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Vice Chairman


DAVID R. OBEY, Wisconsin

EDWARD M. KENNEDY, Massachusetts
ALBERT GORE, Jr., Tennessee
WILLIAM V. ROTH, Jr., Delaware
ROBERT C. SMITH, New Hampshire

STEPHEN A QUICK, Executive Director
RICHARD F KAUFMAN, General Counsel
EDWARD W. GILLESPIE, Minority Staff Director



edn esday,


eptem ber


Hamilton, Hon. Lee H., Vice Chairman, Joint Economic Commit­
tee: Opening statement ...................................................................
Katz, Lawrence F., Department of Economics, Harvard University
Reich, Robert B., Kennedy School of Government, Harvard Univer­
sity ....................................................................................................
Bennett, James, Department of Economics, George Mason Univer­
sity ....................................................................................................
Bingaman, Hon. Jeff, member, Joint Economic Committee: Open­
ing statement ...................................................................................



Mr. Katz: Prepared statement ...........................................................
Mr. Reich: Prepared statement .........................................................
Mr. Bennett: Prepared statement .....................................................



C ongress of the U nited S tates ,
Joint E conom ic C om m ittee ,

Washington, DC.

The Committee met, pursuant to notice, at 10:00 a.m., in room 2359, Ray­
burn House Office Building, Honorable Lee H. Hamilton (vice chairman of
the Committee) presiding.
Present: Representatives Hamilton and Obey, and Senator Bingaman.
Also present: Charles Stone, Glen Rosselli, Dorothy Robyn, and Doug
Koopman, professional staffmember.
R epresentative H amilton. The meeting of the Joint Economic Committee
will come to order.
For much of this century, the United States economy provided good paying
jobs for less-skilled workers. But in recent years, technological advances, in­
ternational trade, and a host of other factors have seriously hurt America's
blue-collar middle class, and the gap in income between high school and col­
lege graduates has widened dramatically. More recently, even white-collar
workers have experienced layoffs and real wage declines.
The purpose of today’s hearing is to examine what is happening to the dis­
tribution of jobs and earnings in the United States, why it is happening, and
what industry and government can do to help create more high-skill, highwagejobs. In short, what are the ingredients for a high-wage economy?
We are fortunate to have with us today three experts on this topic: Law­
rence Katz is a professor of economics at Harvard University and a research
associate of the National Bureau of Economic Research. He has done exten­
sive research on changes in the structure of wages, labor mobility, and unem­
ployment. Robert Reich is on the faculty of Harvard's John F. Kennedy
School of Government His latest book, The Work o f Nations: Preparing
Ourselvesfor the 21st Century Capitalism, looks at who wins and who loses
in the global economy, and what America must do to avoid increased eco­
nomic polarization. James Bennett is a professor of economics at George
Mason University and an adjunct scholar of the Heritage Foundation. His re­
search has focused on die economics of government and bureaucracy, labor
unions, and health charities.
Gentlemen, we are very pleased to have you with us this morning. We will
get under way. I suppose the way to go is Mr. Katz, start with you, and just
go across this way and hear the testimony from each one of you before we
turn to questions.
Mr. Katz, you may proceed, sir.

(1 )

M r . K a t z . I am grateful for die opportunity to testify about trends in the
distribution of U.S. jobs and earnings.
I have recently completed several studies examining changes in the U.S.
wage structure and income distribution over the last 30 years, and I am cur­
rently directing, along with Richard Freeman at Harvard University, a col­
laborative project between researchers and a large number of OECD
countries comparing changes in die structure of wages and employment
across OECD countries.
Today, I want to focus my remarks on three issues. The first is what has
happened to die U.S. wage and employment structure over the last two dec­
ades; the second is whether the patterns we see in the United States are uni­
versal among advanced industrial countries, or whether there are differences
among countries that depend upon policies and institutions; and, third, what
do we think are the major causes of die changes in the U.S. wage structure.
It is quite clear from anyone who has looked at the data, from a wide vari­
ety of data sources, that over the last decade wage dispersion has increased
dramatically in the United States overall and for both men and women. If one
compares the wages of full-time workers at the 90th percentile versus those of
the 10th percentile, the wage gap has grown by about 20 to 25 percent over
the last decade for both men and women.
This is true if one includes part-time workers; it is true from census data; it
is true if one looks at data taken from employers. There is broad agreement
across the ideological spectrum of researchers, with easily replicative results,
that wage inequality has grown. There are three major components of these
changes in die wage structure:
The first is that wage differentials, by education and across occupational
groups, have expanded sharply over the last decade. In particular, the college
wage premium has increased. For young workers, the earnings of college
graduates have increased about 30 percent relative to the earnings of those
with high school degrees.
Second, for those without college degrees, young workers have been par­
ticularly affected by the changes. The relative earnings of older workers have
expanded relative to those of younger workers. And, third, a major compo­
nent of the changes in the wage structure is rising inequality among those of
the same age and same education. Even among those working in the same in­
dustries and occupations, wage dispersion has grown.
The gap between the wages of two secretaries has increased over time, of­
ten depending on whether they work with computers or have word processing
skills or not. Similarly, if you go industiy-by-industry, occupation by occupa­
tion, one finds wage dispersion growing in every sector of the economy, with
one exception, which is die Federal Government, which we think may have a
wage structure set somewhat differently than in the private sector.
So it is clear that wage inequality has grown, and that it is happening both
between education groups and among those with similar characteristics. Who
you work for and what you do matters much more than it has in the past for
what you are earning. The level of wage inequality today is essentially back


to the level in 1940. The one exception to the growing wage inequality, over
the last decade, is that the gap in earnings between women and men has nar­
rowed substantially.
Within eveiy education and age group, the earnings of women are growing
relative to those of men. Although there exists much disagreement concern­
ing exactly the causes of all these changes, there is no disagreement about
these sets of facts: wage inequality has grown and each of these parts have
played a role in it. In the same period, it is clear that the industrial and occupa­
tional distribution of U.S. employment has shifted sharply, and it has shifted
systematically towards industries and occupations that have traditionally em­
ployed college-educated workers, more-educated workers.
Any way you break down the data, at whatever level of aggregation, you
see the sectors that have employed college graduates are growing relative to
other sectors. Since the price of college graduates has also been going up, a
labor economist would conclude that the demand for college graduates must
have been increasing over this period.
How do these trends in wage and employment patterns in the United States
compare to those in other advanced industrial countries? We have heard a lot
from the press, government officials, and others who claim that rising wage
inequality is a universal trend and is happening the same way in all countries.
It turns out that a careful look at the data, using as comparable data as possi­
ble across countries, suggests the pattern is a bit more complicated than that.
There are some similarities, but it is not that the U.S. experience is the same
as in other advanced industrial countries.
It is true that there was a strong similarity prior to the 1980s. In the 1960s
and the 1970s, occupational and educational wage differentials narrowed in
essentially all advanced industrial countries for which there is good data. In
all countries, with the exception of the United States, overall wage dispersion
was narrowing. This tendency towards reduced educational wage differen­
tials and a more compressed wage structure essentially has stopped in all
OECD countries. That is the grain of truth to there being a similarity.
By the late 1980s, that was no longer happening. But what has happened
across different countries differs substantially. In some countries, such as
Great Britain, the pattern is exactly like the United States, wage inequality is
exploding with increasing wage differentials favoring the more educated and
professional workers, older workers relative to younger workers, and with
inequality rising within groups.
On the other hand, that is the exception rather than the rule. In Canada and
Australia, there are moderate increases in wage inequality. In Sweden, nar­
rowing continues through the early 1980s and then some widening. Similarly,
in Italy and France, one doesn't see much happening until the late 1980s. And
in Germany and the Netherlands, there is no evidence throughout the 1980s
o f any growth in education differentials or rising wage inequality.
Thus, wage structure changes are not the same across countries. It is true a
long-term pattern of narrowing differentials has ended, but not every place
has experienced the same type of increase in wage inequality as the United
States. Similarly, the earnings of less-educated workers, which have declined
in real terms dramatically in the United States, really is a U.S.-only factor.
Even in Britain, where wage inequality increased tremendously, the real


earnings at the bottom end have gone up. So the United States is not follow­
ing a pattern that is exactly the same in every place.
On the other hand, when one looks at the distribution of employment, there
is a commonality to what is going on. Sectors and occupations that employ
more educated workers have been expanding in all OECD countries. All
countries, with the exception of Japan, have had large declines in the impor­
tance of their manufacturing sector for employment.
Everything I have talked about here, I think, should be viewed as without
controversy, asjust taking what is in the data sets that have been put together
by myself and others. My interpretation of what is happening is the similarity
in employment pattern changes, and the differences in wage structure pattern
changes suggest that there is something common among countries in terms of
the economics that is happening.
There are shifts in technology and trade, which I will talk about a little
more specifically in a second, that are going on, that are shifting demand in
favor of more educated problem solvers against those without college degrees
who have worked in more routinized type o f jobs. That is happening among
all advanced industrial countries. But that does not necessarily translate into
large increases in inequality and declining earnings for the majority o f the
labor force.
The experience of other OECD countries suggest that a country's policies,
with respect to education and training and direct wage bargaining, collective
bargaining, institution of minimum wage, matter in how these changes have
affected the wage structure.
What are these universal factors that seem to be going on across countries
in explaining shifts in demand in favor of the more educated? It is clear that
two factors seem to be most important: The first involves increased globali­
zation, reduced transportation costs, improved communications abilities, the
ability to transfer technology abroad so that essentially tradeable goods can be
produced in many more places than in the past for the U.S. and European
markets. And it is clear in the 1980s that the direct effect of trade has been
significant in moving relative demand against less educated workers. This
can account in most direct estimates for about 25 percent of the change in the
relative wages of the more educated versus the less educated.
Immigration has worked somewhat in the same direction in the United
States, but it is a bit misconstrued. Immigration is very important at both the
top and bottom end. There are a lot of Ph.D.s who immigrate, a lot of college
graduates, and a lot of high school dropouts. For the big picture, overall
change in wage equality, immigration was not tremendously important in the
1980s. At the very bottom end, among high school dropouts, it has become
important, and there could be some role to explain maybe 10 or 15 percent of
what is going on, but it certainly is not the major global factor.
The third part is technological change, and it is clear that firms in every
sector of the economy are employing more and more highly educated workers
relative to other groups of workers, despite the fact that the price of more edu­
cated workers has gone up substantially versus other workers. To an econo­
mist, the only way this is possible is that, in some sense, their production
technology has to have changed, and this is why technological change is fo­
cused upon. And it is clear, if one looks across sectors, that the sectors'


implementation of new computer technologies—high R & D —are strongly,
highly correlated with the growth in the relative usage of more educated
workers. Furthermore, there is a large premium in the labor market attached
to computer skills. That seems to account for a substantial fraction of the
growth in education differentials.
So the bottom line is that trade and technology, that we can measure, ex­
plain a substantial part of the change in the wage structure in the United
States through pure market-driven changes in demand. But it turns out that
these same demand shifts do not necessarily have to translate into such big
changes. To the extent that they do depends on how substitutable college
educated workers are with less educated workers.
If college educated workers were not much better than those without col­
lege degrees at dealing with these new skills, these forces would not change
the wage structure very much. All workers potentially could benefit from the
new technology. The comparison across countries suggests that the major
factor in determining how these changes affect the wage structure is essen­
tially the training that goes into the large fractions of populations that are not
college graduates.
Countries have essentially followed three lypes of strategies: The U.S.
strategy has been essentially not to do much of anything explicitly on the
training or education front for those that don’t go on to universities. One
mechanism of responding to these changes is that more and more people go
to universities as the relative earnings of college graduates goes up, and that
has slowed down the growth of inequality in recent years as well as in the re­
cent recession, but, clearly, has not come close to reversing trends.
The other two strategies are directly regulating the wage structure. This is
a strategy used in France and Italy, for example, with very high minimum
wages. It can be successful at preventing the wage structure from expanding,
but that is a veiy costly type of policy done on its own. It tends to be associ­
ated with stagnating employment growth, especially for young workers who
find a difficult time getting hired when wages are not fitting with market
The final approach is to invest heavily in the training and education o f the
entire labor force rather thanjust in the college educated labor force as in the
United States. These have been the strategies, although using quite different
systems, in Germany and Japan, and seem to be associated with superior ex­
port performance, much less of a growth in inequality, and strong real wage
performance, even for those without college degrees.
I think the choices are clear. The experience of the 1980s in the United
States and Britain suggest that doing nothing is likely to have some market re­
sponse in more people getting college degrees, but to be a period of poor eco­
nomic performance for the less educated. Just playing around with the wage
structure by itself is not going to offset tilings. It will become politically un­
popular, eventually.
The key issues are things to improve the skills and the investments in the
75 percent of our population that don't get college degrees.
Thank you.
[The prepared statement of Mr. Katz starts on p. 30 of the Submissions:]

R epresentative H amilton.

Okay, thank you, Mr. Katz.

Mr. Reich, please proceed..

