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Automation, Employment, and the Importance of Vocational Education

I just returned from a week in Australia and another in Singapore, and found much food for thought in both.

Mining is by far Australia's biggest industry.  But that does not mean that it is Australia's biggest employer.  I learned that once a mine is established, most of the mining is automated.  The mining itself is almost completely automated.  Automated, driverless trucks deliver the ore produced by the mine to automated trains that deliver it to automated machines that take it from the trains and dump it into largely automated ships which deliver it to Australia's dominant customer, China.

It might take 3,000 people to build one of these mines and the associated infrastructure, but only 300 to actually operate it.  So it makes no sense to build big new towns for the workers who build the mines, because they won't be there long.  So the mining companies fly them in at the beginning of the week and fly them home at the end of the week, maybe hundreds of miles in each direction, for as long as it takes to construct the new mine and related infrastructure, at enormous cost.

In Singapore, I ran into a senior official from Germany who happened to know a lot about vocational education and training in China and about how the Germans are doing business in China.  I asked him how companies like Daimler, the makers of Mercedes Benz motorcars, were able to get Chinese workers who were as skilled as the famed German mechanics.  Oh, he said, Daimler's operations are now almost completely automated.  The numbers of highly trained mechanics they need is now so small that they can bring in a small crew of trainers from Germany and train all the workers they need themselves.

Besides, he said, Daimler is not making cars in China for export, but only for the China market.  The price of making such things in China has been steadily rising, relative to the price of making them in Europe, so it no longer makes sense for Daimler to make cars in China for export.

In 1990, my organization, the National Center on Education and the Economy, issued a report, the introduction to which pointed out that industrial workers in South Korea were working for one tenth of what similarly skilled American workers were making, and those in mainland China were making one one-hundredth of what American workers made.  But that is not true anymore.  The average wages of American autoworkers have been falling steadily since then and those of similarly skilled Chinese workers have been rising.  Wage levels for industrial workers in Shanghai are now around one quarter of those in the United States.  And wages are swiftly rising in the interior of China, too.

This is to be expected in a world in which workers on one side of the world are competing directly with workers on the other side of the world, as never before.  In such global markets for labor, one can expect that the prices for labor will slowly come into equilibrium, with prices coming down in the high priced countries and rising in the low price countries, for similarly skilled labor.  Eventually, one could expect that these prices would be about the same from one country to another for the same skills.

For China, that will mean that their decisive price advantage in world markets will wither and die.  The Chinese know that, and know that, increasingly, their growth will have to be internal, the result of their own people getting richer and demanding more goods and services from their own suppliers.

As the difference between the "China price" and the prices charged by other countries for similar goods and services becomes smaller and smaller, the United States will find that it no longer has access to the kinds of very cheap goods that has made Walmart such a success in our country and around the world.  So the prices of many things that Americans have now become accustomed to purchasing very cheaply will rise, in some cases steeply.  That will mean that a dollar earned by low-skill, low-wage workers in the United States will buy even less than it does now.  It is also the case that the return of manufacturing to our shores will continue to pick up, partly because the difference between the cost of their labor and the cost of our labor is narrowing, but also because it is better to have suppliers who are closer than farther away, it is easier to protect intellectual property rights, and, most especially, because labor costs make up less and less of the cost of the product to the customer, because of advancing automation.  So the return of manufacturing will be a blessing, but a blessing for fewer and fewer workers.  

As the United States comes out of the Great Recession, many of the jobs we lost will not come back.  American companies, as I pointed out in an earlier blog, have used their massive cash supplies to purchase the very latest in automated equipment to automate many jobs that people did before the Great Recession, jobs that will never return.  More and more of our economy will look like the Australian mining industry.  The industries will be healthy, but will employ far fewer people than before.  Productivity will be high, but employment will be low.  The owners of those industries will prosper.  But the citizens of this country will suffer.  Income disparities will grow more quickly than at present and the middle of that income distribution will get narrower and narrower as these processes accelerate.

There will be employers in the United States who will tell us that the way to be competitive is to keep the price of labor low, to waive environmental regulations because regulations make American products uncompetitive, to cut back on health care and retirement benefits for the same reason.  They will argue, in effect, that the only route to competitiveness is to pollute our environment, endanger our health and lower the American standard of living.

But there is another possibility.  You can see it in Singapore.  With a combination of determination, persistence and smart policy, the Singaporeans have been investing wisely in their future for half a century.  When other countries in the East saw their future in offering cheap labor to global companies, Singapore was trying to figure out how to raise the cost of their labor--and therefore the standard of living of their people--by providing higher educated and better-trained labor.  They made life difficult for their low-value added producers and made it very attractive for their high value-added producers.  They made very close partners with the world's leading high tech companies, figured out just what kind of skills they needed most and made sure that they could get those skills in Singapore.  They paid very close attention to every segment of their workforce.  They built a very high floor under the entire workforce by providing a world-class academic curriculum to all their students and creating a world-class teaching force to teach that curriculum.  They built a system of polytechnics as good as any in the world to provide very highly skilled senior technical workers for a wide range of industries.  Perhaps most impressive, they created a set of post-secondary vocational schools for the bottom quarter of their students as fine as any I have seen anywhere in the world, with facilities that rival those of many American universities.  They turned vocational education and training from a dumping ground into a sought-after alternative that attracts more and more students every year.  

And little wonder.  Ninety percent of the graduates of their vocational schools have job offers in their chosen fields within six months of graduation.  Singapore has one of the lowest rates of youth unemployment in the industrialized world.  Last week, I heard the head of Rolls-Royce Asia (which makes jet engines, not motor cars) explain that they decided to make Singapore their Asia manufacturing headquarters in no small measure because of the high quality of Singapore's work force.

The distribution of income in the United States is getting to look more like an hour glass every day, hollowing out the middle class and endangering the political stability of both countries as a result.  That is not happening in Singapore, and that is true because Singapore had a strategy for improving the lives of their people, a strategy that married economic policy to education policy in very explicit ways.  Singapore has created both a basic education system and a vocational education and training system that can sustain an economy that is shaped not like an hour glass but rather like a flattened diamond, with a big fat middle.  Singapore's population is about five million, right in the range of many American states.

When I was in Australia, I was discouraged to hear some of my friends dismissing Singapore's achievements on the grounds that Singapore is not a "liberal democracy," just as I have heard some of my friends in this country dismiss Singapore because its government does not tolerate either drug users or those who throw chewing gum on their sidewalks.

This, in my view, is a kind of cultural arrogance we can ill afford.  Singapore is only half a century old.  I have met many officials there with degrees from Harvard, Stanford, MIT, Oxford and Cambridge whose parents were illiterate and poor.  These officials are sophisticated, worldly and very much like us in their ambitions for themselves and their children.  As the conference I was at in Singapore got underway last week, it featured a band of polytechnic students that included a young man with scarlet hair and others who found other ways of declaring their independence from the cultural commitments of their parents.  These young people did not grow up with the sense of existential threat to the very existence of their country that made their parents quite willing to trade restrictions on their political freedoms for the chance to build a decent life for themselves and their children.  There is every reason to believe that these young people will find a way to make the transition to liberal democracy just as their parents found a way to build a brilliantly successful economy.  Our best hope for China is that the country continues to look to Singapore for inspiration.  We, too, could learn a thing or two from Singapore if we want a country with broadly shared prosperity, a strong middle class and the kind of freedoms that only a broad and prosperous middle class can guarantee.
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