[Economic Report of the President (2000)]
[Administration of William J. Clinton]
[Online through the Government Printing Office, www.gpo.gov]


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CHAPTER 4
Work and Learning in the 21st Century



Eunice Hunton Carter, born in 1899, was a trailblazer for expanded
labor market opportunities for women and minorities. She received
bachelor's and master's degrees from Smith College, went on to
Fordham Law School, and ultimately became the first African American
woman district attorney in New York. Special prosecutor Thomas E.
Dewey made her one of his ~~``twenty against the underworld'' who
investigated organized crime in the late 1930s.

The nature of work has changed dramatically over the past 100 years.
Today, vastly fewer people work on farms, and women are much more
likely to be working for pay. Discrimination, which long limited the
participation of minorities and women in the labor market, is now
illegal and has been greatly reduced. In addition, the educational
attainment of our labor force has risen sharply. These changes have
combined to produce the most diverse and highly educated work force in
our country's history. The tools and techniques of work also changed
dramatically over the 20th century. At the beginning of the 21st century
this has meant a technological revolution, which has affected the
majority of jobs and put a premium on a new set of skills. This chapter
examines the new labor market and the role government will play in
preparing workers for the next century.

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Formal education was a far less important job qualification for most
workers at the turn of the last century than it is now. Over 40 percent
of the work force was in agriculture, and another 28 percent was in
manufacturing. Services, broadly defined, accounted for the remaining
31 percent (Chart 4-1). In keeping with this industry mix, a large
proportion (38 percent) of workers were occupied in farming, forestry,
or fishing. Another 25 percent were operators or laborers. Managers and
professionals represented just 10 percent of the work force, and sales
and administrative support occupations just 8 percent.

Over the course of the 20th century, the share of total employment in
agriculture declined steadily. Until the early 1970s, manufacturing
employment grew roughly in line with growth in the labor force, and
manufacturing's share of total employment remained roughly constant.
Since then, however, employment in services has accelerated, and the
share of employment in manufacturing has declined. The occupational
mix has changed accordingly. By 1999, 30 percent of workers were
employed as managers and professionals, and 26 percent worked in
technical, sales, and administrative support occupations. Operators,
fabricators, and laborers made up just 14 percent of the work force,
and farming, forestry, and fishing occupations represented a scant 3
percent.

Most recently, the change in the industrial and occupational mix of
the economy has been associated with a technological revolution. That
revolution has been a rich source of new jobs, but many of those jobs
require familiarity with the latest technological advances. In 1996,
for example, the share



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of total employment in industries that are intensive users of information
technology was 41 percent. Projections by the Bureau of Labor Statistics
suggest that this figure will rise to 44 percent by 2006. Other projections
indicate that the five fastest growing occupations between now and 2008
will be related to computers.

This evolution of the labor market from one based on a strong back
to one based on a strong mind has both caused and been driven by
substantial improvements in educational attainment. The change in the
education of the work force and the increasing value of education
represent an important transformation of the labor market over the
course of the century. A second important transformation has been
an opening up of opportunities to women, minorities, and persons with
disabilities. The typical adult female in 1900 was working at home or
on the farm, and those women who worked for wages were likely to be
unmarried and in low-paying occupations. African Americans and other
minorities were also generally limited in their occupational choices.
Over the course of the century, however, women and minorities entered
the labor force in increasing numbers and enjoyed expanded occupational
choice, and their earnings have risen. All groups have made substantial
improvements in educational attainment and have shared in the greater
wealth generated from the accumulation of skills and higher productivity.

This chapter analyzes these two key transformations of the labor market_
the increasing value of education and the increasing opportunities for
women, minorities, and persons with disabilities_and assesses the
challenges they pose for current policy. Although education has proved
to be an avenue toward higher earnings for all, a large gap has emerged
between the wages of those with education beyond high school and the wages
of those with less education.

The economy has changed in a way that places a high premium on certain
skills, some of them unknown only a few years ago, and workers without
those skills are increasingly likely to be left behind. This wage premium
provides a strong market signal about the value of education, but evidence
suggests that many workers lack the skills needed for today's jobs.
Therefore government policies have a role to play. Governments at all
levels have traditionally been involved in providing education, in part
because of the social as well as economic benefits associated with it. The
last part of this chapter examines the role of government and, more
specifically, the initiatives put forth by this Administration to improve
the quantity and quality of education and training of the American work
force and provide new opportunities for American workers. The challenge
for public policy in the 21st century will be to develop an appropriate
set of education and training policies, one that creates a framework of
lifetime learning within which workers can acquire and maintain both the
basic skills and the more technical skills they need in the new labor
market.

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The Transformation of the Labor Market

A hallmark of our increasingly technology-driven and knowledge-
intensive labor market is the importance of education for success.
The gains in educational attainment that the U.S. labor force achieved
over the course of the 20th century were impressive and have led to
great improvements for many groups. Yet the number of educated workers,
although growing, has been falling short of demand: employers eager to
hire qualified workers have driven up the relative wages of those who
have the desired skills. In the 1980s and early 1990s, those who
acquired the education and training that employers sought were rewarded
in the labor market, while those who lacked that preparation saw their
earnings lag behind.


The Rising Importance of Skills and Education


Growth in Educational Attainment

The average level of education of the U.S. working-age population
increased dramatically in the 20th century. Many more Americans than
ever before are graduating from high school and college, and overall
educational attainment has increased. The median number of years that
an adult American has spent in school rose from 8.6 in 1940 to nearly
13 in the 1990s. In addition, the disparity between men and women in
high school and college completion rates has disappeared. In fact, in
the decade just past, women completed both high school and college at
slightly higher rates than men.

The gap in years of schooling between whites and other groups also
narrowed substantially over the century. The gap between African
Americans and whites in high school graduation rates fell markedly from
the 1940s to the present (Chart 4-2). Whereas in 1940 the proportion of
whites who had completed high school was more than triple that of African
Americans (41.2 percent versus 12.3 percent), by 1998 this gap had
virtually disappeared, with 88 percent of both groups having completed
high school. Hispanics have not made the same gains, however, and the
proportion of this population that had completed high school (which
includes those Hispanics who immigrated as adults) was only 62.8
percent in 1998. Raising the high school completion rates of Hispanics
has been an important goal of this Administration, and to achieve it,
the President has pushed for the first-ever Hispanic Education Action
Plan. The Federal budget for fiscal 2001 includes $823 million in
increased funding for a number of education programs that help to improve
the educational outcomes of Hispanics and other students with limited
English proficiency.


College completion rates increased over the second half of the century
(Chart 4-3). In contrast to high school completion rates, however, the
racial

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and ethnic gap in college graduation rates remains large. In 1940, 6.4
percent of whites aged 25-29 had completed college; by 1998, 28.4
percent had. African American and Hispanic graduation rates have
improved over the same period, but they still lag far behind that of
whites. Although the rate for African



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Americans has risen almost 10-fold since 1940, only 15.8 percent of
African Americans and only 10.4 percent of Hispanics aged 25-29 held
bachelor's degrees in 1998. A number of Administration policies seek to
improve access to postsecondary education and are discussed later in
this chapter.


Changes in the Demand for Skills

These statistics show clearly that the American labor force is becoming
more educated over time, but are these increases in educational attainment
keeping up with the demands of an increasingly technology-driven labor
market? And in that market, what happens to those who do not keep up? The
rise in importance of basic computer skills illustrates the concern.
Computer use on the job has increased tremendously since the introduction
of the personal computer in the late 1970s. Already by 1984 about a quarter
of all workers were using a computer at work, and by 1997 that proportion
had risen to virtually half. What this trend implies is that the pool of
potential jobs is shrinking for those who lack basic computer skills.

But it is not just computer skills that are in demand in today's labor
market. Survey evidence from the 1992-94 period indicates that most jobs
available to workers without a college degree require not only specific
experience but the ability to perform basic tasks involving reading,
writing, or arithmetic and the interpersonal skills to serve customers
effectively. Focusing specifically on jobs available to those without a
college degree, this survey found that over half of such jobs required
workers, on a daily basis, to deal with customers (70.0 percent), read or
write paragraphs (61.1 percent), do arithmetic (64.7 percent), or use
computers (50.7 percent). Only 8 percent of the jobs available to
non-college graduates required none of these skills.

