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The drivers of economic change: Technology, globalization, and demography

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The drivers of economic change: Technology, globalization, and demography

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Content THE DRIVERS OF ECONOMIC CHANGE:
TECHNOLOGY, GLOBALIZATION, AND DEMOGRAPHY
by
Monica Bray
A Dissertation Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(POLITICAL ECONOMY AND PUBLIC POLICY)
May 2006
Copyright 2006 Monica Bray
UMI Number: DP23419
All rights reserved
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a note will indicate the deletion.
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UNIVERSITY OF SOUTHERN CALIFORNIA
THE GRADUATE SCHOOL
This dissertation, written by
under the direction o f h '&K dissertation committee
and approved by all its members, has been presented to
and accepted by the Graduate School in partial
fulfillment o f the requirements for the degree o f
DOCTOR OF PHILOSOPHY
Jean Morrison
Associate Vice Provost for Graduate Programs
Date
Dissertation Committee
Chair
TABLE OF CONTENTS
LIST OF TABLES.............................................................................................................iv
LIST OF FIGURES............................................................................................................v
ABSTRACT..................................................................................................................... vii
CHAPTER 1. INTRODUCTION.....................................................................................1
Introduction........................................................................................ 1
Intellectual History...........................................................................................................11
CHAPTER 2. TECHNOLOGY AND THE AMERICAN ECONOMY.................... 27
Innovation and Economic Change: A Look B ack........................................................30
Innovation and Change in the American Economy Today...........................................36
Developments in Telecommunications .................................................. 39
How Information Technology is Changing the Economy............................................ 47
Managing Information Flows.............................................................................50
Retail E-Commerce............................................................................................. 53
Business-to-Business E-Commerce....................................................................55
Information Technology and the Theory of the Firm ......................................58
Information Technology and Network Effects..................................................59
The Role for Government Policies................................................................................. 62
Support for Research and Development ................................................ 65
Maintaining Competition....................................................................................67
Conclusion........................................................................................................................71
CHAPTER 3. THE GLOBAL ECONOMY.................................................................. 73
The Fall and Rise of the Global Economy.................................................................... 78
The Growing Importance of Trade.....................................................................78
The Rise of International Capital Flow s........................................................... 84
The Forces Behind Globalization....................................................................................90
The Role of Technology.................................................................................... 90
The Role of Policy............................................................................................... 93
The Benefits of a Global Economy................................................................................ 97
Globalization and Living Standards.................................................................100
Globalization and Growth..................................................................................103
The Challenges of Globalization...................................................................................105
Spreading the Benefits of T rade......................................................................106
Addressing Concerns About Adjustment............... 112
Conclusion......................................................................................................................114
iii
CHAPTER 4. WORK AND EDUCATION.................................................................116
The Transformation of the Labor M arket....................................................................116
The Rising Importance of Skills and Education............................................ 119
Growth in Opportunities...................................................................................129
Preparing the American Work Force..........................................................................1.135
Building Foundations: Educating America’s Y outh.....................................136
The Continuing Challenge: Reeducating and Retraining...............................152
Conclusion......................................................................................................................162
CHAPTER 5. THE CHANGING AMERICAN FAMILY........................................ 164
Key Trends Shaping the American Fam ily............................................ 168
Female Labor Force Participation...................................................................168
Family Formation and Dissolution................................................ 171
Life Expectancy and H ealth........................................................................... ..174
Increasing Diversity Across Families.......................................................................... 176
Diversity in Family Structure.......................................................................... 176
Diversity of Income and Hours of W ork................... 181
The Rising Earnings of Women with Children..............................................185
Challenges Families Face............................................................................. 192
The “Money Crunch” .......................................................................................193
Boosting the Financial Resources of Families
to Lessen the Money Crunch......................................................................197
The “Time Crunch”...........................................................................................204
Increasing the Flexibility of Paid Work
to Lessen the Time Crunch.........................................................................211
Conclusion......................................................................................................................215
BIBLIOGRAPHY...........................................................................................................227
LIST OF TABLES
iv
Table 2-1 48
Table 4-1 132
Table 5-1 166
Table 5-2 188
Table 5-3 189
LIST OF FIGURES
Figure 2-1 31
Figure 2-2 42
Figure 2-3 45
Figure 2-4 52
Figure 2-5 55
Figure 2-6 64
Figure 3-1 75
Figure 3-2 80
Figure 3-3 82
Figure 3-4 86
Figure 3-5 95
Figure 3-6 98
Figure 4-1 117
Figure 4-2
121
Figure 4-3
122
Figure 4-4 126
Figure 4-5 127
Figure 4-6
133
Figure 4-7
139
Figure 4-8
145
V I
Figure 5-1 170
Figure 5-2 172
Figure 5-3 174
Figure 5-4 177
Figure 5-5 180
Figure 5-6 183
Figure 5-7 184
Figure 5-8 185
Figure 5-9 206
ABSTRACT
Technological innovation, globalization, and demographic shifts have been
the principal drivers of economic change in the American economy over the last
century. The ascendance of United States in the global economy has been a direct
result of these forces. Their importance, future evolution and the public and
economic policies we implement in response will in large part determine our future
prosperity and security. This dissertation confirms the liberal economic model and
demonstrates how these factors are creating new industries, transforming the way in
which businesses operate, altering the nature of work, and reshaping the typical
family. Furthermore, it analyzes the new opportunities and new challenges that have
emerged as the United States has moved from an agrarian and industrial economy,
anchored in the production of goods, to an increasingly information-driven economy,
fueled by the exchange of services and ideas. Finally, and most importantly, it
addresses the challenges ahead for public policy and their implications for our
economy, our work force and our families.
1
CHAPTER 1: INTRODUCTION
Introduction
The last century was one of dramatic growth, change, and new opportunity
for America. Technological innovation, globalization, and demographic shifts have
led to fundamental changes in our economy, creating new industries, transforming
how businesses operate, altering the nature of work, and reshaping the typical family.
The American economy today is more prosperous and more diverse and offers
Americans more possibilities and choices than ever before. But new challenges have
accompanied those changes, and policymakers must continue to seek ways to
harness and maximize the benefits for all Americans. Rising to these policy
challenges is particularly appropriate as we seek to sustain the phenomenal economic
performance America enjoys.
This dissertation will discuss some of the key economic changes of the past
century and analyze some of the principal factors driving those changes. New
opportunities and new challenges have emerged as the United States has moved from
an agrarian and industrial economy, anchored in the production of goods, to an
increasingly information-driven economy, fueled by the exchange of services and
ideas.
To appreciate how far we have come, it is instructive to look back on what
American life was like in the early 1900s. At that time, fewer than 10 percent of
2
homes had electricity, and fewer than 2 percent of people had telephones.1 An
automobile was a luxury that only the very wealthy could afford. Many women still
sewed their own clothes and gave birth at home. Because chlorination had not yet
been introduced and water filtration was rare, typhoid fever, spread by contaminated
water, was a common affliction. One in 10 children died in infancy.2 Average life
expectancy was a mere 47 years.3 Fewer than 14 percent of Americans graduated
from high school.4 The typical family was a two-parent family where the father was
the breadwinner and the mother did not work for pay. Fully 80 percent of American
children lived in this kind of family.5 Fewer than 10 percent lived in single-parent
homes.6 Widowhood was far more common than divorce. The average household
had close to five members, and a fifth of all households had seven or more.7
More than 40 percent of the work force labored in agriculture.8 Average
income per capita, in 1999 dollars, was about $4,200.9 Options for women and
minorities in the work force were limited. The overwhelming majority of women
worked at home or on the farm. Only about 20 percent of women were in the labor
force, and those who did work were likely to be unmarried and in low-paying
occupations.1 0 Over 90 percent of African American women worked as either farm
laborers or domestic servants.1 1 The typical workweek in manufacturing was about
50 hours, 20 percent longer than the average today.1 2
In 1900 only 5 percent of factories used electricity as a power source.1 3 The
rest still used steam or water power to drive their machines through intricate
arrangements of wheels, belts, and shafts. By far the greater part of the productive
economy was involved in making goods. Only about 30 percent of workers were
employed in service industries, and services made up just 2 percent of U.S. exports.1 4
Although international trade equaled about 15 percent of GNP, there was relatively
little integration of national economies through investment and production
arrangements.1 5
The broad contrasts between America in the early 1900s and America today
are striking. Some of the most dramatic improvements have been in the area of
public health. Infant mortality dropped by more than 90 percent over the course of
the century.1 6 Life expectancy has increased by about 30 years.1 7 Diseases such as
typhoid, cholera, smallpox, and polio have been dramatically reduced or even
eliminated through improved sanitation and the widespread use of vaccines.
Average income per capita in 2000 was $33,740, more than eight times what
15?
it was at the beginning of the 20th century. Just 3 percent of the labor force now
work on farms.1 9 More than 40 percent of total employment is in industries that are
intensive users of information technology.2 0 And studies project that the five fastest
growing occupations between now and 2008 will be related to computers.2 1 The
service sector accounts for 50 percent of the 20 million new jobs created over the last
7 years, and services are now about 29 percent of exports.2 2 More than 80 percent of
Americans aged 25 and over have graduated from high school, and almost a quarter
have graduated from college.2 3
The long-standing gender gap in education has disappeared—women are in
fact graduating from high school and college at slightly higher rates than men.2 4
Over 75 percent of women aged 25-44 are in the work force.2 5 Women and
minorities are now employed in a broad range of industries and occupations that had
previously been closed to them. And although the pay gaps between men and
women, and between whites and minorities, have not yet disappeared, they have
shrunk significantly.
The “typical” family today is much more diverse. Some 28 percent of
children now live in single-parent families, and another 44 percent live in families
where both parents are in the paid labor force. Only 24 percent of children now live
in what used to be the typical model of a breadwinner father and homemaker-
mother.2 7 Meanwhile many other types of family arrangements, including unmarried-
partner households and same-sexpartner households, have become more
commonplace.
Today, the vast majority of households have electricity, telephones, and
automobiles. A number of appliances that did not exist a century ago are now
considered common, if not essential, household fixtures: televisions, videocassette
recorders, refrigerators, washing machines, wireless phones, and personal computers,
to name a few.
America’s international trade (exports plus imports) now amounts to nearly
25 percent of GNP.2 8 Both trade and cross-border investment have been spurred by a
range of new technologies and products that have cut transport costs and allowed
producers and investors continents apart to coordinate their activities with ever
greater ease. A U.S. computer manufacturer can import components from foreign
5
suppliers or its own overseas facilities. International mutual funds allow American
families to diversify their savings across both industrial and emerging markets
abroad. And with the advent of e-commerce, consumers around the world can order a
wealth of goods that they might never find at their local shopping centers.
These dramatic changes have been driven by a number of factors. Among the
most important are technology, globalization, and demographic change. America
now faces a number of unique challenges as we try to maximize the benefits to all
Americans of the internationally integrated, technologically advanced economy in
which we now live.
Technology
From electricity to mass production to telecommunications and e-commerce,
technological innovation has been a constant in the American economy, and its
effects have been far-reaching. Entire industries that only a few decades ago did not
even exist, such as the computer industry, are now leading engines of growth.
Between 1995 and 1998, information technology-producing industries contributed,
on average, 35 percent of the Nation’s real economic growth.2 9 Computers are cited
as a principal factor in the increase in productivity growth and are credited with
helping keep inflation low. The computer industry itself has achieved dramatic
productivity increases: prices of computers have fallen nearly 30 percent per year on
average since 1995.3 1 And as companies integrate computers, information,
communications technology, and, most recently, the Internet and e-commerce into
their business practices, there is evidence that technological innovation is changing
the very fabric and structure of industries. Many economists now posit that we are
entering a new, digital economy that could inaugurate an unprecedented period of
sustainable, rapid growth.
Among the challenges posed by the evolving digital economy is maintaining
the economic conditions that will sustain the virtuous cycle of low interest rates, high
investment, increasing productivity, low inflation, and strong growth. Fiscal
discipline is a key underpinning of these trends. In addition, government policies
must foster the competitive dynamic that encourages firms both new and old to
introduce innovative products and services, to lower prices through gains in
productivity, and to expand customer choice and improve customer service. The
greater competition promoted by the Telecommunications Act of 1996, among other
developments, has led to explosive investment in communications infrastructure.
This, in turn, has led to a proliferation of new and increasingly affordable
information and data services. As both consumers and businesses make increasing
use of the Internet and e-commerce, these new tools are beginning to have pervasive
effects on how business is conducted—much as the advent of electricity or mass
production did earlier.
The American job market is adapting to change with much the same vigor.
Workers who are well educated and technologically skilled command a substantial
wage premium in today’s information-driven economy. Information technology-
producing industries have experienced faster than average job growth in recent years.
In 1997 they added 350,000 jobs—a 7.7 percent increase from 1996—compared with
average employment growth in the broader economy of about 3 percent. Those
jobs, moreover, pay a significant premium: salaries average $53,000, compared with
an economy-wide average of $30,000.3 3
Now is the time to make the right strategic investments in education and
training, so that the American work force will be well prepared to take advantage of
these new opportunities. Government policies that address this task encompass
initiatives to improve the quality and standards of schools, to encourage students to
stay in school, and to help schools afford the technology necessary to teach students
the skills needed in today’s job market. Programs such as the E-rate, together with
other initiatives in education technology, play a valuable role in closing the digital
divide by ensuring that all students, whatever their family’s income and wherever
they live, have access to computers, Internet connections, and teachers trained in the
new technologies.
Globalization
America’s increasing openness to the world, through trade, investment, and
the integration of cross-border business operations, has been yet another driver of
change that has made our economy more prosperous. The freedom of firms to choose
from a wider range of inputs, and of consumers to choose from a wider range of
8
products, improves efficiency, promotes innovation in technology and management,
encourages the transfer of technology, and otherwise enhances productivity growth.
These benefits in turn lead to higher real incomes and wages. Quite in contrast to the
commonly expressed fear that globalization hurts American workers, our experience
in the last century has shown that as we have grown more open to globalization, we
have grown more prosperous, and both workers and consumers in the aggregate have
realized the benefits. Only a small share of worker dislocation has been attributed to
trade.3 4 Policies that help ease the transition and offer retraining to those workers
play an important role in their adjustment. But we as a Nation have much to gain
from continuing to work for trade liberalization through the World Trade
Organization. We should work, however, to bring more transparency to the WTO, to
make sure that developing countries benefit from globalization, and to encourage
greater consideration of labor and environmental concerns.
Demographic Change
Over the course of the century, a number of demographic changes altered the
profile of the typical American family. The massive entry of women into the work
force reflects new opportunities for women but also places new demands on families.
More and more families today are dualeamer or single-parent families. Without a
parent available full-time to care for the home and children, these families often face
both a time crunch and a money crunch as they seek to balance the needs of work
and family life.
At the same time, the combination of longer life spans and the aging of the
baby boom has given new urgency to the issues surrounding care for older
generations. The graying of the population poses a clear challenge to policymakers to
strengthen Social Security and Medicare so that they continue to meet the changing
needs of older Americans, including helping them afford the prescription drugs that
are becoming increasingly important in medical care.
Conclusion
America stands at a unique juncture in its history. We are more prosperous,
more technologically sophisticated, and more integrated into the global economy
than ever before. Yet great challenges still lie ahead to ensure that the benefits of this
golden age are sustained and shared as broadly as possible, and that the right
investments are made in the future. Fiscal discipline, to keep interest rates low and
fuel continued investment, will remain fundamental to policy strategy. Investing in
education, health care, science, and technology will prepare our families and our
firms for the challenges ahead. Opening markets and continuing to lower barriers to
trade will help deepen the global integration that has served us well thus far.
Furthermore, change is now a constant in the American economy and an
essential part of its success. And, as the study of history involves understanding
10
change, it is important to first consider the intellectual history of our market
economy. The next section explores the ideas of thinkers that have fundamentally
changed the way we perceive the global economy.
11
Intellectual History
In the broad sweep of history, it is ideas that matter. Indeed, the world is
ruled by little else. As John Maynard Keynes famously observed: "Practical men,
who believe themselves to be quite exempt from intellectual influences, are usually
the slaves of some defunct economist. Madmen in authority, who hear voices in the
air, are distilling their frenzy from some academic scribbler of a few years back."3 5
Emperors and armies come and go; but unless they leave new ideas in their wake,
they are of passing historic consequence.
The short list of some of the greatest socioeconomic thinkers who have
materially advanced the betterment of civilization unquestionably includes Adam
Smith. He is a towering contributor to the development of the modem world. In his
Wealth o f Nations, Smith reached far beyond the insights of his predecessors to
frame a global view of how market economies, just then emerging, worked. In so
doing, he supported changes in societal organization that were to measurably
enhance world standards of living.
For most of recorded history, people appear to have acquiesced in, and in
some ways embraced, a society that was static and predictable. A young twelfth-
century vassal could look forward to tilling the same plot of his landlord's soil until
disease, famine, natural disaster, or violence ended his life. And that end often came
quickly. Life expectancy at birth was, on average, twenty-five years, the same as
12
it had been for the previous thousand years.3 6 Moreover, the vassal could fully expect
that his children and doubtless their children, in turn, would till the same plot.
Perhaps such a programmed life had a certain security, established by a rigid social
and legal hierarchy that left little to individual enterprise.
To be sure, improved agricultural techniques and the expansion of trade
beyond the largely self-sufficient feudal manor increased the division of labor and
raised living standards and populations, but growth in both was glacial. In the
fifteenth century, the great mass of people were engaged in the same productive
practices as those of their forebears many generations earlier.
Smith lived at a time when market forces were beginning to erode the
rigidities of the remaining feudal and medieval practices and the mercantilism that
followed them. Influenced by the ideas and events of the Reformation, which helped
undermine the concept of the divine right of kings, a view of individuals acting
independently of ecclesiastic and state restraint emerged in the early part of the
eighteenth century. For the first time, modem notions of political and economic
freedom began to gain traction. Those ideas, associated with the Age of
Enlightenment, especially in England, Scotland, and France, gave rise to a vision of a
society in which individuals guided by reason were free to choose their destinies
unshackled from repressive restrictions and custom.
What we now know as the rule of law - namely protection of the rights of
individuals and their property - widened, encouraging people to increase their efforts
to produce, trade, and innovate. A whole new system of enterprise began to develop,
13
which, though it seemed bewildering in its complexity and consequences, appeared
nonetheless to possess a degree of stability as if guided by an "invisible hand." The
French Physiocrats, among others, struggled in the middle of the eighteenth century
to develop rudimentary principles to untangle that conundrum. Those principles were
an attempt to explain how an economy governed by a calculable regularity - that is,
natural law and, as characterized by the Physiocrat Vincent de Toumay, "Laissez-
faire, laissez-passer" - would function. The Physiocrats' influence, however, waned
rapidly along with the influence of other political economists as evidence grew that
their models were, at best, incomplete. It was left to Adam Smith to identify the
more-general set of principles that brought conceptual clarity to the seeming chaos of
market transactions. In 1776, Smith produced one of the great achievements
in human intellectual history: An Inquiry into the Nature and Causes o f the Wealth o f
Nations. Most of Smith's free-market paradigm remains applicable to this day.
Smith was doubtless inspired by the Physiocrats, as well as by his friend
David Hume, his mentor Francis Hutcheson, and other participants in the
Enlightenment. Early political economists had made impressive contributions, many
of them anticipating parts of Smith's global view. But Smith reached beyond his
predecessors and subjected market processes to a far more formidable intellectual
analysis. One hears a good deal of Franz Joseph Haydn in the string quartets and
symphonies of Wolfgang Amadeus Mozart; yet to my ear, at least, Mozart rose to a
plateau beyond anything Haydn and his contemporaries were able to reach. So, too,
in his sphere, did Smith.
He concluded that, to enhance the wealth of a nation, every man, consistent
with the law, should be "free to pursue his own interest his own way, and to bring
both his industry and capital into competition with those o f ... other ... men."3 7 "It is
not from the benevolence of the butcher, the brewer, or the baker, that we expect our
dinner, but from their regard to their own interest."3 8 The individual is driven by
private gain but is "led by an invisible hand" to promote the public good, "which was
no part of his intention."3 9 This last insight is all the more extraordinary in that, for
much of human history, acting in one's self-interest - indeed, seeking to accumulate
wealth - had been perceived as unseemly and was, in some instances, illegal.
In the opening paragraphs of the Wealth o f Nations, Smith recognized the
crucial role played by the expansion of labor productivity in improving welfare when
he cited "the skill, dexterity, and judgment with which labor is generally applied" as
one of the essential determinants of a nation's standard of living. "Whatever be the
soil, climate, or extent of territory of any particular nation, the abundance or
scantiness of its annual supply must in that particular situation, depend upon ... the
productive powers of labor."4 0 More than two centuries of economic thought have
added little to those insights.
Smith, on remarkably little formal empirical evidence, drew broad inferences
about the nature of commercial organization and institutions that led to a set of
principles that would profoundly influence and alter a significant segment of the
civilized world of that time. Economies based on those principles first created levels
of sustenance adequate to enable the population to grow and later - far later - to
15
create material conditions of living that fostered an increase in life expectancy. The
latter development opened up the possibility that individuals could establish long
term personal goals, a possibility that was remote to all but a sliver of earlier
generations.
Smith's ideas fell on fertile ground and within a very few decades verged on
conventional wisdom. The ancient political power of the landed gentry, the major
beneficiaries of the older order, was giving way to a new class of merchants and
manufacturers that was a product of the Industrial Revolution, which had begun a
quarter-century earlier. Pressures were building in Britain and elsewhere to break
down mercantilist restrictions. But with Smith, the emerging elite found their voice
and sanction.
Smith's sanction, however, was directed to the freedom of markets and trade,
not to the new business elite, many of whose business practices Smith severely
deprecated. He concluded that the competitive force unleashed by individuals in
pursuit of their rational self-interest induces each person to do better. Such
competitive interaction, by encouraging specialization and division of labor,
increases economic growth.
Smith's essentially benevolent views of the workings of competition
counteracted pressures for market regulation of the evident excesses of the factory
system that had begun early in the eighteenth century. Those excesses were decried a
century later by the poet William Blake as "... the dark Satanic mills" that by then
characterized much of industrial England.
16
Perhaps if the Wealth o f Nations had never been written, the Industrial
Revolution would still have proceeded into the nineteenth century at an impressive
pace. But without Smith's demonstration of the inherent stability and growth of what
we now term free-market capitalism, the remarkable advance of material well-being
for whole nations might well have been quashed. Pressures conceivably could
have emerged to strengthen mercantilistic regulations in response to the stresses
created by competition and to the all-too-evident ills of industrialization.
Smith was the first in a line of political economists whom we now identify as
the classical school. Foremost of his followers was David Ricardo, a stockbroker,
parliamentarian, and skilled essayist. Ricardo's major work, The Principles o f
Political Economy and Taxation, published in 1817, offered a rigorous, though less
optimistic, analysis of the structure of a system of wholly free commerce.
Under the political onslaught of a rising industrialist class intellectually
supported by the classical school, mercantilism was gradually dismantled, and
economic freedom spread widely. This process reached its apex with the repeal of
Britain's Com Laws in 1846.4 1 The acceptance of classical economics was, by then,
broad enough to prompt reorganization of commercial life in most of the
civilized world.
Adam Smith died in 1790, well before his extraordinary impact could have
been assessed. But Ricardo lived until 1823, and John Stuart Mill, another member
of the school, lived until 1873. Would they and the other early followers of Smith
find the current economic landscape at all familiar?
17
In one sense, not likely. Among the developed countries, famine is now
virtually nonexistent. Thomas Robert Malthus's penetrating analysis at the end of the
eighteenth century of the limits of subsistence, to which many of the classical school
subscribed, proved wrong.
Malthus built his pessimistic vision on a notion that the long-evident forces
of stagnation would persist: A human population with a propensity to grow
geometrically would be thwarted by limits to growth in the means of subsistence.
Having observed crop yields that had changed only marginally for millennia,
Malthus could not have foreseen the dramatic increase in agricultural yields. In the
United States, for example, com yields rose from 25 bushels per acre in the early
1800s to 160 by 2004.4 2
Moreover, those living in the early part of the nineteenth century could not
have imagined that life expectancy in developed countries two centuries later would
rise on average to more than twice that which they experienced.4 3 That increase
directly and indirectly resulted largely from the almost twentyfold increase in
average real per capita gross domestic product gained since 1820, according to
estimates of Angus Maddison, the economic historian. From this expanding output,
society has been able to devote more resources to nutrition, sanitation, and health
care.
And yet, regrettably, much of today's developing world would appear
familiar to our forebears. Pestilence is present in the form of AIDS, and as a
consequence, life expectancy in much of Africa is not much different from what it
18
was in most of the world two centuries ago. Significant parts of the world still
experience periodic famine.
Although workers in developed and many emerging nations have witnessed
an extraordinary rise in living standards, some shadow of worker angst of the earlier
period remains. Today's vast technological advances and the labor turnover
associated with it have not sparked the violence of the early nineteenth-century
Luddites, but they are nonetheless associated with significant job insecurity.
Finally, classical economists, who battled the rear guard of mercantilism in
their days, would certainly recognize the assault on their paradigm in the anti
capitalist, anti-free-trade rhetoric currently prevalent in some contemporary
discourse.
Yet, with all of today's economic shortcomings, there can be little doubt that
the Industrial Revolution and the emergence of free-market capitalism have brought
civilization to a material level that could not have been imagined two centuries ago.
The late eighteenth century, when the dramatic rise in standards of living and in
population began after millennia of virtual stagnation, was one of the seminal
turning points of history.
With few exceptions, that advance has carried forward to this day. Average
global real per capita GDP has risen 1.2 percent annually since 1820, enough to
double standards of living every fifty-eight years.4 4 In the same period, world
population has increased sixfold 4 5 In the previous two millennia average per
19
capita incomes barely exceeded levels required to support, at minimum subsistence,
a marginally noticeable rise in population.
Today, Adam Smith's insights still resonate as they did after the publication
of the Wealth o f Nations. However, during the intervening generations the esteem in
which Smith's contributions were held waxed and waned with the acceptance of free-
market capitalism.
After its initial acceptance in the late eighteenth century, the new economic
order soon attracted criticism. The Industrial Revolution brought "the dark Satanic
mills" and all the squalor associated with them. To be sure, life for a significant part
of the population at the margin of subsistence during the early days of the Industrial
Revolution was misery. But it was life. A half-century earlier, many of those
poor souls would have died as infants or children. Nonetheless, within decades of the
emergence of the new order the visible misery and the evident wretched struggle for
subsistence inspired competing visions of economic organization.
Robert Owen, a successful British factory owner, in a challenge to Smith,
averred that unrestrained laissez-faire by its nature would lead to poverty and
disease. He led a school of so-called Utopian Socialists who advocated, in Owen's
phrase, "villages of cooperation." In 1826, he set up such a community in the United
States, which he named New Harmony. 4 6 Ironically, communal strife brought the
New Harmony experiment to collapse within two years.4 7 Many saw the initiative as
opposed to the laws of human nature, a component of natural law.
20
But Owen's charismatic devotion to his cause continued to draw large
followings among those barely able to eke out subsistence in an appalling working
environment. The elevation to a more civilized state of work was still a century in
the future.
Karl Marx was dismissive of Owen and his utopian followers. Indeed, Marx
was attracted to the intellectual rigor of Smith and Ricardo, who to his mind, up to a
point, accurately described the evolution of capitalism. As we all know, Marx
viewed capitalism as a transition to the inevitable emergence of communism.
Unlike Marx, the Fabian socialists who emerged in the last decades of the
nineteenth century advocated evolution rather than revolution to a more collectivized
economy. Indeed, many of the restraints on laissez-faire advanced by the Fabians
and other reformers were eventually enacted into law.
However, throughout the nineteenth century, notwithstanding widespread
criticism of market capitalism, standards of living continued to increase, propelling
the world's population to more than 1-1/2 billion by 1900.48 The major advances in
life expectancy by the early twentieth century were attributable largely to efforts to
ensure a clean water supply, the result of the increased capital stock associated with
rising affluence.4 9
In the nineteenth century, criticism of capitalism emphasized abuses of
business practice. Aside from Marxist views of the exploitation of workers by
capitalists, monopoly was seen by many as a natural consequence of unfettered
capitalism. Even earlier, Smith had weighed in with his often quoted insight
21
that "people of the same trade seldom meet together, even for merriment and
diversion, but the conversation ends in a conspiracy against the public, or in some
contrivance to raise prices."5 0
Yet standards of living of the average worker moved inexorably higher,
serving through most of the nineteenth and early twentieth centuries as an effective
political buffer to the widespread emergence of socialism. Because agriculture so
dominated the world's economies at that time, the industrial recessions, which
appeared from time to time, did not provoke a severe enough political response to
alter the capitalistic order.
The writings of Jean Baptiste Say, an early nineteenth-century follower of
Smith, were significant in this regard. He postulated that supply creates its own
demand and concluded that marked contractions in economic activity would, with
time, be unwound.5 1 The widespread acceptance of Say's Law and the associated
confidence in the self-stabilizing property of a market-based price system were
dominant factors inhibiting government intervention in periods of economic distress,
especially during the latter part of the nineteenth and early twentieth centuries.
But the Great Depression of the 1930s subjected the optimistic conclusions of
classical economics, especially Say's Law, to a much broader assault. As the
economic stagnation of the 1930s dragged on, the critical notion that capitalism was
self-correcting fell into disrepute.
The marked increase in government intervention into markets, in effect a
partial reversion to mercantilism, was perhaps an inevitable response to the distress
22
of the Great Depression. At the same time, the notions of Marx gained influence in
the West, perhaps because the repressions of the Soviet Union, the major avowed
practitioner of Marx, were not well known before World War II.
But cracks in the facade of economic management by government emerged
early in the post-World War II years, and those cracks were to widen as time passed.
Britain's heavily controlled economy, a carryover from the war, was under persistent
stress as it encountered one crisis after another in the early postwar decades. In the
United States, unbalanced macroeconomic policies led to a gradual uptrend in the
rate of inflation in the 1960s. The imposition of wage and price controls to deal with
rising inflation in the 1970s proved ineffective and unworkable. The notion that the
centrally planned Soviet economy was catching up with the West was, by the early
1980s, increasingly viewed as dubious, though the view was not fully discredited
until the collapse of the Berlin Wall in 1989 exposed the economic ruin behind the
Iron Curtain.
The East-West divisions following World War II engendered an unintended
four-decade-long experiment in comparative economic systems - Smith versus Marx,
so to speak. The results, evident with the dismantling of the Iron Curtain, were
unequivocally in favor of market economies. The consequences were far-reaching.
The long-standing debate between the virtues of economies organized around free
markets and those governed by central planning came to an end. There was no
eulogy for central planning; it just ceased to be mentioned, leaving the principles of
Adam Smith and his followers, revised only in the details, as the seemingly sole
23
remaining effective paradigm for economic organization. A large majority of
developing nations quietly shifted to more market-oriented economies.
But even earlier in the postwar decades, distortions induced by regulation
were viewed as more and more disturbing in the developed world. Starting in the
1970s, American Presidents, supported by bipartisan majorities in the Congress,
deregulated large segments of America's transportation, communications, energy,
and financial services industries. Similar initiatives were advanced in Britain
and elsewhere. The stated purpose was to enhance competition, which following
Adam Smith was increasingly seen as a significant spur to the growth of productivity
and standards of living. The slow, but persistent, lowering of barriers to cross-border
trade and finance assisted in the dismantling of economic rigidities.
By the 1980s, the success of that strategy in the United States confirmed the
earlier views that a loosening of regulatory restraint on business would improve the
flexibility of our economies. Flexibility implies a faster response to shocks, a
correspondingly greater ability to absorb their downside consequences, and a quicker
recovery in their aftermath. Enhanced flexibility has the advantage of enabling
market economies to adjust automatically and not having to rest on policymakers'
initiatives, which often come too late or are misguided. Such views, which echo Jean
Baptiste Say in some ways, clearly have been paramount in a renewed twenty-first
century appreciation of Adam Smith's contributions.
Classical economics, especially as refined and formalized by Ricardo and
Alfred Marshall, emphasized competition in the marketplace among economic
24
participants governed by rational selfinterest.5 2 The value preferences of these
participants would be revealed by their actions in that marketplace. But the ultimate
source of value preference was assumed to be outside the scope of economics.
