[Economic Report of the President (1999)]
[Administration of William J. Clinton]
[Online through the Government Printing Office, www.gpo.gov]




CHAPTER 3
Benefits of a Strong Labor Market

The Nation's labor market is performing at record levels: the number
of workers employed is at an all-time high, the unemployment rate is at
a 30-year low, and real (inflation-adjusted) wages are increasing after
years of stagnation. Groups whose economic status has not improved in
the past decades are now experiencing progress. The real wages of blacks
and Hispanics have risen rapidly in the past 2 to 3 years, and their
unemployment rates are at long-time lows; employment among male high
school dropouts, single women with children, and immigrants, as well as
among blacks and Hispanics, has increased; and the gap in earnings
between immigrant and native workers is narrowing.
The most recent data also show that the employment relationship is
strong. Job displacement--job losses due to layoffs, plant closures, and
the like--has declined substantially since the 1993-95 period, and among
those who have been displaced, the share that have found new work has
increased. These reemployed workers still typically earn less on the new
job than at the job they lost, but these wage losses are at record lows.
Moreover, the popular assertion that secure lifetime jobs are
disappearing appears to be overstated. This is not to suggest that the
picture is entirely benign: some groups have experienced declines in job
tenure since the 1980s, and the rate of job displacement remains
relatively high given the current strength of the labor market. To
address these and other problems, this Administration has undertaken a
number of measures to strengthen education and job training and to
promote lifelong learning.
Besides spreading the benefits of economic growth more widely, the
robust labor market has generated other, less obvious benefits. It has
contributed to a decrease in welfare case loads, allowing States and
localities to focus increased resources on designing and implementing
welfare reform. In addition, low unemployment and, especially, the rise
in average wages may have contributed to a reduction in crime. Several
studies have demonstrated an inverse relationship between labor market
opportunities and criminal behavior: the better the options in legal
employment, the less likely are potential criminals to commit crimes.
The chapter begins by documenting economy-wide developments in the
labor market in the past few years within the context of longer run
changes. It then focuses on recent improvements experienced by workers

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who have traditionally not fared as well in the labor market, including
high school dropouts, blacks, Hispanics, youth, immigrants, and single
mothers. The chapter then goes on to examine some important but less
obvious side benefits of the tight labor market. This is followed by a
discussion of evidence on changes in the relationship between workers
and employers, including job displacement, job tenure, and the
contingent work force. Finally, the chapter reviews recent policy
developments to promote job training and lifelong learning.

ECONOMY-WIDE DEVELOPMENTS IN THE LABOR MARKET

EMPLOYMENT

The usual indicators of labor market progress--employment,
unemployment, and wages--show that working men and women continue to
benefit from the ongoing economic expansion. Employment is at an all-
time high, with 133 million Americans at work in December 1998, and only
4.3 percent of the labor force unemployed. Having fallen from 7.3
percent in January 1993, the unemployment rate is at its lowest level
since February 1970 (Chart 3-1).
Data on discouraged workers provide further evidence of a strong
labor market. The number of discouraged workers--workers who are not
employed and who have not looked for work in the past 4 weeks

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because they did not think they could find a job--has shrunk by one-
third since 1994, the earliest year for which comparable data are
available. Discouraged workers are not counted in the labor force and
therefore are not captured in the official unemployment rate. However,
because there are so few discouraged workers, redefining the
unemployment rate to include them as unemployed increases the
unemployment rate by no more than 0.4 percentage point (see Chart 3-1).
Much of the growth in employment reflects an increase in the share
of women looking for and finding jobs. More women than ever before have
joined the labor force: among women aged 25-64, 72.4 percent were
working or seeking work in 1998, up from 70.2 percent in 1993 and 33.1
percent in 1948. The labor force participation rate among men aged 25-64
gradually declined during the 1960s and early 1970s, but it has remained
steady at about 88 percent ever since.
A tight labor market in a high-employment economy means that more
men and women who are looking for jobs are finding them, and finding
them faster. Those unemployed in 1998 had been searching for work an
average of 14.5 weeks, down from 18.8 weeks in 1994, the earliest year
with comparable data. The average length of a spell of unemployment is
sensitive to the number of those undergoing long spells. In 1998, 14.1
percent of the unemployed had been searching for a job for over 27
weeks, far below the 1994 figure of 20.3 percent. By contrast, the share
of those unemployed for less than 15 weeks rose from 64.2 percent to
73.6 percent during the same period.

WAGES

One of the best documented labor market trends of the past few
decades has been the decline in real wages among men. According to the
Current Population Survey (CPS; see Box 3-1 for a description of

Box 3-1.--Sources of Wage Data

This chapter uses several different sources of data on wages. The
Bureau of Labor Statistics (BLS) of the Department of Labor publishes
estimates derived from monthly surveys of both households and
establishments: the CPS, which surveys about 50,000 households, and
payroll records reported by about 390,000 establishments representing
the nonfarm sector. Earnings data tabulated by the BLS from the
household data usually describe the median weekly earnings of full-time
workers aged 16 and over. However, because significant portions of the
populations of interest in much of this chapter often do not work full
time, in many cases the Council of Economic Advisers has made special
tabulations of wages including all workers aged 16 and over--part-time

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Box 3-1.--continued

as well as full-time--in the CPS data. Unless otherwise specified,
this is the population referred to in this chapter.
All of the Council's tabulations use the merged Outgoing Rotation
Group (ORG) files of the CPS, which include a subset (25 percent) of the
full CPS sample who are asked about their earnings and hours on their
current job each month. In the ORG data, hourly wages are measured by
dividing usual weekly earnings by usual weekly hours, both as measured
on the individual's main job. All wage data are presented in real 1997
dollars, adjusted for inflation using the CPI-U-X1 (the urban consumer
price index with rental equivalence).
This chapter also uses BLS establishment data, collected from
businesses and State and local governments. From these data are derived
estimates of average weekly earnings and hours worked for production and
nonsupervisory workers. In addition, the employment cost index (ECI),
also constructed from establishment data, measures total compensation
paid to workers, including both wages and salaries and the cost of
benefits such as health plans. Fixed industry weights are used to ensure
that the ECI reflects only changes in compensation, not shifts in
employment across industries and occupations. The CPS wage data and
average weekly earnings of production and nonsupervisory workers do
reflect these shifts, as well as wage trends within industries and
occupations.
the data), between 1979 and 1993 the median real wage for men fell by
11.1 percent (Chart 3-2). However, progress has been made since 1996:
the median real wage for men rose 1.7 percent in 1997 and 2.3 percent in
1998. Women experienced slightly stronger real wage growth in 1997 of
1.9 percent, but their wages were flat in 1998. Other measures of
compensation show similar increases. Data reported by establishments
(businesses and government agencies; the CPS data cited above are from
surveys of households) show that, after stabilizing in the early 1990s,
real hourly earnings of production and nonsupervisory workers have risen
by 5.4 percent since 1993. The employment cost index (see Box 3-1) shows
that total compensation (wages and salaries plus benefits) per worker
increased by 2.2 percent in real terms from the third quarter of 1997 to
the third quarter of 1998. Employers' wage and salary costs in that
period rose by 2.7 percent and benefit costs (health insurance, paid
leave, supplemental pay, retirement benefits, and the like) by 1.2
percent. Establishment data also show that the average workweek for
production and nonsupervisory workers continued to hover between 34.4
and 34.8 hours, as it has since the mid-1980s.

