Friday, October 05, 2007

young people and wages... or is it wages and young people?

As a few know, but many more suspect, the oped that appeared last week in the Post-Gazette Paid Less in Pittsburgh, was enough to drive me into deep apoplexy. Why? The thesis was simple enough, young people are paid less in Pittsburgh and that is why they are leaving. It’s a bit of Pittsburgh orthodoxy that is taken as gospel truth by most everyone here, yet it is economic gibberish in many ways. The oped ends with a simple question: “So why should we be paid less?”. I really don’t know where the ‘should’ comes from in this context, if you think wages are being set by the market I am a little unclear where the value judgment is coming from… but it is worth asking the question why market wages are lower here in many occupations.

As simple as I can make it, the oped is clearly the perspective of a worker, i.e. labor demand, but says nothing about the labor market. There is this little concept of labor supply that factors into why wages are low and it may be counterintuitive as to why some young people feel they can’t earn as much as they want to in the local labor market.

I also hate to point out that the analysis in the oped is all based on some income statistics pulled from the census bureau. “Income” includes a lot more than just wage and salary earnings such as transfer and retirement benefits, along with other income sources. Due to our odd age demographic, all those income stats are heavily impacted by our elderly population here and say little about what local jobs pay. But no matter in that I don’t dispute the premise that we are paid less here, but it just does not work out to the disparities the oped claims to have discovered. A better source for looking up the “average wage per job” (something very different from median income) across regions is from the BEA. See this link for those who want to look this up themselves: http://www.bea.gov/regional/reis/default.cfm?catable=CA34&section=2


From which I get these numbers for the regions cited:

Pittsburgh: $38,480
Cleveland: $39,688
Philly: $45,965
Cinci: $39,866
Charlotte:$43,468
Raleigh: $39,174 (note the oped actually says we get paid 34% less than in Raleigh??... it just isn't even close to being true.)

Before I begin, lets say I just skip the fact that the implied premise, that young people are leaving disproportionately, is baseless. I’ve beaten that to death as much as I can, let’s just look at the economic logic here. And lets stipulate entirely that there are people, many people I bet, who would stay in Pittsburgh or move to Pittsburgh if they could earn the same wage they can get on the open market in many other regions. What does that mean and what does it really say about the region? Something good or something bad? Given equal wages, everyone wants to live in Pittsburgh? Wow!

It is also worth mentioning, but I wont get into, that the oped does the common benchmarking of our educational attainment to other regions looking at the easily extracted statistic for the population age 25 and over. Again, that confuses the issue for us because we have older folks who generally have less education. But I have beaten that to death as well.

Lets talk about young, highly educated, recent college graduates who make up one of the most mobile parts of the labor force. What is Pittsburgh all about these days? We ‘produce’ an inordinate number of college graduates across a wide range of fields. I am pretty sure that if computed a ratio of new college graduates annually to the size of the local workforce would peg Pittsburgh at or near the top among large metro regions. Thus what you get is a nearly perpetual supply of workers being fed to local employers. Think that is affecting local wages? You bet.

Thus the problem is not that so many are leaving, wages are low because so many are staying. Seriously, by any measure, the educational attainment of our young workers ranks high, so somebody is staying…. a lot are staying. If somehow we really retained that many more graduates each year, we would soon become a top-heavy and dysfunctional labor force. The place can’t work with only PhD’s running around serving coffee at Starbucks, let alone working on the shop floor. With an overabundance of college graduates local employers looking for those workers are generally able to meet their needs by paying lower wages, that’s how markets work.

Now I know people bring up the issue of job growth in the region and clearly more job growth would both increase labor demand and also potentially push up wages but that is true everywhere and always. Even if we had several percentage points more growth each year in the workforce (which would be enough to shift us from a job laggard to a job leader among regions) we would still be producing a lot of college graduates for the size of the local labor market. That imbalance would still be there and so would be that wage premia (or negative premia) that we all abhor.

The low wage conundrum has a corollary: why Pittsburgh lags at attracting people to Pittsburgh. It’s just another effect of our high educational production. I have long suspected that local employers have gotten out of the habit, actually I doubt they were ever in the habit, of recruiting nationally for positions. If local employers can meet their needs with local workers it makes every sense for them to do so. It costs more to find and screen candidates from elsewhere… and there is a big hidden cost. Workers who move to Pittsburgh for a job are much more likely to move elsewhere if a better offer comes up. So until local employers are forced to find workers elsewhere, something that may not happen anytime soon as long as our local colleges and universities continue to succeed at their intended missions.

So what does it all mean? Are we are all destined to earn a fraction of what our friends in SF are making? Job and wage growth will come or it will not based on a lot of factors, but confusing the role of local wages is just bad economics. There is no button to push that will raise wages and keep people here. It all comes across as just another perspective that there is something wrong in the water inhibiting our future growth.

5 Comments:

Blogger Schultz said...

The best companies to work for typically pay the best wages. The slower moving companies that are behind the curve tend to pay less. The former are not in Pittsburgh, so people leave for those jobs. The latter are here, and those companies do not attract young people from other regions. I've seen this and I have lived this, as have my friends who are now living in Minneapolis, Columbus, Philadelphia, Charlotte, etc, etc. This is the way it is.

Thursday, October 04, 2007 11:52:00 PM  
Anonymous AZMike said...

Chris:

So you're saying that Pittsburgh's highly educated workforce is actually a drawback for workers in the region? That would make an interesting op-ed if you want to write it. Does the solution to that problem involve getting CMU and Pitt to product fewer graduates each yer? How does it affect the job market for workers without a college degree?
Also, do you have any thoughts about CNN's cost-of-living calculator thing? It's hard to imagine that all of those cities actually have a lower cost of living.

