What’s New about the New Economy
The Skills Imperative: Talent and U.S. Competitiveness
The nation must do more to give people the skills they will need in our evolving economy.
Is there anything fundamentally “new” about the economy? With the benefit of hindsight, we know that predictions about the demise of the business cycle were premature. “New economy” booms can be busted. All companies, even the dot-coms, need a viable business plan and a bottom line to survive. Market demand is still the dominant driver of business performance; the “build it and they will come” supply model proved wildly overoptimistic. But the assets and tools that drive productivity and economic growth are new. The Council on Competitiveness’s latest report, U.S. Competitiveness 2001, links the surge in economic prosperity during the 1990s to three factors: technology, regional clustering, and workforce skills.
Information technology (IT) was a major factor in the economic boom of the 1990s. The widespread diffusion of IT through the economy, its integration into new business models, and more efficient IT production methods added a full percentage point to the nation’s productivity growth after 1995. Now the information technologies that powered U.S. productivity growth are being deployed globally. The sophistication of information infrastructure in other countries is advancing so rapidly that many countries are converging on the U.S. lead. With 221,000 new users across the globe expected to log on every day, the fastest rates of Internet growth are outside the United States.
The growth in regional clusters of economic and technological activity also propelled national prosperity. The interesting feature of the global economy is that, even as national borders appear to matter less, regions matter more. Strong and innovative clusters help to explain why some areas prospered more than others. Clusters facilitate quick access to specialized information, skills, and business support. That degree of specialization, along with the capacity for rapid deployment, confer real competitive advantages, particularly given Internet-powered global sourcing opportunities. The early data from the council’s Clusters of Innovation study indicate that regions with strong clusters have higher rates of innovation, wages, productivity growth, and new business formation.
Finally, to an unprecedented degree, intellectual capital drove economic prosperity. Machines were the chief capital asset in the Industrial Age, and workers, mostly low-skilled, were fungible. In the Information Age, precisely the opposite is true. The key competitive asset is human capital, and it cannot be separated from the workers who possess it.
The nation has made enormous strides in workforce skills over the past 40 years. As recently as 1960, over half of prime age workers had not finished high school, and only one in 10 had a bachelor’s degree. Today, only 12 percent of the population has not finished high school, and over a quarter of the population has a bachelor’s degree or higher. This improvement in the nation’s pool of human capital enabled the transition from an industrial to an information economy.
Unfortunately, the gains in education and skills made over the past 40 years will not be sufficient to sustain U.S. prosperity over the long term. The requirements for increased skills are continuing to rise, outstripping the supply of skilled workers. The empirical evidence of a growing demand for skills shows up in two ways. First, the fastest-growing categories of jobs require even more education. Only 24 percent of new jobs can be filled by people with a basic high-school education, and high-school dropouts are eligible for only 12 percent of new jobs (see Figure 1). Second, the large and growing wage premium for workers with higher levels of education reflects unmet demand. In 1979, the average college graduate earned 38 percent more than a high school graduate. By 1998, that wage disparity had nearly doubled to 71 percent. Several trends are driving the push for higher skills: technological change, globalization and demographics.
Technological change. Technology enables companies to eliminate repetitive low-skilled jobs. During the past century, the share of jobs held by managers and professionals rose from 10 percent of the workforce to 30 percent. Technical workers, sales people, and administrative support staff increased from 7.5 percent to 29 percent. Technology has also forced an upskilling in job categories that previously required less education or skills. For example, among less-skilled blue collar and service professions, the percentage of workers who were high-school dropouts fell by nearly 50 percent between 1973 and 1998, while the percentage of workers with some college or a B.A. tripled.
Globalization. Another reason for the decline in low-skilled jobs is globalization. Low-skilled U.S. workers now compete head-to-head with low-skilled and lower-wage workers in other countries. This is not a reversible trend. Our competitiveness rests, as Carnevale and Rose noted in The New Office Economy, on “value-added quality, variety, customization, convenience, customer service, and continuous innovation.” Ultimately, a rising standard of living hinges on the availability of highly skilled workers to create and deploy new and innovative products and services that capture market share, not on a price competition for standard goods and services that sends wages in a downward spiral.
