Inequality, growth, and restructuring - Special Issue: Earnings Inequality - Panel Discussion

What is the effect of inequality on growth? In particular, will growing income inequality retard growth? The answer, I think, is mixed. In the long run, increasing inequality may limit the national rate of growth, for reasons I discuss below.

In the short run, I think the causality works in exactly the opposite way. The inequality we now see is a by-product of enormous industrial restructuring that began in manufacturing in the early 1980s and spread to the services sector by the end of the decade. On the one hand, this restructuring is responsible for raising the rate of productivity growth across the economy. On the other hand, this same restructuring has sharply reduced the demand for semi-skilled labor, and their falling wages have significantly increased earnings inequality.

The underlying problem is that labor demand can shift much faster than labor supply. In this case, the demand for semi-skilled labor can fall much faster than semi-skilled labor can acquire new skills. The issue is much bigger than minority communities in central cities. Median earnings for 25- to 34-year-old men with a high school diploma or a GED is now $20,500. This is a big decline; 15 years ago, similar men earned about $28,000 in today's dollars. The number is particularly significant because 40 to 45 percent of all 30-year-old men have not gone beyond high school. A plausible connection can be made between these wage numbers and the "angry white males" we hear about in political argument. A lot is at stake. We need short-run policies to address how we can get through this period without atomizing our society. We need longer-run policies to help us get out of this situation.

In the short term, I would recommend that we treat the situation as an unanticipated natural disaster - like a flood or a hurricane. In response, we might expand our safety net to ensure that, say, health care is not linked to jobs, since the trends that are pushing down wages also reduce fringe benefits. In addition, we could expand or at least strengthen the earned-income tax credit. In all of this, we must recognize that for a large part of the population who played by the rules, the rules have changed in the middle of the game, leaving people in economic jeopardy when it may be too late to alter their choices. In this regard, we know from training studies that it is difficult for workers to pick up new skills at the age of 35 or 40.

Special Role of Schools

As for the future, the major issue is education and the provision of human capital; this is where the spatial aspect of these problems comes in. Schools, in particular our public schools, run on routines, like most organizations. In the 1970s, the established routines were perfectly adequate because high school graduates still could get decent jobs. The labor market has changed quite fast since then, but it is hard to get schools to change their routines in response. The highly decentralized structure of our schooling system makes it doubly hard. Local schools operate within their state's context. And states have become something of a deregulated industry themselves, with the federal budget playing a much smaller role in supporting state budgets. This leaves the states in very intense competition for jobs, putting pressure on resources. Within states, schools are governed in fairly income-homogeneous local districts. So the schools and communities that have been hit hardest must make the biggest adjustments. The towns where all the parents are highly educated have fine schools to begin with, and their taxpayers are also doing pretty well. But poorer working-class communities that have been hit harder by economic restructuring are also the places that need to make the biggest changes in their schools.

As John Bishop noted, kids make decisions early that have a kind of path-dependence in terms of which classes or tracks they are put in. The issue of their access to information about what is out there for them is very important. Programs such as apprenticeships for students in low-income high schools, like Project ProTech here in Boston, change the information on which kids are acting.

But more than that, we must keep saying that states should be upgrading educational standards and imposing minimum requirements, even though it may run against their short-run interests. These standards and measures should give parents some sense of what their kids are learning. In a period when we need to upgrade standards and increase the provision of human capital, providing more information externally to the school district is crucial.

The Migration Question

I will close with one final issue, migration, that I wish had been discussed more this morning. Massachusetts, for example, recently flirted with zero population growth. During the "Massachusetts Miracle" of the 1980s, the wage structure got pushed much higher than national wages because of a lack of in-migration. The loss of manufacturing jobs here was masked by a construction boom, then the construction boom ended. Anecdotally we hear that fewer decent jobs remain for less-educated people, although well-educated people have few problems. Is zero population growth being pushed by the out-migration of less-educated or more-educated workers? A more general question is, to what extent is migration affecting the distribution of human capital around the states and the underlying issue of earnings inequality? I hope this issue will be discussed more in the future.

Panelist Frank Levy, Daniel Rose Professor of Urban Economics, Massachusetts Institute of Technology.

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