Mr. R eich. Mr. Chairman, my name is Robert Reich. I am on the faculty
of Harvard's John F. Kennedy School of Government. I am going to, with
your permission, mercifully refrain from reading my testimony. If you have
no objections, I will put it in the record, and I will just highlight a couple of
R epresentative H amilton. Very good. Without objection it will be in­
cluded in the record.
M r . R eich. Competitiveness—we all talk about it It is one of those terms
that has gone directly from obscurity to meaninglessness without any inter­
vening periods of coherence. What we are talking about this morning, the
subject of this hearing, really, is at the center, in myjudgment, of the issue of
the Nation's competitiveness. We do have high-wage jobs in this country.
Part of our population is indeed competitive. But much of our population, a
growing segment of our population, is not competitive; does not have highwagejobs.
Competitiveness cannot be generalized. If you look at the United States, if
present trends continue, 20 years from now there is going to be a small pro­
portion of American workers who are highly competitive in international
markets and doing very well. But Germany and Japan, and a few other coun­
tries, will have a larger proportion of their work force in the same category;
highly competitive and high wage.
If present trends continue, we are going to have more of a two-tiered econ­
omy than we do now. We are going to have the people who work in the glass
and steel office towers, who are linked by faxes and modems and satellites to
other commercial and industrial centers around the world who are solving
problems, whether they are called engineers, or they are called researchers, or
they are called marketers, or, even if the world actually needed them, lawyers;
and then you are going to have a stratum of people at the Main Street level in
the personal service economy who are doing restaurants, retail, hospital order­
lies, hotel, and taxi transportation work.
Not that thesejobs are awful, but productivity gains are very slow and they
are going to be fairly close to the minimum wage. The gap is going to grow,
for all the reasons my colleague, Professor Katz, outlined.
In this country, we have an educational and training system that is very ap­
propriate for an old economy, an old economy in which only a few people at
the top had to make all the decisions and then a lot of people at the bottom did
the same thing over arid over and over again. A very pyramid-shaped econ­
omy, and we did it through economies of scale. We are moving to a new
economy in which a lot of people have to have problem-solving abilities. We
don't have that yet.
The two factors my colleague mentioned, globalization and technological
change, in my view, are exactly the two factors that are critical. If you are a
problem solver, if you come out of a four-year college or university, espe­
cially if you have a graduate degree, the market for your services is growing


around the world. As world markets integrate, as technology becomes more
complicated, there is a greater and greater market Supply and demand means
your income will go higher and higher.
But if you don't have skills and are in an internationally traded area, mil­
lions and millions of people are now competing for your job, and most of
them are willing to pay a small fraction for your work; a small fraction for
your wages and benefits. And even if we protected the American market,
which you recommend, even if we tried to do that, technology would still be
taking those jobs away through computers and robots and all kinds of new
manufacturing technologies, and even service technologies.
The college degree in the United States has become the parchment that di­
vides the winners from the losers. It divides the people who are in the glass
and steel economy, the office tower economy, from the people who are in the
Main Street economy, and that gap is growing faster and faster. There is no
reason the college degree has to be that signal.
Now, I can speak with some authority on this because I teach in one socalled prestigious university, and I am a trustee of another so-called prestig­
ious university. And I can tell you that what is learned in college rarely, if
ever, has any direct applicability to futurejobs. Now, ideally, what you learn
in college is going to make you a fuller person, make you appreciate life per­
haps a little more, make you more intellectually aware of certain kinds of en­
vironmental possibilities, but it is not directly going to improve your
performance on thejob.
Rather, what employers see when they look at someone who has achieved
a college degree, it is a signal that that person has a certain degree o f intellec­
tual and psychological discipline, making them capable of continuously learn­
ing on the job, doing the kind of work that is most important in a high-wage
economy, and that is the continuous on-the-job learning. Learning how to
solve problems on thejob.
Employers in this county take that college degree as the proxy for the abil­
ity to do that. If you have a graduate degree, so much the better.
Other nations, particularly Japan and Germany, don't use that. There is a
much smaller proportion of the population in Japan and Germany that actu­
ally goes to college or has a college degree. I don't have the figures in front of
me, but I think 6 percent in Japan and 15 percent in Germany. But they have
created other ways of certifying that people have skills; other ways of giving
people skills.
There is a whole layer of potential technical skills in this country that lie
between the glass and steel tower economy and the Main Street service econ­
omy. A whole layer o f technical skills that people could get if we organized
ourselves properly. They are getting these in other countries and they dont
have to go to college to get them.
Now, what I am saying should not suggest we shouldn't help people go to
college. If they want to, we should help them more than we are, but not eve­
rybody needs to go to college. We have created a monster out there, a kind of
myth that people have to go to college. They don't have to go to college, but
we do have to help people get the technical skills and training they need, and
help employers know that they can count on the fact these people have the
technical skills that they need.


Let me talk about four specific things that the public sector could do, and
four specific things the private sector could do. First of all, public sector.
I am going to repeat what you have heard many times before, I am sure. In
order to prepare oneself for a lifetime of learning, and that is what we need in
a high-wage economy, you have to start right at the beginning. A kid who ar­
rives at school at five years old, who is not prepared to leam, may never be
prepared to leam programs that we know work, like Head Start, Women, In­
fants, and Children, and other programs of early education and child nutrition.
We have to fully fiind, and we may have to go even beyond fully funding, to
help other people have access to those programs—lower middle-class people,
working class people.
Number two, how we finance primary and secondaiy education in this
country. We are using the local tax base. More and more Americans are be­
ing segregated by income. Zip code marketing is all the rage. Why is zip
code marketing the rage? Because now you can get to a particular socioeco­
nomic group through the zip code. What that means is that the local tax base
is becoming more diverse; that is, disparate.
If you live in a poor city, poor town, poor local tax base per capita, people's
per capita revenues per kid, you will have a much, much lower per-pupil ex­
penditure than you do in a wealthy suburb. We are seeing that gap widen in
per-pupil expenditures in primary and secondary schools. I am not suggesting
that it is only money. Believe me, you have to have standards. You have to
make sure schools are performing in a way that they should. But given the
way we finance public education, the gap is growing.
Third, the school-to-work transition. Right now, as I said, it is basically
college. If you don't go to college, there is no school-to-work transition.
Other nations have a lot of different kinds of programs. You have heard, I am
sure, in this Committee many times about apprenticeships, about ways the
private and public sector can work together to ease the transition for the non­
college bound. We have to focus our attention in this country on the noncol­
lege bound and the work-to-school transition.
Manufacturing extension is something that this Committee has talked
about before. Extension of the small business. The key, there again, is giving
people on-the-job training in technical areas that they would possibly not
have otherwise. On-the-job training for people who don't have college educa­
We could spend at least several hearings on each o f these four areas. You
probably have already.
Number one, the private sector claims to be spending $30 billion a year
training workers, and I have investigated that figure. It is even better than
what the private sector is saying; it is about $31, almost $32 billion a year.
But the downside is that approximately two thirds, if not more, of that money
is going to people with college educations. Again, it is not going to the non­
college educated. So it is not going to the people who need it most.
Private sector—you need to be pushing more of that training money. It is
not that you are not doing your job—$32 billion is a pretty good figure—but
more of it needs to be going to the noncollege educated.
Number two, private sector, you have to overcome what economists call
the free-rider problem, and that is that there is a reluctance among many


private-sector employers to train their employees in basic skills—really the
basics. Not reading, writing, arithmetic, but slightly above that. Why? Be­
cause if you train your employee and you train the employee well, what is to
stop the employee from going down die street to the ex-employer and being
even more valuable?
If I, as an employer, knew that eveiy other employer was giving employees
basic skills, I would be much more willing to do it. I would overcome that
paradox. I would overcome that free-rider problem. So maybe the public
sector can help the private sector by requiring a small amount of training to be
going on. I think France is now up to 2 percent.
Number three, private sector, do not shop for tax abatements. Right now,
many American companies, even though they pride themselves on working
with schools, having computers in schools, and doing all o f these school part­
nerships, they don't know that at the same time their chief financial officer is
going around to communities where either they have factories or they have
offices and laboratories, or where they might have them, and saying, give us
tax abatements, because if you don't, we are leaving; or give us tax abate­
ments in order for us to come.
Those tax abatements take money directly out of the school system and the
infrastructure and all the things a local community needs. New York City is
now spending over $700 million a year on tax abatements in order to prevent
companies from moving to New Jersey and Connecticut. New Jersey and
Connecticut are spending nearly $200 million a year to get them to come.
That is all kinds of money to help real human capital.
Number four, the private sector should go to die high schools directly. Tell
the high schools that you going to, among their noncollege bound, hire 5 or
10 or 15 or 20 of their best students; you will work with their principal, guid­
ance counselors, teachers; you will consult them. Tell the noncollege bound
that their performance in high school counts, that even though they are not
going on to college, it really does have some relationship to future earnings
and employment.
Right now, the private sector doesn't do that. As a result, the noncollege
bound in high school has no conception at all that performance is related to
future earnings, and it probably isn't.
These are four steps that the private and public sectors can work on. There
are many more, obviously. We are talking about the tip of the iceberg. But,
again, this large and amorphous term called "competitiveness," I think a lot of
it does come down to this issue of the noncollege educated workers.
Thank you.
[The prepared statement of Mr. Reich starts on p. 38 o f the Submissions:]
R epresentative H amilton. Mr. Reich, thank you.
Mr. Bennett, please proceed.

Mr. B ennett. Mr. Chairman, I appreciate very much the opportunity to be
here this morning.


I would like to address, briefly, a somewhat different question from the
ones discussed by others here. In specific, I would like to talk about what the
Federal Government can do and should do to encourage the creation of highwagejobs.
When we start talking about job creation, we are not really talking about a
new problem, because for a number of years we have had concerns expressed
about the so-called vanishing middle class in America. Deindustrialization,
according to some people, was causing the Nation's manufacturing sector to
disappear along with its high-wagejobs.
Tliis current recession, in which white-collar workers are bearing much of
the brunt of unemployment for the first time in the Nation's history, is some­
what different in that most of this can be traced to the technological changes
caused by the widespread introduction and use of veiy cheap computers.
Now, while this pruning of corporate structures is very healthy in the long
run, it creates real short-term problems for the employees who have lost their
jobs and are displaced, because these dislocations can be painful and difficult.
I would like to emphasize, however well-intended as all public policy is, that
public policy which seeks to ease the transition of the unemployed through
the job creation programs may potentially have some very undesirable conse­
quences. Simply, good intentions do not necessarily produce good public
I might also add that there are a number of people who believe that the
whole problem of the disappearance of high-wagejobs has been greatly exag­
gerated, but for the sake of argument, I think we should accept that and be­
lieve that a serious problem exists. That is to say, we need a great deal of
high-wage jobs, and, in fact, if we have vacancies for people, they will get
their training somehow.
Now, my answer is in two parts. First, what government can and should
do and what it shouldn't do. Put simply, government can and should facilitate
the creation o f new high-wage jobs by encouraging both the expansion o f ex­
isting firms and the formation of new ones. These are activities that involve
risk. Therefore, in my view, public policy should focus on increasing the eco­
nomic rewards for risk-taking by dramatically reducing or eliminating entirely
the tax on capital gains.
To go further than that, one might also want to eliminate the double taxa­
tion on dividends and eliminate the taxation on interest income from savings,
as is done in some other nations that are doing quite well, such as Japan. This
simple expedient would encourage rapid economic growth and thereby job
Now, from a political perspective, economic decisionmaking does not have
the same incentives as political decisionmaking. It does not allow bureaucrats
to channel taxpayer fiinds to special interest groups with political clout.
There are three reasons why I furnly believe that it is not possible for a gov­
ernment agency to identify sources of new jobs and to tiy and create them
through a spending program.
First, is the whole notion that a jobs creation program is just another form
of an industrial policy initiative, with the twist that the emphasis is on em­
ployment rather than on technologies or firms. In the past decade, industrial
policy has been widely discussed, and it has been repeatedly discredited as


unsound, fatally flawed, and unworkable. And it seems to have nine lives;
like cats, it comes back in different forms. But, nevertheless, the arguments in
such proposals are still very valid.
Second, and more basically, a high-wage job is a form of wealth. It pro­
duces a high income and individuals who would be willing to pay to obtain
such a job. But no government, by definition, can create wealth. If public
policy could create wealth, then we have found the holy grail. If it were pos­
sible, merely by enacting regulations or the right set of laws, if we could cre­
ate wealth in that way, we wouldn't need to wony about the deficit or taxes,
The third thing, in my view, is that public policy must be future oriented.
History cannot be changed. So, if we are to have effective public policy, we
will have to have very accurate forecasts. History has shown government bu­
reaucracies are very, very incapable of producing very accurate forecasts. In
fact, I just, along with a colleague, Tom Di Lorenzo, have written a book
about this called, Official Lies: How Washington Misleads Us.
To give you an example: Oil was first discovered here in the United States
in 1859 in Pennsylvania. Some seven years later, the Federal Government
noted that we may need synthetics because oil production may end. Through­
out this period, from 1866 to the present day, we have had a whole stream of
forecasts. For example, we were told there was little or no chance of oil in
California, little or no chance of oil in Texas or Kansas, and even as recently
as the Carter Administration, oil was supposed to cost SI 15 a barrel by 1990.
So, when your forecasts make constant errors, it seems to me there is little,
very little, public policy can effectively achieve, and if you have a Federal
Government program targeting the creation of high-wage, high-skilled jobs,
there is likely to be quite a costly failure.
Thank you.
[The prepared statement of Mr. Bennett starts on p. 43 of the Submis­
R epresentative H amilton. Senator Bingaman, please proceed.
S enator B ingaman. Thank you very much.
Thank you, Mr. Chairman. I appreciate the testimony of all the witnesses.
I didn't get to hear all of Mr. Katz's testimony, but I heard most of it and I
have looked at it
Let me ask, maybe, just a slightly different perspective on it. In my State,
when you say high-wage jobs, you are talking about one of two things. You
are talking about government jobs or you are talking about manufacturing,
which many of the manufacturingjobs are not really high wage, but they are
high wage compared to what most folks are doing, which is servicing the
tourist industry; doing service-related jobs. Some of the things that you were
referring to, Mr. Reich.
I guess what I am concerned about is that we can do all the training in the
world, but if we don't have other explicit policies to encourage the mainte­
nance and growth of our manufacturing sector, we are not going to create
high-wagejobs, as thosejobs are defined in my State. We have 5.6 percent of

our workers in New Mexico engaged in manufacturing. Now, the figures I
hear—you folks may know better figures—that that compares to about 16
percent nationally in manufacturing, about 28 percent in Japan, and about 32
percent in Germany.
So we do not have an industrialized economy in New Mexico, which we
are talking about here. Unfortunately, I think that circumstance carries
through to a lot of our country. We need to have explicit policies that allow
and encourage industry to create manufacturing jobs and maintain manufac­
turing jobs. I think, from my limited perspective, that means tax incentives
for investment—plant and equipment. In this country, not overseas.
It involves things like manufacturing extension, of course, for small- and
medium-size firms, but it involves other things, I am sure, that you could al­
lude to. But, as I say, we can do all we want to in the area of training, and we
can get very highly trained, college educated people who have great skills, but
if we don't have accompanying that a series of these other policies, we arejust
not going to have the opportunities for these folks. You are going to have a
lot of engineers driving cabs, and that is my concern.
I would be interested in comments that any of you have. Mr. Katz, maybe
you would want to start.
M r . K a t z . I agree with you. I think investing more in the noncollege
bound or having more people go to college are necessary conditions for a
high-wage economy, but they are certainly not sufficient conditions by them­
selves. And if we look across countries at what are the keys to having high
growth in wages and productivity, there are two factors: One is human capi­
tal investment, particularly in those who are noncollege bound; the second is
investment in physical equipment and new technologies.
It is clear that you cannot get a lot of that investment if there are not the
people around to do the work, but it is also clear thatjust having the skills by
themselves is not completely sufficient. And I think that policies for encour­
aging investment in new equipment and new technologies are quite an impor­
tant complement to improvements in the training of the noncollege bound.
It is certainly true, on average, jobs in durable goods, manufacturing, pay
higher wages for a given type of worker than otherjobs, but the whole defini­
tion of high-wage jobs shouldn't be manufacturing. I think we live a little bit
in the past, in the notion of manufacturing being the whole thing driving the
I think it is important, and we need a policy for it. But, if we look, for ex­
ample, at the recent export performance, we have done tremendously well in
exporting business professional services and other things, which are very high
paying jobs for college graduates, but in a world where noncollege graduates
have problem-solving skills could be won in tremendously expanding mar­
One need not look at manufacturingjobs, as a single statistic, as the impor­
tance of high-wage jobs. There are a lot of other jobs in services that are
tradeable, as well as things done nationally, that involve a lot of skills that we
tend to ignore by focusingjust on manufacturing. I think that there is no state
of nature in which we are going to have an economy in which the majority of
people are going to be working in manufacturing, so we have to pay attention
to other sectors as well.


