WORKFORCE 2000 WORK AND WORKERS FOR THE 21ST CENTURY

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• Release Decision: RIPPUB
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• Document Creation Date: December 27, 2016
• Document Release Date: April 15, 2013
• Sequence Number: 1
• Publication Date: June 1, 1987
• Content Type: MISC

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WORK AND WORKERS FOR THE 21ST CENTURY
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STAT
Published by Hudson Institute, Inc.
Herman Kahn Center
5395 Emerson Way
P.O. Box 26-919
Indianapolis, IN 46226 USA
Telephone: [phone]
Telex 855477
The views in this study are solely the views of the authors. No opinions,
statements of fact, or conclusions contained in this document can properly
be attributed to the Institute, its staff, its members, or its contracting
agencies.
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WORKFORCE 2000
Work and Workers for the Twenty-first Century
William B. Johnston
Project Director
Arnold E. Packer
Co-Project Director
With Contributions By
Matthew P. Jaffe
Marylin Chou
Philip Deluty
Maurice Ernst
Adrienne Kearney
Jane Newitt
David Reed
Ernest Schneider
John Thomas
HUDSON INSTITUTE
Indianapolis, Indiana
HI-3796-RR June 1987
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ABOUT HUDSON INSTITUTE
Hudson Institute is a private, not-for-profit research organization with
headquarters in Indianapolis, Indiana. Hudson specializes in the analysis
of policy problems and the formulation of policy options for government
and private sector clients. Hudson analysts strive to approach research in a
creative and innovative fashion, while at the same time stressing the
importance of providing decisionmakers with practical, usable analyses.
Hudson's goal is to help policymakers make the best possible decisions
within constraints of time, money, and information.
In its work, Hudson employs various methods and disciplines, but
relies on no single specific methodology. This electic, multidisciplinary
approach has become the hallmark of Hudson Institute studies. Hudson
researchers were among the pioneers in the use of "scenarios" ?a
technique used to gain insights by posing alternative hypothetical future
outcomes. Scenarios help to give decisionmakers a better understanding of
the likely consequences of various policies, as well as the implications of
both likely trends and less likely, but not implausible, events.
There are no "official" Hudson Institute positions. Hudson studies
reflect the views of those who work on them. Hudson's staff includes
about 35 research professionals experienced in many disciplines, but
sharing a broad, multidisciplinary outlook. In addition to its full-time
professional staff, the Institute has access to its public and fellow members,
as well as to a wide range of expert consultants in the United States and
abroad.
The Institute was founded in 1961 by the late Herman Kahn and
colleagues from the Rand Corporation. Initially, the Institute's primary
focus was on policy issues involving national security and international
order. This emphasis reflected Herman Kahn's contributions to the
understanding of nuclear strategy in his books On Thermonuclear War,
Thinking About the Unthinkable, and On Escalation. The Institute's research
has always emphasized the value of a long-term perspective on policy
issues, and therefore the development of techniques for studying the
future ?especially the long-range future.
In 1984, Hudson moved its headquarters to Indianapolis, Indiana.
Hudson also maintains offices in Alexandria, Virginia; Montreal, Canada;
Brussels, Belgium; and Bonn, Federal Republic of Germany, and manages
the Center for Naval Analyses in Alexandria, Virginia.
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ACKNOWLEDGMENTS
Hudson Institute takes a broad multifaceted approach to futures
research, relying on expertise from many disciplines. This project has
been conducted in that tradition. Within the institute, many research-
ers made significant contributions to the study. Among the most
important were those of Matthew Jaffe on the future skill require-
ments of the economy, Marylin Chou on the impacts of women and
older workers on the economy, Philip Deluty on the shift to services,
Adrienne Kearney on the impacts of immigration, Jane Newitt on the
demographics of the future workforce, David Reed on economic
scenarios, Ernest Schneider on future sodal and political changes,
John Thomas on workplace literacy and Maurice Ernst on the
dynamics of the international economy. In addition, the project
benefited from the ideas, criticism and advice of Frank Armbruster,
Denis Doyle, Rob Melnick, and Jimmy Wheeler, the research assis-
tance of Brad Huang and Nancy Bernardon, and the skillful editing of
Carol Kahn and Ernest Schneider. Yvonne Swinton and Karen
Whitehouse provided essential administrative support. Perhaps most
importantly, the insight, patience, and support of Hudson's President
Thomas D. Bell, Jr. contributed vitally to the project's success.
In addition, Workforce 2000 has benefited from the counsel and
criticism of a group of distinguished experts from outside Hudson
Institute. Meeting periodically to review the research results, this
group has been invaluable in testing the ideas, probing the evidence,
and critiquing the logic of the study's recommendations. These
experts included Gordon Berlin of the Ford Foundation, Pat Choate of
TRW, William Kolberg of the National Alliance of Business, Malcolm
Lovell of George Washington University, Connie Newman, and
Robert Teeter of Robert Teeter Associates. Mac Lovell, in particular,
contributed to the project, not only with his sharp insights, but with
his gracious hospitality on numerous occasions. While these advisors
bear no responsibility for the report's conclusions or its analysis, they
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vi
have helped immensely in sharpening the research focus and clari-
fying the issues.
The research that led to this book was funded by a grant from the
Employment and Training Administration of the U.S. Department of
Labor. While the department deserves credit for its far-sighted com-
mitment to long-range policy research, it bears no responsibility for
the conclusions and policy recommendations presented here. The
research, writing, analysis, and judgements of Workforce 2000 were
left exclusively to the study's authors, and do not necessarily reflect
the views of the Department of Labor or any of its officials.
While they bear no blame for the failings of this study, three
officials within the department deserve great credit for initiating and
pursuing the Workforce 2000 project. Secretary William E. Brock,
whose concern with these issues preceded his leadership of the
Department of Labor, provided the original inspiration for undertak-
ing the work and valuable guidance as it progressed. Roger D.
Semerad, Assistant Secretary for Employment and Training, and
Roberts Jones, Deputy Assistant Secretary, have been invaluable
supporters of the project from its inception. Without Roger's vision
and boldness in undertaking this research, it could not have been
started. And without Roberts' cooperation, support, and patience, it
could not have been completed. As public officials entrusted with
great responsibilities for the future welfare of the workforce, they
deserve high praise for their courage and vision in support of this
work.
William B. Johnston
Project Director
Arnold E. Packer
Co-Project Director
Indianapolis, Indiana
June 1987
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vii
FOREWORD
"The quest for excellence into the twentieth-first century begins in the
schoolroom, but we must go next to the workplace. More than 20 million new
jobs will be created before the new century unfolds and by then our economy
should be able to provide a job for everyone who wants to work. We must enable
our workers to adapt to the rapidly changing nature of the workplace. . . ."
President Ronald Reagan
State of the Union Address
January 27, 1987
The president's challenge to meet the requirements of the
workplace of the future is a challenge to all Americans. But effective
action must flow from a solid base of information. While forecasting
the future is not an exact science, many of the changes that are
reshaping our economy and society are powerful, long-term trends
that can be projected with some confidence.
Early in my tenure as Assistant Secretary of Labor, it became
clear that we needed considerably more information if we were going
to chart our policy course into the twentieth-first century. I asked the
Hudson Institute, one of the nation's most respected research insti-
tutions, to work with us in developing that information. The product
of that initiative is this volume, Workforce 2000.
As in the case of other serious studies of the future, these pages
will contain few surprises for the informed reader. Rather, the book
documents labor market trends that have been ongoing for some
time?the shift from manufacturing to service employment has been
under way since the beginning of the century?and, most important-
ly, illustrates how the confluence of these trends in the year 2000
poses serious problems?and opportunities?for policymakers. I
have been struck particularly la the paradox that the drastic reduc-
tion in the availability of qualified young labor force entrants during
these years may imperillneriaTion's competitive position, but, at the
same time, offer a window of opportunity to integrate disadvantaged
youth into the economic mainstream.
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vffi
Although future trends can be anticipated to some degree,
policies and programs seldom lead, or even keep up with, change in
economic and social conditions. Most of the policies that guide
today's economy and labor markets were originally devised during
the 1930s or 1960s in response to the conditions and problems of those
decades. Social Security, welfare, unemployment insurance, trade
adjustment assistance, training programs, and many other federal
programs trace their roots either to the New Deal or to the Great
Society. As times have changed, the relevance of these programs from
earlier eras must increasingly be called into question. As change
continues to unfold between now and the year 2000, many of the
policies from past decades are likely to become irrelevant to the needs
of the 1990s and beyond.
The purpose of this research study is not to provide policy
prescriptions, but to furnish the basic intelligence on the job market
that we can use in evaluating the adequacy of our current public
policies and, where needed, undertaking new policy initiatives. This
task the report has admirably carried out. In the Department of Labor,
we have already begun the process of rethinking our policies and
programs in light of the "Workforce 2000" scenarios. Legislative pro-
posals to recast our current programs?notably in the area of worker
readjustment?have been introduced. We have taken administrative
action to begin building a more comprehensive and effective invest-
ment in our nation's human capital. Other policy and program
changes are bound to follow.
But the trends discussed in the report have implications for more
than federal policy. Business, labor, the schools, and state and local
government officials in communities across the nation will all need to
reflect on how well they are positioned to meet the increasingly
higher levels of skills and education that will be required by the jobs
of the future.
While research on the workplace of the future will be an ongoing
process, we now have a much clearer path to the year 2000. Our job
is now to reach' our destination: an economically competitive America
that fully utilizes the talents and skills of all its citizens.
Roger D. Semerad
Assistant Secretary of Labor
June 1987
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ix
TABLE OF CONTENTS
Acknowledgments
Foreword
vii
List of Tables
List of Figures
xi
Executive Summary
xiii
1. THE FORCES SHAPING THE AMERICAN ECONOMY
1
The Integration of the World Economy
1
The Shift of Production from Goods to Services
20
The Proliferation of Advanced Technologies
32
Renewed Productivity Growth, Particularly in Services
37,
Disinflation or Deflation in World Prices
43
Increased Competition in Product, Service, and Labor Markets
48
2. SCENARIOS FOR THE YEAR 2000
51
Three Projection of the Future
51
The Surprise-Free Scenario: Outcomes and Impacts
57
Alternative Scenarios
70
3. WORK AND WORKERS IN THE YEAR 2000
75
Demographics as Destiny?WORKFORCE 2000
75
The Changing Job Mix
95
4. SIX CHALLENGES
105
Stimulating World Growth
106
Improving Productivity in Service Industries
107
Improving the Dynamism of an Aging Workforce
110
Reconciling the Needs of Women, Work, and Families
112
Integrating Blacks and Hispanics Fully into the Workforce
114
Improving Workers' Education and Skills
115
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LIST OF TABLES
1
The U.S. Economy in the Year 2000
xvi
1-1
High-Earning Occupations Employ a Growing Share of the
Workforce
31
1-2
But More Workers Are Earning Low Wages.
31
2-1
The U.S. Economy in the Year 2000
54
2-2
Goods Production Will Shrink Further by the Year 2000
57
2-3
Employment in Goods Production Will Decline by the
Year 2000
58
2-4
Most New Jobs Have Been Created by Small Firms
60
3-1
U.S. Population Growth, 1950-2000
76
3-2
The Labor Force is Growing Slowly
78
3-3
The Population Over Age 65 Will Grow More Slowly
80
3-4
Women Are a Growing Share of the Workforce
85
3-5
Non-Whites Are a Growing Share of the Workforce
89
3-6
Blacks and Hispanics Are Much Less Successful in the
Labor Market
90
3-7
The Changing Occupational Structure, 1984-2000
97
3-8
The Occupations of the Future Will Require More Education
98
3-9
Fast-Growing Jobs Require More Language, Math, and
Reasoning Skills
99
3-10
Black Men and Hispanics Face the Greatest Difficulties in the
Emerging Job Market
102
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LIST OF FIGURES
1 Low-Skilled Jobs are Declining xxii
2 Blacks and Hispanics Face the Greatest Difficulties in the
Emerging Job Market xxiii
1-1 Exports and Imports Are a Growing Share of U.S. GNP 2
1-2 U.S. Growth Mirrors World Growth 5
1-3 The U.S. Trade Balance Declined Sharply After 1975 14
1-4 The Real Value of the Dollar Rose Rapidly During the
Early 1980s 16
1-5 During the Early 1980s American Unit Labor Costs Rose Faster
Than Those of West Germany or Japan 18
1-6 Services Are the Largest Share of Production in Advanced
Industrial Countries 21
1-7 The Nine Largest U.S. Service Industries (1986) 22
1-8 Goods Production Is a Declining Share of Nominal GNP and
Employment 24
1-9 Manufacturing's Share of the U.S. Economy in
"Constant" Dollars 25
1-10 Production Workers' Wages are a Shrinking Share of
Manufacturing Value 26
1-11 Production Workers' Wages are a Small and Declining Share of
U.S. GNP 27
1-12 Service Industry Wages are Less Equally Distributed 30
1-13 The Cost-Effectiveness of Computers Continues to Rise
Geometrically 33
1-14 Productivity Has Dedined Substantially Since 1965 38
1-15 Low Productivity Growth in Services Has Slowed U.S.
Economic Growth 39
1-16 Output Per Worker is Lower in Farming Than in the Rest
of the Economy 40
1-17 Service Industries Lag Behind Manufacturing in Output
Per Worker 41
1-18 OPEC Capacity Greatly Exceeds Production 44
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1-19
The Prices of Agricultural Goods Have Been Declining
45
2-1
U.S. Productivity Rebounds, Offsetting Slower Labor
Force Growth
55
2-2
Service Industry Establishments Are Smaller
60
2-3
Services Moderate the Business Cyde
62
2-4
Productivity Gains in Services Are the Key to Future
Economic Growth
65
3-1
Population and Labor Force Growth Will Drop by 2000
77
3-2
The U.S. Population Is Growing Older
80
3-3
The Middle-Aging of the Workforce
81
3-4
Young People Are More Likely to Move
83
3-5
Young People Are More Likely to Change Occupations
84
3-6
Women Hold a Growing Share of Managerial and
Professional Jobs
86
3-7
Most New Entrants to the Labor Force Will Be Non-Whites,
Women or Immigrants
95
3-8
Low-Skilled Jobs are Declining
100
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WORKFORCE 2000
EXECUTIVE SUMMARY
The year 2000 will mark the end of what has been called the
American century. Since 1900, the United States has become wealthy
and powerful by exploiting the rapid changes taking place in tech-
nology, world trade, and the international political order. The last
years of this century are certain to bring new developments in
technology, international competition, demography, and other factors
that will alter the nation's economic and social landscape. By the end
of the next decade, the changes under way will produce an America
that is in some ways unrecognizable from the one that existed only a
few years ago.
Four key trends will shape the the last years of the twentieth
century:
? The American economy should grow at relatively healthy pace, boosted by
a rebound in U.S. exports, renewed productivity growth, and a
strong world economy.
? Despite its international comeback, U.S. manufacturing will be a much
smaller share of the economy in the year 2000 than it is today. Service
industries will create all of the new jobs, and most of the new wealth,
over the next 13 years.
? The workforce will grow slowly, becoming older, more female, and more
disadvantaged. Only 15 percent of the new entrants to the labor force
over the next 13 years will be native white males, compared to 47
percent in that category today.
? The new jobs in service industries will demand much higher skill levels
than the jobs of today. Very few new jobs will be created for those
who cannot read, follow directions, and use mathematics. Ironically,
the demographic trends in the workforce, coupled with the higher
skill requirements of the economy, will lead to both higher and lower
unemployment: more joblessness among the least-skilled and less
among the most educationally advantaged.
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xiv WORKFORCE 2000
These trends raise a number of important policy issues. If the
United States is to continue to prosper?if the year 2000 is to mark the
end of the first American century?policymakers must find ways to:
? Stimulate Balanced World Growth: To grow rapidly, the U.S. must pay
less attention to its share of world trade and more to the growth of the
economies of the other nations of the world, including those nations
in Europe, Latin America, and Asia with whom the U.S. competes.
? Accelerate Productivity Increases in Service Industries: Prosperity will
depend much more on how fast output per worker increases in
health care, education, retailing, government, and other services than
on gains in manufacturing.
? Maintain the Dynamism of an Aging Workforce: As the average age of
American workers climbs toward 40, the nation must insure that its
workforce and its institutions do not lose their adaptability and
willingness to learn.
? Reconcile the Conflicting Needs of Women, Work, and Families: Three-
fifths of all women over age 16 will be at work in the year 2000. Yet
most current policies and institutions covering pay, fringe benefits,
time away from work, pensions, welfare, and other issues were
designed for a society in which men worked and women stayed
home.
? Integrate Black and Hispanic Workers Fully into the Economy: The
shrinking numbers of young people, the rapid pace of industrial
change, and the ever-rising skill requirements of the emerging
economy make the task of fully utilizing minority workers particularly
urgent between now and 2000. Both cultural changes and education
and training investments will be needed to create real equal employ-
ment opportunity.
? Improve the Educational Preparation of All Workers: As the economy
grows more complex and more dependent on human capital, the
standards set by the American education system must be raised.
The U.S. Economy in the Year 2000
Because long-range forecasts are so uncertain, alternative scenar-
ios are useful to help to bracket a range of possible outcomes. The
three scenarios presented here are based not only on different rates of
economic growth, but on different policy choices.
The baseline or "surprise-free" scenario reflects a modest im-
provement in the rate of growth that the nation experienced between
1970 and 1985. But despite improved trends in inflation and produc-
tivity, the U.S. economy does not return to the boom times of the
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Executive Summary xv
1950s and 1960s. Slow labor force growth is only partly offset by
faster productivity gains, and imperfect coordination between the
world's governments leads to only moderate rates of world
growth. Economic turbulence causes periodic recessions in the
U.S. that hold total growth to just under three percent per year.
In contrast, "world deflation" focuses on the possibility that a
worldwide glut of labor and production capacity in food, minerals,
and manufactured products could lead to a sustained price defla-
tion and sluggish economic growth. World governments, chas-
tened by a decade and a half of inflation, are slow to recognize the
new economic realities and unwilling to undertake coordinated
efforts to respond to them. The U.S., whose huge trade deficit has
been the world's growth engine during the early 1980s, moves
toward balance in its trade and fiscal accounts. Without U.S.
stimulus, the rest of the world slides into a series of recessions that
lead to increased protectionism and beggar-thy-neighbor trade,
monetary, and fiscal policies that hold growth to only 1.6 percent
per year over the period.
The third scenario, the "technology boom," outlines a pow-
erful rebound in U.S. economic growth to levels that compare
with the first two decades following World War II. Coordinated
international monetary, fiscal, and trade policies succeed in smooth-
ing world business cycles. Renewed public and private lending to
developing nations and low oil prices trigger rapid growth in
much of the Third World. In the U.S., high rates of investment in
both physical and human capital, coupled with rapid productivity
growth in services, low inflation, low resource prices, lower taxes,
and less government intervention combine to produce a boom in
productivity that causes the U.S. economy to surge ahead by 4
percent per year.
Table 1 summarizes the major assumptions and outcomes of the
three scenarios. The table underscores several key points about the
U.S. economy over the next 13 years:
? U.S. Growth and World Growth are Tightly Linked: The strong histor-
ical correlation between world growth and U.S. growth continues
through the balance of the century. In the baseline forecast, the U.S.
grows at about 2.9 percent, compared to 3.1 percent for the world.
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Table 1
THE U.S. ECONOMY IN THE YEAR 2000
1985
Level
BASE
Level Change*
2000 (Three Scenarios)
LOW
Level Change*
HIGH
Level Change*
World GDP (bill. 82$)
7745
12204
3.1%
9546
1.4%
13057
3.5%
U.S. GNP (bill. 82$)
3570
5463
2.9%
4537
1.6%
6431
4.0%
GNP Deflator (1982-100)
111.7
182.4
3.3%
117.8
0.4%
196.4
3.8%
Employment (millions)
107.2
131.0
1.3%
122.4
0.9%
139.9
1.8%
Manufacturing
19.3
17.2
-0.8%
18.0
-0.4%
18.1
-0.4%
Commercial & Other Services.
62.0
84.3
2.1%
76.5
1.4%
88.7
2.4%
Productivity (output/worker,82$).
33.3
41.7
1.5%
37.1
0.7%
46.0
2.2%
Manufacturing
40.4
71.4
3.9%
58.0
2.5%
81.3
4.8%
Commercial & Other Services .
29.9
34.1
0.9%
30.4
0.1%
38.2
1.6%
Fed. Surplus (bill. curr.$)
-200.8
-110.0
-170.1
-
-40.7
Curr. Acct. Bal. (bill. curr.$)
-116.8
14.0
-
12.5
32.6
Disp. Income Per Capita
(thou. 82$)
10.5
13.5
1.7%
11.5
0.6%
15.6
2.7%
*Average Annual Gain
Source: Hudson Institute.
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Executive Summary xvii
? U.S. Manufacturing Employment Declines While Services Grow: Despite
strong export growth and substantial production increases, manufac-
turing jobs decline in all scenarios. Whether the U.S. and world
economies are booming in an open trading environment or growing
slowly in an atmosphere of protectionism and nationalistic trading
patterns, U.S. manufacturing jobs decrease. No pattern of growth
enables manufacturing employment to return to the peak of 1979.
In addition to the decline in employment, manufacturing will
decline as a share of GNP, measured in current dollars. Where
manufacturing produced some 30 percent of all goods and services in
1955, and 21 percent in 1985, its share will drop to less than 17 percent
by 2000.
The shift to services will bring with it broad changes in the
location, hours, and structure of work. Service jobs tend to be located
where and when the customer wants them, rather than centralized as
are manufacturing jobs. Partly as a result, the typical workplace in the
future will have fewer people, and the average workweek will
become shorter with more people employed part-time.
The shift to services will also have great impacts on the economy
and its employees. For example, the business cycle should moderate,
since service industry growth is less volatile than manufacturing.
Wages may become less equally distributed, since service jobs tend
have more high and low earners, and fewer in the middle. Economic
growth may be harder to achieve, because productivity gains are
lower in most service industries.
Most importantly, the shift to services means that efforts to
preserve or develop the nation's manufacturing base are swimming
upstream against a powerful tide. Productivity gains, not Japanese
competition, will gradually eliminate manufacturing jobs. Lower
prices (relative to services) will gradually shrink manufacturing's
share of the economy. Just as agriculture lost its central role in the
American economy at the beginning of the century, so will manufac-
turing lose economic importance as the century draws to a close.
Those who fail to recognize these inevitable trends?for example,
states that try to capture new factories to boost their local economies
or the Congress, which is threatening to legislate trade barriers to
hang on to U.S. manufacturing jobs?will miss the most important
opportunities of the future.
? The Key to Domestic Economic Growth is a Rebound in Productivity,
Particularly in Services: Throughout the 1970s and early 1980s, the
United States managed to sustain a rising standard of living by
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xviii WORKFORCE 2000
increasing the number of people at work and by borrowing from
abroad and from the future. These props under the nation's con-
sumption will reach their limits before the end of the century: there
will be relatively fewer young people and homemakers who will enter
the workforce during the 1990s, and the burden of consumer,
government, and international debt cannot be expanded indefinitely.
If the U.S. economy is to grow at its historic 3 percent per year
average, the nation must substantially increase its productivity.
Output per worker during the 1990s is projected to double, from
0.7 percent per year to 1.5 percent, the same rate as the 1960s. A
combination of older, more stable, and better-educated workers, and
higher rates of investment will support this improvement. Better
productivity performance by the service industries will be particularly
important. Output per worker in manufacturing continues to show
strong gains, but the most important productivity improvements
come in services, where output per worker climbs from -0.2 percent
over the last 15 years to + 0.9 percent per year from 1985 to 2000. The
keys to such advances will be more competition in traditionally
noncompetitive industries such as education, health care, and gov-
ernment services, coupled with the application of advanced technol-
ogies to deliver more automated business, government, and personal
services.
? U.S. Trade Accounts Move Toward Balance: Although the different
scenarios show widely dispersed rates of growth of imports and
exports, the U.S. current account balance improves under all condi-
tions. This is due both to the devaluation of the dollar that has already
taken place against other currencies and to improving productivity in
manufacturing industries. Under the baseline scenario, by the year
2000 the U.S. current account balance is in the black by some $14
billion.
? The U.S. Budget Deficit Declines: Along with the improvement in the
trade deficit comes a decline in the budget deficit. Even without any
major tax increases, growth in GNP and a large surplus in the Social
Security Trust Fund cut the federal budget deficit to $18 billion by
1995.
? Inflation Moderates: Under the baseline scenario, prices increase by
an average of 3.3 percent per year over the 1985-2000 period. The
excess world capacity in labor, goods, and services prevents inflation
from resuming its pace of the 1970s.
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Executive Summary xix
? Unemployment Remains Stubbornly High: The baseline scenario fore-
casts unemployment at just over 7 percent in the year 2000, despite
the relatively slow growth of the labor force projected over the period.
In the deflation scenario, unemployment climbs above 9 percent,
while even in the boom scenario Unemployment is reduced only to
5.9 percent.
? Disposable Income Increases Moderately: Disposable personal income
per person, the best single measure of how rapidly society is
improving its standard of living, grows by 1.7 percent per year under
the baseline scenario, almost precisely the rate at which it grew
between 1970 and 1985.
Workers and Jobs in the Year 2000
Changes in the economy will be matched by changes in the
workforce and the jobs it will perform. Five demographic facts will be
most important:
? The population and the workforce will grow more slowly than at any
time since the 1930s: Population growth, which was climbing at
almost 1.9 percent per year in the 1950s, will slump to only 0.7
percent per year by 2000; the labor force, which exploded by 2.9
percent per year in the 1970s, will be expanding by only 1 percent
annually in the 1990s. These slow growth rates will tend to slow
down the nation's economic expansion and will shift the economy
more toward income-sensitive products and services (e.g., luxury
goods and convenience services). It may also tighten labor mar-
kets and force employers to use more capital-intensive production
systems.
? The average age of the population and the workforce will rise, and the
pool of young workers entering the labor market will shrink: As the baby
boom ages, and the baby bust enters the workforce, the average
age of the workforce will climb from 36 today to 39 by the year
2000. The number of young workers age 16-24 will drop by almost
2 million, or 8 percent. This decline in young people in the labor
force will have both positive and negative impacts. On the one
hand, the older workforce will be more experienced, stable, and
reliable. The reverse side of this stability will be a lower level of
adaptability. Older workers, for example, are less likely to move,
to change occupations, or to undertake retraining than younger
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xx WORKFORCE 2000
ones. Companies that have grown by adding large numbers of
flexible, lower-paid young workers will find such workers in short
supply in the 1990s.
? More women will enter the workforce: Almost two-thirds of the new
entrants into the workforce between now and the year 2000 will be
women, and 61 percent of all women of working age are expected
to have jobs by the year 2000. Women will still be concentrated in
jobs that pay less than men's jobs, but they will be rapidly entering
many higher-paying professional and technical fields. In response
to the continued feminization of work, the convenience industries
will boom, with "instant" products and "delivered-to-the-door"
service becoming common throughout the economy. Demands for
day care and for more time off from work for pregnancy leave and
child-rearing duties will certainly increase, as will interest in
part-time, flexible, and stay-at-home jobs.
? Minorities will be a larger share of new entrants into the labor force:
Non-whites will make up 29 percent of the new entrants into the
labor force between now and the year 2000, twice their current
share of the workforce. Although this large share of a more slowly
growing workforce might be expected to improve the opportuni-
ties for these workers, the concentration of blacks in declining
central cities and slowly growing occupations makes this sanguine
outlook doubtful.
? Immigrants will represent the largest share of the increase in the
population and the workforce since the first World War: Even with the
new immigration law, approximately 600,000 legal and illegal
immigrants are projected to enter the United States annually
throughout the balance of the century. Two-thirds or more of
immigrants of working age are likely to join the labor force. In the
South and West where these workers are concentrated, they are
likely to reshape local economies dramatically, promoting faster
economic growth and labor surpluses.
In combination, these demographic changes will mean that the
new workers entering the workforce between now and the year 2000
will be much different from those who people it today. Non-whites,
women, and immigrants will make up more than five-sixths of the
net additions to the workforce between now and the year 2000,
though they make up only about half of it today:
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Executive Summary xxi
1985 Net New Workers,
Labor Force 1985-2000
Total 115,461,000 25,000,000
Native White Men 47% 15%
Native White Women 36% 42%
Native Non-white Men 5% 7%
Native Non-white Women 5% 13%
Immigrant Men 4% 13%
Immigrant Women 3% 9%
Source: Hudson Institute.
Juxtaposed with these changes in the composition of the workforce
will be rapid changes in the nature of the job market. The fastest-growing
jobs will be in professional, technical, and sales fields requiring the
highest education and skill levels. Of the fastest-growing job categories,
all but one, service occupations, require more than the median level of
education for all jobs. Of those growing more slowly than average, not
one requires more than the median education.
