The Economics of Despair

Since
the late 1970s, social science researchers, the media, private foundations, and
policymakers have directed considerable attention to the labor market problems
of young adults and their families. Most of this attention has focused on high
school dropouts, the poor, minorities, and inner-city youth. But an equally
troubling—and broader—problem has received comparatively less notice:
the steep and sustained decline since 1973 in the real (inflation-adjusted)
earnings of young men and women generally. Even adjusting for demographic and
socioeconomic characteristics, the labor market problems of young workers are
disproportionately severe—they include higher than average unemployment and
relatively low earnings when employed. This sustained drop in earnings has been
especially dramatic for young adults with no postsecondary school education.

Most proposed remedies have emphasized the quality of the labor supply. But
improving education and training, while often worthwhile and necessary, is not
by itself sufficient to raise earnings. If this downward trend, which has
persisted through recession and recovery alike, is to be reversed, then
policymakers and educators must address the demand side as well as the supply
side. Raising young adult wages will require not only better academic
performance, training, apprenticeships, and school-to-work programs, but also
full-employment policies, changes in the configuration of jobs and careers, and
larger young adult union membership.



FALLING WAGES

Prior to 1973, the annual and weekly earnings of both young adults and older
workers had been improving markedly. Between 1967 (the year the Bureau of Labor
Statistics began tracking weekly earnings of wage and salary workers) and 1973,
the real median weekly earnings of 16- to 24-year-olds rose by approx i mately 8
percent. Since 1973, however, the earnings of young adults have fallen almost
continuously. Between 1973 and 1979, the weekly earnings of young men working
full time fell by 7 percent. Young men experienced a 19 percent decline in
earnings (a real value of $72 per week) between 1979 and 1989. This decline
cannot be attributed solely to business cycle contractions. About half of the 19
percent decline did take place during the recessionary period of 1979-1982. But
between 1982 and 1989, a period of strong overall job growth, the weekly
earnings of young men fell by another $33, or 9 percent. Earnings declined still
more between 1989 and 1994, dropping yet another 9 percent. The result of all
this decline? A young man under 25 years of age employed full time in 1994
earned 31 percent less per week than what his same-aged counterpart earned in
1973.

Annual earnings trends display the same pattern. Using findings from the
U.S. Census Bureau's annual work experience surveys, we estimate that between
1973 and 1993 the median real annual earnings of young males employed on a
full-time basis for at least 27 weeks fell from $18,600 to $13,700, a decline of
26 percent. Young male high school dropouts experienced a 32 percent decline in
real annual earnings, while high school graduates with no college education
experienced a 29 percent decline. In 1993 a young male high school graduate
earned in real terms only what a comparably aged high school dropout was
earning in 1973. And a four-year-college graduate in 1993 earned only slightly
more than a high school graduate earned 20 years earlier.

Young women also experienced earnings declines over this period, but of a
smaller relative magnitude. From 1973 to 1994 the real median weekly earnings of
young women fell 14 percent—compared to a decline of 31 percent for young
men. Because the earnings declines among young men have been significantly
larger than the earnings declines among young women, the median weekly wages of
young men and women have substantially converged. Whereas in 1973 the average
young woman working full time earned only 75 percent of what her male
counterpart earned, a young woman in 1994 typically earns 95 percent of what her
male equivalent does. Near-equality of earnings between the sexes, sadly, has
been attained only as part of a broader decline in the earnings of all young
adults.

Of course, wage declines during this time have clearly not been confined to
young adults. The earnings of full-time employed males older than 24 have also
declined. The relative size of older men's earnings declines, however, has been
much smaller—only a 9 percent decline for men over 25 compared to 31
percent for men aged 16 to 24. As a consequence, the relative weekly earnings
position of young men has deteriorated dramatically since 1967. In the late
1960s, a young man employed full time could expect to earn nearly three-fourths
of what an older man earned. Until 1973, a majority of young men could earn
enough to support a family. By 1994, however, their relative weekly earnings had
dropped to only one-half the earnings of older men, leaving them hard pressed to
contend with the costs of raising children.

Declining Weekly Earnings
Median weekly
earnings (in 1993 dollars) of 16-24 year olds, 1967-1994
























Year Men Women
1967 $386 $294
1973 $417 $315
1979 $388 $299
1982 $349 $293
1989 $316 $286
1994 $286 $271

These
earnings declines would be less consequential if workers could look forward to
higher earnings growth in their later years. Unfortunately, the earnings of most
older males have also failed to keep pace with inflation over the past two
decades. Using annual earnings data from the Census Bureau's March Current
Population Survey, we can project that the expected lifetime earnings of an
employed male in 1973 would have been $1.482 million. By 1993 an employed male's
expected lifetime earnings had declined to $1.312 million, a drop of 11 percent,
despite the fact that the pool of employed males is now better educated. These
declines have had the strongest percentage effect on least-educated workers:
Employed males with fewer than 12 years of schooling have suffered lifetime
earnings losses of an estimated 33 percent. Earnings of high school graduates
have declined 26 percent.

