The powerful surge in America's foreign trade has been the bright spot in an otherwise weak economy. Without it, the recession would undoubtedly have been more severe and the recovery even more anemic. Yet troubling new information indicates that free trade is driving a wedge right down the middle of the work force. The result? The U.S. is developing a pattern of income inequality that is different from anything it has ever experienced.
The brutal division between the haves and have-nots lies along an educational fault line. The losers in free trade are the 64 million workers who never went beyond high school. As tradethe sum of exports and importsrose from less than 10% of gross national product in the late 1970s to 25% today, imports and the shift of manufacturing jobs overseas have displaced many low-skilled workers and depressed the wages of others. Employees exiled from manufacturing have fled to service industries, glutting the job market and keeping the lid on pay for lower-skilled employees across the economy. As a consequence, real wages for high school dropouts have fallen by 20% since 1979.
By contrast, free trade has benefited the 54 million workers who finished college. Their real income grew by 8% during that time. Despite the nation's fear of losing out to Japan and Europe, the part of Americas work force employed in high-tech, high-information industries has done well in economic battles with First World competitors. But the bottom half of the working population has been hammered by Third World countries.
What is to be done? Invest heavily in worker training and education, the one proven pathway to higher productivity and the production of high-value-added goods and services. Slashing wages and transferring production to Mexico or China may be an interim step for companies to cut costs and survive in a fiercely competitive world. But long-term gains will go to those corporations that do more by offering high-quality goods, great service, speed, and low prices to customers. Only a well-trained and educated work force can embrace the kinds of total quality management, just-in-time inventory control, computerized manufacturing, teamwork systems, and other techniques so crucial to producing the goods that generate First World-level profits and salaries.
Corporate America should take note. It spends only $30 billion a year on employee training. That works out to about one-third of what Europe spends per worker. Most of the U.S. money currently goes to train managers at expensive business schools rather than to train workers at local community colleges, even though experience at Motorola and Ford, for example, shows that grass-roots employee training is what really pays off. A boost in funding and a redirection of resources would go far to make the bottom half of the work force more productive and companies more competitive.
Government could play a major role by forcing change in the public schools to boost learning and reduce the dropout rate. It could then guarantee a college education to every graduating senior through a loan program that provides tuition in exchange for national service. Washington can also use the tax code to reward companies that spend heavily on upgrading employee skills instead of chasing around the globe looking, as a few have, even to the gulags of China for the cheapest source of labor. In particular, those workers who might suffer as a direct consequence of the North American Free Trade Agreement deserve special attention.
A high-skills, high-wage strategy for all American employees is the best way to compete in the global economy. The alternative is a permanent class society no one wants.