Ranking jobs according to skills, rather than education, illus-
trates the rising requirements even more dramatically. When jobs are
given numerical ratings according to the math, language, and reason-
ing sldlls they require, only twenty-seven percent of all new jobs fall
into the lowest two skill categories, while 40 percent of current jobs
require these limited skills. By contrast, 41 percent of new jobs are in
the three highest skill groups, compared to only 24 percent of current
jobs (see Figure 1).The changes ahead in the job market will affect
different groups in the society in different ways. While young whites
may find their jobs prospects improving, for black men and Hispanics
the job market will be particularly difficult (see Figure 2). In contrast
to their rising share of the new entrants into the labor force, black men
will hold a declining fraction of all jobs if they simply retain existing
shares of various occupations. Black women, on the other hand, will
hold a rising fraction of all jobs, but this increase will be less than
needed to offset their growing share of the workforce.
Six Policy Challenges
These trends in the emerging economy suggest six policy issues
that deserve the greatest attention:
Stimulating World Growth: For more than a decade, American
policymakers have been concerned with the U.S. balance of trade, the
nation's deteriorating ability to compete with other nations, and the
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xxii
40
30
WORKFORCE 2000
Figure 1
WW SKILLED JOBS ARE DECLINING
- I= EXISTING JOBS
1=3 NEW JOBS 35
34
10 -
0.7-1.4
31
REPRESENTATIVE JOBS
Natural Scientists 5.7
Lawyers 5.2
Engineers 5.1
Management 4.4
Teachers , 4.2
Technicians 4.1
28 Marketing and Sales 3.4
Construction 3.2
Administrative 2.9
Service Occupations 2.6
Precision Production 2.5
Farmers 2.3
Transport Workers 2.2
Machine Setters 1.8
Hand Workers 1.7
Helpers and Laborers 1.3
11
1.5-2.4
2.5-3.4 3.5-4.4
SKILL RATING
Source: Hudson Institute.
2
4.5-5.4 5.5-6.4
presumed unfairness of the trading policies of other countries. These
issues, while important, are not the most critical international con-
cerns facing the nation. U.S. prosperity between now and the end of
the century will depend primarily on how fast the world economy
grows and on how rapidly domestic productivity increases. It will
depend very little on how open or closed the Japanese market is to
American goods, or even on how soon U.S. trade accounts return to
balance.
In particular, it is important for the United States, along with
other industrial countries, to find ways to restimulate growth in the
developing world. These nations that are still on the threshold of
industrialization have the greatest opportunities for rapid growth that
can stimulate the world and U.S. economies.
At the same time, efforts to improve U.S. competitiveness must
always be undertaken within the context of strengthening the world
economy. The envy and anger that many in the United States feel
toward Japan's success should not blind policymakers to the reality
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Executive Summary
25
20
0
Figure 2
BLACK MEN AND HISPANICS FACE THE GREATEST
DIFFICULTIES IN THE EMERGING JOB MARKET
4.9
CI SHARE OF CURRENT
JOBS
EZI IMPLIED SHARE OF
NEW JOBS
E=3 SHARE OF LABOR
FORCE GROWTH
7.7
BLACK MEN
12
22
BLACK WOMEN
HISPANICS
that as Japan (and every other nation of the world) grows richer, the
United States will benefit. Just as it is easier for a company to prosper
in a rapidly-growing market than to capture market share in a
shrinking one, so it will be easier for the United States to prosper in
rapidly-growing world markets than in static or shrinking ones.
Of course, the U.S. share of world growth is also important. But
most of the steps that must be taken taken to improve U.S. compet-
itiveness have little to do with changing the behavior of the Japanese
or the Koreans. Instead, they involve changes in the propensity of
Americans to borrow and spend rather than to save, major improve-
ments in the educational preparation of large numbers of prospective
workers, and reforms in the practices and laws that encourage
America's best and brightest to provide legal advice in corporate
takeovers rather than to build companies that exploit new technolo-
gies.
Improving Productivity in Service Industries: Manufacturing still
controls the imagination, the statistics, and the policies of the nation,
even though it now represents a small and shrinking fraction of
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xxiv WORKFORCE 2000
national employment and output. The nation's mental image of
progress continues to be one in which manufacturing plants produce
more cars, computers, and carpets per hour. But services are a far
larger segment of the economy and the sector whose productivity has
actually declined in recent years. These industries?health, educa-
tion, trade, finance, insurance, real estate, and government?must be
the targets of government efforts to improve productivity.
To realize this objective, new efforts must be made to tear down
the barriers to competition in many of the service industries where
competition does not now exist. At the same time, new investments
must be made in research and development targeted toward improv-
ing service industry productivity.
In education, for example, competition is needed at the elemen-
tary and secondary school level, where the monopoly position of the
public schools has stifled innovation. In order to provide a benchmark
for measuring gains, national standards and nationally comparable
tests are essential. At the same time, new investments are needed in
educational technology, in particular to develop a large base of public
domain software to teach math, reading, science, and more advanced
courses.
In health care, the steps taken to inject competition into the
system must be extended, while new investments are made in
productivity-enhancing technologies such as automated diagnostics.
In a range of other government services, privatization and competi-
tion promise to provide great productivity gains.
Improving the Dynamism of an Aging Workforce: At the same time
that the workforce is aging and becoming less willing to relocate,
retrain, or change occupations, the economy is demanding more
flexibility and dynamism. Despite general recognition of the impor-
tance of a flexible workforce, many national policies fail to promote
this end.
For example, the nation's pension system is one in which most
retirement benefits are tied to the job. In many cases, employees
receive no benefits if they leave after a few years, and, by the time
they reach mid-career, they would suffer major benefit losses if they
switched employers. The current system tends to inhibit workers
from changing jobs and to discourage companies from hiring older
workers.
Similarly, the unemployment insurance system has been largely
used to provide income support to workers who are laid off. Rela-
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Executive Summary xxv
tively little has been done to make the system one that promotes
relocation, retraining, and job search.
Although worker retraining has become a catchphrase, and the
federal government and private industry now spend billions of
dollars for retraining, there is still no national consensus that all
workers should expect to learn new skills over the course of their
worklives. Except in a few companies, training is confined mostly to
the top and bottom ranks of employees, with little systematic effort to
insure that all workers are constantly reinvesting in themselves to
avoid obsolescence. National policies that promote such corporate
and individual attitudes toward retraining should be backed up with
changes in the tax code to encourage lifelong education.
Finally, the goal of promoting dynamism requires reconsidera-
tion of national policies on immigration. The most careful studies of
legal immigrants have concluded that they are a valuable asset to the
nation and help to stimulate economic growth and change. The need
for more, better-educated immigrants to help staff a growing econ-
omy will increase as the growth of the population and labor force
slows in the 1990s. Despite the political and social objections, the
nation should begin a program of gradually increasing its quotas and
opening its doors to more individuals desiring to enter the country.
Reconciling the Demands of Women, Work, and Families: America has
become a society in which everyone is expected to work?including
women with young children. But many of society's institutions were
designed during an era of male breadwinners and female homemak-
ers.
What is needed is a thoroughgoing reform of the institutions and
policies that govern the workplace, to insure that women can partic-
ipate fully in the economy, and that men and women have the time
and resources needed to invest in their children. For example, some
formula is needed to provide parents with more time away from
work. Flexible hours, the use of sick leave to care for children, more
part-time work, pregnancy leaves for mothers and fathers, and other
innovations are expensive, but ultimately necessary changes in the
structure of work that will accommodate the combination of work and
family life. Similarly, the need for high-quality day care has not yet
been fully addressed. Government and private mechanisms to pro-
vide for the care of the children of working parents need further
development.
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xxvi WORKFORCE 2000
The increase in the numbers of working women also has impli-
cations for the current debate over welfare reform. The current
stay-at-home welfare program was designed long before most women
worked. Now that a majority of nonwelfare women with young
children work, it no longer seems cruel to require welfare mothers to
do so. The current system should be replaced with one that mandates
work for all able-bodied mothers (except for those caring for infants),
while providing training, day care, and job counseling.
Integrating Blacks and Hispanics Fully into the Workforce: For minor-
ity workers, the changes in the nation's demography and economy
during the 1990s represent both a great risk and a great opportunity.
With fewer new young workers entering the workforce, employers
will be hungry for qualified people and more willing to offer jobs and
training to those they have traditionally ignored. At the same time,
however, the types of jobs being created by the economy will 'demand
much higher levels of skill than the jobs that exist today. Minority
workers are not only less likely to have had satisfactory schooling and
on-the-job training, they may have language, attitude, and cultural
problems that prevent them from taking advantage of the jobs that
will exist.
If the policies and employment patterns of the present continue,
it is likely that the demographic opportunity of the 1990s will be
missed and that by the year 2000 the problems of minority unem-
ployment, crime, and dependency will be worse than they are today.
Without substantial adjustments, blacks and Hispanics will have a
smaller fraction of the jobs of the year 2000 than they have today,
while their share of those seeking work will have risen.
Each year of delay in seriously and successfully attacking this
problem makes it more difficult. Not only will the jobs become more
sophisticated and demanding, but the numbers of new workers
entering the workforce will begin to increase after 1993. Now is the
time to begin investing in education, training, and other assistance.
These investments will be needed, not only to insure that employers
have a qualified \ workforce in the years after 2000, but to finally
deliver the equality of opportunity that has been America's great
unfulfilled promise.
Improving Workers' Education and Skills: As the economies of
developed nations move further into the post-industrial era, human
capital plays an ever-more-important role in their progress. As the
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Executive Summary xxvii
society becomes more complex, the amount of education and knowl-
edge needed to make a productive contribution to the economy
becomes greater. A century ago, a high school education was thought
to be superfluous for factory workers and a college degree was the
mark of an academic or a lawyer. Between now and the year 2000, for
the first time in history, a majOrity of all new jobs will require
postsecondary education.
Education and training are the primary systems by which the
human capital of a nation is preserved and increased. The speed and
efficiency with which these education systems transmit knowledge
governs the rate at which human capital can be developed. Even
more than such closely-watched indicators as the rate of investment
in plant and equipment, human capital formation plays a direct role
in how fast the economy can grow.
If the economy is to grow rapidly and American companies are to
reassert their world leadership, the educational standards that have
been established in the nation's schools must be raised dramatically.
Put simply, students must go to school longer, study more, and pass
more difficult tests covering more advanced subject matter. There is
no excuse for vocational programs that "warehouse" students who
perform poorly in academic subjects or for diplomas that register
nothing more than years of school attendance. From an economic
standpoint, higher standards in the schools are the equivalent of
competitiveness internationally.
Promoting world growth, boosting service industry productivity,
stimulating a more flexible workforce, providing for the needs of
working families with children, bringing minority workers into the
workforce, and raising educational standards are not the only items
on the nation's agenda between now and the year 2000. But they are
certainly among the most important.
More critically, they are issues that will not go away by them-
selves. If nothing unusual is done to focus national attention and
action on these challenges, they are likely to be still unresolved at the
beginning of the next century. By addressing them now, the nation's
decisionmakers can help to assure that the economy and the work-
force fulfil their potential to make the year 2000 the beginning of the
next American century.
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CHAPTER 1
The Forces Shaping The
American Economy
How will the U.S. economy develop in the future? Between now
and the year 2000, a number of powerful economic forces will reshape
American jobs and industries. The most important trends will be:
? Continued Integration of the World Economy
? Further Shifts of Production from Goods to Services
? The Application of Advanced Technologies to Most Industries
? Faster Gains in Productivity, Particularly in Services
? Disinflation or Deflation in World Prices
? Increased Competition in Product, Service, and Labor Markets
In varying degrees, the patterns that will shape the future are
visible in recent economic history. A brief review of the past sheds
light on how these forces will act on the economy and interact with
each other between 1987 and 2000:
The Integration of the World Economy
Gradual improvements in transportation and communications
technologies have slowly woven the world's economic fabric more
tightly together. Railroads and long-haul trucks, coupled with radio
and television broadcasting and microwave telecommunications,
created a national U.S. market during the first six decades of this
century. Since the 1960s, container ships, jet airplanes, and satellite
and fiber optic communications have created an international one.
Even the lowest value products now travel around the globe from
producers to consumers: logs cut in the forests of Vancouver travel to
Japan to become lumber and then return across the Pacific to become
houses in Southern California. World markets establish the prices, not
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2
14 ?
12 ?
10 ?
5.2
2-
0
1955
WORKFORCE 2000
Figure 1-1
EXPORTS AND IMPORTS ARE A
GROWING SHARE OF U.S. GNP
4.5
E. EXPORTS
= IMPORTS
6.8
1970
YEAR
Source: Wharton Econometrics, Inc.
13.1
1985
only of such commodities as wheat, coal, and oil, but of manufac-
tured goods such as clothing, automobiles, and semiconductors.
The shrinking time and distance that separate countries and
continents have caused world trade in goods and services to rise
much faster than world gross domestic product (GDP). Traded goods
and services now account for a larger fraction of world GDP than ever
before. Between 1973 and 1984, GDP in the industrial market econo-
mies grew at an average of 2.4 percent annually, while merchandise
trade grew at 4.2 percent annually. Between 1965 and 1983, exports
climbed from 12 to 18 percent of GDP in the developed countries.
The United States has shared in this rapid growth of global trade.
Between 1955 and 1985, for example, the export share of GNP almost
doubled, while the import share nearly tripled (see Figure 1-1).
More recently, both capital and labor markets have also become
globally integrated. Only a decade ago, borrowing foreign currencies
or investing in foreign assets was restricted to the most sophisticated
multinational companies. Today, individual Americans routinely buy
mutual funds investing in the Japanese stock market, and Japanese
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The Forces Shaping The American Economy 3
investors pour billions of dollars into American real estate and the
U.S. Treasury bond market.
Labor, which the economist Adam Smith characterized as immo-
bile, now flows around the world with increasing ease. Where
formerly a few managers and technicians crossed international bor-
ders for overseas jobs, now whole armies of workers travel from
Turkey to labor in German factories, from Korea to build Saudi
Arabian petrochemical plants, or from Mexico to staff American
restaurants.
The Loss of Economic Sovereignty
As the world economy has become more integrated, the United
States, like all other nations, has progressively lost control of its
economic destiny. The growing importance of trade means that no
nation can expect sustained growth unless the world economy also
grows. These parallel growth patterns are reinforced by the tight
linkages between national fiscal and monetary policies. The U.S. can
no longer unilaterally set its own interest rates, balance its trade
accounts, or finance its deficit without consideration of the policies
and attitudes of other countries. A vast network of currency traders,
central banks, and corporations determines relative currency valua-
tions, trade flows, and national interest rates. These, in turn, influ-
ence rates of economic growth, sectoral shifts, unemployment rates,
and other national economic outcomes. Sovereignty over economic
matters has become a shared power.
Although economic integration has been under way for many
years, its impacts have only become decisive in the U.S. within the
last two decades. During the 1970s, the OPEC oil shocks and
worldwide patterns of inflation and recession forced U.S. decision-
makers to recognize the reality of global interdependence. The cutoff
of imported oil served to underscore this new reality. Just as national
defense had become a multilateral undertaking, so U.S. economic
growth had become inextricably intertwined with world growth.
The loss of control over the domestic economy was much more
difficult for U.S. policymakers to recognize and accept than it was for
other nations. Japan, West Germany, and other countries never
controlled more than a small fraction of world trade, even though
they devoted a substantial fraction of their GNPs to trade. These
nations were accustomed to planning economic policies in light of
international economic conditions that were beyond their control.
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In contrast, during the early postwar era, the United States
dominated world trade, even though it devoted only a small part of
its GNP to exports. As a result, the U.S. largely ignored international
conditions in planning its economic policies. American economic
forecasters typically devoted a few minutes to speculating about trade
issues, after carefully analyzing domestic housing starts, the U.S.
savings rate, and Detroit's auto sales.
In 1960, for example, the U.S. devoted less than 6 percent of
GNP to exports, but controlled a fifth of world trade. American
companies dominated international commerce, the American dollar
was the international medium of exchange, and American technology
was unrivaled. So omnipotent did American multinationals seem
during the 1960s, that the conventional wisdom?enshrined in The
American Challenge by a French author, J. Servan-Schreiber?was that
Europe was at risk of being swallowed by U.S. cultural and economic
power.
By the mid-1980s, Servan-Schreiber's awe of American power
had become a quaint historical footnote, as the U.S. position in world
irade eroded. In 1984, the U.S. devoted more than 10 percent of its
GNP to exports, but its share of world exports had dropped below 9
percent. Although the U.S. position had simply become more like
that of other nations, American economic decisionmakers were
shocked by the loss of control that resulted from the erosion of U.S.
economic preeminence. Now the Federal Reserve must consider the
attitudes of Japanese and German bankers before deciding on a
discount rate. Mortgage rates rise or fall, depending less on American
personal savings than on the strength of the dollar against the yen.
Union and management negotiators in Detroit must review wage
patterns in Seoul and Tokyo before signing new contracts. Economic
forecasters are forced to study the West German discount rate, Latin
American debt, and OPEC oil prices before estimating American
growth. Just as state economic strategists in New York or California
are required to begin their planning with an understanding of the
direction of the U.S. economy, so the possibilities for U.S. economic
growth are constrained by economic patterns around the world.
Seen from this perspective, the path of the U.S. economy over
the next 13 years will depend substantially on events and decisions
elsewhere in the world. The rate at which the world economy grows
and the competitive actions of other nations will be as important as
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Figure 1-2
U.S. GROWTH MIRRORS WORLD GROWTH
(Moving Average of Three Previous Years)
5
7 -
6
5 -
1- 4_
Z
C.) 3 -
CC
IT 2 -
1 -
0 I I I I I I tI
-1 ?
2
REST OF THE
WORLD GDP GROWTH
-0- U.S. GNP GROWTH
1973
1975
1977
1979 1981
YEAR
Source: Wharton Econometrics, Inc.
1983
1985
1987
actions taken in the U.S. Without rapid world growth in both
developed and developing nations, the U.S. cannot hope to sustain
strong growth at home. And unless American productivity rises more
rapidly than that of its principal competitors, domestic economic
growth will lag behind other nations.
Globalization and U.S. Future Economic Growth
Over the past 25 years, the U.S. economy has closely mirrored
the world economy. With few exceptions, in years in which the
world has been booming, the United States has been booming;
when the world has been in recession, so too has the United States
(see Figure 1-2).
The reason for this tight linkage is straightforward: as trade
grows in importance, it accounts for more of U.S. growth. When
Japan expands rapidly, it buys more Boeing jets for Japan Airlines,
uses more American medical instruments in Japanese hospitals, and
sends more wealthy Japanese tourists to visit the United States. Just
as rapid growth in California's Silicon Valley created jobs in Michigan
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auto plants and New York investment banks, so growth in Japan and
Korea has created jobs in San Francisco hotels and Seattle aircraft
plants. The market for U.S. goods and services has grown to include
not only the 50 states, but also the 178 countries of the world.
Although U.S. growth has closely paralleled world growth over
the past two and a half decades, it has not equalled it. Between 1960
and 1985, the world economy grew at an average rate of 3.9 percent
per year, while U.S. growth averaged 3.1 percent annually. As a result
of this slower growth, the U.S. share of the world economy (includ-
ing eastern bloc nations) dropped from 35 percent in 1960 to 28
percent in 1985.
It is likely that this pattern of similar, but slower, U.S. growth
compared to the world economy will continue in the years ahead. As
a mature industrial economy, the United States is unlikely to be able
to match the pace of productivity gains and economic growth that will
be experienced by countries that are still in the early stages of
industrialization. Over the next 13 years, growth in the developing
world should resume its rapid pace, fueled by large gains in the size
of the labor force, the continuing shift from subsistence agriculture to
manufacturing, and rising educational levels. On the other hand,
moderate productivity gains and slow labor force growth in the
service-dominated U.S. economy mean that it will be quite difficult
for the U.S. to match world growth rates and that the U.S. share of
the world economy will fall further by the year 2000.
As obvious and unremarkable as these observations may be,
they have been widely ignored in recent debates concerning the
nation's economic future. Much discussion of competitiveness, trade
balances, and other measures has focused exclusively on the U.S.
position relative to the rest of the world and failed to recognize the
overwhelming interest the nation has in the economic success of
other nations. The real challenge for the United States is to increase its
own productivity, while stimulating maximum world growth?not to
capture economic activity from other nations.
Put simply, the Japanese, the Germans the
Braz ans are not stealing American jobs?they are creating them.
Ji.orea or Brazil profit from strong growth in Europe and North
America, so the United States gains from growth in Asia and Latin
America. More important than the competition among nations for
high-productivity industries and good jobs is the collective effort to
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The Forces Shaping The American Economy 7
maximize world growth. The world is not a zero-sum game in which
the U.S. must level the playing field in order to win a fair share of
jobs. Instead, U.S. self-interest dictates that it stimulate the econo-
mies of other nations, since this is the most important way of creating
American jobs.
In particular, the extraordinary attention that has been directed
toward the competition between the United States and Japan has
been misplaced. The United States has been one of the greatest
beneficiaries of the huge advances in productivity and economic
growth that Japan has enjoyed during the postwar era. Not only are
the cars, television sets, and VCRs purchased by Americans cheaper
and of higher quality than they would otherwise be, the total size of
the U.S. economy and the number of U.S. jobs are certainly greater
because of Japan's success, rather than despite it. If Japan were
somehow returned to the small, low-productivity economy that
existed after World War II, American citizens would suffer nearly as
much as the Japanese.
Conversely, each step that is taken to restrict our trade with
Japan?from holding clOwn auto imports to forcing the Japanese to
raise the prices of computer chips?will cause the U.S. to grow more
slowly that it would without such restrictions. Not only will the prices
of U.S. goods rise, making U.S. consumers effectively poorer, but the
size of U.S. markets will shrink as Japanese economic growth slows.
Even without a tit-for-tat trade war, restrictions on Japanese imports
will certainly harm the U.S. economy.
These observations about Japan apply as well to America's other
trading partners. Far from being alarmed by the strong growth of
South Korea and Taiwan, or concerned about West Germany's large
trading surplus, the United States should recognize that the success
of these nations is working to help promote world growth and
development, stimulating demand for American products, and help-
ing to boost the American economy.
In the years ahead, these lessons will be extended to other
nations, as the circle of U.S. trading partners and competitors
expands. By the year 2000, the U.S. will be benefiting from much
expanded trade with China, India, and Latin America, just as it earlier
gained from trade with Canada, Europe, Japan, South Korea and
Taiwan.
The problem for America is not the healthy saving, investment,
and productivity of other countries, but the weakness of these factors
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in the U.S. economy. Individuals, communities, regions, and coun-
tries that continuously spend beyond their means, fail to invest
wisely, or ignore opportunities to increase their productivity will not
be as prosperous as those that do. The solutions lie with changes in
domestic U.S. economic performance, not with attempts to balance
trading accounts or protect U.S. industries.
Stimulating World Economic Growth
The integration of the world economy will be easier if the world
grows rapidly. With hundreds of millions of new workers flooding
into the cities of the developing world, growth rates of 5-6 percent
annually would be required to utilize fully the world's productive
capacity and prevent the army of the unemployed from growing. This
is far higher than current forecasts, which mostly contemplate 3-4
percent growth.
Whether even these forecasts will be reached will depend mostly
on the amount of fiscal and monetary stimulus that is collectively
applied to the world economy by national governments. In particular,
the policies of Japan, West Germany, and other large OECD econo-
mies will play a central role. Unless those nations pursue much more
stimulative policies, there is considerable likelihood that the world,
and the U.S., will grow sluggishly over the next decade and a half.
Throughout the early 1980s, the U.S. was the world's fiscal
engine of growth, using huge budget deficits to stimulate world
demand and absorb exports. This unilateral Keynesianism cannot be
sustained during the late 1980s and 1990s. Although concern over the
budget deficit may not translate into spending cuts, political pres-
sures will reduce the rate of growth of U.S. spending. For the next
few years, large new domestic spending initiatives are unlikely, and
real defense spending is likely to be flat. Revenues, on the other
hand, should rise steadily, both because of economic growth and,
possibly, tax increases. The combination of higher revenues and flat
spending will gradually reduce the federal deficit.
During the late 1980s and 1990s, this pattern of deficit reduction
is likely to be reinforced by growing surpluses in the Social Security
Trust Funds. For example, between 1984 and 1988, the difference
between revenues and expenditures in the basic Social Security and
Medicare programs shifted from ?$26 billion to + $15 billion. During
the 1990s, these positive annual balances will continue to rise, helping
further to trim the deficit.
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The Forces Shaping The American Economy 9
At the same time, the traditional fiscal surpluses of state and local
governments will continue. Between 1970 and 1985, for example,
state and local governments collected about 1.1 percent more of GNP
in taxes than they spent. During the 1990s, the states will continue to
be net savers, as they emphasize pay-as-you-go financing and set
aside funds to support future employee pensions.
These anticipated increases in government savings are needed to
bring U.S. consumption and investment back into balance with U.S.
production and to reduce the U.S. trade deficit. But if the U.S. is not
to continue to absorb the world's excess production capacity, the
responsibility for stimulating the world economy will shift to Japan,
West Germany, and other industrial nations. Many of these nations
are extremely reluctant to boost demand through either monetary or
fiscal policies. After more than a decade of relentless inflation, central
bank authorities in West Germany and Japan have been cautious
about expanding their money supplies and wary of pushing the
growth of their economies above historic averages. If inflation re-
mains under control through the late 1980s, these attitudes may
become less pervasive, leading to greater willingness to stimulate
world demand. In the near-term, however, it is likely that lower U.S.
deficits will not be fully offset by greater stimulus from other nations,
and world demand growth will be sluggish as a result. Current
forecasts by the IMF and others suggest that the world will not
achieve even 3 percent growth during the late 1980s, much less the
5-6 percent growth of the 1960s.
Rebalancing World Growth
Almost as important as the gross level of stimulus will be the
correction of severe imbalances in the current world economy. In
order to maximize world growth, the distortions in world financial
markets that have been created by inflation and unsound govern-
ment investment policies must be corrected. The world's financial
institutions must rechannel capital from the rich, agir-ig-Tions orthe
world to the young, industriali7in co Iiu wh
return are likely to be higher. To accomplish this, the United States
must cease consuming so much of the world's savings, by reducing
its massive trade and bucfg-erTeliFti s.
Managing the Inflation Cycle
The imbalances that have developed over the past 15 years can
be traced in large measure to the powerful cycle, first of high and
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accelerating inflation, followed by severe disinflation. As the coun-
tries of the world scrambled to shield themselves from the huge
increases in the cost of oil during the 1970s, they triggered great
instabilities in the real values of their various currencies, which sent a
series of false signals to the world economy.
Because inflation fluctuated so widely among countries and over
time during these years, it made calculations of real rates of return
much more uncertain than usual. This was particularly true for
projects with long-term payoffs. A corporate planner trying to decide
whether to construct a plant in Mexico or Brazil discovered that
assumptions about relative trends in inflation and exchange rates
dwarfed the importance of fundamental calculations about the cur-
rent costs of labor, materials, and land. As a result, many unsound
projects were financed, and many more worthwhile investments
were delayed or abandoned, because planners could not properly
calculate their potential returns. The fact that inflation resulted in low,
or even negative, rates of return in the industrial countries during the
late 1970s encouraged many banks to seek more risky loans at higher
nominal yields, while borrowers, particularly in the Third World and
in natural resource industries, plunged into debt, expecting to be able
to repay in depreciated currencies. Between 1970 and 1984, for
example, the total external public debt of the developing countries
grew from $69 billion to $828 billion, or from 13 percent to 34 percent
of their combined GNPs.
The sharp turn toward monetary restraint in the United States in
1980 triggered a severe recession, a lasting decline in commodity
prices, and a sharp increase in real interest rates. This disinflation
cycle exposed the unsoundness of the debts that had been incurred
by many of the LDCs and others dependent on natural resource
prices. Although the world has weathered the early years of the
process of unwinding from this massive debt overhang without
triggering a banking crisis, the process has led to a new set of
imbalances. As lenders have reversed direction and attempted to
improve the quality of their portfolios in a new, lower inflation
environment, they have retreated from higher-risk lending of all
kinds, particularly to many LDCs.
This flight from LDC lending threatens to undermine world
economic growth, because these nations offer the greatest prospects
for rapid economic gains. A combination of demographic, structural,
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The Forces Shaping The American Economy 11
and educational factors makes the developing world a place where
investments offer particularly high real rates of return. Many devel-
oping nations are converting their economies from agrarian to indus-
trial modes, with huge gains in productivity and production. For
example, among the middle income LDCs, agriculture's share of
production dropped from 21 to 14 percent between 1965 and 1984,
while industry grew from 31 to 37 percent. Educational levels are also
rising rapidly in many developing countries, further increasing the
potential for rapid industrial progress. Among the middle income
countries, the proportion of teenagers in high school climbed from 20
percent to 47 percent over the 1965-1983 time period. As a result of
these favorable economic conditions, abetted by the huge lending
from the rich nations, the developing nations have grown much more
rapidly than the OECD countries in recent years. Between 1970 and
1984, the GNP of the developing countries grew by 95 percent in real
terms, while that of the developed countries rose only 60 percent.
