Three lessons in creating good jobs

Today, let’s unpack the economics of a “good job”. Few people would argue that a good job-one with high pay, reasonable hours, and security-isn’t valuable. But while most agree on what makes a job “good,” the debate heats up around how to ensure more people have them. Are good jobs disappearing due to globalization and greedy corporations, or are they going unfilled because workers aren’t trying hard enough?

Let’s step back and ask: What does economics tell us about where good jobs come from? I’m going to focus on the “high pay” aspect of a good job, but most of the discussion that follows translates into hours and job security as well.

A key principle of labor economics is that a worker’s wage cannot sustainably exceed the value they produce. So if someone generates $50,000 worth of value in a year, that’s the most they can earn without bankrupting the employer.

So lesson #1 is that better jobs can be obtained through increasing worker productivity. Higher worker productivity, in turn, can be supported by governments through training programs and education subsidies such as scholarships, low-interest student loans, and direct funding of universities and colleges.

But a worker’s productivity represents the maximum they can be paid. What a worker will be paid in practice will be determined by bargaining between an employer and a worker. So the concept of “bargaining power” is key here. The more bargaining power a worker has, the closer their wage will be to the maximum. Therefore, another, not mutually exclusive, way to raise earnings is to increase workers’ bargaining power.

What determines bargaining power? First, how replaceable a worker is. The easier it is for a firm to hire an identical worker, the lower the worker’s bargaining power, the lower the wage. So lesson #2 is that making workers less replaceable will boost their earnings. One way to make workers less replaceable is to increase their skills. Lower-skilled workers are fundamentally easier to replace than higher-skilled workers. Good education and training programs can therefore create good jobs for two reasons: first, they raise worker productivity and, second, they raise their bargaining power. Unions also form in order to raise worker bargaining power, but in some cases unions can have downsides that I’ll leave for another time.

The second determinant of bargaining power is the amount of competition between firms. If there’s only one employer in a particular industry in a particular area, that employer will likely be able to hire workers at wages substantially below what they’re worth. The more potential employers there are, the better for workers’ wages.

So lesson #3 is that promoting competition among employers will help workers get paid more as well. This can be done through improved anti-trust regulation and enforcement. Such actions also benefit the economy as a whole by improving efficiency.

Not all “solutions” to low wages are efficient. For example, subsidizing a company’s output might raise the price of what a worker produces, allowing for higher wages. But this requires taxpayer funding and distorts the economy-wages go up, but only artificially. A better approach is to boost real productivity. Another way to misuse these lessons is to try to make the workers less replaceable by creating artificial barriers to firms hiring other workers, including those from other countries.

Trying to protect good jobs by opposing trade or globalization is misguided. Most goods imported into the U.S. are produced abroad either because they’re cheaper or because they offer variety. Importing goods isn’t free-transportation is expensive-so firms only do it when it makes economic sense.

Trade barriers act as hidden taxes on consumers and rarely preserve high-quality jobs. Assembling electronics, sewing fast-fashion garments, or working in outdated manufacturing lines won’t lead to a high-paying or secure career. Instead of shielding low-quality jobs from competition, we should help workers develop the skills to access better ones-and ensure our markets are competitive enough that employers have to pay fairly. Creating good jobs doesn’t require stopping progress-it requires preparing workers for it.

Note: this is a lightly edited transcript of my latest Econ Quick Takes video.

Originally published at https://mytwocentsandcounting.substack.com.