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�TEENS AND THEIR PARENTS IN THE·21 ST CENTURY:
AN EXAMINATION OF TRENDS IN TEEN BEHAVIOR
AND THE ROLE OF PARENTAL INVOLVEMENT
May 2000
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REACHING THE UNINSURED:
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September 2000
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Dublin Core
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Clinton Administration History Project
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Cinton Administration History Project
Council of Economic Advisers
Department of Commerce
Central Intelligence Agency
Department of the Interior
Department of Defense
Corporation for National Service
Council on Environmental Quality
Department of Justice
Domestic Policy Council
Department of Education
Department of Energy
Environmental Protection Agency
Federal Emergency Management Agency
General Services Administration
Small Business Administration
Social Security Administration
United States Agency for International Development
National Economic Council
Office of Management & Budget
Office of National Drug Control Policy
Office of Personnel Management
Office of Science & Technology Policy
Office of the Vice President
United States Trade Representative
Date
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1993-2001
Description
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<p>The Clinton Administration History Project describes in detail the accomplishments of President Clinton's Administration for the period 1993-2001. The records consist of the histories of 32 agencies or departments within the Executive Branch. In general, each organization associated with the Project submitted a narrative history along with supporting documents. These narrative accounts are primarily overviews of the various missions, special projects, and accomplishments of the agencies. The supplementary records include substantive memos, press releases, briefing papers, and publications illustrated with photos and charts.</p>
<p>Agencies:<br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Council+of+Economic+Advisers&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Council of Economic Advisers</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Central+Intelligence+Agency&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Central Intelligence Agency</a><br /><a 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href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Defense&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Defense</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Corporation+for+National+Service&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Corporation for National Service</a><br /><a 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href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+United+States+Trade+Representative&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the United States Trade Representative</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Veterans+Affairs&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Veterans Affairs</a></p>
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Clinton Presidential Records: White House Staff and Office Files
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Clinton Presidential Library & Museum
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1474 folders in 111 boxes
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[Council of Economic Advisors] [12]
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History of the Council of Economic Advisers
Clinton Administration History Project
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1993-2001
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Box 2
<a href="http://clintonlibrary.gov/assets/Documents/Finding-Aids/Systematic/Administration-History-finding-aid.pdf">Collection Finding Aid</a>
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Clinton Presidential Records: White House Staff and Office Files
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1224798-council-economic-advisors-12
1224798
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https://clinton.presidentiallibraries.us/files/original/c2ba2154e8038598c2361ffcac138c76.pdf
de644ed00540273d6ff668402d95e8c0
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Dublin Core
The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/.
Title
A name given to the resource
Clinton Administration History Project
Creator
An entity primarily responsible for making the resource
Cinton Administration History Project
Council of Economic Advisers
Department of Commerce
Central Intelligence Agency
Department of the Interior
Department of Defense
Corporation for National Service
Council on Environmental Quality
Department of Justice
Domestic Policy Council
Department of Education
Department of Energy
Environmental Protection Agency
Federal Emergency Management Agency
General Services Administration
Small Business Administration
Social Security Administration
United States Agency for International Development
National Economic Council
Office of Management & Budget
Office of National Drug Control Policy
Office of Personnel Management
Office of Science & Technology Policy
Office of the Vice President
United States Trade Representative
Date
A point or period of time associated with an event in the lifecycle of the resource
1993-2001
Description
An account of the resource
<p>The Clinton Administration History Project describes in detail the accomplishments of President Clinton's Administration for the period 1993-2001. The records consist of the histories of 32 agencies or departments within the Executive Branch. In general, each organization associated with the Project submitted a narrative history along with supporting documents. These narrative accounts are primarily overviews of the various missions, special projects, and accomplishments of the agencies. The supplementary records include substantive memos, press releases, briefing papers, and publications illustrated with photos and charts.</p>
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Text
"Key Policy Challenges for the G-7"
Address by Dr. Joseph Stiglitz
to the Institute of International Finance
Washington, DC
Sunday, October 8, 1995
Introduction
° Thank you very much for inviting me to address
this distinguished group.
° :rhe title of my talk is "Key Policy Challenges for.
the G-7," and I will speak about two long-run
challenges facing economic policy-makers today:
fiscal consolidation and reform of the official
international organizations.
Of course, we all hiwe different notions of "short
.
run" and "long run." Toyoo Gyoten, the former
.
.
.
Vice Minister for International Affairs atJapan's
Ministry of Finance, tells a wonderful story of
interviewing some foreign exchange traders. One of
them said that he took short-run, medium-run,. and
long-run factors into account in his trading
strategies. Gyoten became quite interested that the
trader looked at long-run factors, arid asked him
what he meant by that. The trader paused and then
responded: "Probably ten minutes." I can reassure
you that is not what I mean by the long run.
. 0,
�I. Short-run economic prospects
o Before turning to longer-run. issues, let me begin
with a brief summary of current economic
conditions in the G-7.
o The G-7 experienced an impressive combination
of strong growth and low inflation during 1994:
--Growth for the G-7 as a whole was 3.1
" percent in 1994 (see chart). Private sector
consensus estimates predict G-7 growth of ""
2.4 percent this year and next year (see
chart) .
.[It may be appropriate to note that all
forecasts you will mention were
constructed prior to the announcement
of the Japanese stimulus package on
Septerpber 20.]
--Inflation remain"s low. Inflation across
the G~7 in 1994 was 2.2 percent,
reminiscent of the low inflation rates of the
19608. Inflation i~ expected to be 2.5
percent this year and 2.6 percent next year
(see chart). Inflation is not dead, but it
may have a hard time buying life."
insurance.
o The United States seems to be achieving a highly
desirable "soft landing."
�--Real GDP growth slowed at the
beginning of this year, at 2.7 percent in
the first quarter and 1.3 percent in the
second quarter (see chart). Official
administration forecasts are for growth of
2.8 percent on a year-over-year basis and
1.9 percent on a Q4/Q4 basis. More
recent data, includirig the upward revision
in the second quarter GDP figures, suggest
that these estimates may be a bit
conservative.
--u.S. economic growth continues to be
driven by interest-sensitive spending and
by exports. Real spending on producers' .
durable equipment' rose by 25 percent in
the first quarter and by an additional 12
percent in the second quarter (see chart).
Export growth has also been substantial:
real merchandise exports were 14 percent
higher in the second quarter than a year
earlier (see chart).
--Inflationary pressures remain subdued.
The consumer price index in August was
only 2.6 percent above its level a year
earlier. For a variety of reasons, this may
overstate the actual rate of inflation. The
Administration and others are currently
studying the various biases in the
consumer price index.
�--As the U.S. economy settles into what I
hope will be an extended period of
sustainable growth with low inflation,
.fiscal policy issues have become a central
focus. I will return to a discussion of the
historic deficit reduction that the Clinton
Administration has achieved, as well as the
impact for the long-run prospects of the
U.S. economy, below.
o The.situation in Japan may be the most
challenging.
--There has been essentially zero growth in
the past three years (see chart).
--The Japanese government has finally
acknowledged and has now begun to
confront the bad loan problem of its
financial sector. One lesson we have
learned from our mistakes with the Savings
and Loans experience is that it is better to
confront bad loans quickly, rather than to
. allow the problem to linger on and grow.
I hope that our ex'perience proves useful to
the Japanese authorities as they face the
problems in their own banking sector.
--The U.S: Government welcomes both the
reduction in the official discount rate (to
0.50 percent) announced on September 8
and the 14.2 trillion yen fiscal stimulus
�package announced on September 20.
, Economic conditions in Japan have
important ramifications for the rest of the
world, and I trust that the Japanese
Government will continue to take whatever
steps it feels is necessary to stimulate the
economy and address problems in the
banking sector.
o The European economies are, in general, likely to
continue to achieve moderate growth with relatively
low inflation.
--Nevertheless, high levels of
unemployment--and especially high levels
of long-term unemployment--remain a
substantial economic policy challenge.
--Recent attention in Europe has focused
on fiscal consolidation issues, especially in
the context of European Monetary Union
and the Maastricht Treaty, conditions.
Such fiscal issues will be the focus of the
next part of ;'TIy talk, on longer-run
economic prospects.
, II. Fiscal positions in the G-7
o Fiscal positions in many ,of the G-7 countries are
a cause for concern.
--According to the OEeD, general
�government deficits in the G·7 amounted
to 3.6 percent of GOP in 1994 (see chart).
This is slightly lower than the peaks
reached in the early 1980's and early
1990's, but still remains quite high. The
G·7 as a whole does not meet the
. Maastricht 3 percent threshold .
..There is considerable variation in deficit
GOP ratios .across the G-7 economies (see
chart). As is well known, the deficit
problem is particularly severe in Italy,
where the budget deficit amounted to 9.0
percent of GOP in 1994.
.
--Because of sustained and substantial
deficits over the past fifteen years, ..
government debt levels have reached very
high levels in some countries. Acco~ding
to the OEeD, the G·7's general
government debt amounted to 40 percent
of GOP in 1994, up from 21 percent in .
1980 (see chart). Again, the data display
considerable variation across the countries
(see chart).
o A natural and important questiori to ask is
whether these deficit and.debt levels matter. Are
they a problem? The answer is ~.
--To put it simply: deficits can stunt long
term economic growth. If governments
�borrow against savings in order to finance
current consumption--rather than investing
in things like education and technology and
infrastructure that will boost our future
productivitY7-economic growth will be
limited down the road.
--An alternative way of putting the same
point is that under reasonable assumptions,
government borrowing pushes uprea\
interest rates. This increase in real interest
rates crowds out private iIivestment. If the
government borrowing is used to finance
public consumption, private investment
falls without any offsetting expansion in
public investment. This hurts productivity
growth.
--Deficit reduction is therefore important.
because it frees up resources for
investment and thus can boost \ong~term
growth. The ultimate objective of fiscal
consolidation is to raise growth and living
standards.
.
--The crucial economic lesson is that
eliminating the deficit is important, but it
is not an end in itself. How the deficit is
reduced is also crucially important. This
is a theme I will return to below.
--Let me also stress that eliminating the
�deficit too quickly and without
compensating changes in monetary policy
entails short-run costs in terms of lower
output and higher unemployment. The
timing of deficit reduction matters, just as
the method of deficit reduction does.
III. Fisl:al policies in the long run
o Given that large budget deficits impede long-run
growth, the current state of government finances. in
most countries would require corrective,poliCy
action--even if all else were to remain constant. But
unfortunately all else'is not going to remain
constant. Demographic changes will put increasing
pressure on fiscal positions in the G-7 in the future.
o .There is of course uncertainty over long-term
patterns of immigration, mortality,and birth rates.
Nevertheless, demographic ,changes are already
determined to a significant degree. And they
represent one of the most substantial long-run
challenges facing the G-7.
o In all G-7 countries except the UK, the elderly
dependency ratio (defined as the ratio of elderly to a
measure of the working age popUlation) is expected
to almost double by 2040.
'
--The elderly dependency ratio is expected
�to peak at about 40 to'50 percent for the
United States, the UK, and Canada (see
chart for US)
--The elderly dependency ratio is expected
to peak at about 60 percent for Japan,
,Germany, and France
--The elderly dependency ratio is expected
to peak at over 70 percent for Italy.
o These demographic trends have significant
implications for fiscal policy, especially in terms of
public spending on health care and pensions.
--According to rough OECD projections,
demographic and debt pressures would.
imply a truly dramatic deterioration in
public sector fi\1ances. Under its more
conservative set of assumptions,', the OECD
projects that government deficits would
,
significantly deteriorate in all G-7
economies except the UK and Canada (see
chart).
--The problem is particularly striking in
Japan. The OECD projects that
demographic and debt pressures under
current policies will drive the Japanese
deficit up to 20 percent of GDP in 2030.
--These projections should be treated with
�more than the usual degree of skepticism.
But they do point to the need for
substantial policy adjustments across the
industrialized economies.
o There are numerous policy responses to these
projected imbalances--responses which will ensure
that the imbalances do not in fact materialize as
expected.
--Deficit reduction today generates more
favorable debt dynamics in the future
--We can and must slow the rate at which
health expenditures are rising. "
"
IV. The Clinton Administration's deficit reduction efforts
o The United States has already begun the process,
of making these adjustments. I'd therefore like to
turn to the historic fiscal consolidation efforts of the
Clinton Administration.
o Over the past two and ahalf years, we have made
great strides in reducing our budget deficit. Indeed,
the Clinton Administration has for the first time '
since President Truman succeeded in reducing the
deficit three years ina row (see chart).
o The deficit reduction has been even more
impressive when viewed relative to the size of the
economy (see chart).
�o As a result of the Clinton Administration's
efforts, the debt-GDP ratio has stabilized after
climbing sharply during the 1980's and early 1990's
(see chart).
.
o Another measure of the Administration's fiscal
responsibility can be seen in what economists call
the "primary bal;u:tce"--which is simply the budget
balance excluding interest payments. The Clinton
Administration has been running primary budget
surpluses--something which hasn't happened since
Lyndon Johnson was President (see chart) .
. V. The current budgetary battle in the US
o Over the next two months, we will be engaging in
a momentous debate about how the U.S. budget
deficit should be further reduced. Both President
Clinton and Congress agree: the deficit must be
zeroed-out.
o The question is therefore no longer whether to
eliminate the deficit, .but rather how to eliminate it.
As I noted before, the manner in which the deficit is •
reduced and the timing of how it is reduced are both
crucially important questions--one with significant
implications for productivity growth and the other
with implications for short-term economic
performance.
.
o Some in Congress are suggesting that our critical
�investments in education be put on the chopping
block, along with everything else. I find this
troubling and extremely short-sighted.
o The two fundamental economic challenges facing
the U.S. today are slow productivity growth and
widening income inequality. For reasons only,
partly understood, there has been a marked
slowdown in productivity since 1973 (see chart). At
the same time, wage inequality has grown: wages
havt~ declined at the bottom of the distribution and
risen at the top (see chart).
o Investments in education offer the- best hope of
addressing both. of these challenges. Educating the
workforce will spur productivity growth, which will
jump-start stagnating wages and raise the living
standards of all workers.
o A recent report released by the Council of
_Economic Advisers shows clearly that investments in
,
education yield greater dividends today than ever .
before, To cite just some of the evidence: .
.--In 1979, a full-time male worker between
the ages of 25 and 34 with at least a
bachelor's degree earned 27 percent more
per week than a worker with only a high ..
school degree. By 1993, that difference
had grown to 65 percent (see chart).
--Recent studies suggest that one year of
�college education increases annual earnings
by between 5 and 13 percent. .This holds
true not only for four-year institutions, but
also for community colleges.
--High school dropouts are far more likely
to be convicted of. crimes that those with
higher levels of education. On any given
day in 1992, almost one-quarter of all
males between 18 and 34 who had not
received a conventional high school
diploma were eith~r in" prison, on
probation, or on parole. This compares to
less than 4 percent of those with a high
school diploma (see chart).
o Government investments in education mean higher
wages for our workers, a stronger economy, and a
better, healthier s()ciety. Now· is the time to renew
our commitment to education, not to back away .
from it. Deficit reduction should nQt be
accomplished by cutting away at our human capital
investments.
o Some people clearly see things differently. The
Clinton Administration proposes to invest $76 hillion
more in education by the year 2002 than the Budget
Resolution passed by Congress (see chart),
o The fight over education spending is just one
example of how there is a right way and a wrong
way to reduce the deficit. We must continue to
�build on the historic deficit reduction we've already
achieved. But doing it. the wrong way and doing it
too quickly could be just as disastrous as not doing
it.
VI. Other policy challenges: international public goods
o In addition to fiscal policy issues, there are many
other ways in which governments can raise living
standards. Indeed, I have a reputation for being
enthusiastic about the wide variety of ways in which
governments can play such a positive role.
o Unfortunately, I won't be able to go into detail on
all of these ideas. But because I am addressing this
august international body, and because the topic is
one that is being discussed in Washington this
weekend, I did want to focus briefly on the roles of
official institutions in improving living standards
across the globe.
o A brief digression into economic theory may be
beneficial in framing the issue properly. I will
therefore briefly don my professorial hat. Please
accept my apologies and bear with me.
o Economists have recognized a class of goods,
called pure public goods, that have two properties:
·they are non-rival in consumption (so that if I
consume it, it does not diminish the consumption
available to you) and non-excludable (so that it is
difficult, if not impossible, to exclude you from
�enjoying the benefits of it)., "
--The classic examples of publ ic goods
include national defense, police protection,
and basic scientific research.
o Some public goods are local: that is, they benefit
only those who reside in a particular area or nation.
But I want to call attention to another important
class of public goods: international public goods,
which benefit people across the. globe,
o These international public goods are, or should
be, the collective responsibility of all nations. "And
unless this collective responsibility is recognized, the
goods will be underprovided. "
o There are at least four categories of international
public goods: international stability and security,
" assistance to the less developed economies, science,
and the environment. Because of my limited time, I
will focus on the first of these. "
o International stability and security has many
facets of relevance to.official institutions, including
the" maintenance of macroeconomic and financial
market stability, the maintenance of a liberal
international trading system, and assisting the reform
process in the economies in transition. As an
illustrative example, I want to examine this final
item, the reform process in the economies in
transition.
�o Trillions of dollars were spent winning the Cold
War. To maintain this victory, the industrialized
democracies should at least be willing to spend
.
billions.
--Ensuring the success· of the reform effort
in the economies in transition is a
collective good: all of the world benefits
from international security, and no country
or countries can be free riders.
--More than aid is involved. "Trade not
aid" is fast becoming a popular mantra,
and there is a lot of truth to the saying.
Trade assists the reform effort by
providing hard currency, helps to correct
distorted internal prices, increases
interdependence, stabilizes democratic .
political reforms, and raises incomes and
living standards.
--There are, however, strong forces in the
industrialized world resisting the free flow
of trade from the economies .in transition.
The entrance of those economies into
world markets has been a significant. shock
to producers of aluminum or uranium or
steel. And people often don't like shocks.
--The producers of these raw materials, like
other producers, prefer not to have competition ..
That is understandable. But what is not
�understandable nDr excusable is that Western
gDvernments have nDt dDne enDugh tD prevent
these prQducers frDm using unfair trade laws
and .other means tQ blDck eXpDrts frDm the
eCDnDmies in transitiDn. In .one example, a
prDducer IDbby was able to create what was
effectively a gDvernment-sanctiDned· cartel that
was suppDsed to restrict Russian output.
--Limiting trade with the economies in
transition is a case in which the interests of
consumers and the whDle wDrld are
sacrificed at the hands .of a few producers,
willing tD fight change rather than adapt tQ
it.
--In .order tQ address the needs of the
eCQnomies in transition, Western
governments must take a more liberal and
enlightened apprQach to trade. We must
not say ".open up and reform YDur
econDmies" and then close ours. We must
. not allQw the narrow interests of prDducers
tQ limit exports frQm the econDmies in
transitiDn outweigh the brDader national
and consumer interests in expanding those
. expDrts.
o What is required, to return tD the mDre general
theme, is cDllective action in. a collection good.
This is true for the entire class .of internatiDnal
public gDDds that I delineated befQre.
�Conclusion
This weekend, as we discuss possible changes to
the roles played by official international institutions,
we should keep in mind the framework of
international public goods.
. 0
•
--We should recognize that official'
institutions should ideally provide those,
. and ~ those, goods. Ensuring that such .
. goods are provided is. crucial to ensuring
long-run prosperity. At the same time, in
this era of tight budget for both national
governments and official international
bodies, it is more important than ever that
roles not be duplicated--both between the
public sector and the private sector, and
also ·within the public sector itself.
o In closing, I would note that the efficient .
provision of international public goods, in this era of
fiscal consolidation, is one of the most important
problems requiring G-7 leadership. And it is one of·
the most challenging. Thank you.
�Two Key Policy Challenges for the G-7
• Fiscal Consolidation·
.,
- while ensuring full employment
- while promoting investment in human .
.and physical capital
- while improving equality of opportunity
.
. • Reform of Official International Institutions
- providing international public goods
- avoiding duplication
�~
Real GOP Growth in 1994
5 ----------------
4
~
3
c:
2
I
o
~--
US
~1994
Japan
Purchasing Power Parity weights
Germany
France
Italy
UK
Canada
G-7·
�..
Consensus Forecasts for GOP Growth
3.5
3
2.5
-
2
c:
~
"
n.
1.5
1
0.5
o
us
Japan
Germany
~ 1995'
Source: Consensus Forecasts. August 1995
-1994 Purchasing Power Parity weights
Italy
France
iii
1996
UK
.
Canada
G·?"
�5
Inflation Rates in 1994
i
\
,
4
3
J
2
1
o
US
Japan
Germany.'
France
. Italy
UK
Canada
-1994 Pun::haslng Power Parity weights
"
G-7'
�Consensus Forecasts for Inflation
6
5
4
-
3
co
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IL
2
1
oI
-1
F
us
Japan
France
Germany
l.2:!J
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Source: Consensus Forecasts. August 1995
·1994 Purchasing Power Parity weights
"1995
Italy
_
-
1996
UK
Canada
G-7'
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101
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G-7 Government Financial Deficits
5
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c:
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t960
1961
1962 1963 1964 1965 1966 1967 1966 1969 1990 1991
1992 1993 1994 1995" 1996"
�Government Financial Deficits in 1994
10 ,
----=====:..:..=:.........-------------l
8
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fl
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•
�Government Net Financial Liabilities in 1994
140
120
100
11.
0
Cl
<ii
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80
0
z
"
2
"
0
60
"
11.
40
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Source: OECD
us
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G-7
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5
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-15
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us
Japan
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~ 1995
Source: OECD
France
DII
2030
Italy
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4
Primary Surplus as a Share of GDP
Percent
,1 I :
...
.
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,
0.5
'
I, '
o
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-1
-1.5.
,
-2
-2,5
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Johnson
Nixon
Carter
Nixon/Ford
.Note: .Primary Surplus is revenues less program spending.
Source: Office of Management and Budget
Clinton
Raaga:n 2
Reagan 1
'Bush
�,
The Returns to Education
Percent Difference In Earnings of College .. and
High School Graduates (lull-time males, 24-35)
c/
70 rl------~----------------~--------------------------------------_.
60
50
40
I
30
20
•
10
o
1979
1994
�•
•
<
Probability of being in prison, on probation, or on parole in 1992
Men Aged 18 to 34
35%
30%
25%
<25%
20%
15%
10%
•
4%
5%
0% L-_ _ _ _ _-"
No high.school diploma
High~school
diploma or higher
education
�,
,
Investment in Education and Training
42.0
.
/
40.0
,
38.0
l!:
m 36,0
o
u
,,
,
,
President Clinton's proposal
'. ', .'
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m
en 34,0
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,
'0
2
,Q 32.0
• ,
,
•
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iii
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•
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••
• • •
• •
26.0 j-------------------- -+
1996
1997
"
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28.0
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. .... .. .
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. ..
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House proposal
~
----_._._.,._._._._-------------------,----------------------,
1998
1999
2000
2001
2002
�•
,
Output per Hour in the Private Nonfarm Business Sector
120
Index. 1987 = 100 (ratio scale;
rl~~~----~~~~~--------~--------------~------------------'
Trend growth 1978-94
1.0 percent per year
110
100
90
Trend growth 1B63-72
2.8 percent per year
~//
80
///'
70
r:..;/
"
Trend growth 1972-78 .
