To Market, to Market, with What? Some Observations on Labor Market Rationales for Industrial Policy
Thomas, Celia, Friberg, Emil, Journal of Economic Issues
With the arrival of the Clinton administration in Washington came an increase in the volume of rhetoric calling for government policies aimed at creating "good" jobs, "high-performance" jobs, and more jobs in "high-value," "high-tech," or high-performance" sectors. In accepting his party's nomination, President Clinton reiterated the platform position that "the most important family policy, urban policy, labor policy, minority policy, and foreign policy America can have is an expanding, entrepreneurial economy of high-wage, high-skill jobs" [Clinton 1992, 2171]. This is an admirable policy goal that resonates well with a public concerned with the place of American labor in the new world economic order.
In keeping with this interest, the Departments of Labor and Commerce have been seeking to define what constitutes a "high-performance" job for purposes of policymaking. How the definition is ultimately determined is important since arguments for high-wage, high-skill jobs often turn into arguments that the government should favor certain industries over others. For example, some have argued that manufacturing industries contribute more to employment and wage income than does the service sector and thus should be supported; others contend that high-value agricultural product exports create more jobs and greater income than do bulk commodity exports and should be encouraged-even subsidized; and that high-technology industries are, from the standpoint of wages paid, better than low-technology ones and thus worthy of activist trade and industrial policies. These comparisons are often the justification for new priorities in government programs and spending.
The question of whether the mix of government policies that favors "good" jobs is the same mix of policies that favors a broader national welfare objective - such as increasing national income over some horizon - is explicitly addressed in some, but by no means all, of this discussion. The question is, in fact, a complicated one, and this paper identifies some of the issues that must be addressed before it can be answered. In the remainder of this paper, we first examine three studies that claim to show that government should favor certain industries or sectors over others. For each of these studies, we point out important and in some cases unrealistic underlying assumptions. Second, we discuss the evidence on wage differentials between industries and how that relates to policy priorities. And third, we ask what the conditions should be for concluding that government support for one industry or set of industries is most likely to increase welfare or to raise living standards through economic growth.
The idea that manufacturing industries contribute more to job and income creation than do the service and retail-trade sectors has been advanced by the Economic Policy Institute. In one study, EPI analysts use a labor requirements table derived from input-output statistics for the U.S. economy to estimate the secondary employment associated with each job in different sectors [Baker 1993!. These secondary jobs are in supplier industries and in those sectors where workers spend their income. The study finds that a manufacturing job results in 4.2 indirect jobs, which is more than four times the number of secondary jobs created by a job in retail trade (.94 indirect jobs per retail trade job) and almost three times the secondary job creation of a job in personal and business services (1.5 indirect jobs per service job). The study concludes that a significantly larger increase in service employment is required to offset the total employment effect of a lost manufacturing job. The authors suggest that the secondary employment effect shows that government policies to support a specific industry may be desirable.
However, the data used in this study also reveal that the number of jobs (direct and indirect) created by a fixed dollar amount of fiscal spending vary so as to favor job creation in the service and retail sectors. …