Adam Smith's purview was broader: He sought in his Theory o f Moral
Sentiments, published nearly two decades before the Wealth o f Nations, to delve into
the roots of human motivation and interaction. He concluded that human sympathy,
by fostering the institutions supporting human civil interaction and life, was a major
contributor to societal cohesion.
To guide their own lives, people also exhibit a seeming inborn sense of right
and wrong, presumably tested by the laws of nature. Those sentiments fashion each
person's value preferences and their intensity. Rational thought, in Smith's thesis,
apparently emerges only in the contemplation and initiation of those actions that will
make manifest the innate propensities.
Over the past two centuries, scholars have examined these issues extensively,
but our knowledge of the source of inbred value preference remains importantly
shaped by the debates that engaged the Enlightenment. The vast majority of
economic decisions today fit those earlier presumptions of individuals acting more or
less in their rational self-interest. Were it otherwise, economic variables would
fluctuate more than we observe in markets at most times. Indeed, without the
presumption of rational self-interest, the supply and demand curves of classical
economics might not intersect, eliminating the possibility of market-determined
prices. For example, one could hardly imagine that today's awesome array of
25
international transactions would produce the relative economic stability that we
experience daily if they were not led by some international version of Smith's
invisible hand.
The inference is not that people always act rationally in commercial
transactions. The periodic bubbles in product and financial markets prove otherwise.
But, the description of economic processes that Smith, Ricardo, Mill and other great
thinkers developed has undoubtedly help lay the foundation for an understanding of
the determinants of world commerce and the wealth of nations. To this end, we will
forever be indebted to these minds.
This dissertation builds upon the wisdom of these great thinkers. Change is
now a constant in the American economy and an essential part of its success, but that
success must be earned. America’s workers and businesses need to prepare for the
arrival of ever-newer technologies and new ways of doing business. Economic
policy must adapt as well. And even beneficial change, unfortunately, can leave
some people and localities behind. Today amid the general prosperity, some groups
and communities remain in poverty and lack adequate health care coverage. Some
workers may be displaced and see their standards of living suffer. And many
families, well off and not so well off, are facing a time crunch as the demands of
work compete with the needs of their children.
Lengthening life spans reflect the improved health of Americans in general,
but together with changing demographics they present a major challenge for
Medicare and Social Security in the new century. Engagement in the world economy
26
has been vital to America’s economic success, but we have important work ahead in
opening up markets and spreading the benefits of trade and investment more widely
in the world.
In this work, each chapter starts with a look back at the economic history of
the last century and contrasts where Americans stood economically 100 years ago
with where we stand now. This dissertation reviews those key developments that
offer enlightening perspectives on the century’s achievements and that will help us
concentrate our energies on the challenges to come. We will celebrate the successes,
try to understand their causes, and draw from them lessons for facing future
challenges.
27
CHAPTER 2: TECHNOLOGY AND THE AMERICAN ECONOMY
Today, new technologies are transforming the economy. No one can yet
predict all the changes to come, but it seems clear that the information economy is
changing the way companies compete and the nature of work. In addition to
changing the competitive playing field, technology is increasingly redefining the role
of the firm. Some firms are expanding to take on new roles and integrate new
activities into their enterprise, some are finding it efficient to outsource some of their
activities to specialists outside the firm, and some are restructuring through mergers
and acquisitions. Two industries where these trends are strikingly evident are
telecommunications and information technology; this chapter will look at both these
industries, in which many firms, old as well as new, are exploring the economic
opportunities made possible by innovations in computers, communications
technology, and the Internet.
Although technological innovation brings constant and ultimately beneficial
change to the economy, it also requires a constant reevaluation of government
policies to determine how best to shape the forces of change to promote the public
interest. As technology becomes increasingly vital to our knowledge-based economy,
a crucial task of government is to design an appropriate technology policy to
maintain the flow of new ideas, products, and methods that sustains long-run growth.
One element of technology policy is government’s role in creating but also limiting
the property rights of innovators. Without the intellectual property rights provided by
28
patents and copyrights, for example, the reward to innovation in many fields would
fall, as imitators quickly develop similar products. Yet strong property rights for
innovation can also create barriers to entry and competition, hampering not only the
mere imitators but also the true innovators seeking to build on the existing
knowledge base. This problem becomes particularly acute as knowledge-based
industries, such as software and information technology, grow in economic
importance.
A second element of technology policy in today’s economy is supporting the
research and development (R&D) necessary to innovation. Although the private
sector in recent years has increased its R&D expenditure, some of the basic and
applied research that forms the building blocks for tomorrow’s discoveries may not
take place without government support. Rather than support technologies that have
clear and immediate commercial potential (which would likely be developed by the
private sector without government support), government should seek out new
technologies that will create benefits with large spillovers to society at large. Basic
research that expands human knowledge is one example of the type of research that
may have wide applications in many areas of the economy. By supporting the
research necessary for scientific advances, government funding can create the
knowledge from which will emerge the new technologies, new products, and new
jobs of tomorrow’s economy.
Another critical task for government is to ensure that the benefits of new
technologies are widely shared. Well-functioning markets inherently maximize the
29
private benefits from exchanges between individuals and firms, but markets do not
always succeed in maximizing social benefits at the same time. Inefficiencies in the
market, whether created by insufficient R&D incentives or from a firm’s market
power, can limit the gains society receives from technological innovation. One way
to promote the widespread adoption of innovations is to ensure that policy set by the
public sector fosters rather than stifles competition in the private sector. Antitrust
policy is one tool for encouraging competition. When the Nation’s antitrust laws
were originally adopted, market power created by economies of scale in the
production of many industrial goods was a major concern, but in today’s economy
the market power inherent in products that become de facto standards for an industry
may be just as troubling. In addition to a vigorous antitrust policy, government can
promote competition by changing the regulatory framework within which industries
operate, to remove barriers to competition and spur innovation, thereby creating jobs
for American workers and new services for American consumers.
In other areas of the economy, such as the rapidly developing field of e-
commerce, the challenge for government policy is different. Here new businesses are
springing up spontaneously, and at an explosive pace. By refraining from imposing
unnecessary regulatory burdens, government can ensure that innovative and valuable
services will come to market. Government antitrust enforcement will continue to
ensure that mergers between large firms deeply involved in the information economy
will not injure competition.
30
Innovation and Economic Change: A Look Back
The changes that technology continues to unleash on our economy today are
sweeping and may at times seem overwhelming. No one yet knows what
transformations the Internet and e-commerce, to take only the currently most
celebrated examples, will eventually bring. In these circumstances we should
remember that we are not the first generation to have to come to grips with rapid
technological progress. Notable examples of the rapid adoption of new innovations
include electric power, automobiles, and television. These earlier innovations spread
through American households much as have more recent innovations such as
computers and cellular telephones (Figure 2-1). Throughout the 20th century new
technological developments created new products and new ways for firms to conduct
business, and so changed the structure of the economy. Those changes, in turn,
produced changes in the role of government in competition, regulatory, and
technology policy.
31
Figure 2-1 Household Adoption of Selected Technologies Since 1900
Percent of households
100
Automobiles
eo
Televisions
Electric power
Cellular telephones
4U
Home computers
1900 1910 1920 1930 1940 1950 1990 1970 1080 1D90 ?ODO
Sources: Department of Transportation; Department of Commerce; and
Federal Communications Commission.
One example, electricity, is a commonplace fixture in the economy of today,
but in 1900 the electric power industry was just getting under way. At the turn of the
century, fewer than 10 percent of homes had electric service, and cities were still
being wired for electric transmission grids powered by central generating stations.5 3
At that time, only about 5 percent of factories employed electricity as a power
source; most still used steam or water power to drive their machines through intricate
arrangements of wheels, belts, and shafts.5 4 Electricity was initially used to power
similar systems, but the shortcomings of mechanical power distribution systems
32
remained. Once factory workplaces were reorganized so that groups of machines
could be separately powered by electric motors, however, manufacturers began to
realize the full potential of electricity to improve productivity. Over time, electric
power was incorporated into more and more elements of the modem factory. Some
have argued that the process may be repeating itself today with computers. As
modem businesses leam to use computers to change the way they operate, they can
find new ways to optimize business procedures and increase productivity.
At other times during the century, technological advances in basic industrial
products, such as oil, dramatically increased productivity and output, by expanding
the scale at which firms could operate their plants. But some of the largest firms also
formed combinations, like the Standard Oil Tmst, to limit competition. Concern
about the market power of some of these large new industrial combinations led to
passage of two of the cornerstones of public policy toward competition. The
Sherman Antitrust Act (passed in 1890) governing anticompetitive actions by
monopolies and the Clayton Act (passed in 1914) governing mergers remain the
basis of antitrust law today.5 5
The automobile, too, had made its appearance by the end of the 19th century,
but it remained a high-priced luxury item until Henry Ford built the first automobile
assembly line in 1913.5 6 Ford’s innovation revolutionized the way cars were
manufactured. Mass production of the Model T allowed Ford to offer, on an
unprecedented scale, a product that combined relatively high quality with a dramatic
reduction in cost. It made automobiles available to millions of American consumers
33
for the first time.5 7 As increasing numbers of people bought the newer, cheaper cars,
Ford continued to invest in his factories, increasing their efficiency and realizing
huge economies of scale. Greater scale, in turn, allowed Ford to lower the cost of his
automobiles still further and sell even more. By the early 1920s the Ford Motor
Company dominated sales of automobiles in the United States, with a market share
of 56 percent. Ford’s dominance was short-lived, however, as other manufacturers,
with newer models and innovations of their own, adapted their production processes
following Ford’s example. They were able to effectively compete with Ford by
satisfying consumer demand for variety. Ford’s innovation had a number of
implications far beyond the automotive industry: it helped make America a more
mobile society, for example. But perhaps the most important outcome for the
economy as a whole was that other manufacturers in other industries soon copied the
assembly line concept. The impact of this spillover from Ford’s idea to other
industries was enormous: mass production proved an economically efficient way to
produce a vast range of other consumer products.
Another industry that saw major changes at the turn of the last century was
telecommunications. The Bell system had enjoyed a monopoly in telephone service
in the United States until its basic patents on the telephone expired in 1894, after
which a wave of new competitors began providing phone service. The Bell system
had concentrated on serving major cities and business customers, leaving many
smaller communities unwired. Many of these independents extended service to the
underserved communities, while others concentrated on competing with Bell in some
34
major urban centers. By 1907, new entrants accounted for almost half the market.5 9
Service levels increased rapidly with this new competition: telephone penetration
(measured as the number of phones per 100 people) rose from fewer than 2 in 1900
to more than 10 by 1916.6 0 Many of the new entrants adopted the latest innovation in
telecommunications, automatic switching, much more quickly than the Bell system,
which continued to rely upon operators to connect calls manually. Yet despite the
advantages of this new switching technology, within a few years the number of
independents began to decline. Faced with competitive pressure from the Bell
system, most independents either failed, were acquired, or signed sublicensing
agreements that allowed them to connect with the Bell system but limited their
ability to compete with Bell. The competitive failure of the independents was due at
least in part to the Bell system’s successful exploitation of the network dimension of
telecommunications. The Bell system invested heavily in the technology and
equipment needed to create a long-distance network. Although most customers at
that time used the phone almost exclusively for local calls, businesses found the
long-distance service very attractive. The independents tried but were unable to
duplicate Bell’s long-distance network connections, particularly in major urban areas
where the Bell system had its largest networks, and where much o f the long-distance
business originated. Bell allowed the surviving independents to interconnect with its
system, but only under the competition-restricting sublicensing agreements. Many
independents chose this route, even though it meant signing away their own ability to
expand and challenge Bell in the future.
35
In this case, the network characteristics of telecommunications proved critical
to the competitive outcome. By providing long-distance services that its rivals were
unable to duplicate, the Bell system was able to keep more people connected to its
network and exploit economies of scale in long-distance service. But as it connected
more users to its network, the Bell system also made it difficult for other companies
to compete effectively. Without effective competition, the Bell system was in a
position to limit service and set prices for that service at monopolistic levels.
Government policy toward these new technologies and new industries was as
varied as the industries themselves. In the cases of telephones and electricity,
government often chose to permit one monopoly provider to serve a geographic
region but subjected the monopoly firm to rate regulation to prevent consumers from
being overcharged. In part, this policy response reflected a view that some industries
are “natural monopolies.” In a natural monopoly, high fixed costs may make
competition inefficient because a single provider could instead deliver service at the
lowest possible cost. Also, in industries like the telephone industry, where demand-
side network effects are important, previous attempts at competition had ultimately
foundered as one dominant network emerged.
In other industries, however, competition seemed more effective at
restraining market power, and government policy favored continued competition.
In the case of automobiles, despite large economies of scale at individual plants,
several producers were able to effectively compete in the large market pioneered by
Ford, and policy intervention was unnecessary. In the oil industry, where
36
combinations such as the Standard Oil Trust threatened competition, government did
intervene, but rather than establish a regulated monopoly, it used the antitrust laws to
create more competition. These early policy responses shaped each o f these
industries during the years that followed, and these policies are still applied to some
firms today.
Innovation and Change in the American Economy Today
Many of the same manufacturing industries that were just emerging at the
beginning of the century continue to thrive, but new technologies and new processes
are revitalizing these established industries and creating new ones. These innovations
are taking place throughout the economy, and many involve both new technology
and new ways of organizing the workplace. Manufacturing industries remain
dynamic and innovative, reflecting the pace of technological change. Manufacturers
creating new products and processes account for about three-quarters of company-
funded industrial R&D expenditure in the United States. Productivity growth in
manufacturing also remains high, averaging 4.2 percent per year between 1993 and
the third quarter of 1999, and these firms remain an important source of jobs for
workers without college degrees.6 1 In an increasingly global economy, however,
many manufacturing businesses have faced pressure to adapt to new ways of doing
business in order to compete effectively with foreign companies. One example is the
“lean” production techniques first pioneered in the Japanese automobile industry.
37
These methods, which involve redesigning the manufacturing process to eliminate
waste and reduce the number of product defects, resulted in far lower costs and
higher quality than traditional techniques in the U.S. automobile industry could
achieve. Competition from Japanese and other foreign firms using these methods
compelled U.S. automakers to focus on improving quality, and they have
dramatically lowered costs and improved quality as a result.
Innovation in production technology has also changed the nature of the
Nation’s steel industry. Innovative U.S. minimill firms found that they could produce
many steel products much more cheaply than could the traditional integrated mills by
using electric arc furnace technology to recycle scrap steel and produce basic steel
products. A U.S. minimill firm was also the first willing to gamble on constructing a
full scale thin-slab caster using a foreign firm’s technology. This new technology
allowed minimills to compete in the large market for rolled sheet steel, used in such
products as automobile body panels. U.S. companies using these new technologies
are now offering increased competition to the traditional integrated mills; by the
mid-1990s minimills accounted for close to 40 percent of U.S. steel production.6 2
The pharmaceutical industry is one that is taking advantage of technological
developments in biomedicine as well as in information technology. Traditionally,
companies sifted through thousands of compounds to find those with desirable
medical properties. Today’s companies, in contrast, use a deeper understanding of
human physiology that allows them to design, from the molecules up, drugs that
target specific illnesses. The industry is also using the Internet to recruit patients for
38
clinical trials of new drugs and to provide more complete and accessible information
on new drugs to physicians. Perhaps the most dramatic evidence of the economic
impact of the information technology sector itself comes from the capital market.
America’s venture capital industry raised funds at a $25 billion annual rate in the
first half of 1999, about two-thirds of which were placed in the information
technology sector, and of that about three-quarters in Internet companies. In terms
of market capitalization, the information technology hardware sector now accounts
for about 14 percent of the U.S. total, versus 6 percent in 1989.6 4 The software
component has expanded from about 2 percent in 1989 to around 9 percent today.6 5
Stocks in the Internet sector have a market value equal to around 4 percent of the
total.6 6
The importance of the information technology sector to the U.S. economy is
not reflected in stock market valuations alone. The computer and
telecommunications industries contributed between 21 and 31 percent of GDP
growth in each of the years from 1995 to 1998 (Figure 2-1).6 7 And the contribution
of these hardware-producing industries is only the tip of the iceberg. The bulk of
employment today is in the private service-producing sectors, which also account for
nearly two-thirds of GDP. Leading the growth in the service sectors have been a
number of knowledge-based industries such as finance, insurance, and professional
services (a category that includes business and legal services, among others).
Measuring the contribution of these new services to GDP is important to developing
an accurate picture of economic growth.
39
In these knowledge-based industries, information technology has become
increasingly important as a way to create new products and deliver them to
customers. Broadly defined, information technology comprises technologies that
process, store, and communicate information. For example, large U.S. banks now
spend approximately 20 percent of their noninterest expense on information
technology designed to integrate back office functions such as check processing with
fra
other functions such as customer service. Changes in information technology are
transforming the economy by allowing people to communicate ideas and data in a
variety of ways, from wireless phones to the Internet. The following sections
examine several examples of this trend.
Developments in Telecommunications
The telecommunications industry is an example of an older industry that the
new information technologies have transformed. From its origins as a provider of
simple voice telephony, this industry has evolved into a source of advanced
infrastructure and sophisticated services that are essential to a host of businesses
from data processing to online publishing. Indeed, these changes in
telecommunications have been just as important for these information providers as
for the telecommunications industry itself, since, as discussed below, major
telecommunications advances like the Internet are already having a major impact on
how businesses do business.
40
These changes came about from a convergence of factors in which both
technology and government regulatory policy played a part. Beginning with the
Department of Justice’s antitrust case and the resulting 1982 consent decree that
divided the American Telephone and Telegraph Company into its local and long
distance components, prevailing government policy toward telecommunications
regulation has focused on how to reduce barriers to competition for both traditional
telephone service and emerging new services. To allow more competition in wireless
service, portions of the radio spectrum were auctioned off, allowing new competitors
to create their own networks in competition with incumbent cellular providers. Using
provisions of the 1996 Telecommunications Act, new competitors in local phone
markets have begun to negotiate interconnection agreements and to sell local
telephone service in competition with the dominant incumbent local exchange
carriers. To encourage the regional Bell operating companies to make such entry
possible, the Telecommunications Act required them to meet a list of conditions on
opening their markets to new entrants before they were allowed to offer long
distance service in their own regions. In December 1999 the Federal
Communications Commission found that one regional Bell company had met those
conditions in New York.6 9
The changes in the telecommunications industry that have resulted from these
two developments—the emergence of new technologies and the new regulatory
environment created by the 1996 Telecommunications Act— have been dramatic.
Hundreds of new companies have entered all segments of the industry; the number of
41
publicly held telecommunications companies alone nearly doubled over a recent 10-
year period.7 0 These new competitors have been responsible for much of the recent
growth in the local, longdistance, wireless, and equipment industries. Structural
adjustments to this new competition have forced layoffs at some firms, yet the
telephone service and equipment sectors are responsible for the net creation of
approximately 200,000 new jobs in 5 years.7 1 Both new and existing firms have
invested tens of billions of dollars in facilities, services, and R&D.7 2 These
investments in turn have led to increased network capacity, the deployment of new
technology, and the rollout of advanced communications services.
Changes are particularly evident in the communications equipment industry,
which has boomed in the last few years. Investment in communications equipment
grew from $46 billion (in inflation-adjusted dollars) in 1993 to $86 billion per year
' 7-3
in 1998— a 13 percent annual growth rate over 5 years (Figure 2-2). Some of that
equipment is being used by the new providers of wireless services that are building
out the systems made possible by the wireless spectrum auctions. By 1998,
companies providing wireless telephony had invested more than $50 billion in new
capital equipment, and wireless phones are now increasingly common, with more
than 69 million Americans now subscribing to cellular service.7 4
42
Figure 2-2 Real Private Direct Investment in Communications Equipment
Billons of 1998 dollars
100
80
40
20
86
iiiiiiill
1990 1991 1992 1993 1994 1995 1996 1997 1998
Sources: Department of Commerce (Bureau of Economic Analysis), and
Department of Labor (Bureau of Labor Statistics).
In addition to wireless services, demand for new equipment and fiber optic
cable by new local providers of switched voice and high-speed data services like
those used for accessing the Internet has spurred investment. These developments
reflect dramatically declining costs for both data transmission and computing power.
The cost of transmitting a single bit of data over a kilometer o f fiber optic cable has
• j c
fallen by three orders of magnitude since the mid-1970s. At the same time, the cost
of information processing has fallen as more and more transistors can be packed onto
a single semiconductor chip. As technology continues to advance, semiconductor
manufacturers have been able to double the power of computer microprocessors
43
every 18 months. Improvements in semiconductors and reduced costs for other
components have helped account for the 20 to 30 percent annual decline in the
quality-adjusted price of computers.7 6 With new innovations in semiconductor
technology still coming onstream, the cost of information processing continues to
plummet, increasing the capabilities of the information industry and expanding the
market for information services.
These falling prices have encouraged investment in the grid of telephone
lines, cables, optical fibers, and signal processing and routing equipment that forms
the backbone of the U.S. telecommunications infrastructure. The increasing public
demand for fast and ready information has driven this backbone industry, motivating
tremendous volumes of private investment. The growing demand for carrying
capacity, or bandwidth, has led to investment in high-capacity fiber optic lines by
telecommunications systems to meet the new infrastructure demands. The number of
fiber-miles (the miles of sheathed fiber in a bundled cable times the number of fibers
in the bundle) is one way to measure system capacity. By this measure, the total
volume of fiber optic cable deployed by telecommunications carriers in the United
States grew by about 16 percent in 1997, and by more than 21 percent in 1998,
according to data from the Federal Communications Commission.7 7 Consumer
demand for telecommunications services is leading more and more American
households to purchase additional telephone lines. Although some of these lines are
used mostly for voice service, many are dedicated data lines. The number of
additional lines more than doubled from 1993 to 1997, from 8.8 million to 17.9
44
million.7 8 This surge in growth mirrors the growth in American consumers’ use of
the Internet. In addition to extra phone lines, many residential users are beginning to
purchase new high-speed broadband connections to the Internet being offered by
phone and cable companies. For users who need to download large files, the speed
of the connection can make an enormous difference in total transfer time. For
example, a 10- to 20-minute digitized movie clip might take 10 megabytes of
computer memory and require about 24 minutes to download with a 56-kilobit-per-
second modem. By contrast, a cable modem or a high-speed digital subscriber line
(DSL) connection offered by the phone company can download the same file in less
than a minute.
These investments are supporting the rapid growth of the Internet as it
becomes a standard feature in American homes and workplaces. More than 118
million Americans had access to the Internet in November 1999, of whom more than
74 million were actively using the new medium.7 9 The use of e-mail at home has also
risen sharply in the last few years, but this usage varies by income: more affluent
Americans are much more likely to have e-mail access at home (Figure 2-3).8 0 This
surge in connectivity has helped put the United States far in the lead in Internet use
worldwide. The United States far surpasses Germany, Japan, or the United Kingdom
in the number of Internet host computers per capita. Only Finland has a higher
concentration than the United States, according to statistics compiled by the
o 1
Organization for Economic Cooperation and Development (OECD). The OECD
also found that the United States leads all other OECD member countries in the
45
number per capita of web servers designed for electronic commerce. The
combination of relatively high penetration of personal computers among U.S.
households and low Internet access costs in this country also has helped contribute to
the greater success of electronic commerce here than in other countries.
Figure 2-3 Households with Access to E-Mail at Home, by Income
Percent of households
50 ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- : -----------------------
<5 5-10 10- 15- 15-20 20-25 25-35 35-50 50-75 >75
Income (thousands of dollars)
Source: Department of Commerce (National Telecommunications and
Information Administration).
46
Implementing Local Competition Provisions in the 1996 Telecommunications Act
The Telecommunications Act of 1996 reduces barriers to entry in local
telephone markets. To facilitate the entry of competitors into networks owned by
incumbent local exchange carriers (ILECs), the act allows a requesting carrier to
obtain access to the incumbent’s network in any of three ways. It can purchase local
service at wholesale rates for resale to end users, it can lease various (unbundled)
elements of the incumbent’s network needed for service, or it can interconnect its
own facilities with the incumbent’s network.
Six months after the 1996 act was passed, the Federal Communications
Commission (FCC) issued its First Report and Order implementing the local-
competition provisions. Thereafter, numerous ILECs as well as some state utility
commissions challenged the rules, claiming that the FCC had exceeded its
jurisdiction. In January 1999 the Supreme Court affirmed the FCC’s role in
providing a roadmap for competition. The FCC continues to monitor the progress of
competition with traditional ILECs, and its recent reports show that local
competition, although still limited, is growing rapidly. Industry analysts also support
this conclusion: one source finds that, by the middle of 1999, new entrants had
increased their revenue market share to 6.3 percent of local revenue.8 2 The FCC’s
new orders on DSL-based services extend the process to this new technology by
further clarifying which network elements competitors may access. This, too, should
encourage local competition.
47
How Information Technology Is Changing the Economy
In addition to providing a new communications medium, the Internet and its
kindred technologies possess vast potential to enhance the economy’s productivity
and make firms more efficient. Much as Ford’s assembly line concept had broad
spillover effects beyond the automobile industry, so, too, the Internet and e-
commerce are having broad effects throughout a number o f industries. Many firms
are investing aggressively in these technologies to speed the flow o f important
business information, internally as well as externally, and so raise productivity.
Even across industries that are making large investments in information
technology, however, the amount of that investment per worker varies widely (Table
2-1). Telecommunications firms, nondepository financial institutions, and radio and
TV broadcasting firms all invested more than $15,000 per worker in information
technology equipment, according to 1996 data from the Department o f Commerce.8 3
Other firms in industries that are also major investors, such as banks, insurance
carriers, and railroads, invested between $4,000 and $6,000 per worker in
information technology equipment.8 4
48
Table 2-1 - Information Technology Investment per Worker in the 15 Most
Information Technology-Intensive Industries, 1996
[Dollars]
Industry
Investment per worker
T eleco m m u n icatio n s.............................................................................................. 29,236
Nondepository in s titu tio n s...................................................................................... 18,129
Pipelines, except natural g a s .................................................................................. 18,069
Radio and TV b r o a d c a s ti n g .................................................................................... 17,512
Electric, gas, and sanitary s e r v i c e s ......................................................................... 9,728
Petroleum and coal p r o d u c ts ................................................................................... 8,102
Real e s t a t e ............................................................................................................ 7,610
Chemicals and allied p r o d u c ts ................................................................................. 6,049
Insurance c a r r ie r s .................................................................................................. 5,911
Depository in stitutions............................................................................................ 5,897
Holding and investm ent offices................................................................................ 5,739
Railroad tra n sp o rta tio n ........................................................................................... 4,587
Wholesale t r a d e ..................................................................................................... 4,488
Motion p ic tu re s...................................................................................................... 4,225
Electronic and other e q u ip m e n t............................................................................... 3,511
Source: Department of Commerce.
As firms adopt these new technologies, they are also changing the definition
of what constitutes a firm in today’s economy. For some manufacturing firms,
information technology offers new ways to integrate their suppliers more closely in
the design and manufacturing of products. Even where the firms in the supply chain
remain separate entities, the degree of cooperation may come to resemble what might
occur in a vertically integrated firm. At the same time, other firms are finding that
transactions that were once organized internally may now be better organized as
market transactions, with competitive bidding even for specialized orders of custom-
49
made parts. At the retail level, the rise of the Internet has made possible the “virtual
firm,” which exists only to market goods through a website. With outside specialists
available to handle details like filling orders, a firm can be run without the extensive
supply infrastructure that many traditional brick-and mortar firms have built. As
companies grow larger, however, some have found that outsourcing important
activities is not necessarily the best way to handle growing volumes of customers.
Instead these firms are now investing in the same type of real-world infrastructure
that their more traditional competitors have always used.
Managing Information Flows
Information technology is having a major impact on how some firms
organize their own internal operations. Investments in computer hardware like those
described above often represent only a small portion of a company’s total investment
in information technology. Effective implementation of this technology also requires
investing in the staff who will operate it, in developing specialized applications, and
in user support. Cost surveys of firms in the services sector suggest that, at small,
centralized sites, the costs of the staff required for operations and specialized
software development may account for 74 percent of total costs, far exceeding the
more visible expenditures the firm may make on hardware and prepackaged
O C
software. To develop the applications they need, many service firms are now
conducting more of their own R&D, and this activity is beginning to show up in the
50
aggregate R&D statistics. Whereas in 1987 nonmanufacturing industries accounted
for only about 8 percent of non-Federal R&D funds, by 1995 that figure was 25
percent.8 6 These investments have been concentrated in computer programming and
data processing services, in wholesale and retail trade, in communications services,
and in research, development, and testing services.
One area in which information technology can enhance productivity is the
management of inventories. For example, electronic scanners have been a familiar
sight in grocery checkout lines for some time, but some retailers have begun to adopt
new and more efficient distribution methods that rely on these scanners and the
wealth of transactions data they can provide. One large retailer with a chain of
grocery superstores has used information technology to track what is selling in its
stores and to use that information to build a more efficient distribution system. This
firm uses its buying power to generate large orders to manufacturers, which then
deliver the demanded goods to the firm’s warehouse distribution centers. Those
centers, in turn, are responsible for resupplying the individual retail stores. To keep
revenue high and costs low, the firm also analyzes its scanner data on sales to
maximize the use of its shelf space. Detailed information captured by scanners at
each store track how fast products are selling, so that stores can be resupplied at
frequent intervals from the distribution centers. This avoids the need to keep large
and expensive inventories at the stores themselves. In total, this company has
reduced its operating costs to a mere 17.5 percent of sales, compared with 22 percent
for a traditional supermarket. 8 7
51
The increased investment in information technology by companies has
coincided with a reduction in the economy-wide ratio of inventories to sales during
the current economic expansion (Figure 2-4). Although, to be sure, information
technology is used in many areas besides inventory management, some of those
investments may have helped businesses to better manage inventory growth and
improve productivity. Information technology is also being used to better manage
information flows between firms, such as between a final-goods manufacturer and
the different levels of its supplier chain. In the automobile industry, for example,
one recent report notes that companies have largely replaced paper drawings with
digital representations as a means of storing, analyzing, and communicating data on
products and parts. One original equipment manufacturer estimated that it exchanges
product data both within the company and with its suppliers as many as 453,000
times a year.8 8
52
Figure 2-4 Real Inventory-to-Sales Ratios for Selected Product Categories
Annual ratio of inventory to sales
Electronic machinery
1.5
1.4
Manufacturing
and trade
Professional and
commercial equipment
1992 1997 1996
Source: Department of Commerce (Bureau of Economic Analysis).
Retail E-Commerce
Information technology is having an impact on how businesses do business in
yet another way, through the growing use of the Internet by firms as a
communications tool. The Internet is already revolutionizing distribution technology
at both the retail and the wholesale level. With millions of people now online, the
potential to use the Internet as a low-ct>st means to communicate information to
customers and receive orders for products is growing ever larger. At the retail level,
new firms are springing up to market a whole range of consumer products from
books and music CDs to cars. E-commerce retailing has several potential advantages
53
over traditional retailing, some of which it shares with traditional mail-order firms.
Like a mail-order firm, a firm with a website may be able to offer more products
online than a traditional brick-and-mortar store, because it is far less limited by shelf
space constraints. It can make extensive product information available to interested
customers around the country and the world, who can then make their selections
automatically, without the need for a salesperson.
For e-retailers, the Internet replaces paper catalogs as the medium used to
distribute information to customers, but these retailers still face some of the same
challenges as traditional catalog and storefront retailers in delivering the goods. In
response, some large electronic retailers have now begun building their own
warehouse distribution centers, providing a real infrastructure to complement their
virtual one. At present, the Internet is new enough that no one can predict, with
accuracy, which business strategies and which retailers will succeed in the new
medium. Many Internet retailers continue to lose money as they build their
businesses and strive for the economies of scale needed to survive in a marketplace
shared with both other Internet rivals and traditional competitors. Unfortunately,
despite a proliferation of anecdotes, hard data on the importance of e-commerce and
the digital economy more generally remain scant. This lack of appropriate data
hampers analysis of the impact of the digitization of the economy. For example, it is
not currently possible to separate out e-commerce activities from other types of
commercial activities in the statistical series produced by the federal government.