1.7 percent per year
60
•
,
w"
1958
~
. 1962
1966
1970
1978
1974.
Note: Data are based on a chain-wo.ightad measure.
~
Sources: Council of Economic Advisers and Department of labor.
1982
1986
1990
1994
�>
,
Real Hourly Wages for Men by Wage Percentile
1993 dollars
25 Ir----~
20
15
10
5
o
10th Percentile
25th Percentile
•
Source: Department of Labor.
Median
1973
~ 1993
75th Percentile
90th Percentile
�USA· ROC Economic Council Plenary Session
. Remarks by Dr. Joseph E. Stiglitz
Chairman, Council of Economic Advisers
September 23, 1995
It is a special pleasure to be hefore you today here in Anchorage for many reasons.
First, it provides a chance for me to reciprocate the hospitality that I have receiv.ed from
Taiwan on my visits there. I first visited Taiwan at the invitation of one of Taiwan's great
economists, Professor S.C. Tsiang, who I had the great pleasure of knowing over many years
while he was teaching at Cornell. As most of you know, Professor Tsiang is generally given
credit for being the intellectual force behind Taiwan's early macro·economic successes as
well as its financial market liberalization which played such a critical role in its. successful
development strategy. I later had the honor of being invited to give a series of lectures at the
Chung-Hua Institution for Economic Research and the Academia Sinica. On that occasion, I
also was the guest of Samuel Shieh. the governor of the Central Bank, whose successor Mr.
Sheu we shall have the pleasure to hear this evening. And the Deputy Governor, Dr. Paul
Chiu, hosted on my behalf a delightful -lunch which I still remember fondly. I also had the
chance to have some extended discussions with another one of great architects of Taiwan's
success, K.T. Li.
The second reason that this is a special pleasure is that Alaska has represented a state
which I have held with special fondness over many years. I have had the good fortune of
having spent considerable time in this great state, traversing it from Prudhoe Bay above the
arctic circle to Valdez, 'at the other end of the pipeline, 10 Juneau and Anchorage. I hope that
you take the occasion to see some of the natural beauties--environmental amenities which we
as an Administration are.fighting hard to preserve--as well as its impressive economy.
But the real reason that it is such a pleasure to be here is that the subject which I wish
to discuss--some of the lessons to be drawn from the amazing economic success of Taiwan
and other countries of East Asia as we face the challenges of the dynamic changes facing our
economies-..is a question which has both fascinated me as an academic during my years
before joining the Clinton Administration and which has influenced my thinking about
economic policy in the United States.
I should add, as a final prefatory remark, that in many respects, the economic record
of the Unite.d States during the past two and a half years is itself amazing. It i~ a miracle of
sons, one which is only gradually being appreciated. It is not only that almost 7 and a half
million jobs have been created, but that this remarkable growth has. been attained with
remarkable price stability. The overall combination of economic growth and price stability
represents a macro-economic performance that has not been seen for three decades. And
while many of our economic policies--such as the marked deficit reduction, leading at last to
the stabilization of the debt GDP ratio after a dozen years during which it grew seemingly out
�2
of control, a reduction in the deficit GDP ratio by more than half in a space of two and a half
years. and the attainment of a primary surplus, that is, revenues in· excess of expenditures net
of interest expenses on inherited debt, for the first time since the Kennedy and Johnson
Administrations--while these and other policies created a favorable economic climate, it is the
business community to which credit must really be given. They have created almost all of
the new jobs in our economy, they are responsible for the increased productivity--the increase
in the last quarter was four times the level of recent trends--and for the increased exports--il
growth over the last year by more than 15%, a number that may seem low by the standards of
the Asian tigers, but which is truly impressive by standards anywhere else, and particularly
for countries at our stage of development. Let me foreshadow the theme which I want to
develop: governments playa vital role in creating an economic environment which facilitates
economic growth. A central part of that environment is sound macro-economic policy, but a
part the importance of which is also only bTfadually being appreciated is good "micro
economic policies" , policies that affect financial markets, regulations that impact on a host of
other sectors, and legal frameworks, such as intellectual.property, that provide the
institutional infrastructure required by any effective economy. And an essential ingredient in
the success of any of these policies is positive and constructive relations between government
and business. While governments have a vital role to play, markets are at the heart of any
successful economy.
Sy"'any measure, Taiwan and other East Asian economies have achieved extraordinary
successes. Strong economic growth, strong growth of exports and ready adaptation of
technological developments. This a record that is rightfully admired around the world.
So, the question is: how did it happen? Is there a secret behind this success? A
magic ingredient that is the source of the East Asian "miracle?"
A friend in Taiwan once gave me the following explanation: He said "Taiwan's
economic success is due to the actions of its economists and its engineers. The economists
went to the United States, and the engineers stayed and rar:' economic policy."
This probably simplifie~ the real story somewhat. And -- as President Clinton's Chief
Economist _.. I have to say: this is clearly not the explanation for the success of die U.S.
economy over the last 2 years.
But, the questions are very interesting. And, they are important in infonning future
debates about strategies for economic growth. In this talk, I intend to address the following:
What were the true sources of East Asian growth? What role did government and public
policy. play? And, finally what role should government play with the new and exciting
changes and challenges in our industries and our economic environment? An environment, J
might add, that you in this r90m are creating and fostering.
But, first, I think it is important to take slock of the changes in the U.S. economic
�3
relationship with Taiwan and other East Asian nations.
While trade was once largely a transatlantic 'phenomenon for the United States, today,
successful American businesses turn to markets in the East in ever increasing numbers. The
statistics are telling:
•
The 14 Asian APEC economies accounted for over one-third of
our trade last year -- this is larger than any other single regional
grouping. And even more notable it was 60 percent larger
u
u
than U.S. trade with"Europe.
•
Taiwan is a key player in this ever expanding trade relationship .
Taiwan is our 7th largest trading partner, with two-way trade
amounting to $44 billion. Taiwan is also our 6th largest export
market, the largest of any country outside the OEeD.
The Clinton Administratio'n has recognized and responded to this dramatic change in
the international business environment. We welcome the growth in our economic ties with
Taiwan and East Asia. And, we are committed to the APEC process for achieving free trade
in the region by the year 2020.
With this increase in trade and the rapid growth of the East Asian economies, there
has been a maturing of our trade relations ~ith the region. Although some disputes remain,
'the United States welcomes the covoperation it has received from Taiwan on tariff reductions,
protection of endangered species, and intellectual property protection.
And, let me say: as an 'author of several text books, the intellectual property issue is
of particular importance to me. I admit, on my very first trip to Taiwan v. when copyright
violations were still. widespread -- I went to a bookstore in the heart of Taipei to check
whether any of my books were being. "bootlegged."
Before entering, I seriously wondered: would 1 be more upset by seeing bootlegged
books -- knowing that I was losing royalties from the unauthorized editions -- or would I feel
worse from not seeing my books and discovering that my work was being ignored in Taiwan?
In true Confucian fa~hion, I decided that status was more important than material reward.
Luckily, I was not disappointed!
But, yes, there has been progress on intellectual property issues -- in Taiwan and
elsewhere in' the Pacific Rim. That progress has yielded enonnous benefits for Taiwan -- in
lenns of increased innovat~ve activity and increased access to cutting edge foreign
technologies. And, that progress .has come as a result of our strong and growing economic
ties.
So, now let me turn to the important questions I want to address. First, how did the
�East Asian miracle happen?
In my earlier days out<;ide of government J participated i[1 a World Bank study that
looked at the fundamental sources for the East Asian miracle. The bottom line was: there are
no simple and magic answers, No recipe that can be translated into easy success for other
developing countries.
<
j
Instead, the East Asian "miracle" was a result of a combination of strong successes in
cenain bask areas. Let me list them:
First, a stable business environment. This included macroeconomic stability
~~ but also stable and predictable
rules of the game' for business.
- low inflation and realistic exchange rates
There were also high rah.'S of saving and investment. And, there's no miracle here ~
. these economies grew because they invested heavily. And, governments contributed,
by funning balanced budgets, or budget surpluses, and by raising the returns to private
saving. But it was not only that governments had sound budgets~~they made choices
that about how to spend their limited money in ways which enhanced economic
growth. They had a clear sense of priorities. For instance, they inve,sted heavily in
education, the returns to which have proved to be enormous. This is a lesson which
some in Washington need to take to heart.
inde(~ not only was their a strong emphasis on education, particularly a
high level of primary and secondary education, but there was a strong concern
to make sure thai there was widespread aCCess to education. for females as well
as males. The countries of East Asia showed that. egalitarian policies could
~nhance .growtb, One dido', need to tely on trickle down economics,
-
,
.Acd. finally, there was a hasic openness to tecbnology. and strong efforts to learn
from, and adapt. foreign best practice.
A more controversial element of the East Asjan "miracle" is the role of industrial
the combination, of intervention, promOtion and direction th:u characterized many of
the East Asian countries. "J!lere is among academic circles stH! some controversy about
. whether these policies made a difference ~* whether they raised growth or changed the
industrial structure. My study of the countries of East Asia convinced me that at least some
of them did have significant positive effects,
policy
~~
But from some perspectives. the more interesting question, I think, is not whether
industrial policy worked. but rather why it did not fail, Government intervention can ~- and
has been -~ a major retarding factor in so many other countries, So, why noUn East Asia?
The answer is: the mesl successful East Asian governments were able to craft
�5
economic poHcies and build relationships between business and government that employed
market forces rather than blunted them. The most successful East Asian governments activdy
consulted the business community and assisted industry, but they also maintained domestic
competition.
'
In a word, indusuies obtained the t>enefits of economic' cooperation both among the
firms within the industry and between industry and government without society having to pay
the price of economic collusion
and~~at
least up to a
point·~without
the marked disadvantages
that result from what economists refer to as capture, where government simply serves the
interests Df industry without keeping paramount the broader societal perspectiv!! of national
interest
Success in competing on world'markets through exports was strongly emphasized.
And the benefits that government bestowed -- credit, foreign exchange, investment approvals ~
were based on performance. on the outcomes of market- based comests among domestic
w
~L
.
Many of the East Asian governments demonstrated a ready ability to know when
government should get in and where government should stay out. Achieving that delicate
balance between doing what supports growth -- such as investing in infrastructure and R&D
. and not intervening tOO heavily is a very difficult'task. And the most successful East Asian
governments were able to find that approp:ia.te middle ground. a middle ground which so
many countries, bOlh developed ,and less developed, have found difficult to find,
To be sure, East Asian governments have made some mistakes, In particular. where
they have protected uncompetitive indusLries from competition; where they have excluded
foreign invesunent; and, where they have failed to protect intellectual property. Bm, the
, most successful governments reversed course when they saw their policies were having the
wrong effect.
As a result, the East Asian successes have shaped thinking about development policy.
These successes have had a strong and impo:-tant influence on views about the appropriate
relationship between business and government (A relationship that is -- and will be in the
fmure
~¥
central to all of our economic debates.)
Making govemmem work more effectively and less intrusively has been a top priority
for the Clinton Adminis'tration, And, the proper role of government is now at the core of the
debate between the major political pa."1ies in the United States.
But this is not just an issue for the American political debate. Economic changes and
developments in the past few years will force all of us -- in the United States and across the
world -- to fe-ex.amine what is the most effective role that governmei'lt can play,
Let me give you one example: services industries
ww
finance. information and
�6
communications,
These dynamic industries are the indusnies of our economies' future growth and
strength. Intellectual
cre~rivity
is the
pri~ary
inpm
+.
and this input knows no bounds.
Change in these industries is happening like rapid~fire. Competition is springing up in
industries once viewed as monopolies. And, trade is taking place in industries once viewed as
purely local. 1 believe that we in the United States are rising to the challenge, Evidence of
efficiency increases, improvements in the quality of the services provided and decreases in the
costs of providing those services abound. Some of the countries of East Asia, while they
have led the way in improvements in efficiency in manufacturing, have lagged in these vital
sectors, and as a result, improvements in standards of living--which is. after all, the ultimate
objective of aU of this economic activity--have lagged.
Governments -- in East Asia and elsewhere -- have tended to be more heavily
involved in these industries than they have been in manufacturing. And there is now a
pressing ne{:d to reassess government'S proper role.
Achieving tbe proper balancc in government policy is now more important than ever.
The goal is to dismantle unnecessary government regulations and interventtons while creating
a framework of rules that allows the private sector to flourish and -- a1 the same ltme **
protect the public interest. This task--again a careful balancing act--has been one of the '
foundations of this Administration's economic policy. 1 can speak proudly of some of the
reforms that we have already accomplished, such as in the banking se'0tOf, and I can speak,
warily of some of those upon which we are embarking, such as: telecommunications, where
the Administration has been working hard for a bill which promotes long run competition
wbile it provides adequate safeguards during the transition period in which there remain
significant imperfections of competition.
In the financial sectOr, the reassessment of government's role means' liberalization of
existing rules the main effect of which is to impede competition while strengthening
prudential supervision. J cannot overemphasize the importance of tbe delicate balance~~the
failure to achieve such a balance during the previolls Administrations in the United States,
with inadequate prudential supervision, was a major contributing factor to the S & L debacle,
which not only cost taxpayers billions and billions of doHars, but led to massive misallocation
of resources and. in my judgment! was a major contributing factor to the economic slowdown
that we hav'~ had to work so bard during the last two years to recover. In communications it
meuns allowing freer rein to market forces and new entrants. while at the same time
. addressing monopolles or access barriers where they stiU exist
These issues are panicularly important for Taiwan, given lts ambition to become a
regional cemer in finance. transportation, ane communications. The rea~ns for formation of
economic centers - or "clusters" -- are .interesting. Often centers are the product of .
historical accident. But sometimes they have developed because of official efforts~-the
�7
careful balancing of which I spoke earlier, a balancing which includes, as a central ingredient.
a willingness to tolerate new entrants and activities.
This requires both a cosmopolitan attitude and a wi!1ingness to take risks. Those who
can .. and do .. move fastest to' address the new competitive challenges are the ones who will
be most likely 10 create and foster sllccessful regional and international centers.
Finally. I'd like
(0
conclude with a few remarks about the future,
Over the past few years, the economies of East Asia -- as well as the APEC region
more broadly -- have become increasing integrated.· Intra-regional investment, subcontracting,
and trade in finished goods occupy a growing share of the tota! trade for these economies,
and, at the same time, trade with APEC as a whole has grown rapidly,
These interweaving;;; are welcome, And, in fact, their continuation may be necessary
for the continuation of the Asian miracle~~or the beginning of the next Asian ~~ or Asian
Pacific
~~
miracle.
Today's economic changes and challenges all point to the importance of larger and
more integrated marketS: larger markeL'i provide necessary economies of scale; intra-regional
investment provides the presence that is so often necessary for the delivery of modem
services; and, greater integration makes possible those instantaneous communications that are
the heart and core of our n;ost dynamic, creative industries.
But, further integration of the economies of the region will require a number of other
to emphasize two:
things, J wimt
First. political and economic stability. This is critical to fostering the
confidence necessary for the large-scale private sector investments that 'are so
necessary for future growth. This in tum requires that disputes among parties
he settled amicably, something that is strongly supported by the United States,
It also requires a recognition that some of the modus vivendi that have evolved
over recent decades may provide the most constructive framework for the
conlinmuion of the political and e.conomic stability which have served the"
region
50
welL
And. second. j5 further steps' in economic liberalization and deregulation.
These now often stand as barriers to domestic competition and innovation, as
weU as to trade.
President Qintor. is strongly committed to active engagement in the Asja~Pacific.
Two years ago at Blake Island he articulated his vision of a Pacific community based on
shared prosperity and values, Last year along with 17 other Asia~Pacific leaders, President
Clinton committed to achieving free and open trade and investment in the region by 2020 ..
�6
And this year, he will join the other Pacific leaders in laking the first concrete steps to
mak:ing that vision a reality.
But, U.S. interests go beyond economic and commercial. We are by our heritage and
our character interested in individual rights and the spread of democracy, This would be true
even if democratization and !.he expansion of individual and human rights had no bearing on
economic and income growth.
BUl, in fact. the spread of democracy is both supported by economic development, and
plays a strong role in fostering continued economic growth. This is increasingly true as our
businesses and our economies demand greater and greater individual creativity.
It is people like yOIl who will be the driving force for future integration in the APEC .
region. You ~~ the business men and women of America and East Asia ~- are the source and
the energy for the changes and developments in our economies, yo~ are the source of the
economic changes that are forcing governments to respond and change.
The fact that increased integration now seems desirable ~~ even inevitable -~ is largely
due to the explosive growth in private sector activity in the Asia~Pacific region.
SuppOrt and encouragement from the priv'ate sector has been crucial in 'establishing APEC as
a framework for advancing integration and co~operation in the Asia~Pacific region. We hope
and encourage -~ and, indeed, challenge;. -- you to continue your strong panicipation in the
future.
'
•
•
.
,
�"
Remarks by Laura p'Andrea Tyson
council of Economic Advisers
t.o t.he
center for National Policy
It is an honor ,to be with you today for the official release
of the Annual Report o( the Council of
Economic Report of the President for
One year ago,
Economic
Report
Economic~dvisers
and the
1994~
when :many of you were reading last year' 5
of
the
President,
the
Clinton Administration
economic team was'hard at work developing its strategy to address
,
'
the nation's short-term and long-term economic problems.
\
At that time, the economy seemed trapped in a largely jobless,
seesaw ec:onomic recovery, that carried considerable downside risk.
The recovery
economy
was
from
the
growing
1990-91 recession had been
at
less
than
one-half
the
character:istic of a period of recovery after recession.
subp~r--the
growth
rate
Throughout
1992, ·the unemployment rate remained abc:'ve 7.% and at year's end
more than 9 million Americans were out of work.
These short-term problems were
superi~posed
on two distinct
�·.
2
These short-term problems were superimposed on two distinct·
but interrelated long-term
the deficit.
The first was the problem of
problems~
According to our projection, even if the pace of
recovery picked up,
t~e
'it was lik~ly to be strangled. by growing
structural' deficits, ballooning borrowing needs of the
and a resulting rise in'long-term
intere~t
90ve~nmentf
rates that would sooner
or later choke off private spending.,
When the federal budget is on a sustainable path, the deficit
should come down as the economy picks up pace ~
indicated
that
with
unchanged
p~licies,
Instead our numbers
the
deficit
and
the
government's borrowing needs would rise over time and this would
derail the economy's recovery.
sustainable path.
In short, our economy was not on a
The foundation of the recovery was cracked and
threatened to give way to the shock of escalating budget
,
A
second
and
related
long-term
problem'
was
deficit~
sluggish
productivity grow.th, as a consequence of which real compensation
and real pe~ capita income were'advanciflg at a disappointing rate,
and
real median family income
~as
barely increasing.
The
situation
was even worse for low-income families whose incomes were declining
both absolutely
and relatively.
For lnany
low-income working
families, after-tax incomes barely exceeded those income
le~els
available through welfare.
The =nost fundamental explanation of these disturbing long-term
�3
trends 'Was
insuftlcient private and public
foundations
capital
of
productivity -growth
equipment
and
and
technology,
investment--in
living
human
the
standards--new
resources,
national
infrastr\lcture and research and development.
The
policy
challenge
ag~,
Administration one year
that
confronted
-
the
Clinton
was the need' to .design an economic
strategy that would. simultaneously address the economy' short-term
.
and long-term problems.
The key to the strategy was a credible and
gradual deficit reduction program--large enough to have a dramatic
effect on the
~ourse
of the deficit over time, but not so large
that it 1:hreatened to. kill off a faltering
recovery~
Moreover,
,because of the nation's longer-term problems, this progratl required
a shift in government spending and taxation.
A shift toward more
spending on publ·ic invesbnents that are the foundations of private
prosperity.
And a
shift in the burden of taxation to provide
stronger rewards to work to.
low-inco~e
families.
Just' four weeks after he took office,
introduced
his
economic
strategy
in
a
President
detailed
Clinton
budget
plan"
presented to a joint session of congress. Today, one year later,
·the economy is strong again and. appears to be -getting stronger.
ReCent economic data confirm that the economy is on a sustainable
expansionary path with increasing
streng~hening
OU~Pllt,
manufacturing sector.
,interest-sensitive
rising employnv;imt and a
lreprovements in a variety of
sectors--business,
consumers
durable
and
�4
residential construction--are stimulating and reinforcing growth in
other parts of the economy.
up,
Consumer and business confidence are
employment has increased more in the last year than in the
previous four years, and inflation is tame.
was the best performance in the last five
Growth in 1994 at 2.9%
years~
Moreover, as the most recent budget projections indicate, the
deficit is now falling relati,vely to the siz'e of the economy_
1995 deficit is 40% below where it was projected a year
slated to be
only
2.5%
of GDP--the
The
a90-~and
is
lowest level since 1979.
Economic expansion has not been realized at the expense of fiscal
responsibility.
Instead,
both
our
short7tern
and
long-term
economic prospects now rest on a much more solid fiscal foundation,
not the cracked one we inherited.
What accounts' for the change in the economy's short-term
,
fortune?
Have we made significant and sustainable progress on the
deficit? And have we put in place pOlicies that will bolster
productivity growth and
livi~g
standards for all Americans in ,the
future?
This
yearts
Economic
Report
answers
these
questions
and
demonstrates that 'the Administration's economic strategy has put
the economy on track for sustained economic expansion in the
5h~rt
run, while addressing the economy's longer-term problems as well.
�5
,
Deficit Reduction and Economic Expansion
The key to the
change in 'the - short-term fortunes
of the
economy in 1993 was the dramatic decline in long-term interest
'rates--which fell' about 100 basis points between November 1992 and
December 31, 1993.
And the evidence reviewed in the ERP indicates
that this decline in turn was in large measure
th~
result of the
re~ponse of financial' markets to our deficit reduction pr,ogram.
Nor is the CEA the only· observer to make this
~oint.
Even Alan
Greenspan recently noted that the a;:..tions taken to reduce the
, deficit-
~~st
years have been instrumental in creating the
ba~is
declining inflationary expec,tations and easing pressures on
for
1~n9-
term interest rates.
\
Long-term interest rates anticipate change; they shift in the
. present based on credible expectations about the future.
The
'dramatic decline in long-term rates since the, election of 1992
,reflects sustained confidence in the Nation's financial markets
that the Clinton economic plan wil"l finally and si9nificantly
reduce th.: Federal bUdget de! ioi t.
Some of our critics dispute this claim, particularly on the
reVenue side.
They continue to argue that higher incone'tax rates
on the wealthiest
won~t
contribute as much as we think toward
�6
higher
taxable
They tell us thet t.axpayers faced with
deficit~
shrinking the
rates will vigorously
income--they'll
investments to tax-exempt
search out
take
more
in
income
their
or
their
shift
They/il protect so much taxable
bonds~
tax
to reduce
vacations
income, in factI that government revenues
an- increase
ways
rates
~ill
on
actually drop after
the
highest
earners.
Fortunately for believers in responsible: government, history proves
.
.
our critics wrong.
,As we demon::;;trate in the Economic Report,
income tax increases 'in the united states have generally increased
income tax revenues to the government while income tax cuts have
,
,
generally ,reduced Chem.