Does this imply that the skill demands of employers have been
increasing over time? Direct research evidence on this question is
limited, but it suggests that indeed they have. The same survey asked
employers directly whether overall skill use on jobs they had recently
filled had risen in the past 5 to 10 years. The results indicate
substantial increases in each of the skill categories (23 to 25 percent)
over this relatively short period. The data also show that the changes in
labor outcomes (wages and employment) for certain groups that took place
over this time have occurred in a manner consistent with firms demanding
greater levels of skill.

A mismatch does seem to be emerging between the skills that workers
possess and the skills that employers demand. For example, a 1996 survey
of medium-size and large businesses by the American Management
Association found that 19 percent of applicants for vacant jobs lacked
the necessary math and reading skills, but by 1998 this proportion had
increased to almost 36 percent. Another recent study, this one of
manufacturers, found that demand for nontraditional skills, such as
computer skills, interpersonal and teamwork

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skills, and problem-solving skills, has been rising rapidly,
especially among high adopters of new technology. Computer skill
requirements were more frequently cited than other requirements as
having increased from 1993 to 1996. However, employers cited more
difficulty in finding applicants with good problem-solving skills than
in finding qualified computer-skilled applicants. Although these results
in part reflect the strong labor market of this period, they also indicate
a rising absolute demand for skills.


Changes in the Education Premium

A sharp increase in the wages of college graduates relative to
those without a college degree provides indirect but striking evidence
of rising demand for workers with higher level skills. Between 1979 and
1999 the median real weekly wages of comparable male college graduates
aged 25 and over who worked full-time rose by almost 15 percent, from
$833 to $957 (Chart 4-4). Despite a 6 percent increase since 1996, the
earnings of full-time working males with only a high school diploma fell
by 12 percent over the same period. In 1999 the real weekly wages of male
high school graduates were $568, down from $648 in 1979. Similarly, the
real weekly wages of those with less than a high school diploma declined
by 27 percent between 1979 and 1999, from $530 a week to $387, although
their real wages in 1999 were 5 percent higher than in 1995.

In 1979 the median weekly earnings of male college graduates were 29
percent higher than those of similar men who possessed only a high school



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diploma (Chart 4-5). That same year the median earnings of male college
graduates were 57 percent higher than those of high school dropouts.
Other evidence suggests that these ratios had been roughly constant or
even declining slightly in the decade prior to 1979. By 1999 college
graduates were earning 68 percent more per week (again measured at the
median) than high school graduates, and 147 percent more than those who
had not completed high school. Since the mid-1990s the returns to lower
levels of education have increased at about the same rate as returns to
college education, implying that the gap is little changed. Overall, this
evidence suggests that there has been rapid growth in the demand for
skills over the past two decades, because the premium associated with a
college education has gone up even as the supply of college graduates has
increased.

Providing further support for the rising importance of skills is
evidence that, even within education groups, the rates of return to
cognitive skills (reading and math skills, for example) may have
increased in recent decades. Research has used longitudinal surveys
to examine what impact a person's level of basic math and reading
skills, as measured by scores on cognitive tests administered in high
school, have on that person's wages after graduation. Results from a
sample of high school graduates who did not go on to college
indicate not only that a greater mastery of basic skills translates
into higher wages, but also that this relationship has grown stronger
over recent years. The implication is that basic skills are more important
in the labor market than in the past. The same data also allow us to
address the question of whether the educational wage premium



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already demonstrated is due to differences in skills between those
who choose to go on to college and those who do not. When high
school and college graduates are compared, the results suggest
that, controlling for scores on math tests, between 1978 and 1986
there would have been no growth in the college wage premium for women,
and only one-third as much for men. This again demonstrates the
growing importance of skills for labor market outcomes.

In addition to finding a widening gap between the wages earned by
different education groups and between people with different levels of
cognitive skills, researchers have found evidence that skills
associated with new technologies are becoming more important in the labor market. One such piece of evidence is the gap in wages between workers
in information technology industries and those in other industries.
According to the U.S. Department of Commerce, in 1997 workers in
information technology-producing industries earned on average
almost 78 percent more than did workers in all industries combined.
And this figure was up sharply from 56 percent in 1989.

To the extent that higher education indicates a higher level of
skill, one common explanation for the premium associated with
education is referred to as ``skill-biased technological change''_technological change that has caused demand for high-skilled
workers to increase more rapidly than that for low-skilled workers.
What might account for this effect? One explanation may be that when
new technologies are introduced, workers already well endowed with
certain skills are better able to use them. Technological change may
also create scope for organizational changes in the workplace, such as
more decentralized decisionmaking, which would further stimulate demand
for workers with higher education. Adding to this, demand for less
skilled workers has decreased in relative terms as some low-skilled
jobs have been replaced by more automated production processes. But
there are other possible explanations for the increase in the
college wage premium. One is decreased demand for low-skilled
workers as international trade has allowed imports to substitute for
the goods these workers used to produce. As discussed in Chapter 1,
however, recent evidence casts some doubt on these hypotheses:
rapid technological growth and increased trade in the 1990s did not
lead to increased inequality but, in fact, coincided with the end of
a 20-year trend toward greater inequality. Other possible contributors
to the higher college wage premium include the decline in the real
minimum wage over the 1980s and the loss of collective bargaining power
with the decline in unionization rates over the same period.


Growth in Opportunities

The 20th century witnessed changes in job opportunities for all
workers. Changes were already under way at the start of the century,
when the women's suffrage movement was active, and change continued
with the civil rights movement of the 1960s. Government has played a
critical role in


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ensuring equal opportunity for all workers through the passage of the
19th Amendment, and later through such legislation as the 1964 Civil
Rights Act, the 1967 Age Discrimination in Employment Act, the 1990
Americans with Disabilities Act, and, most recently, the 1999 Work
Incentives Improvement Act. This last piece of legislation
eliminated institutional barriers that had limited the employment
opportunities of persons with disabilities. Thanks to these and
other initiatives, jobs that were once closed to women, minorities,
the disabled, and the aged are now open to all, regardless of their
work-irrelevant characteristics. Rising demand for labor in general
may have contributed to growth in opportunities for groups that have
traditionally lacked access, but it should not be forgotten that these
and other acts of government helped open the door.


The Economic Progress of Women

The progress made by women in the paid labor market has been one of
the most important economic changes of the 20th century. In the early
1900s, men and women, if they were in the labor market, typically worked
in different jobs. Whereas some 79 percent of men worked in manufacturing
or agricultural jobs, the comparable figure for women was only about 47
percent. A plurality (28.7 percent) of women in the labor force were
employed as private household workers, but fewer than 1 percent of men
held such jobs. The differences for African American women are even more
striking. It is estimated that among African American women who were in
the labor market in 1890, over 90 percent worked as servants or
agricultural workers.

Disparities remain even today, but today's occupational categories
are much more likely to contain substantial numbers of both men and
women. Table 4-1 examines the participation of female workers in a
range of detailed occupational groups and how it has changed over
recent years. Many occupations experienced sizable increases in the
percentage of women employed, beyond the overall rise in female labor
force participation. For instance, the share of engineers who are female
rose from 1.2 percent to 10.6 percent between 1950 and 1999, and the
share of lawyers who are female increased eightfold, from 3.5 percent
to 28.8 percent.

The opening of opportunities in the labor market for these groups
has gone hand in hand with improvements in labor market outcomes. An
extensive social science literature documents these gains and attempts
to identify their sources. One way of assessing progress is to consider
the earnings of one group relative to another: Chart 4-6 shows the
ratio of female to male median annual wage and salary income for all
workers from 1967 to 1998 and the comparable ratio for annual earnings
of full-time, full-year workers from 1960 to 1998. In 1967 the median
woman worker earned about 40 cents for every dollar that a man earned.
Among full-time, full-year workers, the ratio

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in that year was about 60 cents on the dollar, approximately the same
as during most of the 1960s and 1970s. Since then, however, the gap
between men and women has narrowed. In 1998 the ratio of median earnings
of women to



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those of men (again looking at full-time, full-year workers only) was
73 cents on the dollar.