Data specific to e-commerce currently come, for the most part, from market research
54
firms, which use divergent definitions and methodologies. Estimates of the value of
online retailing range from $7 billion to $15 billion in 1998; even taking the high end
of this range, e-commerce would account for only about 0.5 percent o f retail sales.8 9
However, nearly half of households with Internet access had made online purchases
within 6 months.9 0 In addition, a much larger quantity of sales is influenced in some
way by the Internet. For example, many consumers research their purchases, such as
automobiles or books, online before buying them offline, through traditional outlets.
Roughly $50 billion in offline retail sales was influenced by the Internet in 1998.9 1
Business-to-Business E-Commerce
The Internet plays a significant role today in providing new distribution
channels for wholesale transactions between businesses. Business-to-business e-
commerce has grown from $43 billion in 1998 to over $1.3 trillion in 2003 (Figure
2-5).9 2 Using the World Wide Web, companies can automate the order process and
reduce costs. One major supplier of computer components had routinely been
receiving orders by phone or facsimile from several hundred customers all over the
world. Processing these orders was cumbersome, and moving several hundred of
these customers to a web-based solution promised to improve customer service and
give managers better access to information on the status of orders. The company
built a website targeted to these customers and soon was able to move $1 billion in
orders per month online.
55
Figure 2-5 Business-to-Business E-Commerce
Billions of dollars
1.400 1,331
1.000
1,200
200
400
GOO
800
0
20 0 2
Source: Department of Commerce.
Another firm that sells networking hardware also uses the Internet to reduce
its costs. Many of the company’s products are built to order from customers’
specifications. The firm routinely checks those specifications to make sure the
product will work as configured, but it found that nearly one in four orders taken by
phone, fax, or e-mail contained errors that caused the order to be rejected or required
additional customer contact. After moving the process of configuration and pricing
online, the company now reports that 98 percent of orders pass through the system
without an error, saving both the company and its customers valuable time and
expense.9 4 Across all its operations, having moved more of its technical support and
56
marketing functions online, the company estimates that it now saves more than $300
million per year in operating costs.9 5
Business-to-business e-commerce is also resulting in new and more
competitive markets. The Internet’s size and reach have created deeper markets, with
larger pools of both buyers and sellers, for many basic commodities. Where before
specialized brokers were needed to match buyers and sellers in transactions, new
websites today allow multiple buyers and sellers to find each other and enter into
transactions quickly and efficiently. In the steel industry, for example, the electronic
equivalent o f a spot market now matches customers and suppliers for surplus
quantities of steel of various types. One firm that provides such a virtual marketplace
for transactions in this industry has seen both the number of suppliers and the
volume of product offered on its site expand substantially. In just one year, offerings
on the site rose from about 20,000 tons a month to over 120,000 tons.9 6
Purchasing managers are also using information technology to actively
manage and reduce their firms’ procurement costs by changing traditional
relationships between the firm and its suppliers. For example, many manufacturers
buy custom-made materials that they incorporate into finished products. Because
these materials are often made to buyers’ specifications, there are no catalogs or
price lists to allow buyers to make price comparisons. Fragmented supply markets
and the importance of product quality in supplier selection also make purchasing
difficult. Concerns about the quality of new suppliers’ products, for example, may
cause a firm to rely instead on existing suppliers that are known quantities. One
57
company achieves significant cost savings for the purchasing managers who are its
clients by using electronic bidding technology to conduct auctions among alternative
suppliers of a whole range of inputs.
Although this firm’s electronic auction software is an example of information
technology at work, an important part of the service that the firm provides is a
detailed, specific analysis of the desired components, followed by an extensive
search for potential suppliers. In addition to the traditional suppliers that a firm has
relied on in the past, the auction firm may find that other suppliers around the world
can produce the demanded good as well. Working with the buyer, the company
screens these firms to determine whether they are capable of producing the good that
meets the buyer’s specific needs. This use of information technology to cast a wider
net poses both challenges and opportunities for suppliers. For efficient firms, it offers
a way to compete for business they might not have been able to bid on previously.
But existing suppliers must compete more aggressively than ever before if they wish
to retain or expand their business in an increasingly global economy.
Information Technology and the Theory o f the Firm
These developments in information technology raise a number of questions
about the organization of firms in a market economy. Information technology has the
potential to dramatically lower the cost of acquiring and disseminating information
of significant value to firms and their customers. Using various types of information
58
technology, firms can convey information about products to potential customers,
obtain more detailed and targeted market data about customers and their needs, and
then sell products to more customers. But how will lower costs of communication
affect the structure of the firm itself? When information is less costly to
communicate, some firms may decide to expand their operations to exploit greater
economies of scope in selling different products. Alternatively, other firms may find
that, with more customers for what had previously been low-volume markets, it is
more profitable to specialize, seeking lower production costs through greater
economies of scale. The evolving nature of the new technology makes it hard to
predict which effect will predominate, and the answers could easily vary across
different lines of business.
Information technology may also have far-reaching implications for the
structure of firms if it changes the sources of competitive advantage in the markets
where they conduct business. Using the new information and communications
technologies, firms have greater potential to respond quickly and more flexibly to
challenges posed by changing circumstances. Older sources of competitive
advantage, such as established distribution networks, may now seem outdated and
unnecessary in light of new communications tools like the Internet. By eliminating
middlemen from the distribution network, a firm can cut its costs while still serving
its customers. However, the same technology that disintermediates some actors in the
economic chain between producers and consumers is also opening up new
opportunities for other firms that can effectively add value in a different way.
59
The auction firm that finds new suppliers, for example, replaces an internal
procurement decision process with a market-based specialist. As firms continue to
restructure themselves to take advantage of these new opportunities, they may find it
worthwhile to expand or contract their activities to focus on those where they add the
most value to the economic chain.
Information Technology and Network Effects
As new types of information technology link together computers, telephones,
and other types of communications devices, network effects become increasingly
important in determining the success or failure of some products. In industries not
subject to network effects, the total value of a product is simply the sum of its value
to each user; adding more users increases the total value only by the product’s value
to the new users. But in industries where network effects are present, such as
telephone or Internet service, the value of the product to each user, including the
existing users, rises as the total number of users rises. In the case of a phone network,
for example, each person is connected to the network by a wire (or a wireless) link.
The more links the network has, the more valuable it is to each participant in the
network, because the network can be used to contact more people. This type of
network effect, also called a network externality, creates a cycle of positive feedback
in a growing network. As more people join the network, it becomes more attractive
to potential new members, and the network increases in size, continuing the cycle.
60
The same network effects that create positive feedback in a growing network,
however, can work against a network that is shrinking. As a network shrinks, it
becomes less valuable to members, and more members leave, causing the network’s
value to spiral downward.
Markets with strong network effects are referred to as “tippy,” because they
can tip in favor of one firm or another, depending upon which firm is able to
generate enough positive feedback to win the allegiance of a sizable majority of
consumers. The winning firm in such a market then becomes the dominant network
and may be in a position to establish a de facto standard for the industry. Firms
engaged in such a “standards war” may even choose to give their product away
initially if doing so increases the firm’s likelihood that it will own the dominant
technology. Once a firm wins the standards war, consumers’ switching costs may
well be high enough that the firm can exercise market power to earn above-normal
profits.
As the history of the Bell system at the beginning of the century
demonstrates, network effects can have a dramatic impact on market outcomes when
one network becomes very large relative to its competitors. Using its size and its
superior long-distance service, the Bell system became the dominant firm in areas of
the country where it had once competed with independent phone companies. To
convince consumers to sign up for its service over those of the independents, the Bell
system advertised the advantages of its larger number of connections. By refusing to
interconnect with competing systems, the Bell system was able to exploit the
61
advantage of its large network to the detriment of its competitors. Establishing a new
network in an industry with strong network externalities can be very difficult,
because users of the existing network may have to incur costs to move to the new
network. In some cases, such as the software industry or the computer networking
equipment industry, these switching costs may include major investments in
equipment and training to use the new network. An even larger cost for users of the
new network, however, may be that imposed by the lack of connections with the
incumbent network.
These switching costs, however, do not necessarily allow the incumbent firm
to rest on its laurels. A new network can supplant an established network in certain
circumstances. One advantage a new network may have is that its new technology
may simply work better for some applications than the established network’s
technology. Where the old network may have to worry about compatibility with
existing standards, a new provider can start from scratch and take advantage of
technological developments to create a better product. With a superior technology, a
new network provider may be able to convince some users to incur the switching
costs because the advantages of the new technology are large enough to make it
worthwhile even if users cannot connect easily with the old network. Once it has
established a niche market among these users, the provider can then seek to expand
the use of its network to more mainstream customers. The computer industry,
for example, has seen several waves of technology go beyond an existing dominant
standard, and each of those waves in turn developed into its own standard. Early
62
computer technology was dominated by mainframes, but mainframes were later
supplanted by minicomputers for many uses, and by personal computers for still
more uses. In each case the new technology started out not by directly challenging
the incumbent, but by appealing to a group of users not well served by the existing
technology.
As information technology advances, the economic effects of new data and
communications networks will become increasingly important. The Internet provides
a model for how those networks can work together. The Internet can be described as
a “network of networks” held together by a standard communications protocol. The
hardware and software running any individual local network may be completely
incompatible with the hardware and software running a different local network, but
with a standard communications protocol the two networks can talk to each other.
This increases the value of each network to its users. Where these new technologies
will take us in the next century will only become evident over time, but by
encouraging connections between networks, government and the private sector can
work together to provide a strong platform on which new ideas and new technologies
can grow.
The Role for Government Policies
We have seen how firms in a range of industries are now realizing some of
the productivity gains that recent advances in information technology have promised.
63
One element of policy committed to encouraging innovation and competition in the
private sector is establishing the rules for protecting intellectual property rights to
new products through patents. Although patents have been used to protect the
property rights of inventors in their inventions since the founding of the Republic,
the last several years have seen an explosion in the number of patents granted in the
United States (Figure 2-6). Several hypotheses have been advanced to explain this
surge in patent grants, including the possibility that it reflects today’s rapid pace of
technological discovery. A recent court ruling clearly indicating the patentability of
computer software may also have encouraged the patent surge.
64
Figure 2-6 Patents Granted Since 1900
Thousands
160
140
120
100
60
40
20
1920 1940 1950 1970 1960 1990 1930 1960 1900 1910
Source: Department of Commerce (Patent and Trademark Office).
Intellectual property rights in works of authorship, including those
disseminated through the Internet, are protected through copyright. Information in
the form of software, texts, music, and audiovisuals is increasingly important to the
economy, and all these media can be efficiently delivered over the Internet. Without
legal protections commensurate to those enjoyed by distributors of physical media,
intellectual property owners might choose not to make their works available in the
digital environment.
65
Support fo r Research and Development
Maintaining and increasing the flow of innovative ideas to the economy also
require continuing efforts in R&D to create new products and services. Over the last
several years, private industry has continued to expand its funding of R&D, but
many of these efforts are focused on the development required to bring new products
to market. To fill in the gaps in private R&D efforts, government must go a step
beyond encouraging private innovation and competition. By supporting both the
basic and the applied research necessary to create new technologies yet unimagined,
government can act as a catalyst for growth in the American economy. In supporting
R&D, the objective of government policy is to identify projects with large potential
spillover benefits to the economy. Funding basic and applied research is one way to
accomplish this objective because it expands the knowledge base of society.
Although this research can generate large payoffs in the form of new technologies,
the private sector is unlikely on its own to provide the amount of research, basic or
applied, that is best for society. Firms may underinvest in research because the social
benefits from the innovations they might make exceed the payoff that the firm itself
can capture with traditional mechanisms such as patents and protection of trade
secrets. Some of the most innovative ideas that research might generate may not
immediately result in commercially useful products or methods; they may require an
extended period of further development before that can happen, and often companies
66
may not want to wait that long. Hence government support for basic research is
critical in a knowledge-based economy, where growth ultimately depends upon the
flow of new ideas.
This problem seems particularly vexing for what are sometimes called
general-purpose technologies (GPTs). A GPT is a technology that may have many
possible uses but that depends on the development of complementary innovations for
those uses to be exploited. For example, an ordinary desktop computer can be put to
a vast number of different uses, but all require complementary investment in
software. Until a ready store of such complementary innovations is available, a GPT
may not be very useful, and its creators may have limited incentive to make
improvements in the technology. As these complementary innovations occur,
however, the gains from further innovation to improve the GPT itself increase. And
in turn, as the GPT is improved, the gains from creating still more complementary
innovations rise, these innovations then appear, and so on in a virtuous cycle.
Jumpstarting this virtuous cycle may be difficult, however, when the commercial
gain appears to be low. In such circumstances, government can again play an
important role by providing the initial funding for new technologies that still need
more basic research.
The Internet itself is a GPT that developed in just this way. For all the
considerable excitement today about its commercial potential, the Internet did not
start out as a commercial project at all, but as a way to interconnect government
computers at different sites to share information and data. At its creation in 1969
67
under a U.S. Department of Defense project, the predecessor to the Internet (then
known as ARPANET) consisted of just four nodes at different locations.9 7 Over
time, more nodes and more users were added, until eventually the National Science
Foundation (NSF) took over the primary role in funding what by then had become
the Internet9 8 With the introduction of the World Wide Web by the European Center
for Particle Research in 1989, and of a graphical user interface called Mosaic by the
NSF’s National Center for Supercomputing Applications in 1993, the Internet took a
giant step further.9 9 From a tool used by a relatively small number of government
workers and academics, it was transformed into a widely accessible public
communications medium, and usage increased dramatically. As the number of users
expanded, commercial development began and government sponsorship became
unnecessary.
Maintaining Competition
One way in which government policy can encourage economic growth is
through reducing barriers to competition and entry rather than imposing restrictions
that in effect protect incumbent firms. For example, by making'more of the
electromagnetic spectrum available for wireless services, as discussed above, the
federal government has enabled a number of new firms to enter the market for these
services. The prices that consumers pay for wireless phone service have dropped, on
average, as a result. In designing the spectrum auctions, the Federal Communications
68
Commission was careful to limit the ability of existing cellular incumbents to acquire
the lion’s share of spectrum available, and this laid the necessary foundation for
more competition between competing wireless networks. Similarly, the
Telecommunications Act of 1996 removed barriers to entiy across
telecommunications markets, and it set conditions for regional Bell operating
companies to enter long-distance markets after making changes to permit the entry of
new competitors for local telephone services. In December 1999, the Federal
Communications Commission found that one company had met those conditions in
New York State and allowed it to begin offering longdistance service in New
York.1 0 0
Vigorously enforcing the Nation’s antitrust laws is another important element
of a policy that promotes competition. Concerns about the competitive implications
of mergers are not new, but the recent wave of large mergers has highlighted this
aspect of antitrust policy. One reason for this merger activity is that firms are seeking
to achieve efficiencies and become more competitive in the global marketplace. The
vast majority of these mergers pose no competitive concern because they do not
combine two significant competitors in a market that would raise a concern about
diminished competition. In other cases, however, the antitrust agencies at the
Department of Justice and the Federal Trade Commission have opposed elements of
planned mergers that would have diminished competition in several cases, including
gasoline marketing and refining, grain distribution, avionics, waste disposal, banking
services, and mobile telephony. In these cases the antitrust agencies have opposed
69
mergers because of their potentially adverse impact on consumers and have sought
divestitures that would preserve competition.
In analyzing mergers and other potentially anticompetitive conduct, antitrust
agencies increasingly must consider the effects that arise not only from traditional
economies of scale in production, but also from the effects of market power created
by network effects. For some products— for example, some types of basic computer
software and hardware—having a large installed base of users creates a de facto
standard both for those users and for product developers, who must use that standard
to create new, complementary products. Users accustomed to using a particular
standard may have built up a large investment in knowledge and complementary
products of their own that makes switching to any alternative, nonstandard product
costly. Users also may be reluctant to switch when alternatives to the prevailing
standard do not have enough developers creating the complementary products that
would enhance the value of the basic product. In these circumstances, a company
that controls a standard might use that market power to prevent other products from
gaining the critical mass of users that would enable them to challenge the standard
and undermine its market power. Antitrust agencies vigorously enforce the antitrust
laws to preserve competition and eliminate unreasonably exclusionary practices
related to standards. For completely new areas o f economic activity such as e-
commerce growth can best be encouraged by limiting the regulatory burden.
Regulatory forbearance and policies that let nascent markets grow have encouraged
70
continuing investment in information infrastructure and made possible
unprecedented growth in the development, adoption, and use of e-commerce.
Finally, all policies that rely on the private sector to provide valuable new
technologies or other innovations face a common challenge, namely, that of ensuring
that all members of society benefit from those technologies and those innovations.
Evidence is growing of a “digital divide,” in which some racial, ethnic, and income
groups in the United States use the Internet less than others. Created under the
Telecommunications Act of 1996, the E-rate program for wiring schools and public
libraries is an important means of increasing the diffusion o f Internet use and
ensuring that access to information is widely available.1 0 1
Government’ s Role
Recent developments in technology and regulation underscore the vital role
that government has to play in ensuring the foundations for a growing economy and
a vibrant private sector. By providing support for basic and applied research,
government can act as a catalyst for new innovations and new technologies that may
someday prove critical in maintaining America’s technological lead in an
increasingly information-dependent world. Similarly, by reducing barriers to
competition wherever possible, the regulatory environment that government creates
can encourage the birth of new services that will lead to continued growth, while
ensuring that all Americans have the opportunity to benefit. The dramatic changes in
71
the American economy over the last century should remind us that future changes,
still unpredictable, are sure to follow, creating new challenges and opportunities
during the century that has just begun. If government continues to encourage firms
and workers to meet those challenges, America can maintain a strong, yet flexible
economy that fosters growth and provides opportunity for all its citizens for many
years to come.
Conclusion
Over the last century, the American economy has adapted time and again to
continuing technological change. Repeatedly during our history, American firms and
workers have exploited opportunities inspired by a succession of technical advances,
in the process creating new products, new services, and even whole new industries.
The novel ideas that have reshaped individual industries have often had a broader
effect on the economy as well. Innovation makes it possible to produce more output
from society’s available labor and capital, increasing the productivity of America’s
workers. Those productivity improvements have led to rising prosperity and living
standards, as well as dramatic changes in how firms compete in the American
economy. In some cases, new technology has given birth to new markets, where
startup companies compete on equal terms on a fresh and level playing field. In
others, it has opened a door for entrepreneurs to enter older industries and challenge
the established incumbents. As these forms of competition have spread and
72
flourished, consumers have benefited in numerous ways, from expanded service,
greater variety, and lower prices.
73
CHAPTER 3; THE GLOBAL ECONOMY
What an extraordinary episode in the economic progress o f man that age was
which came to an end in August, 1914! ...life offered, at a low cost and with the least
trouble, conveniences, comforts, and amenities beyond the compass o f the richest
and most powerful monarchs o f other ages. The inhabitant o f London could order by
telephone, sipping his morning tea in bed, the various products o f the whole
earth...he could at the same moment and by the same means adventure his wealth in
the natural resources and new enterprises o f any quarter o f the world.... But, most
important o f all, he regarded this state o f affairs as normal, certain, and permanent,
except in the direction offurther improvement, and any deviation from it as aberrant,
scandalous, and avoidable.
—John Maynard Keynes, The Economic Consequences of the Peace (1919),
writing about the pre- World War I economy
For centuries, rising prosperity and rising integration of the global economy
have gone hand in hand. The United States and much of the rest o f the world have
never before been as affluent as today. Nor has economic globalization—the
worldwide integration of national economies through trade, capital flows, and
operational linkages among firms—ever before been as broad or as deep. Keynes’s
words in the epigraph describe London at the beginning of the 20th century, yet they
ring even truer for the United States and many other countries today. This
conjuncture of rising wealth and expanding international ties is no coincidence. The
United States has gained enormously from these linkages, which have helped drive
the unprecedented prosperity of the economy. Indeed, future improvements in
Americans’ living standards depend in part on our continued willingness to
embrace international economic integration.
As Figure 3-1 shows, the involvement of several of the world’s richest
countries in international trade has grown faster than their output for roughly three
centuries.1 0 2 The one period when trade grew more slowly than output was from
1913 to 1950—a period that encompassed the Great Depression and two world
wars.1 0 3 Fortunately, despite Keynes’s characterization of the pre-World War I
period as an “extraordinary episode,” the rising globalization and economic
buoyancy of that period proved not to be an aberration. Rather, it was the 1913-50
period that stood out as the extraordinary episode, one of uncharacteristically weak
growth in both output and trade. During that period, and that period only, trade
generally fell relative to gross domestic product (GDP).1 0 4 After 1950 the world
economy resumed its globalizing trend. But it took time to make up the ground lost:
in the United States and elsewhere, the level of trade relative to output has
consistently exceeded early-20th-century levels only in the past few decades.1 0 5 One
reason why prosperity and economic globalization have risen together is that
dramatic improvements in technology have contributed to both. Technological
advances have raised living standards, enabling each worker to produce more and
better goods and services.
75
Figure 3-1 GDP and Export Growth Rates for Group of Seven Countries Since
1700
Average annual percent change over period
Merchandise export volume
1700-1820 1820-70 1870-1913 1913-50 1950-73 1973-98
Source: Department O f Commerce (Bureau of Economic Analysis).
Meanwhile innovations in transportation, communications, and information
technology have made international economic integration ever easier. Quite apart
from the impact of technology, openness to the world itself makes us more
prosperous. The freedom of firms to choose from a wider range of inputs, and of
consumers to choose from a wider range of products, improves efficiency, promotes
innovation in technology and management, encourages the transfer of technology,
and otherwise enhances productivity growth. All these benefits, in turn, lead to
higher real incomes and wages. Through trade, countries can shift resources into
those sectors best able to compete in international markets, and so reap the benefits
76
of specialization and scale economies. Opening domestic markets to global capital
can improve the efficiency of investment, which can promote economic growth.
Through firms’ direct investment in foreign affiliates, countries can adopt
international best practices in production, including managerial, technical, and
marketing know-how.
Given the momentum of the economic and technological forces behind
globalization, its rise may seem inevitable. But policy can play a critical role in
either helping or hindering its advance. The experience of the 20th century reinforces
this lesson. International linkages in the United States and elsewhere were fairly well
developed at the beginning of the century: as Keynes observed, rising prosperity and
increasing economic integration had come to seem the natural state of affairs. Yet
from 1914 until mid-century, war as well as mistakes of economic policy thwarted
this normalcy. In the trade arena, governments actively promoted protectionism
through high tariff and nontariff barriers, and so inadvertently contributed to the
slowed pace of world growth and development.
For more than the past 55 years, in contrast, policy has worked actively to
remove barriers and distortions that impede the market forces underpinning trade and
investment. For example, the General Agreement on Tariffs and Trade (GATT) and,
the World Trade Organization (WTO) have championed trade liberalization. Since
the 1970s, most industrial countries have removed most of their controls on
international capital movements, and many developing countries have greatly
relaxed theirs as well. Given the very real benefits of open markets in both trade and
77
finance, we should continue to embrace and encourage this trend toward
liberalization.
O f course, economic globalization is not an end in itself, but rather a means
to raise living standards. Like other sources of economic growth, including
technological progress, economic integration involves natural tradeoffs. It provides
real benefits by increasing the choices available to people and firms, but it also raises
legitimate concerns. Increased trade re-sorts each country’s resources, directing them
toward their most productive uses, but some industries and their workers may find
themselves facing sharp competition from other countries. Broader global capital
flows can increase efficiency and speed development, but when these flows reverse
course, they can temporarily upset whole economies.
Sound policy plays an important role in ensuring that the benefits of
international economic integration are shared as widely as possible, raising living
standards within and across all countries that take part. Even in an increasingly
global economy, each nation controls its own destiny. In large measure, active
participation in international markets for goods, services, and capital strengthens the
case for policies that make sense even without integration. Among these are policies
that encourage a flexible and skilled work force, provide an adequate social safety
net, reward innovation, and ensure that the financial system is sound and that
financial markets are deep.
78
The Fall and Rise of the Global Economy
The U.S. economy today is more closely integrated with the rest of the world
than at any time in history. Trade and, to a much lesser extent, investment links were
well established a century ago, but both deteriorated during the interwar period. Over
the past 55 years, however, international trade and investment have risen sharply.
Today, global ties—through goods and services trade, through capital flows, and
through integrated production relationships —are generally broader and deeper than
ever before.
The Growing Importance o f Trade
Historical statistics on U.S. trade reveal a striking pattern. A period of rising
international economic integration began well before the 20th century but faltered
between the two world wars.1 0 6 Although U.S. tariffs were relatively high during
much of the 19th and early 20th centuries, the United States tended to participate
actively in a generally flourishing world trade. Internationally, nontariff trade
barriers were few. The interwar period that followed, however, was largely one of
rising tariff and nontariff barriers— in the United States and elsewhere— and
disintegration rather than integration. Since World War II, technological
developments and the gradual international liberalization of trade and capital flows,
described below, have once again put integration on the upswing. Figure 3-2 shows
that, except briefly around the time of each world war, the ratio of trade (exports plus
79
imports) to gross national product (GNP) did not return to tum-of-the-century levels
1H7
until the 1970s. Recently, however, this ratio has approached 25 percent, its
highest point in over a century.1 0 8 But to look at U.S. trade only in the aggregate
would miss much of the story of this country’s integration into the global economy.
Important changes have also occurred within sectors and individual industries.
Exports of both goods and services have risen much faster than production, but each
has followed its own distinct path.
80
Figure 3-2 U.S. Trade Relative to GNP Since 1900
Percent of GNP
25
Exports + imports 20
Imports of goods
and services
Exports of goods
and services
1940 1950 1950 1970 1920 1930 1900 1910
Sources: Department of Commerce (Bureau o f Economic Analysis) and
Department of Commerce (Bureau of the Census).
Although typically small relative to aggregate production, U.S. exports of
services—including travel and transportation; royalties and license fees;
telecommunications services; education; and a variety of financial and business,
professional, and technical services—have grown dramatically, providing further
evidence of the increasing importance of global linkages.1 0 9 (The United States
exports transportation services when, for example, a European tourist flies a U.S.
airline to New York, and imports transportation services when an American tourist
flies a British carrier to London.) U.S. service providers have almost tripled the
81
export share of their output over the past five decades. In 1950 only about 2 percent
of U.S.-produced services were exported; in 1998 that share was about 6 percent.1 1 0
Indeed, growth in exports of services has outpaced growth in exports of
goods. Not coincidentally, services have become a more important part of the
domestic economy over the same period. As a result, services now account for about
29 percent of U.S. exports (Figure 3-3), up from only 17 percent in 1950 and about 2
percent in 1900.1 1 1 Although goods production—capturing production in
manufacturing, mining, and agriculture—has come to account for a smaller share of
the economy, it, too, has become more deeply integrated into the global economy.
The share of domestic goods production destined for export markets has grown from
1 1 0
around 9 percent in 1929 to 21 percent in 1998. However, the shares for some
specific industries and products are much larger. Many high-technology U.S.
manufacturing industries, such as electronics, export 25 percent or more of their total
shipments.1 1 3
82
Figure 3-3 U.S. Trade by Sector in 1998
U.S. exports = $966 billion U.S. imports = $1,116 billion
Foods,
feeds, and
beverages
5 %
Services
29%
Other goods
4%
Industrial
supplies and
m aterials
15%
Foods,
feeds, and
beverages
4%
Consumer
goods
6% Automotive
products
8 %
Capital
goods
31%
Other goods
5%
Consumer y
goods
19%
Industrial
supplies and
materials
13%
Petroleum
and
products
5%
Capital
goods
Automotive
products
1 3 %
Source: Department of Commerce (Bureau of Economic Analysis).
Imports, too, foster integration into the global economy. In fact, the United
States often imports and exports within the same categories of products. Capital
goods, for example, are the leading category of both U.S. imports and U.S. exports
(Figure 3-3).1 1 4 This two-way trade can also be seen within specific industries, such
as the computer industry. Some of this two-way, intraindustry trade reflects the
globalization of production arrangements. Anecdotal evidence and studies document
how production processes have been increasingly divided up and reallocated, either
domestically or globally.1 1 5 That is, discrete elements of these processes, such as
research and development, design, assembly, and packaging, are performed by firms
in the United States and elsewhere, based on countries’ relative strengths in
83
completing different tasks. Part of the growth in trade may also reflect rising vertical
specialization, in which goods are imported, further processed, and
reexported.
Data from the U.S. computer industry (computer systems, hardware, and
peripherals) illustrate the extent of both intraindustry trade and vertical
specialization. In 1998 an estimated 43 percent of domestic producers’ total
shipments was exported, and an estimated 58 percent of final and intermediate
domestic consumption was imported.1 1 6 And, more than 60 percent by value of the
• 117
hardware in a typical U.S. personal computer system comes from Asia.
Intraindustry trade may also reflect an interaction o f consumers’ desire for
variety with economies of scale in production. The automobile industry provides
some commonly cited examples. We observe firms in the United States and the
European Union producing and exporting different kinds of luxury and sport vehicles
for niche markets. Because the average cost of production falls as more cars are
produced, firms try to reach as many customers as possible. This gives them an
incentive to seek out markets abroad. And when many producers in different
countries adopt the same strategy, the result is greater satisfaction of consumers’
demand for product selection. Economists note that consumer tastes for variety help
explain trade flows among countries with similar resource and technology bases.
U.S. firms’ trading partners are located around the world, but they tend to be
concentrated in industrial countries and in our closest neighbors. Canada is the top-
ranking trade partner of the United States, accounting in 1998 for about 21 percent of
84
U.S. merchandise exports and imports combined.1 1 8 Measured on the same basis, the
European Union is a very close second, followed by Japan and then Mexico.1 1 9 In the
aggregate, developing countries (excluding the few that are members of the
Organization for Economic Cooperation and Development) account for about 31
percent of U.S. trade, although the 48 countries designated by the United Nations as
1 on
least developed account for a very small share—less than 1 percent.
The Rise o f International Capital Flows
Cross-border capital flows have likewise grown to unprecedented levels in
the United States and around the world, reflecting reduced barriers to capital, an
increased desire on the part of investors to diversify their portfolios internationally,
and a plethora of new financial instruments and technologies. Cross-border
transactions in bonds and equities have exploded in recent decades, reaching 223
percent of GDP in the United States in 1998, compared with only 9 percent of GDP
1 1
in 1980. Average daily turnover on world foreign exchange markets was about
$1.5 trillion in April 1998, although not all such turnover necessarily crosses
borders.1 2 2 This turnover has risen from $0.6 trillion in April 1989.1 2 3
These cross-border figures include substantial trading and retrading of the
same securities, and hence to some extent overstate the degree to which ownership
claims cross borders. For example, a U.S. mutual fund might turn over its entire
portfolio of foreign securities more than once during the course of a year. Official
85
balance of payments data provide an alternative measure of gross flows that comes
closer to measuring the true change in cross-border ownership claims. Figure 3-4
shows these data on inflows of capital sent into the United States by foreigners, and
outflows of capital sent from the United States by U.S. residents. U.S. outflows
abroad have been rising; foreign inflows into the United States have been rising even
faster. These flows typically amounted to 1 percent or less of GNP through the
1960s.1 2 4 By contrast, flows have been much larger recently: from 1995 through
1998, for example, inflows averaged 7 percent of GNP.
86
Figure 3-4 Capital Flows Into and Out of the United States Relative to GNP
Percent of GNP
1 0
s
Inflows of
foreign capital
A
Outflows of U.S. capital
2
0
2
1923 1923 1933 193B 1943 1948 19S3 1958 1963 1968 1973 1973 1083 1988 1993 1998
Sources: Department of Commerce (Bureau of Economic Analysis) and
Department of Commerce (Bureau of the Census.
Net capital flows (the difference between inflows and outflows in Figure 3-
4), measured relative to GNP, have also reached much higher levels in recent
decades. Indeed, the United States is by far the largest recipient of net capital inflows
in the world, amounting to more than $200 billion in 1998.1 2 6 The large net capital
inflows of the past 25 years have led to a profound change in the net international
indebtedness position of the United States. The United States was a net debtor until
the late 1910s and then a net creditor until the late 1980s. At the end of 1998,
foreign-owned assets in the United States exceeded U.S.-owned assets abroad by
about $1.2 trillion (valued at current cost), an amount equal to 14 percent of U.S.