Obvi()usly,
determining
marginal
tax
rates ,are
important
factors
in
savings and investment patterns and economic growth,
\
.'
,
but so is the view of the 'credit markets about whether the
government's
policy
fiscal
is
responsible.
The
Administration introduced higher tax rates 'on the richest
Clinton
1~2%
of
t~e nat;onts taxpayers a~ a "necessary part of a balanced deficit
reduction program.
Cert~inly,
higher taxes by themselves t
like'
spending cuts, exercise a
cont~actionary.effect
the short run.
part of a credible deficit reduction
program,
the
But as
higher
tax
rates
introduced
on the economy in
by
the
Clinton
'Administration have contributed to lower long-term interest rates
and the
$treng~h
in interest-sensitive spending that have been the
�7
most important elements powering our current economic expansion.
Our
economic
has
strategy
created
a
sound macroeconomic
environment and a sound foundation for future economic growth.
have made a qood start., But it is only a start.
franlework
for
sustained
'responsibility,
but
responsibility is to
growth
not' its
~mprove
is
only
the
Creating
government' 5
responsibility.
A
We
the
first
second
how the government itself performs its
functions. , In a time of bUdgetary austerity, inefficiencies in the
governmen1: process must be eliminated. The National Performance
Review, ccrrnpleted under the bold leadership of Vice President Gore,
lays out ,;lays ·to improve the way government itself performs:
by
reducing the size of the Federal bureaucracy, reducing the burden
of govermnent regulations, and ensuring that any new regulations
.
\
carefully balance benefits and costs.'
Government also has a vital role to play in providing some of
the
critical
raw
materials
for
continued growth--science and,
technology, public infrastructure, a heal thy
educated and well-trained
~ebt
~ark
force.
enviromn~nt
and an
We need to worry about the
we bequeath to our children, but we must also worry about the
quantity and quality of the physical, financial, and hUman capital
they will inherit.
Let
me
begin
with
investing
in
People.
The
Clinton
�8
Administration
has
made:
increasing
quality of jobs its highest priority.
are: necessary but not
suffici~nt
both" the
quantity
and
the
Sound macroeconomic policies
for the realization of this goal.
They must be complemented by labor market policies
tc:
remedy a
number of deep and longstanding impediments to the maintenance of
high employment and to improvements in 'the quality of
jobs~
The American' workforce remains the most prOductiva in the
world.
Nonetheless,
as 'We point out in the Economic R:eport,
turnover rates in the American labor markets are very high. . And
losing a jobs is often very costly, especially for those who are:
unlucky enough to lose: a jobs they have held for many
years~
At
the same time, modern industrial processes demand 'Workers with
'higher leve.ls of education and training;
and evidence on the'
. relative wages of college-educated and high school-educated labor
bears thiH out.
In 1981 1 workers with college degrees earned about
\
45% more than workers with only high school degrees; by 1992, this
,gap had reached almost 65%.
The combination of high turnover
ra~es
and rising.. inequality
in the earnings distribution, aggravated by a
$~OW
recovery from
·the 1990-91 recession, bas made many Americans feel increasingly
uncertain and insecure about their economic
fu~ure.
In rc::sponse to these problems in the nationfs labor market,
the Adminjstration has designed a multifaceted strategy to enhance
�9
the education. training and flexibility of the American
This strategy encompasses. several neW programs:
program
that
sets
higher
performance
standards
workforce~
the Goals
for
200
american
teachers and students; the· school to work transitio'n program that
will help students get
~ands-on,
work-related training as they move
between the world of school and the world of work; the National
Servioe program that provides opportunities for community service
and the acquisition o.f jobs-related skills but also helps send l!1ore
Americans to college, the
refo~ed
student loan.program that will
reduce the borrowing costs of students loans and will allow loan
'repayments
base~
on future in-:::ome; and" the new 'Worker re-employment
program that will provide training and income support for displaced
workers
movi~9'from
one jobs to
another~
,Health Care
Our nealth care reform proposal is also an
~mportant
component
of our strategy to build a flexible, high-wage American workforce.
Under
OUt'
current ·system,
mi~lions \ ~f
americans are afraid to
change. jobs because they face the I:'rospect of .lo,sing thei,r health
insurance coverage., Some estimates sugge~t that such worries may
reduce job mobility by as much as 25%.
In addition, America's
working men and women have ,paid for escalating health costs by
,taking home smaller paychecks.
Empirical research suggests that
the dominant "long-run response of businesses to rising health care
costs has indeed been to lower the rate· of increase of take home
pay.
Bet.ween 80 and 100 percent of increases in health care
�10
spending appear to be reflected in lower take home pay. If business
spending on health care were the same share of
co~pensation
today
as it waSi in ~975t wages pre-employee could be over $1000· higher.
The
Economic
Report, dlstinquishes
four, distinct
but
interrelated problems in our current health care sysfelll.
First,
the current health care system fails to provide health
security, for millions of Americans--many insured Americans stay in
jobs' they no longer want because they cannot. risk losing their
insurance;
,treatIDent~
l,
meanwhile,
uninsured' are
sicker
I
receive
less
and suffer higher mortality rates than the insured.
S~condl
shortcomings.
,
the
privat,e
insurance
markets
exhibit
some
severe
People with preexisting conditions, or people who
are simply less healthy, have to pay more, sometimes much more than
.
.
other people, if they can find insurance at all. And many policies
.
don t, cover a var1 7ty of larg~ financial risks--exactly the kinds
I
,.of
risks
t:hat
ihsurance is supposed to address in the first place.
Third, our current health care system suffers from a lack of
effective competition.
. overly-sophisticated
Providers often have incentives to provide
or
unnecessary
care,
because
they
are
,reimbursed for each additional test 'or procedure they perform .
. Consumers often do not have effective choice among insurance plans;
doctors. or hospitals, so market competition among, providers is
•
�11
often
Moreover,
weak.
adequate
infoirnation~
effective
consumer
choice
depends
on
Yet consumers often do not know even the
. price of medical goods ·and services, .and they seldom have the
information they
,reCeiVe4"
~eed t~
evaluate the quality of the services they
This means that providers are often in a p.osition to
influence both the supply and demand sides of their markets. In
short,
consumers
are
ill-equipped to bring strong
competitive
pressures to" bear on providers to make cost-conscious decisions.
Nor do consumers themselves have strong incentives to,exert
such pressures.
works
I
Given how the current health insurance system
consuruers often have few
i~centives
to
comparis~n
shop among
either health care services or health care plans, and even fewer
incentives to pursue more cost-effective preventive care so they
can avoid health trouble before it starts.
Finally
t
the fourth problem with our current system is the
burden it places on public sector budgets. Public sector spending
on health care grew
~
percentage points faster than private sector
spending in the 1979s. and health spending is gro...... ing four times as
rapidly as any other component of the federal budget.
~allooning
choices
health costs, governments are forced to make painful
involving
increases,
Faced with
or
cuts
in
other
spending
programs,
revenue
bigger deficits--;-any of which can have adverse
consequences for
long~term
economic growth.
None of these four problems can be solved in isolation.
In
�12
arbit~ary
the absence of systetn-wi!ie reforms t
caps on Federal
health care programs, which some have proposed t would simply shift
more of the governIDent's program
Similarly,
any
attempt
c~sts
to provide
onto the private
universal
coverage
sector~
without
complementary measures to improve competition and sharpen the
incentive!; for more cost-conscious decisions would mean even more
dramatic increases in systemwide c.osts.
Refot1.ns designed only to
addres,s the most glaring, shortcomings of private insurance markets
would not solve the problem of providing health security for. all
Americans or the problem of escalating government expenditures for
public health •
. The Administration/s health .care reform proposal is the only
proposal currently before the Congress which addresses the four
problems
tlf
the current' system.
As the' recent CEO study argued,
"The Health Security Act is unique among proposals 'to restructure
the health
it
care, system because
is
\
the
only proposal
that
describes the steps that would ha've to be taken to 'accomplish its'
goals. II
'llle CBO study also confirmed that this proposal would
significantly
reduce
expenditures while
comprehensive
century.
the
projected
si~ultaneously
benefits
And finally I
for
gro~th
all
~nd
national
health
providing universal coverage of
Americans
the eso study,
private !;ector organizations
of
,
by
the
end
of
this
like several studies by
scholars, confirms the
·CEAI
sown
asseSSrlent that the net effect of health'care reform on aggregate
level of employment is likely to be small:
at ':reost plus or minus
�13
one half of one percent of total employment.
The reason is that
there are a number of offsetting factors in the plan, some of which
may increase
e~ployment--like
lower aggregate business spending on
health care as the growth of costs slows--and some of which may
decrease employment--like an increase in voluntary
retirement~
bUt the net effect of· these offsetting factor is likely to be
small.
Investing in Technology
.Now let ~e turn to another important area of our investment
agenda--investment in science anq:· technology.
A careful reading of
US economic history reveals that· the government has consistently
played
a
pivotal
role
in
the
development
of
the
nation/s
educational and scientific infrastructure and in the diffusion of
knowledge.
This has been true in areas as diverse as agriculture
I
\
and biotechnology, civilian aviation and microelectronics, lasers
and acute:trauma care, computing and communications.
We have learned, however, especially fr?ID some conspicuous
failures t.o promote .civilian technology development in the 1970s
how government can play its part
m~e
effectively.
1
So w.e argue in
the Report that government support for technology is'rnos,t effective
when projects are evaluated by non-go.vermnent experts, when they
are designed and carried'out by industry, whe.:1 private firms share
a significant portion of program costs,
and when only the ,best
�proposals
are
funded
after
a
ri90rous competition
for
public
support.
We also know that science, techrology
#
and the economic growth
they generate cannot help but be greatly affected by the current
'de'fense retrencmnEmt, because nearly 60 percent of Federal support
for domestic R&D comes from the Defense Department or defenserelated parts of NASA and the Oepartment of Energy, and because
nearly one-fifth of the Nation's scientists and engineers w,ork in
defense-related areas.
\ole
have
funded
That is why. with,the help of the Congress,
several new technology
including the
progr~msl
Technology Reinvestment Project, which is designed to help defense
,contractors
increased
retool
funding
to
civilian markets.
serve
for
successful
examples
We
of
have
public-private
partnership in civilian science and technology research,
the Advanced Technology
Program
of the
also
National
such as
Institute of
\
Standards and Technology.
,We have also begun' to shift the Federal R&D portfolio from
defense to other national needs.
For example, we were able to
increase funding for research into new environmental technologies.
As·we discuss in the Economic Report. improvements in technologies
for
preventing
regula torr
.treating
mechanisms,
interest in
promoting
and
~egulating
economic
can
pollution,
improve
the
and
Given
the
between
tradeoff
,envirohJ;lental hazarcis and
growth.
improvements
ou~
worldwide
in,·
our
interest in
explosion
in
�15
activity,
the
development-
of
more
environmental
regulatory
effecti ve and
lower cost pollution control technology can also
. contribut~=d to our high-wage job base and our exports.
The US is
now the world leader in exports of environmental equipment. Our
"trade surplus in pollution control
and was
$1.1
billion
in
1991.
equip~ent
has been increasing
Our support for
environmental
technology R&D programs will maintain our competitiveness in this
important
The
another
gro~ing
issue
marketplace.,
of
important
international
dimension
strategy---its trade policy.
of
competitiveness
the
brings
Administration's
me
to,
economic
Whatever we accomplish at home, must
be complemented by an expansion of America's trade opportunities
abroad.
We
live
in
an
increasingly
integrated
world
economy
populated by increasingly tough and sophisticated'competitors;
In
\
response,
export
we believ'e that the United States has to expand our
promotion
efforts--so
we
have
streamlined the
Nation's
export control programs, and we've significantly eased Cold War-era
export controls on producers of high tech products like computers
and communications equipment.
We also believe--we know--that America's markets are .already
among the most open in the world.
So last year we moved to ensure
access for American products to markets abroad.
The Administration
vigorously supported the North American Free Trade Agreement.
We
�16
continue
to
work
Japanese market.
throu_9h
bilateral
negotiations
to
open
the
And we have worked hard to complete the Uruguay
Round of the General Agreement on Tariffs and Trade.
As we argue in the Economic Report,
the liberalization of
global trade resulting from successful completion of the Uruguay
Round will raise real incomes in the United states by billions of
dollars annually in the coming years.
In ,fact't the total gain 10
years after implementation of the agreement begins is likely to be
between $100 billion and $200 bi,llion annually.
u.s~
This is because
negotiators have TIC?t on1'y reduced existing barriers; theY've
also brought areas of trade that had been largely outside of the
GATT system, such 'as agriculture, textiles, intellectual property,
and servi=es 1 into'the GATT framework.
We focus on expanding trade because we know that jobs in
export industries pay better wagss--about 22 percent above the
economy-wide average.
We know that Alnerican companies that compete
successfully both at home and abroad offer the best opportunities
for American workers_
But this is not a mercantilist strategy--in
fact, it's a strategy for avoiding mercantilism.
We expect trade
liberalization to ·increase bo't:h u.s. exports and U.S. imports.
And
we welcome both.
summation.
Together, all of the initiatives I've described-
�17
continued
deficit
reduction,
increased
public
investment,
a
reformed health care system, expanded exports,' and a reinvented
government--comprise
an
economic
strategy.
strategy is as clear as it is ambitious:
The
goal
of
that
to sustain a high and
rising standard of living for the average American family.
Because
this is a strategy for the 'long run, its full effects will not be
.
.
felt overnight.
But as we demonstrate with a wealth of detail in
the Economic Report, there are already many signs that the strategy
is beginning to payoff.
We expect the economy to continue to grow in 1994,
percent.
at 3
Consumer spending should remain healthy, due to continued
steady gains in output and employment.
also remain strong,
Investment spending will.
because of low long-term interest rates and
increased. levels of demand. And the economy remains on track to
produce 8 million new jobs over a four year period.
At t,he same time,
and every bit as important, the economic
outlook of the American people will continue
~o
improve.
In our
one year together, this Administration and the American people have
accomplished much.
We have learned that the secret to economic
success is making change our friend, not our enemy--coming to view
.
'
.
change as the opportunity for advancement it is, not as the threat
that it sometimes appears to be.
And so the two largest living
generations of Americans--the baby boomers and. their parents--and
a whole' new generation that has since come of age in an era of
�18
deficits and diminished expectations,
can
now look ahead with
renewed hope and confidence to the future we all share.
proud of that.
But there's much more to be done.
We can be
We'll stay to
answer s()me of yOllr questions about this year's Economic Report.
Then it's time to get back to work on making next year's Report
even
better~
Thank
y~u.
�'.
Women Business Owners and the U.S. Economy
Dr. Laura Tyson
Women's Economic Summit
Northwestern University
MaY,30, 1996
Four years ago I was an economics professor at UC, Berkeley. I was finishing a book
on the problems of U.S. trade and competitiveness in high technology. I was also concerned
both about the increasing federal deficit -- which was a threat to federal investment in
education and technology -- and about the economy's slow recovery.
A friend called and asked me to help out on the Clinton presidential campaign.
agreed 10, because J. felt Bill Clinton had the right agenda. His goals w'ere to Testore
economic growth and to provide opportunity for every American to share in the prosperity
that is possible in this period of profound technological and economic change. The
President's goals embodied our Nation's.core values: to reward individual responsibility and
hard work; to preserve families; and to invest in the future of our children and our country.
I was convinced that Bill Clinton's approach was the right one in part because it rested
on a few common-se!1se fundamentals.
Firs., we live in a market economy, and finns such as yours are the major sour~c of
economic growth and job creation
In particular, small business is the solid foundation upon
which our nation builds it·s· economic strength.
·Second, the 'era of big government is over. In this period of rapid technological and
economic Change, we have to alter fundamentally the way our government works. It has to
be smaller. It has to be less bureaucratic. It has to' be oriented toward partnerships and
results, rather than toward telling people precisely what to do.
Third, even a smaller government has several key roles to play in our economy,
including providing a sound macroeconomic environment for sustained economic growth by
�billion, compared to the FY92 dcfidl of $290 biHion, The federal deficit now represents the
IOWCl>1
percentage of GDP since 1979, Moreover, the U.S. has the best record of any
industrial country, a~ mca,ilured by deficit as a percentage of GOP. In fact,
would be in surplus today, were it not
f~r
OUf
federal budget
the billions of dollars in interest payments we arc
paying o'n deficits accumulated during the previous twO Administrations,
In sum, this country's fiscal condition is much improved. and the President and
Congressional Republicans both have put forth plans to funy balance the' federal budget by
2002, The trHlion-'dollar decrease in the deficit as a'result of the 1993 economic plan -- and
,
'
the prospecl of addiiional deficit reduction -- have ted 10 lower interest rates and a freeing
up of capi(al for invcstmcnI by businesses such as yours.. Inotherwords, deficit reduction has
not been an cnd in itself bUI a means
(0
an end. The end is economic gro'Nth and
opportunity.
The results --
<IS
measured by the economy's performance -- are extremely positive,
During the 'last three years. the nation has ex:perience~ a broad-based l investment-led
economic expansion, accompanied by low inflation:
The economy bas created 8.5 rnHlion ne! new jobs. ncarly all of them in the private
sector -- exceeding the President's promise of 8 million new jobs du~ng' his firs;
term,
Moreover. these ate good jobs. According to a recent study by the Councl; of
·.Economic Aovisef&, in the last two years, 68 percent of the new jobs have been in
industries and occupalion groups thaI pay more than the median ~age.
More than 2 million new business have been created -- an all-time record.
Business investment in productive equipment has grown a1 double-digit rales for three
years in a row -- for the first time since the 1960s,
3
�Home ownership is at its highcst level in 15 years,
TI1C
unemployment
rdte
has been below 6
pCJCCnl
for 20 cnn~ecutjvc months, TIle
latest unemployment figure was 5.4 percent -- down from over 7 percent when
,
Pr<;:sident Clinton to"ok office:.
Inflaikm has remained low and stable, averaging 2.7 percent since 1993.
And the combined rate of inflation and unemployment -- the so':"callcd misery index
-- is at a 27-yeaJ low.
Women-owned husinesses have both contributed to and benefited from the recent
strength of the economy. Women entrepreneurs like yourselves arc stafting new husinesscs
and creating new jobs at twice the national rate, That's a remarkable statistIc, isn't it? Let
me share some other remarkable statistics with you:
In January, the U.S. Census Bureau reported that, as of 1992, there were 6.4 million
womcn-{)wncd businesses. USing'thc Census numbers, the Kational Foundation
fOf
Women Busiuess CAvners reccntly rcieased an analysis showing that today! there are
,'
nearly 8 million businesses owned and operated by womcn. 1bat1s a 25 increase
in the number of women-owned,busincsses jusl in the last four years. Women-owned
firms now accour.t Jor folly 36 percent of all US. businesscs.
Women-owned busincss arc growing in economic power as well as sheer numbers.
1)ley gcnefate sales of $2.3 trimon a year, which is more than the GDP of all but a
few countries in the world,
And women-owned pusinesse); now employ 18.5 miHion people -- [hat's one out of
every five American workers.
4
�in fae!) using Census and l'F\VBO numbers, I have calculated that of the 8.5 million
new jobs created since the President took officc! half of them are in women-owned
firms.
Now, although the economy is the strongest it has hccn in decades -- with womcn
owned businesses playing a major role -- many Americans feci a tremendous djsconnect
between their own lives and rhe positive numbers I've ciled today, Millions of working
Americans aren't
SUIe
what they're going
!O
get out of the new, high-tech, gJobai economy,
The President believes we need to find a way to m;)\nta.in the dynamism of this increasingly
global economy and yet stH! allow people who arc working hard to achieve a. measure of
,
sccurit>' for themselves, lhcir families and their children. We want to avoid a winner-take
all society in favor of a society in which everyone who i'orks hard can be a winncL
The Clinton Administration believes there is an appropria(e role for· government in
areas that would provide greatcr security 10 working Americans, Let me cite three specific
examples.
Tne first
~iTea
is cmp;1oyabilitv security, as distinct from
~cmploym~nt
sccurity." This
is the security 11J3t yo\.! will have access to the education and traim:1g you will need to get
. your next jobs, For some individuals, 'training for self-employment -- creating and operating
a small business -- may
be
the goal.
To hclp Arner:cans. achieve emploj'abilit)' security, the AdI::1inistf.liio!1 has proposed a
G.L Bill for Amcrlca's workers, so thai workers whQ lose their jobs can get a voucher that
will cover their training costs for up to
1wo years, The President bas also proposed to make
the COSI of c.ollege tuition tax deductible, and to extend the dcductlbilllY of cmploycr
fin~nccd
edllcation and training.
Tn he
~t:rCj
education and skills have always maHercd in this country. But today they
arc the ;lIooJ:l)cmal fault linc running through the American wo:kforcc. Tne demand for
5
�highly-skilled workers is growing at the same time that the demand for workers withoul a
,
high level of education of skills is shrinking. Fifteen years ago, the typical college graduate
earned 38 percent more than the typical worker with only a high school degree: By 1994,
,
this gap had doubled to 74 percent.
Fornia! education is not the only investment in skills that pays off. For workers, a
year of either on-tnc-job or formal training raises wages' almost as much as' a year of college
education. Tbatls good news for t~c roughly 70 percent of the American workforce who do
not currencly have college degrees, America's business leaders also know that training is
good business. Several weeks ago, the Nntionttl Association of Manufacturers: issued
<l
whitepaper challeng.ing industry to double its investment in worker training,
Finally, investment in education and training contributes .significantly to ovcraH
economic growth, Economists estimate that improvement in the educational attainment of the
American workforce has accounted for aboUl 20 percent of per capita income growth over the
last two decades,
The second Iype of security is access to heahh insurance and pensioll benefits.
Toward this
~nd.
the President has called upon Congress to yass (he Kassebaum-Kennedy
. bill~' which would allow workers to keep their health insumnce even jf they change jobs or get
sick. And with small business owners in mind l the Prcsidenl last year signed legislation to
.,
increase to 30 percent the share of health insurance premiums that self-employed individuals
can deduct en thel;- lax rclums -- and we're working to increas.e that amount.
.
PC;lsions arc no less important. Small firms arc less likely than their Jarger
counterparts to be able. to provide retirement plans. While 75 percent of workers in
businesses with more than 1,000 employees ha\'c pension plans, only 24 percent of workers in
, . businesses with fewer than 100 employees have them. At last year's While House Conference
on Small Business, Ihc. PresideOl proposc.d a new pension pl;;.n targeted to the needs of small
6
�businessCS--Ihe National Employee Savings Trust (NEST). The NEST would provide
benefits similar to those of a 401(k) pension plan and would be simple to create ar.d operate.
The Administration has endorsed other improvements thal make existing pension plans
safer and more beneficial for business owners and employees alike. For example. we have
proposed to eliminate the "family aggregation" restrictions on pensions for family members,
so Ihat spouses or children who work in the same or related businesses tan earn their own
retirement benefits. Repealing the family aggregation rule wil1 allow aU family members to
earn their own retirement benefits.
By the way) these pension rcfonns would be especially beneficial for American
women. Fewer than one-thIrd of all women retirees age 55 and Over receive pension
benefits, compared
10
55 percent of male retirees, And two-thirds of American women work
in the lhree sectors -- services, retail and construction -- wilh the lowcst pension coverage.
