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Commentary: Strong Growth Will Shrink The Wage Gap


Commentary: Strong Growth Will Shrink the Wage Gap

Is rising inequality the inevitable consequence of economic growth? Over the past two decades, it sure has seemed that way. The very forces propelling growth in the U.S.--the ever-increasing prominence of the microprocessor, heightened international competition, and widening deregulation of the economy--have also boosted demand for highly skilled, educated workers at the expense of those with fewer skills. The result: a dramatic widening of the wage gap. For example, in 1980, the median male college graduate earned about a third more than the median high school graduate; by 1993, that gap had widened to more than 70%.

In today's economy, employers continue to place a premium on education and skills. But this trend toward higher inequality may have just about run its course--and could even be about to reverse--for three reasons. First, continued low unemployment rates mean that companies will have no recourse but to hire and train less skilled workers. Second, the supply of skilled workers is swelling, which will hold down wage growth at the top. And last, information technologies are more user-friendly than before, making them more accessible to the less-educated worker. "I might be congenitally optimistic, but we may be at a turn," says economist Jared Bernstein of the Economic Policy Institute, a Washington (D.C.)-based think tank that regularly publishes statistics tracking the wage gap.

The most important factor helping to reverse the pattern of rising inequality is the unemployment rate, now at a three-decade low of 4.3%. "Help wanted" signs are everywhere, as retail stores, warehouses, and all manner of other businesses are desperate for workers. The search for workers has meant that companies have been willing to pay higher wages, even at the bottom of the income spectrum. The result: Low-income workers have been gaining ground. In 1993, hourly wages of a median worker--one right in the middle of the income distribution--were 2.03 times the earnings of workers in the lowest tenth percentile. In 1997, the wage ratio had dropped to 1.93 times, the lowest figure in 16 years, according to the Economic Policy Institute.

Low unemployment looks like it is going to turn out to be a long-term phenomenon. The U.S. labor force is projected to grow at less than a 1% annual rate over the next two decades, down sharply from the 2.3% pace of the 1970s and 1980s (chart). "The economy is facing perennially tight labor markets during the next quarter-century, and that will help alleviate a further widening in income inequalities," says Mark Zandi, economist at Regional Financial Associates Inc.

Of course, even as the position of low-income workers has improved, the top workers have been doing even better--in fact, spectacularly well. Over the past year, wages and salaries for managers, professionals, and other white-collar workers in the private sector have risen by 4.2%, compared with 3.2% for everyone else.NEW COURSES. Yet this show of inequality may be only temporary. The gains at the top may be exaggerated by the strong performance of the stock market, which has dramatically pumped up bonuses on Wall Street. In the rest of the economy, those same stock market gains have provided a temporary windfall to employees--primarily white-collar workers who receive stock options.

But over the long term, the forces of supply and demand are likely to work in favor of closing the inequality gap. Already, the supply of skilled workers is expanding rapidly as more and more people absorb the New Economy's message: Education pays. The supply of youngsters attending college has swelled dramatically. In 1979, some 49% of high school graduates went on to college the following fall. In 1997, a record 67% went on to college. Thanks largely to this supply-side response, the wage gap between high school graduates and those with a four-year college degree has been stable since 1993, according to Kevin M. Murphy, economist at the University of Chicago (chart, page 58). Indeed, he says, it is only after adding in advanced degrees, such as MBAs and law degrees, that wage inequality creeps higher.COMPUTER COMFORT. Even those with little education are adding to their knowledge. Community colleges have evolved into the bricks and mortar of a national training system. Employers are no longer concentrating their training dollars on a favored elite. Their stepped-up training efforts increasingly embrace all workers.

What's more, computer literacy has spread from the technological elite into the mainstream. Many people have grown accustomed to working with computers at home and in the workplace, and much common software has become easier to use. For the average person, for example, Windows 98 is less intimidating than MS-DOS.

Economists have continually underestimated the U.S. economy's ability to generate fast growth along with low inflation. The one dark spot has been inequality. But going forward, the New Economy will once again put income equality back at the center of the American economic experience.By Christopher FarrellReturn to top

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