continuing advance of income inequality? Both are, among other considerations,
undermining support for competitive markets. As I have noted many
times, competitive markets and, by extension, globalization and capitalism
cannot be sustained without the support of a large proportion of society.
The rule of law under which capitalist economic institutions function must
be perceived as "fair" if these institutions are to continue to receive broad
support. The only way to temper the bias against an economy that entails
the timely repositioning of labor is to continue to support market incentives
that create jobs and to find productive ways to ease the pain of job
losers. That problem is not new. The growing inequality of income, however,
is new, and it requires analysis as to its roots, and policy action where
appropriate.
The Beatles did well in Britain, but they did spectacularly well when
they gained access to the world market and reaped the benefits of vast audiences
and record sales far beyond what was available to them at home.
Nobody complained about globalization. Nor has anyone complained
about Roger Federer's good fortune. His tennis skills would have earned
him little if he had been confined to his native Switzerland. Businesses, of
course, also gain large advantages when they become able to reach beyond
their sovereign borders, advantages that they pass on, in part, to domestic
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customers through lower prices and, in part, to their shareholders. As economists
would say, their marginal cost of going global is a very small fraction
of their added worldwide revenues. Cross-border trade assists in recovering
domestic sunk fixed costs, especially research and development. Boeing and
Airbus, for example, would not have developed so many different types of
aircraft if their markets were limited to sales in their own countries.
Until quite recently, judging from the numerous rounds of successful
trade negotiations, globalization has been generally accepted. There is little
doubt, however, that, driven by rapidly expanding innovation and competition,
globalization has been a major contributor to the increasing concentration
of income virtually everywhere. In the past couple of decades,
innovation, especially Internet-related, has been moving faster than we can
educate ourselves to apply advancing technologies. Thus, the shortfall of
the supply of advanced skills relative to the demand for them is pressing
the wages of skilled workers higher relative to the wages of the less skilled.
There is no compelling reason why the pace of innovative ideas, which often
come in bunches, should be immediately matched by a supply of skilled
workers to implement them. The insights that advance cutting-edge technologies
emerge from a very small part of that workforce.
As globalization increased the skilled wage premium, technological innovation
was also taking a toll on lesser-skilled workers. The demand for
moderately skilled workers declined as repetitive jobs were gradually displaced
by computer programs. I recall architectural and engineering firms
with acres of people drawing detailed designs for the newest building complex
or jet aircraft. Those jobs are all gone—programmed out of existence.
Lower-income workers, mainly in services not subject to global competition,
have fared somewhat better. Fears of Americans that immigration is
undercutting their wage levels have yet to be confirmed by hard evidence.
In general, lower-income U.S. workers did poorly in the 1980s but have
fared somewhat better in recent years.
During the past quarter century, as incomes at the middle and lower
levels of the U.S. income distribution lagged, those of the most affluent rose
rapidly. Americans have seen this before. The last time income in the United
States was concentrated in the hands of such a relatively few people was
a brief period in the late 1920s and, I suspect more durably, in the years
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preceding World War I. Owing to the rapid development of the United
States as a national market in the latter part of the nineteenth century, income
had become highly concentrated by the early years of the twentieth
century, as the Rockefellers, Fords, Morgans, and Carnegies were able to
reach beyond their local fiefdoms to leverage their incomes by many multiples.
The newly rich were a much larger group than the prominent
few families that so engaged the society pages at the turn of the century.
The striking income disparities of the early twentieth century, however,
were driven by a substantially larger concentration of wealth than exists
today. Much of the income concentration of those days reflected interest,
dividends, and capital gains from that wealth, rather than wage and salary
differentials.*
In contrast, the income concentration of today owes more to the generation
of high incomes from work spurred by the imbalance between the
demand for skilled workers and their available supply. Nonetheless, the
trends are troublesome. Corporate managers persistently identify the lack
of skilled workers as one of today's greatest ongoing problems and are willing
to bid up pay packages to acquire them.
Technological advance is rarely smooth. It can take years for labor markets
to adjust to a surge in such demand. They do so by bidding up skilled-
worker pay scales, which attracts workers from abroad and encourages resident
workers to acquire more schooling or otherwise gain greater skills. But
the response takes time, and access to skilled foreigners is constrained.
In the interim, the rise in skilled-worker wage levels, unmatched by a proportionate
rise for those with lesser skills, concentrates income in the upper
brackets. By and large, aside from many protectionist initiatives,
globalization's contribution to increasing inequality has not drawn heavy
opposition—at least not yet. The difficulties encountered in the most re
*Data on wealth distribution in the late nineteenth century are sparse, but the large prevalence
of property income confirms the vast anecdotal evidence of those years. The decline in the
concentration of income in the 1930s and through World War II owed to weakened asset values
and capital losses, the hypertight labor markets of World War II, and the wage and price
controls that inhibited supply and demand from functioning. Parenthetically, one consequence
of those controls was the emergence of company-supplied medical insurance as a means to attract
workers whose wages were frozen. The consequences of that system are all too evident to
today's U.S. manufacturers.
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cent multilateral effort (the Doha round of trade negotiation) to further
ease restrictions on international trade, however, have raised political red
flags against a further spread of globalization.