Finally, the NEST plan would covcr many part-time workers, 'who arc disproportionately
women.
The third type of sccurity is the security that an American worker can make a living
wage. The minimum wage is currently approaching a 40-ycar low. Tne President has called
,
for a 90 cenl increasc, 10 be phaicd in evcr two years. This would benefit 10 minion
minimum-wage workers, 6D percent of them women, and many of them single parents. l..a<;t
week,
th~
House of Representatives approved a 90 cent minimum wage incre3se and we
expect the Senate to follow SuiL
Raising the minimum wage to $5"15 an hour can help make work pay_The extra
$1,800 a yc;u, combined with the Earned Income Tax Credit, is enough to lift a family out'of
poverty. This modest rise in the minimum wage will not derail the sustained economic
recovery we're experiencing,
J:tl,~tead,
it will help to keep aU finns moving forward on the
path of higher wages, higher skills and higher productivity.
7
�In talking about the issue of economic security with small business owners and otbers
over the past year, I have noticed
t~vo
lhings,
First, women across tile board arc more concerned about the issue of economic
security. Because women arc the dominant care-givers ....:- taking care of elderly parents as
well as their children -- concerns aoout education and training, as well pensjons and health
insurancc, strike a responsive and compassionate chord. I was pleased to see that the
statement by Rosabeth Moss Kanter, which appears as the lead-m to the P!ogram for tbis
conference,
C<'f!lS
for an "economic securily agenda that is credible,
M
Second, women entrepreneurs tend to manage their businesses tn a \\tay that reflects
this concern with economic security. Womcn-owllcd businesses arc more likely to offer
child-carel' flex-time, tuition reimbursement and job-sharing programs than Olhor U.S.
businesses. J havc noticed this emphasis on' flexible, "iamlly-fricndly" work environments in
my own conversations wiih' women busincs:s owners, and it is borne out hy research done by
the NFWBO. Some people call this "good corporate citizenship" or "corporate
respons!bility." Women entrepreneurs know that this common-sense approach to the
workplace is simply good business.
In part, hecause of these practices, the work force in a women-owned company is
!ypically about two-lhirds female. As on;;: writer put it, "women-owned businesses become
Ihe training grounds for female employees to leave and launch their own busjnesscs, which
crcarc,'l an ev(!:r-widening circle of women hiring wnmCf\",," This employmc.nt record is good
not only for women themsci\'cl:', bur fN all of Amcrica.
Conclusion
1 starled with the observation tbat it wao;; President Clinton'S economic vision for
g:owth and opportunity thal lured me into the White House. Pcrsonally, of course, there has
been plenty of gro'\.vth and opportunjty for inc. But more important is the growth of the.
8
�\
•
cco'nomy and the pcrfonnancc of the women's b~sincss sector in recent years. Not only has it
outstripped the performance of U.S, bw-;incss overall on major dimensions, but women
entrepreneurs, in the process l arc redefining how business is conducted.
i helieve more strongly than ever that (he
Presiden~
has found the right path for
economic growth ami opportunity: steady prngrcss toward a balanced budget; targeted tax
CulS to lift working families in America out of poverty; and investment in Our future and
OUf
children's future. This is not ·always the casi~l path !O follow, politkally speaking. But, as
an economist, I am confident it is the correct path.
As we move into the knowledge-based economy
of lhe 21$1 century, we arc poised
for success wi.lh a President who understands lhc pmfound economic changes that are
Iransiorming our lives and reordering Ihe way we work and lh'c, We arc prescnted with a
challenge thaI emerges perhaps once in a hundred years: to harness economic change to our
advantage and help pmpel this Nation and its people forward with confidence,
Women entrepreneurs such as yourselves are especially weU poised for growth and
success, in a strong economy that is expected to continue to cxp3nd. You have been very
good for the American economy! and the economy -- assuming we stay on' ?Te$i.dcnt'~
c~osen path -- should continue
to be very good 10 you.
This s~$lained economic grov.'th -
of which yC!~ arc both cause and consequence -- is the ultimate source of economic security
for us alL
9
�Clinton Libra 'Transfer Form
,
,
,
i
,
Ih
I
ii
I
i
24123,23650, & 40514 • these
I
=
I
II
at! result of policy sel by Supenrisory Archilli!Ol
�
Dublin Core
The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/.
Title
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Clinton Administration History Project
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Cinton Administration History Project
Council of Economic Advisers
Department of Commerce
Central Intelligence Agency
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Department of Defense
Corporation for National Service
Council on Environmental Quality
Department of Justice
Domestic Policy Council
Department of Education
Department of Energy
Environmental Protection Agency
Federal Emergency Management Agency
General Services Administration
Small Business Administration
Social Security Administration
United States Agency for International Development
National Economic Council
Office of Management & Budget
Office of National Drug Control Policy
Office of Personnel Management
Office of Science & Technology Policy
Office of the Vice President
United States Trade Representative
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1993-2001
Description
An account of the resource
<p>The Clinton Administration History Project describes in detail the accomplishments of President Clinton's Administration for the period 1993-2001. The records consist of the histories of 32 agencies or departments within the Executive Branch. In general, each organization associated with the Project submitted a narrative history along with supporting documents. These narrative accounts are primarily overviews of the various missions, special projects, and accomplishments of the agencies. The supplementary records include substantive memos, press releases, briefing papers, and publications illustrated with photos and charts.</p>
<p>Agencies:<br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Council+of+Economic+Advisers&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Council of Economic Advisers</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Central+Intelligence+Agency&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Central Intelligence Agency</a><br /><a 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The Continuing Importance of Trade Liberalization
Janet L. Yellen, Chair.
Council ofEconomic Advisers
11 September 1~97
Smith-Barney Washington Conference
The basic goals of the Clinton Administration's economic policies are simple and
uncontroversial. First, to secure rising living standards now and in the future. And second, to
ensure that the benefits of a rising standard of living" are extended to all Americans. To attain
these ends, the Administration's economic agenda has been based on three key policy initiatives:
deficit re~uction, investing in people through education and training, and opening markets
worldwide to U.S. goods and services.
It is this third initiative--promoting free and fair trade--that I will focus on today. From
his first days in office, President Clinton has advocated an outward-Ioo~ing, "internationalist"
trade policy. During the first four years of the Clinton Administration, over 200 trade
agreements were ratified and implemented, .some relatively large in scope-such as NAFTA and
the Uruguay Round of9ATT--others relatively small, but all vit~ to our nation's competitive
future. President Clinton intends to extend and build upon this record during the
Administration's next four years.
The single most important next step in the Administration's effort to open markets abroad
and expand trade is for Congress to renew the President's authority to negotiate trade agreements
on a "fast track" basis. This so-called "fast-track authority" allows the Presid.ent to negotiate
trade agreements with other countries, and then requires Congress to take an up or down vote on
the entire. agreement. In other words, Congress cannot in effect reopen negotiations by adding or
deleting individual provisions of a trade agreement by amendment during Congressional debate.
Instead, Congress must vote on the agreement as a whole. Of course, the final decision as to
whether the trade agreement.-in its entirety:.is approved or disapproved is still in the hand's of
Congress. Fast-track authority simply allows the President to seek approval or disapproval for
the agreement as a whole.
Every President since 1974 has gotte.n fast-track authority from Congress. Why is it so
important? The answer is that fast track lends credibility to trade negotiations. Under fast track,
the parties to a trade agreement know that any provisions that are agreed upon cannot later be
renegotiat(:d individually, nor can such renegotiation be threatened.
History tells us that fast-track negotiating authority is critical: in the early 1970s,
Congress failed to ratify the Kennedy Round GAIT agreement in its entirety, and, as a result the
Europeans refused to negotiate further trade agreements with the United States. For this reason,
in 1974, Congress developed and passed legislation providing the President with fast track'
negotiating authority, and giving the President the credibility he needs to negotiate international
tr~.de agreements.
.
�2
So, why do we need fast track authority today? And; what would the Administration use
it for? The Clinton Administration would focus on three key areas for its use,
, The first Use for fast-track negotiating authonty would be to complete the agenda that
'was established in lhe Uruguay Round ofGATT negotiations, At the end of the Uruguay Round
negotiations. the United States, .a1ong with other countries, pushed for a timetable at which
negotiations in different areas would resume. We did that. as did Europe and other countries.
because we wanted more out of the Uruguay Round than we got. This year, we 'begin again the
negotiations on government procurement~ next year, we will begin in~el1ectual property rights
discussions~ then we will begin'talks. on.agriculture; then on services, Government procurement
is a trillion-dollar market for the United States in Asia alone over the next decade; agriculture. a
S600-billion market globally; services, $1.2 trillion market The United States wants better
access to those markets. And, we must have fast track authority b~fore beginning discussions in
these areas, otherwise countries will not put meaningful offers for market acc~ss on the table.
The second major use for fast-track authority is to extend the information technology
agreement or ITA. The recently concluded ITA will reduce to zero tariffs on a range of
information technology products: semiconductors. computers, telecommunications
, equipment; faxes, phones, integrated circuits _. a huge array of products in which U.s, firms
tend to be highly competitive. The U.S. tariff barriers in those areas are either very low or zero.
Asia', tariffs in these areas averaged 30 percent With the ITA. the United States agreed -- with
43 other countries ~- that tariffs on information technology products ~hould be brought to zero
across the board in all countries. by roughly the year 2000, We already have agreement among
Out trading partners for an ITA-2 - which would expand the scope oftbe products encompassed
by this ~remely ambitious initiative, And, nist-track authQrity would be needed to expand that
arrangement.
We are also considering seeking similar. kinds of agreements in a number of other
individual sectors where the United States is very competitive but global bamcrs tend to be high
-- areas such as environmental equipment and services, medical equipment and technology, and
transportation equipment. In all of these' areas, it would be necessary to have fast track authority
to negotiate a reduction oftrade bafrlers.
.
Finally. the third area that fast~track will be used is for more comprehensive market
access agr'eements with indhidual countries. Thus far, Chile has been identified as the first and
most likely (:ountry for this kind of arrangement: Today, every major economy in this
hemisphere--save the United States-has a preferential trade agreement with Chile,.1n practice,
thi. means that U, S, finn. face tariffs in Chile that make their goods II percenl more expeasive
than those of competing fi~s. from other countries. this is a serious competitive disadvantage.
.
The pace with which preferential trade agreements, are being negotiated between and_
among countnes around the world is fast The United States could easily be Ie!! behind through
inaction. Since 1992. other countries have negotiated 20 preferential trade agreements in Latin
AJ:nerica and Asia that exclude the United Slates, The European Union has begun a process that
Wl11 culf!1inate in a free trad.<; agreement 'With Brazil, Argentina, and oth~ MERCOSUR nations;
President Chirae of France has even gone so far as to declare that the economic interests ofLaHn
�3
America "lie not with tbe United States, but witb Europe." And'within Soutb America itself, the
four MERCOSUR countries are attempting to extend tbeir preferential trade arrangements to
"encompass the entir~ continent. Moreover, other countries are aggress~vely pursuing expanded
foreign trade. For example, China has targetted a number ofLatin American countries~
including Chile, Mexito, and Brazil--for increased bilateral lrede,
It is clear: now, more than ever, continued engagement with the global economy win
require an active effort on the part of the United States. And. an extension of fast track authority
must be an integral component of this effort. But, let's go hack to a fundamental and important
question: why is free trade so important? Why shouLd we be concentrating so much effort in
pushing for more open foreign markets, and how does freer trade contribute to ~he
Administration's goa! of securing rugher living standards for all Americans? In short. what are
tne benefits offree tradefortn. U.S. economy? I will use the remainder afmy time to address
this question--.which. in fact. speaks to'my own comparative advantage as an economist.
I would begin by first saying that one of the benefits of free trade is not. as is sometimes
supposed, an improved overall current account or trade balance. The Administration's pOlicies
do indeed affect the current account, but it' is Its budget, saving. and investment policies, not its
trade liberalization policies. that do so. The current account is a macroeconomic phenomenon
that reflects the gap between wbat.we as a nation invest and what we save. The large budget
deficit' of the 1980, and early 1990s reduced the amount of saving that was available to cover
.the nation's investment in plant and equipment (investment was choked off too. but nut by as
much), and this shortfall had to be filled by importing goods from abroad. In an important sense,
the nation was overconsuming in the 19805, financing its consumption binge by borrowing
output from foreigners. The result was a Iarge and persistent trade deficit.
Today, we still face a trade deficit, but for a very different reason. Reducing the
government's budget deficit has left more room for investment in plant and equipment by the
private sector. And invest it has: since 1993, real business fixed investment bas grown nearly
nine percent per year on average. a much faster rate than that of the preceding ten years. 'This
rate ofinvestment 1S above the rate at which Americans save-.. even with the federal government
dissaving less by virtue ofits smaUer bupget deficit. So, once again the shortfall is made up for
by.borrowing output from abroad, with the result being a current account deficit. But there is a
big difference between borrowing in order to invest-as the economy is doing now-·and
borrowing in order to consume. as we did in the 1980s. In fact, running a trade deficit in order to
expand the nation's productive capacity is not new to American history--in the 1800s: we did
much the same thing in order to build up the nation' s infrastl1.Jcture. most notably during the
railroad com,truction boom a century ago.
So, it is not the gap between imports and exports that is relevant as far as trade policy is
concerned, But the-level oftrade~~the ':ope~ess" of the U.S. economy-does matter, In recent
years, the United States has seen rapid growth in its degree of exposure to the world economy:
real U.S, imports of goods and services grew at an average rate of 11 percent over the past four
ye.fC~ while real exports grevrat an average rate of 10 percent per year, [n the current recovery.
�4
,
'
export growth has been responsible for roughly a third of overall GDP growth, The United
States now exports an amount equal to 13 percent of its GDP every year and imports an amount
equal to 15 percent of GDP; to put these figures in perspective; the corresponding figures for the
1960, were four and five percent, respectively, The' American economy is now more open than
at any time
in its history.
.
What are the bene6ts of an open economy? Economists generally recognize two hroad
classes of benefits, the first being static, the second dynamic, , I would like to discuss each in
turn.
Ever since the work of Adam Smith and David Ricardo, economists have recognized that
trade helps an economy by allowing it to spedaHze in what it does best. Adam Smith argued
that specialization--the division of labor-enhances productivity, but noted that the degree to
which an individual or a nation could specialize depended critically on the extent of its market
We all know the story of Robinson Crusoe. who l alone and isolated. had to do everything for
himself: farm, weave doth. build shelter. and so on~ But if a group ofRobinson Crusoes can
trade amongst themselves. each can specialize in the production of what he or she is best at
doing--thus producing more than would be possible were their attentions divided among goods
which they are less skilled at malcing--and then can trade with his or her neighbors for the goods
which they in turn are good at producing,
It might even be the case that one individual (or country, to drop the Robinson Crusoe
analogy) is better than anyone else at producing every good. Such an argument is often invoked
in order to "'proven that the U.S. cannot benefit from trade with a country such as Mexico. But it
turns out that the argument in favor offree trade still carries the day, All that is required is for a
country to be relatively less skilled than another in the production of some: good in order for it to
benefit from trade, This is, of course, the doctrine of comparative advantage--the fundamental
(if perhaps counterintuitive) principle that underlies the theory ofintemational trade.
This, in a nutshell, is the "classical': view of the benefits of free trade. It is important to
note that the benefits from trade under the classical doctrine are primarily static in nature~~that is>
they- affect the lever of output. Moving from a situation in which there is less trade (or no trade)
to ·one in which trade is freer raises output, but this is more along the lines ofa one~time increase
(even though it might take a number of years for the benefits from trade to be fully felt), This i.
not to dismiss the significance ofthese static benefits: for example, some economic historians
have argued that most of the economic growth that occurred in the classical world was rooted in
the expanskm of markets that took place ~ a result of increased sea trade, around the
Mediterranean,
-
Recently. a new view ofintemational trade has emerged which argues that increased
trede actually mises an economy'. rate pIgrowth, If this is in fact the case, it makes the case for
trade liberalization an even more compelling one, Raising the grollt1h rate of the nation's
econorny~ t'ten by a fe"Y tenths of a percentage point per year, has vastly more significance for
long-run living standards than even a relatively large one-offinerease in the level ofoutput; the
reason, of course~ is that a small increase in the economy's rate ofgrowth cumuJates over tim~ to
yield large gains,
�,
5
Wbat is the rationale behind the new trade theory--in'other words. what is the source of
the "dynamic" benefits' from trade? Well, we know that economic growth has twO' sources:
either we can increase the amount of inputs (capital, labor, and raw materials) that we feed into
the productive process, 'or we can make those inputs more productive, through innovations in
technology. bettor education and training. and so on, (In fac~ this latter factor is necessary if the '
, economy js to grow in per-capita terms in the long run, as sooner or later simply accumulating
more inputs will tun up against the law of diminishing returns,) The static benefits oftrade
,represent a one,.offincrease in this latter factor: specialization lets us allocate labor and capital to
t~e production ofgoods that we are relatively good at producing. making a given amount of
labor and capital more productive in a manner that is not unlike an imprpvement in managerial
technique,
The new vfew of international trade also focusses on this second factor, but argues that
international trade can actually increase the rate of innovation and technological change. One
economist has summarized the argument with the following catena:
- International trade leads to greater competition;
- Competition induces greater innovation; and,
-Innovation (i,e, , technological cbange) drives economic growth,
(It's a simple notion once you think: about it-though it will probably win the economists who
thought it out. Nobel prize some day)
,
In a sense, the emphasis of the new trade theory on the dynamic benefits ofintemationai
trade comes full circle to_Adam Smith. Although Smith·s contribution to trade theory is
generally seen as providing an .rgUment in favor of free trade that highlighted the role of
specialization in raising productivity, he also poime~ out that speciaJization, by acquainting
workers with a specific productive process, could give them insight into how such processes
might be improved-thus fostering innovation. New trade theory also incorporates elements of
Joseph Schumpeter's theory of"creatlv(! destruction," in which the competition that is a
fundamental feature of a capitalist economy serves as a motive force for the economy's progress,
The new view of international trade represents a valuable contribution to academic
economics. But theory alone cannot provide an airtight argument in favor oftrade liberalization.
There is, however, a large booy of empirical literature which attempts to determine what drives
economic grov.rth across cOW1tries. Unsurprisingly, investment in physical capital--plant and
equipment-and investment in human capital--education, for insiance--are two factors which
have a profound influence on economic growth. But these same studies have also found that an
economy's degree ofopenness-as proxied; say, by the amount that it imports and exports
relative to its overall output--has an effect on its rate of growth.
.
'
In an ideal world-the world in which economists live~~free trade unambiguously benefits
the economy taken as a whole. This is true in the real world as well. although the ideal case
masks the fact that some will gain from freer trade. but others may Jose--even though on net the
wfnners could compen~e the losers and stlll have something left over. In practice. increased
globalization will induce reallocations of labor and capital across sectors as the focus of
�6
of
American industry moves to the production those goods and services wruch we are relatively
good at producing, Because our economy is not fiiction1ess, these adjustments'sometimes
involve lengthy periods ofdislocation until the reallocation aflabar and capital across industries
is complete.
Policymakers advocating freer trade mu,t be aware ofthi, fact, and the Clinton
Administration has realized from the beginning that it is the government's duty to minimize the
impact of this dislocation by speeding up the adjustment process however it can. For example.
,one of the key provisions ofNAFTA ttlvoived monitoring those industries that were in danger of
being adversely affected by the free trade agreement, and the Administration committed itself
'early on to providing for dislocated workers through retraining programs. And, more generally,
the Administration's commitment to investing in people through education and training serves as
a strong complement to its policy oftrwe liberalization: since freer trade tends to benefit skilled
workers mo~;t, the United States enjoys greater benefits from trade to the extent that more Of1tS
workers are highly skilled. In the end, though, those who would poinl to Ihe short-Ienn adverse
effects of trade liberalization should not lose sight ofan important point: Trade liberalization
might adversely' affect a small fraction of American workers in their role as producers, but it
benefits all workers in their role as consumers.
Bottom line is:' the benefits of increased openness and increased international trade are
\Vide ranging ~- more efficient utilization of resources, faster productivity growth,' higher quality
goods. and lower prices, aU ofwhich raise living standards..
.'
.
Finally, in ciosing, [ would nole that I have said nothing of the benefits of trade that arise
simply from the fact that it links the economic interests of nations more closely. John Maynard
Keyne, once argued that the greatest tragedy "sited upon Europe by the First World Waf Wi'S
the disruption of the system of international trade that was a hallmark of the Euro~ economy
, . before 1914. The eventual breakdown in the world trading system ~nd resulting deterioration of
Europe's economy was a proximate cause of the Second \-Vorld War. and kept living standards in
Europe and the US. much lower for much longer than was necessary by prolonging the Great
Depression, It is only in recent years that the scope ofintemational trade has returned to the
level ,een before the Great Wat.
The United States is now more closely tied to the rest ofthe world by trade than at any
other time in its history. How the U.S, economy performs relative.to the: ecOnomies ofother
nations will depend critically on how we promote our commercial interests abroad. Aggressive
pursuit oftnide liberalization, for ;"hich fast track authority is a prerequisite, is the best way to
ensure that the U.S. maintains its position as the strongest and most i~9vative economy in the
world.
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�Making Welfare Reform Work
. Janet Yellen, Chair
Council Economic Advisers
May 20,1997
of
Eli Segal Breakfast
I would like to begin by thanking Eli Segal and all of the other CEOs that are participating
today. You are all playing a very important role in our hold welfare experiment. Over the next
years we face the challenge of moving millions ofpeop\e off the welfare rolls. The factor that will.
probably most affect the number of people that escape from welfare is the overall state of the
economy: a strong economy means more jobs available for welfare recipients. Federal policies
can also contribute by providing the individuals with the tools they need and the,proper incentives
to take advantage ofa booming economy., By themselves, however, the,economy and Federal
.
.
policy may not be sufficient to meet the ambitious goals we have set for welfare reform, We will
also need your help. the help of the private sector, to provide sufficient employment and training
prospects to qreak the cycle of dependency and give less-skilled welfare recipients a helping hand
in entering the labor market.
We have spent a lot of tim,e thinking about
~hese
issues at the Council of EconOJ:nic
Advisers, Many 9fthese efforts culminated in our release last week o~a White Paper titled
"Explaining the Decline in Welfare Receipt, 1993-1996," In my remarks today I will be talking
about what we learned from this study and our other work on the vital question, making welfare
refonn work.
�THE CONTRIBUTION OF MACROECONOM1C PERFORMA."{CE
1would like to begin by discussing the contribution of macroeconomic perfonnance to the
large reduction in the welfare caseload we have seen in the last four years. In J992 the
unemployment rate averaged 7.5 percent; almost 10 million people were looking for work. In the
last four years !he unemployment rate has come down to 4.9 percent. The economy has created
over 12 million new jobs. Macroeconomists usually think about job creation and declining
unemployment rates as something which b~osts GDP gro'N1h. That is certainly COrrect: high
unemployment is very inefficient and Increasing employment, increases growth, The reduction in
j
the unemployment fate is one~reason why the economy has grown 2,9 percent over the four years
ofthe Clinto>l,Administration.