An important research and policy question is how much of this gap
is due to labor market discrimination. Because it is difficult to
measure discrimination directly, researchers have explored this issue
by first controlling for other factors that might legitimately explain
the gap. For instance, an additional year of schooling is estimated to
increase a worker's wages, on average, by 5 to 15 percent, and an
additional 25 years of work experience increases wages by an estimated
80 percent. These findings have led some to attribute much of the
male-female wage gap to differences between the sexes in education and
labor market experience. A recent study using longitudinal data from
the late 1980s found that about one-third of the pay gap was explained
by differences in the skills and experience that women bring to the
labor market. This study also found that about 28 percent of the gap
was due to differences in the industries and occupations in which men
and women worked and in their union status. Accounting for these
differences raises the ratio of female to male median wages for the
late 1980s from about 72 percent to about 88 percent, leaving around
12 percent unexplained.

Even as several beneficial trends have tended to boost women's wages
relative to men's and helped narrow the male-female wage gap, two major
trends have worked simultaneously to widen it. The first is increases
in the pay premium associated with higher skill (as measured by
educational attainment and labor market experience), and the second is
increased differences in pay across industries and occupations. Despite
the gains just documented, these trends have served to widen the wage
gap because female workers still have less labor market experience, on
average, than male workers, and because women tend to work in occupations
with slower wage growth than those of men. Rising wage inequality across
occupations, together with increasing economic returns to skills, slowed
women's progress during the 1980s.

Although recent trends suggest that progress is being made, no one
should doubt that barriers remain. Studies that have tried to measure
discrimination by directly looking at pay differences between men and
women in very similar jobs, or by comparing pay with specific measures
of productivity, have found evidence of discrimination. There is also
evidence that discrimination remains a problem at the highest levels of
management. For example, in 1999 only four of the chief executive officers
of Fortune 500 companies were women. A recent study notes that of the
five highest paid executives at each of 4,200 companies, only 2.5
percent were women, and they earned about 45 percent less than their
male counterparts. Although differences in managerial experience
and company size can explain a large part of this wage gap, the ``glass
ceiling'' may still be stopping the advancement of women within management
hierarchies. To make further progress in this area, the President's 2001
budget proposal includes

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$27 million for an Equal Pay Initiative that will, among other things,
strengthen the ability of the Equal Employment Opportunity
Commission to identify and respond to wage discrimination.


The Economic Progress of African Americans

Over the long term, the convergence of earnings between African
Americans and whites is perhaps even more impressive than that between
men and women. The gap in earnings between African American and white
males declined between World War II and the late 1970s. One study showed
that whereas in 1939 African American male wages averaged 43 percent of
white male wages, by 1979 this percentage had risen to 73 percent. The
study noted that convergence in education has been central to these
improvements. Chart 4-7 presents recent evidence showing that the relative
earnings of African American men have been increasing only gradually since
the 1970s. This trend is broadly consistent with the education data
presented above. Other research has shown that government policy appears
to have played a role in improving at least the employment rates of
African American men (Box 4-1), an area of considerable importance given
the differences in unemployment rates between the two groups.

Research has also shown a near convergence in the earnings of
African American and white females, although this trend has somewhat
reversed in recent years. One study found that African American women
in 1939 earned 40 percent of what white women earned; by 1979 that ratio
had risen to 90 percent. Chart 4-7 shows that African American women's
earnings have slipped relative to those of white women since the early
1980s. (However, the gap in earnings between white women and African
American women remains smaller than the corresponding gap for men.)
Despite these changes, other indicators of progress have been encouraging.
For example, the unemployment rate for African Americans in 1999 was the
lowest on record.


The Economic Progress of Persons with Disabilities

It has been estimated that one in five Americans of working age has
a disability. A person is typically considered disabled if he or she
has difficulty performing certain functions such as seeing, hearing, or
walking; has difficulty performing activities of daily living; or has
difficulty with certain social roles such as attending school or working.
It is also estimated that 1 in 10 Americans is severely disabled, in need
of assistance from specialized devices or other persons to perform basic
activities. For working-age persons with disabilities, reducing
discrimination, easing the transition into work, and improving labor
market outcomes have been important goals of this Administration.

The labor market behavior of persons with disabilities often tracks
the behavior of the broader groups to which they belong. For example,
the

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Box 4-1. The Role of Government Policy in Improving the Economic Status
of African Americans

The Federal Government has led the way in extending opportunities to
all Americans. Title VII of the 1964 Civil Rights Act outlawed
employment discrimination on the basis of race, color, religion, sex,
or national origin and established the Equal Employment Opportunity
Commission (EEOC) to monitor compliance with the law and enforce its
statutes. These statutes covered employers with at least 100 employees
beginning July 1965; the threshold was lowered to 25 employees 3 years
later. In September 1963, Executive Order 11246 prohibited employment
discrimination by Federal contractors. The Equal Employment Opportunity
Act of 1972 extended civil rights coverage to employers with 15 to 24
employees and expanded the enforcement power of the EEOC.

Measurement of the effects of civil rights legislation has been
difficult, since the timing of the legislation coincided with many
other significant changes in the U.S. labor market. Despite improvements
in employment and wages for African Americans since the mid-1960s, it is
sometimes difficult to identify a single cause for each change, or to
measure the extent to which Federal policy (as opposed to other factors
such as economic conditions or local sentiment) played a role.
Nonetheless, researchers have documented a link between the enactment of
Federal antidiscrimination policy and evidence of further opportunities
for minorities and reduced discrimination.

An alternative argument is that these policies came about in part
as a result of demand from employers. In a tight labor market,
discrimination becomes costly, and it is possible that the passage of
Title VII and subsequent legislation provided a justification for what
would have occurred anyway. Nonetheless, it appears that government
policy played a role and achieved its intended effect of opening
opportunities and increasing the share of African American employment.

Some have argued that, rather than providing net economy-wide gains,
Title VII and its amendments merely shifted African American
employment from small to large employers. To isolate the true effect
of the legislation, a recent study compared the growth in employment
share across large firms with the growth across small firms newly bound
by the 1972 expansion of the EEOC. The study found that there were gains
in the employment share and pay of African Americans in the industries
most affected by the 1972 legislation. The timing of these gains
provides evidence that the Federal policy positively affected the
labor market status of African Americans.

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long-term decline in the labor force participation of men, particularly
older men, and the long-term increase in female labor force participation
are also evident in the populations of disabled men and women,
respectively. Overall, however, persons with disabilities have lower
rates of labor force activity (whether working, looking for work, or
laid off). They are limited in their choice of occupation, and they are
less likely to work in higher paying occupations than persons without
disabilities. These limitations are particularly evident for those with
severe disabilities. In 1994, for example, only 29.5 percent of adults
aged 20-64 who had severe disabilities participated in the labor market.
In contrast, 84.5 percent of adults in that age group without disabilities
and 81.6 percent of those with moderate disabilities participated in the
labor force. Despite some evidence of an upward trend in the labor market
activity of those with severe disabilities, there is ample room for
improvement.

The increasing importance, documented above, of education and of
certain skills in the labor market will undoubtedly play an important
role in future labor market outcomes for the disabled. The rate of
labor force activity of severely disabled workers with a college degree
(52.4 percent) was more than 1.5 times that of comparable workers with
only 12 years of education (31.2 percent). It was about three times that
of workers with less than 12 years of education (17.3 percent). Evidence
also suggests that having computer skills improves the labor market
outcomes of workers with

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severe disabilities. For example, a recent study examined the earnings
and work behavior of a group of workers who had experienced a spinal
cord injury. Although their injuries led to a large decrease in
employment, hours worked, and weekly earnings, if they had computer
skills they returned more quickly to work and had relatively higher
earnings once there. These results were still observed after controlling
for educational attainment.

