A Rising Tide For Workers

It's no longer just the elite who are gaining from the innovation boom. Wages are growing across the board--and that's no surprise

No novelty in the United States struck me more vividly during my stay there than the equality of conditions. -- Alexis de Tocqueville, 1835

The opening sentence from Democracy in America is a striking testament to how central the idea of equality has been throughout American history. Despite the nation's very real divisions along the lines of money, race, power, and education, America has been more egalitarian and open to talent than any other country in history.

Yet economic inequality began rising dramatically a quarter-century ago. The average worker's paycheck couldn't keep up with inflation, and living standards stagnated for the bottom three-quarters of Americans. At first, the popular culprits behind these woes included the war against inflation--which cramped economic growth--as well as the decline of unions and the supply-side tax cuts of the early 1980s, which cut taxes--especially for the wealthy.

But as inequality continued to rise well into the expansion of the 1990s, a growing number of economists and intellectuals of both the left and the right pinned the blame on the two most powerful economic forces of our age, global competition and breathtaking technological change. High-tech gear transformed the workplace by taking over many routine, low-skill chores and leaving employees to perform the more complicated, high-skill tasks. The income gains largely went to the well-educated elite, expert at handling abstract concepts or doing business overseas. In 1979, median compensation for male college graduates was 42% higher than for male high school graduates. Nearly two decades later, workers with a college sheepskin pocketed 89% more than their less-educated peers. Little wonder more and more people worry that America is evolving into a two-tier society permanently divided between a technological plutocracy that will enjoy most of the economy's bounty--and everyone else, who will struggle to make ends meet.

But The 21st Century Economy likely will avoid such a grim future. Indeed, the benefits of the innovation boom are just beginning to boost all worker incomes. Real wages for the median worker rose at a 2.6% annual rate from 1996 through the first half of 1998, reversing the decline of 0.8% a year from 1989 to 1996, according to the Economic Policy Institute. The gains were greatest among lower-paid employees. With the economy continuing to expand and unemployment at its lowest point in 30 years, companies are snapping up minorities, women, seniors, and anyone else willing to work for a day's pay. Wages for workers in the 20th percentile--those earning less than 80% of all workers--increased at a 3.6% annual rate during this period. Meanwhile, workers in the 90th percentile--those making more than 90% of all workers--saw their wages grow at a 2.3% pace. What's more, the rapid economic growth promised by unleashed innovation will keep unemployment unusually low after adjusting for the inevitable effects of the business cycle. "Everything I have seen suggests that inequality shrinks with a low unemployment rate," says James K. Galbraith, an economist at the University of Texas at Austin.

ANACHRONISM. The downside? A souped-up economy means intense job insecurity from the warehouse floor to the white-collar office. It's clear already that poorly educated workers will continue to lose ground. Less appreciated is how today's tech-savvy, well-compensated worker could become an expensive anachronism as tomorrow's technological advances offer new opportunities for slashing costs and improving economies of scale. A world filled with smart computers, all linked via the Internet, could easily undermine whole sectors of today's vibrant service and information industries. In the next century, lawyers, accountants, and brokers could be the secretaries, bank tellers, and mainframe operators of the 1980s. Worries T. Brock Hinzmann, chief technology navigator at consultant SRI International: "What if you off-load services from people altogether? I'm not talking just about simple technology like speech recognition--what if it includes creativity?"

The current association between economic inequality and technological breakthroughs is far from unique. Whenever major innovations take hold, income gains typically go to better-educated workers, who can quickly master the new techniques and technologies. But history suggests that the payoff spreads as more people move up the learning curve and as additional innovations make the new technology easier to use.

Look at what happened at the turn of the century. Innovations transformed the economy as industry exploited scientific research and modern management as never before. Entrepreneurs built their companies into behemoths, thanks to the new techniques of mass production, the spread of electric power, and the rise of the internal combustion engine. Income inequality worsened as managers bid up the wages of scarce educated workers to staff the offices of their national and multinational enterprises. Yet by the 1920s, the wage premium for secondary education had declined considerably, according to research by Claudia Goldin and Lawrence F. Katz, economists at Harvard University. Education levels rose sharply as high school graduation rates jumped from around 13% in 1913 to almost 50% by 1940. Technological advances such as typewriters and mimeograph machines made many office jobs easier. More important: All groups eventually saw their wages rise and living standards improve as productivity rose at a fast clip.