But today I want to. focus on another important consequences of rapid job creation and
low unemployment: creating opportunity, In the last four years" we have begu.n to see the gains
of gro\vth translated into improved living standards for aU Americans -- especialiy those at the
bottom of the income distribution. Between J993 and 1995, the most recent year for which data
are available, ·the poverty rate fell from 15.1 percent to 13.8 percent -- the largest 2~year drop in
over 20 yean.. Poverty rates for elde~ly and for black Americans reached their lowest levels since
these data began to be collected in 1959. Th~ relentless increase in inequality that began two
decades ago at least has been stalled if not stopped in the last few years. Not only have the
incomes of every quintile of the income distribution increas.ed, but the largest percentage increase
has been seen by the poorest in American society,
The increase in incomes
for the bottom quintile and the decline in the poverty rate have
been mirrored in the dramatic decline in the AFDe easeload that we have witnessed over the last
-
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2
�4'years. During the first four years oftne Clinton Administration. from January J993 to January
1997, the number ofindivldua1s receiving welfare fell by 20 percent, or 2.75 million recipients ~the largest decline in over 50 years
The decline in welfare receipt that mirrors the decline in the unemployment rate is not
unique to the last 4 years. Welfare caseloads tend to fluctuate over the business cycle, rising
when the economy moves into recession and declining once a recovery is underway and the
economy is expanding. We. saw declining welfare rolls in the expansion in the late
197~s
and then
a rise as the economy went into recession in 1980, Similarly, between 1989 and 1993, the
proportion of the population receiving welfare shot up 25 percent, reaching its highest level ever,
The receSilioa of 1990·91 and the weak labor market through 1992 certainly contributed to this
incr~a.~.e,
hindering the effons of those welfare recipients seeking work What is new, however, is
the very largt~ magn!tude of the reduction in the welfare case!oad, much larger than one would
have expected given what we have seen during past economic expansions.
WHY HAVE THE WELFARE ROLLS DECLINED
At the Council ofEconomic Ad~<isers we have done a lot of research attempting to explain
this dramatic decline in the welfare rolls, We started out with the question, how much of the
decline in the welfare Tolls is due. to the strong economic performance of the fast four years, in
panieular the decline in the unemployment rate. Our initial efforts to answer this question were
frustrated by our reliance on data for the economy as a whole, As a result, we switched to usi~g
the experience of individual 'states, The 50 states (plus the District of<;olumbia) provide an. ideal
.
laboratory for testing'different theories as to why the welfare caseload has. declined. Each state
3
�has had different unemployment rates, different welfare policies, and differential success in
reducing its welfare m1ls.
In particular, we used statistical techniques to assess the three potential explanations ofthe
decline in'the welfare rolls:
•
First, the declining unemployment rate f talk.ed about earlier;
•
Second, Federal welfare waivers: between January 1993 to January 1997, the federal
government granted states a variety of waivers to experiment with innovative approaches
to ending welfare dependence. The Clinton Administration granted waivers to 43 states
between 1993 and J996 that included provisions which may require work andlor training,
sanctions for those who do not comply with these requirements, and limits on the duration
of benefit receipt, among other things,
•
And third, other policies. These i~clude policies which increase the return to work, like
the 1990 and 1993 expansio"ns of the earned income tax credit (EITC); policies to make it
easier to leave home in pursuit of a job, like the increase of Federal and state spending on
child care; arid
exp~nsions
in Medicaid eligibility, which have not only increased the
coverage ofp<>or children but also have allowed some low-income individuals to work
without losing Medicaid benefits for their children.
'4
�The results of our study indicate that Qver 4Q percent of the decline in welfare cas~loads
,can be attributed to economic grov.'th. This is quite a lot, and it suggests that continued economic
growth is a prerequisite for
fi.uth~r
progress in moving people from welfare to work But it is
.
certainly not everything. We also found that {tlmoS Q'newtbird of the reduction in welfare .
.
.
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caseloads is related ~o statev.ide waivers, particularly those that sanction recipients who do not
comply \\~th work requirements, A GAO report released just the other day supports our findings
on the importance of these policies in reducing the welfare caseload. The remainder of the declme
is due to other factors that we do not specifically identifY, but could plausibly be ascribed to
policies like the expansion of the EITe and increased ~1edjcaid eligibility.
FEDERAL POLlCIES TO HELP PEOPLE MOVE FROM WELFARE TO WORK
This Administration's effort to reform welfare did not begin with the signing of the
Persona! Responsibility and Work Opportunity Reconciliation Act of] 996 last August. It began
with all of the policies I have been discussing: allowmg
st~tes
to experiment with their own
solutions. expanding the E1TC, providing support for child care, and not penalizing welfare
recipients for finding jobs by making it easier for their children to keep their Medicaid coverage.
<
•
The 1996 welfare reform bill was, however. a dramatic step fOl"\vard. It took those
policies which had proved their success in several states, including work requirements and time
limits, and mandated them for all states" This radical experiment. called Temporary Assistance to
Needy Families (TANF), is an attempt to break the vicious cycle of welfare dependency" But
moving welfare recipients into jobs takes more than ju~t forcing people off the welfare rolls and
.
hoping that they will end up in the many newly created job openings. Access to transportation,
.
5
�child care, and other infrastructure support will be needed. Many job seekers will also need to
acquire the critical "soft skills" -- a hahit of punctuality, lo?, absenteeism, and so forth -"- that will
make them effective members of the labor force.
The welfare bill that the Presi~~n1 signed into law last summer was very strong on
incentives to find jobs, but much weaker on helping provide people with the tools they need to
,
. find and succeed in these new jobs, The recent budget agreement is an attempt to rectify that
shortcoming, It provides $3 billion, the fuli amount requested by the President for the Welfare-toWork Jobs Chalienge, to the TANI' block grant to fund welfare-to-work efforts in high-poverty,
high~unemployment
areas, A share of the funding will go to cities and counties with large
numbers ofpeopfe in poverty. In addition, the President and the Conwessionalleadership have
agreed to seek a welfare to work tax credit to encourage employers to give welfare recipients the
~hance
to work, This credit wilt give companies that hire longMterm welfare recipients a 50
percent credit on the first $10,000 of wages paid over two years. ' .
In addition. the budget agreement rectifies some of the harshest provisions of the welfare
bill: IL"i treatment ofJega) immigrants. These policies were llil1 designed to improve the welfare
system, reduce dependence, or help people findjob~L They were included purely to save money.
The President has gotten the Congressional leadership to agree to restore full SSI and Medicaid
benefits for disable legal immigrants curren~ly receiving assistance; and for legal immigrants in the
country prior to August 23, 1996 who are not now receiving benefits but subsequently become
disabled,
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�THE ROLE OF THE PRIVATE SECTOR
.By themselves, however, tbese Federal policies will probably not be enough to accomplish '
the President's goal ofmovlng,millions of people from welfare into work They need to be
supplemented by efforts by the private sector to hire people off ofIhe welfare roUs. I will briefly
discuss three eConomic reasons why public-private partnerships arc crucial to the succ,ess of the
welfare reform effort.
First, the private sector does many things much better than the government can. A case in
.
point is training programs: St~dies consistently find that on~the~job training is substantiaIly more
effective than classroom training programs. These conclusions are based on the results of
contro1led experiments in which welfare recipients are assigned to control and treatment groups
and the treatment consists of different methods to mOve welfare recipients from welfare to work
Simple comparisons
ofjab~finding
rates between the two groups provides ample evidence that
~m-
the job training works. Successful programs have led to roughly a 25 percent increase in
.
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employment at the end of three years among those who receive
on~the-job
training compared to
ot~erwise identical workers who received no actditionl'!-I services .
. Second, the government's main policy toot is i~ccntives. Our policies have helped to
.increase the incentive for welfare recipients to find jobs by enhancing their incomes' with the
EITC. raising their wages with the minimum wage, and making it difficult to stay on the welfare
rolls for extended periods ohime_ At the same tlme, the work opportunity tax credit helps
increase the incentives'for el1.1ployers to hire welfare recipients. Even though 1 am an economist, 1
have to acknowledge that incentlves can only go so far, Without active efforts on the parts of
7
�employers to
see~
out, hire) and train welfare recipients the welfare reform, program will be a
failure.'
Finally, the last argument'for public..private partnerships is that they have been,proven to
be effective l;olutions in other policy areas" Examples include the Advanced Technology
Program, which provides funding for research and development~ and the Technology Literacy
Challenge Initiative, which is connecting all the cJ3ssrooms in the country to the Internet These
programs ~low the government to set overall objectives and contribute the initial resources,
These resources are then leveraged by the private sector, and targeted to their most efficient uses,
This new economic strategy ~~ which sees the government and the private sector as complements,
rather than alternatives ~~ is ripe for use in the area of welfare refoml"
You are the people who will make these public-private partnerships work. The tOO
companies represented here today are just the first of what we hope win by a 1,000 companies to
join with the President in the Welfare to Work Partnership.
DOES WELFARE REFORM DISPLACE OTHER LOWER·SK1LLED WORKERS?
1 have discussed tbe three pillars of our welfare reduction !i1rategy: (1) ensure the
economy continues to perform well~. (2) use well~designed Federal policies. particularly policies to
increase both the incentives and opportunities to find work; and (3) the responsibility of the
private sector to help ensure the success of this experiment
One important question that remains regarding the effectiveness of this three plllar strategy
is its impact on other less---sklUed workers ;..vho have "played by the rules" and stayed off the
welfare rolls. Some have argued that the labor market operates like a game of musical chairs and
•
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�if new playel's enter the game, the new players "';"00' find seats will be taking them away from
others. This view of the labor market ignores the fact that the economy has created millions of
new jobs and a continued economic expansion wil! likely lead to millions more, increasing the
nun:ber of s(;ats, if you wilL'
Determining whether ~ currently employed workers will lose their jobs is a difficult
proposition, and in the very short-run some may. Several historical episodes suggest, however,
that surges in labor supply from one group does not necessarily reduce employment opportunities
for other groups. These examples include;'
•
Ih~_baby
boom: The baby boom cohort represented a huge increase in the supply ofIabar
when its members reached working age. Yet employment among those in the pre-baby
boom cohort was not significantly reduced.
•
~Ie
labor su)!p.\y.: Women's labor force participation has been rising for decades, For
instance, between 1975 and 1996. the fraction of women aged 25-54 who were employed
incre3sed. by almost 50 percent. Yet the ,fraction of employed men in that age group
hardly changed apart from cyclical fluctuations.
•
IhUlariel Bollllift: In 1980, Fidel Castro allowed 125,000 Cubans to emigrate to the
United States and the majority of these individuals moved to the Miami area. These new
immigrants increased Miami's labor forc.e by 7 percent Yet research shows that the
9
�employment prospects of native-born workers were unaffected by the inflow oftnese
immigrants.
Even ifformer welfare recipients are able to obtain employment without displacing other
workers, their entry into the labor market may lower wages for
low~s:killed workeT~
to some
extent Res~arch suggests, for example, that the entry of the baby boom Into the labor market
may have depressed wages for some groups of workers, Although large reductions: in wages
would be troubling some degree of wage flexibility enables those with no other means of support
j
to find jobs.
CONCLUSION
In conclusion, I think that the policies that we have been pursuing over the past four years
have set us on the fight track. \Ve are n01 embarking, as many think, on a bold new experimenL
\Ve are ~n.uing a bold new experiment. The 20 percent reduction in the welfare caseload is
just the first fruit of the sound m~croeconoffiic policies and iimovative welfare experiments of the
,
last 4 years. The 1996 welfare reform bill and the changes we are now seeking this year are just a
continuation of that process. \yith your help, I am confident that it will work
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\
Cyclical Successes and Structural Challenges: The Clinton,
Administration '5 Economic Agenda in Retrospect and Prospect
Janet Yellen Chair
Council of Economic Advisers
April 18, 1997
. French-Alnerican Chamber ofComrnerce ofWashjngton, DC
j
.
Thank you. I'd like to use the oppOrtunity provided by today's talk to sum up the
,
economic developments of the last four years and to give an indication of where I think the
. economy is heading today, In particular, I will asseSs the role that the Clinton Administration
_0
~
played in the economiC success of the last four years, and discuss the challenges and
opportunitie:; that face us over the next four years,
THE SUCCESS OF THE LAST FOUR YEARS
Using the economy to its full potential
The first rule of economics ,is that inefficiency is bad, and the underutilization of
resources is one of the most glaring examples of inefficiency.
in 1992 the unemployment 'rate
averaged 7,5 percent. Almost 10 million people were looking for work .. which is alot of
unused productive potential; to say nothing of the human costs involved, In the last four years
the unemployment rate has come down to 5.2 percent. Not onJy has the economy created almost
i 2 million, new jobs, but our resemh at the CEA shows that ~ese are overwhelmingly good
.
jobs: over two-thirds of recent employment growth has been" in industry/occupatio~ groups
,
payi~g wages above the median,
i
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\ At the sa.'lle tiine inflation has remained under control, and the underlying inflation rate
has
ev~~?ageddo.v.'ll'
In January 1993, intlation as measured by core CPl6.vhich excludes the'
volatile food and energy components) was 3.5 percent. Last month1 c'are inflation was only 2.5
.
percent. \Ve have not crossed the line into stretching the econ~my past its potentiaL
,
Economic grov.1h has been strong and sustainable. The economic expansion has been
marked by a healthy balance among the components of demand. Private, not public, demand has
�~een
the engine of gr0:vth, The Administration's initiatives to bring dO\\,l1 the deficit and to
reinvent government have slown ,the grov.'th of government purchases and freed savings t<?
,finance domestic investment; Investment and exports have boomed ~- both growing at a more~
than-7-percellt annual rate over the last 4 years. Not only has investment been the strongest
component ofdemand for :he past 4 years, but the new structures and equipment that it
represents will remair. part ofthe }.fati~m's capital st~ck, promoting growth and productivity for
years to come.
Insuring that everyone shares in the gains
Not only has ocr overall economic performance has been strong. But, we are also
beginning to see gains in the opportunities and living standards for all Americans -- especially
those at the bottom of the income distribution. Between 1993 and 1995, the most recent year for
which data are available, the poverty rate fell from 15,1 percent to 13,8 percent -- the largest 2
year drop in over 20 years. Poverty rates for elderly a.'1d for black Americans reached their
lowest levels s~nce these data began to be collected in 1959, Not only have the incomes of every
quintHe of the income distribution increased. but the largest percentage increase has been seen by
the poo:est in American society. Our work at the Council of Economic Advisers suggests that
.these improvements a.-.e probably large~ th.an can be accounted for by the nonual cyclical
behavior of the economy. The relentless increase in inequality that began two decades ago has
been stalled if not stopped in the last few years.
\\'HERE ViE ARE TODAY
Although the last four years have been very impressive, the question on everyone's mind
today is whether or not it will continue. The Blue Chip consensus forecast is for growth to
strengthen in 1997 and then raU back slightly in 1998. In my a,sesment and that of many
observers, "none of the nonnal..
excesses or imbalances that usually appear by this time in the
busine~s expansion can be seen." Although I believe that the very strong growth. we have
,
recently seen should lead us 10 be cautious about the possibHity ofoverheating leading to a rise
2
�in inflation, I also believe that few if any reasons justify the
be~iefthat
the expansion is likelY to
come to a.. .l end anytime soon. Let me explain why I think this is so by discussing the healt.' of
three cyclically sensitive sectors of the economy.
First. PH talk about the labor market, As recently as 1989 when unemployment was at
its c~ent rate of 5.2 percent, inflation rose" In this current e~pansion, however, the und~lying
inflation rate has been falling slightly, not rising. Not only have we not seen inflation inc:"Case,'
but also the evidence is that inflationary pressures are not as great as many fear. One measure of
irulationary },ressures comes from the rate of compensati~n increases in the labor market. Real
product wagc.s - a measure of the real hourly labor cost faced by firms .. increased 0.9 percent
last year·, which is exactly the rate at which productivity increased last year. ¥/e have seen no
evidence of pressures on fir:ns profit margins. And, there is also an additional cushion between
wage gro\vth and the necessity for price rises in the fact that profit as a share of GDP was 8.6
percent last year, as high as its been since the 19605.
By almost any measure, inflation lS lower today than it was two years ago, and insofar as
we hflve seen infl,ationary pressures, they are certainly milder than in previous periods when
unemployment was this low. The reason for this is clear: the NAlRU (or natural rate of
unemployment) has fallen, Unlike
th~
experience with the late 19805. inflation no longer starts
rising when the unemp!oymeQt rate falls below 6 percent
The second importa;lt s~ctor is househQlds, Consumer spending is two~thirds ofdemand,
and thus ess(!Dtial to keeping the economy producing near its full potential. Consumption growth
was strong last year and c:H the evidence indicates that consumers are in a fundamentally sound
. position. In<:ornes
are rising: real dfsposable personal income (that is, after tax income) grew 2.9
percent last year. Overall, the financial conditior. of households looks quite'strong with the ra!io
of net worth to income above 5, the highest its been ir. 28 years. Consumers are not only
wealthier a.."'ld ~arning more than in the past, but they
are c~nfident as well: in the last quaner
consumer confidence (as measured by both the University of Michigan a.'1d the Conference
•
3
�Board) was higherthan anytime since the 1960s, All together, these provide the structural
underpinning:; for strong conswnption growth in the near future,
FinallY,let me talk about the financial sector. History ~hows that fragile financial
institutions are one of the surest ways that minor economic shocks are propagated into systemic
slowdowns. This is. why evidence on the health of the finaI!cial, system is so important. The
average capitu.l~asset ratio in barJcing is now 8: perceGt, up from 6.2 percent in 19-88, There
has
been much talk recently about record levels of credlt card delinquencies. J think. this needs to be
put in perspective: much ofthe"increase in delinquencies is due to companies extending their
credit cards to people previously considered credit risks. Also, the deliquency rate on residential
mortgage Joans; which account for about two-thirds of household debt has trended down in
j
recent years. reaching the lowest 1evels seen in more than a decade. Furthermore. measures of
business bankruptcies and failures remain relatively ::'en~gn. The level ofbusine'ss bankruptcies
remains more than 25 percent below its 1992 peale
To summarize, the analysis of SOme key sectors of the economy leads us to expect the
expansion to coatinue. Evidence from the labor tnafl::et shows tha: we are not producing above
capacity; evidence from households leads us to expect demand to continue to expand. Finally,
the excellent health of the financial sectOr indicates that the economy IS resilient enough that
small shocks v.<ill not lead to a recession. Overall, these factors ereate an economy ~n which
in91viduals can better meet the inevitable perturbations of life.
THECHALLEKGESAHEAD
Now let me talk about the challenges ahead because although we are seeing good
economic times, our Nation still faces a number of troubling economic trends. Productivity, for
exa.+nple, has been grov,ring mOre slOWly over the last quarter century than it did in the previous
'quarter century. Also, even though we have made enormous progress in reducing the deficit over
•
the last four years' -- it is now 1.4 percent of GDP, the lowest it has been since 1974 -- it will stiH
4
�,
be a challenge to balance the budget by 2002 and to keep it in balance, as the ageing population
puts strains on our major entitlement programs. FinaUy, the increase in income inequality ffilght
be the most ehaHenging trend of alL
Productivity growth is not an abs,tract economic co~cept, The only way for wages to
increase is for workers to increase the amount that they produce pe~ hour, Before 1973, output
.per worker rose 2,8 percent per ~ear'; from 1973 to the present. productivity growth has averaged
1, t percent. As a res\,;;]t, compensation has grov.n at-about one-third the rate it used to. Many'
Americans simply do not feel that they are making any headway.
Earlier I talked about the improvements i1\ the income distribution since 1993, In a
longer perspective, however, these gains are small compared to the large rise in inequality over
the previous two decades. Over this period as a whole; not only have ·wages and incomes grown
more slowly but the distribution of the income gains have been very unequal.
Between 1979 and 1993, the bottom 60 percent of families saw their real incomes fall,
not rise. The only families who saw their incomes rise w:ere the upper 40 percent of Americans.
As I said earlier, this direction of change has been reversed in the last few years. These reversals,
however) have still left the jnco.:ne distribution substantially more dispersed than it was in 1979.
FEDERAL ROLE IN INCREASING GROViTH fu'lD REDUCING INEQUALITY
~e
question then is what can be done to reverse the trend of slow and unequal wage
growth. In patticular~ what can and should ~e Federal government do? Let me start by pointing
out what the government should not do. It cannot and should not hold back the growth of new
technology, Technological change is a rr.ajor determinant of productivity growth over time, and,
as r said before, productivity grov,rth is a major determinant of growth and living standards.
Second. the federal government cannot and should n<,Jt try to insulate OUf market from globai
competition, Protectionism has· always been a recipe for e<:onomic stagnation, higher prices, and
iower living standards..
Rather than holding back, the federal government should pursue policies that facilitate
,
,
•
change and growth, That means pol~cies that allow the private sector to expand, hire and invest,
s
�and policies that cushion transitions for today's workers and ensure that tomorrow's workers are
. able to compete in the new high-tech global environment.
The pro-growth agenda
What does a pro-grm.vth agenda look like? It has.four parts:
First, maintaining a stable macroeconomic environment that is conducive to private
sector growth. In the last four years we have made great strides towards balancing the budget.
Since 1992, the budget deficit has been cut by 63 percent -- from $290 billion to $107 billion in
FY 1996. As a share ofGDP, the deficit has fallen from 4.7 percent ofGDP in FY 1992 to 1.4
percent now -- the lowest in over 20 years. In 1992, the budget. deficit-in the United States was a
larger share of the e;conomy than in Japan or Germany; now it is lower than in any other major
.
.
industrialized economy. The dramatic decline in the deficit over the past four years is the result
of many factors. But by far the
mo~t
important are the fiscal policy changes adopte~ in the 1993
deficit reduction package and the stronger economic performance to which it contributed. These
two factors aecount for fully three-quarters of the difference between the actual 1996 budget
deficit ($107 billion) and the deficit forecast before the 1993 package was adopted ($298 billion).
Even uncomproinisi,ng observers give President Clinton "a lot of credit" for deficit reduction:
The 1993 deficit reduction package put the country s?lidly on the road to fiscal !esponsibility.
To illustrate the importance of deficit reduction, I like to discuss a counterfactual: what
would have happened if we had stayed on the deficit path
~om
the last pre-Clinton projection.
First of all, the Federal debt today would have been half a trillion dollars higher. With more
accumulated debt and a higher deficit, interest rates would certainly have been higher. It is hard
to imagine that our stupendous 10 percent annual increase in producer's durable equipment
investment that we have seen since the beginning of this Administration could have survived
these interest rates.
Deficit reduction has also had a very important indirect effect: it has restored the
confidence of Americans ~n the ability of our government to keep its economic house in order.
6
�After 12 years of fiscal mismanagement, the government has finally shov.n that it
0\\-11
can handle its
finances,
From the perspective of 1992, we are more than halfway towards balancing the budget.'
Currently the President has proposed a plan to balance the budget by 2002 while protecting our
priorities. We are at! actively working with Congress in an effort to get a compromise
agreement.
But, in pursuing an agreement it is important to remember that deficit reduction is not 'an
.