87
GNP.1 2 7 A century ago, the net international investment position of the United States
was similar, with net indebtedness of about 18 percent of GNP.1 2 8 However, the
gross investment positions were much smaller then. In 1897, for example, U.S. assets
abroad amounted to only 5 percent of U.S. GNP, compared with 56 percent in
1998.1 2 9
Economists sometimes distinguish among various broad categories of capital
flows. The main ones are foreign direct investment (FDI), portfolio investment (such
as stocks and bonds), and bank lending. These types of capital flows differ greatly in
their volatility—a matter of concern for emerging market economies, as discussed
below. And, bank lending and portfolio flows may be the most volatile. FDI, in
contrast, may be less fickle, because these flows arise, in part, from the
internationalization of production processes. FDI occurs, for example, when an
investor sets up an enterprise in a foreign country or obtains a large enough share
(U.S. statistics, and those of some other countries, set the threshold at 10 percent) in
an existing foreign enterprise to influence managerial decisions. Global FDI outflows
accounted for about a quarter of total international capital outflows between 1990
and 1996.1 3 0 They grew from an annual average of $181 billion between 1986 and
1991 to $649 billion in 1998. 1 3 1
Transactions involving U.S. entities, as either investors or recipients, account
for a large share of global FDI flows. U.S. FDI outflows amounted to $133 billion in
1998, up from an annual average of $26 billion between 1986 and 1991.1 3 2
Meanwhile, U.S. FDI inflows rose from an annual average of $49 billion between
88
1986 and 1991 to $193 billion in 1998.1 3 3 Globally, most FDI goes to industrialized
countries, but developing countries’ share of global FDI inflows is also substantial,
totaling about 28 percent in 1998, although this marked a decline from 37 percent in
1997.1 3 4
Multinational Corporations and Globalization
Globalization is played out in many arenas and by many actors, an important
one of which is the multinational company (MNC). MNCs undertake FDI when they
establish overseas operations through foreign affiliates. They also engage extensively
in international trade. Worldwide, some 60,000 parent operations of MNCs and their
500,000 foreign affiliates account for roughly 25 percent of global output, one-third
of it in host countries.1 3 5 In industrial countries, services accounted for 53 percent of
all FDI inflows in 1997, and manufacturing for 35 percent. In developing countries,
manufacturing accounted for about 50 percent of FDI inflows in 1997, and services
for 41 percent. 1 3 6
U.S.-based MNCs account for a large share of U.S. production, trade,
and employment. They produce about 19 percent of U.S. GDP through their parent
operations (all these figures refer to nonbank MNCs only).1 3 7 In 1997 the trade
associated with U.S. MNCs accounted for about 63 percent of U.S. goods exports
and 40 percent of U.S. goods imports.1 3 8 Over 40 percent of these transactions
involved trade between U.S. parent operations and their foreign affiliates.1 3 9 The
89
parent operations of U.S. MNCs employed about 20 million workers in the United
States in 1997, roughly the same number as in 1977. 1 4 0
Although foreign affiliates of U.S. MNCs trade with their parent operations,
among others, data show that most of their sales are local, occurring within the host
country. In 1997, 63 percent o f worldwide sales of goods and 82 percent of
worldwide sales of services by foreign affiliates of U.S. MNCs were local, reflecting
in part the importance of proximity in the delivery of some products.1 4 1 In terms of
the gross product of U.S. MNCs’ majority-owned foreign affiliates, the United
Kingdom is the most important destination for U.S. MNCs, followed by Canada and
Germany. The foreign affiliates of U.S. MNCs employed about 8 million workers in
1997, up from 7.2 million in 1977. 1 4 2
Just as U.S. MNCs have reached across national borders, so foreign based
MNCs have entered the United States. U.S. affiliates of foreign companies account
for about 6 percent of U.S. private-industry gross product.1 4 3 In terms of the gross
product of foreign MNCs’ U.S. affiliates, the United Kingdom is again the leader,
followed by Japan and Germany.1 4 4 In 1997, U.S. affiliates of foreign companies
accounted for about 20 percent of U.S. goods exports and about 30 percent of U.S.
goods imports.1 4 5 Also in 1997, U.S. affiliates of foreign companies employed about
5 million workers in the United States, up from only 1.2 million in 1977.1 4 6
90
The Forces Behind Globalization
The forces driving globalization include technology and policy.
Technological improvements— in transportation, communications, information
technology, and elsewhere— have reduced the costs of doing business
internationally, thus lowering significant barriers to trade and investment. These
improvements have also increased the range of possible commercial transactions,
particularly in financial markets, and have created venues for new kinds of
transactions, such as electronic commerce.
Policy has also played an active role in reducing barriers to trade and
investment. For example, over the past 55 years, policy measures have sought to
reduce tariff and nontariff trade barriers. More recently, and especially since the
1970s, many countries have decided to remove restrictions on capital flows. Coupled
with other domestic policies designed to promote competition among firms, these
kinds of market liberalization in trade and investment have helped reduce costs to
consumers and promote technological innovation.
The Role o f Technology
Although our nearest neighbors remain among our most important trading
partners— Canada and Mexico together account for about one-third of our total
trade—improvements in technology have reduced the costs of doing business
91
overseas and made distant markets more accessible. The cost of moving goods has
fallen over time. There were substantial reductions in shipping costs in the pre-World
War I period, and some indicators suggest that costs have continued to decline since
then.1 4 7 This decline appears to reflect several factors, including direct declines in
some shipping rates as well as a shift in the mix of traded goods and modes of
shipping. Average ocean freight and port charges on U.S. trade fell from $95 per
short ton in 1920 (measured in 1990 dollars) to $27 in 1960, but then leveled off.1 4 8
Also, looking at relatively disaggregated data since the 1950s, we find little evidence
of declines in real ocean shipping rates.1 4 9 But that study does find that air shipment
rates have fallen sharply: worldwide, the cost of airfreight, measured as average
revenue per ton-kilometer, dropped by 78 percent between 1955 and 1996.1 5 0 In
addition, the share of world trade in high-value-to-weight products such as
pharmaceuticals has risen. Reflecting the falling cost o f airfreight as well as the
shifting composition of trade, air shipments in 1998 accounted for 28 percent of the
value of U.S. international trade—up from 7 percent in 1965 and a negligible share
in 1950.1 5 1
At the same time, the cost of land-based shipping may also have fallen.
Because of the importance of Canada and Mexico as trading partners, about 34
percent of the value of U.S. trade was shipped by land in 1998—up from about 28
percent in 1965— and even many goods that travel by ocean-going vessel must be
transported to or from the port.1 5 2 Domestic deregulation in the U.S. transportation
industry has contributed to efficiency gains in land transport, and the development of
92
the Interstate Highway System since World War II also appears to have reduced
transport costs. In addition, technological developments such as containerization
have facilitated intermodal transportation and improved the quality of transport
services. Containerization allows a standard-sized container to be hauled by truck or
rail and then, if continuing overseas, loaded by crane directly onto a ship. This
technology has reduced both handling requirements and transit time for deliveries.
Improved communications and information technologies have also facilitated
international commerce. In 1930, for example, a 3-minute phone call from New York
to London cost $293 in 1998 dollars.1 5 3 By 1998, one widely subscribed discount
plan charged only 36 cents for a clearer, more reliable 3-minute call.1 5 4 This decline
in communications costs, coupled with the availability of new technologies, has
probably been particularly important in facilitating services trade. Although market
proximity is still an important factor for many services, firms’ ability to provide
customer support by telephone of e-mail at relatively low cost, or to transmit
products electronically via the Internet, has reduced its importance in some
industries. A report from the U.S. General Accounting Office notes that
technological innovations linked to computers and satellites have influenced how
intermodal freight shipments are handled. Such innovations include bar coding for
verification and tracking, electronic transmission of business data and documents,
and in-vehicle navigation systems that help shippers find the most direct or least
congested routes.
93
Improvements in information and communications technology have also
underpinned rapid technological change in the financial sector. Recent years have
seen an explosion in the range of financial instruments, which has contributed to the
massive gross flows of financial capital discussed earlier. For example, advances in
computing technology enable traders to implement complex analytical models (such
as models for pricing options), and this in turn allows financial firms to meet demand
for new financial instruments. Under flexible exchange rate regimes, one source of
demand for such instruments is the desire of market participants to remove or insure
against the exchange rate risks they face in trading goods, services, or assets. Swaps,
options, and futures permit them to do so.
In addition, rising financial wealth in many countries has created demand for
instruments that facilitate international portfolio diversification, even as financial
innovation has made it easier to supply these instruments. For example, international
mutual funds— some highly specialized by sector or region—are more easily
available today than ever before, reflecting both the rise in demand and the ease of
supply.
The Role o f Policy
Given the economic and technological forces behind globalization, its rise
may seem inevitable. Yet governments have taken on a critically important role in
opening markets and removing distortions, thereby allowing market forces to play
94
themselves out. In the interwar period, in contrast, policy actively promoted
protectionism through high tariff and nontariff barriers. Indeed, rising protectionism
in a number of countries— including the United States, through the Tariff Act of
1930 (Smoot-Hawley)— made the Great Depression more severe. Despite efforts by
the United States to begin reducing tariffs at home and abroad in 1934, through the
Reciprocal Trade Agreements Act, world tariffs remained high on average. Since
mid-century, however, policy in the United States and elsewhere has worked actively
to reduce trade barriers that limit or distort the choices available to consumers and
firms. Since the 1970s especially, governments have been reducing barriers to capital
flows as well. Policy can also help in dealing with the inevitable tensions and
disruptions of economic integration.
The United States has played a leading role in liberalizing trade
internationally, both by reducing its own tariffs and by encouraging others, through a
variety of market-opening initiatives, to follow suit. The multilateral trading system,
consisting of the GATT at first, and more recently the WTO, is at the core of these
efforts. Before the creation of the GATT in 1948, trade barriers— in the United States
and elsewhere—were more susceptible to a range of economic and political factors.
Tariff rates, measured as the ratio of duties to import values, rose noticeably in the
United States during the interwar period, partly because of new legislation. But some
of the increase shown in Figure 3-5 reflects the effect of declining import prices in
the early 1930s: many tariffs were “specific,” in that they were imposed as a nominal
dollar amount per imported quantity, so that when prices fell, effective tariff rates
95
rose. The Tariff Act of 1930 raised the tariff rate on U.S. imports by roughly 20
percent, on average, independent of the effects of price declines.1 5 5
Figure 3-5 Average U.S. Tariff Rates Since 1900
Percent
60
Average tariff on dutiable imports
40
30
Average tariff
on all imports
Tariff Act of 1930
(Smoot-Hawley)
C reation of GATT
1310 1930 1940 1950 1960 1970 1900
Source: U.S International Trade Commission.
Following the creation of the GATT, and through successive rounds of
multilateral negotiations, world trade markets have become more open and
integrated, contributing to the strong economic growth of the second half of the 20th
century. Success in reducing nontariff barriers was uneven throughout this period,
but tariffs generally declined. For example, import tariffs on industrial products in
96
industrial countries have dropped 90 percent over the last 50 years, from an average
of about 40 percent to roughly 4 percent.1 5 6 Other market-opening initiatives have
also contributed to trade, such as the U.S. “open skies” policy for international civil
aviation, which has helped improve U.S. air carriers’ access to passenger and cargo
markets around the world. As Figure 3-1 showed, growth of trade has consistently
outpaced growth of income since 1950.1 5 7
Policy developments have also contributed to the growth of international
capital flows. Most governments kept at least some controls on capital movements
from World War II into the 1970s. Today, by contrast, restrictions on capital flows
have generally been removed in the industrial countries, and they have been
substantially relaxed in many developing economies as well. Pervasive controls on
cross-border capital flows were part of the international monetary and financial
regime adopted at Bretton Woods in 1944. These controls were partly a response to
the severe instability of the international monetary system during the Great
Depression. The industrialized countries generally began relaxing these controls in
the 1950s, and the late 1970s saw much more widespread liberalization.
Technological developments in a sense contributed to liberalization by making
capital controls increasingly difficult to enforce. And a rising volume of trade
conducted under flexible exchange rates spurred interest in financial transactions to
hedge exposure to currency and commercial risk.
Moreover, recent decades have brought renewed recognition worldwide that
financial markets, like markets for goods and services, generally allocate resources
97
effectively. This recognition has given impetus to considerable financial
liberalization in developing economies over the past decade. Financial liberalization
has often accompanied other favorable economic policies, such as macroeconomic
stabilization, privatization, trade liberalization, and deregulation. Such structural
reforms in a significant number of capital-scarce developing countries have provided
significant investment opportunities, with high expected rates of return, and this has
attracted a surge of foreign capital. However, this surge does raise some concerns, as
discussed later, and it puts a premium on adopting appropriate domestic
macroeconomic policies and strengthening domestic financial systems.
The Benefits of a Global Economy
The United States approaches globalization from a position of considerable
strength. In per capita terms, the United States has been the world’s richest major
economy since overtaking the United Kingdom early in the 20th century, and by most
measures it remains so today.
Figure 3-6 shows estimates of GDP per capita since 1900. The figure is
plotted on a ratio scale, so that a steeper slope implies a faster growth rate. As the
figure illustrates, the dominant macroeconomic fact for both the United States and
other major economies for more than a century has been that output per person has
grown. But this growth has been far from steady. The 1913-50 period, when global
economic relations deteriorated and integration receded amid active protectionism
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and instability in the international monetary system, recorded the most volatile
output growth rates in all four countries shown in the figure. The post-World War II
period of rising globalization, in contrast, has been a time of rapidly rising
prosperity.
Figure 3-6 GDP per Capita I the United States and Selected Major Economies
Thousands of 1991 PPP dollars (ratio scale)
30
United States
20
United Kingdom
1 0
5
3
Germany 2
1
1970 1990 1930 1940 1950 1960 1910 1920 1900
Sources: Department of Commerce (Bureau of Economic Analysis).
Throughout much of the postwar period, Germany and Japan grew more
quickly than the United States, somewhat closing the gap in GDP per capita. But this
convergence slowed after the early 1970s and had largely ceased by the end of the
1980s. In 1998, GDP per capita remained considerably higher in the United States
than in the other economies in Figure 3-6.1 5 8 Overall, the record shows that the U.S.
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economy has thrived in the global marketplace. The discussion of the benefits of
globalization that follows suggests that this conjuncture of globalization and
prosperity is no mere coincidence.
International economic integration raises living standards by improving
resource allocation, promoting innovation, encouraging technology transfer, and
otherwise enhancing productivity growth. Through trade, countries can shift
resources into their most internationally competitive sectors and reap the benefits of
specialization and scale economies. Their consumers also enjoy less expensive and
more varied products. Opening domestic markets to global capital can help countries
invest more efficiently. FDI can lead to improved management, better technology
and training, and higher wages in local communities.
However, the same processes that bring about economic growth, including
those that work through trade and investment, can force costly adjustments for some
firms and their workers. An array of U.S. domestic policies, such as those to assist
job search and training, address these issues, as do some elements of international
agreements that the United States has entered into.
Globalization and Living Standards
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Trade economists have long recognized the benefits of specialization in
production and of access to markets. When a country produces and exports those
goods and services that it can produce relatively inexpensively, and imports those
that are relatively inexpensive to produce abroad, trade improves standards of living
on both sides of the transaction. For example, the United States can produce financial
services at lower cost, relative to other products that it might produce, than most
developing countries can. Costa Rica, by comparison, can produce coffee at lower
cost, relative to other products, than can most industrialized countries. In this
example, the United States would likely benefit from producing and exporting
financial services and importing coffee. The reverse is true of Costa Rica. Through
freer trade and specialization, a country’s resources can be directed more efficiently
to those uses in which they generate the most economic value, thereby raising
income.
Access to larger markets can also reduce costs and increase the returns to
innovation. Producing such goods as automobiles and airplanes requires building
large plants and installing complex and costly equipment. By adding exports to their
domestic sales, manufacturers can lower their unit costs by extending production
runs and spreading overhead costs more broadly. Moreover, the ability to spread
fixed research and development costs may allow globally competitive firms to be
more innovative than those confined to selling in domestic markets.
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Domestic production can expand when firms export, drawing workers into
jobs in the economy’s most productive and internationally competitive sectors.
Recent studies find a substantial wage premium—on the order of 15 percent—in
U.S. jobs supported by goods exports. Moreover, opening up to trade means giving
consumers and firms greater freedom of choice about what inputs to purchase and
what goods to consume. For consumers, the availability of less expensive and more
varied products increases the real purchasing power of domestic wages. Some of the
benefits of market opening are quantifiable. For example, the costs of protection in
the United States for tariffs and quantitative import restrictions in place in 1990 cost
American consumers about $70 billion.1 5 9 Since 1990, these costs to U.S. consumers
have fallen, as trade barriers have been reduced on some products. At the same time,
import competition creates incentives for U.S. businesses to price their products
more competitively.
Access to international capital markets can also improve living standards.
International capital mobility allows portfolio diversification and improved risk
sharing. It allows investments to take place where they offer the highest returns,
thereby improving global resource allocation. And it allows a country to smooth its
consumption by consuming today more than it produces today, paying for the
difference by borrowing abroad. Therefore, global investment, like trade, yields
benefits to both sides of the transaction. Capital goes to those who are best able to
make productive use of it, and the suppliers of that capital receive a higher return for
a given level of risk than they could get elsewhere. These benefits may be
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particularly pronounced in the case of FDI. Too large a volume of short-term capital
flows, by contrast, may in some cases make an economy more vulnerable to crisis.
Trade and investment activities can be mutually reinforcing. For example,
FDI by U.S. companies can help pave the way for U.S. exports. It may create
demand for U.S.-produced inputs, possibly from the parent operations. It may also
offer U.S. companies a foothold in foreign markets from which they can further
expand sales. In many cases, investment in distribution and other essential services
increases a supplier’s ability to export into a market. Trade between firms and their
foreign affiliates, so-called intrafirm trade, can be an efficient means of doing
business overseas, particularly when firms need substantial information about
suppliers, clients, or markets abroad in order to operate effectively. Over a third of
U.S. merchandise exports and about two-fifths of U.S. merchandise imports are
estimated to be intrafirm; worldwide, intrafirm trade’s estimated share is about a
third.1 6 0 Trade may also expand capital flows. For example, the growth of trade has
created a need for more trade-related financing and, as noted previously, for tools to
hedge risk.
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Globalization and Growth
Although causality may be hard to establish, simple measures of the
correlation between the openness of an economy and its growth suggest a mutually
supportive relationship. For example, ample evidence demonstrates that countries
that actively participate in international trade tend to have higher incomes than those
that do not. They also experience more rapid growth and productivity improvements.
Studies also suggest that countries that have adopted outward-oriented economic
policies since the early 1970s experienced significantly higher annual growth of
GDP per capita over the next two decades than countries that remained inward-
oriented.
Exposure to foreign competition gives domestic firms an incentive to raise
their productivity—and these gains recur. Once competition is introduced, it leads to
a cycle of productivity improvements and quality enhancements that continue to
benefit the economy indefinitely. Numerous studies of the United States and Japan
find a positive relationship between import growth and productivity growth.1 6 1
Furthermore, evidence suggests that openness can induce higher average
productivity through access to a greater range of intermediate inputs and, within a
given industry, through faster growth of those firms that achieve the highest
productivity.
Increased trade and FDI can also boost productivity growth by improving the
flow of knowledge and the transfer of technology. Traded manufactures, like all
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manufactures, embody knowledge and technology and, in the case of information
and communications technology for example, may boost countries’ ability to
innovate. Besides providing funding, direct investors can bring international best
practices, including managerial, technical, and marketing know-how, to the recipient,
which can then spill over into the rest of the economy. In turn, the direct investors
may also benefit from the expertise of the recipient firms. The flow of knowledge
and transfer of technology also occur through local research and development
(R&D). Expenditure on R&D performed by foreign affiliates in the United States
accounted for about 12 percent of the R&D performed by all U.S. businesses in
1997.1 6 2 The ratio of R&D expenditure to gross product for these affiliates was 5
percent, twice the ratio for all U.S. businesses.1 6 3
For developing countries, evidence suggests that FDI, along with
hightechnology trade, can play an important role in their catch-up to the industrial
countries. When industrial-country investors build, contribute to, or acquire
production facilities in a developing country, the recipient country gains not just
from expanded production and improved job opportunities, but also from access to
more advanced technologies. Recent studies show that, in developing countries with
a sufficient stock of skilled labor, FDI from industrial countries can contribute more
to growth than does the country’s own domestic R&D.
In short, increased globalization benefits the United States and other
economies. Globalization yields gains from trade, through specialization and through
realization of scale economies in production. And by allowing capital to flow across
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borders, it lowers the cost of financing investment in the recipient country, increases
the return to saving, and allows for portfolio diversification in the country providing
the funds. Both trade and investment contribute to the flow of knowledge and
transfer of technology.
The Challenges of Globalization
The United States has long sought to extend the benefits of trade and
investment as widely as possible, both within and among countries, but significant
challenges remain. The United States is committed to expanding trade and
investment opportunities around the world. It is also committed to putting a human
face on the global economy, in part through greater consideration of labor and
environmental concerns and more openness in WTO proceedings. For all the
evidence that trade raises living standards, some U.S. industries and their workers
may face difficulties adjusting to more open markets. Economists attribute only a
small share of worker dislocation (roughly 10 percent or less) to trade, but crafting
sound domestic policy to help ease the transition for those affected poses another
important challenge.1 6 4 The emerging market financial crises of 1997-99 highlighted
yet another challenge: the risk that sudden reversals in capital flows can in some
cases be destabilizing. Finally, the growing U.S. trade deficit raises the challenge of
ensuring not only that the United States remains an attractive location for investment,
but also that Americans are saving enough for the future.
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Spreading the Benefits o f Trade
The United States has sought to open markets, extend the rule of law, and
encourage economic growth internationally through bilateral, regional, and
multilateral trade agreements. The multilateral trading system, consisting originally
of the GATT and the WTO, is at the core of these efforts. Although its achievements
have been considerable, this system remains a work in progress.
Many countries continue to maintain high trade barriers, especially in
agriculture and services, but institutional concerns, such as those relating to the
WTO’s accessibility and transparency and to its relationships with international labor
and environmental organizations, have come increasingly to the fore. Much work
also remains to be done to ensure that developing countries —particularly the least
developed—enjoy improved market access and obtain the technical assistance they
need to realize the benefits that international trade can afford. At the same time, the
United States must also address legitimate concerns about the adjustment of
domestic industries and workers. On balance, trade does raise living standards, but
there are those within an economy who may suffer losses when more-open markets
shift resources from one use to another.
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Opening Markets More Fully
The United States gains when it lowers its trade barriers, but it gains most
when other nations also lower theirs. Indeed, as one of the world’s most open
economies, the United States has a particular interest in promoting liberalization
abroad. The Uruguay Round, which lasted from 1986 to 1994, brought agriculture
and textiles and clothing more fully into the GATT and took the first steps toward
liberalizing trade in those sectors. It also brought service trade into the multilateral
system by creating the General Agreement on Trade in Services. A series of post-
Uruguay Round negotiations have yielded additional market access commitments in
financial services, basic telecommunications services, and information technology,
opening up new opportunities in areas where the United States is believed to be
highly competitive. Yet room for improvement remains, as many countries continue
to maintain significant tariff and nontariff barriers.
Agriculture provides a stark example. Bound tariff rates (maximum rates to
which countries commit themselves in trade negotiations) on agricultural products
average about 50 percent around the world, compared with less than 10 percent in
the United States.1 6 5 Moreover, even after the European Union and Japan fully
implement their Uruguay Round commitments, they will be free to provide as much
as $78 billion and $35 billion, respectively, in trade-distorting domestic support to
their farmers each year.1 6 6 By comparison, the United States will be limited to about
$19 billion. Partly because of these policies, average prices for food and related
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goods are 34 percent higher in the European Union and 134 percent higher in Japan
than in the United States.1 6 8
Strengthening Rules and Institutions
Credibility and predictability are essential components of the trading system.
For firms to undertake the investments necessary to serve foreign markets, they need
to believe that new barriers will not be raised and that old ones will not reassert
themselves. To rely on foreign suppliers, buyers need to believe likewise that market
access will not be disrupted. Traders need assurance that commitments will be
binding and that markets will remain open even if circumstances change. And the
rules of the trading game should ensure that governments play fair—that they neither
seek advantage for favored interests by subsidizing their producers, nor pass
regulations that unnecessarily distort international trade, nor otherwise circumvent
international commitments. In setting these rules and encouraging compliance with
them, the WTO has tried to strike an appropriate balance between the needs of the
trading system and those of sovereign nations. Its agreements do not preclude the
United States or other countries from establishing, maintaining, and effectively
enforcing their own laws, nor do they prevent the United States from setting and
achieving its environmental, labor, health, and safety standards at the levels it
considers appropriate.
109
The WTO operates not by decree but by consensus among its members.
Through consensus, the WTO has done much to achieve both credibility and
fairness. Its rules allow nations to take antidumping measures, countervailing duty
measures, and action against import surges, provided they follow certain procedures.
The United States has used its own WTO-consistent trade laws to combat unfair
foreign practices and to provide safeguards for domestic producers. The WTO also
provides an improved framework for resolving disputes within the multilateral
system. This framework has proved extremely useful to the United States, which as a
complaining party has so far prevailed in 22 out of 24 cases, having favorably settled
10 without litigation and having won 12 in litigation.1 6 9 And the WTO provides new
rules for protecting intellectual property rights. For the United States and many other
countries, such rights convey substantial value. In 1998, for example, U.S. exports of
royalties and license fees amounted to about $37 billion.1 7 0
By and large, countries participating in the GATT and later the WTO have
adhered to their commitments. The trend toward market liberalization since World
War II, and the maintenance of commitments not to raise barriers even in the face of
international financial crises, stand in sharp contrast to the trade policy experience of
the interwar period. The multilateral trading system has played a critical role in
maintaining and expanding economic ties, helping make the last half century one of
historically unprecedented economic growth for the United States and many of its '
trading partners.
110
Nevertheless, the rules of the WTO and the ways in which they are
administered can be improved. The dispute settlement process, although much
strengthened, is opaque and sometimes slow. During the Seattle Ministerial, the
United States called for greater public access and participation; sought to open the
WTO’s dispute settlement procedures to the public; and, to allow nongovernmental
organizations to file amicus briefs. The drawn-out pace of settlement proceedings
has also caused dissatisfaction. Ordinarily, a case should not take more than a year
(15 months if it is appealed), but in practice the dispute settlement process can
continue to drag on even after the WTO has adopted a ruling. For example, in the
case involving the EU banana import regime, the WTO found for the United States
in about 18 months from the point of initial consultation, but by the time the United
States was finally authorized to suspend trading concessions, nearly 3 years had
passed.
Promoting Growth Internationally
The United States has long advocated the use of the multilateral trading
system to promote economic growth internationally, often with considerable success,
but not all countries are well positioned to reap the benefits that trade can afford.
Steps can be taken to help ensure that developing countries, including the least
developed, obtain the market access and technical assistance they need to benefit
more fully.
I ll
Developing countries have increasingly come to appreciate the value of the
multilateral trading system. The system not only provides them opportunities to trade
on the basis of their comparative strengths but also reinforces market-oriented
development strategies where they have been adopted. Originally dominated by the
industrial countries, the system has witnessed growing participation as other nations
have sought inclusion. This allure of the trading system supports the conviction that
international trade is not a zero-sum game: both the United States and its trading
partners reap the benefits.
Developing countries have come to account for an increasingly large share of
world trade, but some have moved ahead more rapidly than others. Developing
countries’ total trade (exports plus imports) rose at an annual rate of 9.9 percent
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between 1989 and 1997, exceeding the 7.6 percent growth rate of trade worldwide.
1 7 7
Over this period their share of world trade rose from 29.1 percent to 34.7 percent.
Among developing countries, the trade of those that are WTO members grew slightly
faster, at an annual rate of 10.5 percent.1 7 3 The 48 least developed countries have, as
a group, done less well. For these countries, many of which are also WTO members,
trade grew at an annual rate of only 6.1 percent through 1996.1 7 4
Not all WTO members are well equipped to use the trading system
effectively. Some of the least developed members lack the necessary domestic
institutions and infrastructure to reap the full benefits of trade. For them, capacity
building and technical assistance, coupled with additional market opening, could
help spread those benefits. Through the WTO, the international community can make
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more progress in liberalization in certain priority areas, such as agriculture and
services. But developing countries, including the least developed, can also take their
own actions. In addition to participating in multilateral initiatives, they can benefit
from increased unilateral liberalization, as free trade promotes the movement of
labor and capital into their most productive uses, strengthens competitive forces,
facilitates innovation, and raises living standards.
Addressing Concerns About Adjustment
As markets become more open, some domestic industries will expand while
others may contract. Although globalization provides benefits overall, the
adjustments that businesses and workers in shrinking industries may undergo can be
costly and painful. Although, as noted above, economic studies typically find that
trade is a small factor in U.S. job displacement, some workers may face short-term
unemployment, and others may even face permanent wage reductions if they are
unable to find comparable jobs in expanding sectors.
Trade, like other sources of economic growth, therefore presents challenges
at home. But the fact that trade produces additional income means that, in principle,
resources are available to help those who are hurt—either to adapt by becoming
more productive and competitive at what they were already doing, or to switch
activities. One way to help in the transition is to develop programs that directly
address the problems of dislocation. Another is to encourage trade while limiting the
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pace at which change occurs, as the United States has done by phasing in provisions
of the WTO agreements and applying safeguard measures. Such gradualism may be
desirable under certain circumstances, but trying to prevent liberalization altogether
would be counterproductive. Permanent protection inevitably costs more, in terms of
benefits forgone, than it saves. The key lies in maintaining an economy that is
sufficiently flexible and vibrant to meet the challenges of reaping those benefits.
Managing Capital Flows and the Macroeconomy
Globalization raises other challenges as well: flows of goods, services, and
capital can be the source of macroeconomic shocks. To take an extreme example, the
crisis in emerging markets that began in Thailand in 1997 demonstrated the potential
adverse consequences of volatile capital flows. The crisis also highlighted the need
for developing countries to strengthen their domestic financial systems and adopt
appropriate macroeconomic policies, including consistent monetary and exchange
rate policies, to cope with this volatility. Such policies allow countries to capture
more fully the benefits of an increasingly global financial system and to minimize
their vulnerability to crises. O f course, for some very poor countries the challenge is
not that capital flows are too volatile, but that they are insufficient.
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Conclusion
Over the long term, increasing the standard of living in the United States
requires that Americans embrace change. We should not retreat from the constant
succession of new opportunities that arise in an ever-changing world economy. The
United States has long welcomed the opportunities that integrating with the world
economy provides. Growing international integration has benefited Americans
profoundly, contributing to our increasing prosperity. It is clearly in our interest to
forge ahead, both promoting and guiding the process of international economic
integration. Yet at the same time we must confront the very real challenges that arise
from economic globalization. We must find ways to share its benefits as widely as
possible, both at home and abroad. International policy on trade and capital flows
plays an important role in ensuring that we capture the benefits of international
economic integration.
Ultimately, however, our prosperity in the global economy depends primarily
on our policies at home. The right policies for this task include those that encourage
a flexible and skilled work force, that build an economic system in which innovation
is rewarded, and that ensure that the U.S. financial system is sound and deep.
Furthermore, in this interconnected global marketplace, competitive
advantage is determined by the productivity with which a country, region or cluster
uses its human, capital and natural resources. Productivity sets a nation’s or region’s
standard of living. Those countries and regions that have adaptable workforces with
115
a rich mixture of skills and a supportive economic environment are able to add value
to the free flow of capital, information and technology that characterizes the global
economy. They are able to benefit from integration into the global economy. Those
countries, regions and people that lack necessary skills are destined to fall further
behind. The next chapter discusses the rising importance of skills and education in
the global marketplace.
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CHAPTER 4: WORK AND EDUCATION
The Transformation of the Labor Market
The very nature of work has changed dramatically over the last 100 years.