The same thing seems to be happening today. A study by Katz, David H. Auter of Harvard, and Alan B. Krueger of Princeton University attributes 30% to 50% of the increase in demand for skilled workers over the past 25 years to the computer. But the talents of the American workforce are increasing even as high-tech companies create new products that don't require specialized knowledge to operate. Far from being left behind, most working- and middle-class Americans--especially from the younger generations--are learning what it will take to prosper in the years ahead. "People have a sense of what skills employers are looking for, and they are responding by going to school and getting training," says Harvard's Goldin. Adds Richard Howard, director of the Wireless Research Laboratory at Lucent Technologies' Bell Labs: "Technology goes through this cycle. You start with something simple, it goes through complexity, and then it goes back to being relatively simple."

Clearly, the evolution of technology is transforming work at an astonishing rate. And labor is responding to business' near insatiable demand for educated workers. Last year, a record 67% of high school graduates went on to college the following fall, compared with 49% in 1979. The proportion of people between 25 and 29 years old who have a bachelor's degree increased from 21.3% in 1981 to a record 27.8% in 1997. Enrollment at community colleges is strong, as is enrollment at private schools that upgrade workers' skills.

Indeed, the idea that only PhDs in computer science and their like will benefit from the technological revolution is clearly wrongheaded. Emily R. Geballe, 40, was a rock musician in Los Angeles. She was in the music scene for years, playing bass guitar and working at retail jobs to make ends meet. Tired of struggling to make a living, she took a two-year course in computer programming at a community college in the early 1990s. Geballe now lives in Seattle and troubleshoots customer technical problems for WRQ Inc., a Seattle-based software and Internet company with 700 employees worldwide. She owns a home and took a vacation in Europe last year. "Life is good," she says.

Companies also are devoting more resources to worker training. Greg Surdyk, 29, is taking advantage of his company's willingness to pay for his continuing education. In his early 20s, Greg worked as a part-time supervisor at United Parcel Service and helped his mother run a bar she owned in Cicero, Ill. Three years ago, he started attending DeVry Institute of Technology while working part-time in a warehouse. Now, he's a programming network/PC support specialist for an industrial supply company in Elmhurst, Ill. In the fall, he intends to get certified as a Microsoft systems engineer, a process that will take three months: His company will pay the $5,495 cost. "With certification and two years experience, you can get $65,000 to $70,000," he says. "If I hadn't found computers, I'd still be at UPS. Instead, I'm financially better off and have much more job satisfaction."

EQUALIZER. In one area, technology already has become a powerful force for greater equality: Women are doing better than ever. For instance, it's a lot easier for men and women to compete on an equal footing when they're working with high-tech equipment such as computers than when they're toiling on an auto assembly line. Moreover, a majority of associate, bachelor's, and master's degrees are now earned by women. The ratio of women's median pay to men's, which hovered around 60% in the late 1950s, had reached more than 75% in 1997. The gap narrows even more after adjusting for education and occupation, according to the Council of Economic Advisers.

Throughout American history, successive generations have been able to climb higher up the economic ladder than its parents. Robust productivity growth is the fundamental building block allowing each generation to get ahead. And that is what made the stagnant productivity in the 1970s and 1980s so painful for so many people. Simply put, economic growth was too weak to create enough opportunities for people to fare better than their parents. But with the economy on a fast track, that's no longer true. Living standards already are improving. More than 25% of all workers now own stocks and bonds though a retirement savings plan such as a 401(k). Better yet, a record 66% of households own the homes they live in, and many of the goods inside the house come cheaper. For example, since 1994, prices for household appliances have fallen 3.5% and home electronic equipment is down 4.1%.

Still, in an economy driven by innovation, it's clear that restructuring, reengineering, and downsizing--pick your favorite buzzword--will be a permanent part of management's tool kit in the 21st century. Employees will have to keep learning new skills with each new upheaval. "The types of risks that used to be confined to the blue-collar workforce are beginning to spread their tentacles into the necktie class," says Bradford de Long, an economist at the University of California at Berkeley.

In spite of such insecurity, most Americans will share in the prosperity unleashed by today's technological advances. Tremendous economic growth will lift the incomes of all American families. And a future de Tocqueville touring this nation surely would be struck at the enormous opportunities for the average citizen in The 21st Century Economy.

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