M r . R eich. Senator, this country now has no strategy for reviving Ameri­
can manufacturing in the high-wage job area of American manufacturing,
which is to say, and I agree with you completely, not only tax incentives for
plant and equipment, but everything including permanent R & D tax credits,
which both presidential candidates interestingly are now calling for. This is
widely recognized.
Other countries do a betterjob than we do trying to summon resources to­
gether to make investments in high-wage manufacturing jobs. 1think that is
die critical distinction. Because we are creating manufacturing jobs in this
country now. Not many, but they are low-wage manufacturingjobs—$7 an
hour, $8 an hour. Nothing about manufacturing, per se, any longer means
In fact, if you look at a product, if I were to give you any gadget, or we
were to take an automobile and come into this room and take it apart, you
would see more and more the price of the product. More and more, the price
of that automobile goes into manufacturing engineering, design engineering,
styling, complex fabrication, marketing, sales, legal services, all kinds of
things that are services. I mean, these are all high-wagejobs. ITie actual pro­
portion of that automobile; that is, what you and I would consider manufac­
turing, people soldering and big assembly lines, is shrinking as a proportion of
that value.
So what we really have to do is to develop the ability in this country to add
technical jobs, high-wage technical jobs, that supplement a lot of those pro­
fessional jobs that are already doing very well. Which all goes to say, you are
absolutely right, but I wouldn't get too hung up on the manufacturing versus
service distinction. I think the high-wage job may be the lens in which we
should look through.
S enator B ingaman. Let me add one other thing, and then maybe Con­
gressman Bennett would like to comment
I am also struck by how little effort we make, our industry makes and our
government makes, to export products that result from high-wagejobs.
I had an occasion to vacation a couple of weeks ago in Germany with my
family, Senator Bingaman. First of all, everything is so expensive that you
cant afford it Second, you notice when you get there that all die cabbies are
driving BMWs and Mercedes Benzes—a very, very expensive car—to get
you from the airport into town. There is no doubt in my mind that if we were
permitted and able to compete in the sale of automobiles in that market, we
could drastically undercut those companies in selling cars. I mean, with the
dollar where it is relative to the Mark.
M r . R eich. Undoubtedly, the low dollar will help us in exports, but as you
put your finger it, it makes everything else we want to buy from the rest of the
world that much more expensive. You could get more competitive by having
the dollar decline, but that is like being more competitive by getting poorer
Let me also say, and this is an amendment to what you just said, if we get
out of the manufacturer versus service distinction, and we start looking at
high-wage jobs as the goal, we find that some o f our major exports, in terms
of high-wage jobs, are entertainment. In fact, the number two enterprise, just
behind jet airplanes, die number two major export of the United States is

7 4 -3 X 4


- 9


- 2


entertainment: Films and cassettes and television programs, and this entire in­
dustry. A lot of high-wagejobs.
We ought to be making sure right now that Europe does not prevent us
from getting those kinds of high-wage exports into Europe. That should be
one of our highest trade priorities right now.
R epresentative H amilton. Let me go to Congressman Obey, and then we
will return to you, Senator.
Congressman Obey, please proceed.
R epresentative O bey. Ijust have three questions.
Dr. Katz, I was interested in your statement in which you say that much
empirical research on cross-country growth patterns concludes that invest­
ments in human capital labor force skills and physical capital are the key
sources of rapid growth in improving living standards.
I had heard some people question that. I would simply like to ask you what
you regard as the best evidence of that in the research that you have seen?
M r . K atz . There is a very large recent literature that looks at—and, again,
this is research on cross-country comparisons as well as time series compari­
sons within countries, which was put together by Robert Summers and A1
Heston at the University of Pennsylvania—a series of comparable data
across, over 100 countries for the last 30 years, on things like investment in
physical capital, total GNP and growth. And there is a large literature, much
of it published in the last couple of years, in academic journals.
The clear robust findings of these are that if you look at countries' growth
rates over 10-, 20-, 30-year periods, the first factor that matters—and one I
didn't mention—is that you grow faster if you started out behind. Hopefully,
that isn't the mechanism we want to rely on, because it is much easier to adopt
technology that has already been used in the rest of the world to grow.
The other two factors that matter a lot are how much you invest in educa­
tion and how much you invest in physical capital. The education thing is very
important because your existing stock of education is the key determinant of
how much in the future you then invest in physical capital. You can view that
as you need the education to make those investments in new technologies
worthwhile in an increasingly open-world economy.
Where does the capital go? It goes to the place where the skills are around.
So it is clear that starting out behind and having low wages can get you some
more capital in investment, but the other key strategy, which seems to be
more useful from our point of view, we could make ourselves incredibly poor
and get a lot o f jobs here, but I think the investments are clear.
What the debate in the literature is, it tends to be a technical debate about
whether having more investment affects your growth rate permanently or just
your level, and that is really a technical issue, mat over the time periods which
we look at they arc pretty much similar.
Again, one could question all of this evidence, in that reverse causation
could be the driving force. Countries that have their act together may invest
more and grow more, and it might not be causal, but the evidence is fairly ro­
bust on the correlation.
R epresentative O bey. Do either of the other panelists disagree with any­
thing that Mr. Katz has said?


Mr. B ennett. Well, perhaps, I could address some comments toward
Senator Bingaman.
R epresentative O bey. I would appreciate it, in my time, if you would re­
spond to my question of whether you disagreed with anything Mr. Katz said.
M r. B ennett. Okay.

Just two other questions.
Mr. Reich, in your statement, you address the view that primary and secon­
dary education should no longer be funded largely from local property taxes.
I want to ask you what the federal strategy should be with respect to that
As I see the world, the Federal Government gets stuck with an awful lot by
way of pressure to pay for programs to aid cities, because local regions essen­
tially bug out on their responsibilities to deal with the problems of cities
themselves—the most spectacular example of that being here in the Nation's
capital. So I think the lack of responsibility on the part of people who use cit­
ies to earn their bread but don't provide much by way of support for the cities
in return means that the Federal Government gets stuck with a big piece of the
budget, and in an ideal world it wouldn't
I dont think we will be able to do much about that, and so I guess my ques­
tion is: Given the fact that we are limited there, and given the fact that the
Federal Government expends such a small percentage of the total national
budget for education, how do you think we can best impact the inequality
problems that are raised by reliance on property tax?
In my state, for instance—which has a reputation for progressivity—I am
struck by the fact that we have such a wide range of financial support from
school district to school district, generated locally, that we, in many ways, ex­
ceed the divergence in taxes which the courts declared unconstitutional.
So I guess I would ask you this: What would be wrong—and there may be
other things you would want to consider—but what would be wrong with
simply saying that, with respect to federal aid to elementary and secondary
education, one of the major factors that we would use to determine who gets
that limited pot of money is the degree to which states themselves have equal­
ized financial burdens and resources between elementary and secondary
school districts?
M r . R eich. I would support that wholeheartedly, but I would also go be­
yond that perhaps, Congressman, and there are ways in which the Federal
Government, through its leverage, might encourage consolidation between ur­
ban and suburban areas.
One of the great scandals in this country, as you suggested, was that you
have some extraordinarily wealthy suburbs draining extraordinarily poor ur­
ban areas and where the urban schools experience disparate per-pupil expen­
ditures that are far lower.
Now, again, let me hasten to add that you want a lot of school restructuring
and school reform, and you need school standards and you have to get a lot of
the school bureaucracy out of the way and put responsibilities down to teach­
ers and students. But even when you do that, there are still great disparities in
per-pupil funding.
Consolidation might help the Federal Government, who has a lot of lever­
age in the way you suggested in terms of consolidation, but a third point.
R epresentative O bey.


In 1980, the Federal Government supplied 9 cents o f every dollar spent on
primary and secondary education. We are now down to about 5.5 cents.
There may be some justification in looking at the states where per-pupil ex­
penditures are lowest or where poverty figures are worse and coming up with
a formula—to the extent that it is possible to come up with a "neutral formu­
la"—that uses that at the margin cents—6 cents, 8 cents, 9 cents, whatever the
Federal Government could do—to help those states that are particularly in
R epresentative O bey . Let me ask a second question. You also indicate
about disparity in growth in college costs from one type of institution to an­
other. What I found especially disturbing is your statement that at the 25
most selective schools, the proportion of students with family incomes o f at
least $100,000 a year has risen from 31 to 37 percent of the freshman class.
I think that that is a highly disturbing fact, and I think that our aid to educa­
tion policies ought to be geared in some way to try and reverse that. But I
guess I am more concerned about a more basic problem. I think that there is
such a snob appeal to a college degree as opposed to anything else in this so­
My kid brother didn't go to college. He wound up going to a technical in­
stitute in Kenosha, Wisconsin. Today, he heads an engineering department
for an air-conditioning company. He has 20 college-educated engineers
working under him. You don't need a college education in order to know
what the hell you are talking about in business, for instance. But I am so con­
cerned about the attitudes in society, which I think make it difficult for us to
get attention paid to noncollege-educated workers.
I remember when Wisconsin was putting together our system of technical
institutes. We had a dispute about how that system would be structured and
how it would be competing with the University of Wisconsin. And I will
never forget when the lobbyist o f Wisconsin was standing in the hall outside
the assembly chamber and he was saying, well, you know, if they want to do
it that way, that is all right. He said that way we can get the smart ones and
they can get the dummies.
I think that comment typifies die arrogance that you often see among a lot
of people who are college educated.
How would you go about creating public demand for the kind o f certifica­
tion of education performance at something other than the college level,
which you talk about and you say that Germany has?
M r. R eich . Well, the first step would be to create a national system of cer­
tification in which employers gain confidence over time. Right now, we have
no national certification, such that somebody who passes a series of exams or
whatever is understood to have a particular competence.
The college degree in this society, as we have right now—particularly a
college degree from a prestigious institution—becomes a very powerful
proxy for future employers of having qualities that the person may or may not
have. As you suggested, it is undermclusive, because there are a lot of people
who don't go to college and may have those qualities, but it is also overinclusive. Considering a few of the Harvard students I have had over the years,
there may even be an inverse relationship between a college degree and com­
mon sense.


So I think a national system of certification, promoted and encouraged by
the Federal Government—the government doesn't have to do it itself. It can
obviously contract out or use incentives, such as you suggested. But a na­
tional system of certification, such as Germany has—other countries are de­
veloping them as well—could generate higher degrees of confidence among
employers who would much rather pay less—not a lot less, but somewhat
less—for somebody they know has certain competencies than pay a lot more
for somebody they assume does simply because they have a college degree.
R epresentative O bey . Thank you, Mr. Chairman.
R epresentative H amilton. Mr. Bennett, did you want to respond to one of
Senator Bingaman's comments?
M r. B ennett. Yes.
R epresentative H amilton .

Go ahead, please.