In recent years, government policies have begun to focus on helping
disabled workers return to work. The 1990 Americans with Disabilities
Act was designed to eliminate discrimination against the disabled,
including in the workplace. In December 1999 the President signed the
Ticket to Work and Work Incentives Improvement Act of 1999, to help
eliminate the institutional barriers that limit employment
opportunities for persons with disabilities. The act provides health
insurance protections to the working disabled by giving States new
options to allow workers with disabilities to buy into Medicaid. It
extends Medicare coverage for an additional 4H years for beneficiaries
of disability insurance who return to work. It also creates a Medicaid
buy-in demonstration program to help those who are disabled but still
able to work. And it provides grants for States to develop
infrastructure that will help people with  disabilities return to
work. The act also offers a ``Ticket-to-Work'' for disabled
beneficiaries of Social Security disability insurance and Supplemental
Security Income, giving them more choice in the selection of vocational
rehabilitation and employment service providers.


Preparing the American Work Force for the 21st Century


The transformation of the economy from one based on agriculture and
manufacturing into one based on services and high-technology skills has
meant many changes for the American economy and people. It has, for
example, led to the rise of new economic centers such as Silicon
Valley and the decline of other areas that were once vibrant and had
jobs in abundance. This Administration has led the battle to revitalize
those areas of the country that have been left behind (Box 4-2). The
changing economy has also meant a new set of challenges for the American
worker. To compete successfully in the new economy, the American work
force must continue to change. This section documents the role of
education and training in providing the skills necessary for the labor
market of today.


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Box 4-2. Helping Areas Left Behind: Opening New Markets

The movement from agriculture to manufacturing that took place at
the beginning of the 20th century implied a movement of jobs and
people from rural to urban areas. Later, suburban employment grew as
the rise in service occupations led to job creation outside the
central cities. Accompanying this change has been a broader movement
of manufacturing jobs out of the Northeast and the Midwest, the
Nation's traditional manufacturing centers, to the South and the
West. In all geographic regions, however, the largest share of
employment growth between 1980 and 1990 took place in suburban
counties. The movement of manufacturing and service jobs from
central cities and rural areas has led to the further decay of
many of these areas and to a spatial mismatch between the
availability of jobs and workers to fill them.

To help revitalize areas that have been left behind because of
sectoral shifts or urban flight, the Administration has implemented
a number of important policies and proposed others. A prime example
is the creation of empowerment zones and enterprise communities in
struggling areas, as provided for in the Omnibus Budget
Reconciliation Act of 1993. Businesses in these areas are eligible
for tax incentives to facilitate employment, financing, and investment.
In 1994 the first 9 empowerment zones were designated, along with
95 smaller enterprise communities. These programs have leveraged over
$10 billion in additional public and private revitalization efforts,
and a recent survey of businesses operating in the 31 empowerment zones
created to date finds that these tax incentives have been an important
factor in employment decisions. The fiscal 2001 budget proposes a
series of extensions to this program, including a third round of 10
new empowerment zones. It will also extend existing wage credits for
existing and new empowerment zones through 2009.

In addition, the Administration has proposed a new set of policies
to spur investment in low-income areas. These include a tax credit
to spur equity capital; creation of America's Private Investment
Companies (APICs), patterned after overseas investment institutions
to leverage investment in untapped domestic markets; and several
programs designed to assist small businesses in low-income areas.
The proposal would expand BusinessLINC, a public-private
partnership that encourages large businesses to work with small business
owners; microenterprise initiatives to provide funding for technical
assistance to low-income microentrepreneurs; and the targeting of Small
Business Investment Company resources to areas served by the New Markets
initiative.

continued on next page...

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Box 4-2._continued

Other policy initiatives seek to overcome the spatial mismatch
between workers and jobs. One of these is the ``Moving to Opportunity''
demonstration project, which helps families that leave high-poverty
inner-city neighborhoods through counseling and rental assistance.
Another is the ``Bridges to Work'' demonstration project, which provides
placement, transportation, and support services to inner-city residents
so that they can take advantage of suburban job opportunities.


Building Foundations: Educating America's Youth

The economic decision to improve one's skills_to invest in one's
own human capital_is based on both the cost of that investment and the
expected return. The cost includes such basic things as expenditure on
tuition and books, but it also includes an opportunity cost: the earnings
that the worker could have made had he or she chosen to stay in the labor
market rather than go to school. And the return_or, to be precise, the
private return_consists mainly  of the higher wages available in the
labor market to workers with more schooling or training. On average,
having more years of formal schooling leads to better labor market
outcomes for those schooled: higher wages, higher rates of employment,
and lower rates of unemployment. Although it is difficult to put an
exact dollar figure on this return, the evidence presented above
indicates that it has increased substantially in recent decades.
Further, and perhaps more important from a policy perspective,
evidence suggests that society at large benefits from having a more
educated population. The social return to education, for example, might
include a more productive work force that can pay taxes, draws less on
government-provided social programs, and participates more effectively
in the democratic process.

Given the high rate of return to schooling, individuals and
families have a tremendous private incentive to invest in education.
People often make great financial and personal sacrifices so that
they or their children can get more schooling, or schooling of higher
quality. Despite the incentives, however, there are a number of reasons
to expect that people might underinvest in education. Financial
constraints present a problem for some. Because they cannot use their
future human capital as collateral, would-be students may not be able to
borrow enough to finance their education. They may also be
underinformed, or misinformed, about the true opportunities available
in the labor market. In particular, they may not know or realize what
level of wages they could eventually earn if they make the human capital
investment, or the length of time over which they will reap the returns.
Perhaps most important for policy, when people make these personal
decisions, they may not take into account the benefits of their further
education to the rest

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of society as well as to themselves. These explanations all point to a
role for government to play in the provision of education and training.

The challenge for government with respect to schools is to give
students the skills they need to succeed in today's economy and
tomorrow's and to participate more fully in American life in general.
Fortunately, students themselves are recognizing the need for improved
skills, and many are seeking greater challenge in their education.
Students today are taking more courses in core academic subjects than
did their counterparts in the early 1980s, and the courses they are
taking are more challenging. For example, a higher percentage of high
school graduates are completing algebra and higher-level mathematics
courses, as well as courses in biology, chemistry, and physics,
than in the 1980s. The proportion of students taking college advanced
placement examinations has also increased dramatically, from 50
twelfth-graders out of every thousand in 1984 to 131 per thousand
in 1997.

Although measuring educational progress is difficult, test scores
may be indicative, and here the signs are mixed but generally
positive in recent years. Since the early 1980s, scores on the
National Assessment of Educational Progress (NAEP) show modest
improvements in mathematics and science proficiency, but little
change in reading and writing proficiency. Differences in NAEP scores
by sex are now small, with females scoring higher in writing and
reading achievement and males generally scoring higher in science
and mathematics. Results for African Americans and Hispanics also show
improvement since the mid-1970s. Indeed, the end of legal segregation,
followed by efforts to equalize spending on public schools since 1970,
has made a substantial difference in student achievement. On every
major national test, including the NAEP, the gap between minority and
white students' test scores narrowed substantially between 1970 and 1990.

Scores on the Scholastic Assessment Test (SAT, a test typically
taken by college-bound high school juniors and seniors) have also
shown improvement in recent years. Mathematics scores on the SAT were
16 points higher in 1995 than in 1980, although students scored higher
on both parts of the test, mathematics and verbal, in the early 1970s
(Chart 4-8; scores reflect the recentering that occurred in 1995).
Between 1976 and 1995, the combined verbal and mathematics scores of
African Americans climbed by over 50 points, while those of white
students remained roughly stable. Observed gains in SAT scores
are particularly impressive given that the proportion of high school
graduates taking the test has increased by about a fourth since the
early 1970s.

The gains that the U.S. education system has achieved in the past
few decades deserve recognition, but they should be viewed in a
broader context. Schools have been changing, but the economy has been
changing more quickly. The result, as discussed above, is that a high
school diploma alone is no longer a ticket to the middle class. Even at
higher educational levels there may be a mismatch between the skills
acquired in school and the skill

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requirements of jobs. To right this balance, the Administration has
made improving education one of its highest priorities (Box 4-3).