If the world can achieve some sustained measure of monetary
stability over the next few years, the false signals sent to the world
economy by inflation/deflation may fade away. As inflation subsides,
the fundamental returns to investment should again begin to guide
world capital markets, leading to a renewal of lending and faster
growth in the less developed nations of the world.
Improving Government Allocation Decisions
Along with the distortions caused by world inflation have been
great imbalances created and sustained by governments. If new
lending is to produce solid real investment returns, the unsound
investment decisions of many governments will require reform. The
need for changes extends from the richest and most developed
nations such as the United States to the poorest developing nations.
During the past 15 years, there have been two major new
accumulations of world capital. The first was caused by the sharp
increase in oil prices during the 1970s, which by 1983 had concen-
trated some $380 billion in the hands of the OPEC nations. The
second resulted from the huge savings and spectacular trading
surpluses accumulated by Japan during the 1980s. According to one
study, Japan will control $700 billion in overseas assets by the end of
the 1980s.
The world's financial institutions in which these resources were
deposited chose to recycle them in large part in loans to nations rather
than to enterprises. The size of the surpluses, the difficulties in
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understanding complex local economic conditions, and the presumed
safety of government loans all contributed to this pattern. For the
most part, however, governments were not wise investors of these
resources. Much of the OPEC surplus was used to finance unproduc-
tive investment and consumption in the developing world. Some of
these funds were used to finance oil imports, while many other loans
underwrote the construction of redundant steel, auto, and petro-
chemical plants in various LDCs. Within the OPEC nations, much of
the wealth was used to support higher levels of consumption and
investments in dubious schemes for industrial development.
More recently, large Japanese trade surpluses have been directed
back into U.S. Treasury securities, in effect underwriting the Ameri-
can budget deficit. By continuing to run massive deficits, the U.S.
government absorbed a huge share of net new world savings. But
rather than directing these resources toward productive U.S. invest-
ments, the government simply allowed them to be spent by Ameri-
can consumers.
In both cases, capital resources accumulated in one part of the
world were used for consumption or for unproductive investment in
others. Importantly, it was the unsound decisions of governments,
rather than unwise investments by industrialists, that dissipated the
capital. In aggregate, the world's productivity gains were under-
mined by these large capital surpluses that world governments failed
to recycle into productive investments.
In combination, the slower growth policies pursued by many
developed countries in the wake of the years of high inflation,
coupled with the failure to allocate resources around the world in an
efficient manner, contributed substantially to the poor performance of
the world's economy after 1973. Between now and the year 2000, the
most important prerequisite to strong U.S. growth will be a reversal
of this pattern: stable policies of fiscal and monetary stimulus coor-
dinated among Japan, West Germany, the U.S., and other developed
nations; renewed lending to the underdeveloped nations, particularly
in Latin America; sounder investment policies in the developing
world; and a reduction in the U.S. budget deficit.
Improving American Competitiveness
Even with robust world growth, the United States cannot expect
to enjoy a rapidly rising standard of living unless it maintains a strong
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The Forces Shaping The American Economy 13
competitive position in world trade. Yet for all the attention that
national competitiveness has received, there is little agreement con-
cerning the definition of the term, the roots of the problem, or the
steps that should be taken to insure U.S. competitiveness.
A basic definition of competitiveness is simply the ability of
domestic producers to sell sufficient goods and services outside the
country to pay for American imports. It is not enough, however,
merely to sell abroad or to match the price of imports. Exports must
be able to support wages and profits that are better than those the
nation has historically enjoyed. For competitiveness to be a sensible
national objective, it cannot simply be purchased at the price of a
lower standard of living. From this perspective, competitiveness is
really another way of looking at national productivity. The emphasis
should not be on balancing import and export ledgers, but on
increasing national wealth through productivity gains.
In general, international trade has almost always worked to
promote increased productivity and wealth in the United States.
Throughout the postwar era, higher levels of exports and imports
have been accompanied by a rising U.S. standard of living. Of course,
some industries, regions, and companies have not gained from trade
but have suffered lower sales, lower wages, and lower profits as a
result of competition from abroad. But on a national basis, the losers
from trade have been far outnumbered by the gainers. The well-
known benefits of comparative advantage and specialization have
meant that, on a national basis, increases in imports and exports have
never been purchased at a cost of lower real wages or profits.
The recent imbalances in American trade accounts, particularly
vis-a-vis Japan, have led many to question this historic calculus of the
benefits of trade. Over the past decade, the erosion of the competitive
position of steel, automobiles, textiles, consumer electronics, and
other U.S. manufacturing industries has led to widespread doubts
concerning American industrial strength and a growing crescendo of
support for trade restrictions.
Why did so many American industries lose their international
competitiveness? Is the damage irrevocable or will it be corrected?
The Roots of America's Competitive Problem
Until about 1970, the U.S. balance of trade remained slightly
positive (see Figure 1-3). In 1971, merchandise trade flows dipped
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20
Figure 1-3
THE U.S. TRADE BALANCE DECLINED
SHARPLY AFTER 1975
CC ? - 20 -
-I -40 -
0
- 60 -
0
co
Z -80-
0
-100-
-120 -
MERCHANDISE
TRADE BALANCE
-e-- CURRENT ACCOUNT
BALANCE
140
1955 1960 1965 1970
YEAR
Source: Economic Report of the President, 1987
1975
1980
1985
into the red for the first time since World War II, but large surpluses
in the service accounts?principally profits from foreign invest-
ments?kept overall trade flows balanced. After recovering some-
what in the mid-1970s, merchandise trade turned sharply negative in
1976 and continued to grow steadily worse over the next decade,
reaching ? $65 billion in 1983 and ? $140 billion in 1986. By 1982, the
gap in merchandise trade was large enough to make the overall U.S.
balance of trade negative, and, by 1986, this overall deficit had
plunged to ? $144 billion. The reasons for this record can be traced to
four related events:
? Gradual Loss of the American Productivity Advantage: Throughout the
postwar era, U.S. manufacturing productivity has been growing
more slowly than that of its chief trading partners and competitors.
Between 1950 and 1983, for example, output per hour of U.S. workers
increased by 129 percent. Canadian workers' productivity rose by 215
percent during the same period; the war-ravaged economies of
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France and West Germany increased output per hour by 458 and 508
percent. Japanese workers increased their output per hour by a
staggering 1,624 percent.
Importantly, the faster gains of America's trading partners were
primarily the result of the broad diffusion of advanced manufacturing
systems throughout the world. Other nations, who entered the 1950s
with vastly inferior infrastructure, capital plant, equipment, knowl-
edge, and technologies gradually acquired the resources they needed
to bring their manufacturing capabilities up to the world standard set
by the United States.
But though other nations were rapidly gaining ground, the
United States manufacturers remained superior in absolute terms
throughout the 1960s in most industries. By the late 1970s, however,
Japanese and West German productivity had so improved that the
absolute productivity levels of some of their manufacturing industries
had caught up with, and, in some cases, had surpassed American
industries. In automobiles, for example, several studies in the late
1970s showed that Japanese carmakers could produce an automobile
with 10-30 percent fewer hours of labor than American firms. Once
Japanese firms had overtaken American manufacturers in absolute
levels of productivity, the relatively slower productivity growth of
American firms in the late 1970s began seriously to undermine
American competitiveness. Between 1975 and 1980, output per hour
in U.S. manufacturing rose by an average of 1.7 percent per year,
compared to 3.8 percent in West Germany and 8.6 percent in Japan.
One factor that exacerbated the situation in some industries was
the loss of volume that occurred as imports gained market share. For
example, U.S. steel production dropped by more than one-fourth
between 1975 and 1983, and the U.S. share of world steel production
declined from 16 percent to 12 percent; for autos, the drop in volume
was 22 percent, as the U.S. share of world production fell from 27 to
17 percent. Since these declines in volume and market share could
not be fully offset by employment declines, overall labor productivity
dropped.
? Exchange Rate Fluctuations: The pattern of exchange rate fluctuation
over the 1970s and early 1980s exacerbated the effects of these
relatively slower productivity gains. Currency realignments of 1971-72
and the sharp further depreciation of the dollar in 1978 and 1979
temporarily masked the unfavorable trend in U.S. competitiveness,
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140
Figure 14
THE REAL VALUE OF THE DOLLAR ROSE
RAPIDLY DURING THE EARLY 1980'S
130-
c' 120-
0110-
100
90-
80
73 74 75 76 77 78 79 80 81 82 83 84 85 86
YEAR
Source: Economic Report of the President, 1987
enabling the U.S. to maintain its share of manufactured exports and
roughly to balance its current accounts. Between 1973 and 1979, for
example, the real (inflation-adjusted) value of the U.S. currency
dropped by 16 percent relative to the currencies of its major trading
partners (see Figure 1-4).
This drop in the value of the dollar made imports more expensive
and exports cheaper. It effectively disguised the decline in competi-
tiveness that was occurring, enabling U.S. manufacturers to continue
competing, even though their productivity and labor costs were not
keeping pace with their competitors. When the dollar changed
direction in late 1980, based on .higher U.S. interest rates, greater
confidence in U.S. economic prospects, and declining confidence in
foreign economies, the weakness that had been building was sud-
denly revealed. By 1985, when the real value of the dollar had climbed
almost 60 percent above its 1979 low, American manufacturers were
in an untenable position. As exports slowed and imports boomed,
U.S. producers scrambled to respond to unfavorable exchange rates,
by moving production overseas and importing components and
finished products from foreign plants. The spectacular deterioration
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The Forces Shaping The American Economy 17
in the U.S. trade balance that occurred in 1985 and 1986 was the result
of the cumulative effect of exchange rates that effectively whipsawed
U.S. industry?first shielding it from competitive realities and then
overexposing it to foreign competition.
Higher Labor Costs: Slow relative growth in U.S. productivity was
exacerbated during the late 1970s, as the country adjusted to the effects of
rising oil prices. Because of differences in bargaining power, market
conditions, and other factors, American manufacturing workers' wages
rose faster than those of other workers during this inflationary period. In
1973, for example, U.S. manufacturing workers earned an average of 4
percent more than all U.S. workers; by 1980, the gap had widened to 9
percent. In effect, U.S. manufacturing workers bore less of the immediate
burden of paying for the higher cost of oil. Their rising relative wages
contributed to the erosion in the cost-competitiveness of American
industry. The combination of higher wages and slow productivity growth
caused U.S. unit labor costs to rise more rapidly than those of several
foreign competitors during the late 1970s and early 1980s. Between 1973
and 1983, for example, unit labor costs rose at an annual rate of 7 percent
per year in the U.S., compared to 4.4 percent in West Germany and 2.8
percent in Japan (see Figure 1-5).
? The Emergence of Stronger Competitors: While part of the decline in U.S.
competitiveness can be explained in terms of lower productivity, higher
wages, and fluctuating exchange rates, some of the explanation lies
outside these macroeconomic variables. In the simplest terms, the
competition became much tougher during the 1970s. In the 1960s, there
were only a handful of companies outside the U.S. that could rival the
enormous wealth of engineering, marketing, and manufacturing talent
fielded by U.S. multinationals such as GM, Ford, GE, Westinghouse, and
IBM. By the 1980s, the American giants had been joined by a number of
companies that had become their technological and marketing equals.
Toyota, Hitachi, Siemens, Phillips, Matsushita, and many others were
capable of research, investment, and marketing on an equal footing with
any competitor in the world.
Particularly in consumer products, where quality, reputation, and
marketing are often as important as price, the new competitors have
proven formidable. The story of the loss of American competitive strength
is at least partly a story of superior products that have won market share,
whether or not they were cheaper than American alternatives.
Japanese cars, for example, initially penetrated the U.S. market
because they cost less than American models. During the 1960s,
when the Japanese share of the U.S. market was climbing from 7 to 15
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18
INDEXES (1977=100)
160
140 -
120 -
100 i
WORKFORCE 2000
Figure 1-5
DURING THE EARLY 1980's AMERICAN
UNIT LABOR COSTS ROSE FASTER THAN
THOSE OF WEST GERMANY OR JAPAN
-?- UNITED STATES
JAPAN
-.3- WEST GERMANY
80 -
60 -
40
20
1955
1960
1965
1970
YEAR
Source: U.S. Bureau of Labor Statistics
1975
1980 1983
percent, the average Japanese car sold for about two-thirds as much
as the average American model. By 1979, however, the average
selling prices of Japanese cars had nearly equalled American prices,
yet the Japanese share had risen to 22 percent. And by 1983, when
Japanese cars cost more than American models, their share of the
market had soared to 26 percent. Evidently, Japanese automakers had
convinced consumers that their products were better than those
made in Detroit. American competitors continued to lose market
share during the 1980s, not because their higher cost structure had
resulted in higher prices, but because they were making inferior
products that could not compete even when they were sold more
cheaply than imports.
Can American Manufacturers Compete?
How will the factors that have shaped U.S. competitiveness in
recent years affect American manufacturers in the future? What are
the prospects for a resurgence of American export strength?
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The Forces Shaping The American Economy 19
A review of the likely trends indicates that American industry is
poised for a remarkable recovery. While the competition from abroad
has certainly not slackened, all of the basic macroeconomic factors?
manufacturing productivity, unit labor costs, and exchange rate
alignment?have shifted in favor of American competitors. During
the late 1980s, American manufacturing exports are likely to expand
strongly, while import gains level off.
Since the depths of the 1981 recession, U.S. manufacturing
productivity has rebounded strongly. From the third quarter of 1981
to the third quarter of 1986, for example, U.S. manufacturing produc-
tivity grew at a 3.8 percent annual rate, far above the 1.5 percent rate
that had prevailed between 1973 and 1981, and well above the
postwar trend rate of 2.6 percent.
U.S. labor costs have also improved markedly. Strong produc-
tivity gains coupled with moderate wage hikes significantly improved
the competitive position of U.S. workers. From 1982 to 1985, U.S. unit
labor costs declined by 3 percent, compared with an increase of 2
percent for the wages of workers in the plants of America's major
foreign competitors.
Until 1985, these relative improvements in productivity and unit
labor costs were swamped by the growing strength of the U.S. dollar.
But since its peak in the first quarter of 1985, the dollar has fallen by
31 percent against a trade-weighted average of major U.S. trading
partners, standing now roughly where it was in 1973 before its first
sharp decline. With the dollar now much more favorably aligned, the
prospects for a revival of U.S. manufacturers are much improved.
Two obstacles remain that could slow or block this revival. First,
the dollar has not fallen relative to the currencies of Canada and
several developing countries whose products have begun to enter the
U.S. market in substantial volumes. South Korea, Taiwan, Brazil, and
Mexico have markedly improved their competitive positions during
the early 1980s, and unless their currencies are revalued, they are
likely to show substantial trade surpluses with the U.S. over the next
few years.
Second, the competitive advantages that many Japanese and
West German companies have built up in the American market may
erode only slowly, even in the face of unfavorable macroeconomic
conditions. In automobiles, for example, the voluntary restraint
agreement between the United States and Japan has certainly held
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Japanese car imports far below the levels they would have attained
otherwise. Despite higher prices, American consumers are much
more eager to purchase Japanese cars than market shares indicate.
Thus, it may take much more drastic increases in the value of the yen
and the price of Japanese cars before Japanese auto imports decline.
Similarly, in some products such as consumer electronics, there is no
serious American competition remaining to benefit from the U.S.
dollar revaluation. Here also it may be many years before imports
decline or U.S. competitors emerge.
Despite these uncertainties, the tremendous improvement in the
economic fundamentals for American competitors suggests that U.S.
export industries will rebound strongly in the future. By the year
2000, U.S. industry is likely to show new competitive vigor in
international trade, and, as a result, U.S. merchandise trade accounts
may be in balance or even surplus.
The Shift of Production from Goods to Services
The improvement in the U.S. trade balance will provide some
stimulus to the nation's economy over the next 13 years. But, despite
the increasing international competitiveness of American manufac-
turing firms, manufacturing is unlikely to be a major contributor to
the growth of U.S. GNP or employment over the next decade and a
half. Manufacturing, along with other goods production, is a small
and shrinking share of the economy, and this share is sure to shrink
further in the years ahead. The revitalization of American manufac-
turing will be a favorable development, but it will be much less
important to U.S. economic prospects than changes in productivity
and employment patterns in the service industries that dominate the
U.S. economy.
Economic development follows a predictable pattern in which
agricultural production shifts to manufacturing and then to services.
While there have been variations in this pattern, the shift to services
is so pervasive that it is a reliable barometer of the stage of industrial
advancement that a country has achieved. In 1984, for example, low
income countries devoted more than a third of their economies to
agriculture, but only 30 percent to the production of services. Among
the advanced industrial countries, the agricultural share accounted
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The Forces Shaping The American Economy 21
70 -
60 -
50 -I-
6 40 - 6
?
CC
w 30 -
a.
20 ?
Figure 1-6
SERVICES ARE THE LARGEST SHARE OF
PRODUCTION IN ADVANCED
INDUSTRIAL COUNTRIES
(1984)
El AGRICULTURE
0 INDUSTRY
12:1 SERVICES
10
0
5
29
Low Income
Economies
51
Lower Middle
Income
Economies
Upper Middle
Income
Economies
62
35
3
Industrial
Market
Economies
Source: The World Bank, World Development Report, 1986
for only 3 percent, while services comprised more than three-fifths of
production. Middle income countries fell in between these levels (see
Figure 1-6).
Despite the long history of this trend, and the pervasiveness of the
phenomena, the structural shift toward service industries is still poorly
understood and often misinterpreted. What are service industries? How
and why is the American economy confirming to shift to these kinds of
economic activities? What will the shift mean for American employment,
productivity, and wealth over the next 13 years?
What Are Service Industries?
Service industries differ from manufacturing, agriculture, and
other goods-producing industries in that they create economic value
without creatin a tangible product. Some services, such as transpor-
laiion and retailing, ad v ue to manufactured goods by making
them more available or useful to consumers. Others, such as education
and health care, create value that is largely independent of the goods-
producing economy. In addition, services usually create value at or close
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Figure 1-7
THE NINE LARGEST SERVICE INDUSTRIES
(1986)
12.5 RETAIL TRADE
9.1 EDUCATION
8.0 HEALTH CARE
7.7 GENERAL GOVERNMENT
6.4 FINANCE, INSURANCE AND REAL ESTATE
6.0 BARS AND RESTAURANTS
212Mmui1 5.9 WHOLESALE TRADE
5.8 TRANSPORTATION AND PUBLIC UTILES
5.0 BUSINESS SERVICES
0 2 4 6 8 10 12 14 16
MILLIONS OF EMPLOYEES
Source: Derived from U.S. Bureau of Labor Statistics, Employment
and Earnings, January 1987
to the consumer, in both space and time. A few services (for example,
finance) can be transported and stored?but most cannot be. For this
reason, they are more difficult to trade internationally than goods.
Services are often stereotyped as low-productivity, low-wage indus-
tries such as fast food and barber shops. The reality is that many of the
largest service industries involve relatively high wages and advanced
technology. Although the largest single category is retail trade, education
and health care are the second and third largest employers, followed by
government and the finance industry (see Figure 1-7).
This list of service industries suggests that many commonly-held
assumptions concerning the post-industrial economy are suspect. For
example, the huge numbers of sales clerks, hospital orderlies, waiters,
and truck drivers employed by service industries belie the use of the term
"the information economy" as a synonym for services. Not all service
industries are intensive users of information. On the other hand, the
presence of such capital- and technology-intensive industries as medical
care, finance, and transportation casts doubt on glib generalizations
about the low quality of service jobs. Many service industries require
extensive knowledge and training, and pay premium wages.
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The Forces Shaping The American Economy 23
Measurement problems also cloud understanding of the shift to
services. For example, the same economic activities may show up as
manufacturing or as services, depending on the firm for which they are
performed. When General Motors bought Electronic Data Systems,
hundreds of EDS systems analysts who had been counted as service
industry employees suddenly became manufacturing workers. As EDS
staffers working in GM divisions, they had been allocated to services,
because the establishment that employed them was primarily engaged in
services. As employees in GM's EDS division, they worked for establish-
ments that were primarily engaged in manufacturing.
While erroneous generali7ations and measurement uncertainties
may make the shift to services harder to understand, they do not
make it any less important. Services will continue to reshape the U.S.
economy over the next 13 years, affecting the rate of growth of the
economy, the distribution of income, the location and organization of
work, and the balance of U.S. trade.
The Changing Structure of the U.S. Economy
Much of the confusion over the scope and importance of the shift
to services stems from a misunderstanding of how to measure and
evaluate the restructuring that is occurring. Observers focusing on
different measures of change can reach radically different conclu-
sions. For example, when measured in terms of employment and
nominal output, the goods share of the U.S. economy has been falling
rapidly over the last 30 years. Many economists, however, focus on
inflation-adjusted or "real" output as the best measure of underlying
change. Using this index, goods production appears to be a stable
share of U.S. GNP during the postwar era (see figure 1-8).
What do these different indexes mean? Which index is most
relevant for predicting the future? Is the economy truly shifting to
services or not?
Because almost all economic value in market economies is
ultimately created by human labor (capital can be thought of as labor
that can be stored and used later), the employment share is the best
single measure of economic change. Over any significant period of
time, employment shares will closely track actual economic activity
and nominal output. In terms of understanding the future, the
decline in employment shares and nominal output is far more
important than the stability in "real" output. In fact, the "real" output
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55
50 ?
45 ?
Figure 1-8
GOODS PRODUCTION IS A DECLINING
SHARE OF NOMINAL GNP AND EMPLOYMENT
30
25 ?
20
1955 1960 1965 1970
YEAR
Source: Economic Report of the President, 1987
--REAL GOODS
PROD./REAL GNP
- NOMINAL GOODS
PROD./NOMINAL
-N- EMPLOYMENT (IN
GOODS
PROD.)/TOTAL
1975
1980
1986
measure is actually a purely hypothetical index. The actual activity in
the economy?hours worked and dollars paid?is counted in the
employment and nominal output totals.
The historical analogy of agriculture helps to clarify this point.
Between 1947 and 1986, the value of farm output dropped from 8.6 to 1.6
percent of GNP, reflecting the shift of economic activity to the production
of other goods and services, and the decline in farm prices relative to
other goods. More efficient farms, bigger tractors, more fertili7er, hybrid
seeds, and other advances meant that fewer workers and other resources
were needed to feed the nation. If the 1986 economy were restated to
reflect "real" 1947 prices, farming would represent 3.7 percent of GNP?
more than twice as great a share as it actually holds. Although it might be
comforting to economists to believe that farming is producing twice as
much real wealth as the nominal figures record, this hypothetical money
would be of little use to farmers.
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40
30
Figure 1-9
MANUFACTURING'S SHARE OF THE U.S.
ECONOMY IN "CONSTANT" DOLLARS
--?-1958 PRICES
-e- 1972 PRICES
--"? 1982 PRICES
1 0
0
1950 1960 1970 1980
25
Source: Economic Report of the President, various years
1986
A brief look at how manufacturing's "constant" share has been
declining reinforces the point. Economists analyzing the economy
during the Kennedy and Nixon years correctly noted that, in 1958
prices, the manufacturing share of "real" GNP was stable at about 30
percent. During the Carter years, a 1972 benchmark was used, and
manufacturing was a stable 24 percent share of the "real" economy.
The President's Economic Report in 1987 noted that manufacturing
was maintaining a constant 21 percent share of U.S. GNP, measured
in 1982 prices. Despite the often-observed record of stability, between
1958 and 1982, manufacturing had managed to decline from 30 to 21
percent of GNP, because manufacturing prices were rising more
slowly than service industry prices. It was the "real" economy that
was an illusion. The reality was a steadily shrinking manufacturing
share of economic activity (see Figure 1-9).
Just as food production gradually shifted away from the farm
into "upstream" industries (seed development, tractor production,
and fertilizer manufacturing) and "downstream" industries (truck-
ing, warehousing, food stores, and restaurants), manufacturing value
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26 WORKFORCE 2000
is being increasingly created outside of the factory. To an ever-greater
degree, the value of manufactured products is represented by ser-
vices that occur upstream of the plant, such as product and market
research, design, engineering, and tooling, or by downstream activ-
ities such as transportation, retailing, and advertising. Meanwhile,
the factory itself is becoming ever more automated. As a result, its
share of the total cost of production is dropping, and it is being
rendered less and less important economically. During the postwar
era, the share of total U.S. manufacturing value-added represented
by the wages of production workers dropped from 40 to 24 percent
(see Figure 1-10). Since manufacturing's share of the total economy
45
40
Figure 1-10
PRODUCTION WORKERS' WAGES ARE A SHRINKING
SHARE OF MANUFACTURING VALUE
Wm 30
25 -
20 I I I I I I 4 I I I I
1949 1959 1969 1979 1983
YEAR
Source: Statistical Abstract of the U.S., 1986
was dropping over the same period, by 1983, the wages of production
workers represented only 6.2 percent of U.S. GNP, down from 11.6
percent in 1949 (see Figure 1-11).
As manufacturing becomes more efficient, it requires fewer
resources of all kinds?not only fewer people, but less capital and
energy as well?to produce the same or greater quantities of goods.
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The Forces Shaping The American Economy 27
12
Figure 1-11
PRODUCTION WORKERS' WAGES ARE A SMALL AND
DECLINING SHARE OF U.S. GNP
11 -
10 -
7 -
6 -
5
1949 1959 1969
YEAR
Source: Statistical Abstract of the U.S., 1986
1979 1983
Part of these productivity gains is passed on to consumers in the form
of lower (or more slowly rising) prices. It is these lower relative prices
for manufactured goods that are causing them to decline as a share of
nominal GNP, even though the volume of goods is rising. As this
transformation continues, manufacturing will become less and less
important to the economy as a mechanism for creating wealth.
Sometime during the next century, manufacturing may require as few
resources as today's agriculture. When this occurs, manufactured
goods will seem no more important to the nation's economy than
farm produce seems today. Manufactured goods, of course, will still
be produced in great quantities, just as huge amounts of food are
produced. But goods production will employ few people and gener-
ate a relatively small share of the nation's income.
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Although the transformation away from agriculture now seems
unremarkable, the shift away from manufacturing is still confusing
and threatening to many. Just as during the fifteenth century the most
learned French economists felt that farming was the only true source
of wealth (and convinced Louis XI to use government money to create
a domestic silk industry), so today there are those who see manufac-
turing as the only real creator of value and view services as somehow
secondary or even parasitic. To these observers, for example, the
so-called "hollowing" of U.S. industries as manufacturing plants
move overseas is gravely alarming, since it seems further to under-
mine our ability to create wealth in this country.
Yet, understood in the context of the inevitable shift of economic
activity toward services, the movement of plants overseas is not so
much threatening as it is irrelevant. As manufacturing plants become
less and less the places where economic value is created, their
locations become less and less important. If only a handful of workers
in highly automated plants is needed to make all the cars or cameras
or compact disc players the world can buy, then the location of these
plants becomes inconsequential.
It has been argued that, even if manufacturing represents only a
small share of economic activity, the location of manufacturing plants
still matters, because these facilities are the linchpins that control or
direct the production of many - auxiliary goods and services. If, for
example, South Korea manufactures most of the world's steel, then
presumably South Korean companies will ship most of the iron ore,
South Korean engineers will design new steelmaking equipment, and
South Korean accountants will balance the books.
But this analysis overestimates the impact of manufacturing
geography on the location of other types of value-added. It is
analogous to arguing that a strong French silkworm industry should
have caused textile factories to locate in France or that Idaho potato
farmers influence the locations of McDonald's restaurants. Increas-
ingly, the upstream and downstream activities that contribute most of
the value to manufactured goods take place far away from the
location of production. Corporate headquarters can be moved at the
whim of the chief executive. Research and development facilities can
be sited in the woods of Vermont, along the southern coast of France,
or wherever a supply of engineers and scientists can be hired.
Accountants, consultants, lawyers, construction and tooling special-
ists, and many other service providers fly around the world to
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The Forces Shaping The American Economy 29
provide their talents to manufacturers, wherever they are located.
Sales, marketing, and distribution, of course, occur chiefly in the
country where the product is sold. The geography of plant locations
is gradually losing its importance as determinant of where value is
created in the goods economy.
Consider, for example, a major "American" product: personal
computers sold by IBM. The components in these machines are
manufactured in many locations around the world, including facto-
ries in Singapore, Taiwan, South Korea, and the USA. Because
manufacturing represents less than 10 percent of the the selling price
of the machine, the foreign share of the value created by IBM PC
production is quite small. The majority of the value in these products
is American, consisting of design, engineering, sales, and servicing,
as well as the substantial overhead required to manage a large
corporation. Far from threatening American economic growth, the
IBM personal computer has been a tremendous boon to the nation,
despite the offshore location of much of the manufacturing associated
with the product.