Today, vastly fewer people work on farms, and women are much more likely to be
working for pay. Discrimination, which long limited the participation of minorities
and women in the labor market, is now illegal and has been greatly reduced. In
addition, the educational attainment o f our labor force has risen sharply. These
changes have combined to produce the most diverse and highly educated work force
in our country’s history. The tools and techniques of work also changed dramatically
♦ h
over the 20 century. In the 21st century this has meant a technological revolution,
which has affected the majority of jobs and put a premium on a new set of skills.
Formal education was a far less important job qualification for most workers
100 years ago than it is now. Over 40 percent of the work force was in agriculture,
and another 28 percent was in manufacturing.1 7 5 Services, broadly defined,
accounted for the remaining 31 percent (Figure 4-1). In keeping with this industry
mix, a large proportion (38 percent) of workers were occupied in farming, forestry,
or fishing.1 7 7 Another 25 percent were operators or laborers.1 7 8 Managers and
professionals represented just 10 percent of the work force, and sales and
administrative support occupations just 8 percent.1 7 9 Over the course of the 20th
century, the share of total employment in agriculture declined steadily. Until the
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early 1970s, manufacturing employment grew roughly in line with growth in the
labor force, and manufacturing’s share of total employment remained roughly
I O r t
constant. Since then, however, employment in services has accelerated, and the
share of employment in manufacturing has declined.1 8 1 The occupational mix has
changed accordingly. By 1999, 30 percent of workers were employed as managers
and professionals, and 26 percent worked in technical, sales, and administrative
« 1 8 7
support occupations. Operators, fabricators, and laborers made up just 14 percent
of the work force, and farming, forestry, and fishing occupations represented a scant
3 percent.1 8 3
Figure 4-1 Composition of Employment by Major Sector Since 1900
Percent
(SO
so
30
1909 1900 1930 1950 I960
Sources: Department of Commerce (Bureau o f the Census) and Department
of Labor (Bureau of Labor Statistics).
118
Most recently, the change in the industrial and occupational mix of the
economy has been associated with technological advancements. These advancements
have been a rich source of new jobs, but many of those jobs require familiarity with
the latest technological advances. In 1996, for example, the share of total
employment in industries that are intensive users of information technology was 41
percent.1 8 4 Projections by the Department of Labor (Bureau of Labor Statistics)
suggest that this figure will rise to 44 percent by 2006. Other projections indicate that
the five fastest growing occupations between now and 2008 will be related to
computers.
The evolution of the labor market from one based on strong arms to one
based on strong minds has both caused and been driven by substantial improvements
in educational attainment. The change in the education of the work force and the
increasing value of education represent one important transformation of the labor
market over the course of the century. A second important transformation has been
an opening of opportunities to women and minorities. The typical adult female in
1900 was working at home or on the farm, and those women who worked for wages
were likely to be unmarried and in low-paying occupations. African Americans and
other minorities were also generally limited in their occupational choices. Over the
course of the century, however, women and minorities entered the labor force in
increasing numbers and enjoyed expanded occupational choice, and their earnings
119
have risen. All groups have attained higher levels of education and have shared in the
greater wealth generated from the accumulation of skills and higher productivity.
The Rising Importance o f Skills and Education
Although education has proved to be an avenue toward higher earnings for
all, a large gap has emerged between the wages of those with education beyond high
school and the wages of those with less education. The economy has changed in a
way that places a high premium on certain skills, some of them unknown only a few
years ago, and workers without those skills are increasingly likely to be left behind.
This wage premium provides a strong market signal about the value of education, but
evidence suggests that many workers lack the skills needed for today’s jobs.
Therefore government policies have a role to play. Governments at all levels have
traditionally been involved in providing education, in part because of the social as
well as economic benefits associated with it. The challenge for public policy in the
21st century will be to develop an appropriate set of education and training policies,
one that creates a framework of lifetime learning within which workers can acquire
and maintain both the basic and more technical skills they need in the new labor
market.
A hallmark of our increasingly technology-driven and knowledge-intensive
labor market is the importance of education for success. The gains in educational
attainment that the U.S. labor force achieved over the course of the 20th century
120
were impressive and have led to great improvements for many groups. Yet the
number of educated workers, although growing, has fallen short o f demand:
employers eager to hire qualified workers have driven up the relative wages of those
who have the desired skills. In the 1980s and early 1990s, those who acquired the
education and training that employers sought were rewarded in the labor market,
while those who lacked that preparation saw their earnings lag behind.1 8 5
The average level of education of the U.S. working-age population increased
dramatically in the 20th century. Many more Americans than ever before are
graduating from high school and college, and overall educational attainment has
increased. The median number of years that an adult American has spent in school
rose from 8.6 in 1940 to nearly 13 in the 1990s (Figure 4-2).1 8 6 In addition, the
disparity between men and women in high school and college completion rates has
disappeared. In fact, in the past decade women completed both high school and
college at slightly higher rates than men.1 8 7 The gap in years of schooling between
whites and other groups also narrowed substantially over the century. The gap
between African Americans and whites in high school graduation rates fell markedly
from the 1940s to the present (Figure 4-2).1 8 8 Whereas in 1940 the proportion of
whites who had completed high school more than tripled that of African Americans
(41.2 percent versus 12.3 percent), by 1998 this gap had virtually disappeared, with
1 Q Q
88 percent of both groups having completed high school. Hispanics have not made
the same gains, however, and the proportion of this population that had completed
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high school (which includes those Hispanics who immigrated as adults) was only
62.8 percent in 1998.1 9 0
Figure 4-2 High School Graduation Rates as of 25- to 29-Year-Olds by Race and
Ethnicity
Percent
109
S O
Whites
B O
African Americans
1990 mo ms 1 9 5 0 1:975 1990
Source: Department of Commerce (Bureau of the Census).
College completion rates increased over the second half of the century
(Figure 4-3).1 9 1 In contrast to high school completion rates, however, the racial and
ethnic gap in college graduation rates remains large. In 1940, 6.4 percent of whites
aged 25-29 had completed college; by 1998, 28.4 percent had.1 9 2 African American
and Hispanic graduation rates have improved over the same period, but they still lag
far behind those of whites. Although the rate for African Americans has risen almost
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tenfold since 1940, only 15.8 percent of African Americans and only 10.4 percent of
Hispanics aged 25-29 held bachelor’s degrees in 1998.1 9 3 These statistics show
clearly that the American labor force is becoming more educated over time, but are
these increases in educational attainment keeping up with the demands of an
increasingly technology-driven labor market? And in that market, what happens to
those who do not keep up?
Figure 4-3 College Completion Rates of 25- to 29-Year-Olds by Race and
Ethnicity
Percent
30
Whites
African Americans
I960 fS8S 1970 1S7S 1960 1985 1990 1995 195S
Source: Department o f Commerce (Bureau of the Census).
The rise in importance of basic computer skills illustrates this concern.
Computer use on the job has increased tremendously since the introduction of the
123
personal computer in the late 1970s. Already by 1984 about a quarter of all workers
were using a computer at work, and by 1997 that proportion had risen to virtually
half.1 9 4 What this trend implies is that the pool of potential jobs is shrinking for those
who lack basic computer skills. But it is not just computer skills that are in demand
in today’s labor market. Survey evidence from the Department of Labor (Bureau of
Labor Statistics) from the 1992-94 period indicates that most jobs available to
workers without a college degree require not only specific experience but also the
ability to perform basic tasks involving reading, writing, and arithmetic and the
interpersonal skills to serve customers effectively. Focusing specifically on jobs
available to those without a college degree, these surveys found that over half of
such jobs required workers, on a daily basis, to deal with customers (70.0 percent),
read or write paragraphs (61.1 percent), do arithmetic (64.7 percent), or use
computers (50.7 percent).1 9 5 Only 8 percent of the jobs available to non-college
graduates required none of these skills.1 9 6 Does this imply that the skill demands of
employers have been increasing over time? Direct research evidence on this question
is limited, but it suggests that indeed they have. The same surveys asked employers
directly whether overall skill use on jobs they had recently filled had risen in the past
5 to 10 years. The results indicate substantial increases (23 to 25 percent) in each of
the skill categories over this relatively short period.1 9 7 The data also show that the
changes in labor outcomes (wages and employment) for certain groups that took
place over this time have occurred in a manner consistent with firms demanding
greater levels of skill.
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A mismatch seems to be emerging between the skills that workers possess
and the skills that employers demand. For example, a 1996 survey of medium-size
and large businesses by the American Management Association (AMA) found that
19 percent of applicants for vacant jobs lacked the necessary math and reading skills,
but by 1998 this proportion had increased to almost 36 percent.1 9 8 Another AMA
study, this one of manufacturers, found that demand for nontraditional skills, such as
computer skills, interpersonal and teamwork skills, and problem-solving skills, has
been rising rapidly, especially among high adopters of new technology.1 9 9 Computer
skill requirements were more frequently cited than other requirements as having
increased from 1993 to 1996.2 0 0 However, employers cited more difficulty in finding
applicants with good problem-solving skills than in finding qualified computer-
skilled applicants.2 0 1 Although these results in part reflect the strong labor market of
this period, they also indicate a rising absolute demand for skills.
A sharp increase in the wages of college graduates relative to those without a
college degree provides indirect but striking evidence of rising demand for workers
with higher level skills. Between 1979 and 1999 the median real weekly wages of
comparable male college graduates aged 25 and over who worked full-time rose by
almost 15 percent, from $833 to $957 (Figure 4-4) 2 0 2 Despite a 6 percent increase
since 1996, the earnings of full-time working males with only a high school diploma
fell by 12 percent over the same period.2 0 3 In 1999 the real weekly wages of male
high school graduates were $568, down from $648 in 1979.2 0 4 Similarly, the real
weekly wages of those with less than a high school diploma declined by 27 percent
125
between 1979 and 1999, from $530 a week to $387, although their real wages in
1999 were 5 percent higher than in 1995.2 0 5 In 1979 the median weekly earnings of
male college graduates were 29 percent higher than those of similar men who
possessed only a high school diploma (Figure 4-5). That same year the median
earnings of male college graduates were 57 percent higher than those of high school
dropouts.2 0 7 Other evidence suggests that these ratios had been roughly constant or
even declining slightly in the decade prior to 1979.2 0 8 By 1999 college graduates
were earning 68 percent more per week than high school graduates, and 147 percent
more than those who had not completed high school.2 0 9 Since the mid-1990s the
returns to lower levels of education have increased at about the same rate as returns
to college education, implying that the gap is little changed. Overall, this evidence
suggests that there has been rapid growth in the demand for skills over the past two
decades, because the premium associated with a college education has gone up even
as the supply of college graduates has increased.
126
Figure 4-4 Median Weekly Earnings of Male Workers by Educational
Attainment
1998 dollars
1,000
College graduates
900
soo
700
High school graduates
S O O
S O O
High school dropouts
400
1979 1981 1983 198® 1987 1989 1991 1993 199® 1997 1993
Source: Department of Labor (Bureau of Labor Statistics).
127
Figure 4-5 Ratios of Median Weekly Earnings of Male College Graduates to
Earnings of High School Graduates and Dropouts
Ratio
3-0
College graduates to high school dropouts
2.5
2.0
College graduates to high school graduates
Source: Department of Labor (Bureau of Labor Statistics).
Providing further support for the rising importance of skills is evidence that,
even within education groups, the rates of return to cognitive skills (reading and
math skills, for example) may have increased in recent decades. Research has used
longitudinal surveys to examine what impact a person’s level of basic math and
reading skills, as measured by scores on cognitive tests administered in high school,
have on that person’s wages after graduation. Results from a sample o f high school
graduates who did not go on to college indicate not only that a greater mastery of
basic skills translates into higher wages, but also that this relationship has grown
128
91 n • «
stronger over recent years. The implication is that basic skills are more important
in the labor market than in the past. The same data also allow us to address the
question of whether the educational wage premium already demonstrated is due to
differences in skills between those who go on to college and those who do not. When
high school and college graduates are compared, the results suggest that, controlling
for scores for math tests, between 1978 and 1986 there would have been no growth
9 1 1
in the college wage premium for women, and only one-third as much for men.
This again demonstrates the growing importance of skills for labor market outcomes.
In addition to finding a widening gap between the wages earned by different
education groups and between people with different levels of cognitive skills,
researchers have found evidence that skills associated with new technologies are
becoming more important in the labor market. One such piece of evidence is the gap
in wages between workers in information technology industries and those in other
industries. According to the U.S. Department of Commerce, in 1997 workers in
information technology-producing industries earned on average almost 78 percent
more than did workers in all industries combined. And this figure was up sharply
from 56 percent in 1989.2 1 2
Technological change has caused demand for high-skilled workers to
increase more rapidly than that for low-skilled workers. What might account for this
effect? One explanation may be that when new technologies are introduced, workers
already well endowed with certain skills are better able to use them. Technological
change may also create scope for organizational changes in the workplace, such as
129
more decentralized decision-making, which would further stimulate demand for
workers with higher education. Adding to this, demand for less skilled workers has
decreased in relative terms as some low-skilled jobs have been replaced by more
automated production processes. But there are other possible explanations for the
increase in the college wage premium. One is decreased demand for low-skilled
workers, as international trade has allowed imports to substitute for the goods these
workers used to produce.
However, recent evidence casts some doubt on these hypotheses: rapid
technological growth and increased trade in the 1990s did not lead to increased
inequality but, in fact, coincided with the end of a 20-year trend toward greater
inequality. Other possible contributors to the higher college wage premium include
the decline in the real minimum wage over the 1980s and the loss of collective
bargaining power with the decline in unionization rates over the same period.
Growth in Opportunities
The 20th century witnessed changes in job opportunities for all workers.
Changes were already under way at the start of the century, when the women’s
suffrage movement was active, and change continued with the civil rights movement
of the 1960s. Government has played a critical role in ensuring equal opportunity for
all workers through the passage of the 19th Amendment, and later through such
legislation as the 1964 Civil Rights Act, the 1967 Age Discrimination in
130
Employment Act, the 1990 Americans with Disabilities Act, and, most recently, the
1999 Work Incentives Improvement Act. This last piece of legislation eliminated
institutional barriers that had limited the employment opportunities of persons with
disabilities. Thanks to these and other initiatives, jobs that were once closed to
women, minorities, the disabled, and the aged are now open to all, regardless of their
work-irrelevant characteristics. Rising demand for labor in general may have
contributed to growth in opportunities for groups that have traditionally lacked
access, but the role of government in opening the door should not be overlooked.
The progress made by women in the paid labor market has been one of the
most important economic changes of the 20th century. In the early 1900s, men and
women, if they were in the labor market, typically worked in different jobs. Whereas
some 79 percent of men worked in manufacturing or agricultural jobs, the
comparable figure for women was only about 47 percent.2 1 3 Over a quarter (28.7
percent) of women in the labor force were employed as private household workers,
but fewer than 1 percent of men held such jobs.2 1 4 The differences for African
American women are even more striking. It is estimated that among African
American women who were in the labor market in 1890, over 90 percent worked as
servants or agricultural workers.
While disparities remain, today’s occupational categories are much more
likely to contain substantial numbers of both men and women. Table 4-1 examines
how the participation of female workers in a range of detailed occupational groups
has changed over recent years. Many occupations experienced sizable increases in
131
the percentage of women employed, beyond the overall rise in female labor force
participation. For instance, the share of engineers who are female rose from 1.2
percent to 10.6 percent between 1950 and 1999, and the share of lawyers who are
female increased eightfold, from 3.5 percent to 28.8 percent.2 1 6 The opening of
opportunities in the labor market for these groups has gone hand in hand with
improvements in labor market outcomes. An extensive social science literature
documents these gains and attempts to identify their sources. One way of assessing
progress is to consider the earnings of one group relative to another: Figure 4-6
shows the ratio of female to male median annual wage and salary income for all
workers from 1967 to 1998 and the comparable ratio for annual earnings of full-time,
full-year workers from 1960 to 1998. In 1967 the median woman worker earned
about 40 cents for every dollar that a man earned.2 1 7 Among full-time, full-year
workers, the ratio in that year was about 60 cents on the dollar, approximately the
same as during most of the 1960s and 1970s. Since then, however, the gap
between men and women has narrowed. In 1998 the ratio of median earnings of
women to those of men (again looking at full-time, full-year workers only) was 73
cents on the dollar.2 1 9
132
Table 4-1 — Share of Women Employed in Selected Occupations in 1950 and
1999
[Percent]
O ccu p a tio n 1950 1999
Architects .................................................................................................... 4.0 15.7
Biological and life scientists.......................................................................... 29.2 43.8
Chem ists, except biochem ists ........................................................................ 10.0 27.4
C lergy .......................................................................................................... 4.1 14.2
Dentists........................................................................................................ 2.7 16.5
Dietitians ..................................................................................................... 94.3 S4.0
Economists................................................................................................... 18.4 51.2
E ditors and reporters.................................................................................... 37.6 49.8
Engineers..................................................................................................... 1.2 10.6
Law yers......................................................................................................... 3.5 28.8
Librarians..................................................................................................... 88.6 83.7
Pharmacists................................................................................................. 8.3 49.0
Physicians..................................................................................................... 6.1 24.5
Psychologists................................................................................................. 43.8 64.9
Public relations specialists............................................................................. 10.5 61.0
Registered nurses.......................................................................................... 97.6 92.9
Social workers............................................................................................... 69.2 71.4
Teachers
E lem entary school..................................................................................... 90.9 83.8
Secondary school...................................................................................... 56.7 57.5
Source: Department of Commerce (Bureau o f the Census) and Department
of Labor (Bureau of Labor Statistics).
133
Figure 4-6 Ratios of Median Annual Earnings of Female Workers to Earnings
of Males
Ratio
0,7
Full-time, full-year workers
0 .6
0,5
0.4
0.3
I960 196a 1966 1969 1872 1975 1978 1981 1984 1987 1:S®0 1993 19S6
Source: Department of Commerce (Bureau of the Census).
An important research and policy question is how much of this gap is due to
labor market discrimination. Because it is difficult to measure discrimination
directly, researchers have explored this issue by first controlling for other factors that
might legitimately explain the gap. For instance, an additional year of schooling is
estimated to increase a worker’s wages, on average, by 5 to 15 percent, and an
additional 25 years of work experience increases wages by an estimated 80
percent.2 2 0 These findings have led some to attribute much of the male-female wage
gap to differences between the sexes in education and labor market experience. A
134
study from the National Longitudinal Surveys from the late 1980s found that about
one-third of the pay gap was explained by differences in the skills and experience
that women bring to the labor market.2 2 1 This study also found that about 28 percent
of the gap was due to differences in the industries and occupations in which men and
women worked and in their union status.2 2 2 Accounting for these differences raises
the ratio of female to male median wages for the late 1980s from about 72 percent to
about 88 percent, leaving around 12 percent unexplained.2 2 3
Even as several beneficial trends have tended to boost women’s wages
relative to men’s and helped narrow the male-female wage gap, two major trends
have worked simultaneously to widen it. The first is increases in the pay premium
associated with higher skill (as measured by educational attainment and labor market
experience), and the second is increased differences in pay across industries and
occupations. Despite the gains just documented, these trends have served to widen
the wage gap because female workers still have less labor market experience on
average than male workers, and because women tend to work in occupations with
slower wage growth than those of men. Rising wage inequality across occupations,
together with increasing economic returns to skills, slowed women’s progress during
the 1980s.
Although recent trends suggest that progress is being made, no one should
doubt that barriers remain. Studies that have tried to measure discrimination by
directly looking at pay differences between men and women in very similar jobs, or
by comparing pay with specific measures of productivity, have found evidence of
135
discrimination. There is also evidence that discrimination remains a problem at the
highest levels of management. For example, in 1999 only four of the chief executive
officers of Fortune 500 companies were women.2 2 4 A recent study notes that of the
five highest paid executives at each of 4,200 companies, only 2.5 percent were
'■ s 'jc
women, and they earned about 45 percent less than their male counterparts.
Although differences in managerial experience and company size can explain a large
part of this wage gap, the “glass ceiling” may still be stopping the advancement of
women within management hierarchies.
Preparing the American Work Force
The transformation of the economy from one based on agriculture and
manufacturing into one based on services and high-technology skills has meant many
changes for the American economy and people. It has, for example, led to the rise of
new economic centers such as Silicon Valley and the decline of other areas that were
once vibrant and had jobs in abundance. The changing economy has also meant a
new set of challenges for the American worker. To compete successfully in the new
economy, the American work force must continue to change and receive the
education, training, and skills necessary for the labor market of today.
136
Building Foundations: Educating America’ s Youth
The economic decision to improve one’s skills—to invest in one’s own
human capital— is based on both the cost of that investment and the expected return.
The cost includes such basic things as expenditure on tuition and books, but it also
includes an opportunity cost: the earnings that the worker could have made had he or
she chosen to stay in the labor market rather than go to school. And the return—or,
f t
to be precise, the private return—consists mainly of the higher wages available in the
labor market to workers with more schooling or training. On average, having more
years of formal schooling leads to better labor market outcomes for those schooled:
higher wages, higher rates of employment, and lower rates of unemployment.
Although it is difficult to put an exact dollar figure on this return, the evidence
presented above indicates that it has increased substantially in recent decades.
Further, and perhaps more important from a policy perspective, evidence suggests
that society at large benefits from having a more educated population.
The social return to education, for example, might include a more productive
work force that can pay taxes, draws less on government-provided social programs,
and participates more effectively in the democratic process. Given the high rate of
return to schooling, individuals and families have a tremendous private incentive to
invest in education. People often make great financial and personal sacrifices so that
they or their children can get more schooling, or schooling of higher quality. Despite
the incentives, however, there are a number of reasons to expect that people might
137
under invest in education. Financial constraints present a problem for some. Because
they cannot use their future human capital as collateral, would-be students may not
be able to borrow enough to finance their education. They may also be
underinformed, or misinformed, about the true opportunities available in the labor
market. In particular, they may not know or realize what level of wages they could
eventually earn if they make the human capital investment, or the length of time over
which they will reap the returns. Perhaps most important for policy, when people
make these personal decisions, they may not take into account the benefits of their
further education to the rest of society as well as to themselves. These explanations
all point to a role for government to play in the provision of education and training.
The challenge for government with respect to schools is to give students the
skills they need to succeed in today’s economy and tomorrow’s and to participate
more fully in American life in general. Fortunately, students themselves are
recognizing the need for improved skills, and many are seeking greater challenge in
their education. Students today are taking more courses in core academic subjects
than did their counterparts in the early 1980s, and the courses they are taking are
more challenging.2 2 6 For example, a higher percentage of high school graduates are
completing algebra and higher-level mathematics courses, as well as courses in
biology, chemistry, and physics, than in the 1980s.2 2 7 The proportion o f students
taking college advanced placement examinations has also increased dramatically,
from 50 twelfth-graders out of every thousand in 1984 to 131 per thousand in
1 9 9 7 . 2 2 8
138
Although measuring educational progress is difficult, test scores may be
indicative, and here the signs are mixed but generally positive in recent years. Since
the early 1980s, scores on the National Assessment o f Educational Progress (NAEP)
show modest improvements in mathematics and science proficiency, but little change
'j'y o
in reading and writing proficiency. Differences in NAEP scores by sex are now
small, with females scoring higher in writing and reading achievement and males
generally scoring higher in science and mathematics. Results for African
Americans and Hispanics show improvement since the mid-1970s.2 3 1 Indeed, the end
of legal segregation, followed by efforts to equalize spending on public schools since
1970, has made a substantial difference in student achievement. On every major
national test, including the NAEP, the gap between minority and white students’ test
scores narrowed substantially between 1970 and 1990.2 3 2
Scores on the Scholastic Assessment Test (SAT, a test typically taken by
college-bound high school juniors and seniors) have also shown improvement.
Mathematics scores on the SAT were 16 points higher in 1995 than in 1980,
although students scored higher on both parts of the test, mathematics and verbal, in
i l l
the early 1970s. Between 1976 and 1995, the combined verbal and mathematics
scores of African Americans increased by over 50 points, while those o f white
students remained roughly stable.2 3 4 Observed gains in SAT scores are particularly
impressive given that the proportion o f high school graduates taking the test has
increased by about a fourth since the early 1970s.
139
The gains that the U.S. education system has achieved in the past few
decades deserve to be noted, but they should be viewed in a broader context. Schools
have been changing, but the economy has been changing more quickly. The result, as
discussed above, is that a high school diploma alone is no longer a ticket to the
middle class. Even at higher educational levels there may be a mismatch between the
skills acquired in school and the skill requirements of jobs. To right this balance, it is
imperative that improving education is one of the United States’ highest priorities.
Figure 4-7 Average Scores on the Scholastic Assessment Test (SAT)
Score
§30
520
510
500
v Math
490
1971-72 1 i 974-75 1977-78 1980-81 1983-84 1988-87 1989-90 1992-93 1998.es
Source: College Entrance Examination Board, National Report On College-
Bound Seniors.
140
Greater Access to Preschool Education: The Head Start Program
Research demonstrates that the early preschool years, when human ability
and motivation are being shaped, are critical for skill formation. Developmental
programs that intervene early in life have been shown to be more costeffective than
later attempts at remediation. One such program is Head Start, which since 1965 has
provided comprehensive developmental services for America’s low-income
preschool children as well as social services for their families. These services focus
on fostering intellectual, social, and emotional growth as well as providing a
comprehensive health program. Since 1993, funding for Head Start has nearly
doubled, to $5.3 billion in 2000.2 3 6 The additional funds have enabled Head Start to
increase its enrollment from 714,000 to 877,000 children since 1993 and to enhance
the quality of its services.2 3 7 Since there are still extensive waiting lists for Head
Start, substantial increases in funding are necessary.
Although conclusive evidence is limited, studies have shown the
effectiveness of Head Start. A 1995 study used a nationally representative data set to
compare children who had participated in the program with their siblings who had
not.2 3 8 This methodology allowed the researchers to control for many confounding
factors that they could not observe but that may be related to outcomes. The study
found significant and persistent effects of Head Start in increasing test scores and
school attainment and in reducing grade repetition for whites.2 3 9 However, the large
and significant gains in test scores for African Americans were found to be quickly
lost after they left the program, perhaps because of lower quality in the schools that
141
so many of them attend after leaving the program.2 4 0 Also, large positive effects on
test scores and schooling attainment for Hispanic children was found, although long
term follow-up was unavailable.2 4 1
Improving Elementary and Secondary Education
It is important to ensure that all students have access to good-quality
educational resources once they enter school. As was stated at the beginning of this
chapter, students need society’s help as they prepare themselves for a changing work
force and the demands of a technology-driven labor market. Therefore, there needs
to be a three-part agenda to help State and local governments build and maintain a
world-class elementary and secondary school system. The first part of this agenda
should focus on setting high standards. A national consensus has emerged on the key
role of standards in school improvement: 48 States now test their students, and 36
publish annual report cards on individual schools.2 4 2 However, only 19 States
currently use more extensive public rating systems to identify low-performing
schools, and only 16 apply sanctions to failing schools.2 4 3
A second and related way to encourage local cooperation in improving
schools is to increase the accountability of those responsible for their outcomes. The
Education Accountability Act, which requires States and school districts to comply
with accountability measures in order to receive Federal funds is a good start. These
accountability measures include identifying failing schools and making critical
investments to turn them around; reconstituting or closing chronically
underperforming schools; employing qualified teachers and assigning them to teach
142
in their field of expertise; instituting disciplinary codes and issuing school report
cards; and ending social promotion by making sure students get the help they need to
succeed in school.
Finally, the importance of investing in strategies aimed at raising student
achievement is critical. These include assuring students access to the latest
technology, reducing class sizes in the early grades, improving teacher quality,
providing opportunities for extended learning in after-school and summer school
programs, providing free and appropriate public education to students with
disabilities, and offering options for public school choice. Each of these strategies is
discussed below.
Improving Access to the Latest Technology.
Computer and technology skills are increasingly important for students as
they prepare for the future. Knowledge of these skills provides a gateway to higher
wages and to the new jobs of the new economy. Accordingly, it is a priority to help
all children gain access to the tools they need to prosper in a changing economy. The
Technology Literacy Challenge had four basic goals: to equip all classrooms with
modem computers, to connect all classrooms to the Internet, to promote the
development of quality educational software, and to prepare teachers to use
technology effectively. It is important to find creative ways to use technology in the
classroom, because evidence suggests that it can be a useful tool. For example, a
recent study showed that eighth graders who use computers to leam higher order
143
thinking skills, or who had teachers trained in the use of technology, raised their
achievement in mathematics by more than one-third of a grade level.2 4 4
The Technology Literacy Challenge program makes progress toward the goal
of equipping classrooms with computers through the Technology Literacy Challenge
Fund. Resources available through this fund can be used to help States and local
school districts increase the number of modem, multimedia computers in the
classroom. In the 1998-99 academic year there were 9.8 students for every
multimedia computer in use.2 4 5 This represented an improvement from 21.2 students
per computer only a couple of years before.2 4 6 Computers for Learning program, an
interagency effort to refurbish surplus computers from Federal Government
operations and distribute them to schools, has also been effective. Thousands of
computers from this program are currently in use in schools across the country.
One of the most important programs designed to help in linking schools to
the Internet has been the E-rate program created under the Telecommunications Act
of 1996. Through this program, approximately $3.6 billion has been made available
since 1998 in the form of discounts to over 50,000 schools and libraries so that they
can afford telecommunications equipment, Internet access, and internal connections
to the classroom.2 4 7 The level of the discount for which a school is eligible is
determined by the proportion of children eligible to participate in the Federal school
lunch program. In this way the E-rate targets those schools and libraries that serve
the most disadvantaged students. 70 percent of funding in the program continually
goes to schools in the lowest income areas.2 4 8
144
Progress has been hopeful. In 1994, according to the Department of
Education, only 3 percent of classrooms had Internet connections; by 1998 that
figure had risen to 51 percent. And, E-rate alone has helped connect more than 1
million classrooms.
There is still a long way to go, however, before all children have easy access
to the new medium. A “digital divide” remains for poor and minority children who
lack the same access to this technology in their homes that other children enjoy. In
fact, households with incomes over $75,000 are more than five times as likely to
have a computer at home and more than seven times as likely to have home Internet
access as those with incomes under $10,000.2 4 9 But with advances through the E-
rate, the gap between rich and poor within schools has narrowed (Chart 4-9).
An essential complement to computer hardware and Internet access is
developing user-friendly educational software with engaging content. The
Department of Education’s Technology Innovation Challenge Grants support
partnerships among educators, the private sector, and nonprofit organizations to
develop compelling applications of educational technology. For example, teachers in
San Diego are working with university researchers and other partners to develop a
curriculum of studies with an ocean exploration theme, designed to improve
performance in mathematics and science.
Finally, making effective use of this new hardware and software requires
training teachers to use the new technology. A $75 million fund to help train new
teachers in the use of the new high-tech tools in their classrooms has been approved
145
by Congress.2 5 1 This program will help ensure that all new teachers entering the
work force can integrate technology effectively into their curriculum and teaching
styles.
Figure 4-8 Shares of Public Schools with Internet Access by Poverty Status
Percent
I C O
■ High-poveriy schools
E 3 Low-poverty schools
1984 1995 1996 1997 1998
Source: Department of Education (National Center for Education Statistics).
Class Size Reduction.
Average class size in the United States declined from 29 in 1961 to 24 in
1991.2 5 2 Despite this improvement, however, many parents and educators believe
class sizes are still too large. There is also substantial variation in class size, with
many students still being taught in classes with more than 30 students.2 5 3 Smaller
classes allow teachers to interact more with each student and to tailor instruction to
that student’s needs, and they allow students to participate more in class discussions.
These benefits can boost students’ academic performance. In Tennessee’s Project
STAR, for example, a group of students from kindergarten through third grade were
randomly assigned to either regular-sized classes (22 to 25 students) or smaller
classes (13 to 17 students). Over 11,000 students in 79 schools eventually
participated in the program.2 5 4 Results show that students in smaller classes learned
more in the first year of the program than did students in larger classes, and that
these gains were maintained as these children continued in smaller classes in
subsequent years.2 5 5 Some researchers have argued that children get a one-time gain
from a reduction in class size, and that this gain is maintained in later years whether
or not they remain in smaller classes.