Greater Access to Preschool Education: The Head Start Program

Research demonstrates that the early preschool years, when human
ability and motivation are being shaped, are critical for skill
formation. Developmental programs that intervene early in life have
been shown to be more cost-effective than later attempts at
remediation. One such program is Head Start, which since 1965 has
provided comprehensive developmental services for America's
low-income preschool children as well as social services for their
families. These services focus on fostering intellectual, social, and
emotional growth as well as providing a comprehensive health program.
Since 1993, funding for Head Start has nearly doubled, to $5.3 billion
in 2000. The additional funds have enabled Head Start to increase its
enrollment from 714,000 to 877,000 children since 1993 and to enhance
the quality of its services. The President's 2001 budget proposes a $1
billion increase in this program.

Although conclusive evidence is limited, two recent studies have
shown the effectiveness of Head Start. A 1995 study used a nationally
representative data set to compare children who had participated in
the program with their siblings who had not. This methodology allowed
the researchers to control for many confounding factors that they could
not observe but that may be related to outcomes. The study found
significant and persistent effects of Head Start in

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Box 4-3. The Administration's Education Goals

In his 1998 State of the Union Address, the President stated that
``[t]he Information Age is, first and foremost, an education age, in
which education must start at birth and continue throughout a lifetime.''
To meet the challenges of the information-based, skills-intensive economy,
the President has set ambitious goals for the Nation's education system:

  All students will read independently and well by the end of
third grade.

  All students will master challenging mathematics, including
the foundations of algebra and geometry, by the end of eighth grade.

  By 18 years of age, all students will be prepared for and
able to afford college.

  All States and schools will have challenging and clear
standards of achievement and accountability for all children, as well
as effective strategies for reaching those standards.

  There will be a talented, dedicated, and well-prepared teacher
in every classroom.

  Every classroom will be connected to the Internet, and all
students will be technologically literate.

  Every school will be strong, safe, drug-free, and disciplined.

To achieve these goals, the President has proposed and implemented a
broad agenda of education policies that extend from preschool to college.


increasing test scores and school attainment and in reducing grade
repetition for whites. However, the large and significant gains in test
scores for African Americans were found to be quickly lost after they
left the program, perhaps because of lower quality in the schools that
so many of them attend after leaving the program. Another study using the
same methodology found large positive effects on test scores and
schooling attainment for Hispanic children, although long-term follow-up
was unavailable.


Improving Elementary and Secondary Education

It is important to ensure that all students have access to good-quality
educational resources once they enter school. As was stated at the
beginning of this chapter, students need society's help as they prepare
themselves for a changing work force and the demands of a technology-
driven labor market. The President has therefore laid out a three-part
agenda to help State and local governments

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build and maintain a world-class elementary and secondary school
system. The first part of this agenda focuses on setting high
standards. A national consensus has emerged on the key role of
standards in school improvement: 48 States now test their students,
and 36 publish annual report cards on individual schools. However,
only 19 States currently use more extensive public rating systems to
identify low-performing schools, and only 16 apply sanctions to
failing schools.

A second and related way to encourage local cooperation in
improving schools is to increase the accountability of those
responsible for their outcomes. The Administration has proposed
the Education Accountability Act, which requires States and school
districts to comply with accountability measures in order to
receive Federal funds. These accountability measures include
identifying failing schools and making critical investments to
turn them around; reconstituting or closing chronically
underperforming schools; employing qualified teachers and
assigning them to teach in their field of expertise;
instituting disciplinary codes and issuing school report cards;
and ending social promotion by making sure students get the help
they need to succeed in school.

Finally, the President has emphasized the importance of investing
in strategies aimed at raising student achievement. These include
assuring students of access to the latest technology, reducing class
sizes in the early grades, improving teacher quality, providing
opportunities for extended learning in after-school and summer
school programs, providing free and appropriate public education to
students with disabilities, and offering options for public school
choice. Each of these strategies is discussed below.

Improving Access to the Latest Technology. Computer and technology
skills are increasingly important for students as they prepare for the
future. Knowledge of these skills provides a gateway to higher wages
and to the new jobs of the 21st century. Accordingly, in 1996 this
Administration made it a priority to help all children gain access
to the tools they need to prosper in a changing economy. The
Technology Literacy Challenge had four basic goals: to equip all
classrooms with modern computers, to connect all classrooms to the
Internet, to promote the development of quality educational software,
and to prepare teachers to use technology effectively. It is important
to find creative ways to use technology in the classroom, because
evidence suggests that it can be a useful tool. For example, a recent
study showed that eighth graders who use computers to learn higher
order thinking skills, or who had teachers trained in the use of
technology, raised their achievement in  mathematics by more than
one-third of a grade level.

The Technology Literacy Challenge program addresses the goal of
equipping classrooms with computers through the Technology Literacy
Challenge Fund. Resources available through this fund can be used to
help States and local school districts increase the number of modern,
multimedia computers in the classroom. The fund''s 2000 budget was
$425 million. In the 1998-99 academic year

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there were 9.8 students for every multimedia computer in use. This
represented an improvement from 21.2 students per computer only 2
years before. The Administration has also supported the Computers for
Learning program, an interagency effort to refurbish surplus computers
from Federal Government operations and distribute them to schools.
Thousands of computers from this program are currently in use in
schools across the country.

One of the most important programs designed to help in linking
schools to the Internet has been the E-rate program created under
the Telecommunications Act of 1996. Through this program,
approximately $3.6 billion has been made available since 1998 in the
form of discounts to over 50,000 schools and libraries so that they can
afford telecommunications equipment, Internet access, and internal
connections to the classroom. The level of the discount for which a
school is eligible is determined by the proportion of children
eligible to participate in the Federal school lunch program. In this
way the E-rate targets those schools and libraries that serve the most
disadvantaged students. In fact, 70 percent of funding in the program's
second year went to schools in the lowest income areas.

Progress so far has been dramatic. In 1994, according to the
Department of Education, only 3 percent of classrooms had Internet
connections; by 1998 that figure had risen to 51 percent. Already
the E-rate alone has helped connect more than 1 million classrooms.

There is still a long way to go, however, before all children have
easy access to the new medium. A ï¿½digital divideï¿½ remains for poor
and minority children who lack the same access to this technology
in their homes that other children enjoy. In fact, households with
incomes over $75,000 are more than five times as likely to have a
computer at home and more than seven times as likely to have home
Internet access as those with incomes under $10,000. But with recent
advances through the E-rate, the gap between rich and poor within
schools has narrowed tremendously (Chart 4-9).

An essential complement to computer hardware and Internet access is
developing user-friendly educational software with engaging content.
The Department of Education's Technology Innovation Challenge Grants
support partnerships among educators, the private sector, and
nonprofit organizations to develop compelling applications of
educational technology. For example, teachers in San Diego are
working with university researchers and other partners to develop a
curriculum of studies with an ocean exploration theme, designed to
improve performance in mathematics and science.

Finally, making effective use of this new hardware and software
requires training teachers to use the new technology. The Congress
has approved a $75 million initiative proposed by the President to
help train new teachers in the use of the new high-tech tools in
their classrooms. This program will help ensure that all new teachers
entering the work force can integrate technology effectively into
their curriculum and teaching styles.

[[Page 152]]



Class Size Reduction. Average class size in the United States declined
from 29 in 1961 to 24 in 1991. Despite this improvement, however, many
parents and educators believe class sizes are still too large. There
is also substantial variation in class size, with many students still
being taught in classes with more than 30 students. Smaller classes
allow teachers to interact more with each student and to tailor
instruction to that student's needs, and they allow students to
participate more in class discussions. These benefits can boost
students' academic performance. In Tennessee's Project STAR, for
example, a group of students from kindergarten through third grade
were randomly assigned to either regular-sized classes (22 to 25
students) or smaller classes (13 to 17 students). Over 11,000
students in 79 schools eventually participated in the program.
Results show that students in smaller classes learned more in the
first year of the program than did students in larger classes, and
that these gains were maintained as these children continued in
smaller classes in subsequent years. Some researchers have argued
that children get a one-time gain from a reduction in class size, and
that this gain is maintained in later years whether or not they remain
in smaller classes.

