidly than the average wage, suggesting that low unemployment is a key factor in sustaining wages for less-skilled workers.

It is also worth noting that the government has pursued a conscious policy of exposing less-skilled workers to direct competition with workers in the developing world through trade, thereby depressing their wages. In contrast, it explicitly protects highly skilled workers like doctors, lawyers, and economists, through licensing and professional restrictions. Any serious discussion of the wage gap should take these policies into account.

The article also notes Mr. Greenspan's stated belief that a higher minimum wage leads to job loss. It is worth noting that there is now a large body of economic research that indicates that moderate increases in the minimum wage lead to little or no job loss. The article did not indicate if Mr. Greenspan cited any research to support his views.

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