Demographic changes. Like other industrial economies, the United States is on the threshold of enormous demographic changes. With the aging of the baby boomers, nearly 30 percent of the workforce will be at or over the retirement age by 2030. Given that the rate of growth in the size of the workforce affects economic output (more work hours yield more output), a slow-growth workforce could profoundly affect economic well-being. The obvious way to offset the impact on the gross domestic product of a slow-growth workforce is to increase the productivity of each individual worker. Department of Labor studies find that a 1 percent increase in worker skills has the same effect on output as a 1 percent increase in the number of hours worked. Hence, the ability to raise the skills and education of every worker is not just a matter of social equity. It is an economic requirement for future growth–and an urgent one, given the generation time lag needed to develop skills and educate young workers.
Skills and education will be a dominant, if not decisive, factor in the United States’ ability to compete in the global economy. As noted by council chairman and Merck Chief Executive Officer Raymond Gilmartin at the council’s recent National Innovation Summit in San Diego: “The search for talent has become a major priority for Council members. If companies cannot find the talent they need in American communities, they will seek it abroad.” Former North Carolina Governor James Hunt warned that “Our ability to engage in the world economy–and to support open trade initiatives–must be accompanied by a commitment to boost the skills of every worker. We must give every American the tools to prosper in the global economy.” Achieving that goal will require action on several fronts.
Target at-risk populations
The United States could not have enjoyed a decade-long period of prosperity without a talented workforce. But because of rising demand for higher skills and education, a substantial minority of Americans is in danger of being left behind. Although access to quality education and lifelong learning opportunities must be increased for everyone, attention should focus on the groups within our population that are seriously underprepared and underserved. These include educationally disadvantaged minority populations, welfare-to-work populations, and the prison population.
Low-income minority populations. It does not bode well for the country’s social or economic cohesion that the most educationally disadvantaged among us also represent the fastest-growing groups in the workforce. High-school dropout rates for Hispanic students are more than four times higher than for white students. Black students have a dropout rate nearly double that of white students. Low education achievement is highly correlated to lower incomes. Rates of unemployment and poverty are 5 to 10 times higher for those without a high-school education.
Most jobs will require some form of postsecondary education, but the college-bound population is also far from representative of the population as a whole. A significantly smaller proportion of black and Hispanic students attend or graduate from college (see Figure 2). At least part of the problem is likely to be financial. Inflation-adjusted tuition at colleges and universities has more than doubled since 1992, but median family income has increased only 20 percent. The cost of attendance at four-year public universities represents 62 percent of annual household income for low-income families (versus 17 percent for middle-income households and 6 percent for high-income households). As a result, low-income students are highly sensitive to increases in college costs. One study shows that for every $1,000 increase in tuition at community colleges, enrollments decline by 6 percent.
In the past, the federal government played a much larger role in offsetting the burden of college tuition for low-income families. But federal assistance based on need has declined significantly. Although student aid overall increased in total value, most of the growth was in the form of student loans, about half of which are unsubsidized. Need-based tuition assistance declined from over 85 percent of the total in 1984 to 58 percent in 1999. This shift in student aid policy has limited access to postsecondary opportunities for low-income students.
Welfare-to-work programs. Welfare reform in the mid-1990s succeeded in taking millions of Americans off the welfare rolls but not out of poverty. An Urban Institute study indicates that although welfare leavers generally earn about the same as low-income families, they are less likely to have jobs with health insurance or enough money for basic necessities. Only 23 percent of welfare leavers receive health insurance from their employers, and more than one-third sometimes run out of money for food and rent. It should not be surprising that of the 2.1 million adults who left welfare between 1995 and 1997, almost 30 percent had returned to the welfare rolls by 1997.