Declining Lifetime Earnings
Young adults
beginning work now will earn considerably less over their lifetimes than their
counterparts 20 years ago.























Years of Education 1973 1993 Percent Change
All $1,481,690 $1,312,397 -11%
Less than 12 Years $1,119,503 $750,072 -33%
12 Years $1,468,467 $1,093,488 -26%
13-15 Years $1,634,382 $1,273,995 -22%
16 Years $1,976,460 $1,678,596 -15%
17 or More Years $2,161,950 $1,995,593 -8%

ECONOMIC ADOLESCENCE

The steep downward trend in the earnings position of young men has
lengthened the period of "economic adolescence," during which young
adults are working but not earning enough to be economically self-sufficient or
capable of supporting a young family. This development has, in turn, had a
number of damaging consequences for young men and for society at large. Among
the effects of this protracted adolescence are:

  • a sharp increase in the age of first marriages;

  • lengthier stays in the homes of parents;

  • a rise in young single-parent families;

  • reduced economic support of children;

  • the increased economic attractiveness of drug sales and other illegal
    activities;

  • the sustained rise in the numbers of young men incarcerated in jail and
    prison.

While we do not believe that economics is destiny, we do believe that
changes in the labor market can in large part account for these wider social
phenomena.

Between 1967 and 1973 the real median weekly earnings of young men grew by
1.3 percent per year. If the American economy had continued to generate weekly
earnings gains at this modest rate from 1973 until 1994, the median real weekly
earnings of young men would have been nearly twice as high in 1994 ($551, in
1993 dollars) as the actual observed earnings were during that year ($286). One
does not have to be an economic determinist to believe that doubling real wages
might alleviate some of our current social problems.



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POSSIBLE CAUSES

Explanations of wage trends typically fall into three general categories:
supply factors, de mand factors, and institutional factors.

Supply-side factors. It is commonplace to attribute the declining
wages of the young mainly to the quality of the labor pool. Too few of the
young, supposedly, are equipped to compete in today's job market. But
conventional supply-side explanations do not account very well for declining
wages. If anything, supply-side forces ought to have led to increasing
wages. Young men are better educated than they used to be, and there are fewer
of them relative to the overall population—so their earnings should have
gone up.

The number of 18- to 24-year-olds in the civilian noninstitutional
population peaked in 1981, at just under 29 million. By 1993 this
number had declined to 24.1 million. Young adult workers comprised a smaller
share of the workforce in 1993 than at any time since before the baby boomers
began entering their young adult years, in the early 1960s. So the quantity of
young adult workers was not a factor in these wage declines.

What about the quality of the young adult labor pool? Despite common
misconceptions, young workers employed full time for 27 or more weeks in 1993
were considerably better educated than their peers in 1973, with a lower
fraction of school dropouts and a considerably higher share with at least one
year of postsecondary schooling. Moreover, test score findings by the National
Assessment of Educational Progress (an assessment of the reading, math, and
writing proficiencies of primary and high school students funded by the U.S.
Department of Education) has revealed a moderate upward trend in reading
proficiency and no significant change in mean math proficiency in American
17-year-olds between the early 1970s and the late 1980s. Even Charles Murray and
the late Richard Herrnstein conceded, in The Bell Curve, that the
average verbal and math skills of recent high school students were as good as,
if not better than, the skills of equivalent students in the 1950s. Though even
higher skills may be required in this information age, young adults' skills
have not deteriorated over time.

One supply-side development that may, in part, account for the relative
earnings deterioration of some young adults is the increase in immigration of
the 1980s and early 1990s. Since many immigrants are good substitutes for
younger, less-educated U.S. native-borns, increased immigration may explain part
of the decline in the earnings of young dropouts, especially males. Immigrants
comprise a particularly high percentage of younger, lower-skilled workers. In
March 1994 nearly 12 percent of 16- to 24-year-old males were foreign born,
including 29 percent of high school dropouts. Although the evidence from
economic studies concerning the impact of immigration on the earnings of
native-born citizens is mixed, some academic analysts (such as George Borjas,
Richard Freeman, and Lawrence Katz) attribute a substantial portion of the
declining earnings of less-skilled Americans to the increased supply of
immigrants. If their analysis is correct, this raises questions about the
advisability of maintaining current immigration flows.