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DISADVANTAGED GROUPS

A strong labor market is particularly important to less advantaged
groups in the labor market, such as workers with less education, younger
workers, racial and ethnic minorities, and immigrants. The unemployment
rates of these groups typically swing up and down more than the average
during expansions and recessions. When employers find it hard to fill
vacancies, they are more willing to hire and train workers whom they
might pass over when they have fewer openings and an abundance of
applicants.
For the same reason, a tight labor market can also pull up wages for
disadvantaged workers. When labor is scarce, these workers can command
better pay than at other times. The current expansion is especially
important for disadvantaged workers given their experience from the late
1970s to the early 1990s, when wage inequality grew and less skilled
groups faced persistently declining wages, on average.
The reasons for these wage declines and the rise in inequality that
accompanied them were discussed in the 1997 Economic Report of the
President and are still being debated, but it seems clear that demand
for highly skilled workers has been expanding faster than supply,
whereas demand for less skilled workers has declined even faster than
supply. Even though the fraction of the population without a high school
diploma has shrunk, as older, less educated cohorts have retired

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and been replaced by younger, more educated ones, the number of jobs
available to high school dropouts shrank even faster from the late 1970s
to the early 1990s. An important explanation is technological change in
manufacturing, as a result of which the manufacturing sector requires
fewer workers to produce more output than in the past. Competition from
lower wage, low-skilled labor in other countries may also have been a
factor, although most studies find that technological change is more
important than increased international trade in explaining the declining
demand in the United States for workers with no more than a high school
diploma. Meanwhile, employment has expanded dramatically in the
financial, professional, and business services industries, where most
jobs require a college education or beyond.
Unions have historically helped less educated workers obtain higher
wages than they could get otherwise. As employment in the highly
unionized goods-producing, transport, and utilities industries has
declined as a share of the work force since the 1950s, however, so has
union membership. Like the American economy in general, the labor market
has become more competitive in recent decades, with compensation and job
security more often determined by market forces than before. This has
benefited many American workers who were in a position to take advantage
of the new job opportunities, but it has been hard on less skilled
workers at the lower end of the wage distribution.
The Administration's efforts to keep the economy expanding and to
make work pay have been particularly important to these workers. Not
only is the overall labor market performing at record levels, but
several groups of workers who had been experiencing low employment
rates, declining wages, and high rates of unemployment have begun to
show marked improvements. These groups include low-wage workers, workers
with less than a college education, blacks and Hispanics, immigrants,
and single mothers.

LOW-WAGE WORKERS

It is well established that workers at the lower end of the wage
distribution have not fared well in recent decades: from the late 1970s
through the early 1990s, the purchasing power of their wages declined.
Between 1979 and 1993 the real hourly wages of male and female workers
(including part-timers) at the 10th percentile of the wage distribution
fell by 14.8 percent and 15.8 percent, respectively (Chart 3-3). More
recently, however, these lowest paid workers have seen significant
gains. Real hourly wages for men 16 and older at the 10th and 20th
percentiles have increased by about 6 percent since 1993, with
especially large gains in the past 2 years. One might expect the
earnings of low-wage women to have declined in recent years as supply
expanded when a large number of them left welfare and entered the labor
force. But on the contrary, wage increases for women were

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significant, with wages for those at the 20th percentile increasing by
4.7 percent since 1993.
These gains have not been confined to the lower end of the wage
distribution. Real hourly earnings of the median male worker have
increased by 3.6 percent since 1993, while those of the highest earning
men and women (measured at the 90th percentile; these data are not shown
in the chart) have increased by 6.4 percent and 6.2 percent,
respectively.

LESS EDUCATED WORKERS

Education is a key determinant of labor market success, and much of
the decrease in real wages for low-wage workers over the past two
decades may be due to changes in the economy that have placed increasing
value on skilled labor. The shift from goods-producing industries to
services and to a more technology-intensive workplace has increased the
premium on education, and particularly on workers who have at least a
bachelor's degree. In this new economic environment it is important to
monitor the progress of those with less education, who risk missing out
on gains in the economy as a whole. During the current economic
expansion, however, those with less education appear to be sharing in
the benefits of the tight labor market in a number of ways.
Since 1993 the strong labor market has sharply reduced unemployment
rates for workers at all levels of educational attainment.

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Particularly interesting, however, are changes in the employment-to-
population ratio for people with different levels of attainment. As
Chart 3-4 shows, high school dropouts have experienced a much larger
relative increase in their employment rate than have workers with more
education. This increase is the joint result of increased labor force
participation among dropouts and decreased unemployment among those
dropouts who are in the labor force. The economy created enough low-
skilled jobs to employ a larger share of the dropout population, which
is shrinking as more-educated younger cohorts replace older ones. Chart
3-4 shows the results for men and women combined, but looking at men and
women separately yields the same qualitative result. [TIFF
OMITTED]
Workers with less education are not only experiencing employment
gains; they are also beginning to share in wage gains. From 1993 to
1998, male high school graduates aged 20 and over without any college
attendance experienced a real increase in their median wage of 2.8
percent. Although small, this was an improvement over their experience
from 1979 to 1993, when their median wage fell by 21.8 percent. In 1998
the median real wage of male high school dropouts aged 20 and over
finally increased, for the first time since at least 1979, by 7.0
percent.
Although, as these numbers show, both the employment and the
earnings of workers with less education have been improving, education
remains a key determinant of labor market outcomes. The fiscal 1999
budget passed by the Congress contained a down payment for the