The challenge is not simply to move people off the welfare rolls but to increase their skills and education to enable them to get better-paying jobs that offer upward mobility. The emphasis of the current welfare system, which was overhauled in 1996, is work, not training or education. The Personal Responsibility and Work Opportunity Reconciliation Act stipulates that welfare recipients can apply only one year of education–and only vocational education–to satisfy the requirements for assistance. More often than not, according to Carnevale and Reich, caseworkers urge welfare recipients to seek jobs first and opt for training only if they cannot find employment. Indeed, many states require welfare recipients to conduct a job search for six weeks before they can request job training. Others make it difficult or impossible for welfare recipients to pursue full-time education or training.
There is mounting evidence from the field, however, that the outcomes for individuals who pursue education or training activities are far better than for those who simply find a job. For example, only 12 percent of the participants in a Los Angeles County welfare-to-work program pursued education and training, but this group was earning 16 percent more than the other participants after 3 years and 39 percent more after 5 years. Regulations that narrow or restrict the opportunities for educational advancement cannot be in the best interests of the people trying to make a more successful welfare-to-work transition or of the nation, which must boost the skills of its workforce.
Prison populations. The United States has one of the highest incarceration rates in the world (481 prisoners per 100,000 residents versus 125 in the United Kingdom and 40 in Japan). Almost two-thirds of all U.S. prison inmates are high-school dropouts. Indeed, the national high-school dropout rate would likely be much higher if it included institutionalized populations.
About 7 out of 10 prisoners are estimated to have only minimal literacy skills. That means that most of the 500,000 inmates released every year have limited employment prospects. Targeting this at-risk population with education and training programs has also proven very cost-effective. In 1999, analysts from the state of Washington surveyed studies dating back to the mid-1970s on what works and what doesn’t in reducing crime. They concluded that every dollar spent on basic adult education in prison led to a $1.71 reduction in crime-related expenses; every dollar spent on vocational education yielded a $3.23 reduction. In Maryland, a follow-up analysis of 1,000 former inmates found a 19 percent decline in repeat offense for those who had taken education programs in prison. Although corrections spending has grown dramatically, educational funding for inmates has not. Only 7 to 10 percent of inmates with low literacy skills receive literacy education.
Expand workforce training opportunities
The skills gap is an integral part of the widening difference in income between those at the top of the economic ladder and those at the bottom; a gap that is wider in the United States than in any other industrial economy. Linked to the pay gap is a disparity in benefits. In 1998, more than 80 percent of workers in the top fifth of the wage distribution had health coverage, as compared with just 29 percent in the bottom fifth. Similarly, almost three-fourths of workers in the top fifth had pension benefits, as compared with fewer than 20 percent in the bottom fifth. Higher education and skills may not be the only strategy needed to reduce income inequality, but it is an essential first step toward higher living standards for all Americans.
Industry training programs reach only a small share of the workforce. Although companies spend tens of billions of dollars on training, their investment is skewed toward the upper end of the workforce. Only one-third of training dollars are targeted toward less-skilled workers. Two-thirds of corporate training funds are directed toward managers and executives or concentrated in occupations in which the workers already possess high levels of education or skills.
Options to expand opportunities and access to training include the following.
Expand the tax incentives for employer-provided tuition assistance. The current benefit is limited to undergraduate education and should be expanded to include a wider range of educational opportunities, including two-year vocational or academic tracks at community colleges as well as graduate studies. Nondiscrimination clauses in the credit could be strengthened to ensure that lower-skilled employees can also take advantage of the training.
Institute performance-based measurements, putting a premium on accountability. There are few, if any, standards for performance in job training programs, and the lack of standards impedes the portability of the training. Establishing stronger accreditation standards for public and private training centers and linking funding to performance will go far toward rewarding the best programs and eliminating those that squander limited human and financial resources.