In his 1999 State of the Union Address, the President proposed the
first-ever nationwide effort to reduce class size in the early grades.
The Congress passed the proposed legislation in 1999. School districts
around the Nation received a total of $1.3 billion to enable them to
recruit, hire, and train new, qualified teachers for the 2000-2001
school year. This was the first installment of a 7-year initiative to
help schools hire 100,000 new teachers and reduce class size in the

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early grades to a nationwide average of 18. All 50 States have
received funds through the program. A recent report by the Department
of Education on the program's first year estimated that 1.7 million
children are benefiting from the program; that 29,000 teachers have
been hired; that, in schools receiving the bulk of the funding, class
sizes for grades one through three were reduced by an average of five
students; and that the program's flexibility has allowed it to
complement State and local efforts.

Improving Teacher Quality. Research has shown that teachers do make a
difference to student achievement, although the exact characteristics
that make some teachers more effective than others remain elusive. In
fiscal 2000, $98 million was appropriated for Teacher Quality
Enhancement Grants, which help link teacher preparation institutions
and high-need school districts, to strengthen teacher education and
to provide incentives to prospective teachers to teach in high-need
schools. As part of the Hispanic Education Action Plan, in the fiscal
2001 budget the Administration has requested $100 million for
Bilingual Education Professional Development. This would be an
increase of $28.5 million over the fiscal 2000 level. The funding will
provide more than 2,000 additional instructors in bilingual education
and English as a second language with the high-quality pre-service and
in-service training they need to teach students with limited proficiency
in English.

Opportunities for Extended Learning in After-School Care and Summer
School. The summer months can be an important time for learning outside
of the classroom. Recent evidence has shown, however, that the test
scores of poorer children are more likely to fall over the summer than
those of children from wealthier families. This research suggests the
importance of providing disadvantaged children with increased
opportunities to learn. The President has called for a large investment
in after-school and summer school programs to give children the extra
help they need to meet high educational standards. The fiscal 2000 budget
more than doubled Federal investment in these programs (21st Century
Community Learning Centers), to $453 million, to provide educational
support to 675,000 students. The President has proposed doubling
funding again for fiscal 2001, to $1.0 billion.

Providing Public Education to All Students with Disabilities. The
Individuals with Disabilities Act, first enacted in 1975, has helped
change the lives of millions of people with disabilities. Before its
enactment, approximately 1 million children with disabilities were shut
out of schools, and hundreds of thousands more were denied appropriate
services. In 1986, 26 percent of children with disabilities were educated
in regular classrooms. By 1996 that proportion had risen to 45 percent.
Today, people with disabilities are graduating from high school and going
to college in unprecedented numbers.

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During this Administration, the Federal investment in educating young
people with disabilities has more than doubled, from nearly $3.0 billion
in fiscal 1993 to about $6.0 billion in fiscal 2000, and the fiscal 2001
budget would increase this spending by $333 million. More important,
however, is the Administration's strong commitment to improving the
educational outcomes of disabled children. The 1997 amendments to the
Individuals with Disabilities Act made it clear that the education of
children with disabilities must be based on the same challenging
standards applied to nondisabled students, with appropriate modifications
and supports for their disabilities.

Options for Public School Choice. Charter schools provide parents
with greater choice within the public school system. They also allow
educators an opportunity to create innovative learning environments
while remaining accountable for student achievement. The number of
public charter schools nationwide has risen from 2 in 1993 to nearly
1,700 in 1999. Through the President's leadership, startup funding of
$145 million for as many as 2,000 charter schools in 2000 has been
provided.

Greater Access to Postsecondary Education


As discussed earlier in this chapter, the difference in average wages
between those Americans with postsecondary education and those without
it is considerable. One way to help people improve their economic status
is to provide greater access to postsecondary education and more
opportunities for people to enhance their skills throughout their
working lives. The Administration is committed to making postsecondary
education both attainable and affordable for all Americans, from recent
high school graduates to adult learners and displaced workers. To help
ensure access to 4-year and community colleges (Box 4-4), the President
has proposed and supported programs that prepare students for
postsecondary education and help make college affordable.

Preparing Students for College. Too many children, especially from
low-income families, are reaching college age without the skills and
knowledge they need to go on to college. Recent research has shown
that students form their educational expectations early, and courses
taken early in junior high or high school are closely related to
postsecondary enrollment. This indicates that the end of high school
may be too late to inform students of the importance of a college
education. Rather, information on the importance of college admission
requirements as well as on financial aid is critical for students
early in their educational careers. GEAR UP (Gaining Early Awareness
and Readiness for Undergraduate Programs) helps low-income students
prepare for education beyond high school by providing tutoring,
counseling, mentoring, information on financial aid, and other
assistance these students need to become ready for college. The
President is requesting $325 million for GEAR UP in fiscal 2001,
an increase from $200 million in fiscal 2000, to finance needed
services to over 1.4 million students in high-poverty schools.

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Box 4-4. The Role of Community Colleges

Community colleges more than doubled in number and quadrupled their
enrollments during the 1960s. In 1995, 5.5 million students were
enrolled in these 2-year colleges, accounting for 38 percent of
enrollments in all postsecondary institutions. Because community
colleges typically charge lower fees than 4-year institutions and
operate under open admissions policies, they have helped provide
greater access to education for people at all income levels. They have
lowered the costs of attendance in other ways as well, by offering
evening and weekend classes where workers can enhance their skills
while holding a job.

Community colleges were originally designed as a stepping stone for
students who would later transfer to 4-year colleges to complete
their bachelor's degrees. Today, however, community colleges provide
a wide range of offerings, including vocational training and
continuing adult education. The dramatic increase in community
college enrollment was primarily the result of growth in part-time
students; today roughly 65 percent of community college students
attend part-time.

Almost 36 percent of community college students are 30 years old
or older, compared with only 22 percent of students at public 4-year
colleges. These schools have become an important source of the
lifelong learning that today's dynamic economy demands. Recent
evidence suggests that community colleges have increased the overall
educational attainment of the American work force, and that one of
their major roles has become that of providing access to higher
education for those not traditionally served by the 4-year college
system. Other evidence suggests that these schools also effectively
address the skills mismatch described earlier. For example, a recent
study noted that high-technology manufacturers were less likely to
report difficulty in finding skilled labor in communities that had a
community college than in those that did not.


TRIO programs are another important resource to help disadvantaged
students prepare for and succeed in college. These are educational
outreach programs designed to motivate and support students from
low-income families. There are currently 2,400 TRIO programs serving
700,000 students. The fiscal 2000 budget is $645 million. Evaluation
results from one type of TRIO program, Upward Bound, found that students
in the program were four times more likely to earn a college degree than
students from similar backgrounds who were not in TRIO.

Helping Finance Postsecondary Education. Enacted in 1997, the HOPE
Scholarship program and the Lifetime Learning tax credit represent the
largest Federal investment in higher education since the G.I. Bill over
50

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years ago. In 2000, 13.1 million students_5.9 million receiving HOPE
Scholarships and 7.2 million claiming the Lifetime Learning credit_are
eligible to benefit. The budget for HOPE Scholarships in fiscal 2000
was approximately $5 billion. Each HOPE Scholarship provides a tax
credit of up to $1,500 for each of the first 2 years of college for
students enrolled on at least a half-time basis. This credit is phased
out for joint tax filers with incomes between $80,000 and $100,000, and
for single filers making between $40,000 and $50,000. By reducing the
financial barriers to continued education, the President hopes to
make the first 2 years of college as universal as high school.
In addition, the 2000 Federal budget provides $7.6 billion for Pell
grants, a program that provides direct financial assistance to help
financially needy students pay for their postsecondary education. The
maximum award was increased 43 percent between 1993 and 2000, from
$2,300 to $3,300.

To further these goals, the President's 2001 budget proposes a $30
billion investment in the form of a college opportunity tax cut. This
initiative would offer a 28 percent tax credit for higher education
expenses and would set higher income thresholds than do existing
education tax credits. Unlike with the HOPE Scholarship, there would
be no limit on the number of years in which a student could claim the
credit. When fully phased in, the credit would cover $10,000 in expenses.