Friday, October 05, 2007 7:55:00 PM  
Blogger C. Briem said...

Ha… and think how much Penn State would have to cut back to prevent all those young people from leaving State College. They really have a problem. As for an oped, even if I tried to write that argument facetiously, someone would take me seriously. But of course not. That question implies I agree with the premise that we have problem here to begin with. Since I don’t, I am not about to go argue for universities to cut back their class sizes. This is America right? and many have a choice of which labor markets to live in and the wage levels that exist in. Lest that sentence get me in trouble, most equity and disparity issues are in populations that do not have that type of freedom. But I suspect that is not the issue with the oped-writer per se. But for those who choose to stay in Pittsburgh, and live with its wage scale, they must be compensated for it in some other way. Beyond the numbers, my personal experiences are such that the unhappiest people in Pittsburgh are people who have some binding constraint that has kept them here in town which keeps them from some other job market that would pay them better. Constraints such as family commitments are often the root cause. So I feel for those people, but they are individual circumstances that don’t say much about the overall regional economy.

The non-college graduate labor market question is a big and important question.. just too much to begin to address here. I would point out that a lot of the movement toward encouraging people to seek alternative post-secondary training: vocational training, etc, things you may get in community college or related, has come out of the Pittsburgh region as much as anywhere.

As for the CNN cost of living calculator. It’s actually from the standard ACCRA regional cost of living index which I use when needed. So it seems fine to me. You can look at the online link yourself:
http://cgi.money.cnn.com/tools/costofliving/costofliving.html

The problem is I just can’t get the same results as cited in the oped. For a $50,000 salary, the site says the comparable salaries you need in the other cities are:

Charlotte: $47,693.67
Raleigh: 50,156.18
Cleveland: $51,915.87
Cincinatti: 48,688.05
Philadelphia: $65,233.24

That means that all but Charlotte and Cinci have higher costs of living than here although Raleigh isn’t far off, Cleveland is within a couple % points. The oped did point out Philadelphia has a higher cost of living. It does not point out how big a gap: over 30%. Once you look at the right wage numbers, the cost of living disparities are not out of line. When you are benchmarking with just 5 regions, I’m not sure how far you want to go with conclusions. As a general rule I would bet that these metrics are lagged to current costs in some regions and the most expensive places are even higher than they appear in the data at hand. Just for fun I plugged in SF to see how much you need to earn to be comparable to $50K here. Almost a whopping 80% more, over $89K. For Manhattan the number is $107K.. and if you look just at Manhattan housing costs they come in at over 300% higher and I have to bet that is understating it a fair bit. And a super important caveat, all these cost of living issue impact different households differently. Young and single recent graduates don’t react to housing costs the way 30 something with a child does. That’s the rub.

It does seem like Charlotte is a place to be with both higher wages and lower costs of living. But Charlotte compares favorably to a lot of other regions in that sense. Is that our big crime here, we are not doing as well as Charlotte?

Friday, October 05, 2007 11:00:00 PM  
Anonymous John said...

Chris-

If your original post is right, then something is seriously wrong with business development efforts in this region. How can we have a highly educated workforce who are willing to take lower than market compensation to stay in the region and still not be able to attract more companies? Even with the perception of "high taxes" or "big unions", that just doesn't make sense--or at least should offset those perceptions somewhat, no?

And it is just the opposite of what I hear from the tech industry. They say that they have tons of trouble attracting workers because the critical mass of workers--say for when your start-up fails--just doesn't exist here.

As for Charlotte, well, I think that the PG piece on Charlotte a few weeks (months?) ago showed that Pittsburgh had a shot at begin more like Charlotte if the leadership at Mellon and PNC had a different vision in the 90s. Like Pittsburgh, Charlotte was a regional banking center in 1985. The big banks there, in contrast to Pittsburgh, set upon a vision of becoming national. From a shareholder point of view, I don't know who won. Perhaps the Mellon and PNC strategies returned more shareholder value. But Charlotte sure benefitted in the number of banking jobs--and the ancillary legal, financial, and business support jobs that came with such success. For comparison, look at the downtown employment growth at PNC now that it has embarked on a growth binge and we can all daydream about what could have been.

Plus, I wonder if the average wage numbers in Charlotte aren't skewed by the high number of banking jobs. I hear from people in many professions--especially teachers--that compensation is lower in the Carolinas.

Sunday, October 07, 2007 10:25:00 AM  
Blogger C. Briem said...

In reverse order. if the comparison is to Charlotte, a lot of regions in the US are falling way short. Charlotte has number of advantages, some of which we may be able to address but others (like weather) we just can't.

Growth and change depend on lots of factors and labor force is just one of them. There is a larger debate over whether people follow jobs or jobs follow people, something it would take too long to get into here. Overall, regional job stats are a lot more complicated to judge and an awful lot of why our growth stats appear anemic are low growth in the most population servicing industries that are being hit by some factors that cant be changed.

I will tell you that when people were complaining the most about lack of workers in the tech industry I would talk to friends who were senior recruiters at places like Fore Systems and get some very different perspectives, they felt Pittsburgh was an easier sell for recruiting people than lots of other regins. In high growth occupations, job shortages are real everywhere. The uber example of Lycos leaving because of lack of workers happened right around or before when Fore and Freemarkets were able to expand very quickly here and if you go look at Lycos future employment growth in the Boston area it was not what you might think it was..

the question of retaining tech workers in particular gets into some other issues on what firms are capable of bringing in entry level trainees versus mid level experienced workers. Most startups dont have the luxury of implementing training pipelines and what the region does lack are the large tech firms or institutions that typically can bring in entry level workers and grow them.. that was the advantage Westinghouse RD center had for the region.

Sunday, October 07, 2007 3:04:00 PM  

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