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Administration's initiatives to reduce class size by hiring 100,000 new
teachers. The Administration has also encouraged both young people and
adults to pursue further education and job training. The new GEAR UP
program, for example, provides mentors to disadvantaged students
preparing for college, and the new HOPE Scholarship tax credit provides
up to $1,500 for the first 2 years of college or vocational school.
Also, in 1998 the Administration obtained an increase both in total
funding for Pell grants, to $7.7 billion, and in the maximum grant, from
$3,000 to $3,125. These grants provide financial aid to undergraduates
on the basis of need.
For fiscal 2000 the Administration is proposing substantial changes
to America's schools. Measures in the President's budget will hold
teachers, schools, and students more accountable for educational
outcomes; will reduce class size; will provide for building and
renovating public schools; and will recruit outstanding new teachers.
The President has asked the Congress to expand on the $1.2 billion down
payment made last year to reduce class size in the first three grades to
a national average of 18. The Administration has proposed new Federal
tax credits as incentives to help States and school districts build new
public schools and renovate existing ones. The President's budget
contains a series of new initiatives and funding increases to help
recruit well-prepared people to teach where they are most needed, in
high-poverty urban and rural communities. In addition, the President is
proposing to help the more than 44 million adults who perform at the
lowest level of literacy to acquire reading and writing skills. His
budget would, among other things, establish a 10 percent tax credit for
employers who provide workplace education programs for their employees
who lack basic skills.

BLACKS AND HISPANICS

After years of decline, the real wages of black men began to
increase in 1993; they have risen by 5.8 percent since 1996 alone. Black
women and Hispanic men and women have also experienced recent gains
(Charts 3-5 and 3-6). Because blacks and Hispanics are
disproportionately represented in the lower end of the wage
distribution, the long-run trends in their wages are similar to those
for low-wage workers generally. Both of these minority groups have less
education on average than the rest of the work force, and Hispanics are
younger on average. When the real wages of workers without a college
education started declining in the 1970s, the median real wages of black
and Hispanic men started declining as well. In the last few years,
however, their wages have been rising.
Employment opportunities are also expanding for minorities. The
unemployment rates for blacks and Hispanics in 1998 were the lowest ever
recorded, and were 4.1 and 3.6 percentage points lower, respectively,
than in 1993. But minority unemployment is still unacceptably

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high, at 8.9 percent for blacks and 7.2 percent for Hispanics in 1998,
compared with 3.9 percent for whites.
The tight labor market of the 1990s appears to be helping even young
minority workers, who suffered greater wage declines than others in the
1980s and who typically have extraordinarily high unemployment rates. By
1998 the unemployment rate among black youth aged 16-24 was 20.7
percent, lower than in any year since the data series began in 1973. And
the unemployment rate among young Hispanics aged 16-24 dropped 3.7
percentage points between 1993 and 1998 (Chart 3-7). Moreover, the
median real wages of young black males aged 16-24 rose by 6.2 percent in
1998 alone.

IMMIGRANTS

Foreign-born workers often face challenges in the labor market that
native-born workers do not: weaker English skills, a lack of networks
for finding jobs, and unfamiliarity with American institutions and
workplace culture sometimes create barriers to their obtaining good
jobs. Foreign-born workers, including those from Mexico and Central
America (who account for about 30 percent of new immigrants since 1980),
are less likely to have completed high school than are American-born
workers. However, there is wider variation in educational attainment
among immigrants than among natives; whereas many immigrants have
minimal schooling, many others have completed college.

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In fact, in 1990 immigrants and natives were equally likely to have a
college degree.
A worrisome trend has been the decline in relative educational
attainment and wages of successive cohorts of immigrants over the past
few decades. Although educational levels have risen across successive
cohorts since 1960, they have not kept up with the educational
attainment of natives. Immigrants who entered in the late 1980s are much
more likely to lack a high school diploma than persons born in the
United States. However, during the past 4 years, immigrants have clearly
been sharing in the labor market benefits of the economic expansion,
particularly through reduced unemployment rates. (Comparable data are
not available for earlier years of the CPS because the CPS did not
collect data on country of birth until 1994.)
Unemployment rates decreased from 1994 to 1998 throughout the
working population, but immigrants have experienced especially large
declines (Chart 3-8). Particularly striking is the narrowing of the gap
in unemployment rates between native-born workers and those born in
Mexico and Central America. This trend has been coupled with steady

levels of labor force participation for men in this group and a small
increase among women. As a result, employment rates for both males and
females from Mexico and Central America have increased. A rising share
of these workers are also working full time.

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Certain groups of immigrants are also earning more. Since 1995 the
median real wage of Mexican- and Central American-born immigrants has
risen, by a total of 6.8 percent for men and 3.8 percent for women. This
is particularly encouraging because one might expect the continuing
addition of low-wage new entrants to the population of Mexican- and
Central American-born immigrants to depress the group's median wage,
even though individual immigrants' wages tend to increase with time in
the United States. In fact, because entrants since 1995 are likely to
have below-median wages and are included in the pool used to calculate
the median wage in 1998, wages for Mexican- and Central American-born
immigrants already employed in the United States in 1995 have probably
risen by even more than the median for the group overall. The increases
in the minimum wage in 1996 and 1997, as well as the President's
proposed $1-per-hour increase over the next 2 years (Box 3-2), are
especially important for large numbers of these immigrants, whose wages
are at or near the minimum.