Congress passed the first-ever nationwide effort to reduce class size in the
early grades in 1999. School districts around the United States receive a total of $1.3
billion to enable them to recruit, hire, and train new, qualified teachers each school
year until 2007. This is to help schools hire 100,000 new teachers and reduce class
size in the early grades to a nationwide average of 18. All 50 States have received
funds through the program. A report by the Department of Education on the
program’s first year estimated that 1.7 million children are benefiting from the
program; that thousands of new teachers have been hired; that, in schools receiving
the bulk of the funding, class sizes for grades one through three were reduced by an
147
average of five students; and that the program’s flexibility has allowed it to
complement State and local efforts.
Improving Teacher Quality.
Research has shown that teachers do make a difference to student
achievement, although the exact characteristics that make some teachers more
effective than others remain elusive.2 5 7 In 2000, $98 million was appropriated for
Teacher Quality Enhancement Grants, which help link teacher preparation
institutions and high-need school districts, to strengthen teacher education and to
provide incentives to prospective teachers to teach in high-need schools. In 2001,
as part of the Hispanic Education Action Plan, $100 million was apportioned for
Bilingual Education Professional Development. This is an increase of $28.5
million over the 2000 level.2 6 0 The funding provided more than 2,000 additional
instructors in bilingual education and English as a second language with the high-
quality pre-service and in-service training they need to teach students with limited
proficiency in English.2 6 1
Opportunities fo r Extended Learning in After-School Care and Summer School.
The summer months can be an important time for learning outside of the
classroom. Recent evidence has shown, however, that the test scores of poorer
children are more likely to fall over the summer than those of children from
wealthier families.2 6 2 This research suggests the importance of providing
disadvantaged children with increased opportunities to learn. A large investment in
after-school and summer school programs is necessary to give children the extra help
148
they need to meet high educational standards. In 2000, investment in these programs
(21st Century Community Learning Centers), was $453 million and provided
educational support to 675,000 students.2 6 3 Increased funding is again important to
reach even more students.
Providing Public Education to All Students with Disabilities.
The Individuals with Disabilities Act, first enacted in 1975, has helped
millions of people with disabilities. Before its enactment, approximately 1 million
children with disabilities were shut out of schools, and hundreds o f thousands more
were denied appropriate services.2 6 4 In 1986, 26 percent of children with disabilities
were educated in regular classrooms. By 1996 that proportion had risen to 45
percent.2 6 6 Today, people with disabilities are graduating from high school and going
to college in unprecedented numbers.
Government funding of the education of young people with disabilities was
nearly $3.0 billion in 1993 and about $6.0 billion in 2000.2 6 7 More important,
however, is the goal of improving the educational outcomes of disabled children.
The 1997 amendments to the Individuals with Disabilities Act made it clear that the
education of children with disabilities must be based on the same challenging
standards applied to nondisabled students, with appropriate modifications and
supports for their disabilities.
Options fo r Public School Choice.
Charter schools provide parents with greater choice within the public school system.
They also allow educators an opportunity to create innovative learning environments
149
while remaining accountable for student achievement. The number of public charter
schools nationwide rose from 2 in 1993 to nearly 1,700 in 1999.2 6 8 Funding of $145
million for as many as 2,000 charter schools in 2000 was provided.2 6 9
Greater Access to Postsecondary Education
As discussed earlier in this chapter, the difference in average wages between
those Americans with postsecondary education and those without it is considerable.
One way to help people improve their economic status is to provide greater access to
postsecondary education and more opportunities for people to enhance their skills
throughout their working lives. It is important to have a strong commitment to
making postsecondary education both attainable and affordable for all Americans,
from recent high school graduates to adult learners and displaced workers. To help
ensure access to 4-year and community colleges, it is crucial that we develop even
more programs that prepare students for postsecondary education and help make
college affordable.
Preparing Students fo r College.
Too many children, especially from low-income families, are reaching
college age without the skills and knowledge they need to go on to college. Recent
research has shown that students form their educational expectations early, and
courses taken early in junior high or high school are closely related to postsecondary
enrollment.2 7 0 This indicates that the end of high school may be too late to inform
students of the importance of a college education. Rather, information on the
importance of college admission requirements as well as on financial aid is critical
150
for students early in their educational careers. GEAR UP (Gaining Early Awareness
and Readiness for Undergraduate Programs) helps low-income students prepare for
education beyond high school by providing tutoring, counseling, mentoring,
information on financial aid, and other assistance these students need to become
ready for college. Again, increasing funding of GEAR UP in vital to finance needed
services to millions of students in high-poverty schools.
TRIO programs are another important resource to help disadvantaged
students prepare for and succeed in college. These are educational outreach programs
designed to motivate and support students from low-income families. There are
0 * 1 1
currently 2,400 TRIO programs serving 700,000 students. Evaluation results from
one type of TRIO program, Upward Bound, found that students in the program were
four times more likely to earn a college degree than students from similar
backgrounds who were not in TRIO.2 7 2
Helping Finance Postsecondary Education
Enacted in 1997, the HOPE Scholarship program and the Lifetime Learning
tax credit represent the largest Federal investment in higher education since the G.I.
Bill over 55 years ago. In 2000, 13.1 million students— 5.9 million receiving HOPE
Scholarships and 7.2 million claiming the Lifetime Learning credit—were eligible to
benefit.2 7 3 Each HOPE Scholarship provides a tax credit o f up to $1,500 for each of
the first 2 years of college for students enrolled on at least a half-time basis. This
credit is phased out for joint tax filers with incomes between $80,000 and $100,000,
and for single filers making between $40,000 and $50,000. By reducing the financial
151
barriers to continued education, hopefully at least the first 2 years of college will
become as universal as high school.
In addition, in 2000, $7.6 billion was provided for Pell grants, a program that
provides direct financial assistance to help financially needy students pay for their
•J 1 A
postsecondary education. The maximum award was increased 43 percent between
1993 and 2000, from $2,300 to $3,300.2 7 5 To further these goals, more investment in
the form of a college opportunity tax cut is needed.
The Lifetime Learning tax credit targets adults who want to go back to
school, change careers, or take courses to upgrade their skills, as well as college
juniors and seniors and graduate and professional degree students. The 20 percent
credit applies to the first $5,000 of a family’s qualified education expenses through
2002 and to the first $10,000 thereafter, and it phases out at the same income levels
as the HOPE Scholarship. In 2000, this credit amounted to $2.4 billion.2 7 6
Student loans have opened the doors to college for millions of Americans.
We need more programs that offer students the option of income-contingent
repayment and installments based on the borrower’s income after completing studies.
In the Higher Education Amendments of 1998, significantly lower interest rates for
borrowers on student loans were introduced, easing the burden of repayment for new
borrowers and for borrowers who consolidate their loans. These are all steps in the
right direction. It is simply that we need more.
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The Continuing Challenge: Reeducating and Retraining
Progress in strengthening formal education is a key ingredient in preparing
young people for the labor market, but training after formal education is also
essential, both for those just entering the market and for those well into their careers.
To take advantage of the opportunities offered by an increasingly global,
competitive, and information-driven economy, workers today may require ongoing,
lifelong learning.
The Provision o f Training
In large measure, it is the responsibility of individuals and firms, not of
government, to develop the methods and practices most appropriate for promoting
lifelong learning and training. As with education, both individuals and firms have
strong incentives to invest in training: both stand to reap high returns from their
investments. But as with education, government policies may have an important role
to play in facilitating such investments.
Employers have a clear interest in providing their employees with the
specialized training they need to perform those tasks that they can perform for that
employer and nowhere else. Companies should therefore be willing to provide
training in these firm-specific skills. In contrast, many other valuable skills are
occupation- rather than firm-specific, and still others, such as many mathematical
and literacy skills, are quite general in their application. The data on training
described below suggest that firms do provide substantial training in general skills,
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but it is difficult to disentangle the cost o f employer investments in training from that
of employee investments in training, even when the employer sponsors the training.
Firms provide general training for several reasons. They may simply be
unable to find employees with the necessary occupational skills, or employees may
need some general training before they can benefit from training in more firm-
specific skills. When firms provide general training in their own facilities but do not
pay employees their full wages while in training, it is largely the employees, not the
firms, who are then doing the investing—they are paying an opportunity cost. In
practice, both individuals and firms are likely to share in these investments, but
employers will be reluctant to invest heavily in general skills when workers have
high turnover rates, since the firm does not reap the returns on the investment.
Despite the evidence that firms do provide general training, there is reason to believe
they might underinvest in such training.
As in the case of education, there are reasons to believe that individuals
might underinvest in their own general training. If they are not sure that the skills
they will acquire will result in higher wage offers, they will hesitate to bear the costs.
They may also underinvest because their incomes are too low to carry them through
a period of unpaid training. In times of rapid technological progress, workers may be
unaware of the value of new training or consider it too risky: the same rapid change
that makes the skill valuable today may make it obsolete tomorrow. Finally, again as
with investments in formal schooling, individual workers may fail to invest in
154
training because they do not take account of the full social benefits of training in
their decisionmaking.
All these underinvestment scenarios provide reasons for government policies
to encourage general training. One way in which government attempts to encourage
investment in training is by allowing employers to deduct from taxable income the
tuition payments for schooling they provide for their employees. Other policies are
discussed below. First, however, it is worthwhile to review the evidence on the value
of firm-based training.
Firm-Based Training
Privately provided training by firms themselves is the primary mechanism by
which workers receive training in the United States, and there is evidence that this
firm-based training is growing.2 7 7 Although this source of training is difficult to
measure, a number of surveys have been conducted and agree on several
conclusions. First, training is very widespread: in 1994, 81 percent of all
establishments offered some type of formal training, and 57 percent said that they
had increased the amount offered since 1991 (only 2 percent reported providing less
training).2 7 8 Second, firms with more than 1,000 employees are more likely to invest
in training than small firms; virtually all large firms report that they offer formal
training.2 7 9 This may be because smaller firms have trouble financing certain fixed
costs associated with training, or because it is more difficult to measure the informal
training that takes place in smaller firms. Third, there is considerable variation across
industries, with a higher incidence of training provision in nonmanufacturing than in
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manufacturing firms.2 8 0 Fourth, establishments with more highly educated workers
(which also tend to be larger establishments) are more likely to provide training.2 8 1
Finally, training is more likely when the firm is already making other investments,
such as investments in capital, or in new organizational practices, such as self-
managed teams or other “high-performance” work practices.
These data suggest that firm-based training becomes more prevalent as firms
experience rapid technological progress, but much training is specific to the
employer and is not o f a general nature. For example, training in basic literacy and
numeracy, in computer skills, or in teamwork is less common than training in safety
procedures or in new, firm-specific production methods. Only 27 percent of all
establishments provide training in basic educational skills for their workers, whereas
53 percent invest in computer-related skills and 82 percent invest in safety
training.2 8 3 Although more workers receive training from their employers than from
government-sponsored programs, the level of employer-provided training may still,
for the reasons discussed above, fall short of what is socially optimal. This is
particularly true for lower income groups or those in industries experiencing
increases in imports or other conditions associated with worker dislocation.
These incentives to underinvest in employer-provided general training may
be particularly strong in the United States, where labor turnover is high and there is
no national, standardized credentialing system for this type of training. U.S.
companies invest roughly $60 billion a year on education, training, and upgrading
156
skills, but this is modest relative to the challenge posed to the United States by
rapidly changing workplace demands.2 8 4
Government Training Programs
Government training programs are aimed primarily at workers who have lost
their jobs and are having difficulty finding new ones, or at those who are
unemployed and disadvantaged and may lack the skills or experience to enter the
labor market without further preparation. Some employment and training programs
are designed specifically to help welfare recipients go to work. Typically, training
programs include some form of remedial or vocational education, subsidized
employment to provide job experience, or guidance in how to find a job.
Modem U.S. training programs trace their history back to the mid-1960s. The
1964 Economic Opportunity Act created the Job Corps, which still operates today,
currently providing training for disadvantaged youth at over 100 urban and rural
residential centers throughout the United States.2 8 5 Since its inception, the Job Corps
has helped more than 1.7 million young people.2 8 6 The Manpower Development and
Training Act (MDTA) was enacted in 1962 to retrain technologically dislocated
workers, but the Economic Opportunity Act of 1964 shifted its emphasis toward
disadvantaged workers. In 1973 MDTA was replaced by the Comprehensive
Employment and Training Act (CETA). This program, which gave State and local
governments the authority to operate training programs with Federal grants, also had
a public service job creation component, which grew quite large in the late 1970s. In
an effort to shift more responsibility to the private sector, the Job Training
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Partnership Act (JTPA) replaced CETA in 1982. JTPA eliminated the public service
employment component of training and further decentralized its administrative
structure by giving primary responsibility for the program to State and local
governments and the business community. The program served over a million
economically disadvantaged persons annually and was until recently the principal
training program for the disadvantaged. JTPA has been replaced by the Workplace
Investment Act, discussed below.
The first major mandatory training program for welfare recipients was the
Work Incentive (WIN) Program of 1967. This program generally provided recipients
of Aid to Families with Dependent Children (AFDC) with job search assistance. In
1988 WIN was replaced by the Job Opportunities and Basic Skills Training (JOBS)
program. Created by the Family Support Act of 1988, this was a comprehensive
welfare-to-work program that gave AFDC recipients the opportunity to take part in
job training, work, and education related activities that would lead toward economic
self-sufficiency. The comprehensive welfare reform legislation passed in 1996
replaced JOBS (as well as the AFDC) with the Temporary Assistance for Needy
Families (TANF) block grant. TANF gives States the flexibility to design their own
welfare programs, provided they require recipients to participate in work or work-
related activities in exchange for time-limited assistance. Within certain limitations,
States may provide both pre- and postemployment services, including training to
help welfare recipients find and keep a job.
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Government appropriation specifically on training and employment services
amounted to approximately $5.5 billion a year, a level that implies that government-
funded training opportunities for U.S. workers are limited relative to those available
to workers in other countries.2 8 7 Comparative research done in 1994-95 found that
the United States spent only 0.2 percent of its GDP on publicly funded employment
and training programs, much less than many other industrial countries, including the
United Kingdom (which spends 0.5 percent of GDP) and Sweden (3.0 percent). 2 8 8
Are government employment and training programs effective in improving
labor market prospects for the disadvantaged? A review of the evidence provides
grounds for cautious optimism. One general conclusion, however, is that these
programs appear to have been more successful for disadvantaged adults—women in
particular—than for disadvantaged youth.
Disadvantaged youth are perhaps the most difficult population to help, and
success has been limited except in a few highly intensive or particularly well run
programs. One program that has shown noteworthy success is the Center for
Employment Training (CET) in San Jose, the only one of the 13 Jobstart
demonstration programs found to be effective in increasing youth earnings. An
evaluation of this program showed a 40 percent ($3,000) increase in participants’
earnings.2 8 9 The Job Corps has also been shown to produce significant gains in
earnings (about 15 percent per year) and to reduce the number of serious crimes that
participants commit.2 9 0 Both of these programs are considerably more intensive than
most other efforts: enrollees either reside at the program’s facilities (in the case of
159
the Job Corps) or spend many hours per month undergoing training (in the case of
the CET). Finally, a number of programs have been specifically targeted at young
single parents on welfare. Some of these programs have produced small short-run
gains in employment and educational attainment among teenage parents. However, it
has proved difficult to sustain these gains once the program has been terminated.
The evidence is much more consistent that job training programs increase the
earnings of disadvantaged adults, and particularly those of economically
disadvantaged women. The JTPA Title II program, which offers short-term training
and job search assistance to disadvantaged adults, appears to have increased the
JQ 1
earnings of women in the program by 15 percent, and of men by 10 percent.
More intensive programs that offer subsidized employment and supportive services
to long-term welfare participants have yielded larger earnings gains. Mandatory
welfare-to-work programs, which tend to offer job search assistance rather than
training, have shown modest but positive effects on earnings and employment and
small negative effects on welfare receipt. Given the very low initial earnings of most
disadvantaged adults served by training programs, the gains made by most programs
have not been enough to pull many of those served out of poverty. However, most
studies documenting this finding were completed before the recent expansion of the
Earned Income Tax Credit (EITC). It may be that the EITC boosts starting incomes
enough so that the additional earnings generated by job search and training programs
can then move noticeable numbers of participants out of poverty.
160
Research on the effects of employment and training programs for dislocated
workers, although much more limited, suggests that some of these programs can be
effective. Carefully targeted job search assistance programs can decrease the
duration of unemployment and the receipt of unemployment insurance among
displaced workers. These programs are generally cost-effective for the government.
One study has suggested that for every dollar the government spent on targeted job
search programs, the government saved about $2 in the form of reduced
unemployment insurance payments and increased tax receipts due to faster
292
reemployment.
Taken together, these results suggest that employment and training programs
can achieve modest employment and earnings gains for disadvantaged women.
These programs are also often cost-effective. Results for other groups are less clear.
Moreover, the earnings gains generated by successful programs have usually not
been enough to lift participants out of poverty. To some extent this is not surprising
given the relatively modest and short-term nature of the investments these programs
make. It is possible that more intensive interventions, focused on local skill demands
and tailored to individual needs, would produce greater gains.
Training
The macroeconomic environment for American workers improved markedly
during the 1990s. The United States’ labor market performed at extraordinary levels
during that period, with the unemployment rate at a 30-year low, labor force
participation at an all-time high, and real compensation measures recording strong
161
gains. But even so, the rapid pace of change and the premium put on technology and
skills may cause some workers to lose their jobs and have trouble finding new jobs
given the skills they have. And those workers who have failed to acquire the
necessary skills may have trouble securing employment that provides the middle-
class standard of living they are striving for. Policies that pursue training policies
that will help ensure, for all those willing to work hard, an opportunity to prosper,
should be made a priority.
Government efforts, in the past, to strengthen work force development and
promote lifelong learning lead to the Workforce Investment Act (WIA). Signed into
law in August 1998, WIA represented the first major reform o f the United States’ job
training system in over 15 years. The Act streamlined and revitalized the system that
provides workers with the information, advice, job search assistance, and training to
find and retain good jobs, and provides employers with a pool of skilled workers.
The Act aims to enable any adult interested in advancing his or her career to continue
learning, regardless of income; it also aims to provide high-quality information and
services to all job seekers. The seven key principles are:
• Streamlining services: A variety of programs should be integrated at the street level
to make the delivery system more accessible to both individuals and businesses.
• Empowering individuals: Individual Training Accounts, along with consumer
reports providing key information on the performance of training providers, and job
counseling at one-stop centers would enable individuals to make informed training
choices.
162
• Making services universally accessible: WIA provides ready access to core
employment-related services to all in need o f those services. This Act should be
expanded.
• Increased accountability: States and local communities should be held accountable
for meeting performance measures, and should suffer sanctions if they fall short, and
should receive incentive funds for strong results.
• Strong role fo r local boards and business: State and local Workforce Investment
Boards should be chaired by a member of the business community and have a
majority of members from business.
• Provide local flexibility: Local authorities should have flexibility to tailor delivery
systems to meet the needs of their community.
• Improved youth programs: Fostering connections between academic and
occupational learning and providing activities geared toward youth development
should be a goal. A youth council will be established under each local Workforce
Investment Board to improve coordination among organizations that serve young
people.
Conclusion
Two key developments—the growing importance of education and the
expansion of opportunity—transformed the American labor market in the 20th
century. Tomorrow’s workers will need skills and flexibility to respond to the
opportunities and challenges that technology is making available. As long as skills
163
command a premium in the labor market, both workers and firms will have an
incentive to invest in education and training. But for any number of reasons, workers
and firms might nevertheless underinvest in their human capital. Therefore
government policy will continue to play a role in the acquisition of skills by the
American work force. It is important, however, not to downplay the roles of other,
noninstitutional factors, the most important of which is the family. Much of a
person’s skill formation occurs before he or she enters school. This implies that the
environment in which a child is raised is very important for that child’s later '
learning. The next chapter discusses the American family and the challenges it faces
in the new economy.
164
CHAPTER 5: THE CHANGING AMERICAN FAMILY
Among the trends that have shaped the American family over the course of
the century, one of the most important has been the rise in female participation in the
labor force, as more opportunities have opened up for women to work and more
women have taken advantage of those opportunities.
For most of the 20th century, the prototypical American family was a married
couple with children in which the wife did not work for pay. But for decades now
this traditional one-breadwinner, one-homemaker family has made up a declining
share of families, as more wives have entered the paid labor force and as single
parent families have become more widespread. At the beginning of the 21st century,
fewer than a third of all families are married couples in which the wife does not work
outside the home.2 9 3 This means that a majority of American families face—and in
consequence the nation faces— different opportunities and different challenges from
those of a society of “traditional” families.
The changes in the American family, viewed over the entire span of the 20th
century, have been dramatic (Table 5-1). In 1900, for example, about 80 percent of
children lived in two-parent families with a mother or stepmother who worked on the
farm or at home.2 9 4 Fewer than 10 percent o f American children lived in one-parent
families. The typical home had few o f today’s conveniences (only 8 percent of
dwelling units had electricity in 1907), and many women sewed their own clothes
and gave birth in the home rather than in a hospital.2 9 6 Women early in the century
165
married younger, had more children, and died younger than women today. Ten
percent of children died in infancy, and average life expectancy for both men and
907
women was less than 50 years. The average household had close to five members,
and a fifth of all households had seven or more.2 9 8 Job opportunities for women who
did not live on farms were limited as much by custom as by physical demands: only
a fifth of all women worked for pay, and those who did were mainly single and
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Table 5-1 - Contrasting American Families Then and Now
Item 1900 1950 1998
H ouseholds t r y type (percent)
F am ily house b id s.......................................................
M a rried couple...........................................................
M a le householder, n o wife present...............................
F em ale householder, no husband present.....................
N onfom ily households...................................................
(3)
(a )
(3)
( 3)
( 3)
89.2
78.2
2.7
8.3
10.8
69.1
53.0
3.8
12.3
30.9
A verage househsId size (persons)........................................
H euseholds w ith seven o r m ore people (percent)....................
4.8
20.4
3.4
4.9
2.6
1.2
L ivin g arrangem ents of children b y fam ily status (percent)*
Tw o-parent farm fam ily..................................................
Tw o-parent n on farm fam ily
F ather breadw inner, m other hom em aker.......................
D u a l earner................................................................
Single-parent................................................................
N ot living w ith parent.....................................................
41
43
2
9
5
1 7
56
13
8
6
(5)
2 4
44
28
4
M ales and females b y m arital status (percent)
M ales aged 15 and over
M arried......................................................................
D ivorced.....................................................................
W idowed....................................................................
N ev er m arried.............................................................
Fem ales aged 15and over
M arried......................................................................
D ivorced.....................................................................
W idowed....................................................................
N ever m arried.............................................................
54.6
.3
4.6
40.3
57.0
.5
11.2
31.2
68.9
2.0
4.2
24.9
67.0
2.4
12.0
18.5
58.0
8.2
2.5
31.2
54.9
10.3
10.2
24.7
M edian age at first m arriage
M en...........................................................................
W om en.......................................................................
25.9
21.9
22.8
20.3
26.7
25.0
L ife expectancy at b irth (years)
M en..............................................................................
W omen.........................................................................
Infant m ortality rate (deaths p er 1,000 live births)................
46.3
48.3
99.9
65.6
71.1
29.2
73.9
79.4
7.2
L a b o r force participation rate of w om en (percent).................
W om en in the labor force b y m arital status (percent)
Single...........................................................................
M arried........................................................................
W idow ed, divorced, or separated.....................................
20.0
66.2
15.4
18.4
33.9
31.9
52.2
16.0
60.0
26.8
53.1
20.0
Sources: Department of Commerce (Bureau of the Census) and Department
of Labor (Bureau of Labor Statistics); and Department of Health and Human
Services (Centers for Disease Control and Prevention).
167
The average family today enjoys advantages that its counterpart of a century
ago did not. The material standard of living of the average family is much higher
now than it was then. People are more likely not only to live longer but to remain
healthy into retirement as well. It is partly because of these very advances, however,
that families today face a different set of challenges than did families 100 years ago.
In particular, the expansion of opportunities for women to work for pay, and the
greater desire of women to seek such work, have added a new challenge to the
perennial one of having adequate resources to meet family needs. That new
challenge is how to balance the material gains from more hours of paid employment
against the desire to reserve time for the responsibilities and enjoyments of family
life.
This chapter examines these two challenges. It begins with an overview of
some of the key trends that have created the modem American family: the rise in
female labor force participation, changes in family formation and dissolution, and
improvements in health and longevity. It then explores the emergence of a diverse
set of family types, focusing on differences in incomes and in time spent at work.
The remainder of this section assess the challenges these different kinds of families
face— and their policy implications. The first part discusses the “money crunch”: the
financial constraints that still burden many families despite the remarkable growth in
the American standard of living. This problem is more likely to confront single
mother families and one-earner couples than two-earner couples. The second part
discusses the “time crunch”: the shortage of time to devote to family needs that
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results from the increased participation of parents, especially mothers, in the paid
labor market. This problem affects a vast number of families, including many for
whom the money crunch is less pressing.
Key Trends Shaping the American Family
Among the many trends that have affected the American family over the
course of the century, three have been particularly important. The first is the rise in
female participation in the labor force as more opportunities have opened up for
women to work and as more women have taken advantage of these opportunities.
The second is not a single trend but a set of related changes in how families form and
dissolve, which have contributed to the growing prevalence of single-parent families.
The third is improvements in health and life expectancy that have made care for
older relatives— and providing for their own retirement— increasingly important
issues for heads of families today. Many other kinds of households— including
people living alone—are also part of American society and face challenges of their
own, but this dissertation focuses primarily on those challenges that affect families
with children.
Female Labor Force Participation
Women have always worked, whether on the family farm, in the home, or in
the paid labor force. What distinguished the last century was the enormous increase
in the proportion of women who work for pay. In 1999 about three-fifths of the
169
female population aged 16 and over were in the labor force (Figure 5-1).3 0 0 This is
three times as high as the female labor force participation rate in 1900.3 0 1 And the
participation rate of women aged 25-44— those most likely to be balancing work and
child rearing—has risen severalfold, from less than 20 percent in 1900 to over 75
percent today (Figure 5-1).3 0 2 The participation rate of women in this age group with
children under age 18 has been somewhat lower than the overall rate but has shown a
similar pattern of increase. Over the past 25 years the share o f working mothers in
this age group who were employed full-time has been roughly 71 percent.3 0 4
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Figure 5-1 Labor Force Participation of Women
Percent
00 '
Women, aged 25-44
Mothers aged 25-44
with youngest child
under 18 years old
40
20
1910 1950 1970 1990
Sources: Department of Commerce (Bureau of the Census) and Department
of Labor (Bureau of Labor Statistics).
Many factors have contributed to the growth in women’s participation in the
paid labor market, including increases in education and wages for women, the
opening up of more opportunities for women to work, and changes in family
structure. As a result of higher labor force participation rates and later marriages, a
proportion of women larger than ever before experience a period of independent
living and employment before marriage. This gives them greater attachment to the
labor force and increases the chances that they will continue to work, or return to
work, after they marry and start a family.
171
Family Formation and Dissolution
Marriage remained a near universal experience throughout the last century.
Among the population 15 years old and over, the proportions of both men and
women who are married are roughly the same today as a century ago, although lower
than in the 1950s and 1960s.3 0 5 Only 6 percent of women aged 45-64 in 1998 and 12
percent of women aged 35-44 had never been married.3 0 6 However, according to the
U.S. Census Bureau, women today are spending a smaller fraction of their adult lives
married than did their counterparts a few decades ago; and, a much larger proportion
of children are being bom to unmarried mothers. As a result, the share of children
living in one-parent families increased from 9 percent in 1900 to 28 percent in
1998.3 0 7
Several strands of evidence suggest that people are spending a smaller
fraction of their lives married than in 1900. First, people are marrying slightly later.
In 1900 the typical first marriage was between a woman of 22 and a man of 26; now
the typical bride is 3 years older and the groom nearly a year older.3 0 8 Second,
divorce rates are much higher today than at the beginning of the century.3 0 9 In 1900,
among those aged 35-54, widowhood was far more common than divorce.3 1 0 Over
the century, the probability of being a widow in this age range declined markedly,
31 1
while the probability of being divorced rose (Figure 5-2). The divorce rate, which
jumped from around 10 per 1,000 married females per year in the mid-1960s to more
172
than 20 per 1,000 in the mid-1970s, has drifted down slightly since then but remains
high. A third reason why people spend a smaller fraction of their lives married is
that life expectancy is longer today relative to the typical duration of a marriage. The
net result of all these forces is that only 56 percent of the population aged 15 and
over are married today, rather than 68 percent as in I960.3 1 3
Figure 5-2 Shares of Population Aged 35-54 Who Are Widowed or Divorced
Percent
IB
16
14
Women, widowed
1 2
10
8
6
4
2
O
1970 1980 1990
Source: Department of Commerce (Bureau of the Census).
Thus it is probably not surprising that the proportion of children living in
single-parent households has risen dramatically. The increased prevalence of single
parent households is also related to the rise in out-of-wedlock births. For unmarried
females aged 15-44, the number of births per 1,000 women increased dramatically
from 7.1 in 1940 to 46.9 in 1994, but it has since stabilized and begun to decline,
reaching 44.3 in 1998 (Figure 5-3).3 1 4 In contrast, this measure of the birth rate
among married women has been dropping since the baby-boom of the 1950s and
1960s, although it remains nearly twice that o f unmarried women.3 1 5 As a result of
these trends, the share of all births that were to unmarried women of all ages
increased eightfold, from 4.0 percent in 1950 to 32.8 percent in 1998, although this
figure has begun to level off in recent years.3 1 6 Some of this increase reflects lower
marriage rates generally, and some reflects the rapid increase in the late 1980s and
early 1990s in out-of-wedlock births, including those by teens.
174
Figure 5-3 Birth Rates for Married and Unmarried Females
Live Births per 1,000 females Percent of all births
Birth rale for married
females, 15-44
(left scale)
Births to unmarried
fem ales (right scale)
160
140
120
100
8 0
Birth rate for unmarried
females, 16-44 s.
(left scale) ^ -
80
1940 1045 1950 1955 I960 1965 1970 1975 1980 1985 1990 1995
40
35
as
25
2 C
15
10
Source: Department of Health and Human Services (Centers for Disease
Control and Prevention).
Life Expectancy and Health
The life expectancy and health o f Americans increased dramatically over the
last century. Major public health initiatives (such as immunization campaigns, better
sewage systems, and education about hygiene) as well as medical advances (from
antibiotics to pacemakers to bone marrow transplants) have led to the virtual
eradication of numerous diseases and conditions that once contributed to high death
rates and low life expectancy. For example, technological innovations, better
obstetrical care and nutrition, more widespread access to prenatal care, and greater
175
use of antibiotics all contributed to tremendous improvements in the health of
mothers and infants. The infant mortality rate dropped by more than 90 percent over
the century, from 99.9 per 1,000 live births in 1915 to 7.2 per 1,000 in 1998.3 1 7 The
maternal mortality rate dropped similarly: whereas in 1900 more than 80 women
died from pregnancy-related complications for every 10,000 live births, by 1997 this
rate had fallen to less than 1 death for every 10,000 live births— more than a 98
percent decline.3 1 8 Advances also have been seen in other areas. Death rates from
coronary disease have declined by 51 percent since 1972, improved sanitation has
dramatically reduced typhoid and cholera in the United States, and the widespread
use of vaccines has eliminated smallpox and polio.3 1 9 These improvements have
meant longer life spans for most Americans.
Over the century, the average life span in the United States increased by 30
years, and the Centers for Disease Control and Prevention attributes five-sixths of
that increase to advances in public health such as vaccinations and food safety. Life
expectancy at birth for a woman rose from 48.3 years in 1900 to 79.4 years in
1998.3 2 0 For men it rose over the same period from 46.3 years to 73.9 years.3 2 1 Older
Americans now have longer remaining life expectancies as well. Whereas the
average 60- year-old white man in 1900 could expect to live almost to age 75, by
1998 a man of that age could expect to live almost to age 80.3 2 2 Combined with the
recent declines in fertility behavior, these changes in life expectancy have led to an
increasing share of the population that is elderly—a trend that will continue as the
baby-boom generation ages.
176
Increasing Diversity Across Families
Income and the leisure to enjoy it are two key components of economic well
being. In principle, the strong growth in productivity and the resulting growth in real
wages over the past century could have allowed material standards of living to
increase while simultaneously allowing families to work shorter hours. In fact, the
substantial increase in female labor force participation and the increase in the
proportion o f households headed by single females mean that there are more families
with working women, and many women are working more hours. These trends also
mean that there is now a greater diversity in family structure as well as differences in
incomes and hours of work among family types.
