High Wages for Low Skills?

Seth Godin has a very good blog post on economics, which makes the point:

“It was the inefficiency caused by geography that permitted local workers to earn a better wage . . . .”

There’s much more good stuff than just that line, but I’d like to elaborate on this geography issue just in case it’s not obvious to you how geography used to help low skilled workers get high paying jobs.

Let’s go back in time to the early days of the steel industry. Bessemer’s new steel making process (1858)  lowered the cost of making steel, substantially increasing its market. Steel could be used in place of wrought iron economically. So we want to make a lot of steel, in an era of expensive transportation. We need to bring together iron ore, abundant in Minnesota, with coal, abundant in Pennsylvania and West Virginia. Look at a map, keeping in mind that water transportation is hugely cheaper than overland transportation. Now you pretty much know where the steel industry would be located.

We have not said anything about labor availability. The early steel mills used lots of manual labor. The steel companies did not locate next to cheap labor, however, because labor was a trivial cost compared to transporting the raw materials. So the mills were sited at good transportation centers, then wages increased until enough workers moved into town. The result was high wages for low-skilled labor.

The same story played out in the automobile industry of the mid-west, the sawmills of the Pacific Northwest, and the textile mills on the fall line in New England. In many areas, high wages were paid for low-skilled work. We came to think it was normal.

It didn’t happen everywhere, of course. The south was stuck with low wages. After enough people had moved to the areas of production, competition for the plum jobs was keen. Unions often kept the wages high, after there was no longer a need for high wages to attract workers. Some think of this as a golden age for workers, but it was only golden for those who had the high wage jobs. In many of the most overpaid (relative to skills) jobs, such as longshoremen, jobs were only available to the sons and nephews of older members. The kid from the country, the African-American, the immigrant need not apply.

Geography was the key, back then, to high wages for unskilled jobs. There are still a few examples left, such as Alaskan oil workers.

Generally, high wages are now paid only to high-skilled workers. There is simply no way to bring back the old era. Local economic development committees try “elephant hunting,” to bring in the one big factory that will offer great jobs. Typically, though, such companies bargain for excessive tax breaks, publicly funded infrastructure and specialized training. They don’t pay exceptionally high wages. And they are ready to move to the next town that gives them a better offer.

The bottom line: in most cases, it takes high skills to earn high wages.