M r. B ennett. You put a great deal of emphasis on manufacturing, and I

would like to take a historical perspective for a moment and mention that
roughly a century ago about two thirds of the American work force was en­
gaged either in agriculture, in transportation related to horse transport or rail­
roads, or in domestic service. And today those three occupations account for
a very, very small fraction of employment in the United States.
And, in fact, if we had a more realistic view of what a farmer is—the De­
partment of Agriculture says if you sell $1,000 worth o f food or animal prod­
ucts, or whatever, in a year you are a farmer. Probably around 2 or 2.5
percent of the population would fall into those three categories. But the im­
portant thing is that our agricultural output has not fallen. It has increased
dramatically, even though the labor input has fallen greatly. And this is what
is very desirable.
And the same, to some extent, is true in manufacturing. Even though the
manufacturing level of employment has dropped somewhat, there has not
been an accompanying great drop in output So we are simply going through
a sectoral shift, and the important thing is creating high-wage jobs, regardless
of what the sector is. Although, since we tend to think of many of these as
arising in manufacturing, the idea seems to be to create or to think in terms of
creating manufacturingjobs.
R epresentative H amilton. If you want to go ahead-----S enator B ingaman. Thank you for those comments. Let me just ask one
other question that I had, Mr. Chairman.
Mr. Reich, you suggested that we have a real problem with all these tax
bases in every community competing with every other community, or every
state competing with every other state, to attract industry, retain industry,
Is there any practical solution to that? Is it realistic for us to think that we
can pass a federal law saying, from henceforth it is illegal for states and lo­
calities to do this? I agree with you that this bidding mat goes on between
states and localities is counterproductive—not only for U.S. companies to
come in and establish plants but for foreign companies as well—but I just
don't know how to get out of that box.
M r. Reich. I would suggest that there are possibly two or three ways to get
out of the box. One, the Federal Government could encourage groups o f


states, regions, to get together and create compacts. The Midwest governors
almost achieved it a couple of years ago. There may be some ways in which
the Federal Government can use incentives to create those regional compacts
so that there will not be that much bidding.
Number two, the Federal government—again, through the kind of leverage
that we have been discussing this morning—might simply condition some
federal assistance on there not being certain kinds of bidding.
Number three—and most drastically—it seems to me that at least this pos­
sibility should be explored: federal preemption of state laws that authorize
tax bases. Now, this is a pretty drastic step, but, legally, I believe it is permis­
sible. In a former life, I did graduate from law school, and at least it ought to
be explored.
Let me say one final thing on that point. The European Community has
begun to police its member states against bidding. Five or six years ago,
France would bid against Britain who would bid against Italy. Global compa­
nies that wanted to get the best deal they possibly could would actually or­
chestrate these bidding contests, not unlike the bidding contest between
American states.
The European commission has successfully stopped these bidding con­
tests; stopped what are essentially zero sum—in fact, in many respects, nega­
tive sum gains.
S enator B ingaman. Thank you very much, Mr. Chairman.
R epresentative H amilton. Okay.
Let's see, Mr. Bennett, you seem to challenge the idea that, in fact, highwage jobs are disappearing. You don't seem to accept that idea at all.
M r . B ennett. I indicated that there are others w h o have said that that is not
the case. And in specific-----R epresentative H amilton . D o you also challenge the idea that there is a
growing disparity in wages, the point that Mr. Katz made?
M r. B ennett. That may w ell be true, I have not gotten into that. I did not
look into those things.
R epresentative H amilton. Y ou accept the idea that wage inequality has
Mr. B ennett. It may well have, yes.
R epresentative H amilton. N ow , Mr. Katz, you indicate that this wage ine­
quality has grown substantially, and it is really a worldwide trend, right?
M r . K a t z . What I said is that there was a worldwide trend towards de­
creasing inequality. That has stopped. The United States and Britain have
enormous increases in wage inequality that are very similar. Other countries
have much more muted versions. Some countries have little.
What is common across countries is the shift of employment towards simi­
lar sectors that use college-educated workers and occupations. In some sense,
the market forces are shifting demand towards the types of workers who have
done very well in the United States, but how wages change is not the same
R epresentative H amilton. All right. Are American real wages less today
than they were five years ago, or ten years ago?


Mr. K a t z . They are certainly less today than they were in 1989 and again
for most workers, except for the veiy top group, they are lower than they were
in 1973.
R ep resen ta tiv e H a m ilton . Are you lookingjust at the wages, or do you in­
clude fringe benefits?
Mr. K a tz . This is lookingjust at the wages. If you include fringe benefits,
the answers are veiy much die same for the noncollege educated, because the
fraction of them with pension benefits and health insurance has actually de­
clined over the last decade. The story would look a little brighter for more
educated workers and for workers who work in the government where bene­
fits have grown quite well.
R epresentative H amilton. If y ou are a high sch ool graduate today and y ou
are com in g out, getting you r degree, are you r jo b prospects w orse or better
than they w ere 10 years ago, 12 years a go?
M r . K atz . Certainly today, 1992, they are worse, for two reasons: One,
entry level wages are much lower than tiiey were in 1979 for a 20-year-old
high school graduate—about 20 percent lower in real terms. Two, we are in a
very severe recession that doesn't seem to be ending, so job availability is
much worse—I mean, 1989 to 1992 has been a disaster for everybody, even
the top end of the distribution.
R epresentative H amilton. S o the person who ends their education with a
high school degree is in real trouble?
M r . K a t z . Very deep trouble.
R epresentative H amilton. Is that the conclusion you draw ?
M r . K a t z . Deep trouble today, yes.
R epresentative H amilton. And as you look ahead at the prospects, it will
get worse for them; is that fair?
M r . K atz . I w ou ld say that, but I w ou ld, again, reiterate that w e have a
very hard tim e forecasting the future. If the last 2 0 years are a g o o d indication

o f the future, the answer is certainly yes.
R epresentative H amilton. How about the college graduate? How does he
or she stack up with ten years ago or five years ago? Are theirjob prospects
better or worse?
Mr. K a t z . If we had ended the data in 1989, the answer would have been
they look better. The last recession has brought about dramatic reductions in
the earnings and employment prospects for college graduates. The ques­
tion—which I don't think anyone could seriously give an answer of knowing
for sure—is whether the last three years are just a particular cyclical down­
turn, or whether there has actually been a shift in the trend that prospects look
poor for college graduates as well in the future. My guess is most of it is a
particular cycle and things will pick up again, but that is reading something
that one couldn't say for sure.
Since 1989 even college graduates have had large losses, so they are about
where they were in 1979. If one had stopped in 1989, they were doing sig­
nificantly better than they had been a decade ago.
R epresentative H amilton. All of us run into college students who are
working in fast food places—a lot of college graduates.

M r . K atz . There are two points to make. Two things are happening in the
U.S. economy-----R epresentative H amilton. Even with a Harvard degree.
M r . K a tz . I agree.
Two things are happening in the U.S. economy: One is the average wage
of college graduates versus noncollege graduates went up, but the other thing
that has happened is that within each group—that is the third point I make on
wage structures—there is rising inequality. That is, the average college gradu­
ate has done reasonably well; the bottom 30 percent of college graduates have
done absolutely awful. The growth between the 90th percentile and the 10th
percentile college graduates has been about 20 percent.
So it is true there are more and more college graduates working in lower
paying jobs than in the past, and if you are in the 20th percentile college
graduate, you are significantly worse off than you were 20 years ago. Both
Slings can be true because we have a market in which the distribution is
spreading out. It is true the share of jobs that are college-required jobs has
grown. It is also true there are more and more college graduates.
R epresentative H amilton. Is it also true there are more and more people
working full time but earning poverty level wages?
M r . K a t z . Certainly, that is true.
R epresentative H amilton. Has there been a dramatic increase in that or a
modest increase?
M r . K a t z . Dramatic versus modest If you looked at male full-time em­
ployees from the early 1970s, we are talking about 7 percent; by the late
1980s, 13 percent. That is dramatic today. In 1982 that figure would be
R epresentative H amilton. One economist testified not long ago that
among men age 18 to 24, for example, the percent went from 18 to 24 percent
of people working full time but earning poverty wages. Do you accept that?
Mr. K atz . That would be consistent with what I found.
R epresentative H amilton. Are we following a kind of low-wage growth
strategy in the American economy today? Is that what we want?
Mr. K atz . I hope that is not what we want, but that certainly is what the
data suggests we have been doing. For the median worker, real wages have
not grown in 20 years.
R epresentative H amilton. Did you want to add anything, Mr. Reich?
M r . R eich. N o, I agree with all o f those data.
R epresentative H amilton. I expect you to jump in here if you hear things
you don't agree with, or you have additional comments to make.
Now, this big gap here between the highly skilled and well-educated per­
son, on the one hand, and lower skilled, less-educated person, on the other
hand, does that come about because the employer is bidding up, or does it
come about because you have a downward push on wages from the em­
M r . K a t z . If you decomposed it and took literally zero as the margin, more
of it is that the wages o f the less educated have gone down than the wages of
the more educated have gone up in an accounting sense.


As economists, we tend to focus on answering two questions: What is the
relative prices of different groups of workers; and the other, what is happen­
ing to total productivity growth? What we have seen is that the relative price
o f the more educated—and among them the elite of them—has gone up ver­
sus others. But it has happened in a period of stagnant productivity growth,
so more of what is happening is that the bottom end is doing worse than the
top end is doing well.
For example, if you look at how women have gained on men in earnings,
it is not that high school graduate women have incredible wage growth over
the last decade. Their real wage basically stood still over the last decade. It is
just that high school men's wages fell by 15 percent. So, in that sense, it is
that the bottom end is going down, not that the groups that are doing well
have done particularly well.
M r . R eich. If I could intervene for one moment, Mr. Chairman. One of the
phenomena that confuses many of these discussions, particularly in the public
discussions about these problems, is that you have two simultaneous eco­
nomic trends: The business cycle and then the long-term earnings trend, and
they are superimposed on one another.
People very much, in a political season, talk aboutjobs. But even when the
jobs come back, we have the long-term wage and income problem. In my
view, and the view of many others, that is the problem. That is the thorniest
and the more serious.
R epresentative H amilton. What do you say to the constituent who asks
you, Congressman, what are you going to do to get us good payingjobs?
You have 30 seconds to answer. I mean, how do you respond to that?
What do you say? And that is not an unusual question.
M r . R eich. I drop out of the race.
R epresentative H amilton. I get the question all the time. You would
M r . R eich. I am bein g som ew hat facetious. I am n ot sure I can enter the
race to begin w ith.
R epresentative H amilton. What do you say to a person like that? Con­
gressman, what are you going to do to get me a good payingjob?
M r . R eich. I would say in 30 seconds that I would support public policies
to stimulate this economy. We have to invest in roads, bridges, sewers, high­
ways and water, and all kinds of infrastructure. I am going to make sure we
do more of that. We are falling behind our competitors. And that createsjobs
immediately, and that may help stimulate the economy right away. It is
something we have to do over the long term, and I will insist we do it starting
R epresentative H amilton. The deficit be damned?
M r . R eich. I would take money out of the military budget The multiplier
in the militaiy, with regard to every dollar we spend on jobs there, is much,
much less than the multiplier with regard to the money we spend in the civil­
ian sector on infrastructurejobs.
If I am running for office, I would not say we have to expand the deficit

R epresentative H amilton. And how about his answer? Mr. Bennett, Mr.
Katz, I want you to give me an answer, too. How would you respond to that
question? Congressman, how do we get good jobs?
M r . K a t z . I would agree with, certainly, the part about we need to get the
economy going. Infrastructure investment is something we have to do for the
long haul, and starting out today we will stimulate the economy and we will
I also think that for the long term, we need to do more to improve invest­
ments in training and education of those that go on to college. Those will not
create jobs today, but if we invest in infrastructure and invest in education we
will be attracting capital and new technologies in the future.
R epresentative H amilton. Mr. Reich, you are really ready to accept an in­
crease in the deficit to achieve these things?

M r. R eich. Personally?
R epresentative H amilton.

Put on your other hat

M r. R eich. M y pointy-hatted, unrealistic, out-of-this-world academic hat?
R epresentative H amilton. Y o u said it, not I.

Mr. R eich. With that hat on, it would seem to me that there is a very strong
argument now for some fiscal stimulus of a Keynesian nature—and here is
the trick—so long as you can convince people, and the markets in particular,
that you are going to make it up when the economy grows. Because you are
not really going to be able to get the deficit down unless you have growth.
In other words, the world is divided between the people who think that
deficit reductions create growth and the people who think that, fundamen­
tally, growth creates deficit reductions. It is a combination of the two, obvi­
ously, but the emphasis has to be on one of the two, and I am on the side of
people who think that growth creates deficit reduction.
R epresentative H amilton. H o w about you, Mr. Katz? Which side are you
M r . K a t z . I think, everything else held constant, growth does produce
deficit reduction. In my totally apolitical view of the world, if I were making
decisions I would also be doing stuff probably on the spending side of things
that are untouchable.
R epresentative H amilton. Mr. Bennett, how are you going to answer my
M r . B ennett . Well, I would suggest, first off, in terms o f Keynesian inter­
est, I was always taught budget deficit was the norm of a Keynesian stimulus,
so we should be stimulated from here to the moon.
But it seems to me that the notion of trying to encourage economic risktaking in the formation of new firms by making the taking of risk more profit­
able—cutting the capital gains tax would be one thing. I also like the idea of
the notion of rebuilding the Nation's infrastructure, and I would propose that
what we would do is cancel the Davis-Bacon Act so that we would get as
much bang as possible for our dollar.
The third thing that I think one might think about is looking at other Fed­
eral Government policies that tend to raise the cost of living for American
workers. For example, the whole notion behind the marketing orders of the
Department of Agriculture is to make food expensive for the American


people. I think all that could be done away with so that we dont have food
rotting out in the fields. I think those kinds of policies would be veiy useful.
R ep resen ta tiv e H a m ilton . You dont see any need to spend additionally
for investment, which these gentlemen have been talking about?
M r . B ennett. Investment how, sir?
R epresentative H amilton. Investment in infrastructure and education.
M r . B ennett. I said I thought-------R epresentative H amilton. Y ou w ou ld d o that-------M r . B ennett. --------that som e o f our infrastructure, but w ith the p roviso that

it be done under non-Davis-Bacon kind of legislation.
R epresentative H amilton. Would you be prepared to accept an increase in
the deficit?
M r. B e n n e it. I am afraid the deficit w ill go on regardless o f what we do.
R ep resen ta tiv e H a m ilton . Would you be prepared to accept that if the in­
vestment were in infrastructure?
M r . B ennett. Professor Reich would cut military spending; I would cut
out many other forms of spending as well.
For example, Department of Agriculture spending welfare for farmers. I
think a lot of government welfare programs could be done away with. So I
think that I would take an ax to some of the programs that we currently have,
and perhaps the deficit would come down substantially, even with putting
money into infrastructure.
R epresentative H amilton. Where is the demand for more skilled workers
coming from? Why do we have that demand in the economy today? Is it be­
cause of changes in the workplace that workers are being required to have
higher and higher skills? Is that the reason?
You had the old Henry Ford principle—you know, mass production ap­
proach—where the worker does repetitive acts and all. But is that changing
now, today?
M r . K atz . Well, essentially, the issue is that there still is a Henry Ford de­
mand out there for workers doing routinized tasks. But the point is, one can
have an economy with that if you want to pay the same wages. Those same
things can be done at much, much lower wages overseas. The transportation
costs are low, the coordination, the communication costs are low.
So those same sets of jobs, we could have them, but not at wages Ameri­
can workers are willing to work at. That is not the future for high-wage jobs.
The future for high-wagejobs are thejobs that involve problem-solving skills.
They are the types of things that Professor Reich talked about involving all
these services that go into products as opposed the routine job. Both clerical
and manual routine jobs can easily be done for just much, much lower wages
in the rest of the world, and that is not the type of thing we should be focusing
It is clear that there are still jobs like that that involve in-person services.
You are not going to travel overseas to get a haircut and a number of other
things. But, for the most part, the value added in the world economy, and
what we ought to be moving towards, is problem-solving sets of skills and not
routine Henry Ford. If we dont have a work force that has those sets of skills,


we will continue to use Hemy Ford production techniques and have stagnat­
ing real wages. If we make the training, we will move in the opposite direc­
M r . R eich. Another way of making the same-----R ep re se n ta tiv e H a m ilton . Hold on, before you go on here.
A lot of the things that bother me when you talk about education training
and raising the skill level, and all the rest of it, is, what if you raise it and then
you dont have the jobs? I mean, there is nothing worse—well, I guess there
are a lot of things worse—but one of the bad things is, what if you train a per­
son and educate them and then they dont have a goodjob out there.
M r . K atz . I think it is m uch w orse to have p eop le w here there is n o
ch ance w hatsoever. If the on ly possibility y ou have is ending up in a routine
jo b that is don e a lot cheaper overseas o r w ith a n ew tech n ology, there is n o
R e p re se n ta tiv e H a m ilton . All the economists that come before us talk
about this and say we have to have more education, we have to have more
training, more apprenticeships, and all the rest of it, as if that in itself takes
care of the problem.
M r. K atz . I think that it is a necessary but not sufficient ingredient. I think

there are a lot o f things that the American private sector does not do that are
necessary for having these types o f high-wage jobs. I w ill certainly admit that
I am someone who spends most o f my time looking at the wage data and eco­
nomic models. I do not spend a lot o f time in plants. M y reading o f the evi­
dence is that there are many different strategies that have been taken in other