Demand-side factors. Prior to 1973, many young men worked in
manufacturing industries, which have historically paid above-average wages. But
because of structural changes in the domestic economy and increasing import
competition, young men are now much less likely to be employed in mining and
manufacturing, and much more likely to be working in retail trade and private
services. The share of young men employed in goods-producing industries fell
from 54 percent in 1973 to less than 39 percent by 1993. In contrast,
approximately 27 percent of all young men employed full time in 1993 worked in
retail trade industries, with another nearly 20 percent working in private and
public service industries. More than 70 percent of all net new jobs created
between 1992 and 2005 will be in the retail trade and service industries,
according to Bureau of Labor Statistics projections. Clearly, the future
earnings power of today's young adults will be critically influenced by the
salary and wage structures in these industries.

However, it is easy to overstate the earnings impact of the shift in young
male employment from manufacturing to trade and services. We estimate that only
13 to 16 percent of the actual decline in the annual earnings of young men can
be explained by changes in the industrial distribution of jobs. Even though
manufacturing jobs have paid above-average wages in the past, the differences
between what young men earned in different industries in 1973 were actually
fairly small—so the effect of the shift away from manufacturing should not
have had a substantial impact on earnings. Over the past two decades, young
male earnings have declined within virtually every major industry, including
goods-producing industries, so that even those employed in manufacturing are
earning less in real terms than their 1973 counterparts.

It turns out that much more important than interindustry shifts have been
the declines in earnings within industries. Only those employed in
public administration posted gains in real earnings between 1973 and 1993, and
they accounted for only 2.5 percent of employed young men in 1993. Between 1973
and 1993, the mean real annual earnings of employed young men fell by 22 percent.
Earnings declines varied considerably by sector, ranging from lows of 2
percent in personal and entertainment services and 6 percent in professional
services to highs of 23 percent in manufacturing, wholesale trade, and business
and repair services, and 28 percent in retail trade.

Might some portion of these declines be attributable to decreased labor
productivity? In part, yes: The Bureau of Labor Statistics has estimated that
output per hour in such key retail trade industries as food stores, grocery
stores, retail bakeries, variety stores, and eating and drinking establishments
actually declined between 1973 and 1992. But while labor productivity was
declining in the retail sector, it actually rose strongly in most manufacturing
industries. Yet young men's real earnings in manufacturing industries also
declined considerably—by 23 percent—over this period. Clearly there
is no longer a guarantee that the benefits of increased labor productivity in
manufacturing will be passed on to young manufacturing workers, a disconcerting
development considering that a strong, direct relationship between rising
productivity and rising young workers' earnings prevailed between the 1940s and
the early 1970s.

Some economists have attributed these within-industry earnings declines to "skill-biased
technological change"—shifts in demand in favor of more highly skilled
workers capable of handling the requirements of sophisticated and computer-based
technologies. But studies have shown that the widespread introduction of new
technologies from the late 1970s onward was not accompanied by any major
increased demand for highly skilled workers [see David Howell, "The Skills
Myth," TAP, Summer 1994]. More likely, technology affects the
young adult labor market by making it easier for large companies to avoid hiring
young workers, to globalize their operations, and to contract out to small,
low-wage suppliers—in short, by enabling employers to pursue low-wage
strategies that depress the wages of young adults.

Institutional factors. At least three institutional forces explain,
in varying proportions, the decline of wages among lesser-skilled young adults:
the decline of trade unionism, the drop in the real value of the federal minimum
wage, and the large-scale "restructuring" of American corporations.

Unions boost wages but today's young workers are seldom represented by labor
unions or other employee associations at the workplace. During 1994, fewer than
8 percent of employed men under the age of 25 were members of labor unions, a
membership rate only one-third as high as that of their older male counterparts
(aged 25-64).

Erosion of the federal minimum wage has contributed to rising earnings
inequality among young men, particularly between those with earnings in the top
and bottom 10 percent. Even so, the Clinton administration's modest proposed
increases in the federal minimum wage would have no measurable effect on the
real median weekly earnings of full-time employed young men. A hike in the
minimum wage to $5.15 per hour over the next two years, combined with projected
annual consumer price index increases in the 3 to 4 percent range, would yield a
real weekly wage equal to only 44 percent of the median real weekly earnings
that young men obtained in 1973 [see John Schmitt, "Cooked to Order,"
and Barry Bluestone and Teresa Ghilarducci, "Rewarding Work," TAP,
May-June 1996]. The bottom layer of young, full-time earners would benefit from
a minimum-wage increase, but the median weekly wage would remain unchanged. The
entire wage distribution for young workers must be lifted—not simply the
bottom layer—if earnings are to be restored to 1973 levels.

Finally, efforts to boost labor productivity and economic competitiveness
have led to the adoption of new technologies, capital investments, labor
deployment strategies, corporate restructuring efforts, and compensation
policies that have substantially reduced the demand for and pay of semiskilled
blue-collar workers and lower-level white-collar workers. Increasingly, younger
adults without a college education have been relegated by companies pursuing
short-term profits to being part-time, temporary, or just-in-time workers. The
labor costs of short-term workers are more subject to management control than
permanent workers.