To a greater or lesser extent, most developed countries have experienced
the impact of technology and globalization much as the United
States has. Yet, although they confront increasing income concentration,
the impact to date appears to be significantly milder than what we are experiencing
in the United States. The United States is clearly an outlier
among the global trading partners, and that calls for a broader explanation
of the causes of U.S. income inequality. Part of the explanation is the more
elaborate welfare systems, especially in Europe, that are engaged in far
more extensive programs to redistribute income than has been deemed acceptable
in the United States. But this is not new. Such disparities existed well
before 1980, when income inequality began to become a global problem.
A very likely significant part of the explanation for recent developments
appears to be the dysfunction of elementary and secondary education
in the United States. A study conducted first in 1995 by the Lynch
School of Education at Boston College revealed that although our fourth-
grade students on an international comparison scale were above average in
both math and science, by the time they reached their last year of high
school they had fallen well below the international average. The leading
nations included Singapore, Hong Kong, Sweden, and the Netherlands.*
Follow-up studies in 1999 and 2003 indicated only modest U.S. relative improvement.
This education disaster cannot be pinned on the quality of our
children. Our students were average, or above, at age nine or ten. What do
we do to them in the next seven or eight years that they test so poorly relative
to their peers in other countries? What do we do to their learning process
that requires business recruiters to dismiss vast numbers of "educated"
applicants for modestly skilled jobs because they cannot write coherent
sentences or add a column of numbers accurately?
It is not surprising that, as a consequence, too many of our students
languish at too low a level of skill upon graduation, adding to the supply of
*The study and its follow-ups are available at the International Study Center's Web site, ://
timss.bc.edu.
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lesser-skilled labor in the face of an apparently declining demand. One can
only wonder how our labor markets would behave if our students could
match the accomplishments of their counterparts in Singapore.* These education-
driven mismatches of skills coupled with the forces of globalization
and innovation appear to explain much, if not most, of the failure of
real wages at the middle and bottom of our income distribution to rise
measurably during the past quarter century. The decline in the ability of labor
unions to hold wages above the market has probably had some effect
on middle-class incomes, but it cannot be a significant factor in the greater
incidence of increased concentration of income in the United States relative
to our trading partners, since globalization has weakened the bargaining
power of unions worldwide.
The key policy levers to address the problem of increasing inequality,
as I see it, are thus primarily education and immigration. Markets are already
working in that direction. We need to quicken the process. Specifically,
we need to harness better the forces of competition that have shaped
the development of education in the United States, and we need to make
immigration easier for highly skilled individuals. I'll return to these points
below.
For three decades following World War II, in the face of advancing
technologies and globalization, we managed to hold the distribution of income
stable. How did we do it, and what lessons from that experience will
help craft policies that can rein in the growth of income inequality and possibly
reverse it?
The skill composition of our workforce at the end of World War II
meshed reasonably well with the needs of our even-then-complex capital
facilities. As a result, wage-skill differentials were stable, and percentage
changes in wage rates were broadly the same for all job grades. The significant
addition of college graduates to the labor force, in part the result of
schooling financed by the GI Bill, was sufficient to contain wage increases
for the highly skilled. Real wages of the lesser skilled also rose, in part as a
result of effective high school education and the many skills learned during
*Ironically, many educators in Singapore marvel at the entrepreneurial skills of American
youth.
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the war. In short, technical proficiencies across all job levels appeared to
rise about in line with the needs of our ever-more-complex infrastructure,
stabilizing the income distribution in the United States for three decades.
While the GI Bill and on-the-job training in the World War II military were
not, of course, initially market-driven, they helped to meet the needs of a
changing labor market.
By 1980, however, a persistent rise in income inequality began to take
hold.* High-wage, middle-class factory jobs in the United States have been
under pressure from technology and imports since they peaked at nearly
twenty million in mid-1979. But in recent years, fear of outsourcing of service
trades not previously subject to international competition has added
to job insecurity. That insecurity, fostered by global competition, was new
for many middle-income Americans, who increasingly became willing to
forgo pay raises for job-tenure guarantees.
Our institutions of education have responded to the skill mismatch
that became evident a quarter century ago, but only in part. When I was
young (the 1940s), education was seen as preparation for a lifetime of
work. Everyone viewed formal education as what you did in your early
years. Either you ended your studies after high school or you went on to
college and beyond. Whatever your final degree, educationally, you were
set for life. A teenager with a high school diploma would follow his father
into the local steel mill, or, if a college graduate, he would seek a job as an
assistant to an executive in a large corporation. Steel mill jobs were high
paying, and most people who took them expected to spend the whole of
their working lives at the mill. The young male corporate assistants aspired
to replace their bosses someday. Young women by and large took jobs as
secretaries or teachers upon graduation, pending marriage and family. In 1940,
only 30 percent of women between ages twenty-five and fifty-four were employed
or seeking jobs. (Today the number is more than 75 percent.)
But as competition spurred creative destruction, the pace of job turnover
quickened and the visions of a lifetime with a single employer faded.
interestingly, despite the marked increase in income concentration over the past quarter century,
there is little evidence that the distribution of wealth in the United States has materially
changed.
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