The Lifetime Learning tax credit targets adults who want to go back
to school, change careers, or take courses 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, and it phases out at the same income levels as the HOPE
Scholarship. The fiscal 2000  budget for this credit was $2.4 billion.

Student loans have opened the doors to college for millions of
Americans. In 1993 the President established the direct student loan
program to reduce costs and increase efficiency in the Federal
Government's student loan programs and to offer expanded benefits to
borrowers. The program offered students the option of income-contingent
repayment: installments were based in part on the borrower's income
after completing studies. In the Higher Education Amendments of 1998,
the Administration proposed and obtained significantly lower interest
rates for borrowers on student loans, easing the burden of repayment for
new borrowers and for borrowers who consolidate their loans.

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The Continuing Challenge: Reeducating and Retraining

Progress in strengthening formal education is a key ingredient in
preparing young people for the labor market, but training after formal
education is also essential, both for those just entering the market
and for those well into their careers. To take advantage of the
opportunities offered by an increasingly global, competitive, and
information-driven economy, workers today may require ongoing, lifelong
learning.


The Provision of Training

In large measure, it is the responsibility of individuals and firms,
not of government, to develop the methods and practices most
appropriate for promoting lifelong learning and training. As with
education, both individuals and firms have strong incentives to invest
in training: both stand to reap high returns from their investments. But
as with education, government policies may have an important role to play
in facilitating such investments.

Employers have a clear interest in providing their employees with
the specialized training they need to perform those tasks that they
can perform for that employer and nowhere else. Companies should
therefore be willing to provide training in these firm-specific
skills. In contrast, many other valuable skills are occupation-
rather than firm-specific, and still others, such as many mathematical
and literacy skills, are quite general in their application. The data
on training described below suggest that firms do provide substantial
training in general skills, but it is difficult to disentangle the cost
of employer investments in training from that of employee investments
in training, even when the employer sponsors the training.

Firms provide general training for several reasons. They may simply
be unable to find employees with the necessary occupational skills, or
employees may need some general training before they can benefit from
training in more firm-specific skills. When firms provide general
training in their own facilities but do not pay employees their full
wages while in training, it is largely the employees, not the firms,
who are then doing the investing_they are paying an opportunity cost. In
practice, both individuals and firms are likely to share in these
investments, but employers will be reluctant to invest heavily in
general skills when workers have high turnover rates, since
the firm does not reap the returns on the investment. Despite the
evidence that firms do provide general training, there is reason to
believe they might underinvest in such training.

As in the case of education, there are reasons to believe that
individuals might underinvest in their own general training. If they
are not sure that the skills they will acquire will result in higher
wage offers, they will hesitate to bear the costs. They may also
underinvest because their incomes are too low to carry them

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through a period of unpaid training. In times of rapid technological
progress, workers may be unaware of the value of new training or
consider it too risky: the same rapid change that makes the skill
valuable today may make it obsolete tomorrow. Finally, again as with
investments in formal schooling, individual workers may fail to invest
in training because they do not take account of the full social benefits
of training in their decisionmaking.

All these underinvestment scenarios provide reasons for government
policies to encourage general training. One way in which government
attempts to encourage investment in training is by allowing employers
to deduct from taxable income the tuition payments for schooling they
provide for their employees. Other policies are discussed below.
First, however, it is worthwhile to review the evidence on the value
of firm-based training.


Firm-Based Training

Privately provided training by firms themselves is the primary
mechanism by which workers receive training in the United States, and
there is evidence that this firm-based training is growing. Although
this source of training is difficult to measure, a number of surveys
have been conducted and agree on several conclusions. First, training
is very widespread: in 1994, 81 percent of all establishments offered
some type of formal training, and 57 percent said that they had
increased the amount offered since 1991 (only 2 percent reported
providing less training). Second, firms with more than 1,000
employees are more likely to invest in training than small firms;
virtually all large firms report that they offer formal training.
This may be because smaller firms have trouble financing certain
fixed costs associated with training, or because it is more difficult
to measure the informal training that takes place in smaller firms.
Third, there is considerable variation across industries, with a
higher incidence of training provision in nonmanufacturing than in
manufacturing firms. Fourth, establishments with more
highly educated workers (which also tend to be larger establishments)
are more likely to provide training. Finally, training is more likely
when the firm is already making other investments, such as investments
in capital, or in new organizational practices, such as self-managed
teams or other ``high-performance'' work practices.

These data suggest that firm-based training becomes more prevalent as
firms experience rapid technological progress, but much training is
specific to the employer and is not of a general nature. For example,
training in basic literacy and numeracy, in computer skills, or in
teamwork is less common than training in safety procedures or in new,
firm-specific production methods. Only 27 percent of all establishments
provide training in basic educational skills for their workers, whereas
53 percent invest in computer-related skills and 82 percent invest in
safety training. Although more workers receive training from their
employers than from government-sponsored programs,

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the level of employer-provided training may still, for the reasons
discussed above, fall short of what is socially optimal. This is
particularly true for lower income groups or those in industries
experiencing increases in imports or other conditions associated with
worker dislocation.

These incentives to underinvest in employer-provided general
training may be particularly strong in the United States, where
labor turnover is high and there is no national, standardized
credentialing system for this type of training. U.S. companies
invest roughly $60 billion a year on education, training, and
upgrading skills, but this is modest relative to the challenge
posed to the Nation by rapidly changing workplace demands.


Government Training Programs

Government training programs are aimed primarily at workers who have
lost their jobs and are having difficulty finding new ones, or at those
who are unemployed and disadvantaged and may lack the skills or
experience to enter the labor market without further preparation. Some
employment and training programs are designed specifically to help
welfare recipients go to work. Typically, training programs include some
form of remedial or vocational education, subsidized employment to provide
job experience, or guidance in how to find a job.

Modern U.S. training programs trace their history back to the
mid-1960s. The 1964 Economic Opportunity Act created the Job Corps,
which still operates today, currently providing training for
disadvantaged youth at over 100 urban and rural residential centers
throughout the United States. Since its inception, the Job Corps has
served more than 1.7 million young people. The Manpower Development
and Training Act (MDTA) was enacted in 1962 to retrain technologically
dislocated workers, but the Economic Opportunity Act of 1964
shifted its emphasis toward disadvantaged workers. In 1973 MDTA was
replaced by the Comprehensive Employment and Training Act (CETA). This
program, which gave State and local governments the authority to operate
training programs with Federal grants, also had a public service job
creation component, which grew quite large in the late 1970s. In an effort
to shift more responsibility to the private sector, the Job Training
Partnership Act (JTPA) replaced CETA in 1982. JTPA eliminated the public
service employment component of training and further decentralized its
administrative structure by giving primary responsibility for the program
to State and local governments and the business community. The program
currently serves over a million economically disadvantaged persons
annually and was until recently the principal training program for the
disadvantaged. JTPA is in the process of being replaced by the
Workplace Investment Act, discussed below.

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The first major mandatory training program for welfare recipients
was the Work Incentive (WIN) Program of 1967. This program generally
provided recipients of Aid to Families with Dependent Children (AFDC)
with job search assistance. In 1988 WIN was replaced by the Job
Opportunities and Basic Skills Training (JOBS) program. Created by the
Family Support Act of 1988, this was a comprehensive welfare-to-work
program that gave AFDC recipients the opportunity to take part in job
training, work, and education-related activities that would lead toward
economic self-sufficiency. The comprehensive welfare reform legislation
passed in 1996 replaced JOBS (as well as the AFDC) with the Temporary
Assistance for Needy Families (TANF) block grant. TANF gives States the
flexibility to design their own welfare programs, provided they require
recipients to participate in work or work-related activities in
exchange for time-limited assistance. Within certain limitations,
States may provide both pre- and postemployment services, including
training to help welfare recipients find and keep a job.

Government appropriation specifically on training and employment
services in fiscal 2000 amounted to approximately $5.5 billion a year,
a level that implies that government-funded training opportunities for
U.S. workers are limited relative to those available to workers in
other countries. Comparative research done in 1994-95 found that the
United States spent only 0.2 percent of its GDP on publicly funded
employment and training programs, much less than many other industrial
countries, including the United Kingdom (which spends  0.5 percent of GDP)
and Sweden (3.0 percent).