Box 3-2.--Increasing the Minimum Wage

On October 1, 1996, the minimum wage was raised from $4.25 to
$4.75 an hour. It was again increased to $5.15 an hour on September 1,
1997. These were the first increases in the minimum wage in 5 years,
during which its real value had fallen by 15 percent. The President has
proposed to increase the minimum wage further, by $1 per hour over the
next 2 years.
As Chart 3-3 shows, the wages of low-wage workers have increased
markedly since 1996, and the recent increases in the minimum wage are
likely to explain some of this rise. It has been estimated that almost
10 million workers benefited from the recent minimum wage hikes. Some
have suggested that much of the benefit from a higher minimum wage goes
to teenagers from well-off families, but in fact most minimum wage
workers are adults from lower income families, and their wages are a
major source of their families' earnings. Among workers who were earning
between $4.25 and $5.15 an hour just prior to the 1996 increase, 71
percent were aged 20 or older, 58 percent were women, and one-third were
black or Hispanic. Almost half (46 percent) of the affected workers
worked full time, and most lived in low-income households. Over half the
benefits from the higher minimum wage went to households in the bottom
40 percent of the income distribution. In 1997 the earnings of the
average minimum wage worker accounted for 54 percent of his or her
family's total earnings.
A potential side effect of increasing the minimum wage is a
reduction in employment: with low-wage labor more expensive,

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Box 3-2.--continued

some firms may hire fewer workers. Many studies have examined this
issue, and the weight of the evidence suggests that modest increases in
the minimum wage have had very little or no effect on employment. In
fact, a recent study of the 1996 and 1997 increases, using several
different methods, found that the employment effects were statistically
insignificant. Moreover, the unemployment rates of black teenagers and
high school dropouts--two groups of workers most likely to be affected
by the wage hike--are lower today than they were just prior to the
increases.
Increases in the minimum wage and expansions in the earned income
tax credit reinforce each other. Among low-wage workers, the joint
effect of these changes has been a substantial increase in income.
Between 1993 and 1997 the inflation-adjusted minimum wage rose by 9
percent, while the maximum payment under the earned income tax credit
rose by 38 percent for one-child families (116 percent for two-child
families). For families with one earner working full time at the minimum
wage, the combination of higher earnings and a larger tax refund would
have raised total income by 14 percent if the family had one child, and
by 27 percent for a family with two or more children. As a result of
these policy changes, one- and two-child families with a single full-
time minimum wage worker now earn enough to escape poverty.

SINGLE MOTHERS

The percentage of children living in single-parent families, usually
with a single mother, has risen sharply over the past few decades. The
share of all families (defined as households in which one or more
persons live with children of their own under age 18) that were headed
by a single parent increased from 13 percent in 1970 to 32 percent in
1998. The majority of these families rely heavily on the mother's labor
earnings; therefore, the labor market opportunities available to these
mothers are critical for their families' economic well-being.
The labor force participation rate of single mothers aged 16-45 has
been climbing since 1993, after remaining essentially flat for many
years (Chart 3-9). In just the 4 years from 1993 to 1997, their
participation rate increased by 8.7 percentage points, from 75.5 percent
to 84.2 percent.
What caused this unusually large rise? The expansion of the earned
income tax credit (EITC; Box 3-3) seems to have contributed. During the
same 4 years the real value of the maximum EITC payment increased by 38
percent for workers with one child, including single mothers, and by 116
percent for those with two or more children. In contrast, the proportion
of single women without children who

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participated in the labor market--who became eligible for only a very
small credit in 1994, if their earnings were very low--did not change
over this period. As Chart 3-9 shows, the difference in labor force
participation rates of single women with and without children has
closely tracked growth in maximum EITC benefits.
One recent study concluded that as much as 60 percent of the
increase in employment of single mothers since 1984 was attributable to
expansions in the EITC. For the period between 1992 and 1996 the EITC
explains 33 percent of the increase in annual employment among

Box 3-3.--The Earned Income Tax Credit

The EITC is a tax credit for low-income workers designed to reduce
their overall tax burden. The credit is refundable; that is, workers can
receive the full amount to which they are entitled even if it exceeds
the income tax they owe. Workers apply directly to the Internal Revenue
Service for the EITC and generally receive the credit as part of their
tax refund.
Only families with a working member are eligible for the EITC, and
the amount depends on the family's labor market earnings. For example, a
worker with one child will receive a credit of 34 cents per dollar of
1998 earnings, up to a maximum of $2,271. A family with two or more
children gets 40 cents per dollar up to a

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Box 3-3.--continued

maximum of $3,756 (Chart 3-10). Childless workers aged 25-64 with
earnings under $10,030 are eligible for a much smaller credit of less
than 8 cents per dollar up to a maximum of $341. For all eligible
workers the credit remains at the maximum over a range of earnings and
then is gradually phased out.
The EITC was significantly expanded under the Omnibus Budget
Reconciliation Act (OBRA) of 1993. Before the 1993 law was passed,
eligible working parents received just 19 to 20 cents for each dollar
earned up to the maximum. OBRA 1993 increased the maximum credit for
families with two or more children by over $1,500 (in 1998 dollars) and
extended eligibility to families with incomes up to $30,095--about
$3,600 more than under previous law. These expansions have resulted in
significant increases in the labor force participation of single
mothers.
A large proportion of families eligible for the EITC--81 to 86
percent in 1990--have claimed the credit. About 19.8 million workers are
expected to claim the credit in tax year 1998, receiving an average of
$1,584. About 16.4 million of these claims will be for workers living
with children; these families will receive an average credit of $1,870.
The EITC is targeted to families living in poverty, with the goal
of lifting their income above the poverty line. The latest estimate from
the Bureau of the Census shows that the EITC lifted 4.3 million
persons--workers themselves and their family members--out of poverty in
1997, more than twice as many as in 1993. Just over half (2.2 million)
of these were under the age of 18, and 1.8 million were living in
families headed by unmarried women. Updates by the Council of Economic
Advisers of analyses reported in the 1998 Economic Report of the
President find that over half the decline in child poverty between 1993
and 1997 can be explained by changes in taxes, most importantly in the
EITC. The EITC enabled about 1.1 million blacks and nearly 1.2 million
Hispanics to escape poverty in 1997. These statistics make it clear that
the EITC has become a major weapon in the fight against poverty.
this group. A second study examined the 1986 EITC expansion, which was
more modest than the 1993 expansion, and found that it, too,
significantly increased labor force participation among single mothers,
especially those with less education. Still another study, looking at
the effects of the EITC on all eligible families, found that the 1993
expansion could account for an increase in labor supply of 19.9 million
hours by 1996 and induced an estimated 516,000 families to move from
welfare into the work force.