Set practical goals to infuse information technology into the student’s learning process in K-12. Acquiring computer literacy is not a one-dimensional exercise, with students simply logging “seat time” in computer labs. Administrators and teachers need to incorporate technology into every discipline. Students who integrate computers and the Internet into their learning process are able to use the technology to develop the analytical skills and computer know-how that are prerequisites for most careers.
Increase the number of scientists and engineers
The U.S. Department of Labor projects that new jobs requiring science, engineering, and technical training will increase by 51 percent between 1998 and 2008: a rate of growth that is roughly four times higher than average job growth nationally. When net replacements from retirements are factored in, cumulative job openings for technically trained personnel will reach nearly 6 million.
Even as demand for science and engineering (S&E) talent grows, the number of S&E degrees at the undergraduate and graduate levels has remained flat or declined in every discipline outside the life sciences. Graduate S&E degrees did turn upward in the fall of 1999, but the increase was almost entirely due to the rise in enrollment by foreign students on temporary visas. For U.S. citizens, enrollment in S&E disciplines overall continued to decline.
This trend in the United States is not mirrored elsewhere. The fraction of all 24-year-olds with science or engineering degrees is now higher in many industrialized nations than in the United States. The United Kingdom, South Korea, Germany, Australia, Singapore, Japan, and Canada all produce a higher percentage of S&E graduates than the United States (see Figure 3). Although attracting the best and brightest from around the world will strengthen our own S&E base, the United States cannot rely on other nations to provide the human talent that will sustain our innovation economy. It must be able to increase the domestic pipeline.
The ability to increase the science and engineering workforce depends on several factors:
Increased diversity in the workforce. As long as the S&E workforce is composed disproportionately of white males, its expansion prospects will remain limited. Women and minorities, the fastest-growing segments of the workforce, are underrepresented in technical occupations. White males make up 42 percent of the workforce but 68 percent of the S&E workforce. By contrast, white women make up 35 percent of the workforce and 15 percent of the S&E workforce, and Hispanics and blacks make up about 20 percent of the workforce but only 3 percent of the S&E workforce (see Figure 4). Efforts to boost participation by these groups in the S&E workforce are the single greatest opportunity to expand the nation’s pool of technical talent.
Increased financial incentives for universities. Stanford economics professor Paul Romer maintains that many universities remain gatekeepers rather than gateways to an S&E career. He argues that budgetary constraints are a major factor. Educating S&E students is significantly more expensive than educating political scientists or language majors. Because universities have fixed investments in faculty and facilities across many disciplines, they try to maintain the relative size of departments and limit growth in the more expensive S&E programs. Unlike the education funding system in other countries, the U.S. system does not provide additional resources to universities based on the cost of the educational track. Romer proposes the establishment of a competitive grant program that would reward universities for expanding S&E degree programs or instituting innovative programs, such as mentoring, new curricula, or training for instructors that would raise retention rates for S&E majors.
Empowered graduate students. At the graduate level, students often respond more to R&D funding than to market signals. A large part of student funding comes through university research grants that typically finance research assistantships. This may be an increasingly important part of graduate student support, since direct stipends from the government have steadily declined since 1980. Because students tend to gravitate toward fields where money is available, their specialization choices are sometimes dictated by the availability of research funding rather than their own interests or market needs. Romer points out that this leads to a paradoxical situation of a Ph.D. glut coinciding with a shortage of scientists and engineers in key disciplines. He proposes a new class of portable fellowships that would allow graduate students to choose a preferred specialty based on a realistic assessment of career options rather than the availability of funds for research.
Science and math education
Although K-12 education is a national priority, the science and math component merits special attention for several reasons. First, the demand for increased technical skills and independent problem solving in the workforce puts a premium on science and math education in the schools, and not just for those students pursuing S&E careers. Second, our democracy requires a population that can understand the scientific and technological underpinnings of contentious political issues: cloning, global warming, energy sufficiency, missile defense, and stem cell research, to name only a few. Finally, and perhaps most important, science and math education merits special attention, because even our best students are underperforming when compared with the rest of the world.