Diversity in Family Structure
Traditional one-breadwinner, one-homemaker married couples have been
declining as a share of all families, from 67 percent in 1952 to 27 percent in 1999
(Figure 5-4). Rising female labor force participation has increased the proportion
of all married-couple families in which the wife works, and these now account for
roughly half of all families.3 2 4 Reflecting the trends in marriage and divorce
discussed above, the share of all families headed by a single householder with no
spouse present (predominantly single-parent families) increased from 13 percent to
Ill
23 percent between 1949 and 1999.3 2 5 Although most children living in single-parent
families live with their mothers, the share of single-parent families headed by fathers
has more than doubled since 1975 and stood at 19 percent in 1999.3 2 6 It is estimated
that more than a third of all children do not live with their biological fathers.3 2 7
Figure 5-4 Composition of Families by Family Structure
Percent of all families
Married couple,
_ _ wife not in paid labor force
60
Married couple,
wife l.r t paid labor feme
20
Single head, spouse absent
Female head, husband absent
Source: Department of Commerce (Bureau of the Census).
Although the proportion of single-parent families headed by the father is
rising, the mother has typically been the custodial parent in such families. For this
reason, and because of the higher incidence of poverty in female-headed families, the
discussion of single-parent families in this section focuses on single mothers. An
178
important issue for such families is the link between children’s well-being and the
absence of the father. It is estimated that 36 percent of American children live apart
from their biological fathers; about 40 percent of children in fatherless households
have not seen their fathers in at least a year.3 2 8 Before they reach age 18, more than
half of America’s children are likely to have spent a significant portion of their
childhood living apart from their fathers. Yet there is strong evidence suggesting that
the presence of a father matters:
• Children under age 6 who live apart from their fathers are about five times as likely
to be poor as children with both parents at home.3 2 9
• Girls without a father in their life are two and a half times as likely to get pregnant
and 53 percent more likely to commit suicide.
• Boys without a father in their life are 63 percent more likely to run away and 37
percent more likely to abuse drugs.3 3 1
• Children without father involvement are twice as likely to drop out of high school,
roughly twice as likely to abuse alcohol or drugs, twice as likely to end up in jail, and
nearly four times as likely to need help for emotional or behavioral problems than
those with father involvement.
The absence of a father has effects beyond his own children: it can affect
communities as well. About 4.5 million children in 1990 resided in predominantly
fatherless neighborhoods in which more than half of all families with children were
headed by single mothers.3 3 3 Although most fathers can afford to pay child support
(an estimated 74 percent of noncustodial fathers have incomes above the poverty
179
level), about 2.8 million men are destitute, noncustodial fathers, most of whom do
not pay child support.3 3 4
Increasing life expectancy has also changed the structure of the family. For
example, over 70 percent of adults aged 30-54 in the early 1990s had living relatives
who spanned three or more generations, and over 40 percent of adults aged 50-59
had living family members from four or more generations.3 3 5 In addition, nearly 2.4
million families now have more than two generations living under one roof.3 3 6
Longer life expectancy has meant that more grandparents are able to watch their
grandchildren grow to adulthood. And younger generations are facing caregiving
responsibilities for older relatives. For example, 22 percent of all U.S. households
provide care for an elderly person.3 3 7
At the same time, grandparents have also become more important as
caregivers — including primary caregivers. From1970 to 1998, for example, the
share of children under age 18 living in a household headed by a grandparent has
risen by more than 70 percent (Figure 5-5).3 3 8 Most of the increase in this share
during the 1990s was from an increase in the share of children living in households
with neither parent present.3 3 9 Between 1980 and 1990, by contrast, the increase
came mostly from children living in grandparent-headed households with just a
single parent present.3 4 0 The share of such households with a single father present,
although small, continued to grow in the 1990s.3 4 1
180
Figure 5-5 Grandchildren in Grandparents’ Homes by Presence of Parents
Percent of children under 18 who live with a grandparent
Source: Department of Commerce (Bureau of the Census).
Consistent with the focus of this chapter, this discussion has emphasized
family types likely to have children present. It is important to recall, however, that
American households are much more diverse than this.
The Diversity o f American Households
The Census Bureau defines a family as two or more people related by birth,
marriage, or adoption who reside together. A household, by contrast, is defined as
any person or group of people who occupies a single housing unit. Thus households
Et Neither parent present
□Only father present
■Only mother present
BBoth parents present
4 -
181
include single people and groups of unrelated people who reside together. In 1970
the proportion of households fitting the traditional definition of a family (a husband,
a wife, and their children) was 40 percent; by 1998 only 25 percent of households fit
that definition.3 4 2 The number of Americans living in unmarried-partner households
is large and growing rapidly. From 1994 to 1998 the number of married-couple
households increased by 2 percent, while the number of unmarried-partner
households increased 16 percent.3 4 3 In 1998 about 1.7 million, or 1.6 percent, of
households were same-sex partnerships.3 4 4 The fraction of individuals choosing to
live together outside of a formal marriage rose dramatically in the second half of the
20th century. Analyzing U.S. Census Bureau reports, only 3 percent of women bom
between 1940 and 1944 had lived in a nonmarital cohabitation by age 25, whereas
for women bom 20 years later, 37 percent had cohabited by that same age.3 4 5 In fact,
despite lower marriage rates and a later age of first marriage now than several
decades ago, evidence indicates that individuals are still forming coresidential
relationships at about the same point in their lives.3 4 6
Diversity o f Income and Hours o f Work
An examination of income growth among families with children by family
type reveals important differences among two-earner married couples, one-eamer
married couples, and families headed by single females. To some extent these
differences represent choices about how many hours to work and how many to leave
free for other things. But they may also reflect underlying differences in education or
other factors that affect earnings opportunities. For the past 50 years, the median
income of two-earner couples has been higher than that of one-earner couples, which
in turn has been higher than that of families headed by a single female (Figure 5-
6).3 4 7 Moreover, the gap between the median income of two-earner couples and that
of the other family types has widened, both in absolute dollars and in percentage
terms.3 4 8 Although many measures of income inequality have stopped rising in
recent years, the real median income of married-couple families where the wife is
not in the paid labor force is less than three-fifths that of married-couple families
where the wife works for pay.3 4 9 Increases have brought the real median income of
female-headed families in 1998 above its previous peak in 1979, although that
income is only a little more than a third the median for two-earner couples. To a
great extent, of course, these differences reflect factors other than family type. As
emphasized below, wives in two-earner couples are likely to have greater earnings
opportunities than wives in single-eamer couples. And single mothers tend to be
younger and less educated than married mothers, with the result that their earnings
are likely to be lower as well.
183
Figure 5-6 Median Family Income by Family Structure
Thousands of 1998 dollars
Married couple,,
wife in paid labor force
e o
Married couple, wife
not in paid labor force
With children
Single female head
1974 1939 1994 1934
1954 1959 1964
Source: Department of Commerce (Bureau of the Census).
Median incomes provide one perspective on differences in income by family
type, but they necessarily conceal the extent o f income variation within each family-
type grouping. Among families with children, there is considerable overlap between
the distributions of income for each family type, particularly in the lower income
ranges (Figure 5-7).3 5 1 The distribution of female-headed families with children,
however, is more concentrated in the lower income range.3 5 2
184
Figure 5-7 Income Distributions for Families with Children by Family
Structure, 1998
Percent
■ Married couple,, wile in paid labor force
a Married couple, wife not in paid labor force
□ Single female head
0’ 10 20 30' 40 50 60 70 80 90 1.00 110 120 130 M0 150 160 170 180 1S0 200 +
Family Income (thousands of dollars)
Source: Department of Commerce (Bureau of the Census).
The income differences across families shown in Figure 5-7 are due largely
to differences in earned income from employment, not differences in wealth or
transfer payments (such as welfare payments).3 5 3 In 1998, wage and salary earnings
represented 87 percent of income for the average married-couple family with
children and 69 percent for the average female-headed family with children.3 5 4
Differences in hours worked are a major factor accounting for differences in income
across family types. Not surprisingly, dual-eamer couples devote more total hours to
work than the other family types, on average, and have the highest concentration of
185
families in the portion of the distribution with the most hours worked (Figure 5-8).3 5 5
Among single-eamer family types, husbands in single-eamer couples work more
hours on average than single mothers.
Figure 5-8 Distribution of Annual Hours Worked by Families with Children,
1998
Percent
so
■ Married couple, wife in paid labor force
E S Married couple,, wife not in paid labor force
□ Single female head
so
40
20
500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 + 0
Annual hours of husband and wife combined (or o f unmarried female)
Source: Department of Commerce (Bureau of the Census).
The Rising Earnings o f Women with Children
The typical mother today now contributes significantly more earnings to
family money income than did her counterpart several decades ago. The median
186
earnings of single mothers with children rose from $4,800 to $12,000 (in 1998
dollars) between 1968 and 1998, and among working single mothers the median rose
from $11,300 to $15,000.3 5 7 The median earnings of all wives with children rose
from zero (more than half had no earnings) to $10,400 during this same time period,
and from $7,600 to $18,000 for working mothers.3 5 8 As a result, married working
mothers’ earnings today represent 30 percent of the couple’s combined earnings,
compared with only 15 percent in 1968.3 5 9 In addition to raising average family
income, mothers’ earnings have dramatically increased the proportion of families
who are well off.
The share of working wives earning more than $20,000 rose from 14 percent
to 43 percent between 1968 and 1998, and the share of single working mothers
earning above $20,000 rose from 21 percent to 37 percent (Figure 5-7). Among
married couples, wives’ earnings have had a big effect in increasing the proportion
of wealthy families: in 1998 only 18 percent of all men earned more than $60,000,
but when wives’ earnings are included, 37 percent of all married couples with
i i r i
children had combined earnings above $60,000. In contrast, among families
headed by single women, only 2 percent had earnings above $60,000.3 6 2 Thus,
although most women now contribute to family income, there are pronounced
differences across different types of families. These differences in mothers’
contributions can be traced to differences both in wages and in hours of work.
Women’s wages have risen over time, in part because of rising skill levels.
But single mothers have experienced slower wage gains and have considerably lower
187
wage rates, on average, than married mothers who work.3 6 3 The lower wages of
single mothers are related in large measure to their lower average educational
attainment than married mothers who work. Across all family types, about one-third
of mothers have a high school diploma but no college.3 6 4 However, single mothers
and wives who are not working are much less likely than working wives to have
graduated from high school, although as a group each has made substantial strides in
raising their educational attainment over the past three decades (Table 5-2).3 6 5
Furthermore, a smaller share of single mothers than of married mothers who work
have at least some college, although the increase in the single mothers’ share since
the late 1960s has been large.3 6 6 In contrast, employed wives have strikingly higher
levels of education than all others, so that a portion of the stronger growth in median
incomes for these families shown in Figure 5-6 is due to their higher and rising
• \ f r j
educational attainment, which feeds into their higher wage rates.
188
Table 5-2- Educational Distribution of Women with Children
[Percent]
Item
Single w om en
M arried w om en
who w orked in
previous year
M arried w o m en
who w orked in
previous year
1969 1999 1969 1999 1969 1999
Less than h ig h school diploma.............................. SI 19 34 2 1 32 3
H igh school diplom a, no college............................. 35 35 47 33 46 32
A t least some college............................................. 14 46 2 0 46 2 2 60
Total............................................................... 1 0 0 1 0 0 1 0 0 1 0 0 1 0 0 1 0 0
Source: Department of Commerce (Bureau of the Census).
The rising incomes of mothers are also a function of their rising hours of
work, and here, too, single mothers differ from married mothers on average. Over
thirty years ago, single mothers worked longer hours than married mothers, and thus
their hours have risen less over time.3 6 8 For example, the share of single mothers
working full time rose 11 percentage points, to 67 percent, between 1968 and 1998,
whereas the share of married mothers working fulltime rose 18 percentage points, to
52 percent.3 6 9 The increase in full-time work arose almost entirely from women
entering the labor force in greater numbers, not from a switch from part-time to full
time work: between 1968 and 1998 the proportion of single mothers who worked
rose from 69 percent to 82 percent (Table 5-3); that of married mothers increased
from 51 percent to 75 percent.3 7 0 (The proportion of married mothers working part
^71
time increased substantially less, from 17 percent in 1968 to 23 percent in 1998.)
189
Married mothers have dramatically increased their hours of work, but they continue
to work somewhat less than single mothers.3 7 2
Table 5-3 - Share of Women with Children Who Worked in Previous Year, by
Education
[Percent]
Item
Single w om en M arried w o m en A ll w om en
1969 1999 1969 1999 1969 1999
Less than high school diploma.............. 63 64 50 52 52 57
H ig h school diplom a, n o college............. 74 82 51 75 53 76
A t least som e college............................. 79 90 53 79 55 82
All.................................................. 69 82 51 75 53 77
Source: Department of Commerce (Bureau of the Census).
A portion of the higher average earnings growth for married mothers relative
to single mothers arises from the positive correlation between education and hours of
work: well-educated women work longer hours. Well-educated women have also
increased their hours of work the most over time. From 1968 to 1998, the proportion
of mothers with less than a high school education who worked increased from 52
percent to 57 percent.3 7 3 For mothers with at least some college, in contrast, the
proportion increased from 55 percent to 82 percent.3 7 4 Several factors shape the
190
decision to work for pay. On the one hand, the potential to earn a high wage makes
work attractive, and thus the well-educated should have greater incentive to work.
On the other hand, higher earnings and higher husbands’ incomes tend to lessen the
need to work long hours—this “income effect” provides an incentive for women to
consume more leisure or home time with their children. Highly educated women
tend to be married to high-income men, and thus the husband’s higher income
induces the family to place a greater value on the wife’s home time relative to paid
employment. Over time, however, the effect of husbands’ incomes on wives’ hours
of work has declined. Thus, highly educated women with children have increased
their employment rate the most over time, and today they have the highest rate
among women with children.3 7 5 The outcome is that highly educated women,
working many hours and earning high wages, have contributed very significantly to
the number of families in the upper tail of the income distribution. For these families,
incomes are high, but so too are hours of work.
In sum, the growth of female hours of work and female earnings has had
different effects on different family types. For married mothers, strong growth in
wages and in hours worked has been a primary source of family income growth over
the last 35 years, even though married women’s earnings on average still account for
less than a third of the couple’s earnings.3 7 6 The wages of female family heads have
not grown as rapidly over time, so that, despite working many hours, their earnings
lag behind those of married women.3 7 7
191
Additionally, the proportion of women in many professional occupations has
-1*TO
risen dramatically since 1950. As recently as 1979 only 10 percent of doctors and
13 percent of attorneys were women, but by 1999 these percentages had increased to
25 percent and 29 percent, respectively.3 7 9 The female share of enrollment in
professional schools has been rising and exceeded 40 percent in 1996.38 0 To the
extent that female professionals who are married have husbands who work full time,
this growing professionalization of the female work force has created a time strain
for many American families. There is little evidence that human resource systems
originally designed for men with stay-at-home wives have adapted to ease this strain
by offering jobs with shorter working hours. On the contrary, work hours among
college-educated employees have been trending upward over the last several
decades.3 8 1
One of the reasons for some firms’ reluctance to abandon existing work
norms is their use of “rat race” work practices. In many professional settings,
members of the professional group benefit from the productivity of other group
members, yet these contributions to productivity are difficult to measure and reward
directly. Firms instead find that a worker’s willingness to work long hours often
serves as a proxy for valuable yet hard-to-observe characteristics such as
commitment and ambition. In response to this use of work hours as a screening
device, workers will tend to overwork as a means of signaling to management their
ability and willingness to contribute. For example, in a survey conducted at two large
Northeastern law firms, associates (young attorneys) and partners alike were in
192
agreement that “billable hours” and especially “willingness to work long hours when
required” were important factors in promotion to partner. Not surprisingly,
associates at these firms worked long hours. Also not surprisingly, associates felt
overworked: most indicated that they would gladly forgo their next raise in exchange
for the opportunity to work fewer hours. Nonetheless, most associates indicated that
they would be much more willing to work fewer hours if all other associates also
agreed to cut back. O f course, firms might be reluctant to abandon these work
practices unless they can develop other effective means of screening junior
employees.
Challenges Families Face
Over the last century, the American family experienced many positive
changes that have resulted in richer lives for many parents and their children. Family
income has increased dramatically and poverty has decreased. People live longer and
are much healthier. Over the past few years, the gains from a strong labor market
have been shared widely and somewhat equally. Other favorable recent
developments include a fall in teen pregnancy and out-of-wedlock birth rates and a
stabilization of divorce rates.3 8 3 Despite this general prosperity, however, family
income inequality remains high, and many families are experiencing a “money
crunch” that makes it difficult to meet basic family needs. Many o f these families
have incomes that fall below the poverty threshold, but the perception of a “money
193
crunch” is by no means limited to families officially classified as poor. Perhaps an
even greater number of families today are experiencing a “time crunch.” With more
women working more hours, the amount of family time devoted to work has
increased, while that available for leisure and other family activities has declined.3 8 4
This time crunch affects a wide range of families from poor single mothers to
prosperous two-earner couples. This part explores the challenges facing American
families as they deal with the money crunch and the time crunch.
The “ Money Crunch ”
Despite the increases in female labor supply and earnings discussed above, a
large number of families with children—both married and female-headed—belong to
what are sometimes called the working poor. Those families with incomes in the
lower tail of the distribution in Figure 5-7 are the most likely to suffer from the
money crunch. Based on the distributions in the Figure, in 1998, 8 percent of
families with working wives, 27 percent of families without working wives, and 64
percent of female-headed families had incomes below $25,000 (about 1.5 times the
poverty line for a family of four).3 8 5 These families are at the epicenter of the money
crunch. Families headed by single females tend to have fewer financial resources
than other families, and the number of children living in such families has grown
substantially. Whereas families headed by single females made up only 10 percent of
all families with children in 1970, in 1998 that figure was 22 percent.3 8 6 In 1970, just
194
11 percent of all American children under 18 years of age lived in such families; in
1998, 23 percent did.3 8 7 About half of all African American children under age 18
live in single-mother households, up from 30 percent in 1970.3 8 8 The fraction of
white children living in single-mother households rose from 8 percent in 1970 to 18
percent in 1998.3 8 9 And as discussed earlier, the percentage of children living with
grandparents has also been increasing in recent decades.
Divorce and out-of-wedlock childbirth are two events that contribute directly
to lower incomes for female-headed families. It is estimated that 22 percent of
women who get divorced experience a 50 percent or more decline in family
income.3 9 0 Also, never-married mothers are much less likely to have a child support
award than divorced mothers (44.1 percent versus 75.6 percent in 1995), and for
those who have received child support payments, the annual amount received by
never-married mothers is much less than that received by divorced mothers ($2,271
versus $3,990 in 1995).3 9 1 Reflecting these low income levels, poverty rates for
families headed by single females with children under age 18 are very high: 38.7
percent of these families were poor in 1998, compared with 6.9 percent of married-
couple families with children..
The overall poverty rate has dropped from 15.1 percent in 1993 to 12.7
percent in 1998. These official poverty rates are based on a definition of income that
does not include the earned income tax credit, Medicaid, food stamps, or other non
cash benefits. An experimental poverty measure incorporating improvements
proposed in a 1995 report by the National Academy o f Sciences (a measure that does
include the earned income tax credit and noncash benefits) shows an even larger
OQ9
drop. Adequate income is certainly essential for families to develop a sense of
economic well-being, but that sense of well-being may also be influenced by whether
the family can meet what it perceives to be its consumption needs. As technological
change over the course of the century has lowered the relative cost of food and freed
up income for other expenditures, incomes have risen and consumption patterns have
changed, resulting perhaps in a perception of increased consumption needs. In 1950
about 30 percent of a typical family’s expenditures were for food, and about 10
percent were for clothing.3 9 3 By 2000 those percentages had fallen to 14 percent and
5 percent, respectively.3 9 4 But other expenses have taken up the slack. The typical
family now spends a greater share of its income on housing than in the past, and
entirely new forms of consumption have become standard. Today, about 90 percent
of households have automobiles, up from 59 percent in 1950, and the typical family
has two motor vehicles and two television sets.3 9 5 Consumers have had the
discretionary income to buy such goods as CD players, videocassette recorders, and
personal computers. It is estimated that, in 2000, 35 percent of households owned a
personal computer, 61 percent had a cordless phone, and 88 percent had a video
recorder.3 9 6 Some of these goods that might once have been thought luxuries have
become increasingly difficult for a family to do without. For example, when newly
created jobs are in the suburbs rather than the inner cities, a car becomes a near
necessity. And children who lack access to a computer at home may suffer an
educational disadvantage compared with their peers who have computers.
196
Meanwhile, the same health and demographic trends that have increased
longevity also confront many more families with the need to care for their elderly
relatives. Although the elderly at any particular age are healthier today than in the
past, they are likely to require more care over more years, in part because they are
living longer and because medical advances can keep the very ill alive longer than
before. This care often becomes the responsibility of their adult offspring.
Consumption of formal and informal care by the elderly has increased substantially.
From 1987 to 1996 the number of nursing homes increased 20 percent, and the use
of home and community-based care is growing rapidly.3 9 7 The population receiving
such care is becoming older and increasingly frail. The proportion of nursing home
residents over age 85 increased from 44 percent in 1987 to 49 percent in 1996, and
that of residents with limitations in three or more standard activities of daily living
rose from 72 percent to 83 percent over that period.3 9 8 The average cost of a nursing
home is now more than $40,000 per year, and for those admitted to a nursing home
at age 65 or older, the average length of stay is 29 months for women and 23 months
for men.3 9 9 Nearly 50 percent of the costs of long-term care are paid out of pocket by
nursing home patients and their families, and Medicaid bears most of the remaining
costs.4 0 0 The implications of increased care of elderly relatives for family time are
also an issue.
As the typical market basket affordable by most families changes, it may be
appropriate in characterizing the money crunch to expand our notion of family needs
beyond such traditional, basic purchases as food and clothing to the acquisition of
197
certain standard consumption goods like automobiles and telephones. The crunch is
even tighter when the rising costs of educating children and caring for elderly parents
is factored into the equation. Finally, the changing trends in the labor force
participation of family members have given rise to increasing costs of working
outside the home, such as child care, additional work expenses (for meals in
restaurants, dry cleaning services, and so on), and transportation costs. It is
estimated, for example, that just from 1986 to 1993 direct expenditure on child care
rose 23 percent (after adjusting for inflation) for families with a preschool-age child
and a working mother.4 0 1
Boosting the Financial Resources o f Families to Lessen the Money Crunch
Families in each fifth of the income distribution, since 1993, have
experienced solid and roughly equal percentage gains in income.4 0 2 In part this
balance reflects the strong overall performance of the economy, but it also reflects a
number of specific policies to make work pay for lower income working families
facing a money crunch.
Expansion o f the Earned Income Tax Credit
In 1993, a major expansion of the Earned Income Tax Credit (EITC), a
refundable credit that is designed to reduce the overall tax burden of low-income
workers, was signed into law. Because it is refundable, workers can receive the full
credit to which they are entitled even if it exceeds the income tax they owe, and
people generally receive the credit as part of their income tax refund. The EITC is
198
not currently included in the definition of money income used to compute the official
poverty rate. However, calculations based on an alternative income concept that does
include the EITC show that the credit lifted more than 4.3 million Americans out of
poverty in 1998— more than double the number in 1993.4 0 3 The EITC lifted more
than 2.3 million children out of poverty in 1998.4 0 4 And over 40 percent of the
decline in child poverty between 1993 and 1998 can be explained by progressive tax
relief, especially the EITC.4 0 5 Therefore, it would stand to reason, that an even
greater expansion of the EITC is needed and would make the credit even more
effective in rewarding work for families.
Increases in the Minimum Wage
The minimum wage was increased in two steps in 1996 and 1997 from $4.25
per hour to $5.15 per hour, boosting the wages of 10 million workers 4 0 6 The
combined effects of the minimum wage and the EITC have dramatically increased
the returns to work for families with children. For example, between 1993 and 1998,
families with two children and one wage earner who worked full-time at the
minimum wage experienced a 26 percent ($2,700) increase in their real income as a
result o f these two policies alone 4 0 7 Research examining the impact of minimum
wage increases has shown that about two-thirds of workers affected by earlier
minimum wage increases were adults—predominantly women and minorities—and
that about one-third of the increase went to families in the lowest tenth of the family
earnings distribution 4 0 8 Thus minimum wage increases can help reduce poverty
199
among low-wage workers. Given recent tight labor markets, job opportunities are
plentiful, and American families are benefiting from the higher minimum wage.
Welfare Reform
The welfare reform law enacted in 1996 dramatically changed the Nation’s
welfare system into one that requires work in exchange for time-limited assistance.
The law contains strong work requirements, comprehensive enforcement of child
support awards, and support for families moving from welfare to work. To assist
people making this move and to support low-income working families, a range of
logistical and financial challenges typically faced by such families need to be
addressed.
Welfare-to-work grants help move long-term welfare recipients (mainly
mothers) and certain noncustodial parents (mainly fathers) in poor areas into
unsubsidized jobs, enabling them to work and support their families. These services
have also been extended to a broader group of low-income noncustodial fathers,
many of whom may have been wanting to contribute to the support of their children
but lacked the means to do so. To encourage hiring and retention of long-term
welfare recipients, employers are eligible for the welfare-to-work tax credit equal to
35 percent of the first $10,000 in wages in the first year of employment, and 50
409
percent m the second year.
Housing vouchers that subsidize the rents of low-income Americans are
helping families move closer to new jobs, reduce a long commute, or secure more
stable housing; new transportation grants are helping communities and States
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develop flexible transportation alternatives for welfare recipients and other low-
income workers. Policy guidance allows States to use the more generous welfare
rather than food stamp asset tests in determining food stamp eligibility for those on
welfare, making it easier for low-income working families to own a car and still
receive food stamps.
The 1996 welfare reform law invested an additional $4 billion over 6 years to
provide more child care assistance for families moving from welfare to work and for
other low-income parents.4 1 0 The State Children’s Health Insurance Program
provides funds to help States expand health care coverage of uninsured children, and
new Medicaid rules allow States to expand Medicaid to cover more low income
families who work, including more two-parent families.
Finally, Individual Development Accounts (IDAs) help low-income families
to save for a first home, to enroll in postsecondary education, or to start a new
business.
As a result of the strong economy and welfare reform, the number of welfare
recipients nationwide had fallen to 6.9 million in 1999, 51 percent less than in
1993 4 1 1 That number represents 2.5 percent of the total population, the lowest
proportion since 1967.4 1 2 All 50 States met the overall work participation
requirements of the welfare reform legislation. Twenty-seven States were awarded
bonus funds for their superior results in reforming welfare. Reports by the 46 States
competing for the bonus indicate that more than 1.3 million welfare recipients
nationwide went to work in the 12-month period from October 1997 through
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September 1998 4 1 3 Retention rates are also informative: 80 percent of those who got
jobs were still working 3 months later.41 4 States reported an average earnings
increase of 23 percent for former welfare recipients, from $2,088 in the first quarter
of employment to $2,571 in the third quarter 4 1 5 Among those remaining on welfare,
the proportion working has nearly quadrupled, from 7 percent in 1992 to 27 percent
in 1998 4 1 6
At least one independent study confirms these conclusions, finding that
almost 70 percent of welfare leavers said they went off welfare because of increased
earnings or a new job 4 1 7 When women move to paying jobs, they develop the skills
needed to produce higher sustainable incomes over their lifetimes and to reduce the
inter generational cycle of dependency. In addition, initiatives to reduce teen
pregnancy plays a role in breaking the cycle of dependency and increasing the well
being of families by reducing the number of children bom to teen mothers.
Social Security and Medicare
Social Security is a key source of income for most recipients: in 1996 it was
the main source of income for 66 percent of beneficiaries; it represented at least 90
percent of income for 30 percent of beneficiaries; it was the sole source of income
for 18 percent4 1 8 Social Security benefits provide 81 percent of total income for
those in the lowest fifth of the income distribution of the elderly, and they are the
largest single source of income for all but the highest fifth.4 1 9 Although only 9
percent of aged beneficiaries are poor, an additional 41 percent would be poor based
on their non-Social Security income 4 20 Recognizing the importance of Social
202
Security to the elderly, it is important to use the benefits of fiscal discipline and debt
reduction to strengthen Social Security, extending its solvency from 2034.
Medicare is the main source of health insurance for the elderly and people
with disabilities, insuring nearly 40 million Americans.4 2 1 The elderly population is
projected to double in the next 30 years as the baby-boom generation retires 4 2 2 At
the same time the ratio of elderly persons to workers who pay payroll taxes that help
fund Medicare will increase.4 2 3 In addition, some Medicare payments systems and
benefits are outdated. Plans need to be made to modernize and strengthen the
Medicare program to prepare it for the health, demographic, and financing
challenges it will face in the coming century. A plan could include provisions to
make Medicare more competitive and efficient; to modernize and reform Medicare
benefits, including prescription drug benefits; and to make a long-term financing
commitment to the program, and in doing so extend the solvency of the Medicare
trust fund.
Assistance with Long-Term Care
Millions of adults and a growing number of children have long-term care
needs arising from a health condition present at birth or from a chronic illness
developed later in life. Moreover, with the number of Americans aged 65 or older,
and of those 85 or older, both projected to double by 2030, longterm care is a need
that will become more pressing in the 21st century.4 2 4
Currently there is a long-term care tax credit of $3,000 for people with long
term care needs or their caregivers. In addition, other proposals are important.
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Providing funding for services that support family caregivers of older persons;
improving equity in Medicaid eligibility for people in home- and community-based
settings; encouraging partnerships between low-income housing for the elderly and
Medicaid; and encouraging the purchase of good-quality private long-term care
insurance. These proposals would aid the effort to improve the quality of care in
nursing homes.
Other Policies to Help Families
Millions of families with children have benefited from the $500-per-child tax
credit enacted in 1997; therefore, there is a need for additional tax relief measures,
including expansion of the child and dependent care tax credit.4 2 5 Another financial
concern of American families - access to affordable health care coverage - is
crucial. It is important for the well-being of families to investment in expanding
health insurance coverage.
Tougher enforcement of child support has helped ease the economic burden
on single mothers and stresses the responsibility of both parents for the economic
support of their children. In 1998, Federal and State child support enforcement
efforts collected an estimated $14.3 billion from noncustodial parents, a nearly 80
percent increase since 1992 4 2 6 In 1998, 4.5 million families received child support,
an increase of 59 percent since 1992 4 2 7 Finally, a primary means of reducing the
money crunch is to provide more individuals with the skills and education they need
to raise their incomes. Therefore, great emphasis should also be placed on policies to
invest in skills, as discussed in Chapter 4.
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The “Time Crunch”
The historic entry of millions of women into the labor force has resulted in
higher incomes for families and a new sense of career satisfaction for many women.
But it has also resulted in a significant jump in the total horns that parents spend at
work. Around 4,000 hours per year total, or 2,000 hours for each parent, is common
for families where both parents work full-time*4 2 8 Those families who work that
many hours or more—that is, the upper tail of the hours distribution in Figure 5-8—
are most likely to suffer from the time crunch. The share of married couples in which
both spouses work full-time rose from 32 percent to 48 percent between 1968 and
1998.4 2 9 As the sole support of their children, single parents working long hours also
are likely to suffer from a time crunch; the share of these parents working full-time
rose from 56 percent to 67 percent from 1968 to 1998.4 3 0 Thus, although the choice
to enter the labor market results in more material goods for families, these benefits
come at the expense of home time. Evidence that families are feeling a time crunch
comes from a 1999 national survey that asked whether respondents “always feel
rushed, even to do the things you have to do.” 4 3 1 Thirty-three percent said yes,
compared with 24 percent in 1965.4 3 2 The analysis of changes in parents’ allocation
of time in this section provides a closer look at how patterns of family care have
changed as women have entered the labor force.