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Other factors also contributed to the increase in labor force
participation among single mothers. Changes in the welfare system,
culminating in the enactment of the Personal Responsibility and Work
Opportunity Reconciliation Act (PRWORA) in 1996, were very important.
PRWORA replaced the Aid to Families with Dependent Children (AFDC)
program with Temporary Assistance for Needy Families (TANF), which made
most Federal welfare assistance dependent on work effort and limited the
lifetime duration of assistance. Before PRWORA was passed, States had
been experimenting with work requirements and time limits under waivers
of the Federal rules governing AFDC since the early 1990s. Even before
that, States had been changing their formulas for calculating AFDC
benefits in ways that made it more worthwhile for low-income single
mothers to work. It has been estimated that changes in the welfare
system account for about 30 percent of the increase in employment of
single mothers between 1984 and 1996, and at least 20 percent of the
increase between 1992 and 1996. PRWORA is discussed further below.
Expansions of Medicaid coverage to low-income children who were not
eligible for AFDC removed another disincentive to their mothers'
working. Expansions of training and child care programs for low-income
workers also encouraged these women to work. These factors played a much
smaller role than did the EITC and welfare reform, however. Finally, the
tighter labor market has made employers more

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willing to hire welfare recipients and has made it easier for all single
mothers to find jobs in recent years.

OVERCOMING DISADVANTAGES IN THE LABOR MARKET

The last several years have seen the gains from the ongoing economic
expansion distributed throughout the population, reaching groups that
had previously been left out. Low-wage workers, high school dropouts,
blacks, Hispanics, immigrants, younger workers, and single mothers have
all enjoyed better labor market outcomes. Administration policies, most
importantly the expansion of the EITC and the increases in the minimum
wage, along with efforts to keep the overall economy growing, have
played a central role in achieving these successes.
However, members of these disadvantaged groups are still much more
likely than other workers to be unemployed, and when they do find a job,
they still earn lower wages than other groups. A competitive labor
market is a two-edged sword. Although competition is the most efficient
way to allocate labor and get goods produced at lower cost, it may
result for some in wages that fail to ensure an adequate income.
Competitive market forces produced an increasingly unequal distribution
of earnings from the late 1970s into the early 1990s, so that some
people found it difficult, even by working hard, to support their
families.
Government can mitigate these undesirable side effects of labor
market competition. Beyond its emphasis on education, this
Administration has responded to the problem of low wages for the less
skilled by expanding the EITC and raising the minimum wage, as described
in Boxes 3-2 and 3-3. The Administration will continue to address this
concern by designing policies that make work pay, improve education, and
expand opportunities for education and job training, as described
previously in this chapter. Moreover, the President's fiscal 2000 budget
proposes an $84 million increase in funding for civil rights
enforcement, including $14 million for an Equal Pay Initiative at the
Equal Employment Opportunity Commission and the Department of Labor.

BENEFITS TO SOCIETY OF A STRONG LABOR MARKET

Better employment opportunities and higher wages are obviously good
for workers individually. But today's strong labor market is enhancing
the well-being of the whole of American society in ways that are less
obvious. One way is by easing the implementation of the 1996 welfare
reform act; another is by reducing crime.

WELFARE REFORM

It has been 2H years since the President signed the Personal
Responsibility and Work Opportunity Reconciliation Act into law,

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initiating dramatic changes in the Nation's welfare system. Welfare
assistance is now work-focused and time-limited: with few exceptions,
Federal welfare assistance is strongly linked to the recipient's efforts
to find a job. Adults cannot receive aid for more than a total of 5
years during their lifetime, and in some States the maximum is even
less. PRWORA shifted greater responsibility for welfare management to
States and localities, many of which have responded quickly by
redesigning and implementing their own welfare programs. In most States
this effort builds on reforms initiated under waivers approved by this
Administration before PRWORA was passed.
Welfare case loads have fallen dramatically since PRWORA was enacted
in August 1996 (Chart 3-11). Moreover, this reduction has been
experienced nationwide, with every State except Hawaii and Rhode Island
posting double-digit percentage reductions in case loads. The national
case load peaked in 1994, and since that time it has declined by 42
percent; in 17 States the case load in September 1998 was less than half
what it had been in March 1994.
What caused this unprecedented case load reduction? Case loads
normally fluctuate with the business cycle, rising in periods of high
unemployment and declining when unemployment is low, as it is today.
Chart 3-11 illustrates the relationship between labor market
opportunities and welfare participation over the past three decades.
When unemployment increased in the early 1970s, so, too, did welfare

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participation. The renewed increase in welfare participation in the late
1980s and early 1990s, as well as the decline that began in 1994, also
corresponded with changes in employment opportunities during these
periods.
Other evidence suggests that in the current expansion many
businesses are coming to see welfare recipients as an untapped source of
employees. In a 1998 survey of 400 businesses that are members of the
Welfare to Work Partnership (Box 3-4), 71 percent stated that they or
their industry faced a labor shortage, and that the tight labor market
was one of the main reasons they were hiring welfare recipients. More

Box 3-4.--The Welfare to Work Partnership

At the President's urging, the Welfare to Work Partnership was
launched in May 1997 to lead the national effort to encourage businesses
to hire people from the welfare rolls. Founded with five participating
businesses, the partnership grew to include 5,000 businesses within 1
year; it currently has a membership of 10,000. In 1997 the 3,200
businesses then participating hired an estimated 135,000 welfare
recipients.
An important goal of the partnership is to increase awareness
within the business community that welfare recipients are productive
potential employees. A survey of Michigan firms suggests that lack of
such awareness may be an important barrier to some businesses: among
firms that said they had been contacted by the Michigan employment
agency and informed about the advantages of hiring from the welfare
rolls, the majority had subsequently hired at least one welfare
recipient. To overcome the awareness barrier, the partnership provides
outreach, technical assistance, and support for hiring welfare
recipients through a variety of channels, including a toll-free number,
a World Wide Web site, a ``Blueprint for Business'' manual, and a guide
to retaining welfare workers.
Many firms realize that welfare recipients are a pool of good
potential workers, and the partnership has helped firms learn how to
locate and identify them. In fact, in a survey of partnership firms who
have hired former welfare recipients, 76 percent reported that these
workers were ``good, productive employees.'' The tight labor market has
motivated many firms to consider hiring welfare recipients, but the hope
is that the efforts of the partnership and the employment emphasis of
PRWORA have built a relationship between employers and welfare offices
that will endure into leaner times. If so, firms will continue to tap
into the pool of reliable employees on the welfare rolls even after
their hiring pressures ease.