In summary, the shift to services is the inevitable and healthy
result of steady productivity gains occurring in manufacturing. Be-
cause productivity gains are easiest to achieve in the controlled,
high-volume environment of the factory, the factory is becoming less
and less important as a source of jobs; economic value is moving
away from the plant into other activities. This process is not a threat
to society's wealth-producing potential, it is a reflection of it; it
represents a shift in the economic challenge to new sectors: retailing,
health care, education, government, food service, and other indus-
tries. The nation's economic future will be written by these industries,
not by the revival of manufacturing.
Are Service Jobs Good Jobs?
Suspicion of the service economy has been focused most recently
on the quality of service employment. Service jobs, it has been
alleged, are not only less productive than manufacturing employ-
ment, their earnings are less equally distributed. As a result, the shift
to Esyices is graduallyl sin the middle s,crga_gm tin a nation of
haves and have-nots.
The most careful studies of the impact of the shift to services
suggest that these concerns are largely unfounded. Although service
industry wages are less equally distributed than those in manufac-
turing or government, the shift to services is not yet having a
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the 1960s, more of the new jobs will pay high wages; when it is
growing slowly, as it has been recently, a greater fraction will pay
poorly.
Even more important may have been the large increase in the
share of wages devoted to fringe benefits in recent years. Between
1973 and 1985, fringe benefits (in 1985 dollars) rose by $150 billion, or
4 percent per year. Wages, on the other hand, rose by only 1.1 percent
per year. Since most of these fringe benefits were part of the
compensation of middle- and higher-earning workers, the rapid
increase in fringe benefits appears to have accounted for a large share
of the perceived decline in the share of high-wage jobs.
Slow productivity growth, coupled with the diversion of more of
total compensation to Social Security, pensions, and health benefits,
created the statistical illusion that fewer top-paying jobs were being
created. In reality, the opposite was probably true: the economy has
been creating more high-wage, high-skill jobs, not fewer.
The Proliferation of Advanced Technologies
Since the industrial revolution, technology has played a power-
ful role in reshaping the world's economy. During the early twentieth
century, the rapid development or application of electricity, tele-
phones, airplanes, and automobiles fundamentally restructured Amer-
ican cities and brought dramatic changes in the nature of work. At
mid-century, the invention of computers, television, and jet aircraft
brought more revolutionary change. During the last decade and a half
of the century the continued exploitation of these older technologies,
along with the proliferating impact of new inventions, will bring
important, and perhaps radical, transformations to the economy.
What will the most important technologies be? How will they be
applied? How will they reshape the nation's jobs and industries?
In the relatively few years between now and the end of the
century the most important technologies are those that are already
well-known and far along in their development. A few innovations
that are still in the laboratory stage may be implemented by the year
2000, but the most important changes will flow from existing inven-
tions. Five technologies will have the greatest impacts:
? Information storage and processing: The forty-year history of comput-
ing has been characterized by steady, apparently inexorable, improve-
ments in the price/performance ratios of computing devices (see
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INSTRUCTIONS PER DOLLAR
100000 ?
10000 ?
1000 ?
100 ?
10 ?
1
Figure 1-13
THE COST-EFFECTIVENESS OF COMPUTERS
CONTINUES TO RISE GEOMETRICALLY
(Computer Instructions Processed Per Dollar)
116
1955
Source: IBM
3617
1965
8500
1975
34000
1985
Figure 1-13). Beginning in 1977, the industry entered a new phase in
which the enormous power of very large-scale integrated circuits was
coupled with the cost savings of a mass personal computer market.
Today, many desktop microcomputers are more powerful than the
machines that were used to guide the Apollo rocket that carried a
man to the moon in 1968.
By the year 2000, microcomputers will be as powerful as today's
mainframes. Today's memory chips that can store 256,000 or a million
bits of information will have given way to chips with 10-30 times
more storage capability. Today's microprocessors that can process one
or two million instructions per second will have been succeeded by
chips that are an order of magnitude more capable. Desktop storage
will not be measured in today's megabytes (million words) but in
gigabytes (billion words) and terabytes (trillion words). Machines that
can analyze many different types of information at once, and enor-
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mously sophisticated software, will have finally resolved traditional
debates over whether computers can ever really think like people.
Artificial intelligence will be real.
In practical terms, this continuing evolution of computers will
mean that it will be trivially cheap to apply staggering amounts of
machine intelligence to jobs that are currently handled by people.
Silicon secretaries that can take dictation and edit letters, reservation
clerks that understand speech in any language, or robots that can load
a truck or pick strawberries are easily within the reach of technologies
being developed now. By the year 2000, such machines will be
coming into wide use. Even much more sophisticated tasks, such as
diagnosing illness or writing computer programs, may be partly
automated by the turn of the century.
Communications: Along with the advances in computers will be
parallel improvements in the country's communications systems. By
the year 2000, the nation will be blanketed by a digital telecommuni-
cations network that will connect most businesses and many homes
with fiber optic links of enormous capacity. Most homes will have
some sort of home terminal (in addition to a traditional telephone) for
accessing this system. This network will make realities out of current
dreams such as home shopping and banking, working from the
home, and even dial-up music or video entertainment. As more and
more information is stored electronically and transmitted electroni-
cally, print media will begin to lose their historic advantage. The
postal service and the newspaper industry (whose demise has been
predicted for decades) will still be in existence, but the growth
industries will be electronic communications. At the same time, new
software industries will spring up to integrate, analyze, and present
the huge array of electronic information that will be available. The
providers of dial-up data will be both large companies and cottage
collectors.
Advanced Materials: Many traditional materials used in industry
will be replaced by much more sophisticated and useful synthetics. In
particular, coatings of unprecedented hardness and durability will
enormously extend the lives of moving parts and surfaces exposed to
wear, weather, and extreme conditions. Diamond coatings, ceramics,
and reinforced plastics will greatly increase the toughness, resilience,
and useful life of many manufactured products. This improvement in
the durability of durable goods, coupled with a continued trend
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The Forces Shaping The American Economy 35
toward less material-intensive products (and the shift to the service
economy), will substantially reduce the use of raw materials. Jobs in
durable goods industries, and those in industries whose output is
sold by the ton, will decline.
Biotechnologies: The understanding of biological processes, and
the ability to manipulate life forms at the cellular and sub-cellular
level, have exploded in the last decade. The first fruits of the
biotechnology revolution are already visible in world agriculture,
where new plant varieties have been invented that can withstand
extremes of temperature, moisture, and soil conditions, create their
own fertilizer, or combine the best features of widely different strains.
Super-producing milk cows, pigs that grow faster with less feed (and
have less cholesterol), and chickens that are naturally resistant to
disease are being developed. Over the next 13 years, these advances
will vastly improve the productivity of world agriculture, causing a
continued glut of farm produce and an exodus of workers from the
farm, particularly in the developing world.
The same technologies will have large impacts on health care,
although these impacts will be delayed by the extensive testing and
licensing that will be required for substances intended for human use.
For example, the task of mapping the human genome is well under
way. As this knowledge advances, not only will genetic birth defects
become uncommon, but it will become more feasible to predict and
treat many chronic and degenerative diseases such as heart disease.
As the interaction of genetics and environment is better understood,
advances will also be rapid against some acute diseases, with the
prospect that many of today's killers will be contained by the year
2000. Although AIDS and many cancers are unlikely to be conquered
within this short time frame, the knowledge gained in research on
these diseases is likely to have wide-ranging impacts on the practice
of medicine generally. In particular, the extraordinary progress being
made by AIDS researchers in understanding the body's natural
immune system will lead to medicines and treatments of unprece-
dented specificity and power by the year 2000.
Superconductivity: In 1986, scientists discovered a new family of
materials that are superconductive (carry electric current without
energy loss) at relatively high temperatures and are far more magnetic
than anything previously encountered. This group of materials prom-
ises to have astonishing implications for many industries within the
relatively near future.
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36 WORKFORCE 2000
For example, if materials can be developed that transmit electric-
ity without loss at room temperature, there is little doubt that the
whole structure of the nation's energy system will undergo radical
transformation. Electricity could be generated near to coal deposits
and then shipped hundreds or thousands of miles to urban areas. The
efficiency of all kinds of electric motors would increase dramatically,
and the size of all kinds of electric devices would shrink. Electric cars,
magnetic trains, nuclear fusion, and a host of other currently unfeas-
ible inventions could become possible.
In contrast to many less revolutionary technologies that might be
expected to be integrated into the world economy relatively slowly,
the potentials of superconductivity are so great that commercial
applications are likely to be implemented within five to ten years.
While it is too early to predict the exact consequences of such a
fundamental scientific advance, superconductivity is likely by the
turn of the century to be reshaping many American industries and
accelerating the pace of economic change.
Technology and Change: Predictions of the impact of new technol-
ogies on the economy are highly uncertain. This is not only because
technological advances themselves are hard to forecast, but also
because the speed with which these technologies will be imple-
mented will depend more on gbaal, political, and cultural attitudes
than on scientific progress. For example, improved electric motors
and generators were available to industry by the 1890s, but it was not
until after World War I that manufacturers began to reconfigure
manufacturing plants into the more efficient layouts that were possi-
ble when each machine had its own motor. Telephones required half
a century to come into wide use, yet television became universal in a
single decade, as consumers rushed to purchase early models even
before high-quality programming was available. The personal com-
puter became a national market, even though the leading computer
manufacturers were certain that there was little demand for them
("There is no reason for anyone to have a computer in his home,"
asserted Ken Olson, Chairman of the Digital Equipment Corporation,
in 1977).
These vagaries of consumer acceptance of new technologies are
compounded by the complexity of the changes induced by new
technologies. The automobile and the truck, for example, not only
revolutionized transportation, they changed the location of factories
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The Forces Shaping The American Economy 37
and homes, and enabled an entirely new, and more efficient, form of
retailing (the regional mall) to develop. These second order effects are
often the most difficult to predict, simply because the possibilities are
not realized until they are exploited.
Despite these uncertainties, the technological changes on the
horizon suggest that several fundamental changes are under way in
the economy. First, technology is gradually overcoming the barriers of
time and distance that have organized work though the centuries. In
the future, technology will increasingly enable workers to choose
where and when they will work. As a result, the 5-day, 40-hour,
50-week, 30-year career spent at the office or the plant will gradually
become an anachronism. Work at home, work at night, work in
retirement, or time off for errands, time off for child rearing and time
off for vacations will be the "rules" of the future.
Second, technology is lightening the economy. As products
become lighter, more intensively processed, and more durable, the
per capita demand for all kinds of materials will decline. The world
will not run out of oil, or metals, or food in this century or the next.
Third, technological change is so rapid that it is beyond the
capacity of any single firm or nation to manage. There is no patent so
valuable, no production system so advanced, and no market share so
dominant that it prevents competitors from challenging an en-
trenched position. Because of technology, the economy of the future
will be a race to stay ahead or a race to catch up. Technology will
introduce change and turbulence into every industry and every job.
In particular, the necessity for constant learning and constant adap-
tation by workers will be a certain outgrowth of technological inno-
vation.
Renewed Productivity Growth, Particularly in
Services
Productivity gains are the key to improvements in output,
wages, and national income. After a boom during the early postwar
period, U.S. productivity growth declined substantially during the
1970s and 1980s, with the sharpest drop beginning in 1965 (see Figure
1-14). Over the past several years, one measure of productivity
improvement, increases in output per hour, has averaged a dismal 0.7
percent per year. This poor performance was largely responsible for
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38
PERCENT GAIN (OUTPUT PER HOUR)
4.00
3.50-
3.00-
2.50
2.00-
1.50-
1.00-
0.50-
WORKFORCE 2000
Figure 1-14
PRODUCTIVITY HAS DECLINED SUBSTANTIALLY
SINCE 1965
(Average For Most Recent Five Years)
0.00 I I I I I I I I I I I I I I I I I III
1960 1965 1970 1975
YEAR
1980
Source: Economic Report of the President, Jan. 1987
1986
the slow growth of wages and family income that the nation has
recently experienced and the stubborn persistence of poverty during
the 1980s.
Various theories have been proposed to explain this weak
productivity growth. Declines in the rate of capital investment,
increases in the numbers of young, inexperienced workers during the
1970s, and the slowdown in the shift of workers from agriculture to
industry all apparently played some part. But, despite voluminous
analyses, the empirical evidence does not support any single expla-
nation. It is clear, however, that the declines of productivity growth of
the 1970s and 1980s were particularly marked in service industries
(see Figure 1-15). Between 1955 and 1970, for example, output per
worker in manufacturing grew at a compound rate of 2 percent per
year. From 1970 to 1985, this average accelerated to 2.9 percent per year.
In services, on the other hand, output per worker fell from 1.4 percent
per year during the first period to ?0.2 percent during the second. It
was this drop in service productivity that caused the overall pattern of
output per worker to slide from a 1.6 percent annual gain to only 0.5
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The Forces Shaping The American Economy
Figure 1-15
LOW PRODUCTIVITY GROWTH IN SERVICES HAS
SLOWED U.S. ECONOMIC GROWTH
3.0
2.0
-1.0
-2.0
39
2.0
1.4
1955-1970
-1.2
2.9
CI MANUFAC-
TURING
ED SERVICES
Eza GOVERN-
MENT
-0.2
A
1970-1985
-0.7
(Average Annual Percentage Increase in Output Per Worker)
Source: Wharton Econometrics, Inc.
percent. In contrast to the extensive analysis and discussion of the
productivity problems in American heavy industry, the real story of
the nation's productivity problems has little to do with manufactur-
-"rr%,'7-Mv im rovin its output at an accelerating rate.
nstead, it was the poor and deteriorating per ormance o services
that dra ed down output, wage gains, and national growth.
stonca y, t e s om agricultural to industrial employment
has accelerated the growth of productivity and output. Each worker
in agriculture, for example, produces on average only about two-
thirds as much as each worker in the nonfarm economy (see Figure
1-16). As workers have left agriculture for more productive jobs in
factories and other industries, the economy's average productivity
and output have increased.
The shift from manufacturing to services, however, does not
have such beneficial effects. During the 1950s and 1960s, service
workers produced about 10 percent less per worker than manufac-
turing workers. In 1970 each worker in the service and trade sectors
of the economy produced approximately $10,900 of output, corn-
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WORKFORCE 2000
Figure 1-16
OUTPUT PER WORKER IS LOWER IN FARMING THAN
IN THE REST OF THE ECONOMY
5 40.0
0
z 30.0 -
w
CC
CC
C.)
re 20.0 -
w
CC
0
10.0 -
a.
2.8
a.
3 0.0
4.6
ED FARM
E22 NONFARM
7.2
23.3
21.5
32.9
1950 1960 1970
1980
Source: Economic Report of the President, 1987
1986
pared to $13,000 of output for each manufacturing worker. During the
1970s and 1980s, the slower growth of service industry productivity
caused this ratio to decline steadily. By 1985, service industry workers
were producing only $28,700 per worker, compared to $41,200 for
manufacturing workers (see Figure 1-17).
The gap between output per worker in services and in manufac-
turing is expected to widen throughout the late 1980s and 1990s. Even
if productivity growth in services rebounds sharply, it is unlikely to
equal manufacturing productivity growth. As a result, the continuing
shift to services in the future will impose a sustained drag on the
economy.
Why have service industry productivity gains been so weak? Part
of the story may be due simply to measurement problems. In some
industries, such as education, health care, and many business servic-
es, there is no accepted way of measuring output and productivity. Is
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The Forces Shaping The American Economy 41
Figure 1-17
SERVICE INDUSTRIES LAG BEHIND MANUFACTURING
IN OUTPUT PER WORKER
50.0 ?
40.0 ?
30.0 ?
20.0 ?
F9 MANUFACTURING
ESE1 TRADE &
SERVICES
13.0
41.2
1950 1960 1970 1980 1985
Source: Economic Report of the President, 1987
a $50 per hour lawyer who files one short, persuasive brief more
productive than a $200 per hour lawyer who files ten voluminous but
irrelevant ones? Is a doctor who saves a life with an accurate
emergency room diagnosis more productive than one who saves a life
with years of kidney dialysis? The numbers do not capture these
differences, particularly where actual outputs (e.g., student learning
gains or patient health) are not comprehensively measured.
The Productivity Gains of the 1950s and 1960s
But measurement difficulties cannot completely explain the
decline in service industry productivity during the last 15 years. There
is no evidence, for example, that it became harder to measure service
industry output during the 1970s than the 1960s. Instead, it appears
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42 WORKFORCE 2000
that the 1950s and 1960s included periods of remarkable advances in
several service industries that were not repeated during the 1970s.
The slowdown of the 1970s is explained more by events that did not
happen than by special circumstances peculiar to the decade.
In the retailing industry, for example, the 1950s and 1960s were
marked by the proliferation of regional shopping centers and large
food supermarkets. Between 1958 and 1972, the number of retail food
stores declined by 26 percent, and large stores (greater than $500,000
per year) increased their share of total retail food sales from 51 to 70
percent. Although the trend toward larger stores has continued, the
rate of gain has slowed simply because the process was largely
complete by the early 1970s.
The transportation industry also experienced rapid productivity
gains during the 1960s that were not repeated during the 1970s. In
passenger transport, the jet plane increased the speed and efficiency
of aircraft substantially. This helped to increase the numbers of air
passengers, which led to huge gains in output and productivity.
Although the 1970s saw the introduction of the jumbo jet, its impact
did not equal the original change from propeller aircraft to jets.
Similarly, in freight transportation, the 1960s witnessed the wide-
spread introduction of the standardized, reusable shipping container,
which enormously improved the efficiency and productivity of the
trucking and ocean freight industries. Although there were further
advances in the 1970s, they did not match this initial breakthrough.
The glut of new workers during the 1970s helped to retard
investment that might have led to greater productivity gains in the
service industries. The flood of women and young people willing to
work for relatively low wages made it unnecessary for employers to
develop advanced labor-saving technology. In food service, hospital
care, education, and many other areas there was little pressure to
develop labor-saving devices and little international competition to
spur innovation.
The sluggish growth of productivity in services over the past 15
years has led many to doubt that these dispersed, low-technology
industries can ever become highly automated or productive. The
inherent difficulties in automating activities that occur in widely
scattered locations (e.g., restaurants), and that require personal
service (e.g., lawyers and doctors) seem to imply that little can be
done to improve productivity in many service industries.
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The Forces Shaping The American Economy 43
But the application of new and existing technologies, coupled
with the declining numbers of new workers entering the workforce,
suggests that industries such as health care, retailing, education, and
government may be on the threshold of a new burst of productivity
gains. Faced with a potential shortage of skilled workers willing to
work for low wages, and responding to technological possibilities that
are clearly within reach, many service industries are poised for a
rebound in productivity. The next chapter discusses how some of
these gains might occur.
Disinflation or Deflation in World Prices
Between 1965 and 1982, prices in the developed nations in-
creased by more than 234 percent, an average annual increase of more
than 7 percent. This long-running struggle with inflation has deeply
affected the structure of the world's economy and the thinking of its
economic decisionmakers. Today, assumptions about continuing in-
flation are built into virtually every economic choice made by con-
sumers, governments, and industries.
During the next 13 years, however, world inflation is unlikely to
reignite. Indeed, there are strong reasons to believe that the imme-
diate future will be a mirror image of the recent past, rather than a
repetition of it: price increases will continue to decelerate, and flat or
even declining prices may be the rule. The most significant risks for
the American and world economies in the immediate future are not
from a return of inflation but from deflation.
The reasons for this projection are:
? Excess Capacity in Oil, Food, and Natural Resources: During the late
1970s, it became conventional wisdom that the world was running
out of natural resources. Supplies of food, oil, minerals, lumber, and
many other products were assumed to be growing less rapidly than
population; dire projections for famines and shortages beyond the
year 2000 were commonplace. The oil crises of 1973 and 1979, and the
famines in Bangladesh, seemed to confirm these forecasts.
As the 1980s have progressed, the fallacy of these fears has been
overwhelmingly demonstrated. Oil supplies, for example, are clearly
far in excess of demand and seem likely to remain so, for at least a
decade (see Figure 1-18). The great challenge for oil-producing
nations is how to prevent this surplus from completely eroding
OPEC's pricing structure.
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50.0 -
40.0
112 30.0 -
20.0 -
C
2
10.0 -
0.0
Figure 1-18
OPEC CAPACITY GREATLY EXCEEDS PRODUCTION
41.4
26.7
16.0
THEORETICAL
INSTALLED
CAPACITY
Source: Hudson Institute
IMMEDIATE
SUSTAINABLE
CAPACITY
PRODUCTION, 1985
Despite famines in parts of Africa and elsewhere in the world,
global food supplies are also growing faster than demand. Driven by
new advances in biotechnology agricultural production in both the
developed and developing world has been growing rapidly. Between
1971 and 1984, world food production rose at a compound rate of 2.4
percent annually, compared to world population growth of only 1.9
percent per year.
This relatively rapid growth of food production increased world
nutritional standards in many countries. It also drove down world
agricultural prices, continuing a trend that has been under way for
the last 35 years (see Figure 1-19).
In the 1980s, a growing number of Asian nations that were once
large importers of grain achieved self-sufficiency or net export status.
India had a large surplus of wheat in 1985, and Indonesia was
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AVERAGE ANNUAL PERCENT
The Forces Shaping The American Economy 45
Figure 1-19
THE PRICES OF AGRICULTURAL GOODS HAVE BEEN DECLINING
ALL
AGRICULTURAL FATS AND
GOODS BEVERAGES CEREALS OILS
0.00
?0.20-
-0.40--
-0.60--
-0.80-
-1.00-
1.20? ?1.13
? 1.40 ?
Source: The World Bank
?1.03
RAW
MATERIALS
?1.30 ?1.29
?1.08
self-sufficient in rice. China shifted from being a major importer of
food grains in the 1970s to being an exporter in the 1980s. Even
Bangladesh was able substantially to reduce its cereal imports in the
1980s. Both government policy changes and improved systems of
cultivation and agricultural management were responsible for these
shifts.
Over the next decade, this trend toward self-sufficiency in the
developing world may accelerate. There is growing recognition that
previous policies that penalized or constrained agriculture have
failed, and a new willingness to liberalize these restrictions is emerg-
ing in many developing nations. At the same time, investments in
agriculture and the application of new technologies promise to
improve yields substantially, with the greatest relative gains coming
in the developing countries.
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These developments suggest that over the next several years
world supplies of food grains may be in substantial oversupply, as
more nations achieve their goal of self-sufficiency, while the industrial
countries continue to protect and subsidize their agriculture. This
oversupply will continue to hold down food price increases.
In addition to food and oil, many other raw materials are
currently in oversupply. For example, supplies of tin, copper, iron
ore, and other metals have far exceeded demands in recent years.
Continuing investments in mineral production by governments in
developing countries seeking to increase exports promise to prolong
this oversupply condition indefinitely, keeping downward pressure
on commodity prices.
? Excess Capacity in Manufactured Goods: The glut in raw materials is
echoed in manufactured products. In the steel industry, for example,
world production capacity stood at some 570 million tons in 1985,
compared to consumption of only 450 million tons. For automobiles,
the picture is similar, with world capacity of about 42-44 million
vehicles, compared to demand of about 35 million. In semiconduc-
tors, capacity utilization stands at about 70 percent, compared to
almost 100 percent in 1984. Though the current recovery has been
under way for more than five years, excess capacity is still present in
many other industries as well, including textiles, heavy equipment,
and computers.
Of course, market forces will eventually correct these imbalanc-
es, as the least efficient and unprofitable firms are forced to reduce
production. But intervention by governments seems likely to prolong
the overcapacity. Among developing nations, the desire to industri-
alize by building world-scale heavy production facilities is leading to
continued investments in steel, textiles, and other goods. In automo-
biles, national pride and beliefs in the importance of the industry as
an engine of growth have slowed the industry's consolidation, at the
same time that many developing countries are insisting on more local
production as the price of access to their markets. More recently, the
serniconductorandustry has been the subject of similar intervention
by governments, as the U.S. and Japan have each taken action to
preserve and build their industries, despite worldwide overcapacity.
These government-preserved excesses will continue to depress
the prices of manufactured goods as long as they persist, with autos,
steel, textiles, and semiconductors feeling the greatest impacts.
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The Forces Shaping The American Economy 47
? Worldwide Labor Surpluses: Although the U.S. labor force will be
growing slowly through the balance of the century, the world picture
is much different. Three decades ago, advances in health care led to
dramatic drops in infant mortality and an acceleration in world
population growth. These millions of children have grown up,
moved to the city, gone to school, and are now looking for jobs. In
1984, for example, almost half of the residents of middle income
developing countries lived in cities, and half of all teenagers were
enrolled in school. As recently as 1965, only a third of the residents of
these countries were urbanized and a only a fifth of teenagers
attended high school.
This widespread pattern of urbanization and more universal
education is increasing the size of the world labor market at an
extraordinary rate. Between 1985 and 2000, the world labor force will
grow at a compound rate of more than 2 percent, adding more than
600 million new job seekers to the world workforce.
Not all of these workers will be unskilled laborers and mill
hands. In the developing world, the share of the population attend-
ing college has more than doubled during the last 20 years and
continues to increase. The trend toward increased trade, travel, and
immigration will mean that these better-educated workers will be in
competition for the world's supply of highly-skilled jobs and that
wage competition across international borders in all kinds of occupa-
tions will become more intense. This wage competition will help to
hold down wage increases, dampening inflationary pressures.
? The Failure of Governments to Stimulate Demand Along With Production:
Surpluses of production capacity and labor would not necessarily lead
to stable or falling prices, if they were matched by parallel increases in
demand. But government decisionmakers, emerging from more than
a decade of potentially catastrophic inflation, have been reluctant to
stimulate their economies aggressively to absorb excess capacity. This
has been especially true of Japan and West Germany, where both
fiscal and monetary policies have been cautious throughout the
1980s. The United States has run much more stimulative fiscal and
monetary policies, but is currently retreating from both.
For different reasons, the economies of a substantial portion of
the developing world have also been slow to grow. In Latin America,
the debt crisis has slowed international lending and produced a crisis
of confidence that has undermined economic activity. In parts of Asia,
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political instability has created a similar pause in growth. For nations
that are dependent on natural resources, the glut of commodities has
eroded the basis for industrialization and economic advance, making
growth more difficult to achieve.
Instead of macroeconomic stimulus, governments have gener-
ally sought to capture market share in industrial products, all hoping
to generate export-led growth. These policies, which seem sensible
on a country-by-country basis, cannot collectively succeed. By adding
to production capability without stimulating demand, they are likely
to lead to relatively slow worldwide growth. Slow growth, coupled
with huge excesses in capacity to produce raw materials and indus-
trial goods, is likely to hold down worldwide price increases through-
out the next 13 years and could degenerate into a deflationary spiral.
Increased Competition In Product, Service, and
Labor Markets
For a number of reasons, the world economy has become more
competitive in recent years, and this trend promises to continue until
the year 2000 and beyond. The integration of global markets, excess
production capacity, the rapidly growing world labor force, the
decline of labor unions, and the general deregulation of industry by
many western governments are all contributing to the competitive
trend. For both firms and nations, increased competition means that
there will be relentless pressure to change and adapt to new markets
and technologies. It also means that it will be increasingly difficult to
create jobs and profits based on traditional market shares, technolog-
ical advantages, or proprietary knowledge.
For the United States, it means that maintaining world leadership
in any industry or technology will be a ceaseless struggle that will
require extraordinary individual and collective national effort. In
earlier eras, changes in the economic power of the British or Roman
empires required centuries to play themselves out. The new compet-
itiveness of the world economy means that, in economic terms, great
changes in America's postwar economic power could come in a
matter of decades or even years, depending on how well the nation
continues to innovate, adapt, and grow.
There are five factors that are most responsible for the increasing
competitiveness of the world economy:
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The Forces Shaping The American Economy 49
? Integrated World Markets: Competition that used to be limited by
geography now knows no national boundaries. Protected national
monopolies that once could dictate the prices of cars or the wages of
auto workers have given way to competitive prices and wage rates.
Similarly, the opening of world financial markets means that the cost
of capital is becoming more equal in various countries.
? Oversupply of Production Capacity: The glut of natural resources,
manufactured goods, and educated workers means that the compe-
tition among producers and workers will be relentless.
? The Decline of Labor Union Wage-Setting Power: In the United States in
particular, labor unions control a shrinking fraction of the industrial
workforce. While this trend may not continue indefinitely, its impacts
on competition in labor markets will continue to be felt throughout
the next 13 years. Whether a pattern of contract "givebacks" persists
or not, the wage premium exacted by labor union members in
manufacturing industries will shrink as nonunion companies, both in
and outside the United States, compete for jobs once controlled by
unionized employers.