WHAT MIGHT WORK

America's labor market crisis for young adults is not limited to minorities,
dropouts, or the products of single-parent families. It is, to use Wallace
Peterson's expression, a "silent depression," a set of deep and
sustained earnings declines. Moreover, there is no evidence that these youth
will "grow out" of their lower-earnings trajectory as they get older.
Efforts to improve real earnings prospects for young adults will only become
more challenging in the years ahead as demographic changes yield increased
supply pressures. What can be done to address this problem?

Full-employment policies. The federal government's efforts to move
the nation's labor markets to true full employment (a 4 to 4.5 percent
unemployment rate) would benefit young adult workers by expanding overall job
opportunities and increasing access to year-round, full-time jobs. Greater
competition among employers for younger workers would reduce their ability to
offer only part-time and contingent positions and would lift earnings at the low
end of the wage distribution. Support by the Federal Reserve Board for higher
growth rates would ideally be complemented by coordinated efforts to
create both private-sector jobs and subsidized jobs for out-of-school youth in
high-poverty neighborhoods in central cities and rural areas. The U.S. Depart
ment of Labor is beginning to fund several demonstration programs in this area,
but pilot programs are only a modest first step.

Improving education. Academic skill level remains a strong predictor
of future earnings, strongly influencing access to both apprenticeship training
and formal employer training. Employers want high levels of basic academic
competency in their entry-level workers. A high school diploma no longer
guarantees employability.

School-to-work and apprenticeship programs. Schools cannot solve the
labor market problems of young adults by themselves. If they could, the rising
proficiency levels among high school graduates and the reduced numbers of school
dropouts would have translated into higher wages. Ultimately, it is the
nation's employers who control the critical hiring, training, and compensation
policies that determine the labor market fortunes of young adults. High
schools, community colleges, and technical training institutes need to work more
closely with employers to help students gain access to jobs, work-based
learning, and formal training opportunities, including apprenticeship programs.
In recent years, fewer than 1 percent of the nation's high school juniors and
seniors have been involved in regular or youth apprenticeship training programs,
and only 1 to 2 percent have been enrolled in an apprenticeship program three
years after high school graduation. To this end, we recommend a number of
different programs:

First,
states should make sustained efforts to expand the number of work-based learning
and youth apprenticeship programs with monies from the recently enacted
School-to-Work Opportunities Act. This act, passed in 1994, was designed to
encourage an integration of academic and vocational education and to increase
opportunities for work-based learning. Expanding in-school employment
opportunities, especially for those students not expecting to immediately enroll
in four-year colleges, is a desirable strategy. Recent research by Chris Ruhm
of the University of North Carolina at Greensboro has revealed that work
experience in the senior year favorably influenced the annual earnings of young
noncollege-bound adults seven to nine years after graduation.

Second, state and local education and training agencies should leverage
funds from state workforce development budgets and unemployment insurance trust
funds to pay for programs that train young workers in transferable occupational
skills. Paying for this training with state money gets around the problem of
companies not wanting to pay for the training of a young adult who might end up
employed by a competing firm.

Third, federal Pell grants (currently available to low-income youth to
finance postsecondary education and training) can be broadened to purchase slots
in occupational skills training programs. Research over the years has
consistently shown that the economic impacts of vocational and technical
education are critically influenced by the ability of graduates to secure jobs
that are closely related to the occupational skills they acquire.

Fourth, greater funding should be provided to federal and state
apprenticeship boards. Appren ticeship and employer-provided training,
particularly formal training, has been consistently found to significantly raise
the real earnings of workers. A summary of the findings of an array of studies
on the impacts of training by Lisa Lynch of Tufts University revealed that the
average hourly wages of workers receiving training rise by 7 to 13 percent. This
training also benefits employers by raising the productivity of such workers
within their firms.

What clearly don't work are employment and training programs that involve
only limited, nonintensive interventions and that lack close ties to jobs and
employers. Studies of such programs reveal that they have no lasting effects on
earnings. High school diploma equivalency programs not tied to either
postsecondary educational opportunities or intensive job placement efforts also
have limited effects on the earnings of former dropouts. There is no cheap
human capital solution for the steep earnings declines of young men with no
postsecondary schooling.

Finally, economic policymakers, employers, and labor unions need to consider
seriously the extent to which a number of the labor market problems currently
confronting young adults have been caused by past "solutions" to other
problems. Efforts to boost productivity, especially in manufacturing, have had
the unintentional side effect of lowering the demand for blue-collar and
low-level white-collar workers. New corporate strategies, in pursuit of lower
labor costs, have eroded the wages of young adults. The key to reversing young
adult wage trends requires not only full-employment policies but also effective
education and training programs. Only by providing more opportunities for
year-round, full-time work—and by increasing the productivity of this work—can
we hope to effect a sustained rise in the market wages of young adults.



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