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over, the tight labor market is most likely causing employers to expand
efforts to invest in and retain current workers, including former
welfare recipients. The skills and job experience that former welfare
recipients are accumulating during this expansion may be a lasting
benefit.
However, the trend in welfare participation does not always match
that in unemployment, most notably when other important changes are
taking place, including changes in welfare benefits and in family
structure, as well as policy reforms. Indeed, welfare participation did
not increase during the recession of the early 1980s. It is difficult to
determine how much each of several factors--the economy, program
reforms, and other factors--has contributed to the recent case load
decline. An analysis by the Council of Economic Advisers that examines
these competing factors finds that a 1-percentage-point decline in the
unemployment rate in each of 2 successive years is associated with
roughly a 4 percent decline in the case load in the second year. Other
studies have corroborated this finding. Applying this estimate to the
change in the unemployment rate between 1994 and 1998 indicates that the
improvement in the labor market can explain an 8.3 percent drop in
welfare case loads. Given that the national welfare case load actually
fell by 42.3 percent during this period, it appears that improved labor
market conditions were responsible for roughly one-fifth of that
decline. Similar analyses indicate that the share of the decline since
1996 that can be explained by the strength of the economy is much
smaller, reflecting the importance of other changes, especially welfare
reform. This result builds on the Council's analyses, which show that
welfare reform achieved through State waivers played an important role
in the case load reductions of the mid-1990s.
The case load reduction, combined with fixed block grant funding
under PRWORA, has translated into greater resources for States and
localities. The amount of the Federal welfare grant given to each State
is now fixed (with some exceptions) and guaranteed, typically at the
level of funding that the State received in 1994. As a result, States
receive more Federal assistance today than they would have under the
AFDC program, under which Federal transfers decreased as the case load
fell. It has been estimated that, in 1997, 46 States had more welfare
resources at their disposal--State and Federal dollars combined--under
PRWORA than they would have had if the old system had been maintained.
The difference nationwide was $4.7 billion, with a median difference
across all States of $44 million, or 22 percent.
States are using these expanded resources in a variety of ways. Some
have enhanced investment in services such as child care, transportation,
and substance abuse treatment for those who remain on welfare, many of
whom face multiple barriers to employment. Other States are expanding
support for welfare recipients who have gone to work. In part because
States have been unable to forecast case load levels with any degree of
accuracy, some States have a portion of their

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TANF grants in reserve at the Treasury. These States will be able to
draw upon these reserves should case loads once again increase or should
those remaining on assistance need more intensive and costly services.
Many States are responding by reducing their own contribution to welfare
funding (but can do so by no more than the Federal maintenance-of-effort
requirement allows).
Although the additional resources have thus allowed States to
concentrate on designing and implementing welfare reform, the expanded
resources come with greater responsibility and accountability. States
and localities now have many more decisions to make regarding their
welfare programs. Moreover, because the Federal block grant is fixed,
States bear most of the risk associated with a future rise in the case
load.
Since PRWORA's enactment, this Administration has pursued various
initiatives to enhance the welfare reform effort. The $3 billion Welfare
to Work Grants Program targets long-term, hard-to-employ welfare
recipients and noncustodial parents, helping them move into lasting,
unsubsidized employment. These resources can be used for job creation,
job placement, and job retention efforts. Most of the resources are
given directly to localities through private industry councils or local
work force boards. The Administration has proposed an additional $1
billion for the Welfare to Work Grants Program in fiscal 2000. The
welfare-to-work tax credit is a credit to employers to encourage them to
hire and retain long-term welfare recipients. The credit for each
eligible worker hired is equal to 35 percent of the first $10,000 in
wages during the first year of employment, and 50 percent of the first
$10,000 in the second year.
The Congress fully funded (at $283 million) the President's proposal
for welfare-to-work housing vouchers for fiscal 1999. The vouchers may
be used by welfare families to reduce a long commute or to secure more
stable housing to eliminate emergencies that keep them from getting to
work every day on time. Another important barrier facing people who want
to move from welfare to work--in cities and in rural areas--is lack of
transportation to jobs, training programs, and child care centers. With
the President's leadership, the Transportation Equity Act for the 21st
Century authorized $750 million over 5 years to address this problem.

CRIME

The incidence of crime can be related to many factors, both in the
individual and in the policy environment, but clearly one determinant is
conditions in the legal labor market. A person who has a good job
usually finds his or her time better spent in legitimate activities than
in committing crimes, and risks losing more income from incarceration
than does someone who is unemployed or earning low wages. Statistics

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show that crime rates have in fact been dropping since the current
economic expansion began: between 1991 and 1997, property crimes and
violent crimes per capita fell 16 percent and 19 percent, respectively,
and the total crime index dropped 17 percent.
Studies have found that unemployment is related to crime rates, but
that the effect tends to be modest and insufficient to explain changes
in crime rates over periods longer than the business cycle. New studies
suggest, however, that crime may be more strongly correlated with wages
than with unemployment. These studies find that potential criminals are
more likely to be influenced by longer term prospects in the mainstream
economy than by shorter term conditions, and that wages are a better
measure of these longer term prospects than is the unemployment rate.
The new research shows that young men--the demographic group most
likely to commit crimes--respond to wage incentives. Declining real
wages during the 1980s and early 1990s appear to have influenced the
rise in crime rates. In particular, the decline in wages of less skilled
men between 1979 and 1995 is estimated to have increased property crimes
by 10 to 13 percent and violent crimes by about half that amount. These
findings are consistent with the idea that economic incentives play a
greater role in economically motivated crimes such as burglary and
robbery. In addition, because blacks have lower wages on average than
whites, about one-quarter of the racial difference in the probability of
committing a crime can be explained by the wage gap between the races.
Falling wages therefore provide at least a partial explanation for
why property crimes did not fall much over the 1980s and early 1990s as
the proportion of 18- to 24-year-olds in the population declined. Of
course, other factors such as policing and sentencing practices also
affect crime rates. But the correlation between wages and crime suggests
that the current strong labor market and wage growth among young men
have helped reduce crime rates.

JOB DISPLACEMENT, TENURE, AND THE CONTINGENT WORK FORCE

Popular accounts sometimes suggest that the relationship between
workers and firms is undergoing profound change. The contemporary work
environment, in this view, is characterized by more frequent corporate
downsizings and other job displacements, the disappearance of lifetime
employment, and the rapid growth of a ``contingent work force'' that can
no longer count on high and rising earnings and job security. However, a
growing body of research using nationally representative data calls this
picture into question.

