Some Data to Ponder
We can see that public/quasi-public employment rose steadily over the past ten years, and is now up 16%. By comparison, the rest of the private sector is down 8% in jobs over the past 10 years.
He includes education, health care and social assistance in the quasi-public category.
Mandel was a stagnationist before stagnation was cool (Tyler Cowen quite properly credits Mandel). I can think of a number of questions stimulated by his post.
1. How bad has the last decade been?
I agree that, looking at the employment data, the last ten years have been terrible, particularly for the private sector. My one-liner is that so far, the 21st-century U.S. economy seems to be shedding a large portion of its 20th-century work force.
Incidentally, that is why I do not blame monetary policy for being “loose” in 2003-2004. At that time, the labor market still had not recovered from the 2000 recession. Output had recovered, but that was only because of productivity growth. Elsewhere, Mandel argues that the productivity growth was an illusion, due to errors in government statistics. I have not evaluated his argument, but I will say in general that measures of employment are more reliable than measures of output.
2. Why did health care and education add workers while employment went down elsewhere? Note that as a matter of simple arithmetic, labor moves from industries where productivity grows faster than demand to industries where demand grows faster than productivity. So, why did demand grow faster than productivity in health care and education, with productivity growing faster than demand in manufacturing?
The William Baumol answer: the explanation comes from the supply side. You can substitute capital for labor in manufacturing, but it is harder to do that in health care and education. As productivity goes up in manufacturing, wages rise in general, which raises costs in the more labor-intensive industries of health care and education.
The Robert Fogel answer: this is a natural shift in demand, as consumers become relatively satiated with durable goods and get more marginal utility from education and health care
The cranky libertarian answer: government is responsible for both the increase in demand and low productivity growth in health care and education. On the demand side, government spending and credentials policies serve to subsidize education. Meanwhile in health care, government pays for a about half of all medical services, it subsidizes medical innovation, and the tax code subsidizes generous employer-provided health coverage. On the supply side, heavy government involvement in and regulation of education and health care serve to stifle productivity growth.
Offhand, I would say that I lean 60 percent Fogel, 30 percent cranky libertarian, and 10 percent Baumol.