In Japan, it is not an apprenticeship program. It is directly hiring people
out of high schools. It is things, such that Robert talked about, involving pri­
vate firms guaranteeing eight slots to people coming out of high school, and
directly bringing them in and guaranteeing them long-termjobs.
In Germany, it is the apprenticeship. It is the link with private-sector poli­
cies with the education. It is not the education done blanket without anything
involving reforms of the private sector.
R e p re se n ta tiv e H a m ilton . Mr. Reich, I cut you off a moment ago.
M r. R eich . N o, Mr. Chairman, I was going to say, the emphasis on creat­
ing high-wage jobs on the supply side should not in any way be taken to un­
derstate the importance of the demand side—the demand side with regard to
all sorts of problems that we have in the economy, with regard to manage­
ment and Wall Street, failure to incorporate new technologies into production
processes as rapidly as we should, and on and on and on. The list is very
long. But here is where the supply-siders, in my view, are absolutely right, al­
though they are focusing on the wrong element.
We should be focusing on the supply side of education and training. Or,
another way of putting the same thing is, in the future, the way of gettingjobs
into wherever you are—Washington, D.C. or Indiana or Spokane, Washing­
ton, or wherever—you get jobs because you are saying, in a sense, to the
world economy, come here and give us your savings.
But there are only two inducements you have. You can either say, come
here, world economy with savings. Even people in my town say, keep your


savings here, because our wages and taxes are so low, and our regulations are
so nonexistent that it is cheap to do business here; you make a lot of money.
The trouble with that strategy, obviously, is that you dont create a high
standard of living. The only strategy you have is to negotiate with global
capital. And when I say global capital, even the people in your own, town—
IBM and everybody else—has to say, come here, create jobs here, because
we have a terrific wage force, high skills, a great infrastructure. And that is
die only fundamental option you have.
R epresentative H amilton. N ow , the American worker today, if I under­
stand your testimony, is not any better off than he or she was some years
ago— 10, 15 years ago—but the European worker, the Japanese worker, is
better off. Is that right?
M r . K a tz . That is right, sir.
R epresentative H amilton. Now, why?
M r . K atz . There are a lot of differences between what the American and
European economies do. For some European economies, part of that is just
catch-up. They are implementing things tnat we are already doing. Their liv­
ing standards are below us.
But, more importantly, if you look at Japan and Germany, a lot of that is
not new changes in policies towards changing their education and training
system. They have had training and education systems such that firms with
workers without college degrees are able to implement new technologies in
manufacturing processes. They have added integrated systems.
The German and Japanese systems are quite different from each other, but
firms treat their less-educated workers like American firms treat more edu­
cated workers.
R epresentative H amilton. But the interesting thing is that the concern or
the fear that Americans have about the ten-foot tall Japanese competition, that
the Japanese are beating us, and we are losing jobs. We have focused on the
Japanese, but it applies to a lot of other countries as well.
All that has developed here in the last few years is that their strategies are
to provide good wages, and their wages are going up. Ours seem to be going
down, and we are not competitive. I mean, that is curious, isn't it?
M r . K a t z . Is It curious that fears arise when those two facts are happen­
ing? I think it is well-founded. One should be concerned.
M r . R eich. It is very easy to blame others for our problems. I am not sug­
gesting others are blameless, but obviously the responsibility lies at home. In­
terestingly, the Japanese companies here in the United States have been
performing quite responsibly when it comes to creating high-wagejobs. Japa­
nese automakers are spending $1,000 a year more per worker training their
autoworkers than their American competitors right here in the United States.
R epresentative H amilton. I was interested in your comments a little ear­
lier about how much—I think it was your comment—about how much of our
training dollar is focused on the management level people, in effect.
Mr. R eich. That $30 billion is, again, the figure that the private sector in
the United States is spending. I have looked into it not only at the first level in
which you see that of the $30 billion about $21.8 billion is given to the col­
lege educated, but if you look even within that $21.8 billion you see that a


large portion on executive and management conferences. Some of this train­
ing happens on the golf course.
R epresentative H amilton. I thought I saw in one statistic that for every
dollar in federal funds spent on postsecondaiy education of noncollege bound
students, we spend $55 on going to college. That is federal budget
Now, I wanted to raise the question of these causes. What explains the
sharp increases in wage inequality, Mr. Katz?
You said, number one, internationalization of U.S. economy; and, number
two, immigration was less important as the second primary factor o f technol­
ogy. As between technology and globalization, which is the more important?
Mr. Katz. It is very hard to reach a strong conclusion there, because what
you can do is you can measure the direct effects of both. That is, we can see
where imports are coming in, where jobs are being transferred overseas, and
we will count that in the way we do the accounting boards in international
trade effect.
R epresentative H amilton. Y ou cannot really distinguish between the im­
pact of trade and the impact of technology; is that what you are telling me?
M r. K atz. Well, we can look at some things that are directly trade related.
We can look at some things that are associate» directly with technology. But
whether firms change their technologies toward using more robots and com­
puters because there was an exogenous new change in the technology avail­
able, or because it is in response to international competition and the need to
cut cost in that way, is a somewhat ethereal distinction that would be hard to
It is clear, at a minimum, one can get about 25 percent just looking at the
shifts injobs associated with trade. It is clear that the remainder is strongly re­
lated to the technological changes. But technology is a black box. Did com­
puters come out of nowhere? Were they in response to competitive pressure?
It is clear that it is important, but I don't think anyone could honestly say it
is an independent factor driven by itself. I think a lot of it is that, but the key
is that the two things work together in the same way. The availability of tech­
nology and the business overseas means routinejobs can be replaced in either
fashion, and which one independently does it is unclear. Things thatjust op­
erate on the protection side, I don't think would be very useful because o f the
other factor that is in there, and they are highly related.
R epresentative H amilton. Do all three of you support NAFTA?
M r. K atz. As far as I know about it yes.
R epresentative H amilton. Do you, Mr. Reich?
M r. Reich. I have not been able to go through the 1,100 pages. In fact, I
have been trying to get it, and somebody told me in the Administration that
some lawyers are still making changes in the document I definitely think we
want a North American Free Trade Agreement.
R epresentative H amilton. Mr. Bennett.
M r. B ennett. Absolutely. But I agree with Professor Reich. I wonder a
little bit about lawyers producing 1,100 pages. It seems to me free trade is
free trade. Go with it.
M r. K atz. I would agree. I certainly haven't read the entire thing. Inspirit,
yes, but, otherwise, who knows?


R epresentative H amilton. Okay. Do you believe that the trends we have
talked about in wages in the past few years represent the future trends as
well? Do you have any feeling about that? I know it is your area more, Mr.
Katz. Is this mishmash going to continue? Is the disparity going to grow?
Mr. K atz . I believe it is likely to continue, from what we have seen, in the
future. The point that one should make—and, certainly, I don't think one
should count on it a lot—is that this isn't the first time in history that inequal­
ity has risen. There have been other technological innovations in the past,
and it wouldn't completely floor me if seven years from today new computer
technology was out there, so that all the things we think of problem solvers
can be done by people with much less skill and routine work and high-tech
sorts of things, and that would reduce the trend towards going to more edu­
cated workers. But I wouldn't count on it, especially.
In fact, the last 30 years clearly indicates a shift towards more educated
workers in demand. It was all offset in previous periods by the rapid growth
of the supply of college graduates, the baby boom, the Vietnam war period,
and in the big expansion of higher education in Europe in this period. The
long-term trend seems to be at least a 30-year trend.
R epresentative H amilton. We look at the American economy today.
Should we encourage more and more young people to go to college? I am
not talking about just for their own benefit, but from the standpoint of the
American economy. Should we encourage young people to go to college?
M r . K a t z . I think the answer is yes. It may not be an ideal world, but it is
very clear that the American economy does not effectively utilize noncollege
workers. Whether that is because the skills-----R epresentative H amilton. Shouldn't the emphasize be on trying to utilize
the noncollege person rather than forcing everybody into the college mode?
M r . K at z . That would be a more sensible policy, but without that I think it
would be crazy not to encourage people to go to college.
R epresentative H amilton. Mr. Reich, you were talking a lot about this
training for the noncollege bound. In some of the European countries, I
gather that is required. There is a government requirement. You spend so
much money to train your workers, right? And that is one way to do it. Why
doesn't American industry do that more?
M r . R eich. There are a number of reasons. Indeed, it seems to be a major
factor, with regard to fairly generic skills, skills that are basic to almost all
competitors in a particular industry—maybe even beyond that particular in­
dustry—employers are reluctant to sink much money into training for fear
that the employee will simply run off. That is a classic free-rider problem.
R epresentative H amilton. Y ou don't want to stop that, do you?
Mr. R eich. There is no way to stop it unless—just as a thought experiment
—if all the employers were to go into a room and say, we need better trained
employees, but I am afraid to train my own, because he will go to you. So
lefs all agree to spend 1,2,3 percent of our payroll doing the training.
R epresentative H amilton. They do that in the construction industry.

M r. R eich. And in several other countries.

We would not want employers to get together for antitrust reasons. There
is a lot of mischief that could come out of that, and therefore there is a strong


argument—in my view, a convincing argument—for requiring companies,
maybe with the exception of small companies which have less to spend, to
spend a small percentage of their payrolls on training their employees.
R epresentative H am ilton . Do you agree with that?
M r . K a t z . I agree with that. The Japanese do not need to mandate-----R epresentative H am ilton . Not the management people, but directed at
the-----M r . R eich . Not the college educated. Most should be directed at the non­
M r . K a t z . There are two ways you can run a system that have big incen­
tives for firms to invest in their workers. One is to set up an environment
where no one leaves. That is essentially the Japanese system. There isn't
poaching between firms. I don't think we want that in the United States. It is
healthy to have people leaving firms.
The other solution is to have some way of coordinating decisions so that
even though employees will move from firm to firm, training does get done.
That seems to me to be much more sensible in the United States than trying to
enforce a Japanese lifetime employment.
M r . R eich . S o long as the Bill of Rights bars involuntary servitude, we
don't have much choice in this country but to come up with some sort o f re­
quirement—a low, low requirement—that all firms train their workers to
avoid this free-rider issue.
R epresentative H am ilton . Y ou all support NAFTA, but isn't it a fact that
NAFTA is going to hurt the lower skilled worker?
Mr. R eich . In my view, Mr. Chairman—and I have heard the estimate
from Secretary Martin last week o f 150,000 jobs lost—unless we provide re­
training and readjustment assistance—a package of educational and techno­
logical training possibilities—unless we create jobs that are high-skilled jobs
and high-wage jobs for those 150,000 or 800,000 workers that may lose their
jobs through free trade, we are not accomplishing a huge amount. In fact, I
would say you want to move------.
R epresentative H am ilton . S o the advantage of the implementing legisla­
tion that would accompany NAFTA becomes very important
M r . R eich . Implementing legislation is critical, but it also may be that
NAFTA does not go quite far enough with regard to worker adjustment train­
ing and several other matters. Again, not having read it, I dont know.
R epresentative H am ilton . Is NAFTA just going to aggravate the earnings
M r . K a t z . Certainly, in the short run, NAFTA, with nothing else, is likely
to exacerbate things and would be problematic. It just seems that any sense
of equity and fairness suggests with NAFTA that the American consumer is
going to benefit greatly from expanding the benefits of free trade. The costs
are going to be highly concentrated and workers displaced in industries that
compete with Mexican industries, and we can easily afford, given those bene­
fits, to provide some sort of readjustment benefits to these workers.
Given that, I think, in the long run, it will expand trade and we will have
positive effects, since the types of export jobs that will be created will proba­
bly be higher paid jobs than the import jobs lost, but they will not go to the


same people. And I think we have a responsibility to make sure that a small
group of individuals do not have to bear all the costs for the rest of us to gain.
R epresentative H amilton. I th in k I am sa tisfied h ere. I th in k w e h a v e had a
g o o d hearing.