? Deregulation of Industry: Over the past decade, governments in
many industrialized countries have reduced their intervention into
their domestic economies. In the United States, for example, the
transportation industries have been largely freed from regulation;
supervision of telecommunications, financial services, and energy
has been relaxed or abandoned, and antitrust enforcement of restric-
tions on mergers and acquisitions has become less restrictive. In the
future, it seems possible that in the United States other utilities such
as electricity may also be freed from some types of regulation; other
nations may follow the U.S. lead in deregulating airlines, trucking,
and telecommunications.
In combination, these steps to eliminate governments from
markets have made the world's economy increasingly competitive,
and the effects of this renewed competition are still working their way
through the global system.
? Privatization: Along with the relaxation of government regulation
has come a parallel effort to divest government from the direct
provision of goods and services. In European countries where
nationally-owned firms are commonplace, a significant effort is under
way to return many of these firms to the private sector. In the United
States, where there is little nationalized industry, the action is at the
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50 WORKFORCE 2000
state level, where an increasing variety of government services are
being contracted to private companies.
In combination, these efforts to rely on private companies and
unregulated markets have intensified and stimulated new competi-
tion and new innovation in many once-lethargic industries. Although
the political enthusiasm for further deregulation may have peaked,
the impacts of what has already occurred will echo through the U.S.
and world economies for the balance of the century.
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CHAPTER 2
Scenarios For The Year 2000
Three Projections of the Future
In order to evaluate policy options, this section outlines three
scenarios for the development of the U.S. economy between 1987
and 2000.1 Although these scenarios might be characterized as
high, middle, and low growth, they are not intended simply to
bracket a range of possible growth rates. Rather they are meant to
illustrate the forces that will be shaping American industries and
the impact that different policy choices could have on the U.S.
economy in the future.
Many factors are constant in all three scenarios. For example,
each is characterized by moderate inflation, improvement in the trade
and budget deficits, and increased integration of the world economy.
There is no disaster scenario in which world war, a hole in the ozone,
or an unchecked AIDS epidemic creates catastrophic change.
The scenarios are distinguished from each other primarily on the
basis of policy differences: how much does protectionism and poor
allocation of investment slow down world growth?; how rapidly are
entrenched institutions and habit-bound individuals willing to adapt
to new technologies?; how intensively does the nation invest in its
primary asset?human capital?
Although different factors are emphasized in each scenario, the
actual path that the economy follows is likely to be a blend of
elements from each. For policymakers, the value of the scenarios is
not so much to define the most likely future, but to illustrate the
opportunities and risks they face under various conditions, to provide
'The descriptions of the U.S. economic future presented here were developed using
the Wharton Econometrics, Inc. long-term model of the U.S. economy. This is the
same model used by the U.S. Department of Labor for its forecasts of the U.S. job
market. Of course, the assumptions incorporated into the model are solely the
responsibility of the Hudson Institute.
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52 WORKFORCE 2000
a numerical basis for testing alternative choices, and to identify the
issues that most urgently deserve attention.
The baseline or "surprise-free" scenario represents a modest
improvement in the rate of growth that the nation experienced
between 1970 and 1985. Despite markedly better trends in infla-
tion and productivity, the U.S. economy does not return to the
boom times of the 1950s and 1960s. Slow labor force growth is only
partly offset by productivity gains, and imperfect coordination
among the world's governments leads to only moderate rates of
world growth. Turbulence in world economic affairs?with rapid
fluctuations in the value of the dollar, the growth policies of other
nations, and the prices of oil and other commodities?causes
periodic recessions that hold total growth to just under three
percent per year.
In contrast, the "world deflation" scenario focuses on the
possibility that a worldwide glut of production capacity in food,
minerals, manufactured products, and labor could lead to a
sustained price deflation and sluggish economic growth. World
governments, chastened by a decade and a half of inflation, are
slow to recognize the new economic realities and unwilling to
undertake coordinated efforts to respond to them. The U.S.,
whose huge trade deficit has been the world's growth engine
during the early 1980s, moves toward balance in its trade and
fiscal accounts, but, in doing so, slips into a severe recession.
Without U.S. stimulus, the rest of the world slides into a series of
recessions that lead to increased protectionism and beggar-thy-
neighbor trade, monetary, and fiscal policies. Despite repeated
efforts to coordinate stimulative actions, the world is unable to
reflate on a sustained basis. Growth averages only 1.6 percent per
year over the period.
The third scenario, "technology boom," suggests that U.S.
economic growth may rebound to levels that compare with the
first two decades following World War II. Coordinated interna-
tional monetary, fiscal, and trade policies succeed in smoothing
world business cycles. Renewed public and private lending to
developing nations and low oil prices trigger rapid growth in
much of the Third World. In the U.S., high rates of investment in
both physical and human capital, coupled with low inflation, low
resource prices, lower taxes, and less government intervention
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Scenarios For The Year 2000 53
combine to produce a boom in productivity that raises real
after-tax per capita income by almost 50 percent over the 15-year
period. The widespread application of computer and communica-
tions technologies, along with sweeping changes in the organiza-
tion and delivery of health, financial, education, and-other servic-
es, and marked improvement in the trade and budget deficits.
leads to an astonishing rebirth of the U.S. economy, with growth
averaging 4 percent per year over the period. Table 2-1 summa-
rizes the major assumptions and outcomes of the three scenarios
in numerical detail and compares them with previous periods. The
table underscores several key points about the U.S. economy over
the next 13 years:
? U.S. Growth and World Growth Are Tightly Linked: The strong
historical correlation between world growth and U.S. growth contin-
ues through the balance of the century. In the baseline forecast, the
U.S. grows at about 2.9 percent, compared to 3.1 percent for the
world. Both the high and low forecasts show a similar tight linkage
between the United States and world economies.
? U.S. Manufacturing Employment Declines While Services Grow: Despite
strong export growth and substantial production increases, manufac-
turing jobs decline in all scenarios. Whether the U.S. and world
economies are booming in an open trading environment or growing
slowly in an atmosphere of protectionism and nationalistic trading
patterns, U.S. manufacturing jobs decrease. Although fewer goods-
producing jobs are lost if the U.S. pursues a protectionist trade policy
the gains do not offset the huge losses in the service economy in the
slow growth, protectionist scenario.
The decline of manufacturing employment that occurs in all
scenarios represents a departure from past trends. Until 1979, man-
ufacturing jobs were a declining share of U.S. employment, but the
absolute numbers were steady or rising. For the balance of the
century, manufacturing jobs are declining both absolutely and relatively.
? The Key to Domestic Economic Growth is a Rebound in Productivity,
Particularly in Services: The similarity in economic growth rates be-
tween 1955-1970, 1970-1985, and 1985-2000 masks dramatic changes
in the nature of the economy. To offset the decline in the rate of labor
force growth, the nation must substantially increase its productivity.
In the baseline scenario, output per worker, which was an anemic 0.7
percent from 1970 to 1985, more than doubles to 1.5 percent per year,
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Table 2-1
THE U.S. ECONOMY IN THE YEAR 2000
1955 1970
1985
2000
Base
Level Change%
Low
Level Change%
High
Level Change%
Level Change% . Level Change%
Level Change%
Non-Communist World
NA NA 4842 NA
7745
3.18%
12204
3.1%
9546
1.4%
13057
3.5%
GDP (bill. 82 $)
U.S. GNP (bill. 82$)
1495
NA
2416
3.25%
3570
2.64%
5463
2.9%
4537
1.6%
6431
4.0%
U.S. GNP (bill. current $)
406
NA
1016
6.30%
3988
9.55%
9963
6.3%
5344
2.0%
12631
8.0%
Unemployment Rate (%)
4.4
4.9
7.1
-
7.0
-
9.9
-
5.9
-
GNP Deflator (1982=100)
27.2
NA
42.0
2.94%
111.7
6.74%
182.4
3.3%
117.8
0.4%
196.4
3.8%
Employment (millions)
62.2
NA
78.6
1.58%
107.2
2.09%
131.0
1.3%
122.4
0.9%
139.9
1.8%
Manufacturing
16.9
NA
19.4
0.92%
19.3
-0.02%
17.2
-0.8%
18.0
-0.4%
18.1
-0.4%
Commercial & Other Services
27.0
NA
38.2
2.34%
62.0
3.29%
84.3
2.1%
76.5
1.4%
88.7
2.4%
Productivity
(output/worker, 82$)
24.1
NA
30.2
1.52%
33.3
0.66%
41.7
1.5%
37.1
0.7%
46.0
2.2%
Manufacturing
19.4
NA
26.2
2.01%
40.4
2.93%
71.4
3.9%
58.0
2.5%
81.3
4.8%
Commercial & Other Services
24.9
NA
30.6
1.41%
29.9
-0.17%
34.1
0.9%
30.4
0.1%
38.2
1.6%
Fed. Surplus (bill. curt $)
4.4
-
-12.4
-
-200.8
-
-110.0
-170.1
-40.7
-
Deficit/GNP (absolute number)
0.29%
-
0.51%
-
5.62%
-
2.01%
3.75%
-
0.63%
-
Current Account Balance
(bill. cure. $)
0.4
-
2.3
-
-116.8
-
14.8
-
12.5
-
32.6
-
Exports (bill. 82$)
76.9
NA
178.3
5.77%
359.8
4.79%
800.2
5.5%
500.6
2.2%
958.8
6.8%
Imports (bill. 82$)
76.9
NA
208.3
6.87%
467.8
5.54%
773.9
3.4%
482.4%
0.2%
952.5
4.9%
Interest Rates (moodys corp
bond rate)**
3.1
NA
4.9
NA
10.0
NA
7.2
NA
5.1
NA
7.3
NA
Average Compensation Per
0
Worker (Thou 82$)
13.4
NA
18.7
2.27%
19.8
0.39%
25.6
1.7%
22.0
0.7%
27.6
2.2%
Consumption Per Capita
(Thou. 82$)
5.3
NA
7.3
2.13%
9.6
1.89%
12.5
1.8%
10.7
0.7%
14.3
2.7%
0
Disposable Income Per
7:1
n
Capita (Thou. 82$)
5.7
NA
8.1
2.38%
10.5
1.69%
13.5
1.7%
11.5
0.6%
15.6
2.7%
tri
1.4
*Average Annual Gain **Average For Period
Source: Hudson Institute.
?
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Scenarios For The Year 2000 55
ANNUAL PERCENT GAIN
Figure 2-1
U.S. PRODUCTIVITY REBOUNDS OFFSETTING
SLOWER LABOR FORCE GROWTH
GNP
2.1
E3 1955-1970
EZ3 1970-1985
CI 1985-2000
1.5 1.5
EMPLOYMENT OUTPUT PER WORKER
Source: Wharton Econometrics, Hudson Institute
equal to the rate that prevailed from 1955-1970 (see Figure 2-1). This
rebound stems from a modest improvement in manufacturing pro-
ductivity, from 3.4 percent per year in the most recent 15-year period
to 3.9 percent from 1985-2000. This is coupled with a sharp turn-
around in service industry productivity which climbs from -0.2
percent to + 0.9 percent. By contrast, in the deflation scenario,
productivity continues to stumble along at the rates of the 1970-1985
period, causing the economy to grow by less than 2 percent per year.
This projected gain in productivity is the key, not only to the
performance of the economy over the next 13 years, but to the
increases that are forecast in compensation, personal income, and the
quality of the jobs of the year 2000. Throughout the 1970s and early
1980s, the United States managed to sustain a rising standard of
living, by increasing the number of people at work and by borrowing
from abroad and from the future. These props under the nation's
consumption will eventually reach their limits: there will be relatively
fewer young people and homemakers who will enter the workforce
during the 1990s, and the burden of consumer, government, and
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56 WORKFORCE 2000
international debt cannot be expanded indefinitely. Instead, the
nation must find ways to increase its output per worker, particularly
in the service industries that will increasingly dominate the economy.
? U.S. Trade Accounts Move Toward Balance: Although the different
scenarios show widely dispersed rates of growth of imports and
exports, the U.S. current account balance improves under all condi-
tions. This is due both to the revaluation of the dollar that has already
taken place against other currencies and to improving productivity in
manufacturing industries. Under the baseline scenario, the U.S.
current account balance is in the black by some $14 billion by the year
2000, although the nation has incurred a cumulative debt to the rest
of the world of some $900 billion during the period. Though this
cumulative debt seems staggering, it is only 11 percent of U.S. GNP
at its peak. The favorable trend in the current account balance,
coupled with the large size of the U.S. economy and the difficulty that
foreign holders of U.S. dollars have in investing such large sums
elsewhere in the world, enables the U.S. to finance its debt burden
with less difficulty than has been feared.
? The U.S. Budget Deficit Declines: Along with the improvement in the
trade deficit comes a decline in the budget deficit. Even without any
major tax increases, growth in GNP and a large surplus in the Social
Security Trust Fund cut the federal budget deficit to $18 billion by
1995.
? Inflation Remains Under Control: Under the baseline scenario, infla-
tion increases by an average of 3.2 percent per year over the
1985-2000 period. This compares to only 0.3 percent in the deflation
scenario and 3.9 percent in the boom scenario. The excess world
capacity in labor, goods, and services prevents inflation from resum-
ing the pace of the 1970s.
? Unemployment Remains Stubbornly High: The baseline scenario fore-
casts unemployment at just over 7 percent in the year 2000, despite
the relatively slow growth of the labor force projected over the period.
In the deflation scenario, unemployment climbs above 9 percent,
while, even in the boom scenario, unemployment is reduced only to
5.9 percent. High growth draws more women and immigrants into
the U.S. labor force at the same time that substantial numbers of the
least-skilled remain unable to find jobs in the new high-productivity,
high-technology economy.
? Disposable Income Increases Moderately: Disposable personal income
per person, the best single measure of how rapidly society is
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Table 2-2
GOODS PRODUC HON WILL SHRINK
FURTHER BY THE YEAR 2000
(Output in Millions of Current Dollars)
1985 2000
CHANGE (1985-2000)
Amount
Share
Amount
Share
Amount
Percent
TOTAL
$3,897
100.00%
$9,965
100.00%
$6,068
155.69%
-Goods
Total
1222.1
31.36%
2469.5
25.05%
1274.3
104.27%
Farm, Forest, Fishing
98.2
2.52%
301.8
3.03%
203.6
207.37%
Mining
118.0
3.03%
129.1
1.30%
11.1
9.37%
Construction
192.2
4.93%
416.3
4.18%
224.1
116.57%
Manufacturing
813.7
20.88%
1649.3
16.55%
835.6
. 102.69%
Durable
479.1
12.29%
993.9
9.97%
514.8
107.46%
Nondurable
334.6
8.59%
655.4
6.58%
320.8
95.86%
Services
Total
2053.1
52.68%
5665.3
56.85%
3612.2
175.94%
Fin. Ins. & Real Estate
624.9
16.03%
1688.9
16.95%
1064.0
170.26%
Wholesale & Retail Trade
667.5
17.13%
1881.5
18.88%
1214.0
181.88%
Other Services
626.1
16.06%
1818.1
18.24%
1192.0
190.41%
Transport. Utils. Comm
134.7
3.46%
267.8
2.78%
142.1
105.52%
- -Government & Other* - -
Total
622.1
15.96
1803.5
18.10%
1181.3
189.88%
'Excludes government services such as transportation and health care included in other categories.
Source: Hudson Institute.
improving its standard of living, grows by 1.7 percent per year under
the baseline scenario, almost precisely the rate at which it grew
between 1970 and 1985. The boom scenario boosts this index to 2.7
percent, 13 percent above its level during the 1955-1970 period. Low
growth during the deflation scenario causes disposable income to
creep up by only 0.6 percent per year, which would be worse than at
any time in the postwar era.
The Surprise-Free Scenario: Outcomes and
Impacts
The similarities among the scenarios illustrate some of the
fundamental forces shaping the U.S. economy. A more detailed look
at the surprise-free scenario sheds more light on the most important
changes ahead. Two areas deserve the greatest attention: the chang-
ing structure of the economy and the prospects for greater produc-
tivity growth.
The Changing Structure of the U.S. Economy
Between 1985 and 2000, employment and output in goods
production will continue to decline (see Tables 2-2 and 2-3). By the
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Table 2-3
EMPLOYMENT IN GOODS PRODUCTION WILL
DECLINE BY THE YEAR 2000
(Millions of Workers)
1985 2003
CHANGE (1985-2000)
Number*
Share
Number
Share
Number
Percent
TurAL
107.16
100.00%
130.96
100.00%
23.81
22.22%
-Goods
Total
28.21
26.32%
25.74
19.65%
-2.47
-8.76%
Farm, Forest, Fishing
3.14
2.93%
2.67
2.04%
-0.47
-14.88%
Mining
0.97
0.90%
0.79
0.60%
-0.18
-18.68%
Construction
4.66
4.35%
5.06
3.86%
0.40
8.52%
Manufacturing
19.44
18.14%
17.22
13.15%
-2.22
-11.42%
Durable
11.58
10.81%
10.51
8.02%
-1.08
-9.28%
Nondurable
7.86
7.34%
6.72
5.13%
-1.15
-14.57%
Services
Total
72.62
67.77%
96.51
73.69%
23.89
32.90%
Fin. Ins. & Real Estate
5.92
5.53%
8.12
6.20%
2.19
37.02%
Wholesale & Retail Trade
23.19
21.64%
30.37
23.19%
7.18
30.95%
Regulated Industries
5.29
4.94%
5.76
4.40%
0.47
8.92%
Other Services
21.92
20.46%
32.16
24.56%
10.24
46.71%
Government
16.30
15.21%
20.10
15.35%
3.81
23.37%
*Excludes Self-employment
Source: Hudson Institute.
year 2000, manufacturing will employ 2.2 million fewer workers than
it does today, and only 14 percent of all U.S. employees will work in
manufacturing industries. Both durables and nondurables will shed
more than one million workers, with the biggest losses coming in
primary metals ( - 346,000), textiles ( - 243,000), and motor vehicles
( - 143,000).
Manufacturing output will increase, but at a much slower rate
than GNP, so that by the year 2000 manufacturing output (measured
in year 2000 dollars) will shrink to only 17 percent of GNP, compared
to 21 percent today. Services, including government services, will
account for three-fourths of the nominal economy, up from 69 percent
today.
The relative positions of manufacturing and finance illustrate the
changes ahead. As recently as 1965, the finance, insurance, and real
estate industries contributed only half as much value to the economy
as did manufacturing, 14 percent compared to 28 percent. By the year
2000, these financial services will account for $1.7 trillion of GNP,
surpassing the $1.6 trillion total of manufacturing. Similar declines
will take place in the shares of employment and GNP accounted for
by most types of goods production, including mining and construc-
tion. Farming continues to decline in employment share, but a
rebound in farm prices from the depressed levels of 1985 raises
agriculture's share of the economy's output.
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On the services side of the ledger, virtually every subcategory
will show large gains in employment and share of output, with the
fastest gainers including wholesale and retail trade, and the other
services category that includes health care and business services. One
telling measure of the change ahead is that the trade and service
sectors will add more jobs between 1985 and the year 2000 than now
exist in all U.S. manufacturing.
In the retail category restaurants and bars hire 2.4 million new
workers, while food stores gain 1.1 million, and general merchandise
adds 800,000. In the services category the biggest gainers are business
services (3.6 million) and health services (3.1 million). In finance,
insurance, and real estate, the most new jobs are in banking (591,000)
and insurance (559,000).
The Impacts of the Shift To Services
What do these shifts mean for the nation? Although the decline
of goods production and the shift to services are not the ominous
trends portrayed in the press, they will have a number of far-reaching
impacts. The distribution of earnings, the structure of world trade,
union activity, the cyclicality of the economy, and many other factors
will be affected. Some of the most obvious impacts of the trends will
be:
? The Typical Workplace Will Be Smaller and Most New Jobs Will Be in
Small Businesses: Because services are typically located near consum-
ers, each worksite in service industries tends to be smaller than in
manufacturing. For example, the average manufacturing establish-
ment employs some 60 people, compared to only 11 for the typical
service establishment (see Figure 2-2).
Because all employment growth will be in service industries,
most new jobs will be created by small businesses. Between 1978 and
1982, for example, more than half of all new jobs were created by
firms with fewer than 100 employees. The smallest firms (those with
less than 20 workers) represented only one-fifth of all employment,
but created two-fifths of all net new jobs (see Table 2-4).
This concentration of new jobs in small businesses and small
establishments will have major implications for the sociology and
structure of work. For example, management systems designed for
large bureaucratic organizations may increasingly give way to sys-
tems with delegated responsibility that employ small team concepts
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Figure 2-2
SERVICE INDUSTRY ESTABLISHMENTS ARE SMALLER
60
60 -
er)
50
(4)
40
4.6
E 30
.a
as
Tn. 20
Ui
a)
I-
U) 10
0
ALL SERVICES
WI FINANCE,
INSURANCE, REAL
ESTATE
TRADE
I2Z TRANSPORT,
UTILITIES
MANUFACTURING
ITIVA
11
24
SERVICES
Source: Mark Granovetter, American Sociological Review, Vol.
49, 1984
to motivate and manage people. Unionization may be more difficult,
both because of the dispersion of workplaces and the closeness of
Table 2-4
MOST NEW JOBS HAVE BEEN CREATED BY SMALL FIRMS
(numbers in millions)
Jobs in 1976
New Jobs Created
1976-1982
Number
Share
Number
Share
Total
76.0
100%
11.9
100%
Firm Size
0-19 Employees
15.6
21%
4.6
39%
20-99
12.8
17%
1.7
14%
100-499
10.8
14%
1.2
10%
500+
36.7
48%
4.5
38%
Source: Office of Advocacy, U.S. Small Business Administration, unpublished data.
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Scenarios For The Year 2000 61
management and employees. Training may be more expensive at
small work sites and less likely to be provided by small employers
operating with lower overhead.
? Wages May Become Less Equally Distributed
While the stereotypes of a disappearing middle class in the
service economy are exaggerated, the shift to services will have some
impact on the distribution of wages in the economy. As noted earlier,
wages in the slower-growing or shrinking manufacturing and gov-
ernment sectors are more equally distributed than those in the
expanding service sector. While the impact of the shift has not yet
been significant, it could become so.
If service industry productivity rises rapidly, wages are also likely
to rise quickly, and the shift to service jobs with less equally distrib-
uted earnings may not create much concern. But in combination with
relatively slow growth of productivity in services, the shift to these
industries with less equal wage distribution is likely to ignite signifi-
cant political and social controversy. Unless service industry produc-
tivity surges ahead very quickly, these industries are likely to be the
next battleground for unionization or perhaps for government inter-
vention, to help equali7e incomes through tax policy or minimum
wages.
? Part-time Work Will Increase
While the 40-hour workweek has remained standard in manu-
facturing, this is not the case in many service industries. In retail
trade, for example, the average workweek fell to only 29 hours in
1986. In the finance industry the average is 36 hours, while those in
the miscellaneous services category put in only 32 hours per week. As
a result of the shorter hours in these large and growing industries, the
average workweek for all those in the economy has dropped from 40
hours in 1948 to less than 35 hours today.
Because services must usually be performed when and where
the customer wants them, the trend toward flexible schedules,
part-time workers, and shorter hours is likely to continue. Gradually,
the less-than-forty hour week will become the rule. While it seems
unlikely that the short workweek will be officially sanctioned or
legislated, the nation will slowly establish it as the de facto standard.
By the year 2000, this evolution may lead to reductions in the
workweek of "full-time" workers and revisions in benefit structures.
Currently, for example, part-time workers often receive lower levels
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PERCENT CHANGE
WORKFORCE 2000
Figure 2-3
SERVICES MODERATE THE BUSINESS CYCLE
6
1956 1960 1965 1970 1975 1980
YEAR
Source: Economic Report of the President, 1987
- GOODS
- SERVICES
1986
of fringe benefits such as vacation, health, and retirement. If the 35-
or 30-hour week becomes universal, this two-tier benefit structure
will no longer seem justifiable and may begin to erode. Unionization
in the service industries might hasten such a development.
? Reduced Cyclicality in the Economy
No foreseeable change in the nation's industrial structure will
eliminate the business cyde. But the trend toward service employ-
ment will certainly moderate it. Between 1956 and 1986, services have
never had a recession, and their annual growth rate has swung only
between .9 and 5.7 percent. The goods economy, on the other hand,
has been in recession in six of the 30 years, with growth swinging
wildly from -4.8 to 10 percent (see Figure 2-3).
As the economy becomes more and more dominated by services,
the severity of recessions should be reduced; in the same way, the
explosive growth that has sometimes been triggered by a boom in
goods production should also be moderated. As services grow above
three-fourths of the economy, their balance wheel effect should
moderate swings in demand.
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? The Nature of World Trade Will Be Altered
Imports and exports of goods still dominate world trade, al-
though services have become more important in recent years. Despite
growth in service exports and recent efforts to reduce international
barriers to service imports, it is unlikely that trade in services will
overtake goods-trading for the foreseeable future. The reality is that
very few services can be transported across international boundaries.
With the exception of transportation and tourism, the great majority
of international trade in services is not really trade at all, but simply
money moving across international borders as interest, dividends,
remittances, and capital investments.
Because the value of services tends to be created mostly in home
countries near to customers, the importance of goods-trading among
the most advanced industrial countries may decline in the years after
2000, as their economies become dominated by service industries. A
greater fraction of world trade will then consist of goods exchanges
among developing countries, while the post-industrial countries
trade people, knowledge, and capital.
As this trend develops, it may make it more complicated for
developing nations to use traditional goods exports as their avenue
for development. As the advanced countries come to place relatively
low values on imported goods and high value on services that they
produce themselves, many developing countries may find that it is
much more difficult to build substantial export industries by selling
goods to each other. While the peaking of goods-trading among
developed countries should not begin until after the turn of the
century, potential difficulties for developing countries relying on
exports may begin before then.
? Rapid Growth Will Be Harder to Achieve
Although productivity is expected to improve substantially in
service industries toward the end of the next decade, these gains will
not prevent the services from being a drag on the U.S. economy
through much of the next 13 years. The relatively lower output of
workers in service industries today, coupled with the moderate
projected rates of productivity growth in the years immediately
ahead, means that, in the near-term, economic growth may be
sluggish. Only a remarkable, and unlikely, near-term rebound in
service industry productivity could improve this outlook.
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Improved Productivity Gains, Especially in Services
Slow growth of the labor force, increased capital investment, and
better education and training, coupled with deregulation, privatiza-
tion, and less government intervention into the economy may lead to
a rebound in the productivity of the economy over the next 13 years.
Part of the gains will come in the traditional manufacturing industries
that have been spurred by foreign competition to adapt new technol-
ogies (e.g., robots) and systems of organization (e.g., just-in-time
inventory) to improve their quality, cut costs, and raise output.
But by themselves, these gains in manufacturing productivity
will not be enough to offer most Americans a higher standard of
living, simply because manufacturing is such a small and shrinking
share of U.S. production. The service industries, which will be 75
percent of the economy by the year 2000, must increase their
productivity performance dramatically if the nation is to prosper. The
task of improving American international competitiveness in manu-
factured goods is of secondary importance, compared with challenge
of raising service industry productivity.
This point is illustrated by analysis of the structure of future GNP
growth, compared with past growth. Between 1955 and 1970, for
example, manufacturing contributed about one-fifth to GNP, of
which two-thirds came from productivity gain and one-third from
employment growth. Between 1970 and 1985, manufacturing's con-
tribution climbed to one-fourth, all of which came from productivity
gains. Over the next 15 years, manufacturing will again contribute
about one-fourth of the economy's growth, which will consist of a 30
percent gain in productivity offset by a 7 percent decline in employ-
ment (see Figure 2-4).
On the service side of the ledger, the picture is similar. In the
1955-1970 period, services (including government services) accounted
for 80 percent of GNP growth, of which employment accounted for
three-fifths. In the 1970s, the nonmanufacturing sector contributed 80
percent of GNP gains, with all of the gains coming from employment,
while productivity actually fell slightly. In the next 15 years, nonman-
ufacturing industries will contribute about three-fourths of the econ-
omy's growth, of which three-fifths will be due to employment gains
and two-fifths to productivity increases. Without these substantial
gains in service industry productivity, the economy would grow by
less than 2 percent per year.
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100.0
90.0 ?
80.0 ?
70.0 ?
60.0 ?
50.0 ?
40.0 ?
30.0 ?
20.0 ?
10.0 ?
0.0
65
Figure 2-4
PRODUCTIVITY GAINS IN SERVICES ARE THE KEY TO
FUTURE ECONOMIC GROWTH
I= PRODUCTIVITY:
SERVICES & OTHER
E22 PRODUCTIVITY:
MANUFACTURING
ED EMPLOYMENT:
SERVICES & OTHER
EMPLOYMENT:
MANUFACTURING
onis
1955-1970 1970-1985 1985-2000
CONTRIBUTION TO REAL GNP GROWTH
Source: Hudson Institute
How might such a major improvement in service industry
productivity occur? Past examples provide some clues. When the
supermarket chains replaced the small mom-and-pop grocers with
large, high-volume, bar-code check-out stores, they employed tech-
nology, size, and standardization to reach a new level of productivity.