As women spend more time in paid employment and a larger share of
families are headed by single parents, families have less time to devote to unpaid
205
activities, including time with children. Between 1969 and 1999, for example, the
total amount of parental time available outside of work fell in both married-couple
and single-parent families (Figure 5-9). This conclusion comes from analyzing the
trend in time reported in the Current Population Survey (CPS) as spent at work. To
construct the time available on a daily basis, the analysis starts with 48 hours per day
for married couples and 24 hours for single parents. It then subtracts the average
daily amount of time spent at work plus 8 hours per parent per day for sleep. Because
the proportion of single-parent families increased over this period, the average
amount of family time available outside of work fell overall by even more than it did
for either family type. Note that this analysis is only about time potentially available
to spend with children, because the CPS does not contain information about how
parents actually spend time outside of work.
206
Figure 5-9 Time Available to Custodial Parents After Paid Work and Sleep
Hours per day
28
24
20
1 6
12
8 ;
4 ■
0 ■
1969 1999 1&S9 1999 1969 1399
Married couples Single parents All families
Source: Department of Commerce (Bureau of the Census).
The best source of information on time use comes from an analysis of time-
use diary surveys conducted from 1965 to 1995.4 3 3 These surveys ask individuals to
keep a daily record o f how they spend their time during a designated day. Although
rich in detail, these surveys cover a fairly small number of individuals and thus
cannot be used to examine trends for subgroups of the population. Existing time-use
diaries show that employed women spend about one-third less time on child care and
household tasks than do women who are not in paid employment 4 3 4 The primary
change in time use for women is that their increase in paid hours has been nearly
m§m
207
equally offset by a reduction in time devoted to housework.4 3 5 Although men have
increased their time spent on housework by about 5 hours per week, this is far less
than the 11-hour-per-week reduction by women 4 3 6 (The study does not, however,
report separate data for those who are parents.)
Despite the assistance of husbands and the use of purchased inputs into home
care, employed women in the aggregate still have a third less free time today than
nonworking women.4 3 7 The data display a 32 percent reduction in women’s time
spent on child care and household tasks between 1965 and 1995.4 3 8 This decline is
mainly driven by reductions in housework activities. However, data from 1985 (the
most recent year for which a detailed breakdown is available) indicate that working
mothers spend 5 fewer hours per week on child care activities than do nonworking
mothers (6.7 hours versus 12 hours).4 3 9 This suggests that the increase in the
proportion of mothers working has played a role as well. Meanwhile men’s time
spent on child care has been constant at roughly 3 hours per week.4 4 0
Undoubtedly the time crunch is worse for single-parent families (although,
again, existing time-use evidence does not isolate data for this group). These families
typically have lower incomes and thus are less able to purchase substitutes for their
time in the home, such as home-based child care, cleaning services, or labor-saving
products and appliances for the home. They also lack the assistance that a spouse
provides. They may instead rely more on care provided by older relatives. As a
result of improvements in health and longevity, grandparents are increasingly a
resource that parents— single or married—draw on for help with child care. In a
208
441survey of grandparents caring for their grandchildren in a noncustodial
relationship, over 60 percent cited the employment of the grandchild’s parents, the
desire to help the grandchild’s parents financially, or both as reasons for providing
care 4 4 2 In addition, in a sample of working mothers aged 19-26 with a youngest
child under 5, nearly 25 percent utilized a grandmother as the principal caregiver.4 4 3
However, responsibilities for taking care of older relatives may compound the time
crunch for many families.
In 1997, more than 5 percent of households spent over 20 hours a week in
caregiving for the elderly 4 4 4 And since nearly two-thirds of family caregivers are
working, the need to balance work and family will likely increase in the 21st century.
Caregivers of the elderly who are also in the paid labor force report making
adjustments to work schedules and forgoing promotions, new assignments, transfers,
relocations, and training opportunities. In 2002,42 percent of workers provided
some form of elder care.4 4 5
Most of the discussion in this part has focused on the time and money costs
of raising children and the stresses that these costs impose on families. Layered on
top of this is the generational crunch: the need to stretch resources further when
families have multiple caregiving responsibilities to consider as they try to maintain
a delicate balance between work and family. With parents living longer, and with
their daughters—the traditional providers of their care—now largely in the paid labor
force, the costs of parental care are likely to become even greater in the 21st century.
However, social security and other retirement benefits, as well as the availability of
209
assisted living facilities, also permit more elderly people to live independently for
longer.
An explosion of care for the elderly outside of nursing homes is being
witnessed, and this care is largely provided by women. From 1987 to 1997 the
number of U.S. households that provided unpaid care to elderly adults more than
tripled, from 7 million to more than 21 million, or from 8 percent to 22 percent of
households.4 4 6 To the extent that more elderly adults are living on their own, much of
this care will likely take place in the parent’s home. The typical caregiver is a
married woman with only a high school diploma and a household income of about
$35,000, and the typical care recipient is most likely her mother, grandmother, or
mother-in-law 4 4 7 However, even as more households are providing in-home care,
they appear to be spending somewhat less time on that care. Today a typical
caregiver spends fewer hours per week giving care.4 4 8 In addition, the caregiver is
less likely to be residing with the recipient, and is more likely to use paid services
than caregivers a decade ago.4 4 9 The explosion in caregiving responsibility for
parents is contributing to the time crunch that the American family is facing: 43
percent of surveyed caregivers for the elderly say their caregiving has left them with
less time for other family members 4 5 0 These changes arise in part because today’s
average caregiver is balancing work and family: half of all caregivers are working
full-time outside the home 4 5 1 Among employed caregivers, one-fifth had to give up
work at least temporarily, and half reported making changes to work schedules to
accommodate caregiving.4 5 2
210
Surveys of caregivers underestimate the demand for parental care, however,
because they cannot measure the frequency with which employed potential
caregivers choose not to provide care. In the future, the time and money
commitments associated with parental care may become even more confining, given
the trends identified above. The increase in the labor supply of women has been
accompanied by an increase in their wages and thus the opportunity cost of their
time. As employed women age and as their parents require more care, those higher
wages may make these women increasingly reluctant to curtail their paid
employment—hence they will face an even greater time crunch as they care for their
parents. To the extent that these women have had children later in life, they may also
experience the double generational crunch of caring for both children and parents
simultaneously. And among those women whose children are already adults, many
will have grandchildren to care for. During the 21st century, the increasing cost of
elderly care will also fall on fewer children, because of the drop in fertility rates of
the baby-boom generation and the rising population of the elderly relative to the
working-age population. This looming increase in the time crunch may result in
more substitution toward formal care, as the greater wealth of the baby-boom
generation and their children may make such care more affordable. However, if the
cost of that care rises relative to prices generally, these same baby-boomers are likely
to experience a tightening money crunch as well.
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Increasing the Flexibility o f Paid Work to Lessen the Time Crunch
With a record high share of the population employed, many workers find
themselves struggling to balance work and family. Women have less flexibility to
respond to family needs than they once did, and men are increasingly being called on
to take a greater role in child care and other responsibilities. In response to these
changes, policies that increase flexibility at work and help families address the time
crunch are essential.
The Family and Medical Leave Act
The Family and Medical Leave Act (FMLA) of 1993 requires employers with
50 employees or more to provide up to 12 weeks of unpaid, job-protected leave a
year to eligible employees under certain defined circumstances.4 5 3 These include the
need to care for a newborn, newly adopted, or foster child; for a child, spouse, or
parent with a serious health condition; or for a serious health condition of the
employee himself or herself, including maternity-related disability.4 5 4 The FMLA
also requires employers to continue the employee’s health benefits during leave.4 5 5
Employees are eligible to take such leave if they have worked for a covered
employer for at least 1 year and have worked for at least 1,250 hours over the
previous 12 months 45 6 Since 1993, millions of workers have taken advantage of the
FMLA to spend necessary time with their families. 4 5 7
The experiences of both employers and employees with the FMLA were
documented in national surveys sponsored by the Department of Labor. The
employer survey found that one-third of employers (and two-thirds of employers in
212
larger worksites) believed that the FMLA had had positive effects on their
employees’ ability to care for family members.4 5 8 Most employers also reported that
compliance costs were small or negligible and that there was no noticeable effect on
either business or employee performance. The employee survey sponsored by the
Department of Labor found that the majority of those who took family or medical
leave found it relatively easy to arrange; few reported concerns about job related
consequences of taking leave. This survey also found that employees with annual
family incomes between $20,000 and $30,000 were more likely to take leave than
employees with higher incomes, highlighting the importance of the FMLA to lower
income workers.4 5 9
Today, 92 million workers are covered by the FMLA.4 6 0 It has proved to be a
significant advance in helping a larger cross section of working Americans meet
their medical and family caregiving needs for children and for elderly parents while
maintaining their jobs and their economic security.
By expanding the FMLA to cover businesses with more than 25 employees
(currently the threshold is 50 employees), coverage would be extended to almost 12
million more workers.4 6 1 In addition, policies requiring employers to allow FMLA-
covered workers to take up to 24 hours of leave per year to attend parent-teacher
conferences or routine doctors’ appointments is vital to our nation’s working
families.
213
Work Arrangements That Promote Flexibility
The desire for greater job flexibility is also leading to new work
arrangements between workers and their employers regarding when and where paid
work is performed. An increasingly popular work arrangement is “flextime,” which
allows workers to vary the time they begin and end work. In 1997, 28 percent of full
time wage and salary workers had flexible work schedules.4 6 2 This was up sharply
from 15 percent in 1991 4 6 3 The U.S. Government also has instituted flextime,
allowing employees greater discretion in when they work. In addition, a flextime
initiative should be explored where all workers, who get time-and-a-half pay for
working overtime, be compensated in the form of time off for family and medical
leave purposes or vacation instead of in cash.
Another approach to allowing greater flexibility on the job is working at
home for pay. This arrangement is used by a small but growing share of workers. In
1997, for example, 3.3 percent of all wage and salary workers were working at home
for pay, up from 1.9 percent in 1991 4 6 4 Another way parents share child care is by
working different shifts. In order for shift work to make it easier to combine paid
work and child care, however, the choice of shifts must be the worker’s. In 1997, 83
percent of full-time wage and salary workers were on regular daytime schedules, 4.6
percent were on evening shifts, 3.9 percent were on employer-arranged irregular
schedules, 3.5 percent were on night shifts, and 2.9 percent were on rotating shifts 4 6 5
214
Improving Access to High-Quality, Affordable Child Care
Many parents are likely to adjust to an increase in their paid work time by
increasing their use of nonparental child care providers. The availability, cost, and
quality of child care are crucial to the well-being of children and to the ability of
parents to balance the needs of work and family. Primary child care arrangements for
preschool-age children of employed mothers in the fall of 1994 were divided roughly
equally among care in the child’s home (by a relative or nonrelative), care in another
home (by a relative or nonrelative), and care in an organized child care facility.4 6 6
Since 1985 the trends have been toward a slight increase in the proportion of
children receiving care in their own homes, relatively fewer children receiving care
in another home, and relatively more children receiving care in an organized
facility 4 6 7
The importance of child care availability, affordability, and quality is
paramount to the well-being of our nation’s working families. Since 1993, child care
funding for low-income families has more than doubled.4 6 8 Yet, even more needs to
be done, policy supporting further increases in resources for child care, including
more funding for programs benefiting poor and near-poor children, and an expansion
of the child and dependent care tax credit are vital. In addition, it is important to
make the credit refundable, so that it would be available to low income working
families for the first time, and, also increase the amount of the credit for middle-
income families struggling to afford child care.
215
On top, after-school care for children is another concern of working parents.
In 1998, 68 percent o f married couples with children were ones in which both
parents were in the labor force, compared with 28 percent in 1970.4 6 9 Today, 28
million school-age children are in either married-couple families where both parents
are employed or single-parent families where the parent works outside the home; an
additional 10 million children are in married-couple families where only one parent
is employed.4 7 0 This has led to strong demand for quality programs to ensure that
children are safe and learning during the hours when they are not supervised by a
parent. In fact, experts estimate that during a typical week at least 5 million school-
age children spend time unattended at home 4 7 1 It is imperative to respond to this
situation by increasing investment in after-school and summer programs.
Conclusion
The American family in the 21st century faces a different world and a
different set of challenges than the family of 100 years ago. The twin problems of
scarce time and scarce resources are not new, of course, but their manifestations in
the coming decades may well be. Thanks in part to greater participation of women in
paid employment, families today enjoy a much higher standard of living than did
families a century ago. But expectations also appear to be different today. Great
changes in the economy have opened up great opportunities as well as great
challenges. As people aspire to take advantage of those opportunities, changes in
216
workplace arrangements and well-designed government policies can help them
overcome the challenges.
In sum, the more effectively economies can educate, train and employ their
citizens, the greater the chance of prosperity. The family remains a critical economic
unit in this equation as it both represents a large percentage of the global adult
population and the launching pad for the next generation. Policy decisions that
influence the ways in which a family participates in the global economy and raises
children both determine our success now and for generations to come.
217
1 Angus Maddison, Monitoring The World Economy 1820-1992, 1995, p. 23.
2 Ibid, p. 213.
3 Ibid.
4 Ibid, p. 241.
5 U. S. Bureau of the Census.
6 Ibid.
7 Ibid.
8 Ibid.
9 Ibid.
1 0 Ibid.
1 1 Ibid.
1 2 U.S. Bureau of Labor Statistics.
1 3 U.S. Department of Commerce.
1 4 U.S. Bureau of Labor Statistics.
1 5 U. S. International Trade Commission: Tariff and Trade Data.
1 6 U.S.Centers for Disease Control and Prevention, 2000.
1 7 Ibid.
1 8 U.S. Bureau of Labor Statistics.
1 9 Ibid.
2 0 Ibid.
2 1 U.S. Bureau of Labor Statistics.
2 2 Ibid.
2 3 U.S. Department of Education.
2 4 Ibid.
2 5 U.S. Bureau of Labor Statistics, 2000.
2 6 U.S. Bureau of the Census, 2000.
2 7 Ibid.
2 8 U. S. International Trade Commission: Tariff and Trade Data, 2000.
2 9 U. S. Department of Commerce’s Bureau of Economic Analysis, National summary, 2000.
3 0 U.S. Department of Commerce, 2000.
3 1 U. S. Department of Commerce’s Bureau of Economic Analysis, National summary, 2000.
3 2 U.S. Bureau of Labor Statistics, 2000.
3 3 Ibid.
3 4 Ibid.
3 5 J.M. Keynes, The General Theory Of Employment, Interest, and Money, 1936, p. 383.
3 6 The Economist Pocket World In Figures, 2003 Edition, p. 20.
3 7 Adam Smith, An Inquiry Into The Nature And Causes Of The Wealth Of Nations, 1776, p. 687.
3 8 Ibid., p. 26-27.
3 9 Ibid., p. 456.
4 0 Ibid., p. 10.
4 1 Angus Maddison, Monitoring The World Economy 1820-1992, 1995, p. 161.
4 2 The Economist Pocket World In Figures, 2004 Edition, p. 44.
4 3 Angus Maddison, Monitoring The World Economy 1820-1992, 1995, p. 95.
4 4 Ibid.. p. 193.
4 5 Ibid.. p. 213.
4 6 J. F. C. Harrison, Quest For The New Moral World: Robert Owen And The Owenites In Britain And
America, 1969, p. 5.
4 7 A. L. Morton, The Life And Ideas Of Robert Owen, 1962, p. 52.
4 8 Angus Maddison, Monitoring The World Economy 1820-1992, 1995, p. 96.
4 9 Ibid.. p. 33
5 0 Adam Smith, An Inquiry Into The Nature And Causes Of The Wealth Of Nations, 1776, p. 10.
5 1 J.B. Say, Traite D'economie Politique, 1803.
218
5 2 A. Marshall, Principles Of Economics, 1890.
5 3 Department of Transportation; Department of Commerce; and Federal Communications
Commission, 2000.
5 4 Ibid.
5 5 Ibid.
5 6 Ibid.
5 7 Ibid.
5 8 Ibid.
5 9 Ibid.
6 0 Ibid.
6 1 U. S. Census Bureau Economic Programs, Data on U.S. businesses, industrial sectors, and trade
activity, 2000.
6 2 Ibid.
6 3 Ibid.
6 4 Ibid.
6 5 Ibid.
6 6 Ibid.
6 7 Department of Transportation; Department of Commerce; and Federal Communications
Commission, 2000.
6 8 U. S. Census Bureau Economic Programs, Data on U.S. businesses, industrial sectors, and trade
activity, 2000.
6 9 Department of Transportation; Department of Commerce; and Federal Communications
Commission, 2000.
7 0 U. S. Census Bureau Economic Programs, Data on U.S. businesses, industrial sectors, and trade
activity, 2000
7 1 Ibid.
7 2 Ibid.
7 3 Department of Commerce (Bureau of Economic Analysis), and Department of Labor (Bureau of
Labor Statistics), 2000.
7 4 U. S. Census Bureau Economic Programs, Data on U.S. businesses, industrial sectors, and trade
activity, 2000.
7 5 Ibid.
7 6 Ibid.
7 7 Federal Communications Commission, 2000.
7 8 Ibid.
7 9 U. S. Census Bureau Economic Programs, Data on U.S. businesses, industrial sectors, and trade
activity, 2000.
8 0 Department of Commerce (Bureau of Economic Analysis), and Department of Labor (Bureau of
Labor Statistics), 2000.
8 1 Organization for Economic Cooperation and Development (OECD), Data Sources and
Measurement Methods, 1995.
8 2 U. S. Census Bureau Economic Programs, Data on U.S. businesses, industrial sectors, and trade
activity, 2000
8 3 Department of Commerce, 1996.
8 4 Ibid.
8 5 Ibid.
8 6 U. S. Census Bureau Economic Programs, Data on U.S. businesses, industrial sectors, and trade
activity, 2000.
8 7 Ibid.
8 8 Ibid.
8 9 Ibid.
9 0 Ibid.
219
9 1 Ibid.
9 2 Department of Commerce, 2000.
9 3 Ibid.
9 4 Ibid.
9 5 Ibid.
9 6 Ibid.
9 7 Ibid.
9 8 Ibid.
9 9 Ibid.
0 0 Federal Communications Commission, 2000.
0 1 U. S. Census Bureau Economic Programs, Data on U.S. businesses, industrial sectors, and trade
activity, 2000.
0 2 U. S. Department of Commerce’s Bureau of Economic Analysis, National summary, 2000.
0 3 Ibid.
0 4 Ibid.
0 5 Ibid.
0 6 U. S. Department of Commerce’s Economic and Statistics Administration, STAT-USA, 2000.
0 7 U. S. Department of Commerce’s Bureau of Economic Analysis, National summary, and U.S.
Bureau of the Census, 2000.
0 8 U. S. Department of Commerce’s Economic and Statistics Administration, STAT-USA, 2000.
0 9 Ibid.
1 0 Ibid.
1 1 U. S. Department of Commerce’s Bureau of Economic Analysis, National summary, 2000.
1 2 Ibid.
1 3 Ibid.
1 4 Ibid.
1 5 Ibid.
1 6 Ibid.
1 7 Ibid.
1 8 Ibid.
1 9 Ibid.
2 0 Ibid.
2 1 Ibid.
2 2 Ibid.
2 3 Ibid.
2 4 U. S. Department of Commerce’s Bureau of Economic Analysis, National summary, and U.S.
Bureau of the Census, 2000.
2 5 Ibid.
2 6 Ibid.
2 7 Ibid.
2 8 Ibid.
2 9 Ibid.
3 0 U. S. Office of Trade and Economic Analysis, 2000.
3 1 Ibid.
3 2 Ibid.
3 3 Ibid.
3 4 Ibid.
3 5 Ibid.
3 6 Ibid.
3 7 Ibid.
3 8 Ibid.
3 9 Ibid.
220
40
Ibid.
41
Ibid.
42
Ibid.
43
Ibid.
44
Ibid.
45
Ibid.
46
Ibid.
47
U. S.
48
Ibid.
49
Ibid.
50
Ibid.
51
Ibid.
52
Ibid.
53
Ibid.
54
Ibid.
55
U.SI
56
Ibid.
57
Ibid.
58
U. S.
59
U. S.
60
Ibid.
61
Ibid.
62
U. S.
63
Ibid.
64
Ibid.
65
Ibid.
66
Ibid.
67
Ibid.
68
Ibid.
69
U. S.
70
Ibid.
71
Ibid.
72
Ibid.
73
Ibid.
74
Ibid.
75
U. S.
76
U.S.
77
Ibid.
78
Ibid.
79
Ibid.
80
Ibid.
81
Ibid.
82
Ibid.
83
Ibid.
84
Ibid.
85
Ibid.
86
Ibid.
87
Ibid.
88
Ibid.
89
Ibid.
90
Ibid.
91
U.S.
221
1 9 2 Ibid.
1 9 3 Ibid.
1 9 4 U.S. Bureau of Labor Statistics, 2000.
1 9 5 Ibid.
1 9 6 Ibid.
1 9 7 Ibid.
1 9 8 AMA Survey: Basic Skills Testing & Training; Summary of Key Findings, 1996.
1 9 9 AMA Survey: Corporate Downsizing, Job Elimination, and Job Creation; Summary of Key
Findings, 1995.
2 0 0 Ibid.
2 0 1 Ibid.
2 0 2 U.S. Bureau of Labor Statistics, 2000.
2 0 3 Ibid.
2 0 4 Ibid.
2 0 5 Ibid.
2 0 6 Ibid.
2 0 7 Ibid.
2 0 8 Ibid.
2 0 9 Ibid.
2 1 0 Ibid.
2 1 1 Ibid.
2 1 2 U.S. Bureau of the Census, 2000.
2 1 3 U.S. Census Bureau and U. S. Bureau of Labor Statistics, 2000.
2 1 4 Ibid.
2,5 Ibid.
2 1 6 Ibid.
2 1 7 U.S. Bureau of the Census, 2000.
2 1 8 Ibid.
2 1 9 Ibid.
2 2 0 Ibid.
2 2 1 U. S. Bureau of Labor Statistics, 1988.
2 2 2 Ibid.
2 2 3 Ibid.
224
Niederle, Muriel: Department of Economics, Stanford University and NBER,
http://www.stanford.edu/~niederle, and Lise Vesterlund: Department of Economics, University of
Pittsburgh, http://www.pitt.edu/~vester, 2005.
2 2 5 Ibid.
2 2 6 Department of Education (National Center for Education Statistics), 2000.
2 2 7 Ibid.
2 2 8 Ibid.
2 2 9 Ibid.
2 3 0 Ibid.
2 3 1 Ibid.
2 3 2 Ibid.
2 3 3 College Entrance Examination Board, National Report On College-Bound Seniors, 1999.
2 3 4 Ibid.
2 3 5 Ibid.
2 3 6 Department of Education (National Center for Education Statistics), 2000.
2 3 7 Ibid.
2 3 8 Garces, E. & Thomas, D. & Currie, J. “Longer Term Effects of Head Start,” Papers 00-20, RAND
- Labor and Population Program, 2000.
2 3 9 Ibid.
222
2 4 0 Ibid.
2 4 1 Ibid.
2 4 2 Department of Education (National Center for Education Statistics), 2000.
2 4 3 Ibid.
2 4 4 Schacter, John. The impact of education technology on student achievement. Milken Exchange on
Education Technology, 1999. Retrieved from http://www.milkenexchange.org/
2 4 5 Department of Education (National Center for Education Statistics), 2000.
2 4 6 Ibid.
2 4 7 Ibid.
2 4 8 Ibid.
2 4 9 U.S Bureau of the Census, 2000.
2 5 0 Department of Education (National Center for Education Statistics), 2000.
2 5 1 Ibid.
2 5 2 Ibid.
2 5 3 Ibid.
2 5 4 Ibid.
2 5 5 Ibid.
2 5 6 Project STAR 1989, Odden 1989, Mitchell, et al 1989, Slavin 1990, Robinson 1990, Hanushek
1994, and Sadowski 1995.
2 5 7 Ibid.
2 5 8 Department of Education (National Center for Education Statistics), 2000.
2 5 9 Ibid.
2 6 0 Ibid.
2 6 1 Ibid.
2 6 2 Project STAR 1989, Odden 1989, Mitchell, et al 1989, Slavin 1990, Robinson 1990, Hanushek
1994, and Sadowski 1995.
2 6 3 Department of Education (National Center for Education Statistics), 2000.
2 6 4 Ibid.
2 6 5 Ibid.
2 6 6 Ibid.
2 6 7 Ibid.
2 6 8 Ibid.
2 6 9 Ibid.
2 7 0 Project STAR 1989, Odden 1989, Mitchell, et al 1989, Slavin 1990, Robinson 1990, Hanushek
1994, and Sadowski 1995.
2 7 1 Department of Education (National Center for Education Statistics), 2000
2 7 2 Ibid.
2 7 3 Ibid.
2 7 4 Ibid.
2 7 5 Ibid.
2 7 6 Ibid.
2 7 7 U. S. Department of Commerce’s Bureau of Economic Analysis, 2000.
2 7 8 Ibid.
2 7 9 Ibid.
2 8 0 Ibid.
2 8 1 Ibid.
2 8 2 Ibid.
2 8 3 Ibid.
2 8 4 Ibid.
2 8 5 Ibid.
2 8 6 Ibid.
2 8 7 U. S. Census Bureau Economic Programs, 2000.
223
2 8 8 Ibid.
2 8 9 Ibid.
2 9 0 Ibid.
2 9 1 Ibid.
2 9 2 Project STAR 1989, Odden 1989, Mitchell, et al 1989, Slavin 1990, Robinson 1990, Hanushek
1994, and Sadowski 1995.
2 9 3 U.S. Census Bureau and U. S. Bureau of Labor Statistics, 2000.
2 9 4 Ibid.
2 9 5 Ibid.
2 9 6 Ibid.
2 9 7 Ibid.
2 9 8 Ibid.
2 9 9 Ibid.
3 0 0 Ibid.
3 0 1 Ibid.
3 0 2 Ibid.
3 0 3 Ibid.
3 0 4 Ibid.
3 0 5 Ibid.
3 0 6 Ibid.
3 0 7 Ibid.
3 0 8 Ibid.
3 0 9 Ibid.
3 1 0 Ibid.
3 1 1 Ibid.
3,2 Ibid.
3 1 3 Ibid.
3 1 4 U.S. Census Bureau, 2000.
3,5 Ibid.
3 1 6 Ibid.
3 1 7 Centers for Disease Control and Prevention, 2000.
3 1 8 Ibid.
3 1 9 Ibid.
3 2 0 Ibid.
3 2 1 Ibid.
3 2 2 Ibid.
3 2 3 U.S. Census Bureau, 2000.
3 2 4 Ibid.
3 2 5 Ibid.
3 2 6 Ibid.
3 2 7 Ibid.
3 2 8 Ibid.
3 2 9 U.S. Census Bureau, Families and Living Arrangements, CPS Reports, 2000.
3 3 0 Ibid.
3 3 1 Ibid.
3 3 2 Ibid.
3 3 3 Ibid.
3 3 4 Ibid.
3 3 5 Centers for Disease Control and Prevention, 2000.
3 3 6 U.S. Census Bureau, Families and Living Arrangements, CPS Reports, 2000.
3 3 7 Ibid.
3 3 8 Ibid.
224
3 3 9 Ibid.
3 4 0 Ibid.
3 4 1 Ibid.
3 4 2 Ibid.
3 4 3 Ibid.
3 4 4 Ibid.
3 4 5 Ibid.
3 4 6 Ibid.
3 4 7 Ibid.
3 4 8 Ibid.
3 4 9 Ibid.
3 5 0 Ibid.
3 5 1 Ibid. Ib id .
3 5 2 Ibid.
3 5 3 U.S. Census Bureau, 2000.
3 5 4 U. S. Bureau of Labor Statistics, 2000.
3 5 5 Ibid.
356 n • ■ .
3 5 6 Ibid.
3 5 7 Ibid.
3 5 8 Ibid.
3 5 9 Ibid.
3 6 0 Ibid.
3 6 1 Ibid.
3 6 2 Ibid. i D i a .
3 6 3 Ibid.
3 6 4 U.S. Census Bureau, 2000.
3 6 5 Ibid.
3 6 6 Ibid.
3 6 7 Ibid.
3 6 8 U. S. Bureau of Labor Statistics, 2000.
3 6 9 Ibid.
vm .
3 7 0 ibid.
3 7 1 Ibid.
3 7 2 Ibid.
3 7 3 Ibid.
3 7 4 Ibid.
3 7 5 Ibid.
3 7 6 Ibid.
3 7 7 Ibid.
3 7 8 Ibid.
3 7 9 Ibid
3 8 0 U.S. Bureau of the Census, 2000.
3 8 1 Ibid.
3 8 2 Robert Pack, “The Tyranny of the Billable Hour,”
3 8 3 U.S. Bureau of the Census, 2000.
384 ThiH
3 8 4 Ibid.
3 8 5 Ibid.
3 8 6 Ibid.
3 8 7 Ibid.
3 8 8 Ibid.
3 8 9 Ibid.
3 9 0 Ibid.
DC Bar Review, p. 12.
225
3 9 1 Ibid.
3 9 2 C. Citro & R. Michaels eds., Measuring Poverty: A New Approach, 1995.
3 9 3 U.S. Bureau of the Census, 1950.
3 9 4 U.S Bureau of the Census, 2000.
3 9 5 Ibid.
3 9 6 Ibid.
3 9 7 U.S. Census Bureau, Families and Living Arrangements, CPS Reports, 2000.
3 9 8 Ibid.
3 9 9 Ibid.
4 0 0 Ibid.
4 0 1 Ibid.
4 0 2 Bureau of Economic Analysis, 2000.
4 0 3 Ibid.
4 0 4 Ibid.
4 0 5 Ibid.
4 0 6 Ibid.
4 0 7 Ibid.
4 0 8 Ibid.
4 0 9 Ibid.
4 1 0 Ibid.
4 1 1 Ibid.
4 1 2 Ibid.
4 1 3 Ibid.
4 1 4 Ibid.
4 1 5 Ibid.
4 1 6 Ibid.
4 1 7 DottieHom, Women, Work, and Welfare, 1995.
4 1 8 Bureau of Economic Analysis, 2000.
4 1 9 Economic and Statistics Administration, 2000.
4 2 0 Ibid.
4 2 1 Ibid.
4 2 2 Ibid.
4 2 3 Ibid.
4 2 4 Ibid.
4 2 5 Ibid.
4 2 6 Ibid.
4 2 7 Ibid.
4 2 8 U.S. Bureau of Labor Statistics, 2000.
4 2 9 Ibid.
4 3 0 Ibid.
4 3 1 Robinson, John P., and Geoffrey Godbey. Time for Life: The Surprising Ways Americans Use
Their Time, 1999.
4 3 2 Ibid.
4 3 3 Department of Labor, 2000.
4 3 4 Ibid.
4 3 5 Ibid.
4 3 6 Ibid.
4 3 7 Ibid.
4 3 8 Ibid.
4 3 9 Ibid.
4 4 0 Ibid.
4 4 1 U.S. Bureau of the Census, 2000.
226
442
443
444
445
446
447
448
449
450
451
452
453
454
455
456
457
458
459
460
461
462
463
464
465
466
467
468
469
470
471
Ibid.
Ibid.
Ibid.
Department of Labor, 2002.
U.S. Bureau of the Census, 2000.
Ibid.
Department of Labor, 2000.
Ibid.
Ibid.
U.S. Bureau of Labor Statistics, 2000.
Ibid.
Department of Labor, 2000.
Ibid.
Ibid.
Ibid.
Ibid.
Ibid.
Ibid.
Ibid.
Ibid.
Ibid.
Ibid.
U.S. Bureau of Labor Statistics, 2000.
Ibid.
U.S. Bureau of the Census. 2000.
Ibid.
Ibid.
U.S. Bureau of Labor Statistics.
Ibid.
Ibid.
227
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Creator Bray, Monica (author)

Core Title The drivers of economic change: Technology, globalization, and demography

Degree Doctor of Philosophy

Degree Program Political Economy and Public Policy

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag economics, general,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Day, Richard H. (committee chair), [illegible] (committee member), Wise, Carol (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c20-282836

Unique identifier UC11260087

Identifier DP23419.pdf (filename),usctheses-c20-282836 (legacy record id)

Legacy Identifier DP23419.pdf

Dmrecord 282836

Document Type Dissertation

Rights Bray, Monica

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

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