I want to give you an opportunity if you want to add anything. We have
been talking about trade, technology and immigration effects on the loss o f
the middle-income jobs and what countries like Germany and Japan do and
what we can do both in the private and the public sector to help.
Do any of you want to add anything to the Committee record at this point?
If not, speak now or forever hold your peace.
We will adjourn. Thank you very, very much.
[Whereupon, at 11:45 a.m., the Committee adjourned, subject to the call
o f the Chair.]



am grateful for the opportunity to testify about trends in the distribution o f U.S. Jobs and
earnings. I have recently completed several studies examining changes in the U.S. wage structure
and income distribution since the early 1980s (Katz and Murphy, 1992; Cutler and Katz, 1991:
and Boijas, Freeman, and Katz, 1991). With my Harvard colleague Richard Freeman, I am cur­
rently directing a collaborative project in which researchers from throughout the OECD are using
comparable data and methodologies to compare and contrast changes in the structure o f wages
and employment among OECD countries over the last two decades. I will focus my remarks on
the conclusions that can be drawn from this research concerning (1) the nature o f recent dramatic
wage structure changes in the United States; (2) the extent to which similar changes are occurring
in other countries; and (3) the likely causes o f these changes.
Wage dispersion among both men and women increased substantially in the United States
during the 1980s. The hourly earnings o f the 90th percentile full-time worker relative to the 10th
percentile full-time worker increased by approximately 20 percent for men and 25 percent for
women from 1979 to 1989. Changes in the wage structure along three primary dimensions con­
tributed to rising wage inequality. First, educational and occupational wage differentials ex­
panded with a particularly sharp rise In the relative earnings o f college graduates. The college
wage premium doubled for young workers with the weekly wages o f young male college gradu­
ates increasing by approximately 30 percent relative to those o f young males with twelve or fewer
years o f schooling. Second, the average wages o f older workers increased relative to those o f
younger workers for those without college degrees. Third, wage dispersion increased greatly
within narrowly defined demographic and skill groups. In other words, wage dispersion ex­
panded among individuals o f the same age, education, and sex, and it expanded among those
working in the same industries and occupations. Since these wage structure changes occurred in a
period o f stagnation in overall real wage growth, the less-educated and the less-fortunate suffered
substantial losses in real earnings relative to analogous individuals a decade earlier. Wage disper­
sion for males was greater at the end o f the 1980s than at any point in time since 1940. The one
aspect o f the wage structure that narrowed during the 1980s was the gender gap with the earnings
o f women increasing by approximately 10 percent relative to men in all education groups from
1979 to 1989.
Although there exists some disagreement concerning the causes o f these wage structure
changes, there exists a broad consensus among researchers o f all ideological stripes that wage ine­
quality and "skill” differentials have increased sharply since the 1970s (Bound and Johnson,
1992; Davis and Haltiwanger, 1991: Kosters, 1991; Levy and Mumane, 1991; end Murphy and
Welch, 1992). These basic facts have been documented by and replicated by many researchers
using many alternative data sources including household survey data from the Current Population
Survey, other household surveys, establishment surveys collected by the Federal government,
and various establishment surveys collected by private-sector organizations. The conclusion o f
rising wage dispersion in the 1980s is a robust finding that is not particularly sensitive to the pre­
cise choice o f data set, sample, or wage measure.
The industrial and occupational distribution o f US. employment shifted substantially in fa­
vor o f college graduates relative to less-educated workers and in favor o f women relative to men
during the 1980s. Employment declined in traditional goods-producing sectors that dispropor­
tionately employ blue-collar males and expanded in professional, medical, and business service
sectors that disproportionately employ college graduates. These shifts reflect a long- term secular
trend over at least the last thirty years in which the industrial and occupational distribution o f em­
ployment has shifted in favor o f college graduates relative to less-educated workers. The direct ef­
fect on the earnings o f males without college degrees o f the sharp decline in high-wage,
blue-collar Jobs in traditional goods-producing sectors may account for as much as one-quarter to
one-third o f the increase in the college/high school wage differential for males during the 1980s
(Katz and Revenga, 1989; and Bound and Johnson, 1992).


How do U.S. trends in wage and employment patterns compare to those in other advanced
industrial nations? Many academics, government officials, and reporters have recently argued,
typically on the basis o f little more than anecdotal evidence, that wage inequality and educational
wage differentials have been increasing similarly to the U.S. in all or almost oil OECD countries
over the last decade or so. in fact, the actual pattern o f wage structure changes among OECD
countries is a bit more complicated. Researchers involved in the NBER project on Comparative
Labor Markets have assembled us comparable as possible data for many countries (including the
United States, Great Britain, Canada, Australia, Japan, Sweden, France, Italy, Germany, Italy,
Spain, South Korea, and the Netherlands) to systematically compare wage structure changes
among industrial economies (Freeman and Katz, forthcoming).
All o f the countries studied including the United States shared a common pattern o f narrow­
ing educational and occupational wage differentials from the late 1960s to the late 970s. All
countries with the exception o f the United States experienced a decline in overall wage dispersion
for males during the 1970s. The tendency towards reduced educational wage differentials and a
more compressed wage structure had ceased in all OECD countries by the mid-1980s. But the
patterns o f wage structure changes differ widely among OECD countries during the 1980s (Katz,
Loveman, and Blanchflower, 1992; Edin and Holmlund, 1992; Freeman and Needles, 1991;
Abraham and Houseman, 1992; Erickson and Ichino, 1992; Gregory and Vella, 1992; and Hartog, Oosterbeek, and Teulings, 1992). Most countries did experience increased wage inequality,
and increased educational differentials, but the magnitudes o f these increases have tended to be
much more moderate than in the United States; see Figure 1 and Table 1. The one country with a
pattern o f widening wage differentials that is both quantitatively and qualitatively similar to the
United States is Great Britain. Canada, Australia, Japan, and Sweden have had modest increases
in wage inequality and skill differentials since the early 1980s. Wage differentials continued nar­
rowing in Italy and France through the mid-1980s with some hint o f expanding differentials in
the late 1980s. There is no evidence o f rising wage inequality or educational differentials during
the 1980s In either Germany or the Netherlands. Additionally, increased wage inequality in other
countries (such as Britain and Japan) has been associated with generally rising levels o f real
wages so that real earnings for the bottom half o f the distribution have not declined precipitously
as they have In the United States; see Figure 2.
While changes in the distribution o f wages differed substantially among OECD countries in
the 1980s, changes in the distribution o f jobs were fairly similar. All the countries examined have
experienced large, steady shifts in the industrial and occupational distribution o f employment to­
wards sectors and job categories that disproportionately use more-educated workers over the past
two decades, in feet, the share o f employment in manufacturing declined substantially in all the
countries except Japan during the 1980s. My interpretation o f this evidence is that broad eco­
nomic forces arising from changes in technology and increased Internationalization o f economic
competition have strongly shifted labor demand in all advanced OECD economies In favor o f
more-educated workers and those with problem-solving skills and against less-educated workers.
Despite shifts In labor demand favoring more-educated workers skill differentials narrowed in the
1970s because o f dramatic increases in the supply o f highly educated workers associated with
rapid expansions o f higher education systems and explicit government and union policies to nar­
row earnings differentials. Similar demand shifts in favor o f the more-educated translated into
quite different wage structure changes in the 1980s depending on a nation's educational and train­
ing systems and wage-setting institutions.
What explains sharp increases in wage inequality and educational wage differentials in the
United States since the late 1970s? The major cause is a strong secular shift in relative labor de­
mand favoring more-educated workers and workers with problem-solving skills. This shift in la­
bor demand is driven by two primary forces. The first is the increased internationalization o f the
U.S. economy. Both international trade and immigration operated to augment the nation's im­
plicit supply o f less-educated workers, particularly workers with less than a high school educa­
tion, during the 1980s (Borjas, Freeman, and Katz, 1991). Many production and even routine
clerical tasks can be much more easily transferred abroad than in the past Trade-induced changes
in relative demand only became quantitatively important with the emergence o f substantial trade
deficits after 1982. Overall, Increased competition for less educated workers arising from trade
deficit account for about 15 percent o f the increase in the college/high school wage differential
from the late 1970s to the mid-1980s. But balanced expansions o f international trade in which


export growth matches import growth appear to have fairly neutral effects on relative labor de­
mand, and they appear to lead to some upgrading in thejobs for workers without college degrees
since export-sector jobs tend to pay higher wages for comparable workers than do importcompeting jobs. In fact, Japan appears to have been somewhat successful in upgrading thejobs o f
those without college degrees through expanding trade with low-paid jobs in sectors like textiles
and apparel being replaçai by high-wage jobs in high-tech and durable goods manufacturing in­
Immigration does not appear to have been a major factor in the changing U.S. wage structure
except possibly for high school dropouts. The skill distribution at new immigrants into the United
States in the 1980s was bimodal with many highly-skilled college graduates and many workers
with extremely little formal schooling. Overall, the direct effects o f trade and immigration account
for at most a sizeable minority ( 15 to 25 percent) o f the increase in educational wage differentials.
The second primary factor driving changes in labor demand are the technological changes
associated with the "computer revolution." The fact that firms in most sectors o f the economy are
increasing their relative employment o f college graduates despite the sharp increase in the relative
price o f college graduates strongly indicates common shifts in "technology" favoring moreeducated workers. In the U.S. manufacturing sector increases in the relative employment o f moreeducated workers are strongly positively correlated with investment in computer technologies and
R&D intensity (Berman, Bound, and Griliches, 1992). A substantial wage premium for those that
use computers on their jobs helps explain a substantial part o f increases in the college wage pre­
mium in the 1980s (Krueger, 1992).
In summary, the common pattern o f shifts in labor demand among OECD countries indicates
that broad economic forces involving changes in technology and increased globalization o f eco­
nomic competition are at work. Much direct and indirect evidence suggests an unbalanced expan­
sion o f trade involving large trade deficits in manufactured goods and technological changes
favoring computer-literate workers with problem solving skills explain much o f increased wage
inequality and educational wage differentials in the United States. Less-educated American work­
ers are becoming increasingly more substitutable with foreign workers and new computer tech­
nologies. Labor demand is shifting in favor o f jobs for college graduates requiring
problem-solving skills and towards jobs that require the "customer-oriented" skills necessary for
success in service sector jobs that require direct human contact with customers (e.g. health serv­
ices) and thereby cant be easily transferred abroad.
The experiences o f other OECD nations indicate that increased International competition and
the implementation o f new technologies do not necessarily imply sharp increases in wage ine­
quality and substantial declines in the real earnings o f less-educated workers. Two types o f na­
tional strategies have been associated with little increase in skill differentials and overall wage
inequality, in the 1980s. The first Is explicit government intervention In the wage setting process
though increases in minimum wages and extensions o f the terms o f collective bargaining agree­
ments to firms not directly involved in such agreements. Strategies f this type succeeded during
the early 1980s in preventing the wage structures from widening in Italy and France. But These
types o f policies do not directly deal with the profound changes in the demand for skills and
eventually appear to run into serious economic and political difficulties. Policies that directly op­
erate to prohibit market wage adjustments without directly addressing changed labor market con­
ditions can prevent wage Inequality from increasing for a while, but they eventually appear to be
associated with stagnant employment growth, persistent unemployment for young workers,
and/or a shift o f resources to an underground economy to avoid wage regulations.
The more promising approach focuses directly on the changing demand for skills and oper­
ates through a nation’s educational and vocational training systems. Germany and Japan have
educational and training systems that invest heavily in non-college workers. The United States
does not invest heavily in the skills o f non-college workers. Nat surprisingly, German and Japa­
nese firms act as if college-educated and non-college workers are much closer substitutes in pro­
duction than do U.S. firms. The German and Japanese educational and training systems differ
substantially from each other, but they both succeed at producing non-college workers who
passes, the problem-solving skills to adapt to new technologies.
Much empirical research on cross-country growth patterns concludes that investments In hu­
man capital (labor force skills) and physical capital are the key sources o f rapid growth and


improvements in living standards (eg. Barro, 1991). in an increasingly integrated world econ­
omy, investments in labor farce skills and infrastructure are the keys to attracting physical capital
investment and the adoption o f new technologies We heavily Invest in the skills o f college gradu­
ates. The increased returns to college education have led to substantial increases in college enroll­
ment rates in recent years. Nonetheless, we must also invest more heavily and more wisely in the
education and training o f those that don’t go to college. The experiences o f other OECD countries
Indicate that changes o f this type are possible and feasible. The experience o f the Uriited States
over the last fifteen years suggests these changes are not inevitable and require a more explicit na­
tional strategy on upgrading primary and secondary education and providing a more "profession­
alized" education to non-college workers.


Abraham, Katherine G., and Susan Houseman. "Earnings Inequality in Germany." Unpublished
paper presented et NBER Conference on Differences and Changes in Wage Structures,
Cambridge, MA, July 1992.
Barro, Robert J. "Economic Growth in a Cross Section o f Countries." Quarterly Journal o f Eco­
nomics 108 (May 1991): 407-443.
Berman, Eli, John Bound, and Zvi Griliches. "Changes in the Demand for Skilled Labor within
U.S. Manufacturing industries: Evidence from the Annual Survey o f Manufacturing." Un­
published paper, NBER, July 1992.
Boijas, George, Richard Freeman, and Lawrence Katz. "On the Labor Market Effects o f immi­
gration and Trade." NBER Working Paper No. 3761, June 1991.
Bound, John and George Johnson. "Changes In the Structure o f Wages in the 1980s: An Evalua­
tion o f Alternative Explanations." American Economic Review 82 (June 1992): 371-92.
Cutler, David M. and Lawrence F. Katz. "Macroeconomic Performance and the Disadvantaged."
Brookings Papers on Economic Activity: Microeconomics, 1991:2,1-74.
Davis, Steven J. and John Haltiwanger, "Wage Dispersion Within and Between Manufacturing
Plants." Brookings Papers on Economic Activity: Microeconomics, 1991:115-80.
Edin, Per-Anders, and Bertil Holmlund, "The Swedish Wage Structure: The Rise and Fall o f
Solidarity Wage Policy." Unpublished Paper presented at NBER Conference Unpublished
on Differences and Changes in Wage Structures, Cambridge, MA, July 1992.
Erickson, Christopher and Andrea lchino. "Wage Differentials in Italy: Market Forces, Institu­
tions, and inflation." Unpublished Paper presented at NBER Conference Unpublished on
Differences and Changes in Wage Structures, Cambridge, MA, July 1992.
Freeman, Richard,, and Lawrence F. Katz. "Differences and Changes In Wage Structures."
NBER Project, in progress.
Freeman, Richard and Karen Needels. "Skill Differentials in Canada in an Era o f Rising Labor
Market inequality," NBER Working Paper No. 3827,1991.
Gregory, Robert, and Prank Vella, "Aspects o f Real Wage and Employment Changes In the Aus­
tralian Male Labour Market" Unpublished paper presented at NBER Conference on Differ­
ences and Changes in Wage Structures, Cambridge, MA, July 1992.
Hartog, Joop, Hessel Oosterbeek, and Coein Teulings. "Age, Wage and Education in the Nether­
lands." University o f Amsterdam, unpublished paper, 1992.
Katz, Lawrence F., Gary Loveman, and David Blanchflower. "A Comparison o f Changes in the
Structure o f Wages in Four OECD Countries," Harvard University, July 1992.
Katz, Lawrence F. and Kevin M. Murphy. "Changes In Relative Wages, 1983-1987: Supply and
Demand Factors." Quarterly Journal ofEconomics 107 (February 1992): 35-78.
Katz, Lawrence F. and And L. Revenga. "Changes in the Structure o f Wages: The United States
vs Japan." Journal o f the Japanese and International Economies 3 (December 1989):
Kosters, Marvin. "Wages and Demographics." In M. Kosters, ed., Workers and Their Wages.
AEI: Washington, D.C., 1991.
Krueger, Alan B. "How Computers Have Changed the Wage Structure? Evidence from Micro
Data." NBER Working Paper No. 3858, October 1991.
Levy, Frank and Richard Mumane, "U.S. Earnings Levels and Earnings Inequality: A Review o f
Recent Trends and Proposed Explanations." Journal o f Economic Literature, forthcoming
Murphy, Kevin M and Finis Welch. "The Structure o f Wages." Quarterly Journal o f Economics
107 (February 1992): 285-326.