When McDonald's and other franchisers created their standardized,
limited-menu, fast food outlets with production-line kitchens and
push button cash registers, they enormously increased the produc-
tivity of an industry that had been characterized by slow, cook-to-
order kitchens and inefficient dining room service. In each case,
standardized, more capital-intensive systems were created that relied
on customers to perform some of the functions previously performed
by the service provider.
Many other service industries are ripe for such changes. Con-
sider these possibilities:
HEALTH CARE: Throughout the postwar era, health care has
been driven primarily by the desires of doctors and hospitals to
improve the quality of medical care and treatment. Cost control and
productivity gains have been of secondary importance. Until very
recently, the emphasis has been on saving lives, rather than on saving
money.
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Attempts by the government, employers, and large health care
providers to control costs are likely to shift attention toward technol-
ogies and systems that improve efficiency and reduce expenses,
without sacrificing the quality of care. When the large institutions that
are increasingly in control of the health-care industry begin to
respond to these new incentives, radical improvements in productiv-
ity may be possible. For example:
? The Self-diagnostic Health Clinic: In the 1990s, patients of a modern
HMO might receive sophisticated diagnosis and even some forms of
treatment with limited intervention by doctors, nurses, or clerical
support personnel. A patient might enter a clinic and identify himself
with an electronic card containing his complete computerized medical
history and automatic billing information. After responding to a
series of questions posed by a computer, he would submit to a series
of self-adminstered, non-invasive tests (e.g., temperature, blood
pressure, blood chemistry, urinanalysis, and perhaps others based on
cheap magnetic scanning devices). Finally, he might receive a prelim-
inary diagnosis and be issued an unsigned prescription for medica-
tion. Only when this automated process was complete, would he see
a nurse or a doctor. Routine treatments might be cheaper, less
time-consuming, more private, and more effective than those offered
in today's clinics and doctors' offices.
? The Automated Nursing Home: Cooking, cleaning, personal care, and
other low-productivity tasks are the most costly aspects of nursing
care. But the same technologies that promise to automate factories by
the year 2000?robotics, machine vision, artificial intelligence?have
application in this rapidly-growing, labor-intensive service industry.
Advanced robots capable of assisting patients with walking and
feeding, cleaning floors, reading books or newspapers, or other tasks
are only a few years away. These assistants will not be thought of as
threatening or impersonal robots, but as personal tools capable of
enhancing the diminished capabilities of nursing home residents.
RETAILING: The advances in efficiency brought by regional
malls, supermarkets, and fast food restaurants have begun to reach
their natural limits, as congestion, sales transaction times, and inven-
tory carrying charges place limits on further productivity gains based
on store size or customer traffic volumes. But new forms and systems
for retailing are on the horizon. For example:
? The Direct Sales Manufacturer: Historically, manufacturers have sold
to wholesalers, who have resold goods to retailers, who have sold to
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final buyers. Goods are typically handled, invoiced, counted, stocked,
marked up, insured, and financed many times before they are put
into use. In the future, many of the steps in traditional retailing may
be bypassed.
Consider, for example, a typical retailing system for the 1990s,
made possible by modern systems of advertising, communications,
and transportation. Each day a manufacturer of, say, video recorders
buys cable television advertising time in a different city. Each evening,
hundreds of consumers from that city call the toll-free number and
place their orders, using credit cards for payment. That evening, as
the machines roll off the assembly line at the factory in the Midwest,
they are boxed, automatically labeled, and loaded into a UPS truck
bound for the city, for delivery the next day. No warehouse or
shopping mall ever sees the goods, no shelves are stocked, no cash
register ever rings, and insurance and financing have been required
for only 48 hours. The goods are cheaper, the consumer has his
product without the necessity to visit a store, and the manufacturer
has eliminated his finished inventory while capturing much of the
margin that once went to the wholesaler and the retailer.
? The Automated Checkout Counter: At the mall also, technology may
lead to great productivity gains. Imagine, for example, a store
checkout system in which the consumer inserts his bank card and
then places the items he has selected on a conveyor belt leading to an
automatic laser bar code reader. At the end of the belt, a specially
adapted pick and place robot bags his items and hands the consumer
his receipt. Except for stocking clerks, the self-service store has
become fully automated.
EDUCATION: The productivity of the world's education systems
has remained fundamentally unchanged since the days of Socrates.
Teachers still stand in front of classes and deliver lectures to assem-
bled groups of students. Learning per class hour or per teacher hour
has shown little change in response to variations in the organization
of school systems, teacher salaries, textbooks, or audiovisual aids.
The Computerized Classroom: Today's technology, if fully applied,
could revolutionize education as dramatically as the automatic loom
changed the textile industry. The classroom of the late 1990s could be
a set of individual computer screens linked to massive information
storage systems controlled by sophisticated software. The student
would have instant electronic access to the best teachers, the most
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stimulating lessons, and the world's libraries of books, music, or film,
assisted by teachers who are guides to the technology and the
information sources rather than custodians of the knowledge. With
individualized courses, self-paced instruction, and built-in testing,
scoring, and evaluation of progress, the modem classroom could
provide the equivalent of a personal tutor for each student. That part
of education that involves the progressive mastery of large bodies of
information could handled with far fewer lecturers, freeing teachers
for the more challenging tasks of course design and development,
leading group discussion or probing the limits of knowledge.
These examples of productivity possibilities in service industries
could be repeated in many other areas. In protective services, for
example, the potential to protect life or property with advanced
sensing, detection, and monitoring systems has not been fully
developed by either public or private security agencies. (Why, for
example, do we have a large bureaucracy issuing traffic tickets and
collecting tolls, when roadside sensors linked to computers could do
the job for a fraction of the cost?) In the restaurant industry, the task
of transmitting each patron's food order to the kitchen is still handled
with the techniques and technology of two centuries ago, when a
simple adaptation of a paging system could perform the job in much
less time with many fewer errors. In financial services, the potential
for home banking and electronic funds transfers?banking without
tellers or loan officers, checks, deposit tickets and even cash?is still
largely unexploited.
The Obstacles to Change
Of course, this brave new world filled with computer screens
and automatic payments is threatening and even terrifying to many.
Employees who fear job losses, consumers who resist buying auto-
mated services, and civil libertarians who fear government abuse of
individual freedom must be convinced that the changes will benefit
them. These fears have slowed the pace of change and the rate of
productivity advance in many service industries and will continue to
do so.
Indeed, the chief obstacles to productivity growth in services are
not limits set by technology or the inherent nature of services but
institutions and individuals who fear change. The lack of interna-
tional competition in most services and the delivery of many of them
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by government monopolies have slowed change to a glacial pace. In
most service institutions (with the obvious exception of retailing),
there is the equivalent of the tenured faculty: a powerful group with
no incentive to change. In the absence of a market to force action, this
stand pat instinct usually prevails.
But there are signs that the barriers to change in many service
industries may be about to fall. Many service industries that have
been insulated from competition may be revolutionized in the not too
distant future.
In health care, for example, the historic control of care by
tradition-bound doctors reimbursed by third party payers is giving
way to the development of HMOs, hospital chains, self-insured
employers, and other large institutions with the incentive to deliver
care in a cost-effective manner. These institutions will be motivated to
improve productivity in ways that have not historically been given
priority. The most innovative firms will begin to invest in more
efficient management systems and in research and development of
cost-saving technologies. Gradually, these investments will begin to
create more efficient health-care systems.
In education, the government monopoly on elementary and
secondary education is likely to remain largely intact for the foresee-
able future, allowing these institutions to slow the pace of change.
But the renewed emphasis on educational quality at the state level,
and the proliferation of new approaches intended to achieve excel-
lence in education, are laying the groundwork for significant changes
in the years ahead. As these experiments are monitored and evalu-
ated, the best practices and the successful technologies will receive
more attention. As parents and politicians learn the results of the
various programs, demands to apply the most successful systems and
technologies will spread. Although these demands will not by them-
selves create a market in educational services, they will at least spur
the public schools toward useful reforms.
At the same time, in the areas of training for the workplace,
remedial education, and higher education, competition is likely to
spur more rapid implementation of advanced technologies and much
more rapid productivity gains. In these settings, where the institu-
tional barriers to change are less dominant, and where emphasis on
cost-effectiveness may be greater, innovations to promote efficiency
are likely to catch on quickly. Successful methods proven outside the
public schools will help to accelerate their adoption throughout the
educational system.
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In government, the continuing impact of deregulation at the
federal level and the emerging trend toward privatization of state and
local services may pay dividends in terms of more rapid adoption of
new systems and technologies, and bigger boosts in productivity.
If the institutional resistance to change can be overcome, the
technologies certainly exist to bring about spectacular improvements
in the efficiency and productivity of the service industries, thereby
substantially improving the income and well-being of the nation.
After the long plateau in service industry productivity, the nation may
be poised to enter a period of much more rapid gains.
Alternative Scenarios
Luck, unforeseen technological developments, or political and
social shifts could all cause the economy to evolve much differently
from the description painted in the baseline scenario. Policy choices
could also change the future dramatically. To explore the impacts of
major changes in policy, two alternative scenarios were developed.
The "deflation" scenario envisions a world in which policyma-
kers turn inward and toward the past. In an attempt to preserve the
old industries and traditional jobs, the United States veers toward
protectionism. In fear of a repetition of the inflationary era of the
1970s, policy errs on the side of tight money and limited fiscal
stimulus. And in a misunderstanding of the nature of the new
economy, too little is invested in the development of human
resources.
The "technology boom" scenario accelerates the most favorable
technological and institutional changes of the baseline economy. It
envisions rapid gains in service industry productivity, strong stimulus
for worldwide demand, rapid growth of the developing countries in
an open trading environment, and renewed interest in educating and
training the workforce.
What would these different scenarios mean for jobs, economic
growth, and labor markets in the U.S. over the next 13 years?
World Deflation: In the deflation scenario, the world tumbles into
a vicious circle of slow growth from which it is unable to extricate
itself. An initial recession against a backdrop of world trade imbal-
ances triggers a spasm of trade restrictions by the United States.
These in turn throw Japan and West Germany into recessions, which
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cause their imports of U.S. goods to fall, deepening U.S. economic
problems. Although there is no tit-for-tat trade war, many nations
begin to feel that they have been mistreated by their trading partners
and implement policies aimed at securing a greater fraction of world
exports. Coordination of economic policies breaks down, with the
U.S. struggling to contain massive trade deficits, while West Ger-
many and Japan timidly stimulate their weak economies. Many
developing nations suffer severely, as their ability to export is weak-
ened, and domestic and international confidence in their futures
fades.
Although the world manages eventually to begin growing again,
the severe damage to trading relations undermines confidence and
causes growth to remain sluggish; two more recessions interrupt
economic progress before the turn of the century.
As result of this environment, the world manages to grow by
only 1.4 percent per year on average over the period, slightly worse
than the 1.6 percent U.S. domestic rate. U.S. disposable income per
person inches up only 0.6 percent per year, less than half the rate of
the 1970-1985 period. With a surfeit of workers (unemployment
averages 9 percent over the period), employers feel little need to
invest, and productivity rises by only 0.7 percent per year. The only
good news is that inflation is virtually eliminated, averaging less than
half a percent per year. But even this silver lining is wrapped in a
cloud, as it leads to historically high real interest rates, which cause
severe problems for debt-strapped consumers and governments.
Both the trade and budget deficits remain stuck at high levels, with a
cumulative trade deficit over the period of $1.4 trillion and almost $2.3
trillion added to the federal debt.
The impacts of this grim scenario are instructive. Although
protectionist policies are able to save about 830 thousand manufac-
turing jobs, they do so at a cost of more than 10 million service
industry slots; moreover, manufacturing employment still declines,
even though the rate is slower than under the baseline scenario.
Although import growth virtually stops, exports grow by only 2
percent per year, so that the trade imbalance persists, and the
cumulative current account deficit is some $500 billion greater than
under the baseline scenario. Although the shift to services is arrested
(the share of employment in manufacturing drops only to 15 percent
in 2000, compared with 13 percent in the baseline scenario), wage
gains fall far below those in the service-dominated baseline scenario.
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In short, policies designed to preserve America's manufacturing
base by limiting competition from foreign imports can slow down the
restructuring of the nation's economy, but only at an enormous cost
to the nation and the world.
Technology Boom: In contrast with the policies that promote a
deflationary spiral in the slow-growth scenario, the technology boom
scenario envisions a set of extraordinarily wise policy choices that
trigger a stunning rebirth of American productivity and economic
growth.
Recognizing the unusual opportunity presented by the slack in
world commodity markets, world decisionmakers elect to boost
worldwide demand boldly, and world GDP growth climbs by 3.6
percent per year. In the U.S., the prospect of tighter labor markets
causes employers to invest heavily both in automation and in worker
training, and, as a result, productivity rises by 2 percent per year. The
gains are led by spectacular 4 + percent per year increases in
manufacturing coupled with 1.6 percent average gains in services. Per
capita disposable income grows by an impressive 2.7 percent per
year?higher even than during the golden years from 1955 to 1970.
Although inflation climbs back to nearly 4 percent, there is no return
to double digits, and, as a result, real interest rates fall to about 3.5
percent. Unemployment falls slowly, but slips below 6 percent by the
late 1990s.
The budget moves into surplus by 1995, and the cumulative
deficit is some $400 billion less than under the baseline scenario.
Although the current account deficit is slightly higher than under the
baseline, due to the fact that the U.S. economy is growing faster than
the world economy, U.S. exports climb at an alltime record pace of 6.7
percent per year, reaching $960 billion (in 1982 dollars) by the year
2000.
Again, the impacts of this scenario are instructive. Despite the
accelerated shift to services (which accounts for some 81 percent of all
employment by the year 2000 in this scenario), per capita incomes are
some 20 percent above the baseline scenario and 40 percent above the
protectionist world. Although government cuts back on intervention
into international and domestic markets, it becomes more heavily
involved in education and training, because it can afford to and
because the returns justify doing so. As strong productivity and wage
gains ease fears about foreign competition, there is increased lending
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Scenarios For The Year 2000 73
to the developing nations. Their accelerating growth raises world
growth rates and helps to stimulate the U.S. domestic economy. As
years pass without a return of runaway price increases, the world
begins to believe that it can indeed grow quickly without triggering
inflation. Economic historians begin to write about the stagflation of
the 1970s and early 1980s as an aberration from the long-term postwar
trend.
The central lesson of these two alternative scenarios is that
policies?wise and unwise?can make a difference. But strategies for
holding back the pace of change and clinging to the industrial
structure of a previous era have little chance of success and great
likelihood of doing severe damage to the economy. On the other
hand, the policies that appear to take risks by pushing the limits of
growth, accelerating investment in human and physical capital, and
removing the institutional barriers to productivity enhancements in
services, can pay huge dividends.
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CHAPTER 3
Work And Workers In The
Year 2000
Who will be working in the year 2000 and what will they be
doing? Which occupations will grow most rapidly? Which groups of
workers will increase their presence in the workforce, and which will
decline?
Many of these questions can be answered with some confidence.
Everyone who will be working in the year 2000 has already been
born, and two-thirds of them are at work today. Similarly, most of
today's jobs will still exist in the year 2000. It is the new jobs and the
new workers, however, that are of greatest interest and concern. The
workers who will join the labor force between now and the year 2000
are not well-matched to the jobs that the economy is creating. A gap
is emerging between the relatively low education and skills of new
workers (many of whom are disadvantaged) and the advancing skill
requirements of the new economy. Although this gap can certainly be
bridged by education, training, automation, and other strategies, it
presents a great challenge to American workers and employers. To
understand the challenge, it is essential to review both detailed
demographic projections and to forecast the occupational shifts
ahead.
Demographics As Destiny?WORKFORCE 2000
Over the next 13 years, the American workforce and the econ-
omy will be shaped by five demographic "facts":
? The population and the workforce will grow more slowly than at any time
since the 1930s.
? The average age of the population and the workforce will rise, and the pool
of young workers entering the labor market will shrink.
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76 WORKFORCE 2000
? More women will enter the workforce, although the rate of increase will
taper off.
? Minorities will be a larger share of new entrants into the labor force.
? Immigrants will represent the largest share of the increase in the population
and the workforce since the First World War.
Slowly Growing Population
By the year 2000, the U.S. population will reach 275 million, an
increase of 15 percent over the 240 million U.S. residents in 1985 (see
Table 3-1).
This rate of gain, approximately one percent per year during the
1980s and three-fourths of one percent per year during the 1990s, is
well below the average for the last two decades. By the 1990s, the U.S.
population will be growing more slowly than at any time in the
nation's history, with the exception of the decade of the Great
Depression, when the rate was also about three-fourths of one
percent per year (see Figure 3-1).
Changes in fertility, projected death rates, or immigration could
have significant impacts on the size of the population over the next 15
years. For example, technological advances in birth control (a male
contraceptive pill or a safe abortion-inducing drug) could sharply
reduce the birth rate. Rapid advances in the treatment of cancer, or
conversely, unchecked spread of the AIDS virus could alter the death
rate. And changes in social values might encourage larger families
among the affluent, as they did during earlier eras.
Under the most conservative assumptions (low fertility, high
death rates, and low immigration), the population climbs to only
Table 3-1
U.S. POPULATION GROWTH, 1950-2000
(millions)
Total
Increase
Compared To
Previous Census
1950
151.3
19.1
1960
179.3
28.0
1970
203.2
24.0
1980
226.5
23.2
1990
252.7
26.2
2000
275.2
22.5
Source: U.S.
Bureau of the Census,
Decennial Censuses
and
Current
Population Reports, Series P-25, N. 937, Table 1, Hudson Institute.
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Work And Workers In The Year 2000
Figure 3-1
POPULATION AND LABOR FORCE GROWTH WILL
DROP BY 2000
(Average Annual Gain)
77
1900 1910
1920 1930 1940 1950 1960 1970 1980 1990 2000
YEAR
about 256 million, or seven percent. With opposite assumptions, the
population could reach 281 million, a gain of 18 percent.
Changes in immigration represent the greatest uncertainties. The
U.S. Bureau of the Census assumes that immigration during the
balance of the century will match the rate of legal immigration during
the recent past: 450,000 per year. At this rate, immigrants and their
offspring will comprise a little more than one-fourth of the U.S.
population gain. If immigration adds 750,000 persons per year to the
population, i.e., if the estimated rate of legal and illegal immigration
over the past 15 years continues unchanged, immigrants would
account for almost half of the net gain.
Slower Labor Force Growth
The slowing growth of the population will be mirrored by the
reduced growth of the labor force. Between 1985 and the year 2000,
the labor force will grow by about 22 percent, from 115 million to 141
million (see Table 3-2).
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78 WORKFORCE 2000
Table 3-2
THE LABOR FORCE IS GROWING SLOWLY
Gain From
Year Labor Force Previous Period
(millions) (millions)
1950
62.2
9.5
1960
69.6
7.4
1970
82.8
13.2
1980
106.9
24.1
1990
124.6
18.0
2000
140.5
15.6
Source: Bureau of Labor Statistics, Handbook of Labor Statistics, 1985,
Table 4, and Hudson Institute.
Although the labor force gains are proportionally greater than
the population gains (due to the increasing share of the population at
work), the trend is the same: the labor force will be increasing at a
slower rate than at any time since the 1930s (see Figure 3-1). Changes
in birth and death rates could not significantly affect the size of the
labor force during the balance of the century, since they would mostly
affect children and old people who would not be working in any case.
Immigration and changes in labor force participation, however, could
have large impacts. For example, a strong economy could pull more
workers into the labor market or international unrest could swell the
numbers of illegal aliens seeking jobs. Conversely, a weak economy,
growing desires for early retirement, renewed emphasis on child care
by stay-at-home parents, or drastic border-closing legislation could all
reduce the size of the labor force.
Combining the highest rates of immigration projected by the
Census Bureau with the highest plausible rates of labor force partic-
ipation projected by the Bureau of Labor Statistics would produce a
labor force of 147 million in 2000. In contrast, the lowest projections
would cause the labor force to rise to only 129 million. In other words,
the workforce could increase by as little as 12 percent?the slowest
rate in the country's history?or by as much as 28 percent?almost as
fast as during the 1970s.
The Impacts of Slow Population and Labor Force
Growth
The most likely scenario of slow population and labor force
growth will affect the economy and the nation in a number of ways:
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Work And Workers In The Year 2000 79
? The national rate of economic growth will fall well below what it would be
if the nation's population and workforce were increasing at the rates of the
1960s and 1970s. Slower population growth will lead to less demand
for population-sensitive products, such as food, automobiles, hous-
ing units, household goods, and educational services. Productivity
gains will account for a much greater fraction of national growth than
during the past two decades, when increases in population and
workers helped to fuel the economy.
? Economic growth will depend more directly on increased demand for
income-sensitive products such as restaurant meals, luxury goods, travel,
tourism, and health care. Companies will focus more on capturing a
larger share of disposable income, rather than on serving a greater
share of households. As a result, services and luxury goods sectors of
the economy will grow faster than population-dependent goods
sectors.
? Labor markets will be tighter, due to the slower growth of the workforce and
the smaller reservoir of well-qualified workers. While recessions may still
lead to high unemployment, and undereducated workers may still
suffer great difficulties in the labor market, fewer well-educated
workers will be available than during the 1960s and 1970s, and
employers may bid up their price.
An Aging Population and Workforce, and Fewer Young
Workers
The aging of the baby boom generation (those born between 1946
and 1961) will cause the American population to become much older,
on average, throughout the balance of the century. The median age of
the population, which had been declining until 1970, will reach 36 by
the year 2000, six years older than at any time in the history of the
nation (see Figure 3-2).
Most of this aging will be the result of huge increases in the
numbers of middle-aged Americans. Between 1986 and 2000, for
example, the number of people between the ages 35-47 will jump by
38 percent, and the numbers age 48-53 will leap by a staggering 67
percent, compared with overall population growth of only 15 percent.
On the other hand, the population over age 65, which is
sometimes assumed to be growing rapidly as part of the national
aging trend, will actually grow more slowly for the balance of the
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80
MEDIAN AGE
37-
35-
33-
31-
29-
25
1920
WORKFORCE 2000
Figure 3-2
THE U.S. POPULATION IS GROWING OLDER
(Median Age)
1930
1940
1950 1960
1970
1980
1990
Source: U.S. Bureau of the Census, "Current Population
Reports," Series P-23, No. 138, Table 2-9
century than it has in recent years (see Table 3-3). Maturing, rather
than aging, may be the best description for the population trends of
the next decade and a half.
The number of young people will decline both relatively and
absolutely. The numbers between age 20 and 29, for example, will
shrink from 41 million in 1980 to 34 million in 2000, and their share of
the population will drop from 18 to 13 percent.
Table 3-3
THE POPULATION OVER AGE 65 WILL
GROW MORE SLOWLY, 1985-2000
(thousands, except percent)
Total
Over 65 Increase
Percent
Increase
1950
12,397
X
X
1960
16,675
4,278
34.5
1970
20,087
3,412
20.5
1980
25,708
5,621
28.0
1990
31,680
5,972
23.2
2000
35,410
3,730
11.8
Source: U.S. Bureau of the Census,
Current Population
Reports, Series
P-23, No. 138, Table 2-1, Hudson
Institute.
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Work And Workers In The Year 2000 81
Figure 3-3
THE MIDDLE AGING OF THE WORKFORCE
1970
1985
82,900,000
115,460,000
50%
=1 2Z
16-34 35-54 55+
140,460,000
38%
The age of the labor force will closely track the population, rising
from a median of 35 years in 1984 to about 39 in 2000. All of the gains
will come in the middle years of worklife, while the numbers at the
two extremes decline. The number of workers age 35-54 will rise by
more than 25 million, approximately equal to the total increase in the
workforce (see Figure 3-3).
The Impacts of Aging
It is difficult to overestimate the impacts that this maturing of the
population and the workforce will have on the society and the
economy. While most commentary has focused on the benefits of an
older workforce, the changes ahead will be both positive and nega-
tive, and the balance may be decidedly unfavorable. On the positive
side:
? A more experienced, stable, reliable, and generally healthy workforce should
improve productivity. The initial task of educating and training the huge
baby boom generation has been largely accomplished; the investment
in these workers should provide dividends to the economy over the
next 13 years.
? The economic dependency ratio (the proportion of the population not in the
labor force compared to those in the labor force) will continue to drop. This
rough measure of the burden on the economy has been shrinking
since the 1960s, with most of the reduction coming from the declining
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82 WORKFORCE 2000
numbers of dependent children and nonworking wives. In 1965, for
example, there were more than 1.5 dependents for each working
person. By 1984, the ratio had dropped to 1.05 to one; in the year
2000, there will be less than one dependent per worker. Although this
may enhance the nation's sense of well-being during the 1990s, it
could lead to a false sense of security. Because the dependency ratio
will turn around sharply when the baby boom retires after the turn of
the century, the low numbers of dependents in the years to 2000 may
postpone difficult political debates on issues such as Social Security
funding. The healthy, working, middle-aged society of the 1990s may
be reluctant to address the long-range costs of the retirement boom
that will begin about 2010.
? The national savings rate may rise, as the baby boomers reach middle age.
Younger people, who buy first houses, cars, and other consumer
durables generally borrow more money than they save. Among those
under age 35, net borrowing equals about 9 percent of income;
between 35 and 44, families save about 3 percent of their incomes,
while saving for those over 44 climbs to about 11 percent of their
incomes. With the huge increase in the number of workers over age
40, higher national savings may lead to lower real interest rates,
stimulating investment and improving productivity. In addition, the
constituency opposing inflation may increase dramatically, as a much
larger share of the population owns financial assets. Willingness to
tolerate budget deficits or rapid monetary growth may decline. At the
same time, tolerance for high unemployment as the price of a stable
currency may increase.
? Labor markets for younger workers could tighten. Companies accus-
tomed to hiring young workers at cheap wages may find that they
must raise wages, reach further down the labor queue, invest in
labor-saving technology, or all three, in order to prosper. Food service
may be particularly affected.
On the other hand, the aging of the workforce may have some
very negative consequences for the economy and the society:
? The aging workforce may increase the rigidity of the economy. An older,
more stable workforce may adapt poorly to a rapidly-changing
(
economy. For example, older people are much less likely to move
...tialLmwger ones (see Figure 3-4). As the baby boomers reach the
middle years of mortgages and children in school, their willingness to
pull up stakes in response to new opportunities or changing condi-
tions will decline. Similarly, the proportion of individuals who are
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Work And Workers In The Year 2000 83
PERCENT MOVING
Figure 3-4
YOUNG PEOPLE ARE MUCH MORE LIKELY TO MOVE
(Inter-county Movers, 1976-1979)
30?
28.1
28.7
25-
20-
16
15-
10-
9.6
5? A
20-24
41414,
25-34 35-44 45-64
AGE GROUP
7.8
6.5
I ?
65-74 75 and up
Source: U.S. Bureau of the Census, "Current Population
Reports," Series P-23, No. 138, Table 4-6
willing to be refrained or who move between occupations declines
steadily with age. For example, workers over age 45 were less than
half as likely to change occupations between 1982 and 1983, com-
pared with workers age 25 to 44 (see Figure 3-5).
? The dearth of young workers may hamper the ability of companies to grow
rapidly or to respond to change. With the absolute numbers of new
workers age 16-34 declining by almost 5 million, many companies
may find themselves unable to move rapidly to hire large numbers of
new workers to respond to changing economic conditions. The
overnight creation of a Federal Express, an MCI, or an Apple
Computer Company may become more difficult as the numbers of
young people drop. The traditional process of "creative destruction,"
by which a company uses new hires to start a new division, while
laying off older workers in slowly-growing sectors may become much
more difficult. Not only will early retirements be more expensive, but
wages of young workers may be higher. Impacts of this type will be
felt most severely in the Midwest and Northeast, where outmigration
over the last decade has dramatically reduced the numbers of current
and future young workers. The North Central region of the country,
for example, will experience a decline of three million people (22
percent) between the ages of 20 and 34 between 1980 and 2000, while
the West experiences a gain of about one million (eight percent) at
these ages.
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84 WORKFORCE 2000
Figure 3-5
YOUNG PEOPLE ARE MORE LIKELY TO CHANGE
OCCUPATIONS
11.7
0
25-34
7.2
35-44
4.8
III
45-54
AGE GROUP
55-64
a
65+
Source: 'The Education, Training and Work Experience of the
Adult Labor Force from 1984 to 1995," National Commission
for Employment Policy, June 1985
? Many companies with older workforces may find that their aging, higher-
paid workers make them uncompetitive. This will be particularly true of
companies in slowly-growing industries or ones in which productiv-
ity is defined by production systems rather than by worker knowl-
edge or skills, for example, automobiles, metals, and transportation.