.
end in itself, it is a mea.,'lS to an end,: That end is strong long~term economic growth and higher
living standards for an America."1S. Reducing the deficit by eHminating important investments
would be counterproductive,
The second part of this pro-growth agenda is to in\'cst for the future. The private secto'r
does most of the nation's investing, but in,a few key areas carefully targeted 'government efforts
can help, One is education and training,
The payoff 10 education ~~ as measured by the gap between wages for the more skilled
and less skilled -- has increased enomlously in this high-tech world. Each year ofeducation
increases al}llUal earnIngs by betwee!l 5 and l5 percent. So education is important for' the
individual. Education is also an important determinant of economic growth. Empirical studies·
suggest that increases in e~ucation accounted for about 20 percent of the growth of income oyer
the last 30 years. This is not surprising given that a well-educated workforce can implement new
ideas and innov~tions more quickly.
The Federal govermnent can play an important role in adv~cing opporrunity by helping
to provide greater access to education and training programs h1 order create a'mare unifo.rmly
.
high-skilled workforce. Between fiscal year 1993 and 1997 we have increased spending on
. education and training by 19 percent. There have been large increases in fimding for programs.
targeted at every stage of a person's life ranging from Head Start (up 43 percent) to training and
employment programs (up 19 percent). The President's new balanced budget plan includes large
increases fer education and training programs like Head Start, Goals 2000, Technology Literacy
,
Challenge, Pen Grants, America Reads Challenge, the Hope scholarship, and the school
7
�const:"ttction iaitiative. In an era of budget stringency the expa11sions of these programs -- both
past and proposed ~~ represent a truly remarkable achievement.
The nther investment area where goverrunent has a role is research and development.
Research and development produces technological change, and technological change haS
accounted for more than half of the growth in output per capita. This reflects the fact that
Research and development yields high private returns for the investor, and even rugher returns
for society at
la.rge. The fact that the social re~s exceed the private retums'means that
individual firms wiH tend to underinvest in Research and development That is why the
government has a role to play.
The Federal government has long played a critical role in promoting Research and
development. It has financed grov,,1h in telecommunications, for instance, from that'industry's
inception,:hili the Bahimore~Washington telegraph line, to its·latest major development, the
Internet The Administration has placed public~private partnerships at the center of its research
and developlnent policy. The Advanced Technology Program, expanded substantially under this
Administration) is a good example. ATP awards matching funds to industry, on a competitive
basis, to conduct research on cuttingMedge technologies and processes that, despite their great
economic potential, might otherwise not have been pursued. 1)le finns themselves set much of
the research agenda, but ,this pairing has been an effective'way to leverage gove~ent funding
into larger
increa~es
in research and develoment
The Ihird part of the growth agenda is opening markets at hume and nbnmst At home,
One cornerstone of the Adminlstratic:.n's economic strategy has been an aggressive policy of
reforming regulatory structures in key sectors of the economy, including telecommunications,
electricity. and banking, On the environmental front, the Administration has shovm that
regulatory policies that recognize the importance of incentives can be both cheaper and more
effective than traditional regulatory controls.
And abroad, trade agreements, such as NAFTA and the Uruguay ROWld of GAIT will
continue t.o increase exports, The first major fruits of the \"lTO are now on !he horizon, with the
•
December 1996 agreement in Singapore to reduce tari:'fs on a wide variety of infonna~ion
8
�•
technOlOgy products to zero, Exploiting our comparative advantage wiH promote economic
growth and produ;;;e higher income for the nation as a,whole. Wage~ for jobs supported by goods
exports are 13 to' 16 percent higher than the nationaI average.
In the future the Administration win continue to pursue its outward-oriented, protrade
agenda through multilateral, regional) and bilateral means, expanding On and,bringing to fruition
. initiatives like the Asia-Pacific Economic Cooperation group and.the proposed Free Trade .Area
.
afthe Americas, In order to accomplish this, however, we need fast track authority for the
President to be able to negotiate effectively. Every President since Ford has had this. The
absence of procedural authority to implement trade agreetr.ents is the single most important
factor limiting our capacity at this time to open markets and expand American exports and trade
opportunities in ~he new global economy,
The fourth and final part ofthe groVlth agenda is to improve the efficiency with wbieb
,
.
1h£....gQy.~rJl.ment
itself gQ~S its job, By freeing up resources for potentiaHy more productive uses
in other sectors, and by reducing the overall coSt of regulation. government reform can raise
economy-wide productivity. The Vice President's reinventing government initiative has been
doing just that. Thousands of pages of Federal regulations have been eliminated, and thousands
more are being streamlined or improved in other ways. Hundreds of obsolete Federal programs
have been eliminated, and red tape has been r~duced dramatically_ The Federal civilian
workforce bas been cut by more than 250 OOO t and as a percentage of the Nation's total
j
employment it is now smaner than at any time l'ince the New Deal.
Summary
Let me summarize. Creating a stable macroeconomic environment~ encouraging
investment in Research and development and education and
training~
opening, markets at home
and abroad, and ensuring efficient government are the four major parts of a growth agenda that
should increase wages and incomes.
•
PROTECTING WORKERS CAUGHT IN THE TRANSITlOl'i
9
�•
But as I said at the beginning, new technology and global competition produce not only
opportu:niti~s
but also challenges, Individual workers can get trapped in the transition. So at the
same time that we promote long~term gro\'.ilh, we have to take step~ to protect those who,
. through no fault of their own, lack the requisite skins Or training to compete.
Enhancing .he returns to work
One part of this strategy is enhancing the returns to work. The EITe and the minimum
wage are two important aspecU! of this. The EITe is a refundable tax credit of up to 40 percent
ofeaming', It was expanded in 1990 and 1993, Over this period the number offamilie,
receiving the EITe rose by almost 50 percent to 18 minion; and the average credit more than
doubled. In 1995 almost 3.3 million people were lifted out of poverty by the EITe, more than
twice ':5 many as only a few years before.
At the same time the minimwn wage plays an important role in reducing inequality. This
Administration worked hard to get an increase of the minimum wage
to from $4,25 to 55.] 5
enacted, Despite concernS that this wage increase would cost jobs. I am pleased to report that
since the first stage of this increase was enacted last October, we have not seen any noticeable
declines in employment growth in industry-occupation groups whose employment is
"disproportionately composed of minimum wage workers,
The expansion of the EITe combined widt the rise in the minimum wage have increased
the return to work for lo\v-wage workers to the point where, after the next scheduled increase in
,
,
the minimum wage, a full-time. yearMround minimum wage worker with twO children wil1 make
about $14,000 a year -- well.bove the 1981 level in real terms,
Easing the iransition bc~cen jobs
Similarly> we have a package of provisions that ease the transition from one job to
an_other for those who find themselves in industrjes adversely affected by changing technology,
globalization or even s.llnply idiosyncratic shifts in demand and supply. The AdministTation has
proposed providing un~mployed worke;s with 6 months of health insurance through the existing
10
�unemployment insurance system" At the same time, it is important to help the unemployed find
jobs through job retraining centers and "one-stop shopping" career centers,
.~dministration
Fina1ly~
the
has worked hard to make benefits more portable between jobs. For instance, the
Health Insurance Portability and Accountability Act of 1996 (the Kassebaum-Kennedy bill)
ensures that as many as 25 million workers will not be denied health insurance, including
, coverage· of preexisting conditions. at their new j,?bs. Similarly, pension simplification and
improved portability also make it easier to maintain crucial benefits when changingjobs.
By making the economy more supple) ai;lle to respond quickly to changes in markets and
technology, these PQlicies to ease the transitions between jobs are themselves an important part .
of the pro-growth strategy.
CONCLUSION
In cOllclusic:n. the first four years of the Clinton Administra:ion l,1ave set us on the right
" track towards restoring confidence in government"by reducing the deficit. opening markets at
home and abroad, and investing in education, We have alrea~y begun to see the payoffs of these
policies in terms of low unemployment 'With continued low inflation, sustained growth, and
improvem~n:s
in the income distribution. The second term win provide the opportunity to
consolidate and ex'tend the already considerable progress we have made in these areas, I am very
enthusiastic about what this will bring. Thank you.])
,
11
�Trends in Inequality and Policy Responses
Janet Yellen, Chair
Council ofEconomic Advisers
ApnllO,l997
National Polic), Association, Washington DC
Thank you for inviting me to present some of my, views on income distribution. As you
know, our economy has made great strides over.the past 4 years. The unemployment rate is
down to 4,9 percent, more than 12 million new jobs have been created. inflation is low and stable,
and the deficit has been cut by more than 75 percent But our Nation still faces a number of
chall.enges and troubling economic trends. Productivity, for example, has been growing more
slowly over the last quarter century than it did in the previous quarter century. Also, even though
we have made enormous progress in reducing the deficit over the last four years ~- it is now less
than 1 percent ofGDP, the lowest it has been since 1974 - it will still be a. chaUen~e to balance
the budget by 2002 and to keep it in balance, as the ageing population puts strains on our major
entitlement pr~grams_
The trend I am going to talk about today - the increase in incoI!1e i~equaHty - might be
the most challenging trend of all -- although the relentless increase of inequality has been stemmed
in the I~ few years, something I v.till discuss late~ in my speech. Ultimately, economic growth
only matterS to the e,qent that its fruits are shared by aU Americans, And balancing the bu~get
would not be a proud achievement ifit came at the expense of unbalancing the distribution of
income, There is a second reason that the increase in income inequality is a particularly
worrisome trend: we do not fully understanC! why it has occurred. We have very good
•
explanations for some of the rise in inequality, but much of the rise is still very puzzling.
�My remarks today have three parts: First I will discuss the measurement of inequality at a
point in time. This is an important topic ~~ aU too often people rush into discussions ofincome
inequality without stopping to ask just what is. meant by income. In the second part of my talk I
. will discuss the dimensions and causes ofthe rise in inequality over the last two decades, and also
. the experience ofthe last rew years. Finally, the third part of my talk concerns what I believe are
the proper policy responses to the rise of inequality.
•
2
�THE MEASUREMEL'IT OF INEQUALITY
"PRE·GOvllRNMEl'<'T" VS. "POST·GOVERNMENT INCOME"
First, let me begin with the questio~ of how we measure "inequality." Most discussions of
inequality focus on income, in particular "money income" as measured by the Bureau of the
Census, Money income, however, is a concept that is somewhere betwee:n what I will call "pre.
government income" and "post-govenunent lncome," At one extreme, we might be interested in
measuring the income generated by the market: I<pre~govemment income:' This includes inco~e
from labor earnings, interest. dividends, and other private payments. Money income includes an
ofthese -~ indeed, on average) labor earnings alone represent 80 percent ofmaney income, and
they represent 100 percent of money income for many Americans, It also, however, includes cash
payments from the government in the fonn of Social Security, Supplemental Security Income
(S$1), veterans benefits, and other transfers. Money income, however; does not fully represent
"post-government income" because it do~s not include the effect ofgovernment taxes (including
the earned income tax credit, EITC) and noncash transfers like food stamps, As a result, the
featured measure ofrnoney income capture only some ofthe <JpoSt~government" in,come
. distribution,
Because taxes and transfers are themselves functions of incomt; the scope defined for
money income has a substantial impact on the measurement of incorne inequality M_ as well as on
the assessment of the efficacy ofgovernment poliCy, Economists some~jmes measure !nequauty
\\1th something called a (Jini coefficient. Based on this measurc t taxes lower inequality in "pre
government income" by 6 percent. The,inclusion oftransfer payments ~- including both cash and
3
�noncash payments -.; is even more important, lowering this measure of inequality by around 20
perc~nt.
Another illustration of the scope of this definitional issue can be seen bX iooking at an.other
measure of inequality: the proportion of people living below the poverty line. In 1995 the before
tax-and-transfers poverty rate was 21.9 percent. If the effect of all taxes; the EITC, and
government transfers were included. the poverty rate would ti.ave been 10.3 percent. All told,
about 30 mil.1ion people -- more than half of all those who are reckoned poor on a before-tax-and
transfers basis.-- escaped poverty with the help ofgovemment policies. Some of these policies-
like Social Security -- are incorporated into the official poverty rate of 13.8 percent. Other
policies -- like the EITC -- are not.
INCOME INEQUALITY VS. CONSUMPTION INEQUALITY
Beyond definitional questions of what is included in income is the question of whether
income is really the correct variable to focus on in the first place. From an economic perspective
it is consumption, not income, that is the ultimate determinant of well being. Beyond this
theoretical justification, there are important substantive justifications for focusing on consumption
rather than income: I~come undergoes both high and low frequency fluctuations that are
smoothed out, to some degree; in consumption. Some fraction of inequality. for example, is just
,
between people at different stages of the life cycle -- students earning little or no income and
middle age people injobs -- whose consumption expenditures are probably closer than their
income expenditures.
4
�As our intuition suggests, consumption is distributed substantially more equally than
income, The Giro coefficient for consumption is about
o~(?quarter
lower than the G1ni coefficient
for income, Also, although Gini coefficients. for consumption and income tend to move together,
they diverged from around 1989 through 1993 when consumption inequality flattened out and
even declined a little while income inequality continued to rise,
TRENDS IN INEQUALITY
In the question "inequality of whatT the «what'~ has a substantial impact on the
assessment of the level of inequality and some impact on the assessmem of trends in inequality. It
does not, however. overturn the starting point of all contemporary discussions of inequality: by
almost any measure, economic inequality is greater today than it was 20 years ago, So in the
. second, part of my talk ~. trends in inequalIty - I will ignore some ofthe caveats I just elaborated
and focus main1y on the featured measure of money income.
. Over thirty years ago, President John F Kennedy commented that "a rising tide lifts aU the
.
boats." Indeed, the events of the decade preceding his Presidency and tbe d~de fo119wiog it
supported this statement (see C1hart 1). Tremendous economic growth brought increasing
incomes for all families, including the poor. Income inequality feli dramatically. Evidence s~nce
the late 1970&, however, sU88<:sts that not all boats are necessarily lifted by a rising tide, Chart. 2
shows how dramatically the situation changed: during the 1980s and early 1990s, more than half
of the househojds saw their real incomes fall. If the CPI were biased upward there would not be
5
'.
�as many losers in absolute terms. However, the relative picture that the richer the group the
greater the gains would not be changed. Anotber metric for measuring the increasing inequality is
the Gini coefficient which has risen steadily since 1968 (see Chart 3).
What has caused this increased dispersion in household incomes? About half of the
increased inequaJity comes from increasing labor earnings inequaiity. Ratios of annual earnings
between the 90th and 50th percentile and the 50th and 10th percentile for full-time, full-year male.
workers are shown in Chart 4. Note the increased earnings
powe~
of higher-paid workers since
1979. The top workers are better paid relative to the middle) and the bottom workers are worse
off relative to' the middle.
Much of the trend in earnings inequality is the result of rising premiums earned by some
classes of workers, especially the well-educated and
high~skiUed.
The returns to education grew
tremendously during the 19805 and early 19905, as shown in Chart 5. In 1980, a male college
graduate earned one~thlrd more than his counterpart with only a high school education. In 1993
the college premium had grown to more than ~O percent.
There are a number of explanations for this dramatic increase in the returns fa college.
We can rule out changes in the supply of workers: with large increases in the college-educated
workforce. supply effects should have decreased the premium, Instead, the most promising
explanations center around increases in the demand for skilled workers. As new technologies
have been integrated into the production process, firms have increased their demand for workers
capable of using this technology.
Eviden~e indicate's,
for instance, that workers who use a.
computer on their job earn significantly more than those who do not. One recent paper finds that
6
�"the spread of computer technology may 'explain' as much 35 30 to.50 percent of the increase in
the rate ofgrowth of the relative demand for morewskilled workers since 1970,"
Skillwbiused technological change can certainlv account for the rise in· earnings inequality
.
between different groups. Interestingly, even more of the overalllncrease in earnings inequality is
the result of greater inequality within groups that share the same education, experience, ana
. demographic traits. Within group inequality is on the rise and in fact accounts for about two
,
.
.
thirds of the total increase in earnings inequality. Although a number of creative theories have
been advanced to explain this fact, none of them is very convincing,
The increase in earnings inequality, as I said. only accounts for about half of the overall
increase in household income inequailty. Much of the other halfis due to changes in the
,
composition of households. Divorces, out of wedlock births, and later marriages have all
exacerbated income differentials between households. The share of family households headed by
women has risen rapidly, from just over 10 percent in 1970 to 'about 18 percent in 1995. These
households are more likely to have lower incomes because they lack a second wage earner,
because women earn on average less than men, and because some of these women to do not work
at all. In addition to the changing composition ofho.useholds. evi~ence suggests that nomabor
income also contributed to the increase of inequality during the 1980s.
From the ear'y 19705 through 1993 the trend ofincreasing income inequality was clear
and pervasive"
Since 1993, however, this seemingly relentless trend toward increasing inequality
has apparently stalled. and may even have started to be reversed. The poverty rate fell from 15.1
percent in 1993 to 13.8 percent in 1995, marking the largest twQ*year reduction in poverty since'
,
7
�1973. And this is based on the official poverty rate which is before taxes. Ifwe include the
effects of the EITC, the reduction 1n the poverty rate has been even more dramatic.
Incomes at 001 p~ints ofthe distribution have incre!iSed since 1993, and the gains nave:
been. largest lor low-income households (this is shown in Chart 6). This probably represents a
genuine change a~d not just accidental movements in the data: The last two·year period during
which households in .the bottom quintile have seen their income rise more rapidly than households.
in the top quintile was
in 1973.
Also; a glance back at the Gini coefficient in Chart 2 shows that
the decline in the last year IS more than one usually sees in this relatively smooth series -- in fact ii
is the largest decline in any year since 1968,"again without even taking the EIre into account.
These reversals, while dramatic and important, do not undo the twenty years of increasing
inequality, AJso, it would be somewhat rash to declare definitively'an end to a twenty year trend
based on two years of data, This is especi~ly the case for a complex pheno1l!enon like inequality
whose cause:; we do not fully understand, Still, 'our best information suggests that these
developments are significant.
Some explanations for the reversal of the trend toward increasing ineqUality also suggest
that we might be seeio$ the beginning of a decline in inequ'ality. Part ofth'e progress is due to
good macroeconomic conditions, in particular falling unemployment. The evidence, however,
suggests that poverty and inequality have fallen by much more than would be predicted from these
aggregate variables alone. More tellingly, the college wage premum has begun to fall (Chart 5)..
This has translated into a narrowing of the earnings gap between the median worker and the
workers at the bottom of the distribution (Chart 4). Ifthis is the consequence ofthe increased
supply of college graduates, we can exp,ect to see further reductions in this premium in the future.
8
�POLICIES TO AFFECT THE DISTRIBUTION OF INCOME
The final subject of my remarks today is policies to affect the distribution of income.
Regardless ofour interpretation o~the last few years, a,question suU remains: what role does
gov'emment policy play in reducing income inequality.
MITIGATING THE INEQUALITY PRODUCED BY THE MARKET
First, government policies play an important role in mitjgating the ineQuality produced by
tbe market- As I have already discussed, through its taxes, and more importantly its transfers,
government policies have a large affect On the consumption possibilities of individual households.
<
<
. Taxes and transfers eliminate about one~quarter of«pre~governnient'· inequality, as measured by!'
<
•
the Gini coefficient, and more than half of the "pre~govemmentn poverty. The,programs for the
.
aged -- Social Security. Medicare, and parts ofMedicaid - have been so successful that poverty
' .
rates forthe elderly fell to 10.5 percent last year - the lowest level since the data has heen
collected and less than half the level that predominated in the 1960,< Understanding the<
contributions of these programs, and ensuring that they can continue to provide the same income
security, is one of the most important income distribution policies,
EN'IlA"<CING THE RETU1U,S TO WORK
Mitigating inequality, however, is only one step. A second step is enhancing the returns to
~, The EITe and the minimum wage' are two important aspects of this, The EITe is a
refundable ta~ credit of up to 40 perce,,! ofeamings< It was<expanded in <1990 and 1993< Over
9
�. this period
tb~
number of families receiving the EITC rose by almost 50 percent to 18 rnimon; and
.
the average credit more than doubled. In 1995 almost 3.3 million people were lifted out of
.
poverty by the EITC, more than twice as many as only a few years before.
At the same time the minimum wage plays an important rote in reducing inequality.
Between 1981 and 1990 the national minimum wage remained constant at $3.35 an hour even as
inflation eroded its' value by 44 percent. The 1990 increase did not restore the miI}imum wage to
its real 1981 ie~'et This Administration worked hard to get an increase of the minimum wage to
.
$5.15 enacted. Despite concerns that this wage increase would cost jobs, [ am pleased to report
that since the first stage or this increase was enacted last October, we have not seen any
noticeable dl!clines in employment growth in industry~occupation groups whose employment is
disproportionately composed of minimum wage workers. At the same time. although wages have
accelerated in these industry-occupation groups, the effect on overall wage rir price acceleration
has been relntively. muted.
The expansion 9f the EITC combined with the rise in ~he minimum wage have increased
the return to work for low-wage workers to the point
wher~
after the next scheduled increase in
the minimum wage, a full~time. year-round minimum wage worker with two children will make
about $14,000 a year -- .well above the 19&1 level in renl teons.
CREATING OPPORTUNITY
Although mitigating inequalitY and enhancing the returns to work are important elements
of the strategy to address inequality, this Administration's most important emphasis is on creating
opportunity. One ofthe most importan\ contributions that any Administration can make to the
10
�Nation's economy is to help ensure that every American seeking work can find it. Tne decline in
the unemployment rate from over.7 percent in 1992 to 4.9 percent last month was a major step
forward not only for growth, but for opportunity, '
In the long run, a strategy to expand opportunity wiU oniy work to reduce inequality ifit
changes both the access to skills and the distribution of rewards to skills, In particular, the
government can help provide greater access to education and training programs that help create a
mare uniformly high-skilled workforc., Between fiscal year 1993 and 1997 we have increased
spending on education and training by 19 percent. There have been large increases in funding for
programs targeted.t every'stage ofa person's Hfe ranging from Head Start (up 43 percent) to
training and employment programs (up 19 percent), The new balanced budget agreement
between the President and the Congress includes large increases for education and training
programs like Head Start, the Tecilnology Literacy Challenge, PeU Grants, the Amenca Reads
Challenge, the Hope scholarship, and the Job Corps,
In an era of budget stringency the expansions ofthese programs -- both past and planned
- represent a truly remarkable achievement. There is not, however, a simple production function·
.
tbat translatt!s money spent.on education and training programs into more productive workers and
a more equal economy. In the private sector competition ensures that. subject to some caveats~
the returns are equalized across different investments. No similar force to autornaticaUy ensure
the productivlty of government programs exists. We do, however, have a large and high-quality
body of research by labor economists and others to draw on in designing these programs. I want
to brietly discuss what we have learned in policy areas ranging from pre-natal care to lifelong
learning programs.