6. Great Britain

(o» Ma)*«, 21 and elder

t o female*. ifl and *l«cr

Figure 1: Changes in Overall Wage Inequality by Sex
Source: K atz, Loveman, and B lanchflow er (1992)

5 T a T a r>


Table 1
Wag« Inequality for Full-Time Workers
Selected OECD Countries, 1979-904/

Ratio of wage of 90th Percentile
Earner to 10th Percentile Earner
















United States
United Kingdom



United States
United Kingdom
Germany Z
Germany ZX









A/ The samples consist of full-time workers with the exception of Japan. The
wage inequality measures for Japan refer to regular workers. Wages are measured
by hourly earnings for the United States, United Kingdom/ Prance, Sweden and the
Netherlands; weekly earnings for full-time/ full-year workers covered by the
social security system for Germany I; and gross average monthly earnings plus
holiday allowances based on data from the German socioeconomic Panel for Germany
fe/The Canadian data are for the years 1980 and 1985; the data for the Netherlands
are for 1979 and 1989.
Sourcesi The data for the United States/ United Kingdom/ France# and Japan are
from Katz, Loveman, and Blanchflower (1992); the data for Canada are from Davis
(1992); the data for Germany are from Abraham and Houseman (1992); the data for
Sweden are from Edin and Holmlund (1992); and the data for the Netherlands are
from Hartog, oosterbeek, and Teulinga (1992).


10th Percentile ( )

50th Percentile (+)

A. U»!t0« S tales. 18-64 Years Old

90th Percentile(o)

B. C r*»t B rtt«ln. 21

61« an« Older

Figure 2: Cumulative Real Wage Growth By Decile, Males
Source: Katz, Loveman, and Blanchflower (1992).

sraT a™



Mr. Chairman, and members o f the Committee.. My name is Robert B. Reich and I am a
member o f the faculty o f the John F. Kennedy School o f Government at Harvard University. I am
pleased to be with you today to address the issue o f creating high-wage jobs in the United States,
a critically important subject about which there is a great deal o f confusion.
One confusion concerns the relationship between creating high-wagejobs and curing the Na­
tion’s economic problems. America’s current economic malaise is actually two separate sick­
nesses—a recessionary flu which we will survive, and a long-term infection which we may not
The flu has to do withjobs; the chronic infection, with incomes.
We will survive the flu, because Americans who want to work will be able to when the reces­
sion ends. This flu is nonetheless serious and painful. The discouragingly high unemployment
figures don't reveal the depth o f the pain, because they count as "employed” millions o f Ameri­
cans working Part-time who’d much rather be working full time, as well as people who are overquali fied for the jobs they now hold, and because the figures don't include large numbers o f
Americans too discouraged even to look for work. Employer surveys reveal fewer jobs in the pri­
vate sector than in 1989, even though the Nation's population has grown.
Many reasons have been advanced for why the flu lingers longer than most economists had
predicted. Beyond the most obvious-that the Predictions o f economists rarely have any value to
begin with—there is the current straightjacket around fiscal and monetary policies, a direct legacy
o f the 1980s. with the federal government now adding over $330 billion o f debt to the nearly $4
trillion already amassed during the 1980s, it is feared that more fiscal stimulus could lead to a run
on the dollar and a collapse o f stock and bond markets. The Federal Reserve is similarly con­
strained; further cuts in interest rates might also deal a body-blow to the dollar, as rationallymotivated investors shifted their money elsewhere around the world where rates are higher.
Consumer confidence, meanwhile, continues to be haunted by a deadly triumvirate. First is
indebtedness—yet another legacy o f the 1980s—which remains high, at 16.7 Percent o f dispos­
able personal income. Second is the alacrity with which employers are now laying o ff workers in
order to maintain profits. Employers face fewer constraints than in decades pak: Only 12 percent
o f the private-sector work force is now unionized, down from 17 percent during the last reces­
sion, and an unusually large percentage o f recent layoffs have occurred among the ranks o f whitecollar workers. Third is the dependence o f most American families on two incomes, still another
consequence o f the longer-term ailment The combination yields millions o f debt-ridden Ameri­
cans fearful o f losing at least one o f their breadwinners, and thus losing their cars or homes, or be­
ing without health insurance. These people will rationally forebear from visiting the malls.
What's the proper remedy? More fiscal and monetary stimuli regardless o f their effects o f the
dollar? Steps to restore consumer confidence, such as the creation o f a broad-based national
health insurance system? Or a policy o f doing nothing (others call it "restraint"), by which the na­
tion continues to bear the pain until the dollar is so enfeebled by economic stagnation that exports
to rise, American consumers so needy o f basic necessities that they return to the stores, and inven­
tories so depleted that employers, in order to meet These incipient demands, begin hiring once
again? This is not the place to debate how it will come about, only to assure that The pain o f un­
employment or underemployment eventually will be over.
The chronic infection is a different matter. It receives less attention than the recessionary flu,
but it is in many ways tore dangerous. Americans will have jobs when the recession ends, yet if
we continue on the present course most o f Those jobs will not pay as well as the Jobs they now
have, or once had.
This is not to suggest that the nation lacks high-wage jobs, or that it will be lacking in highwage jobs if present trends Continue. Here, too, has been confusion. Some Americans have the
highest-wage jobs in the world; the American economy continues to generate many high-wage
jobs. The issue is not whether we are creating high-wage jobs, but, rather, whether we are creat­
ing enough o f them—and what is happening to Americans who do not have them
The data are not free from Controversy, but almost all economists who value their profes­
sional reputations agree that between the 1977 and 1989, even before the Current recession be­
gan, the average after-tax incomes o f American families in the bottom fifth o f the income ladder
fell some 9 percent, the next fifth grew 6.5 percent poorer, and the middle fifth about 4.5 percent


poorer. Only the top fifth was spared The higher reaches o f the top fifth were not only spared, but
their incomes soared. The incomes o f those in the top 1 percent actually doubled.1
There are several reasons for the widening gap. To some extent, it is a function o f how
income-producing capital assets are allocated in the population, today, the typical American fam­
ily in the richest 1 percent has a total income o f $600,000, o f which only $285,000 comes from
wages and salaries, and the rest—$315,000—from interest, dividends, and capital gains. The
typical American family in the middle 60 percent gets 75 percent o f its income from wages and
salaries and less that 10 percent from interest, dividends, and capital gains. Thus, as the demand
for capital assets rises relative to supply, and the rewards to capital ownership increase, wealthier
families enjoy relatively greater income gains than poorer families. This was the case through
much o f the 1980s. Another reason involves the federal income tax, whose highest marginal rates
dropped in 1981. Were the typical family in the richest 1 percent to have paid federal taxes last
year at the same rate as in the late 1970s, they would have paid approximately $65 billion more
than they actually did.
But the gap is growing mainly because wages are diverging. Routine manufacturing and data
processing jobs, which used to provide high school graduates (and dropouts) with good earnings,
have been vanishing. Since 1989 alone, 1.3 manufacturingjobs have been lost To the extent that
the people who lost them or the young people who would obtained them have found other jobs,
those jobs are likely to be in local services—retail stores, restaurants, hotels, local transportation,
hospitals—paying only one-half to two-thirds o f typical manufecturing wages. The Census Bu­
reau recently reported that between 1979 and 1990, the proportion o f fUll-time workers receiving
poverty-level wages increased from 12.1 percent to 18 percent Young workers have fared even
worse: The proportion o f 18-year-old: working full time and making low wages soared from 22.9
Percent in 1979 to 43.4 percent in 1990.2
Note that manufacturing itselfhas not shrunk substantially as a proportion o f Gross Domestic
Product In fact, for the most part American manufacturers continue to hold their own in global
markets. But good-paying unskilled and semi-skilled manufacturing jobs have grown scarcer,
even if there were not millions o f workers in developing nations eager to do these jobs at a frac­
tion o f the wages o f American workers, these jobs would still be disappearing. Domestic compe­
tition would drive companies to cut costs by installing robots, computer-integrated manufacturing
system, or other means o f replicating the work o f unskilled Americans with machinery which can
be programmed to do much the same thing.
Meanwhile, the "knowledge content" o f most goods and services is rising-putting a pre­
mium on people who are able to recognize and solve problems. The price o f a new pharmaceuti­
cal drug mostly reflects research, development, legal, and marketing skills. The price o f a new
computer goes mostly to software development; hardware is last becoming a low-price commod­
ity. A new jet aircraft is largely a result o f engineering and manufacturing design, fancy electron­
ics, and sophisticated financing. Automobiles are largely styling, engineering, marketing, and
other problem-solving services. Although robots and computers will do most o f the routine,
back-straining work within tomorrow’s factory or service business, there will be an abundance o f
jobs for people who program the robots and computers, who maintain them in perfect running or­
der, and who exercise judgment about how they can be utilized for better effect In the new global
economy, the people who have these sorts o f problem-solving skills are in ever-greater demand.
These three related trends—automation, globalization, and knowledge-intensiveness—are
widening the wage gap between the well-educated and the poorly-educated in our society. In
1970 the average college graduate earned about 50 percent more than the average worker without
a college degree; by 1990 the college grad earned approximately 100 percent more.
It is important to emphasize, however, that the college degree itself does not provide all the
necessary problem-solving skills—nor does the lack o f a college degree mean that the worker is
1 The top 1 percent includes all families whose income exceeds $300,000, in 1993 dollars. The average in­
come of the top one percent is $800,000, in 1993 dollars. All figures are adjusted for inflation and declining
family size. They are derived from datasupplied by the Congressional Budget Office.
2 United States Bureau of the Census, Workers with low earnings: 1964 to 1990. (U.S. Government Printing
Office, May, 1992), The report examines earnings in 1964,1969,1974,1979,1984, 1989, and 1990. It de­
fines low earnings as earnings insufficient to lift a family of four out of poverty in the year examined. The pov­
erty line is adjusted each year.


unable to do the sort o f problem-solving which the new economy requires. The degree functions,
rather, as a signal to employers that the recipient is prepared—intellectually and psychological­
ly—to engage in a process o f continuous, on-the job learning about how to solve abstract prob­
lems, The college degree offers evidence that its recipient has exercised intellectual and personal
discipline sufficient to complete four years o f high school and, subsequently, o f college, and
therefore is likely to have sufficient intellectual and personal discipline to continue to learn on the
job. The more selective the college or university, the greater the apparent evidence o f such intel­
lectual and personal discipline.
I do not mean to suggest that what is learned in a university is completely irrelevant to suc­
cess in a subsequent high-wage job, only that it Is far less relevant Than most people imagine. As
a teacher in one university and a trustee o f another, I can speak with some authority on this point
Advanced education has many benefits. At best, it stimulates the mind and nourishes the soul, it
broadens perspectives and it lays the foundation for a lifetime o f intellectual enjoyment But uni­
versity curricula are rarely, if ever, directly applicable to Jobs, and that is true even with regard to
professional schools. Technologies and markets are changing too fast for any set o f intellectual
models or tools obtained there to remain relevant for long. Besides, university faculty are often
among the last to know o f the newest o f them, even within our leading universities and profes­
sional schools,
The signaling effect o f a college degree is becoming ever more important This is because the
task or finding new problem-solving employees is far more difficult than is the task o f finding un­
skilled workers for routine work, and prospective employers or problem-solvers currently have
no better signal to help them in their quest than that degree. For routine work, employers want
evidence o f reliability and, on occasion, strength. These qualities can be detected with relative
ease. But for problem-solving work, employers seek the abilities to leam quickly and efficiently,
to continue to leam on the basis o f new experiences, and to innovate where there no examples to
follow. These qualities escape easy detection.
Moreover, an erroneous decision is relatively easy to catch when it comes to unskilled em­
ployees, who either do their jobs or don't Not so with problem-solving employees, for whom
there is often no clear measure o f success or standard o f comparison (were a problem they tackled
to have a single "correct" answer, it could be found in a data bank). The cost o f error is also
higher: Failure to find problem-solvers who, collectively, match or exceed the value offered by
the competition, can doom a company. Finally, each problem-solving employee typically entails
a larger investment by the employer in both time and resources than would be the case with an
unskilled employee; not only are wages higher, but overhead per employee (office, laboratory,
computer) is often greater.
Thus does a university degree in the United States separate economic winners from losers.
Other nations are experiencing the same centrifugal forces—an ever-widening wage gap between
unskilled workers and those able to solve complex problems—but are doing something about it
They are giving more o f their citizens first-class basic education and technical training, along with
a range o f certifications—in addition to a college degree—which reduce the cost to employers o f
finding potential high-wage employees.
The United States, has been doing the opposite. The widening wage gap here is being com­
pounded by how America finances the things that otherwise would put downward-trending
Americans on an upward track, or at least halt their decline. Ours is the best system o f higher edu­
cation in the world, envied by all nations. Its success is due in no small measure to federal gov­
ernment policies which, at least until recently, have assured a steady flow o f research funding.
Federal support for primary and secondary education and for training and retraining, on the other
hand, has been relatively less generous. It has dropped by approximately one-third since 1980,
adjusted for inflation. The states, overwhelmed by the rising costs or Medicaid and prison con­
struction, have been cutting back as well—thus placing ever more responsibility on towns and
cities. But as Americans continue to segregate by income, entire towns and cities have become ei­
ther poor or middle class or wealthy. The result has been a growing disparity in the quality o f
schools, pre-schools, libraries, and other public intellectual assets available to Americans o f dif­
ferent incomes.
To make matters worse, the parchment that now most clearly divides future winners from fu­
ture lossers—the college degree is now slipping out o f reach for most American children.