With no way to recover higher pay scales, higher pension charges
(primarily as a result of vesting rather than actual retirements), and
higher health care costs, companies may seek to roll back traditional
seniority systems and other institutional arrangements for granting
higher pay to older workers.
? The job squeeze among middle-aged workers may become more intense. The
large increase in the numbers of middle-aged workers may collide
with corporate efforts to reduce middle-management or to reduce
vulnerability to demographic noncompetitiveness. Because a large
fraction of the skills and productivity of older workers is valuable only
to the firms they work for, older workers who lose jobs will have a
particularly difficult time matching previous salaries when they find
new jobs. A turbulent economy in which many firms are expanding
and contracting in response to market conditions will be especially
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Work And Workers In The Year 2000 85
difficult for middle-aged and older workers. The long-standing pat-
tern of increasing earnings until retirement may be substantially
altered as a result.
? Many industries that depend on young people for market growth will
retrench. Higher education, household furnishings, and rental hous-
ing construction could be most affected.
On balance, it appears that the impacts of the aging workforce
may be favorable in the early 1990s, but could turn strongly negative
by the turn of the century, as aging pushes the huge baby boom
generation into its fifties.
Continued Feminization of the Workforce
Over the next 15 years, women are expected to continue to join
the workforce in substantial numbers. By the year 2000, approxi-
mately 47 percent of the workforce will be women, and 61 percent of
women will be at work. Women will comprise about three fifths of the
new entrants into the labor force between 1985 and 2000 (see Table
3-4).
? Much of the increase in the numbers of women in the labor force
has come from increased participation by women with children. Of
the 14.6 million married women who joined the labor force between
1960 an 1984, 8 million came from families with children. During that
time period, the proportion of married mothers at work grew from 28
to 61 percent, and the share of all children under six whose mothers
worked grew from 19 to 52 percent.
Women continue to be concentrated in traditionally female
occupations that pay less than men's jobs. In 1980, 32 percent of all
women were in jobs that were 90 + percent female, a figure that was
Table 3-4
WOMEN ARE GROWING SHARE OF THE WORKFORCE
(numbers in thousands, except percent)
1950
1960
1970
1980
1990
2000
Women in the
Workforce
18,389
23,240
31,543
45,487
57,230
66,670
Female Labor Force
Participation Rate
33.9
37.7
43.3
51.5
57.5
61.1
Female Share of
The Workforce
29.6
33.4
38.1
42.5
45.8
47.5
Source: U.S. Bureau of Labor Statics, Handbook of Labor Statistics, 1985, Tables 4
and 5; and unpublished data.
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86
WORKFORCE 2000
Figure 3-6
WOMEN HOLD A GROWING SHARE OF MANAGERIAL
AND PROFESSIONAL JOBS
(Percent Female)
Technicians
34.4
29.1
College Teachers 36.3
Lawyers 7"zi 4?9
15.3
W??442:1,:om
Physicians 15.8
Natural Scientists (20.5
All Professionals
6
Accountants & Auditors 38 7
Purchasing Managers '"'"z18?5
48.4
I= 1983
LZZ2 1970
23 6
48.1
Executive/Administrative-'/.??7,7//7-7//z41----28.5. 32 .4
0 10 20 30 40 40
Source: U.S. Bureau of the Census, 1980 Census of the
Population, Supplementary Reports; and Bureau of Labor
Statistics, "Handbook of Labor Statistics, 1985, Table 18
little changed from the 28 percent in 90 + female jobs in 1960. And in
1983, the wages of women working full-time were only 66 percent
those of men, up only 4 percentage points from the figure in 1967.
There are signs however, that these patterns may change sub-
stantially over the next 13 years. For example, women are a rapidly
increasing share of many traditionally male occupations, particularly
those requiring advanced education (see Figure 3-6).
These proportions are likely to rise further over the next 15 years,
as the number of women graduating from professional schools
increases. For example, in 1983, 45 percent of those receiving account-
ing degrees, 36 percent of new lawyers, 36 percent of computer
science majors, and 42 percent of business majors were women. And
although women's wages relative to men's have shown little improve-
ment when looked at over two decades, the pattern of the last five
years is more encouraging, with relative wages gaining five percent-
age points in five years. One Rand study projects that women's
wages will equal 74 percent of men's by the year 2000.
The flood of women entering the workforce during the last three
decades has been driven by powerful social and economic trends.
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Work And Workers In The Year 2000 87
Slow economic growth has made two earners a necessity for many
families striving for a middle class lifestyle. Technology has simplified
homemaking at the same time that society has redefined the role of
women to indude paid employment as the norm for most.
At least two facts, however, suggest that the entrance of women
into the workforce will slow down and may peak by the year 2000:
? Labor force participation rates for women aged 55-64 peaked in 1969 and
are now two percentage points below their high. As more women are able
to retire early on their own or their husband's pensions, labor force
participation among this group may decline. If labor force participa-
tion among this age group were to maintain its 15-year downtrend,
about 500,000 fewer women would be in the labor force in the year
2000 than are currently projected by the Bureau of Labor Statistics.
? Mothers want to work less than they do now. According to a recent
Gallup poll, only 13 percent of working women with children want to
work full-time, regular hours, although 52 percent of them hold
full-time jobs. Six of ten working mothers want part-time employ-
ment, flexible hours, or stay-at-home jobs, and 16 percent would
prefer not to work at all. Only half of all women believe that they can
adequately fulfil their responsibilities to their children if they work
full-time. If employers fail to provide sufficient jobs with flexible
working arrangements, more mothers may choose to leave the labor
force during their child-rearing years, further reducing the numbers
of new workers entering the workforce.
The Impact of Working Women
Even if rates of female labor force participation rise more slowly
than projected, the impacts of the increased numbers of women in
the workforce will still be profound. In less than a generation, the
nation's pattern of employment has been radically altered, from one
in which most married women stayed home, to one in which nearly
everyone is paid to work. Because so much of the change has
occurred since 1960, the society has not fully digested its implications.
Over the next 13 years, policies and patterns of child rearing, taxation,
pensions, hiring, compensation, and industrial structure will change
to conform to the new realities:
? The economic growth that the economy has enjoyed as a result of the shift
of women from low-productivity, unpaid housework to paid employment will
taper off. Between 1970 and 1980, 14 million women joined the
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88 WORKFORCE 2000
workforce; between 1990 and 2000, only 9 million will do so. As fewer
women move from the unmeasured to the measured economy,
economic growth rates will be lower.
? Day care and pre-school education will become more heavily subsidized,
institutionalized, and regulated. Parents, government, and industry will
all become more involved. As evidence accumulates concerning the
positive impacts on children of high-quality day care, the pressure for
ever higher standards will grow. Day care, like health care during the
1970s, will claim a rising fraction of national income. By the year 2000,
it may be routine for employers to subsidize or directly provide care,
and school systems may have lowered the age for starting school to
five or younger. Federal day care programs for children of welfare
mothers, early childhood education for disadvantaged children, and
tax subsidies for child care may be substantially expanded.
? The tax system will be subject to periodic readjustments of the "marriage
penalty," child care deductions, and other anomalies, as society struggles to
reconcile its notions of fairness and its desire to promote families,
with the reality of higher incomes for two-earner families.
? The workforce may become less flexible, as two-career families become less
willing to move. Although corporations will be forced to provide more
relocation assistance to spouses, the two-career trend will reinforce
the rigidity that develops because of aging. Middle aged, two-career
families will become geographically immobile.
? The distinctions between male and female jobs and wage rates will decline
in response to market pressures, and possibly as a result of union and
government intervention. The rapid rate at which women are being
integrated into the professions will make sex discrimination less of a
concern by the year 2000 than it is today.
? Part-time, flexible, and stay-at-home jobs will increase, and total work
hours per employee are likely to drop in response to the needs of women to
integrate work and child-rearing. In combination with the continued
trend toward early retirement, a greater fraction of national income
will be taken as leisure, and this will depress measured GNP.
? Benefit policies are likely to be restructured to reflect the desires of
two-earner families and single workers. For example, "cafeteria" benefit
plans, which enable a worker to choose from a menu of health,
retirement, leave, and other benefits, subject only to a dollar limita-
tion, are likely to become more widespread. Under such plans, a
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Work And Workers In The Year 2000 89
single parent might choose more day care, health, and flexible leave
options, while a middle-aged household head might choose more
insurance, retirement, or savings programs. Similarly, private pen-
sion benefits are likely to be tied more closely to individuals and their
earnings, and to be based less on years of service, family status, and
income from other sources such as Social Security.
? In contrast to this tailoring of private plans to individual needs and
earnings, public programs are likely to move in the other direction, with a
trend towards increased means-testing of social security, Medicare,
and federal pensions, and increased support for families with chil-
dren. As a result of these diverging patterns, society's access to many
pension, health, and other benefits is likely to be increasingly
segregated between those available to earners?which are strictly tied
to economic value, and those available through government?which
are increasingly oriented toward individuals with lower income and
children.
Minorities Will Be A Growing Share of the Workforce
Over the next 13 years, blacks, Hispanics, and other minorities
will make up a large share of the expansion of the labor force.
Non-whites, for example, will comprise 29 percent of the net addi-
tions to the workforce between 1985 and 2000 and will be more than
15 percent of the workforce in the year 2000 (see Table 3-5).
Black women will comprise the largest share of the increase in
the non-white labor force. In fact, by the year 2000, black women will
outnumber black men in the workforce, a striking contrast to the
pattern among whites, where men outnumber women by almost
three to two.
Table 3-5
NON-WHTI ES ARE A GROWING SHARE
OF THE WORKFORCE
(numbers in millions)
Working Age Population
(16 + )
1970
1985
2000
137.1
484.1
213.7
Non-White Share
10.9%
13.6%
15.7%
Labor Force
82.8
115.5
140.4
Non-White Share
11.1%
13.1%
15.5%
Labor Force Increase
(Over Previous Period)
X
32.7
25.0
Non-White Share
X
18.4%
29.0%
Source: Bureau of Labor Statistics, Handbook of Labor Statistics, 1985, Table 4 and
5; and Hudson Institute.
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90 WORKFORCE 2000
Table 3-6
BLACKS AND HISPANICS ARE MUCH LESS
SUCCESSFUL IN THE LABOR MARKKET
(1983)
White
Black
Hispanic
Labor Force Participation
64.3
61.5
63.8
Unemployment Rate
8.4
19.5
13.7
Median Family Employment
(Weekly)
$487
$348
$366
Percent Below Poverty
12.1
35.7
28.4
Median Years of Schooling
12.8
12.5
12.1
Source: U.S. Bureau of Labor Statistics, U.S. Bureau of the Census.
By almost every measure of employment, labor force participa-
tion, earnings, and education, black and Hispanic minorities suffer
much greater disadvantages than whites (see Table 3-6).
To these statistical indices must be added the extensively ana-
lyzed and debated indications of social disadvantage, such as poor
performance in schools, greater dependence on welfare, greater
incidence of broken families and children born to unmarried mothers,
and higher rates of criminal arrest.
Two particularly disturbing trends in the patterns of disadvan-
tage among minorities are the declines in male labor force participa-
tion and the related increase in the numbers of female household
heads. From 1970 to 1984, for example, the proportion of prime age
black men in the labor force dropped from 79 percent to 74 percent,
while the proportion of black families headed by women rose from 28
to 43 percent.
The Uncertain Outlook
Though it appears very likely that the labor market will be
increasingly comprised of disadvantaged minorities over the next 13
years, it is much less clear whether the disadvantages these groups
suffer will be getting better or worse during this period of tighter labor
markets. Several factors are worth noting:
? Relative rates of unemployment and earnings have not improved during the
past decade and may be becoming worse. For example, the ratio of black
family income to white family income, which rose from .54 to .61
between 1950 and 1970, fell back to .56 in 1983. For Hispanics, family
income figures show a drop from .71 to .66 between 1973 and 1983.
Black unemployment, which averaged about 2.1 times white rates
from 1972 to 1977, climbed to 2.4 times white rates from 1978 to 1983.
For Hispanics, the ratio was stable at about 1.6.
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Work And Workers In The Year 2000 91
? Blacks and Hispanics are overrepresented among declining occupations. In
a study by the Equal Employment Opportunity Commission, both
groups were 35 percent more likely to be employed in occupations
projected by the BLS to lose the most employees between 1978 and
1990.
? Blacks and Hispanics are concentrated in a small number of central cities
beset by severe problems. Fifty-seven percent of blacks and 49 percent of
Hispanics, compared to 25 percent of whites, live in central cities.
Forty percent of all blacks live in 11 cities, only two of which, Los
Angeles and Atlanta, are in the highest growth regions of the
country.
The prospect that minorities will comprise a very large fraction of
the new additions to the labor force over the next 13 years appears, on
the surface, to present an unprecedented opportunity. As employers
reach further down the labor queue, they might be expected to
provide better job prospects for historically disadvantaged groups
and to invest more heavily in their education and training.
But the pattern of job growth in higher-technology occupations
requiring more education, and the likelihood of greater employment
gains in metropolitan regions with fewer minority residents, suggest
that this sanguine outlook is far from assured. In fact, given the
historic patterns of behavior by employers, it is more reasonable to
expect that they will bid up the wages of the relatively smaller
numbers of white labor force entrants, seek to substitute capital for
labor in many service occupations, and/or move job sites to the faster
growing, more youthful parts of the country, or perhaps of the world.
Blacks, and particularly black men, are those most likely to be put at
risk if such strategies dominate.
Immigrants Will Be a Growing Share of the Population
and the Labor Force
Between 1970 and 1980, the foreign-born population of the U.S.
(as counted by the Census Bureau) grew by about 4.5 million,
accounting for about a fifth of the U.S. population gain during the
period. While this number was more than a third greater than the
number who entered in the 1960s, it was small by historical stan-
dards. At the turn of the century for example, immigrants added
about one percent per year to the U.S. population, compared with the
current rate of about one-fifth of one percent.
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92 WORKFORCE 2000
In the wake of amendments to the immigration laws in 1965,
recent immigrants have come mostly from Latin America and Asia, in
dramatic contrast to earlier immigrants. Of those who entered the
country after 1970, 78 percent came from these two regions; of those
entering the country before 1960, 79 percent came from Canada and
Europe.
Most of the new immigrants have settled in the South and West.
The number of foreign-born residents in the South grew by 120
percent from 1970 to 1980, and by 97 percent in the West. In the North
and Midwest, the numbers increased by only 10 percent. Three
states, California, Texas, and New York, account for more than half of
all foreign-born residents. One-fifth of all recent immigrants live in
the Los Angeles area.
Immigrants represent a broad spectrum of social and educational
backgrounds. Of adults who entered the U.S. in the 1970s, 25 percent
had less than five years of school, compared to three percent of
native-born Americans; on the other hand, 22 percent were college
graduates, compared with 16 percent of natives.
Estimates of net inflow of illegal aliens into the country vary
widely. The most recent Census Bureau estimates suggest that the
number of illegals residing in the U.S. may be between 4 and 6
million, and the Council of Economic Advisors has estimated that this
figure was increasing by between 100,000 and 300,000 people per year
through the mid-1980s.
A number of factors suggest that, in the absence of radical policy
changes, the number of legal and illegal immigrants will continue to
be substantial. As the preferred destination for those seeking eco-
nomic opportunity or political refuge, the U.S. will remain a powerful
magnet for the rapidly-growing populations of Latin America and
Asia. Between 1985 and 2000, for example, the population of Latin
America alone is expected to increase by 150 million people.
Recent legislation that imposes sanctions against employers of
illegal aliens may reduce this economic attraction. But the experience
of other countries such as France, Canada, Switzerland, and West
Germany that have imposed employer sanctions indicates that they
are ineffective in controlling immigration, without vigorous enforce-
ment. Moreover, legal immigration, which is a matter of right to
members of the immediate family of naturali7ed citizens, is sure to
increase simply as a result of the echo effect of the recent increases in
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Work And Workers In The Year 2000 93
legal immigration, as well as the legalization provisions of the new
immigration law. As more recent immigrants become citizens, they
will be entitled to bring in spouses and children without quota
limitations.
For these reasons, if the conditions of the 1970s and early 1980s
do not change radically, at least 450,000 immigrants are likely to enter
the U.S. each year for the balance of the century. Immigration at this
rate would add about 9.5 million people to the U.S. population
(including the children of immigrants) and approximately 4 million to
the U.S. labor force. If illegal immigration continues at recent rates,
and legal immigration is unchanged, the 750,000 annual immigrants
will swell the population by 16.1 million and the labor force by 6.8
million. A mid-point forecast of 600,000 immigrants annually is used
in the surprise-free scenario. Even under the most conservative
assumptions, both the Hispanic and Asian populations are likely to
double, to 30 million and 10 million, by the year 2000. As they have
in the past, most of these new residents will cluster in the cities and
states where they are concentrated today. California is likely to be
particularly affected, with more than two-fifths of its population
being Hispanic or Asian by the year 2000.
The Impacts of Immigration
Although immigration triggers fears of job losses and earnings
stagnation, the evidence suggests that, on balance, levels of immigra-
tion of 450,000-750,000 will benefit the country. For example, studies
of the Los Angeles labor market, where more than 1 million foreign-
born persons settled during the 1970s, show that job growth was well
above the national average during the period and that unemployment
fell below national rates. Although manufacturing wages were de-
pressed as a result of the immigrant influx, service industry wages, in
which native-born American were concentrated, rose faster than the
national average.
Since immigrants to Los Angeles have been both less-educated
(57 percent had less than a grade school education) and more
numerous than those expected nationally over the next 13 years, the
Los Angeles experience is a persuasive argument that immigration
need not overwhelm the "carrying capacity" of the country.
One particularly important concern with immigration is its
impact on the job prospects of native minorities. Although the
evidence is not definitive, the results of one statistical analysis of 247
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94 WORKFORCE 2000
metropolitan areas concluded that black unemployment rates are not
increased by a rise in the proportion of Mexican immigrants in a local
labor market. These results suggest that, to some extent, immigrants
are complementary to, rather than in competition with, native minor-
ity workers.
In fact, it is plausible that residents of areas that experience
significant influxes of immigrants will benefit rather than suffer from
the new workers. This will be particularly likely over the long-run.
Census data and other studies have shown that, over 10 or 20 years,
the earnings of immigrants and their offspring will equal or exceed
those of native-born Americans with similar characteristics. The
South and West, already enriched by their comparative surfeit of
young workers, will be even more likely to attract new jobs and
self-reinforcing economic growth, if immigration rises and if these
immigrants succeed in the labor market in later years.
Despite the evidence of economic benefits, immigration has
always triggered negative emotional reactions from natives, and the
current concerns with the "loss of control" of U.S. borders are
continuing this tradition. A plurality of poll respondents favor less
immigration, and only 7 percent favor more. It is not unlikely that,
over the next 13 years, the political reaction to these voter attitudes
will lead to much more restrictive and vigorously-enforced legislation
and to dramatically reduced immigration flows.
One particularly ominous version of this scenario might result
from an explosive increase in the numbers of immigrants following,
for example, a major revolution in Central or South America. Huge
numbers of refugees might throng into the country, followed by the
passage of harsh laws and strict border controls. The supply of
immigrant labor might become one more rapidly-fluctuating factor in
the economic equation of the South and West, similar to the price of
oil, the value of the dollar, or the rate of inflation.
Even if no radical border-dosing laws are passed, one likely
outcome of the anti-immigrant emotions will be greater divisions
between Hispanics and blacks. If the labor market experience of
Hispanics and blacks diverges, the unity of interest that currently
appears to unite these groups may crumble. By the year 2000, it is
possible that the political relationships between blacks and Hispanics
will be beginning to resemble those between blacks and older urban
ethnic groups such as the Italians, Irish, or Poles.
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Work And Workers In The Year 2000
100
90
80
70
60
g 50 ?
a)
a.
40
30 ?
20
10 ?
Figure 3-7
MOST NEW ENTRANTS TO THE LABOR FORCE WILL
BE NON-WHITE, FEMALE OR IMMIGRANTS
47
EggiggEggi
1)1111111111111111 4
0 3
5
15
4
13
13
49 ,
Labor Force, 1985 Increase, 1985-2000
Source: Hudson Institute
95
O NATIVE WHITE
MALES
NATIVE WHITE
FEMALES
EZ] NATIVE NON-WHITE
MALES
NATIVE NON-WHITE
FEMALES
MI IMMIGRANT MALES
MI IMMIGRANT
FEMALES
The Workforce of 2000
The cumulative impact of the changing ethnic and racial compo-
sition of the labor force will be dramatic. The small net growth of
workers will be dominated by women, blacks, and immigrants.
White males, thought of only a generation ago as the mainstays of the
economy, will comprise only 15 percent of the net additions to the
labor force between 1985 and 2000 (see Figure 3-7).
For companies that have previously hired mostly young white
men, the years ahead will require major changes. Organizations from
the military services to the trucking industry will be forced to look
beyond their traditional sources of personnel. For well-qualified
minorities and women, the opportunities will be unusually great.
The Changing Job Mix
What will be workforce of 2000 be doing? The changes projected
for the nation's industrial structure will restructure U.S. occupational
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96 WORKFORCE 2000
patterns. The jobs that will be created between 1987 and 2000 will be
substantially different from those in existence today. A number of
jobs in the least-skilled job classes will disappear, while high-skilled
professions will grow rapidly. Overall, the skill mix of the economy
will be moving rapidly upscale, with most new jobs demanding more
education and higher levels of language, math, and reasoning skills.
These occupational changes will present a difficult challenge for the
disadvantaged, particularly for black men and Hispanics, who are
underrepresented in the fastest growing professions and overrepre-
sented in the shrinking job categories.
Predicting The Jobs of the Future
Each industry requires a different mix of occupations to create its
products or services. The insurance industry for example, requires far
more accountants and lawyers and many fewer cashiers than the
retailing business. Within manufacturing, research-intensive indus-
tries such as computers require more scientists and engineers, but
employ fewer tool and die makers than traditional industries such as
steel or automobiles.
The occupational mix of each industry changes gradually, as
industries adjust to their evolving environment by employing people
with different skills and occupational titles. The health-care industry,
for example, is increasingly dominated by large national firms that
manage a wide variety of hospitals, clinics, and other facilities. For
this reason, the industry is employing increasing numbers of manag-
ers and administrators whose jobs did not exist 15 years ago.
By projecting these changes in the mix of occupations in each
industry and applying the projected matrix to the predicted industrial
structure of the economy in the year 2000, it is possible to forecast
coming changes in the mix of occupations.2 The results suggest that the
job prospects for professional and technical, managerial, sales, and
service jobs will far outstrip the opportunities in other fields. In contrast
to the average gain of about 25 percent across all occupational categories,
the fastest growing fields?lawyers, scientists, and health profession-
2See the technical appendix for details of the methodology employed in these
projections.
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Work And Workers In The Year 2000 97
Table 3-7
THE CHANGING OCCUPATIONAL STRUCTURE, 1984 2000
Occupation
Current Jobs
New Jobs
Rate of Growth
Total
(000s)
105,098
(000s)
25,952
(Pesseritage)
7.'" 25
Service Occupations
16,059
5,957
37
Managerial and Management-
Related
10,893
4,280
39
Marketing and Sales
10,656
4,150
39
Administrative Support
18,483
3,620
20
-)
Technicians
3,146
1,389
Tf
Health Diagnosing and Treating
2,478
1,384
Occupations
Teachers, Librarians, and
4,437
1,381
31
Counselors
Mechanics, Installers, and Repairers
4,264
966
23
Transportation and Heavy
4,604
752
16
Equipment Operators
Engineers, Architects, and
1,447
600
41
Surveyors
Construction Trades
3,127
595
19
Natural, Computer, and
647
442
Mathematical Scientists
Writers, Artists, Entertainers, and
1,092
425
39
Athletes
Other Professionals and
825
355 ?
43
Paraprofessionals
Lawyers and Judges
457
326
(-7D
Social, Recreational, and Religious
759
235
31
Workers
Helpers and Laborers
4,168
205
5
Social Scientists
173
70
40
Precision Production Workers
2,790
61
2
Plant and System Workers
275
36
13
Blue Collar Supervisors
1,442
?6
0
Miners
175
?28
?16
Hand Wworkers, Assemblers, and
2,604
?179
?7
Fabricators
Machine Setters, Operators, and
5,527
?448
?8
Tenders
Agriculture, Forestry, and Fisheries
4,480
?538
?12
Source: Hudson Institute.
als---will grow two to three times as fast. On the other hand, jobs as
machine tenders, assemblers, miners, and farmers actually decline (see
Table 3-7).
Rising Educational and Skill Requirements
Among the fastest-growing jobs, the trend toward higher edu-
cational requirements is striking. Of all the new jobs that will be
created over the 1984-2000 period, more than half will require some
education beyond high school, and almost a third will be filled by
college graduates. Today, only 22 percent of all occupations require a
college degree. The median years of education required by the new
jobs created between 1984 and 2000 will be 13.5, compared to 12.8 for
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Table 3-8
THE OCCUPATIONS OF THE FUTURE WILL REQUIRE MORE
EDUCATION
Current Jobs
New Jobs
Total
100%
100%
8 Years or Less
6%
4%
1-3 Years of High School
12%
10%
4 Years of High School
40%
35%
1-3 Years of College
20%
22%
4 Years of College or More
22%
30%
Median Years of School
12.8
13.5
Source: Bureau of Labor Statistics, Hudson Institute.
the current workforce (see Table 3-8).
Looked at another way, of the job categories listed in Table 3-7
that are growing faster than average, all but one?service occupa-
tions?require more than the median level of education for all jobs.
Of those growing slowly or declining, not one requires more than the
median education (see Figure 3-8).
These estimates assume that, for each occupation, the new jobs
created will require the same levels of education required for that
occupation today. The recent trend, however, is toward higher
education levels in each job category. If this trend prevails, levels of
educational attainment required for new jobs may be even higher
than those projected.
Education levels, of course, are only a rough proxy for the skills
required for employment. But more detailed analysis of the language,
math, and reasoning skills required for various jobs reinforces the
conclusion that the skill mix of the U.S. economy will rise substan-
tially between now and the end of the century. For example, when
occupations are ranked by the U.S. Department of Labor according to
a specific set of skill criteria, there is a direct correlation between the
level of skills required and the rate of growth of employment in the
occupation. Ranking of all jobs according to the skills required on a
scale of 1-6, with six being the highest level of skills,3 indicates that
3For example, in the area of language development, a job rated 6 might require an
individual to read literature or scientific and technical publications, and to write
journals or speeches. A level 2 might require only the ability to read stories and simple
instructions, write compound and complex sentences, and speak using all tenses. In
math, the top-skill group would be expected to use advanced calculus, econometrics,
or statistical probabilities, while a level 2 would be expected only to add, subtract,
multiply, and divide, compute ratios and percents, and interpret bar graphs. See the
technical appendix for more details.
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Work And Workers In The Year 2000 99
Table 3-9
FAST-GROWING JOBS REQUIRE MORE LANGUAGE, MATH,
AND REASONING SKILLS
Current
Jp
Fast
Growing
Slowly
Growing
Declining
Language Rating
3.1
3.8
2.7
1.9
Math Rating
2.6
3.1
2.3
1.6
Reading Rating
3.5
4.2
3.2
2.6
Source: Hudson Institute.
the fastest-growing jobs require much higher math, language, and
reasoning capabilities than current jobs, while slowly-growing jobs
require less. Natural scientists and lawyers, for example, whose
average skill requirements are the highest rated at 5.7 and 5.2, are also
the two fastest-growing occupations, with each field slated to add up
to 70 percent more workers. Occupations in decline, on the other
hand, show some of the lowest levels of required skill. (see Table 3-9)
For example, machine setters and hand working occupations have
language skill ratings of 1.8 and 1.7, and both will decline by more
than 7 percent by the year 2000.
Looked at in aggregate, the picture is even starker. When skill
requirements in language, reasoning, and mathematics are averaged,
only four percent of the new jobs can be filled by individuals with the
lowest levels of skills, compared to 9 percent of jobs requiring such
low skills today. At the other end of the scale, 41 percent of the new
jobs will require skills ranked in one of the top three categories,
compared with only 24 percent that require such proficiency at
present (see Figure 3-8).
Although the overall pattern of job growth is weighted towar
higher-skilled occupations, very large numbers of jobs will be create
in some medium-to low-skilled fields. In absolute numbers, th
biggest job creation categories will be service occupations, adminis-
trative support, and marketing and sales, which together account filr
half of the net new jobs that will be created. In the service categorir,
the largest groups are cooks, nursing aides, waiters, and janitor
Among administrative support jobs, secretaries, clerks, and conir-
puter operators predominate. In marketing and sales, most of the
new slots will be for cashiers. With the exception of computer
operators, most of these large categories require only modest levels of
skill.
