The Great Factor-Price Equalization
By Arnold Kling
job creation from start-ups has been falling since the 1980s.
He cites a paper by E.J. Reedy and Robert Litan.
Once again, I want to point out that low job creation and stagnation are not the same thing.
One story we could tell for the past twenty years might be The Great Factor-Price Equalization. In international trade theory, when you open up trade between countries, factor prices tend to converge.
Let us be really crass, and describe as a factor of production the supply of average-IQ males in the U.S. Over the last several decades, we have opened up more opportunities for trade with average-IQ females in the United States and with average-IQ people of both genders in China, India, and many other countries. These opportunities have arisen for both cultural and technological reasons.
Technology has changed so that the muscle power is relatively less important. It has lowered the cost of transportation. It has created new means of delivering services, e.g., over the Internet.
Cultural changes include greater acceptance of women in the market labor force. They include cultural changes in China, India, and in American business so that it has become easier to integrate foreign workers into the production processes of American firms.
The net result of all of this is a tendency toward factor-price equalization among average-IQ workers. This raises the wages of average-IQ women in the U.S. and of average-IQ workers in other countries. However, it puts downward pressure on the wages of average-IQ U.S. males. Although everyone is benefiting from more capital and greater total factor productivity, the net effect on average-IQ U.S. males is negative.
One could argue that the new equilibrium ought to be full employment of average-IQ U.S. males at a much lower wage rate. However, for a variety of reasons, primarily cultural, we do not observe this. There are many institutional mechanisms that resist such an adjustment and instead promote higher unemployment rather than lower wages.
Under the Factor-Price Equalization hypothesis, the reduced rate of business formation and business hiring would be a symptom, not a cause. In fact, under most hypotheses, that would be the case. For reduced rate of business formation and hiring to be a causal factor, I think one would have to ask what has changed in the regulatory environment to make these processes more difficult. I can tell stories about this (cost of employer-provided health insurance, credential restrictions in health care and education), but I could also tell stories that run the other way (low cost of starting a business on the Internet).