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JOB DISPLACEMENT

Workers are considered displaced if they leave their jobs
involuntarily, because of a plant closing, insufficient or slack work,
abolition of their position or shift, or some other, similar reason.
Since 1984 the Bureau of Labor Statistics (BLS) has conducted a
biennial, nationally representative survey of workers who have been
displaced from their jobs sometime in the 3 years prior to the survey
(in the early years of the survey the period was 5 years). Data from the
1996 survey showed job displacement to be unusually high given the
overall strength of the economy. Extrapolation of the survey's findings
indicated that about 15 percent of the work force had been displaced at
some time between 1993 and 1995. This figure was up from 12.8 percent in
1991-93, despite a drop in the overall unemployment rate from 7.5
percent in 1992 to 6.1 percent in 1994 (Chart 3-12). This rise in job
displacement led some analysts to argue that the employer-employee
relationship had changed and that displacement was on a rising
trend.
Results from the 1998 survey, however, suggest that this
interpretation may have been premature: that survey showed a substantial
decline in job displacement, to 12.0 percent for the 1995-97 period. All
major groups of workers experienced improvements: men and women, younger
and older workers, high school dropouts and college-educated workers,
and workers in manufacturing as well as those in professional services.
Nevertheless, the rate of job displacement in 1995-97 was still

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one-third higher than it had been in 1987-89, when the unemployment rate
was at a similar level.
Historically, between 30 and 42 percent of displaced workers were
not employed 1 to 3 years after losing their jobs. Thus it is
encouraging that this rate has fallen to 24 percent in the latest survey
(Chart 3-13). 
In addition, reemployed workers typically earn less than they did in
their previous jobs. For example, one study of workers in the 1970s and
1980s who had at least some earnings in the years after displacement
finds an average earnings decline of 29 percent in the year of
displacement, which subsequently shrinks to 10 percent. Here again the
latest data are encouraging: the reduction in weekly earnings among
those reemployed was only 5.7 percent in 1995-97, a record low, and
earnings losses were at or near record lows for workers of all levels of
education.

JOB TENURE

Trends in average job tenure--the length of time a person stays with
the same employer--are often confused with trends in downsizing and job
displacement. In fact these trends may be quite different: because many
workers leave their jobs voluntarily, statistics on job tenure may not
accurately reflect rates of displacement. Yet much media attention has
focused on a purported disappearance of lifetime jobs, suggesting that
workers are holding jobs for shorter periods, and often implying that
these job terminations are more frequently involuntary. The

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evidence finds that the percentage of workers with long job tenure (10
or more years) has declined somewhat. The share of workers aged 35-64
who have long job tenure fell by about 5 percentage points between 1979
and 1996 but remains substantial at roughly 35 percent. The decline in
the percentage of long-tenured workers has occurred across many segments
of the population. Workers at all levels of educational attainment have
experienced similar rates of tenure decline, and declines have occurred
across industries and occupations, narrowing gaps in average tenure that
formerly prevailed between occupations. The trends differ for men and
women, however, and the aggregate decline in the percentage of long-
tenured workers masks an increase among women. Accounting for part of
the overall decline since 1979 in the percentage of long-tenured workers
are shifts in the demographic, industrial, and occupational composition
of the labor force. Some of the decline is also due to the large number
of new workers that firms have hired during the current expansion.
Obviously, the addition of many workers with short job tenure by itself
lowers the median tenure in the work force.
Retention rates, which give the likelihood that a given worker will
remain with the same employer in the next year, are not complicated by
the changing rate at which new workers are hired. Analysis of retention
rates complements findings on the cross-sectional distribution of tenure
over all workers. Workers with less than 2 years of tenure had
moderately higher retention rates in the mid-1990s than in the late
1980s. On the other hand, retention rates appear to have decreased among
workers with longer tenure. Again, however, some of these changes may be
due to voluntary separation.

THE CONTINGENT WORK FORCE

Contingent employment is defined by the BLS as employment without an
implicit or explicit long-term contract. The BLS has conducted two
surveys of such employment. The first, in 1995, found that contingent
employment made up a relatively small share of total employment. The
second, in 1997, found that that share was not increasing. Using the
BLS's ``middle'' definition of contingency, about 2.4 percent of the
labor force (3 million workers) identified themselves as contingent
workers in February 1997, a slightly smaller share than in February
1995. This definition includes workers who say they expect to work (and
have worked) under their current arrangements for 1 year or less,
whether they are wage and salary workers, self-employed persons, or
independent contractors. In addition, it includes temporary help and
contract company workers if they have worked and expect to work for the
customer to whom they were assigned for 1 year or less.
Forty percent of contingent workers in 1997 were in so-called
alternative work arrangements. They included independent contractors,
on-call workers, temporary help agency workers, and workers provided

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by contract firms; the remaining 60 percent were in ``traditional''
jobs. None of these categories of contingent workers comprised more than
0.5 percent of the labor force.
Contingent and noncontingent workers were strikingly similar in
terms of educational attainment and race (Chart 3-14). Also, contingent
workers were employed in a wide variety of occupations, belying the view
that all contingent jobs are low-skilled jobs. However, contingent
workers include a relatively large proportion of very young workers: 37
percent of contingent workers, but only 13 percent of noncontingent
workers, were less than 25 years old.
Forty-five percent of contingent workers were employed part time,
compared with only 18 percent of noncontingent workers. Contingent
workers also earned less: their median weekly earnings were only 53
percent of that of noncontingent workers, although differences in age
and hours worked appear to account for much of the earnings gap.
Regardless of age, however, contingent workers were less likely to be
offered health insurance or a pension plan by their employer.
Data from 1997 show that nearly half of all contingent workers
accepted their contingent jobs for personal reasons: because they wanted
a flexible work schedule, for example, or because they were in school or
in training. Thus, although contingent work is not a matter of choice
for many people, it may allow others to balance their work and

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their non-labor market activities. In fact, although 57 percent of
contingent workers stated that they would prefer a noncontingent job, 36
percent said they preferred contingency.
For contingent work to become widespread, of course, it must also
meet the needs of employers. Accordingly, a 1996 survey asked employers
their reasons for using flexible staffing arrangements. (These
arrangements, which included hiring from temporary agencies, short-term
hires, regular part-time work, on-call arrangements, and contract work,
were most likely not all contingent jobs as defined above. But most were
probably either contingent jobs or alternative work arrangements.) The
most commonly cited reasons were fluctuations in workload and the need
to cover absences of regular staff. Many employers also said they hired
from temporary agencies or took on part-time workers as a means of
screening candidates for regular jobs: 21 percent of those using agency
temporaries and 15 percent of those using regular part-time workers
cited this reason as important. Savings on wage and benefit costs were
cited as important by only 12 percent of employers using agency
temporaries, by 21 percent of those using regular part-time workers, and
by 10 percent of those using short-term hires and on-call workers. Even
so, the survey found that the hourly costs of workers in flexible
staffing arrangements were lower than those of regular workers in
similar arrangements, and that the savings were primarily due to lower
benefit costs.