II
�•
Pre~nata1
care and ages O~3: A large body of research, much of it recent, has emphasized
the importance of care, both pre-natal and during the first years ofa"child's life. to a
child)s subsequent development. Often very small investments ~~ like immunization for
polio or home-based smoking cessation programs ~- yield large benefits. But, this is not
just a public health issue, Family income is an important contributor to children's well;
being, Children aflaw-income families, for example, are L2 to 2,2 times more likely than
the average child to below birthweight Children who wen> low birthweight babies are
more likely to have learning disabilities, atte,ntion deficit disorder, repeat grades. and be
enrolled in special education programs, Later in life these can translate into lower
earnings and increased inequality.. It is not, ho~ever, very expensive to ensure tbat a baby
is born healthy, nor is it very diffiCUlt to target the expenditure~ at those very young
child ren who have the greatest needs,
•
Early education: Much of the literature
,
on the effects of compensatory preschool finds
,
,
that early education programs lead to significant improvements in educational att'ainrnent,
behaYio" and health status (although, interestingly, no persistent effects on IQ),
Particularly noteworthy evidenoehas been obtained from the Perry Pre-School Study, a
random assignment experiment, which found that the savings from $4,75 to $8.75 in
future expenditure on special education, public assistance, and crime from every dollar
spent on Perry Pre~school. Financial constraints, however, mean that children from poor
families are half as likely to attend
pre~school
12
compared to children in more affluent
�famines" Programs like Head Start are an attempt to help ensure that children from poor
families will also be able to enjoy the benefits of p-re-school.
•
~Il.tkill,
One of the clearest results in the literature on education is that an additional·,
year of schooling adds abo~t 10 percent to future earnings. Furthermore, much oftrus
increase reflects the ,enhanced productivity of the worker and is not simply a signaling
device, Programs like Pell Grants that make it possible for more people from low-income
families to get morc education wiJi clearly help reduCe inequaiity while boosting
productivity. For this reason the President has gotten Congress to agree to the largest
increase to the maximum PeIl Grant award in over two decades, The budget agreement
also will provide resources to add several hundred thousand studentU9' the program.
Expert opinions on the link between spending on education and educational outcomes is
more divided, Although some studies show that more spending on' education (or smaller
class sizes) enhances the future emploYment opportunities and earnings of students, the
evidence is far from decisive. The lesson I take from this is that it matters a lot how the
money is spent. I'm not sure that ~e know the best way to invest money in education, but
some avenues seem promisIng. As I discussed earlier, computer skills are an increasingly
important determinant Df..riling.. The Administration has placed a high priority on
providing computers~ including used government cornp,uters, to schools, In addition,
helping to ensure that all students can access the Internet by the year 2000 win be
potentially importa~t in ensuring that society does, not become se~mented between those
that can use this technology and~those that cannot,
13
�•
Training, Studies suggest that the payoff from government training programs can be
substantial, although their success is not nearly universal. For example. a study of a
government sponsored Job Training Partnership Act for oUI-of-school youth in 1987-89
showed no increase in their earnings; the best results were for adults assigned to receive
on-the-job trainlfl8 at the workplace. Another difficulty comes in targeting training
programs to make sure that it increases skills at the margin, rather than just subsidizing
training that would have taken place anyv.'ay. These <;oncems suggest that school-to
work strategies for youth and programs that combine vocational with conventional
classroom education may have the highest payoffs, A1so important are programs that ease
the adjustment process for dislocated workers by helping them improve thek skills and
find new jobs,
It is important to be realistic about what progr~s in areas, like 0 to 3, educatioi\ and
training can accomplish. Many of these programs have had mixed success, Also, what works
well for the indiviuuals in a program will not necessarily have a noticeable impact on aggregate
produ~ivity
or inequality, Finally. and most importantly, we cannot expect any of these programs
to change the income distribution (or productivity) instantly,. The purely economic benefits of
'Head Start, for example, take at least 15 years to ripen: the time it takes for a Head Start child to
grow up and join the·labor force.
Over the long run, however, properly designed programs that target. .
high reward areas
.
(like ages 0 to 3), that change incentives and opporrunities at the margin. rather than just
subsidizing the inframarginal person, anq that promote opportunity instead of dependence, should
14
�not only improve the skills of the workforce but should also alter the distribution of rewards to
skills. As the supply ofcollego (or high school) graduates relative to high school graduate (or
high school dropouts) increases, the earnings premium I discussed earlier should start to narrow
again, reducing an important source of income inequality.
CONCLUSION
In conctusion, 1 want to reiterate my most important messages, First. economic inequality
is mU,ch greater tOday than it was 20 years ago, This basic fact is the reason we are aU here
discussing this issue,
My second message is a caution against those who use the increase in inequality to argue
that decades of policies have been futile and need to be completely overturned, As I have
discussed at length, many policies -- Social Security, Medicare, EITe, and support for education
to name a few
~~
have played and continue to play an important rote in reducing inequality.
My third message is that the most important policies for reducing inequality are policies to
enhance opportunity. In the short run this means sound macroeconm:nic policy; in the long run.
programs for educationl training, and work opporturuty. In particular we need to emphasize the
importance of program design; building on our successes and learning from our failures.
The trend towards rising inequality is indeed troubling. But long.tenn trends can be
broken. I am hopeful--I might almost say C{)nfident--that we are on the road to addressing this
challenge in " meaningful way.
15
�Acknowledgments
I would like to thank Jason Furman, Phil Levine, and the staff of the Council of Economic
Advisers for their substantial assistance in preparing these remarks.
16
�..
.
Charl : Growth in Real Househl J Income by Quintile, 191... . -1979
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Chart.
: Growth in Real Househl J Income by Quintile, 19. ~-1993
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�Chart : Gini Coefficient
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1987
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�Chart : Earnings Ratios
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1987· 1991
Note: For male full-time, year-round workers.
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�Charl : College/High-School Ml ,an Earnings Ratio
1.8
,mm
1.7 .
1.6 .
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o
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0:
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3.5 ,-,---~----------------,
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, 1
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,
).
",
THE ROLE OF GOVERNMENT IN ECONOMIC DEVELOPMENT
Joseph E. Stiglitz
Annual Bank Conference on Development Economics
April 26, 1996
, It has heen almost three decades since I began working on economic
development issues. During that time, there have heen marked changes in both the
world and the intellectual framework with which we approach development. Then
we felt both hope and concern, We believed that the less developed countries could'
close the substantial gap separating them from the more developed countries, but we
worried that so rew countries had managed to bridge that gap. Standard textbooks
mentioned the leaps the Soviet Union had made between the mid~ 1920s' and the
onset of Wold War II. That supposed success •• which may have heen more
,
'
,
apparent than real .. obviously influenced developing countries, as many around Ibe
.
world sel up planning commissions to guide their economies. In many instan!,es.
"
'the State went well beyond guidance, to actual production and ownership of
enterprises.
What a change thirty years makes! As one ,example, Korea .. whose per
capita income in 1960 was roughly the same as India's (at less than $500 in 1995
.
'
.
}
dollars) .. is now in the process of applying to the OEeD,
The success of Korea
�, .
and other East Asian economies demonstrates the wisdom of a more market-based
development strategy. In most instances, the governments of these economies
abandoned the rigid planning model early on. But they also did not err by going to
. the other extreme. Their governments helped to guide and create markets, rather
than completely supplanting or surrendering to (hem.
Meanwhile, those economies that stuck with the planning model experienced
slow growth, stagnation, or worse; the collapse of the socialist economies was but
(he final nail in the planning coffin, By (he 19805, countries (hroughout the world
were actively engaged in privatizing state enterprises. The dramatic failure of the
grand socialist experiment had an unanticipated consequence: it lent suPPort to
extremists of the opposite ideological persuasion. According to these partisans,
government should have almost no economic role,
But the rejection of one extreme is' not the affinnation of the other. The real
issue that both
the success of East Asia and the failure of the socialist experiment
raises is, what is the appropriate role of government in economic development?
There is a third way -- or I should say, there are many third ways -- between the
extremes or'total government control of (he economy and complete laissez faire. At
different stages of development or in different situations, countries will and should
choose different points within this spectrum. In my limited time, I cannot possibly
touch on every aspect of the appropriate role of government Instead, I want to
�draw selectively upon advances in economic theory, interpretations of the East Asia
miracle. and my experiences within the U.s. government to highlight those aspects
that have not received sufficient attention in recent discussions. My omission or
brief treatment of certain topics (such as the' role and design of industriaJ policies
and the role of government in the financial sector) should be interpreted in this
light: such topics have already been discussed widely elsewhere.
Before developing this framework, I want to make two preliminary remarks.
The first relates to developments in economic theory. The perspective that I will
argue for later in this talk places' markets at the economy's center. Traditionally, the
theoretical foundations for this marliet-oriented perspective rest on Adam Smith's
invisible hand, and especially its modem rendition, the Fundamental Theorems of
Welfare Economics. To be sure, economists have long recognized the need for
selective interventions in the marketplace to remedy well-identified problems such
.
..
as externalities:
But developments within the past fifteen years have emphasized
that weU-designed government actions can improve living standards whenever there.
are imperfections of information or competition or incomplete markets -- problems
which arise in all economies, but especially in less developed ones. The use of the
1 While some suggested that even those difficulties could be handled
privately through Coasian bargaining, most economists believed that market
interventions, in the form of Pigouvian taxes, were the appropriate remedy,
3
�word "can" in this instance is crucial. Not every market "problem" calls for
government action. In order to raise Jiving'standards, government actions must
meet two criteria: Ihey must address some serious imperfection in the marketplace,
.
and they must be designed efficiently enough so that their benefits outweigh their
costs.
My second prefatory comment is that arguments favoring an extremely
circumscribed role for government have generally been shown
to
have only limited
validity. (.nlics have asserted that government is unnecessary, ineffective, and to '
the extent that it actually affects anything, cotinterproductive. They ,argue Ihal
anything government can do, the private sector can do. better; Ihal anything the
,government does will be offset by actions of the private sector; and lhal rather than
improving resource allocations, government interventions actually make matters
worse, especially due to rent seeking. The first proposition is simply false, the
second proposition is true only under highly restrictive conditions, and the third
assumes perfectly competitive rent-seeking. The major thrust of these criticisms,
, however, is one wliich I have already noted and with which I fully agree: the fact
,
that markets are not constrained Pareto-efficient d.oes not imply that any arbitrary
intervention will necessarily improve matters. One must assess carefully th.e full
consequences of any proposed action.
4
�Six illustrative roles of government
While theory no longer provides bright lines, it can continue to give us
valuable
guidan~e
about the appropriate role for government. In this. context, I
believe the East Asian experience and the experiences of the currently developed
countries are instructive. To be sure, there is the ever-present problem of the
counterfactual: What would have happened if government had not taken the actions
it did? Would these economies have grown even more quickly? While we may .
never know for sure, a 'wealth of evidence suggests the contrary. And I am
convinced that while the United States also relied primarily on markets, its success
was in part due to selective government actions. The performance of the rapidly
growing countries of East Asia and the experience of the United States have at least
six common themes.
The first is the role of government in promoting education. The EaSt Asian
countries emphasized the role of government in providing universal education;
which was a necessary part of their rapid transformations from agrarian to rapidly
.
.
industrializing economies. Universal education also created a more egalitarian
society, facilitating the political stability that is a sine qua non for successful longterm economic development In pursuing such egalitarian policies, the countries of
5
�East Asia laid to rest trickle-<iown theories of development. Kuznets bad argued
that economic growth was associated with an increase in iriequality. and Arthur
; Lewis had suggested that such inequality was necessary. because capital
accumulation lay at the heart of growth, Since richer individuals were assumed to
save more on the margin than poorer ones. higher levels of inequality would
. increase savings and hence growth, The East Asian countries showed iliat bigh
levels of savings could be'attained in an egalitarian setting and that human capital
accumulation was every bit as important as - if not more important than -
increases in physical capital.
The role of government in education is .also clear in the United States. Even
before the adoption of the Constitution. in the Ordinances of 1785 and 1787. the
. Federal government. recognized its responsibility for the promotion of public
education, by setting aside land in the newly formed states for that PUfpose. Later.
in' 1863. it helped establish the, public university system,
The second role for government is in Promoting technology, The
Constitution of the United States, written in 1789. recognized the importance of
science and technology by, giving Congress the right to grant patents 10 "promote
the progress of science," Even in the early part of the nineteenth century. support
6
�•
for research went well beyond the establishment of a system of intellectual propeny.
Just as the modern telecommunications system •• including the Internet .. was
fostered by government, so too were earlier advances, For example, in 1842, the
federal government financed the world's first telegraph line between Baltimore and
Washington. Over the more than 150 years during which it has supported research,
the U.S. government has had an impressive record of sUCCeSses. In the nineteenth
century; agriculture was the center of the economy, representing more than 35
percent of GDP in the 18705. The federal government's support for research and its
dissemination is largely given credit for the remarkable productivity growth in that
.
.
.
sector. Similarly, East Asian governments played a central role in the promotion
and transfer of technology.
The third theme is the government's role in the financial sector. Sometimes
depicted as the "brain" of the economy, the financial sector's job is to deploy scarce·
capital resources in the most efficient· way.. As such, it is concerned with gathering •
.
'
processing, and disseminating information ••• precisely .those areas in which market
failures are often most marked. In 1863, in the midst of the Civil War, the United
States recognized the
i~perative
of creating a .national financial system and passed a
7
�National Banking Act, establishing the first supervisory banking agency. We now
know that far 'more is needed for financial stability; yet even this beginning
.
constituted a vast improvement over the financial instability that had characterized
the economy earlier. In later years, the govenirnent created the Fedeial Reserve'
system as well as a'series of financial intermediaries (Ill spur markets that had been
thin,or non-existent prior to the government action). Similarly, the East i\sian
governments took an active role in ensuring the safety and soundness of financial
.
institutions, and in creating new institutions ,and markets to fill the gaps within the
private sector.
'Fourth, governments played a major role in infrastructure investment, '
including roads and communications systems. More broadly, and perhaps more
importantly, government created institutional infrastructures within which
competitive markets could thrive. Oniy recently, as the formerly socialist economies
,
have ;;!riven to establish market economies, have we become fully aware of the
importllce of this institutional infraslIUcture -- which includes property rights,
contract and bankruptcy laws, and policies to promote competition where it is viable
and regulate markets where it is not For insumce, will the lives of the farmers in
,these coun!ries be much improved if the,stale agricullUral monopolies (to which
they wereforced to sell their produce, and from which they were forced to buy their
8
�inputs) are replaced by equally or more exploitive private monopolies?
The fifth theme is the. role of government in preventin g environmental
degradation, While economists have discussed the need for government action to
,
correct market failures at least since &lgeworth, it has become widely accepted
only during the past quarter cenmry, I wish to emphasize that good environmental
policies should not be'viewed as luxuries, to be enjoyed only by the well-off. We
should not confuse increases in GDP with increases in standards of I,iving; nor'
. should we confuse increases in measured GDP today with increases in long-temi
,wealth, Recent attempts at building "Green GDP" accounts recognize these points. ,
It will take generations to correct the environmental disasters that plague many
LDCs and transition economies.'
Sixth. the government has 'a role in creating and maintaining an appropriate
safety ne!, including access to basic health services. In some cases, these activities
can be justified in utilitarian terms: they reduce opposition to change, foster
political stability, and increase the productivity of the labor force, BUI they may
also be Justified in terms of basic values, As [noted above, standards of living
, In many cases. even the shan-run costs of unsound environmental policies
can be large (e,g.• those associated with health costs).
9
�,
embrace more than just those variables captured in GDP statistics. There, is a
,fundamental sense in which improved health conditions represent an improvement in
living standards, despite the fact that such an improvement is not necessarily
reflected in GDP.
Virtually all societies have prov,ided a social safety net, though not always
through the government. In fact. for at least two reasons, governments today may
have to ass~me a larger role in providing a safety net than either the United StaleS
.
or East Asian governments did at comparable stages of their development. First, the
pressures of urbanization militate for a stronger government role. In 1975, just over
one-third of the world's population lived in cities; the United Nations and the World
Barik estimate that proportion will have doubled by 2025. Urbanization. -- and the
migration out of traditional commu~ities with which it is 'associated - is likely to
. result in less effective community-based social safety nets. Second. in the transition
. ,"
, economies, large corporations traditionally provided much of the social safety net
(such as pensions and health care). The transfonnation of these economies is being
accompanied by the shedding of mese social responsibilities by corporations facing
new competitive pressures. The government is the only backstop.
10
�In a sense. much of the role of government can be viewed as establishing
.
.
infrastructure in its broadest sen.se - the technological, educational. financial,
environmental. and social infrastructure of an economy. Since markets cannot
operate in a vacuum, this infrastructure is necessary if markets are to fulfill their
central role
in increasing wealth and living standards.
And constructing the broad
infrastructure is beyond the capacity or interest of any single firm. It must
therefore be primaril~ the responsibility of government.
. Tile special role of government in less developed economies
The six roles I have delineated above hold in both developed and developing
"
,
'
economies. But I want to take note of the special problems facing tbe less
developed '
(~conomies and
.
the economies in transition.
.
Mwket failures in these
.
.
economies are larger: more markets are missing, and those that exist may function
.'
,
.
less effectively.' Meanwhile, information problems 100m larger in the transition
, For instance, recent literature has emphasized the imponance of reputation
mechanisms and implicit contracts in governing economic relations. The
effectiveness pf these mechanisms depends on the long-term nature of
relationship. In LDCs, rapid transition threatens the long-term viability of many
such relationships; the weakening of social ties reduces the role of social sanctions
as an enforcement mechanism; while high interest rates provide an encouragement
for short run self-interested behavior at the expense of long run cooperative
behavior.
the
11
�process simply because of the rapid change in the economic environment.
Development is associated with the acquisition of knowledge about; and
implementation of. more advanced modes of production.
The problem is that while market failures may loom larger in less developed
economies. the capacity of the government to correct these market failures' often is
weaker: Assessing the app~oprial!! role of government requires' a recognition of
both the need for. and the limitations of. government actions. Successful
governments have helped create markets (such as bond and stock markets as well as
long-term credit institutions) .. They have enforced laws and regulations thai
enhanced the stability of the financial sector. and enhanced competition in all
sectors. In many cases, governments have acted as a surrogate entrepreneur.
encouraging the establishment of frrms '10 enter certain markets .. Governments have·
. given firms stranglncentive•• especially in'export markets. (Some econometric
evidence suggests that these government interventions actually worked. An analysis
of the mild financial restraint evidenced in most of the East Asian countries suggests
that it did lead to more rapid ec.onomic growth.)
• Thus. we noted earlier the importance of establishing the appropriate
institutional infrastructure for a market economy in the economies in transition. But
. it may take a strong government to establish the institutional infrastructure enabling
a strong market's viability.
12
�Th'. conservative counter·reply
Most economists ,today accept the proposition that markets by themselves
may not succeed in ensuring economic efficiency and may also fail to protect
segments of society from abject poverty. While most economists also agree that in
,
principle such shortcomings might provide a rationale for government action, some
"
argue that in practice govern!l)ent ititerventions all too often have been
counterproductive.
Any balanced account of the role of government must
acknowledge that Ibis has often been Ibe case, a topic I will touch upon below. But
that in itself proves nothing: Ibe question is, can responsible, democratic
governments put into place policies that raise living standards? Based on the
'
,
.
experiences of both East Asia and the United States, I believe the answer is a
resounding yes.
Some critics of the role of government argue for a different perspective on
the East Asia experience. They contend that all·· or almost all·· of the growth of
the economies of East Asia can be accounted for by factor accumulation. Thus,
they argue, there is no miracle. Instead, there is simply the inexorable workings out
of standard fundamentals: increased inputs lead to increased outputs. Total factor
productivity growth has been negligible.
13
�,
.'
There are a number of technical problems associated with the studies
purporting
to' find
these results. For example. does anyone who has studied wage
setting in Singapore really believe that w~ges are set in a competitive process. so
that the real wage equals the marginal product of labor, as most of the studies
'assume? But even if we take at face value the, findings of low total factor
.
productivity growth, these studies do not really address the question of whether
government policies made a difference. They neither ask nor answer questions such
as the following:
•
Why were savings rates so high? Elsewhere. such savings rates had been
attained only under the compulsion of strong government force.
as in the
Communist countries. While econometric studies suggest that these savings
rates may partly be explained by traditional economic factors. government
actions a/so played a constructive role ill mobilizing savings in East Asia.
,
•
"
Why were the East Asian economies able ,to invest efficienlly at such a rapid
pace? Other countries have invested heavily, but ended up with high
incremental capital-output ratios rather than rapid growth.
•
Why were they able to reduce the technological gap between themselves and
)
14
�the most advanced countries so quickly? The East Asian countries
demonstrated 'an enonnou. capacity to absorb both capital and technology.
The rapidity with which they closed that gap entailed more than just "buying
technology." Governments played a major role in human capital investment,
in allowing foreign investment into the country (with some exceptions). and
in creating an economic atmosphere conducive to foreign investment.
•
And how did the East Asian countries ensure that the benefits of their rapid
growth were spread widely amonwthe population? As I have already noted.
the increases)n inequality that earlier experiences had suggested inevitably
accompany development simply did not occur in East Asia. To the contrary,
there are reasons to believe that greater egalitarianism -- a result of
, deliberative government policies -- actually contributed to the remarkable
growth in these countries.
The limitations of government-
I have argued above that those who want only an
15
�•
extremely circumscribed role for the government -- providing only for items such as
the national defense. for example -- go too far. But I want to stress once again that
government is not infallible. Even in the economies of the East Asian miracle.
governments made mistakes. The Japanese government. for example. at one point
apparently attempted to prevent Honda from entering the auto industry. The point is
that government is not a panacea: it cannot fix every problem. In sum, government
,
.
definitely has a place, but it must know its place.
Improving government performance and the changing role of government
The pragmatic framework for assessing the role of government that I have set
forth in the first part of this talk entails a balancing of the strengths and limitations
of markets and government., and asking how they can complement each other most
effectively. It does not begin by drawing two columns on a page, with one column
labeled "activities to be carried on by government" and the other "activities to be
carried on by the private sector." This careful balancing puts greater emphasis on
.llru!:. the government does what it does ,and how it interacts with the private sector.
To that effect. I want to outline a few general principles, motivated both by
theoretical analyses and historical experiences.
16
�The setting
In assessing the proper role of government, we must take into account two
fundamental points. The first one is the importance of incentives. The second is
the d)IOamic nature of government's role; as the economy changes, so too must the
government.
The role of incentives
The government is a large organization, differing from large market
organizations in that it is not subject to the pressures of market competition. But in
democracies, political compeiition exercises some discipline: incompetence gets
punished just as
performan~e
gets rewarded, To be sure, political competition is a
far cry from the textbook ideal of perfect competition. But so too is market
competition of the form typically observed. It is sometimes alleged that bureaucrats
lack incentives; but incentives in·large corporations can also be muted. For
example, one recent study found that in the typical large firm, aggregate pay of all
top managers increased by only $3.25 for each $1000 increase in the market value
of the firm. It is also alleged that bureaucrats are not responsive to the wishes· of
voters. But both theory and evidence suggest that managers of many large.
17
�.
.
corporations may not always be very responsive to the wishes of the voters
(shareholders) to whom they are in principle accountable.
In short, the distinctions between the public and private sector are often
overblown. But we must once again be careful not to go to the other extreme:
incentives do play .. somewhat more important role in the private than the public
. sector. Provided adequate compelilion policies are put inlo place. market
competition is more effective in providing incentives than ersatz public competition.
The question is whether, and how, the public sector can put into place an effective
frameworK and set of incentives.