Are government employment and training programs effective in
improving labor market prospects for the disadvantaged? A review of
the evidence provides grounds for cautious optimism. One general
conclusion, however, is that these  programs appear to have been more
successful for disadvantaged adults_women in particular_than for
disadvantaged youth.

Disadvantaged youth are perhaps the most difficult population to
help, and success has been limited except in a few highly intensive or
particularly well run programs. One program that has shown noteworthy
success is the Center for Employment Training (CET) in San Jose, the only
one of the 13 Jobstart demonstration programs found to be effective in
increasing youth earnings. An evaluation of this program showed a 40
percent ($3,000) increase in participants' earnings. The Job Corps has
also been shown to produce significant gains in earnings (about 15 percent
per year) and to reduce the number of serious crimes that participants
commit. Both of these programs are considerably more intensive than most
other efforts: enrollees either reside at the program's facilities (in
the case of the Job Corps) or spend many hours per month undergoing
training (in the case of the CET). Finally, a number of programs have
been specifically targeted at young single parents on welfare. Some of
these programs have produced small short-run gains in employment and
educational

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attainment among teenage parents. However, it has proved difficult to
sustain these gains once the program has been terminated.

The evidence is much more consistent that job training programs
increase the earnings of disadvantaged adults, and particularly those
of economically disadvantaged women. The JTPA Title II program, which
offers short-term training and job search assistance to disadvantaged
adults, appears to have increased the earnings of women in the program
by 15 percent, and of men by 10 percent. More intensive programs that
offer subsidized employment and supportive services to long-term welfare
participants have yielded larger earnings gains. Mandatory welfare-to-work
programs, which tend to offer job search assistance rather than training,
have shown modest but positive effects on earnings and employment and
small negative effects on welfare receipt. Given the very low initial
earnings of most disadvantaged adults served by training programs, the
gains made by most programs have not been enough to pull many of those
served out of poverty. However, most studies documenting this finding
were completed before the recent expansion of the Earned Income
Tax Credit (EITC). It may be that the EITC boosts starting incomes
enough so that the additional earnings generated by job search and
training programs can then move noticeable numbers of participants
out of poverty.

Research on the effects of employment and training programs for
dislocated workers, although much more limited, suggests that some of
these programs can be effective. Carefully targeted job search
assistance programs can decrease the duration of unemployment and
the receipt of unemployment insurance among displaced workers.
These programs are generally cost-effective for the government.
One study has suggested that for every dollar the government spent
on targeted job search programs, the government saved about $2 in
the form of reduced unemployment insurance payments and increased tax
receipts due to faster reemployment.

Taken together, these results suggest that employment and training
programs can achieve modest employment and earnings gains for
disadvantaged women. These programs are also often cost-effective.
Results for other groups are less clear. Moreover, the earnings gains
generated by successful programs have usually not been enough to lift
participants out of poverty. To some extent this is not surprising
given the relatively modest and short-term nature of the investments
these programs make. It is possible that more intensive interventions,
focused on local skill demands and tailored to individual needs, would
produce greater gains.


Training for the 21st Century

As Chapter 2 has documented, the macroeconomic environment for
American workers improved markedly during the 1990s. The Nation's labor
market is performing at extraordinary levels, with the unemployment rate
at

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a 30-year low, labor force participation at an all-time high, and real
compensation measures recording strong gains. But even in today's
economy, the rapid pace of change and the premium put on technology and
skills may cause some workers to lose their jobs and have trouble finding
new jobs given the skills they have. And those workers who have failed to
acquire the necessary skills may have trouble securing employment that
provides the middle-class standard of living they are striving for. This
Administration has made it a priority to pursue training policies that
will help ensure, for all those willing to work hard, an opportunity to
prosper.

A key component of the Administration's efforts to strengthen work
force development and promote lifelong learning is the Workforce
Investment Act (WIA). Signed into law in August 1998, WIA represents the
first major reform of the Nation's job training system in over 15 years.
The act, which is now being implemented, will streamline and revitalize
the system that provides workers with the information, advice, job
search assistance, and training to find and retain good jobs, and
provides employers with a pool of skilled workers. The act aims to
enable any adult interested in advancing his or her career to continue
learning, regardless of income; it also aims to provide high-quality
information and services to all job seekers. Seven key principles
are embodied in the law:

  Streamlining services: A variety of programs are being
integrated at the street level to make the delivery system more
accessible to both individuals and businesses. The Department of
Labor has provided implementation funds to each State. Over 1,000
one-stop centers have already been opened. A group of Internet tools
has also been created to provide timely and comprehensive labor
market information (Box 4-5).

  Empowering individuals: Individual Training Accounts,
along with consumer reports providing key information on the
performance of training providers, and job counseling at one-stop
centers will enable individuals to make informed training choices.

  Making services universally accessible: WIA aims to provide
ready access to core employment-related services to all in need of
those services.

  Increased accountability: States and local communities will
be held accountable for meeting performance measures, will suffer
sanctions if they fall short, and will receive incentive funds for
strong results.

  Strong role for local boards and business: State and local
Workforce Investment Boards will be chaired by a member of the
business community and have a majority of members from business.

  Provide local flexibility: Local authorities will have
flexibility to tailor delivery systems to meet the needs of their
community.

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Box 4-5. Using Technology to Help Workers: America's Career Kit

America's Career Kit uses the Internet to offer innovative ways to
help workers find jobs, help employers find workers, and provide timely
and valuable information about the labor market to all stakeholders.
The initiative is designed to help reduce the mismatch between worker
skills and shifting employer requirements. America's Career Kit consists
of the following four websites:

  America's Job Bank is an Internet site that lists both job
openings and resumes. With 6 million users each month, it is the
Nation's largest online labor exchange.

  America's Talent Bank allows job seekers to post their
resumes online, where potential employers can view them. A growing
numbers of workers with information technology skills are using this
resource.

  America's Career InfoNet provides information for both
prospective employees and employers on employment trends, prevailing
wages, and job training requirements. Data are also available on
States and localities.

  America's Learning Exchange is an electronic marketplace for
training and education resources. As of January 2000, the exchange
counted 4,540 providers, 162,053 courses, and 42,968 programs.

  Improved youth programs: The act will foster connections
between academic and occupational learning and provide activities
geared toward youth development. A youth council will be established
under each local Workforce Investment Board to improve coordination
among organizations that serve young people. Given the mixed results
of previous short-term training programs, WIA will require 12-month
follow-up services in its programs.


The 2000 budget included $2.4 billion for the Universal Reemployment
initiative. In a period of rapidly changing job demands, this program
aims to provide training and reemployment services to all dislocated
workers who want and need them. To this end, reemployment services
will be targeted to unemployment insurance claimants in danger of
exhausting their benefits, and funding for one-stop career centers
will be increased. A new initiative will fund grants to identify
skill shortages and target resources to industries struggling to
fill jobs.

Finally, a new effort to encourage lifelong learning is taking shape
through the Learning Anytime Anywhere Partnership program. This program
supports partnerships among universities and colleges, businesses,
community organizations, and other entities to use technology to
address challenges in lifelong learning and postsecondary education.

[[Page 164]]

Conclusion

Two key developments--the growing importance of education and the
expansion of opportunity--transformed the American labor market in the
20th century. Tomorrow's workers will need skills and flexibility to
respond to the opportunities and challenges that technology is making
available. As long as skills command a premium in the labor market, both
workers and firms will have an incentive to invest in education and
training. But for any of a number of reasons, workers and firms might
nevertheless underinvest in their human capital. Therefore government
policy has continued--and will continue--to play a role in the acquisition
of skills by the American work force. It is important, however, not to
downplay the roles of other, noninstitutional factors, the most important
of which is the family. As the chapter has noted, much of a person's
skill formation occurs before he or she enters school. This implies
that the environment in which a child is raised is very important for
that child's later learning. Chapter 5 discusses the American family
and the challenges it faces.