Average tuition, room, and board rocketed 26 percent in the 1980s, while the federal government
cut low-interest college loans- and grants by 11 percent Public colleges and universities cannot
fill the gap, since the states are cutting back here as well: According to the college Board, tuition
at public colleges rose 12 percent last year, the largest single-year jump since 1983. And forget
the elite universities. The higher education research Institute at the University o f California, Los
Angeles, reports that since 1988 prestigious colleges have become more privileged than ever. At
the twenty-five most selective schools, the proportion o f students with family incomes o f at least
$100,000 a year (the top 5 percent o f American families) has risen from 31 to 37 percent o f the
freshman class; students with family incomes o f at least $130,000, form 17 to 22 percent Even
need-blind admissions are now endangered. Smith College and Brown University now weigh a
prospective student's ability to pay before granting admission.
If present trends continue, only kids from families safely within the top 20 percent o f incomeeamers can be expected to do better than their parents. These children will have excellent medical
care throughout their young lives. Some o f them will attend elite private schools; others will go to
high-quality suburban schools, where they will be tracked through advanced courses in the com­
pany o f other fortunate children. Their teachers and professors will be attentive to their intellec­
tual needs. They will have state-of-the-art laboratories, interactive computers and video systems
in the classroom, language laboratories, and high-tech school libraries. Their classes will be rela­
tively small; their peers, intellectually stimulating. They will visit museums and attend cultural
events. At home they will have educational books, videotapes, and personal computers replete
with the latest educational software. Most o f these children will go on to attend four-year colleges
and universities. They will fill the ranks o f the most prestigious. Many will then continue their
education by attending law schools or business schools or other institutions o f higher learning.
Almost all will be selected by employers seeking promising problem-solvers for the global econ­
omy o f the future. (They should not be overly discouraged by the current recession, prolonged as
it may be; when good jobs return, they will get them) They will form America's new high-wage
There is no simple way to enlarge upon the number o f Americans eligible for the high-wage
jobs o f the future. More money for education and training is necessary, but is hardly sufficient
The money must be well-spent, and focused on building two key capacities in the work force:
first, the ability to engage in lifelong learning; second, the opportunity to engage in it on the job.
The most important intellectual (and economic) asset which a new entrant into the work force can
possess is the knowledge o f how to learn. The most important intellectual (and economic) asset
which a worker can possess thereafter is the accumulated wisdom and insight that comes from
continuous learning on thejob.
But the analysis I have provided does suggest several avenues o f reform.
Preschool programs must be strengthened. By the age o f five, children already possess—or
may never possess—many o f the critical capacities they will need in order to learn how to learn
during the years o f their formal schooling. Successful programs like WIC pre- and post-natal
care and child immunization should be regarded not only as poverty programs but also as pro­
ductivity programs; they should be fully fiinded for children living in families below the poverty
line, and partly subsidized for poor working families living just above it
Primary and secondary education should no longer be funded largely from local property
taxes. Cities and suburbs should be consolidated, and state and federal governments should bear
a greater share o f the financial burdens. National tests should be established; schools whose stu­
dents fail to reach a minimal level or to improve at a reasonable rate should be subject to special
oversight School choice may be a viable option, so long as disadvantaged children whose par­
ents are least able to exercise effective choices are not left behind in the worst schools. Perhaps
states should experiment with sliding-scale vouchers whose worth is inversely proportional to
family income, thus creating incentives for schools to compete for disadvantaged children.
School to work transitions demand particular attention. The Federal Government should
help families afford college educations for their children, either through loans repayable from the
graduates' future earnings or as reimbursements for the young persons' public service. But the
university degree should not be the only credential on which employers safely rely. Noncollege
bound students should be able to enroll in vocational, technical, and apprenticeship programs


culminating in nationally-recognized competence tests, the successful completion o f which cer­
tify that the student has gained certain skills.
On-the job training and retraining must be encouraged. Employers often refrain from train­
ing their employees for fear that an employee, once trained and hence more valuable, will leave
the company and join another. One way to overcome this "free-rider” problem is to require that
every business (over a certain size) dedicate a small percentage o f its payroll to training its work­
ers—particularly those without college degrees.
America’s technological prowess must be understood to be a function o f the capacity o f our
work force to rapidly utilize new ideas, from whatever source around the world, in creating better
products and services. Basic research and development will continue to merit federal support
But greater emphasis must be placed on giving Americans on-the-job training in designengineering and manufacturing-engineering with regard to products on the cutting edge o f new
markets, where companies fear to tread.
Foreign direct investment should be welcomed, particularly when it helps Americans gain
on-the-job training in design-engineering, manufacturing-engineering, and complex production.
Americans have as much— if not more—to gain from a foreign company which undertakes high
value-added production in the United States than from an American company which undertakes
it abroad.
This is a small sampling o f the policy areas potentially relevant to the creation o f more high
value-added jobs in the United States. The challenge is immense, but critical to the future. At
present, the United States is creating a third world nation within its borders, and that third-world
nation is growing. At the same time, the rich are quietly seceding into well-appointed suburbs
and "gated" communities. The middle-class is shrinking. We are fast becoming a nation o f haves
and have-nots. This is not the challenge o f "competitiveness," as it is so often described. It is the
challenge o f maintaining a coherent society.



I- Introduction
For a number o f years, there has been a constant chorus o f concern about the so-called van­
ishing middle class in America. According to the critics, '’deindustrialization" was causing the
nation's manufacturing sector and its high-wage jobs to disappear, indeed, the American workers
was destined to toil at low wages as an employee o f fast-food establishments. Now, as a result o f
the most recent blip in the nation's economic fortunes, it seems that white-collar employees are
bearing much o f the brunt o f recession for the first time in history, a case can be made that this
white-collar recession is caused by the first major shock waves from the widespread adoption o f
personal computers: Middle-level managers are no longer needed to pass information up and
down the corporate structure because everyone form the chairman o f the board to the employee
on the shop floor can access the same databases.
In the long-run, this pruning o f the corporate structure is a very healthy development, for it
lowers the costs o f production and makes firms more efficient global competitors. In the short­
term, however, employees who have lost their jobs are displaced, and these dislocations can be
painful and difficult. Congressional concern about those who have lost high-wage jobs is under­
standable. However, it is equally important to recognize that well-intended public policy which
seeks to ease the transition o f the unemployed through job creation programs may have highly
undesirable consequences. Good intentions do not necessarily produce good public policy, and
there are limits on what government can achieve.
At the outset, it is important to recognize that some researchers contend that the magnitude o f
the problem has been grossly exaggerated. For example, Dr. Marvin Kosters o f the American
Enterprise Institute analyzed trends in the overall distribution o f earnings. The popular view that
there has been a disproportionate growth in low-wage jobs represents a grossly distorted picture
o f labor market trends." (Marvin Kosters, "The Changing Quality o f American Jobs?” Journal o f
Labor Research 10 (Winter 1989), p. 31.)
For the sake o f argument, however, let us accept the notion that a serious problem exists:
high-wage jobs are disappearing, thus, it is important to answer the question, "What should the
federal government do to encourage the creation o f high-wage jobs?” My answer is in two parts:
first, what government can and should do, and, second, what government cannot do.
II. What Government Can And Should Do To Create High-Wage Jobs
Government can and should facilitate the creation o f new high-wage jobs by encouraging the
expansion o f existing firms and the formation o f new ones and both o f these activities involve
risk. Therefore, public policy should focus on increasing the economic rewards for risk-taking
behavior by dramatically reducing or eliminating entirely the tax on capital gains. This simple
expedient would encourage rapid economic growth and, thereby, job creation. From a political
perspective, such a policy is not viewed favorably because it allows private markets to work and,
consequently, there is no role for political decisionmaking that permits politicians and bureaucrats
to channel taxpayer funds to special interest groups with political clout As discussed briefly in
Section III, however, the best that public policy can accomplish is to improve the economic envi­
ronment in which entrepreneurs operate, an indirect role rather than a direct one.
III. What Government Cannot And Should Not Do To Create Hieh-Waee Jobs
There are three fundamental reasons why public policy cannot create jobs through a govern­
ment program which involves the expenditure o f tax dollars. First, ajobs program (high-wage or
otherwise) is just another ’’industrial policy” initiative with the twist that the emphasis is on em­
ployment rather than on technologies or firms. Industrial policy has been widely and repeatedly
discredited as unsound, unworkable, and fatally flawed for more than a decade by economists at
both ends o f the political spectrum. Like the phoenix which rises from the ashes, however, a
small, but active group o f adherents maintain the industrial policy drumbeat, primarily because
they envision themselves as "czar” o f this or that Despite the fact that industrial policy seems to
have more lives than a dozen cats, the arguments against such proposals are still valid and so
well-known that they need not be rehashed here.
Second, and more basically, a high-wage job is a form o f wealth (it results in a high income
and individuals would be willing to pay to obtain a high-wage job), but by definition no


government can create wealth. If public policy could create wealth, the deficit could be reduced
merely by enacting "appropriate,, laws or by mandating the "right” regulations and, at the ex­
treme, there would be no need for taxes to operate the public sector. Indeed, poverty could be
eliminated throughout the world if such tactics worked. The costs o f federal programs must al­
ways exceed the benefits, for otherwise the net gains could be used to reduce the deficit or taxes
or both. Thus, government can only transfer wealth from one group to another, and these trans­
fers inevitable have negative net economic consequences. O f course, the transfers will benefit the
political powerful at the expense o f the less fortunate in society.
Third, there is an inherent contradiction in public policy. Public policy must be concerned
with the future; history cannot be changed. Therefore, sound public policy requires accurate fore­
casts about future events. The record clearly shows, however, that the federal governments abil­
ity to predict future trends is nothing less than miserable. Consider, for example, the rhetoric and
the reality o f government predictions about petroleum between 1866 and 1951 shown in Table 1.
For almost a century, government bureaus produced wildly inaccurate predictions about petro­
leum supplies and sources. Even as recently as the Carter Administration, ridiculous forecasts
were common: the Department o f Energy predicted that oil would cost $115 per barrel by 1990.
In retrospect, these forecasts might seem humorous, but they were made by the same bureaucrats
who would be managing a "National Energy Policy." By the way, there are many other examples
o f absurd government forecasts in other areas, such as timber and natural gas; the information
portrayed in Table 1 is by no means an isolated instance. Any private firm that had such a poor
track record on predicting the future would have gone bankrupt or have been laughed out o f busi­
ness long ago, but the federal agencies responsible for such absurdities blunder onward Given
past experience with governmental forecasts, it is inevitable that a federal program targeting the
creation o f high-wage, high-skill jobs would likely be a massive and costly Mure.


nahl e


fte tn r ic and Iteality? Federal O cw en*nt BetmLem Predictions, 1866*1951
U.S. Daily O il
Production Rate

Agency Making


(Billion Hals)



U.S. Revenue

Synthetics available
i f o i l production ends

Synthetics not needed;
37 b illio n fcbls. pulped
in next 82 years



U.S. Geological

L ittle o r no chance o f
o i l in Q ü ifom ia

8 b illio n fcbls. payed
sin ce that date;
i mportant new findings
in 1948



U.S. G eological

L ittle o r no chance o f
o i l in Dexas c r Kansas

14 b illio n Uals. papefl
in these states since
that prediction



U.S. geological

naodm m

future d t?srtir
supply o f 22.5 b illio n


35 b illio n fcbis. papad
sin ce 1908; 26.8 b illio n
fcbls. proven reserves on
January 1, 1949


R eality



U.S. Bureau o f

M a i future dcnestic
production only 5.7
b illic n bids.

34 b illic n th is, p a g ed
since 1914—6 tia e s th is



U.S. G eological

U.S. needs foreign o i l
and synthetics; peak
donestic production
alaost reached

1948 U.S. production
oooeeds U.S. onreaapticn
and is 4 tin es greater
than in 1920



Table 1 (Continued)


U.S. Daily O il
Production Rate
(R üH m

Agency Making




Secretary o f the
in terior

Hast iaport as sich
o i l as possibLe to
ow serve doaestic
o i l sqpplies

During next 8 years,
i aports were disacuraged
and 14 b illic n fcbls. veare
discovered in U.S.



Department o f the
In terior

U.S. o i l supplies
w ill la s t cn ly 13

New o i l found since 1939
exceeds tbe 13 years*
simply known ait that tia e



Department o f
State (Rstzoleun

S u fficien t o i l can
net: be found in the

4.3 b illic n th is , found
in 1948, the largest
v olw e in h istory and
tw ice U.S. consumption


2 .0

Secretary o f the

Ehd o f U.S. o i l
supplies in si/gjbt

U.S. production rose by
m e than one m illion
h bls. d aily in the next
5 years



Department o f tbe
In terior (O il and
Gas Division)

Reserves w ill la s t
cnly 13 years

Reservos not exhausted

Source: U.S. Congress , Bouse conritbee on in terstate and Foreign Oaaaeroe, President? ^ firagy
Program Bearing? before the a ± *™ »
^ Bierqy and B^igr. House o f Rqacesentatives,
on the
icaticns o f the IfcesJdent's Proposals in the B sogy Independence Act o f 1975,
94th Cbng., 1st se s s., 1975, p. 643. Ihe 1951 prediction is f i n “ Pear Is Expressed o f U.S.
O il S ca rcity ," Hew York Times. JUne 11, 1950.