But even for these jobs, whose typical skill scores fall in...4We'
middle of the current skill range with total scores between 2.5 and 3,
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40
Figure 3-8
LOW SKILLED JOBS ARE DECLINING
30 -
1 0 -
ElEXISTING JOBS
35
Ill NEW JOBS
31
1
SKILL RATINGS OF TYPICAL JOBS
28
.77.:47
0.7-1.4 1.5-2.4 2.5-3.4 3.5-4.4
SKILL RATING
Source: Hudson Institute.
Natural Scientists
5.7
Lawyers
5.2
Engineers
5.1
Management
4.4
Teachers
4.2
Technicians
4.1
Marketing and Sales
3.4
Construction
3.2
Administrative
2.9
Service Occupations
2Z
Precision Production
2.5
Farmers
23
Transport Workers
2.2
Machine Setters
1.8
Hand Workers
1.7
Helpers and Laborers
1.3
11
4.5-5.4
1 2
5.5-6.4
workers will be expected to read and understand directions, add and
subtract, and be able to speak and think clearly. In other words, jobs
that are currently in the middle of the skill distribution will be the
least-skilled occupations of the future, and there will be very few net
new jobs for the unskilled.
Moreover, these middle/low-skilled jobs are concentrated in
service industries in which wage gains and productivity growth have
traditionally been weak. Over the past two decades, a self-reinforcing
pattern of job growth for low-skilled, low-productivity low-paid
workers has dominated much of the service economy. This has been
a two-edged sword. On the one hand, it has provided millions of jobs
for relatively low-skilled workers. On the other, it has hampered the
improvement of productivity in the economy and held down overall
wage gains.
As discussed earlier, demographic, institutional, and technolog-
ical changes are likely to force substantial streamlining and automa-
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Work And Workers In The Year 2000 101
tion of many service industries by the year 2000. When this occurs, it
will benefit the economy by raising overall productivity and wage
levels within these industries. For unskilled workers, however, it will
mean that job opportunities may be even scarcer than these projec-
tions suggest. Unless the nation is able to bring even its least able
workers up to higher standards of education and skills, it is likely that
average rates of unemployment will rise, as service industries are
automated. If service industry productivity rises as expected, the
pattern of structural unemployment at ever-higher levels during each
cyclical recovery will become more pronounced.
The Impact of the Changing Job Market On Minority
Workers
How will the changing job market affect the employment pros-
pects of the various groups within the society? In particular, what do
the changes promise for disadvantaged groups such as blacks and
Hispanics?
By analyzing the current occupational patterns of blacks, Hispan-
ics, and others, and projecting these patterns onto the occupational
matrix forecast for the year 2000, it is possible to estimate the likely
impacts of the changing job market. If each group is assumed to retain
its share of the jobs in each occupational category, the overall impact
of the changing job market on the job prospects of various groups of
workers can be estimated. Comparing this implied job share with the
projections of the share of the new labor force entrants that various
groups will comprise gives an indication of the degree to which
traditional occupational patterns must change over the next decade
and a half. Although such an analysis should not be interpreted as a
projection, it can indicate the scale of the challenge that the society
faces_iniully_employing all its members in the future.
For black men and Hispanics, the job market will be particularly
difficult (see Table 3-10). In contrast to their rising share of the new
entrants into the labor force,_black men will hold a declining fraction of
all jobs if they simply retain existing shares of various occupations.
Black women, on the other hand, will hold a rising fraction of all jobs
if they retain their current shares of each occupation, but this increase
will be less than needed to offset their growing share of the work-
force.
Similarly, although the economy will be creating more jobs in the
categories traditionally held by middle-aged workers and women, the
increases will not be enough to offset the increases in the labor force
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102 WORKFORCE 2000
Table 3-10
BLACK MEN AND HISPANICS FACE THE GREATEST
DIFFICULTIES IN THE EMERGING JOB MARKET
Share of
Implied Share
Share of Labor
Group
Current Jobs
of New Jobs
Force Growth
(1985-2000)
Women
45.0%
50.5%
59.3%
Blacks
9.9%
9.5%
19.7%
Black Men
4.9%
3.8%
7.7%
Black Women
5.1%
5.6%
12.0%
Hispanics
6.4%
5.0%
22.0%
Ages 16-24
19.1%
17.9%
?9.6%
25-44
51.6%
53.0%
44.8%
45+
29.3%
29.1%
64.8%
Source: Hudson Institute Projections.
in these categories. For young people, the small decline in the
numbers of jobs they traditionally have held will be overwhelmed by
a large decline in the numbers of young people entering the work-
force. This suggests both that there will be substantial shifts in
sex/race/age distribution of various occupations and that the greatest
shifts must be made by minorities and by older workers and females.
But because minorities are currently the least advantaged in terms of
their skill levels and educational backgrounds, the transition for them
will be particularly difficult.
The Implications of the Changing Occupational
Structure
This rapid increase in the skills required for new jobs in the
economy must be put in the context of the competence of the new
workers entering the workforce. The evidence suggests that many
millions of these new workers lack even the basic skills essential for
employment. For example, the recent National Assessment of Edu-
cational Progress undertaken by the U.S. Department of Education
(NAEP) found that among 21-25 year olds:
?only about three-fifths of whites, two-fifths of Hispanics, and a
quarter of blacks could locate information in a news article or an
almanac;
?only a quarter of whites, 7 percent of Hispanics, and 3 percent of
blacks could decipher a bus schedule;
?only 44 percent of whites, 20 percent of Hispanics, and 8 percent
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Work And Workers In The Year 2000
103
of blacks could correctly determine the change they were due
? from the purchase of a two-item restaurant meal.
The forces that are shaping the U.S. economy will make it
increasingly difficult for young Americans such as these to succeed in
the job market. In particular, as change accelerates and more training
is needed, many workers will need advanced skills simply to give
them access to useful job training. For example, assembly-line work-
ers in many manufacturing plants are learning statistical process
control, a system that is beyond the reach of those without a solid
grounding in mathematics.
As the U.S. economy becomes increasingly integrated with the
world economy, the ability of the U.S. government or American
unions to insulate workers without skills from competition with
unskilled workers in other countries will decline. A decade ago, it was
possible to pay unskilled janitors in automobile plants $12 per hour,
because they worked in unionized, high-productivity plants in a
wealthy economy. The economy of the future will not produce or
sustain such high-wage, low-skill jobs.
During the 1985-2000 period, the good fortune to be born in or to
immigrate to the United States will make less difference than the luck
or initiative to be well-educated and well-trained. For individuals, the
good jobs of the future will belong to those who have skills that
enable them to be productive in a high-skill, service economy. For the
nation, the success with which the workforce is prepared for high-
skilled jobs will be an essential ingredient in maintaining a high-
productivity, high-wage economy.
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CHAPTER 4
Six Challenges
Most of the laws and policies that affect American jobs and
workers were developed several decades ago. Many date from the
1930s and 1960s, when economic conditions were different, world
trade was less important, manufacturing was more dominant, and
women and minorities were a smaller share of the workforce. As the
changes in the American economy and workforce unfold over the
balance of the century, many of these policies will become increas-
ingly outmoded. Between now and the year 2000, six issues will
require rethinking and revision:
? Stimulating Balanced World Growth: The U.S. must pay less attention
to its share of world trade and more to the growth of the economies
of the other nations of the world, including those nations in Europe,
Lath America, and Asia with whom the U.S. competes.
? Accelerating Productivity Increases in Service Industries: Prosperity will
depend much more on how fast output per worker increases in
health care, education, retailing, government, and other services,
than on gains in manufacturing.
? Maintaining the Dynamism of an Aging Workforce: As the average age
of American workers climbs toward 40, the nation must insure that its
workforce does not lose its adaptability and willingness to learn.
? Reconciling the Conflicting Needs of Women, Work, and Families: Des;;;-1
the huge increases in the numbers of women in the workforce, many
of the policies and institutions that cover pay, fringe benefits, time
away from work, pensions, welfare, and other issues have not yet
been adjusted to the new realities.
? Integrating Black and Hispanic Workers Fully Into the Economy: The
shrinking numbers of young people, the rapid pace of industrial
change, and the rising skill requirements of the emerging economy
make the task of fully utilizing minority workers particularly urgent
between now and 2000.
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106 WORKFORCE 2000
? Improving the Education and Skills of All Workers: Human capital?
knowledge, skills, organization, and leadership?is the key to eco-
nomic growth and competitiveness.
Stimulating World Growth
For more than a decade, American policymakers have been
concerned with the U.S. balance of trade, the nation's deteriorating
ability to compete internationally, and the presumed unfairness of the
trading policies of other countries. These are not unimportant issues.
They are not, however, the most critical international problems facing
the nation.
U.S. prosperity between now and the end of the century will
depend primarily on how fast the world economy grows and on how
rapidly domestic productivity increases. It will depend very little on
how open or closed the Japanese market is to American goods or even
on how soon U.S. trade accounts return to balance.
A historical analogy clarifies the point. Almost a century ago,
Michigan and Indiana were both production sites for automobiles,
and companies in the two states competed aggressively for markets.
By the second decade of the twentieth century, however, the battle
was over, and Michigan had emerged as the primary location of this
important industry. Over the next five decades, enormous wealth
was created in Michigan, as the rest of the nation bought millions of
these expensive consumer products.
But the Hoosiers did not become poor as Michigan became rich.
Instead, the vast wealth created in Michigan created new markets for
thousands of products and services that were supplied by Indiana
and other states. As Michigan grew, so did the rest of the country.
Indiana would have been very foolish if, in a fit of pique, it had
decided not to buy Michigan's cheap cars or to require that Michigan
buy as much from Indiana as it sold.
The analogy is not precise, but the message is identical. The envy
and anger that many in the United States feel toward Japan's success
should not blind policymakers to the reality that, as Japan (and every
other nation of the world) grows richer, the United States will benefit.
Just as it is easier for a company to prosper in a rapidly-growing
market than to capture market share in a shrinking one, the United
States will be more prosperous in a world in which knowledge,
technology, and markets are proliferating, rather than one where the
U.S. dominates a static or slowly-growing world economy.
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Six Challenges 107
Of course, if other nations grow much faster than the U.S. over
a long period of time or if America loses its leadership in the most
advanced technologies and the most rapidly-growing industries, the
U.S. could become an economic also-ran, just as Britain and Argen-
tina did previously. But the task of insuring continued strong U.S.
growth has little to do with changing the behavior of the Japanese or
the Koreans.
Instead, it involves changing in the propensity of Americans to
borrow and spend rather than to save. This applies, not only to
personal savings rates (Japanese households save about 16 percent of
their incomes, compared to less than 5 percent for Americans) but
more importantly to government borrowing and spending. It also
involves major improvements in the educational preparation of large
numbers of prospective workers (it has been observed that, in the
competition between the U.S. and Japan, the world's best-educated
lower half of the workforce is beating the world's best-educated
upper half). And it involves reforming the incentives and institutions
that encourage America's best and brightest to provide legal advice in
corporate takeovers rather than to build companies that exploit new
technologies.
Whatever is done to improve U.S. competitiveness must always
be undertaken within the context of strengthening the world econo-
my. It is in America's economic and political self-interest to restimu-
late the economies of the developing countries, where the fastest
growth and productivity gains are still ahead. This may mean taking
a much more aggressive role in leading multilateral efforts to rechan-
nel excess savings from the trade surplus nations to the developing
world. It also means trying to coordinate U.S. fiscal and monetary
policies with other major nations, so that the world is pushed toward
rapid growth rates near to those experienced during the 1950s and
1960s. And it means insuring that trade frictions do not lead to
restrictions on trade in products, capital, or people, since these
exchanges are the key to world dynamism and growth.
Improving Productivity in Service Industries
Manufacturing still controls the imagination, the statistics, and
the policies of the nation, even though it no longer represents the
most important activity in the American economy. The problem is
most severe in the efforts that have been mounted to enhance the
nation's productivity growth.
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108 WORKFORCE 2000
Most government steps to boost productivity have focused on
such things as incentives for capital investment in industry, reduced
environmental and antitrust regulation, refraining workers displaced
from manufacturing plants, and preserving of the nation's industrial
base against unfair foreign competition. The nation's mental image of
progress is one in which American factories produce more cars,
computers, and carpets per hour.
But these activities now represent a small and shrinking fraction
of national employment and output. Moreover, manufacturing pro-
ductivity performance has been relatively satisfactory and continues
to improve.
Services are a far larger segment of the economy, where produc-
tivity has actually declined in recent years. These industries?health,
education, trade, finance, insurance, real estate, and government?
must be the targets of government efforts to improve productivity.
Two kinds of actions are needed:
? Remove the Barriers to Competition in Services: A huge portion of the
service economy has not been touched by competition, ranging from
education, which at the elementary and secondary level is a public
monopoly, to health care, where control of costs has been in the
hands of the providers. In the last decade, government has taken
significant steps to deregulate transportation and communications,
and competition in these fields has triggered major productivity
gains.
Now the task is to bring competition to health, education, and
government. While much of the responsibility rests with state and
local officials, the federal government could provide powerful stim-
ulus for change. For example, educational vouchers could serve to
stimulate experimentation and competition in local schools. To make
this competition effective, better measures of educational progress are
needed?including standardized national tests that will enable schools,
systems, and states to be compared with each other. Only when
student learning progress is comprehensively assessed, and matched
against investments of money and time, can productivity be judged.
Without such measurable productivity data, there is no rational way
to modify the system to attain higher standards and greater efficiency.
Competition in the schools should be mirrored in the health-care
system. The steps that have been taken to reform Medicare and
Medicaid to eliminate cost-plus reimbursement and institute fixed
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Six Challenges 109
payments should be extended and perfected. Payment on a per
person basis, greater emphasis on individual responsibility for health
and for health-care costs, and rewards for efficient care providers
should be implemented. These should be backed up with much more
extensive monitoring of the results of treatment: comprehensive
statistics on the effectiveness of various care and prevention strategies
are needed if cost-effectiveness is to improve while quality is main-
tained. Productivity cannot be improved unless it can be systemati-
cally measured.
Beyond education and health care, many other services provided
by government should be returned to the competitive economy. At
the federal level, services ranging from air traffic control to the Post
Office could be handled more productively by private contractors. At
the state and local level, not only the traditionally private road-
building and construction tasks, but sanitation, social services, cor-
rections, transit, and many other services should be competitively
bid.
In choosing to undertake the complex task of privatizing govern-
ment services, it is important to focus on the long-term benefits of the
strategy. Regardless of the calculus of immediate cost savings, (which
are usually significant), the more important gains flow from the
dynamism that private competition promotes. Competitors innovate.
Bureaucracies respond?often slowly. Unless the government bu-
reaucracies that now monopolize large segments of the economy are
forced to compete, they will change slowly or not at all, and
productivity will stagnate.
? Invest in Technologies that Enhance Productivity in Services: The federal
government is one of the largest hinders of research and develop-
ment. Although most of these investments are in the defense and
health industries, their impacts spread throughout the economy. For
example, federal research funds have helped to underwrite the
development of integrated circuits, computers, robots, and many
other important technologies.
Little of the research that is funded by government is purposely
aimed at improving the nation's productivity. And virtually none is
directed to the important task of enhancing productivity in services.
But in two areas in particular, the government role is so over-
whelming and the opportunities for productivity gains are so exciting
that new R&D investments by the government should be considered.
In education, for example, the potential for using integrated comput-
er, video, and sound technologies to accelerate learning and improve
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110 WORKFORCE 2000
the efficiency of the educational system is astounding. Although the
development of hardware and software by private industry is pro-
ceeding, the risks are great, and the pace of progress and investment
has been slow. If government were to invest in the development of a
set of advanced, public-domain computerized courses for use in
elementary, secondary, and postsecondary schools, the returns to the
nation could well be spectacular in terms of learning gains, cost
savings, and, in particular, the achievement of disadvantaged stu-
dents. With the skills of the workforce an increasingly critical key to
future economic success, such an investment by government?which
would likely be less than $1 billion?could easily be justified.
In health care, the federal government currently spends $6 billion
annually on health research. Yet, though the federal government
pays more than $100 billion per year in health-care costs, few of its
research dollars go to improve the efficiency of the industry. Instead,
almost all federal research funds go toward advancing medical
knowledge and developing new, often expensive, techniques for
improving health and prolonging life. This strategy is the equivalent
of General Motors spending all of its research funds on making
bigger, fancier, faster cars and none on improving the efficiency of its
factories.
While improved health is obviously a worthwhile social goal
deserving government investment, ignoring research that could cut
the cost of care threatens to undermine the objective of a healthier
nation, by pricing health care out of reach. The potential for automa-
tion and other kinds of productivity-enhancing innovations in billing,
diagnosis, testing, treatment, and care is enormous. Again, private
industry is moving ahead in these fields, but there is substantial
potential payoff from redirected government research spending.
Improving the Dynamism of an Aging Workforce
At the same time that the workforce is aging and becoming less
willing to relocate, retrain, or change occupations, the economy is
demanding more flexibility and dynamism. Despite general recogni-
tion of the importance of a flexible workforce, many national policies
fail to promote this end.
For example, the nation's pension system is one in which most
retirement benefits are tied to the job. In many cases, employees
receive no benefits if they leave after a few years, and, by the time
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Six Challenges 111
they reach mid-career, they will suffer major benefit losses if they
switch employers. Designed primarily to insure company loyalty, the
system now tends to inhibit workers from changing jobs and to
discourage companies from hiring older workers. The federal gov-
ernment could encourage the restructuring of this inflexible system
through changes in the tax code and other laws. For example,
changes to encourage earlier vesting and greater portability, both of
which would help to promote more flexibility by workers, could be
encouraged with relatively modest changes in tax deductibility. IRAs,
401Ks, and similar savings-for-retirement plans could be enlarged
and encouraged, rather than capped and discouraged as they were in
recent tax changes.
Similarly, the unemployment insurance system has been largely
used to provide income support to workers who are laid off. Rela-
tively little has been done to make the system one that promotes
relocation, retraining, and job search. Although the objective of
encouraging workers to change may conflict with the humane goals
of cushioning the impact of unemployment, from a national economic
perspective, the system should be much more oriented toward
stimulating movement and change by workers, rather than simply
protecting them against joblessness.
For example, reforms that would require individuals to share in
the cost of unemployment insurance (the equivalent of a deductible in
other types of insurance) could help to discourage abuse of the
system. Lump-sum payments for those who relocate or who return to
work quickly could also encourage workers to make the difficult
adjustments that may be necessary to find new jobs.
Although worker retraining has become a catchphrase, and the
federal government and private industry now spend billions of
dollars for retraining, there is still no national consensus that all
workers should expect to learn new skills over the course of their
worklives. Except in a few companies, training is confined mostly to
managers and technical specialists, with little systematic effort to
insure that all workers are constantly reinvesting in themselves to
avoid obsolescence. National policies that promote such corporate
and individual attitudes toward retraining should be backed up with
changes in the tax code to encourage lifelong education.
For example, tax-favored individual training accounts that enable
workers to save for their own reeducation should be tested. A
program that allows students of all ages to borrow with federal
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112 WORKFORCE 2000
guarantees (and uses the tax system to collect overdue accounts)
deserves consideration. Because midlife, midcareer retraining faces so
many personal, institutional, and financial obstacles, yet offers such
significant payoffs to the national economy, a greater federal role is
justified.
Finally, the goal of promoting dynamism requires reconsidera-
tion of national policies on immigration. The most careful studies of
immigration have conduded that new entrants to the country not
only do well in the labor market (without significantly hurting native
workers), they soon become net contributors to the tax base and the
national economy. The need for more, better-educated immigrants to
help staff a growing economy will increase as the growth of the
population and labor force slows in the 1990s.
At the same time that it is implementing a program to reduce
illegal immigration, the nation should begin a program of gradually
increasing its quotas for legal immigrants, opening its doors to more
individuals desiring to enter the country. Beyond the apparent
economic gains that such higher quotas will bring, immigration will
provide important intangible benefits: entrepreneurial vitality, a more
diverse national culture, a stronger sense of identification, and shared
opportunities among the United States and the countries from which
immigrants come.
Reconciling the Needs of Women, Work, and Families
America has become a society in which everyone is expected to
work?including women with young children. This is a relatively
recent trend. In 1960, only 11 percent of women with children under
the age of six worked. Today 52 percent do. Because universal work
is so new, the nation has not fully recognized the implications of the
trend, much less adapted to it.
Many of society's institutions were designed during an era of
male breadwinners and female homemakers. Some of these institu-
tions, such as national leave policies, have perverse impacts, making
it difficult for women to participate fully in the economy. Other
policies and programs encourage some women (e.g., welfare moth-
ers) to have children, while discouraging others from doing so (e.g.,
young couples with limited incomes).
The institutions and policies that govern the workplace should
be reformed to allow women to participate fully in the economy and
to insure that men and women have the time and resources needed
to invest in their children. For example:
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Six Challenges 113
? Time Off For Parents: Working full-time and raising children demand
more time, energy and money than most parents have. While the
challenge is great for a two-parent family with healthy children and
enough money for day care, the problems can be overwhelming for a
single parent with a limited income and a sick child.
The solution is straightforward, but expensive: more time away
from work for parents. Flexible hours, the use of sick leave to care for
children, more part-time work, pregnancy leaves for mothers and
fathers, and other innovations offer parents time for child care. Seven
of ten mothers would prefer part-time work, stay-at-home jobs, or
flexible work hours, yet only half have such situations.
Short of mandating such changes as pregnancy leaves, the
federal government might take steps to promote the use of part-time
and flexible hours. For example, it could change the thresholds for
Social Security and unemployment insurance taxes to make it less
costly for employers to use part-time workers.
? More High Quality Day Care: When both parents work, the primary
responsibility for child-raising falls to day care providers. The evi-
dence shows that the quality of this care has large impacts on the
subsequent success of the children.
Currently, only about 2000 of the nation's six million employers
provide day care as a fringe benefit. Yet there is evidence that firms
that provide day care assistance have less turnover, better success in
recruiting employees, less absenteeism, and higher worker produc-
tivity than those that do not.
Over the next 13 years, it is likely that the most sophisticated
employers will expand their support for day care. The government
might assist and accelerate this trend by expanding the child care tax
credit, creating a child care voucher, or by offering a tax credit to
employers that assist with day care.
Other federal programs provide day care directly to poor chil-
dren, notably Head Start. There is now persuasive evidence that early
childhood education pays significant long-term social and economic
dividends in terms of enhanced skills, better performance in school,
increased employability, and reduced crime. More such investments
in the care of poor children appear to be justified.
? Welfare Reform: The current welfare program was designed long
before most women worked. Now that a majority of nonwelfare
women with young children work, it no longer seems cruel to require
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114 WORKFORCE 2000
welfare mothers to do so. The current system should be replaced with
one that mandates work for all able-bodied mothers (excluding only
those with infants), while providing training, day care, and job
counseling. To be effective, the job requirement must be backed with
a substantial job creation program at the state and local level.
Integrating Blacks and Hispanics Fully into the
Workforce
For minority workers, the changes in the nation's demography
and economy during the 1990s represent both a great risk and a great
opportunity. With fewer new young workers entering the workforce,
employers will be hungry for qualified people and more willing to
offer jobs and training to those they have traditionally ignored. At the
same time, however, the types of jobs being created by the economy
will demand much higher levels of skill that the jobs that exist today.
Minority workers are not only less likely to have had satisfactory
schooling and on-the-job training, they may have language and
attitude problems that prevent them from taking advantage of the
jobs that will exist.
If the policies and employment patterns of the present continue,
it is likely that the demographic opportunity of the 1990s will be
missed and that, by the year 2000, the problems of minority unem-
ployment, crime, and dependency will be worse than they are today.
Without substantial adjustments, blacks and Hispanics will have a
smaller fraction of the jobs of the year 2000 than they have today,
while their share of those seeking work will have risen.
Each year of delay in seriously and successfully attacking this
problem makes it more difficult. Not only will the jobs become more
sophisticated and demanding, the numbers of new workers entering
the workforce will begin to increase after 1993. Now is the time to
renew the emphasis on education, training, and employment assis-
tance for minorities that has been pursued with limited success over
the past several decades. These investments will be needed, not only
to insure that employers have a qualified workforce in the years after
2000, but finally to guarantee the equality of opportunity that has
been America's great unfulfilled promise.
If new efforts to employ minority workers are to succeed where
earlier efforts have failed, both individual attitudes and social institu-
tions must change.
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Six Challenges 115
Traditional job training and employment programs by them-
selves are unlikely to have profound impacts on the future success of
minority youth. Unless the $127 billion public educational system can
somehow be better harnessed to serve minority youth, the $4 billion
Job Training Partnership Act system can make only a small dent in the
problem. For the public educational system to succeed with the
minorities, however, may require radical changes. In school districts
with the most serious problems, not only vouchers but complete
privatization of the schools should be considered. Performance stan-
dards should be applied, not only to teachers but to students,
administrators, and schools themselves. In practice, this might mean
not only support for magnet schools that can be islands of excellence,
but a willingness to close the worst schools, fire incompetent teach-
ers, and expel disruptive students.
The complex interconnections between employment, education,
literacy, cultural values, income, and living environments argue that
employment problems cannot be solved without also addressing
issues of individual and family responsibility. The choices are not
simply between on-the-job training and basic skills remediation
programs for teenagers, but among investments in child care, preg-
nancy prevention, welfare reform, big brother programs, and other
possible interventions. Before minority unemployment can be signif-
icantly reduced, there must be change in the cultural values that make
it seem more attractive to sell drugs or get pregnant than to do well in
school and work at McDonald's.
Private employers have a new, and more expensive, role to play
in the development of their workforces. Not only are they critically
affected by the quality of the workers they will hire over the next 13
years, they are among the most knowledgeable designers and imple-
menters of cost-effective, technology-based training programs. If
there are real breakthroughs in training and hiring young disadvan-
taged workers between now and the year 2000, "second chance"
educational systems developed at the worksite are likely to play a key
role.
Improving Workers' Education and Skills
In previous centuries, the wealth of nations was thought to
consist of gold in the national treasury and jewels in the emperor's
crown. In more recent years, wealth has often been equated with
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116 WORKFORCE 2000
factories, mines, and production machinery within a nation's bor-
ders.
As the miraculous rebirth of Europe and Japan after World War II
has proven, however, the foundation of national wealth is really
people?the human capital represented by their knowledge, skills,
organizations, and motivations. Just as the primary assets of a
modern corporation leave the workplace each night to go home for
dinner, so the income-generating assets of a nation are the knowledge
and skills of its workers?not its industrial plants or natural resourc-
es.
As the economies of developed nations move further into the
post-industrial era, human capital plays an ever more important role
in their progress. As the society becomes more complex, the amount
of education and knowledge needed to make a productive contribu-
tion to the economy becomes greater. A century ago, a high school
education was thought to be superfluous for factory workers and a
college degree was the mark of an academic or a lawyer. Between
now and the year. 2000, for the first time in history, a majority of all
new jobs will require postsecondary education. Many professions
will require nearly a decade of study following high school, and even
the least skilled jobs will require a command of reading, computing,
and thinking that was once necessary only for the professions.
Education and training are the primary systems by which the
human capital of a nation is preserved and increased. The speed and
efficiency with which these education systems transmit knowledge
govern the rate at which human capital can be developed. Even more
than such closely-watched indicators as the rate of investment in
plant and equipment, human capital formation plays a direct role in
how fast the economy can grow.
If every child who reaches the age of seventeen between now
and the year 2000 could read sophisticated materials, write clearly,
speak articulately, and solve complex problems requiring algebra and
statistics, the American economy could easily approach or exceed the
4 percent growth of the boom scenario. Unconstrained by shortages
of competent, well-educated workers, American industry would be
able to expand and develop as rapidly as world markets would allow.
Boosted by the productivity of well-qualified workforce, U.S.-based
companies would reassert historic American leadership in old and
new industries, and American workers would enjoy the rising
standards of living they enjoyed in the 1950s and 1960s.
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Six Challenges 117
If this bright future is to be realized, the educational standards
that have been established in the nation's schools must be raised
dramatically. Put simply, students must go to school longer, study
more, and pass more difficult tests covering more advanced subject
matter. There is no excuse for vocational programs that "warehouse"
students who perform poorly in academic subjects or for diplomas
that register nothing more than years of school attendance. From an
economic standpoint, higher standards in the schools are the equiv-
alent of competitiveness internationally.
Promoting world growth, boosting service industry productivity,
stimulating a more flexible workforce, providing for the needs of
working families with children, bringing minority workers into the
workforce, and improving the educational preparation of workers are
not the only items on the nation's agenda between now and the year
2000. But they are certainly among the most important.
More critically, they are issues that will not go away by them-
selves. If nothing unusual is done to focus national attention and
action on these challenges, they are likely still to be with the nation at
the beginning of the next century. By addressing them now, the
nation's decisionmakers can help to assure that the economy and the
workforce fulfil their potential to make the year 2000 the beginning of
the next American century.
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