MYTHS AND REALITIES

Nationally representative data on the employer-employee relationship
thus run counter to much current conventional wisdom. The last several
years have seen both a decline in job displacement and, for those who
are displaced, shorter spells of joblessness and a smaller loss of
earnings upon finding a new job. The disappearing lifetime job of
popular mythology is not to be found in the data, which instead show
only modest declines in job tenure. Moreover, contingent workers are not
disproportionately workers with little education, the wages they earn
are similar to those of noncontingent workers of the same age, and
contingent work has not become more prevalent in recent years. In
addition, the flexibility of the contingent arrangement appears to be a
significant benefit to many workers as well as to their employers. On
the other hand, job displacement remains relatively high given today's
low unemployment rates, and contingent workers are much less likely to
receive pension or health benefits than are noncontingent workers. These
developments are part of the reason why this Administration has expanded
and redesigned Federal policies and programs of job training, education,
lifelong learning, and assistance to dislocated workers--initiatives
discussed in the next section.

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NEW DEVELOPMENTS IN JOB TRAINING AND LIFELONG LEARNING

The Federal Government and the governments of the States provide
assistance to workers through a number of channels. Unemployment
insurance, job training, and reemployment services are cornerstones of
the worker support network, helping workers to identify job
opportunities and to retool, and providing financial support until they
find their next job.
In the face of a rapidly changing global economy and the increased
rewards to more highly skilled workers, this Administration has sought
to strengthen America's work force development system and to promote
lifelong learning. In August 1998 the President signed the Workforce
Investment Act (WIA), which gives workers greater control over their
training, streamlines public employment and training services, and makes
all training providers more accountable for their services. WIA
establishes Individual Training Accounts, self-directed accounts that
allow workers more choice over their own training or retraining. To help
workers make informed decisions about which training program is best for
them, WIA also requires that training providers report the performance
of their graduates in terms of job placement, earnings, and job
retention. In addition, WIA establishes universal access to core
employment services, such as skills assessment, career counseling,
information about vacancies, job search assistance, and follow-up
services to assist in job retention.
WIA streamlines employment services through consolidation. The
Federal Government has set up partnerships with 48 States to build
systems of one-stop career centers, which provide convenient access to a
variety of training and employment programs under one roof. The act
requires each local area to have at least one one-stop center providing
job training, employment service activities, unemployment insurance,
vocational rehabilitation, adult education, and other assistance. More
than 800 such centers are already in operation.
WIA also strengthens accountability for States, localities, and
training providers. States and localities will have to meet performance
goals for job placement, earnings of placed workers, and retention, or
else face sanctions. But if they exceed their goals, localities qualify
to receive State incentive grants. To become eligible for funds under
WIA, training providers must be certified under the Higher Education
Act, the National Apprenticeship Act, or the State procedure used by the
local Workforce Investment Board. To retain eligibility, each provider
must meet performance standards established by the local board. The
information that training providers must report on the performance of
their graduates will be available at the one-stop centers, allowing
potential trainees to make an informed choice among programs. This in
turn will make providers more responsive to trainees' needs.

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The Administration is especially concerned about those whose careers
are interrupted by corporate restructuring, changes in government
policies, or turbulence in global markets. The Administration has pushed
to expand assistance programs for these dislocated workers, helping to
nearly triple funding for these programs to $1.4 billion between 1993
and 1999. Under the Economic Dislocation and Worker Adjustment
Assistance Act (EDWAA), one of the funding streams consolidated under
the WIA, the Administration provides grants to State and local programs.
They in turn decide who most needs assistance and how best to provide
services, which can include on-site rapid response for announced plant
closings, job search counseling and support, literacy courses,
vocational education, and financial assistance during training. In
addition, the Trade Adjustment Assistance (TAA) program, including a
special transitional adjustment assistance provision under the
legislation implementing the North American Free Trade Agreement (NAFTA-
TAA), continues to help those workers whose jobs may be affected by
competition from imports.
Workers are considered dislocated if they have lost their jobs and
are unlikely to return to their previous industries or occupations.
Included are those who have lost their jobs as a result of massive
layoffs, plant closure, natural disaster, or Federal action. Farmers and
ranchers hurt by general economic conditions, as well as the long-term
unemployed with limited opportunities in their original occupations, may
also qualify. (Note that the definition of ``dislocated'' is more narrow
than that of ``displaced'' workers, discussed above.) In program year
1998, over 600,000 of these dislocated workers will have participated in
the EDWAA program. In the program year that ended in June 1997, 71
percent of dislocated workers leaving the program were employed and had
earnings, on average, of $10.39 per hour, or 94 percent of their
previous wages. The Administration's strong and continued support for
this program has also generated new funding for assisting trade-impacted
workers not formerly covered by TAA or NAFTA-TAA and for buttressing the
training system with innovative approaches for targeted groups.
The lifetime learning tax credit, enacted in 1997, targets adults
who want to go back to school, change careers, or take a course or two
to upgrade their skills, as well as college juniors and seniors and
graduate and professional degree students. The 20 percent credit applies
to the first $5,000 of a family's qualified education expenses through
2002, and to the first $10,000 thereafter.
Information about job openings and potential workers is especially
important in a rapidly changing economy. America's Labor Market
Information System, an Internet-based system that shares data on
available jobs (America's Job Bank) and workers (America's Talent Bank),
has been designed to meet this need. America's Job Bank (located on the
World Wide Web at http://www.ajb.dni.us/) posts roughly 700,000 jobs on

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any given day and received over 6 million ``hits'' (individual job
searches) in July 1998 alone. America's Talent Bank (http://www.atb.org)
was fully integrated with the job bank in May 1998, and as of July a
total of 112,000 rs had been posted with the
service. In addition, workers and employers can obtain information about
the wages and employment prospects of certain occupations across the
country using America's Career InfoNet (http://www.acinet.org/acinet/).
These policies help ensure that all workers can find employment
following a job loss, or improve their training and skills in order to
move up in the labor market. This Administration is committed to making
sure that the labor market benefits all workers, and that the benefits
of the current economic expansion are enjoyed by all.