Educational achievement overall varies widely among school districts, and some schools are clearly failing. But the deficiencies in science and math education appear to cut across all schools. The Third International Science and Math Study (TIMSS) and its follow-up, TIMSS-R, indicate that U.S. students perform well below the international average in both science and math. Even more sobering, student achievement actually declines with years in the system. The relatively strong performance of U.S. 4th graders gradually erodes by 12th grade.
Since the TIMSS study was released in 1995, there has been considerable research devoted to understanding why our children are not world-class learners when it comes to science and math. That research points to needed reforms in some key areas.
Curriculum changes. U.S. science and math education has been characterized as “a mile wide and an inch deep”. It covers more topics every year than do other countries, and far less comprehensively. U.S. fourth and eighth graders cover an average of 30 to 35 math topics in a year, whereas those in Japan and Germany average 20 and 10, respectively. In science, the contrast is even more striking. The typical U.S. science textbook covers between 50 and 65 topics versus 5 to 15 in Japan and 7 in Germany. Given roughly comparable instructional time, this diversity of topics limits the amount of time that can be allocated to any one topic. Critics contend that in science and math education, “there is no one at the helm; in truth, there is no identifiable helm.”
More rigorous graduation requirements. Irrespective of content, students can’t learn science and math if they’re not taking science and math courses, and many school districts do not mandate a sufficient level of competence as part of the graduation requirements. The National Commission on Excellence in Education recommended a minimum of four years of English and three years of math, science, and social studies as the baseline requirement for graduation. Most school districts (85 percent) have instituted the English requirement, but only one-half of public school districts require three years of math and only one-quarter require three years of science. It is not difficult to imagine that the performance of high-school seniors, whose last course in math or science could well have been in the 10th grade, might be underwhelming.
Higher teacher pay. Teaching is said to be a labor of love, and the salary statistics confirm that the key motivation to become a teacher is probably not financial. Teachers earn substantially less than similarly credentialed professionals, and the gap in pay increases over time and with higher education. New teachers in their 20s earn an average of $8,000 less than other professionals with a B.A. By their 40s, the salary gap between teachers and other professionals with a master’s degree grows to more than $30,000 per year. Although most school districts have limited resources, the most innovative are reaching out to the private sector to form partnerships to boost the effective pay for teachers.
More professional development opportunities. The research shows that the use of effective classroom practices significantly boosts student achievement. For example, students whose teachers use hands-on learning tools, such as blocks or models, exceed grade-level achievement by 72 percent. Similarly, students whose teachers receive professional training in classroom management and higher-order thinking skills outperform their peers by 107 percent and 40 percent, respectively. Unfortunately, few of the factors that affect student achievement are widely used in the classroom. Research by the Educational Testing Service shows that only a small percentage of teachers in eighth-grade math use blocks or models. Higher-order thinking skills generally take a back seat to rote learning; teachers are more likely to assign routine problems than teach students to apply concepts to new problems. The lack of professional education in effective classroom practices is clearly a major obstacle. Fewer than half of teachers receive training in classroom management or higher-order thinking skills. Indeed, only half of all teachers receive more than two days of professional development in a year.
Seamless K-16 standards. There is no question that higher standards need to be imposed at the K-12 level, particularly in science and math. Colleges and universities spend over a billion dollars a year in remedial education, with the highest percentage of students in remedial math. Yet, schools of higher education rarely participate in the standards-setting process. K-12 and postsecondary education move in completely different orbits, with different sets of standards regarding what a student needs to know to graduate and what the student needs to succeed in college. The result is that we may be spending time and resources to develop standards for the K-12 level that bear little relation to what students actually needs to learn to continue their education beyond high school. Only a few states have established mechanisms to address these coordination issues and misalignment problems.
People are America’s future–and its path to prosperity. The president’s vow that no child will be left behind must be realized and expanded to a commitment to leave no American underskilled and underprepared to thrive in a global economy.
Deborah van Opstal (email@example.com) is vice president of the Council on Competitiveness in Washington, D.C.