The changing role of government
We must also recognize that the role of government is not static. Changes in
the economic environment fundamentally alter what the government can and should
do. In a world with limited international trade, for example, it might have made
sense for countries to worry about material balances. Accordingly. there might have
been some rationale for the kinds of planning exercises that dominated development
thinking in earlier decades.
)
18
�•
But as international trade has expanded and the costs of transportation have
fallen., countries can now specialize on that part of the production process in which
they have a comparative advantage; they are not limited to domestic markets on
either the demand or supply side. Consider automobile production. Assembly. is
only one part of the car's cost -- representing only about a fourth of value added at
the factory. Different parts can be constructed in different countries and then
shipped to the assembly point. Modern telecommunications ensures that parts
orders can be transmitted quickly from the assembly plant to the parts plant,
wherever it is located.
In the past ten years, this pattern has spread from large
multi~nationals
to far
smaller companies. Again, credit goes to improved transportation and
telecommunications: a small or medium-sized firm in the United States or Europe
can develop relationships with suppliers in East or South Asia, sending them precise
product specifications. While the long run implications are far from clear, these
developments have been a boon for less developed economies. The "globalization"
of entrepreneurship has slackened the constraint on growth imposed by one of the
scarcest of factors in LDCs.
Globalization is just one example of a change in the economic structure that
19
�necessitates a change in government policies. Later, we. shall discuss other
examples, including how changes in \'lchnology'have enhanced the scope for
competition in areas that formerly were natural monopolies (telecommunications and
electricity.)
Recognizing the importance of incentives and the continually changing role of
government, we can now consider various imperatives for improving government
performance:
increasing consumer orientation, monitoring and rewarding perfonnance. extending
the scope for competition, privatizating and corporatizatirig, and improving
regulatory policies.
Increasing consumer orientation
One of the problems arising from lack of competition is lack of choice:
consumers do not get to choose which bureau issues their driving license or a .
passport
When consumers have a choice, some will choose to go to airlines with
.
.
shoner queues, even if they have to pay a slightly higher price; the market 'reflects
the diversity of consumer preferences, One way to address the problem of choice
within the public sector is to create more competition (see below); short of thaI,
20
�,
.
.
government can create a culture of customer orientation. While vocabulary (such as
thinking of'users of government services as customers) may help, performance
measures may be even more effective in drawing organizational attention to relevant
variables, and perhaps in motivating individual behavior, .
For insumce, one can, with modem technology, easily monitor the length of
time that it takes a telephone to be answered, Standard survey techniques can
evaluate customer satisfaction with the telephone interaction. Indeed, at the
individual level, motivational and monitoring problems facing, say, the Social
Security Administrati?n are little different from those fadng a private insurance
company -- and in the United States, as we have worked hard in the last three years
in improving customer orientation, we have shown that government can in fact
succeed: ratings put our Social Security Administration's services at a level highly
competitive with 'the best in the private sector,
Monitoring and rewarding performance
,
Private firms have simple, bottom line performance measures -- profits and
market value. V/hile government as a whole has no comparable su!nmary statistic
for perfonnance, performance at particular activities (typing letters, issuing airline
.
.
21
�tickets, processing drivers' licenses) can be identified and measured, Nonetheless, it
is important that Qutput and not process or input measures be used: too often,
rewards are based on how well the worker complied willi the standard operating
procedures.
Yardstick competition, In many cases, there are sufficient similarities between
activities performed in the public and private sector, that private sector performance
can provide a yardstick for comparison. For instance, while every firm has slightly
different travel needs, it is possible to obtain a range of estimates of the
,
I
,
administrative costs associated with travel. These costs can then be used to see how
,government agencies compare, and to judge performance relative to those norms as
a basis of rewards..
A caveat, Many of the activities conducted within 'the public sector are different
from those in the private sector. Public sector activities are disproportionately
,
.
.
adeninistrative in nalUre, making measurement of individual performance panicularly
difficult We do not know how to measure the quality of many administrative
decisions made collectively, let alone the contribution of any single individual. In,
many other activities, there is no single metric of performance, Consider education
.
for instance. Rewarding only performance in terms of basic skills (which can be
22
�•
•
more easily measured than other skills) will divert resources away from developing
·higher order and cognitive skills. However. it may be possible to design the
production process 10 mitigate these effects, e.g. by assigning different teachers
different tasks. Whether this is .desirable requires evaluating the magnitude of the,
incentive distortions in comparison with economies of scope. If there are weak
economies of scope (say between teaching basic skills and higher order cognitive
skills) then this organizational design is desirable.
Extending the scope for competition
One way to provide more effective incentives, including enhanced consumer
orientation. is to extend the scope for competition. Creating effective competition
among vendors. for example. is an' essential step in ensuring that the government
procures at the lowest possible cost But the , task of competitive' procurement is
more difficult than often realized. II used to be Ihought Ihat competitive bidding
was the simplest way to ensure thai government does not pay too much for a good
or service. Competitive bidding. however. typically requires the government 10 have
precise specifications of the item being purchased -- and describing a simple T·shirt
might take thirty small Print pages. Since most firms do not normally produce to
those precise specifications. they may find it unattractive to bid even if their
23
�products have similar performance characteristics. Thus, the number of bidders
often is relatively small. And a central result of the auction literature is that the
equilibrium price is sensitive to the number 'of bidders. As a result of the reduced
competition, government may have to pay higher prices than the public at large.
.
.
In a sense. the problem arises here because of the impossibility of specifying
performance -- the issue with which we have been concerned throughout this
section. The difficulty is in developing and clearly articulating performance
measures (for a T-shin that would involve comfon, durability, absorbency, etc.).
The reason that government uses competitive bidding is that it wants to make sure
that taxpayers are not overpaying. Relatedly; cumbersome procurement policies .
have developed in many countries because politicians do not want to be vulnerable
to the criticism that they have wasted taxpayers' money. (These cumbersome
procurement policies often overlay micro-management of contractor production, and
ironically have contributed to increasing average costs.) In those cases where there .
is a competitive marketplace, the diScipline of competition in lhe marketplace may
suffice. In the United States. procurement reforms enacted under this
Administration will save U.S. taxpayers $12.3 billion over the next five years.
Privatizing and corporatizing
24
�•
Even when competition is not viable, it may be desirable to incorporate many
features of a private .fIrm. This objective goes beyond introducing perfonnance pay,'
extending to broader personnel issues, procurement, and budgeting. But when
competition is not viable, there remains a real danger of abuse of monopoly power,·
The three key questions are
•
Is there a dedicated source of revenue, related to the benefIts conferred?
•
Is there a governance structure that can assure efficiency and a regulatory
structure that can protect against abuses of monopoly power?
•
Can there be an effective separation of production issues from other public
policy issues, including those related to externalities. safely, etc.?
Privatization represents only one point along a spectrum of organizational
forms; this spectrum includes a variety of corporatization structures within the public
sector. The Fundamental Theorem on Privatization established that the conditions
under which privatization could fully implement the public objectives of equity and
efficiency were'extremely restrictive - and were quite similar to the conditions
under which competitive markets attain Pareto-efficient outcomes. Because of
25
�differences in risk adjustment and time discounting, the state may receive less -
possibly far less -- than the expected present discounted value of the profits of the
enterprise. Moreover, the Slate may not be able -- even with a complicated set of
Pigouvian taxes -- to induce the privatized industry to act in the way that it would
like, especially when there are complicated social objectives.
The theorem's main thrust is that privatization has to be justified on a caseby-case basis -- incentive improvements must ba found to increase economic
efficiency sufficiently to outweigh privatization's disadvantages. In m'!fly cases (as
. in telecommunications) that case clearly has been established.
.
.
When it is decided that privatization is desirable, it is important that it be
done in the right way and with appropriate protections - induding protections
.
.
against abuse of any resulting monopoly power. Typically, appropriately designed
competitive auctions will be the most effective way of ensuring that the public
.
.
obtains full value for publicly owned resources. The carefully structured spectrum
,auctions in the United States have illustrated how to raise public revenues at·the
same time as promoting competitive markets and innovations.
Corporatization and privatization .. as well as the other reforms discussed
26
�•
, .
earlier -- help to focus attention on perfonnance, on outputs rather than inputs and
process.. This focus is necessary if the efficiency of the public sector is to be
enhanced. And in several areas where privatization may be inappropriate, such as
the granting of patents. government functions can still be organized to focus on
performance. We in the U.S. Government call them performance based
organizatioflS (pBO·s). and have put imo place organization and individual
incentives to enhance the focus on perfonnance.
Regulatory policy
A focus.on perfonnance is also. critical to efforts that ensure regulations
obtain their objectives at minimum costs. In many coumries, the environmental
regulations of the past two decades 'have made cnonnous differences in air and
water quality. They have worked. But in some cases, the objectives could have
.
been obtained at lower costs. Rather than focusing on performance criteria. design
standards were imposed. In some cases, this was because at the time. there were no
effective ways for monitoring perfonnance. But appropriately designed regulations
could have provided incentives for the development of the monitoring technology_
Nowhere is.the Changing role of government, and the increasing reliance on
27
�,
market-based regulatory pOlicies. more evident than in the case of the
telecommunications and electricity iIidustries. We used to think of these industries
as natural monopolies, where government, faced a choice between nationalization
and regulation ..Most chose the former. But as the inefficiencies of state-owned
enterprises became clear, more and morc privatized their telecommunications
. system, creating a monopoly often subject only to weak regulation.
Few governments look the next step. They did nol ask: How can we ensure
that there will be competition? They did not ask this question because economists
.
.
told them that pompetition was not viable: these industries were thought 10 be
natural monopolies. But as we have looked more closely at these industries. we
have realized that competition is indeed viable in many, if not most, of their
segments. We are therefore left with a subtle question: How do we ensure that
monopolies in those segments where competition is not viable do not destroy
competition (e.g. through discriminatory access or pricing) in other segments?
In the case ·of telecommunications within the United States. it became clear
.
.
.
.
that reguladon alone 'eould not effectively prevent discrimination. so structural
separation of the "last mile" (a natural monopoly) and other parts of the
telecommunications system was required. With the appropriate institutional
.
.
.
2&
�,
infrastructure, one could make competition viable in large segmems of'this vast
market. allowing government regulators 10 focus on a much narrower set of issues.
The same process is now happening within electricity,
anoth~r
industry
traditionally seen as a natural monopoly. We now recognize that this industry has
at least three major components: generation, transmission, and marketing. Already,
changes in technology have made possible a competitive markel in generation.
Complex problems have to be solved to make the network viable, bul it appears that
these are being addressed effectively. ·In the United States, a competitive market in
electricity generation is rapidly emerging. Telecommunications and electricity
represent two areas for which governments in most countries used to assume at least
some responsibiliiy but that today can largely be provided efficiently by private
entities.
CONCLUSIONS
It has become almost a cliche to refer to the vast changes in our world and how
we must adapt 10 those changes. Yet the fact remains that there have been changes,
and that the societies that adapt better to those changes will do better, in terms of
raising living standards, than those that do not. Government can help societies embrace
29
�change.
In a way, both the constants and the changes in development practice and theory
are remarkable. So too is the similarily of arenas of activity between countries that
developed successfully in the nineteenth century and the East Asian countries that
developed largely in the post-war era. (One difference is that the earlier development
experience lacked the benefit of insights from modem economics!)
Among the
constants are putting competitive markets at the center of an economy, while still
encouraging governments to assist, use, and supplement those markel~; providing public
investments in education and technology; and constructing appropriate institutional
infrastructures,
including
those
that
support
telecommunications and financial sectors.
a
dynamic
and
competitive
Among the other responsibilities that
governments today should and do take seriously are providing a basic safety net and
protecting ule environment.
Among the changes is the recognition that government
can make use of many of the mechanisms that have helped make markets work so
effectively, and that the scope for competition is broader than had previously been
thought.
Making government perfonn better is as important within less developed
countries as it is here in the United States. Good environmental, education, and health
30
�•
policies are not luxuries to be postponed to a later date. And making government more
customer-oriented, performance-based, and competitive is also essential. Indeed, the
scarcity of resources and the tightness of fiscal constraints facing developing countries
today make it all the more imperative that resources be spent efficiently.
Too often, discussions of what the government should do present false
dichotomies.
Good environmental and educational policies can actually enhance
economic growth. Yet is also true that only if the less developed economies grow more
rapidly will they be able to provide' a decent standard of living to their citizens.
Development and improved living standards have many dimensions, but in the end,
they all must rest on increased production of goods and services. It is right that we
redress an imbalance that saw this increased production ,as an end in itself. But having
refocused our attention on the right set of objectives, we should not lose sight of the
means by which those objectives must be attained.
The theories and historical experience to which I have alluded in this talk may
guide us in shaping the role of government. Leadership can help articulate visions of
that role. But in·the end, it is the desires -- real and perceived -- of the people whom
government is supposed to serve that will determine both the scope of government and
its ability to be a positive and creative force in our societies.
31
�,
•
•
In closing, I'd like to relate a brief story. After I Vias appointed as a member of
the Council of Economic Advisers, my good friend John Taylor (who preceded me on
the Council in the Bush Administration) suggested in an interview with the New York
Times that I would soon be disabused of my notions concerning the positive role of
government. While I have learned quite a lot from my experiences. I must admillhal
so far I have not lost confidence in government. Instead, I am more committed than .
ever to helping make government a more effective tool in promoting economic growth
and raising living standards.
32
�AN ECONOMIC AGENDA
FOR TIlE 21ST CENTURY
Yeshiva University
February 26, 1996
Dr, Joseph E. Stiglitz
Yeshiva University was founded on the premise that learning and education can -~ and
should .- be combined with traditional values. The University is guided by a vision that the
heritage of contemporary civilization ~~ the liberal arts and sciences .- is compatible with the
ancient traditions of Jewish law and life. The lives and minds of your students are enriched
through an understanding and examination of the moral and ethical principies that sbape
historical events and decisions.
For the past three years. 1 believe that this Administration's economic agenda has also
been guided and shaped by an understanding of this nation's fundamental values. Economics
often seems to involve cold statistics~-and often tries to pass itself off as a hard science.
in reality, we are talking about the Ii yes and well-being of real people and 'heir families.
Bu~
For instance, we want the economy to grow faster -- nOt JUSt so we can boast that our
growth rate is 3 percent ~~ but because by growing faster. we can raise living standards for
all Americans. And, so we·can address in a meaningful way some of the challenging
problems that America faces. While America may be the richest country in the world, we
know ,ha' 'he costs of fully addressing problems of prolonged poverty and 'he problems of
ollr inner cities, require enormou~ resources. Higher economic growth gives us more
resources to address these problems.
In my talk this evening, I want to focus on the primary economic challenges facing
America, J will then talk about why the short-term, polirically-driven palliatives being
discussed today are not the answer for addressing these challenges. And. finally~ I will focus
on the Clinton Administration's positive agenda for addressing these economic challenges.
This "Economic Agenda for the 21st Century" has 3 parts: growing the economy in a way
that enhances economic opportunity; embracing change by facilitating transitions: and. finally.
doing no hann to the most vulnerable members of our society.
THE ECONOMIC CHALLENGES
Let me begin with the challenges,
First. over the last 20 years we have seen slow growth of wages and incomes, The
only way for wages to increase is fot workers to increase the amount they produce per hour.
Before 1973, Output per worker rose 2,9% per year, from 1973 to the present, productivity
growth has averaged only 1.1%, [CHART] As a result, 'compensalion has grown at about
�one-third the rate it used to. Moreover,'the rising COSt of health care and other fringe benefits
has meant that take~home wages have grown even more ·slowly. Many Americans simply do
not feel that they are making any headway,
A different way of looking at this problem is that in advanced industrialized countries
there has been a dramatic increase in the demand for skilled labor and a decrease in the
demand for unskilled lahor. To be sure, recent political debates have focused on the
consequence of Ihis change: in the Cnited States, in the increased disparity in wages between
skilled and unskilled workers; in Europe, where governments have nOt allowed unskilled
wages to fall so much, in increasing unemployment among the unskilled I have deliberately
couched the challenge this way to emphasize that there are underlying economiC forces at
play, and that they ate worldwide.
~
But, not only have wages and incomes· grown more slowly over the past 20 years. the
,distribution of income gains has become markedly unequal, During the 1950. and 60s. all
Americans .- rich and poor ~~ saw their incomes rise in roughly the &arne proportions.
Over the PUS! two decades, the numbers have changed. Since 1979. the bottom 60%
of families have seen their real incomes actually fall. not rise. The only families seeing their
incomes rise were in the upper 40%. [CHART] Let me be clear: the problem is not that
some Americans are getting rich. The problem is that many American families are getting
nowhere.
And, these increased disparities are tearing at our social fabric. For example, on any
given day in 1992 almost one~guaT1er of all males between 18 and 34 who had not received a
conventional high school diploma Vr'Cre either in prison, on probation. or on parole. That is
compared to only 4% of those with a high-school diploma. {CHART] To an economist, this
result. while highly disturbing, is not surprising: lacking economic opportunity induces
individuals to turn elsewhere. This is stating a harsh reality~·not condoning this type of
behavior.
I want to emphasize that these are long-run economic trends_ They are challenges that
have been built over two decades. They will not be corrected in a week or a year. After
decades of neglect, it wiH take viSion and long-term commitments to reverse the rn:nd. And,
it wiU take political courage to undertake policies. the main benefits of which win be felt
only in years to come.
The Wrong Way to Address these ·Challenges: Protectionism and "Trickle Down Economics
No, the answer to these long-term economic Challenges is nO[ sholt-term, politically
driven solutions that attempt to exploit the uncertainty and insecurity felt by many Americans.
These simple paUiatives will not work -- and, jn fact may wen exacerbate the problem. The
worst of these rely on jingoism,' blaming foreigners. and trying to create barriers. Others
resort to failed. policies of trickle down economi!fs.
1 want to now explain why those simple palliatives will not work, and contrast them
with this Administratton's positive, pro-growth economic agenda for the 21st Century,
�Recently, we have heard a loud and angry call for a return to protectionist policies,
Some advocme erecting economic harriers around the United States as they pursue isolationist
foreign policies. J believe that abandoning America's role of world leadership is morally
wrong~~bul tonight, I want to argue that revening to protectionist policies is also a recipe for
economic suicide,
This Administration has made great progress opening up markets abroad. Exports of
goods have expanded, in real terms, by more Ihan 25 percen, in just three years. [CHARll
We have been able to expand our production of those goods where we have a comparative
advantage ~~ and where our workers are more pnxluctive. On average, workers in these
seCtors earn 13 percent higher wages than workers in the economy as a whole. The challenge
of foreign competition has spurred innovation and efficiency throughout the economy,
America can, and has, met the competitive chaHenge. For the last twO years. America was
rated, for instance, the most competitive economy in the world by the World Economic
Forum. American mini~ steel mills arc among the most efficient producers of steel in the
world. Some of the automobile plants in the United States have attained productivities
rivaling those anywhere else--uBowing the United States to once again become the largest
producer of automobiles in the world.
Some have argued that internalion.1 trade - and competition from abroad - has forced
down wages. Most analysts. however, believe that foreign trade is only one of several factors
that have dampened wages, The most, important factor ~- which is also affecting wages in
other countries around the world -- is ,the change in technology. Today·s world requires those
with compurer and other advanced skins.,
Other factOrs having a dampening effect on wages include the decline in unionization
~~ from 30 percent of the work force 25 years ago to about 15 percent now -- the increased
level of competition in our domestic market place, and the decline in the real value of the
minimum wage ~~ to nearly a forty-year low.
Indeed, there is a theoretical argument that migh't lead one to expect opening trade
might have some effect in increasing the demand for the relatively abundant factor (skilled
labor), relative to that of the relativeJy scarce factQr~~for the professional economists in the
audience, this is the ,well known Stopier Samuelson effect. But those who have looked
closely at the role of international trade in inducing declining wages point out that the
required changes in relative goods prices that would be associated with such movements in
relative faclor prices simply have not be observed.
Unfortunately, much of the protectionist rhetoric is based on a misguided view of how
a welI~operating economy works. When an economy is on track. it creates enough new jobs
not only to find employment for new entrants into the labor force. but also for those who lose
their jobs as a result of corporate restructuring and changing demands for American goods.
This is what we have done over the past three years. with more than 8 million new jobs being
created neJ. The gross number of new jobs is even larger. This Is"a dynamic economy~-with
more than 2 milHon new bUSinesses seizing new opportunities in the last three years.
�I know that critics say, yes. but these are not good jobs: that charge is simply false.
On average. the new jobs reflect the restructuring lhat is going on in the economy. In the
nineteenth century, the United Sta[es was an agricultural economy. [t restructured--becoming
an industrial giant in the early twentieth century. We are now restructuring once again, into a
sen:ice economy, Too often, this ,drdWS up images of fllpping hamburgers. But the service
"sector includes the dynamic _financial markets, the health care sector, computer programmers,
and other high technology pans of the economy, tndeed, if we look at the jobs from the
perspective of skills required. they are disproportionately high paying, professional and
managerial sectors within the service sector. rCHARn
The conclusion is that evert prOhibiting all foreign trade would do little if anything to
address the underlying challenges. Indeed, pursuing protectionist policies would have
strongly adverse effects. not only on the poor, but on all Americans. Closing off American
markets to foreigners in the Smoot-Hawley Act of 1930 is generally believed to have been
one of the main contributors to the country's slide into the Great Depression. Erecting
protectionist _barriers would be met by retaliation by our trading partners; OUf expons would
decline with our imports. There would be massive lay~offs and unemployment. particularly in
our highly producllve export sectors.
It is difficult for me to tell whether those who advocate protectionist policies suffer
from misguided political opponunism or from naive economic analysis. It makes no
difference: protectionism is a retrograde policy which should be given no place in an
economic agenda ~or America.
There is another
simp~e
paUJative which has also been widely discussed: this year's
version of supply side economics, the flat tax. To some of us, this seems like Voodoo Two
or Deja Voodoo. These are policies that were tried--and failed. Marginal tax rates were
lowered in the early 1980" What we got was not die burst of growth that was widely
vaunted, but rather the largest pe,acelime deficits in the history of the Republic, with the
national debt quadrupling in 12 years. A ciose look at the economic data shows not even a
blip in productivity, The policies simply did not work.
The flat tax has been so badly trounced by everyone that I hardly need to add my
voice to the chorus. But there are two aspects, related to tonight's theme, that] do want to
emphasiw; First, unless one wishes to repeal the laws of arithmetic. lowering taxes at the top
of the income disuibution means that. to raise the same revenue, taxes have to be raised on
the most vulnerable members of our society at the bottom of the income distribution ~~ the
very people whose incomes have declined or stagnated over the past quarter century. This is
unfair. and makes no economic sense.
Second, the flat tax reflects a view of the economy that I find-troubling. It sounds to
me that the are saying that the best way that we have ,to address the problems of stagnating
wages is to give tux breaks to upper income individuals$ panicuhirly those whose primary
source of income is from inherited capitaL The data simply do not provide support for this
kind of [fickie-down economics:
�.
Fifty years ago, distinguished economists such as Nobel Prize winner Simon Kuznets
suggested that increasing inequality was an inevitable part of rapid growth. AnOther Nobel
Prize winner. Arthur Lewis. emphasized that inequality might even promote economic growth,
since saving:; rates among the rich were greater than among the pOOr, Fonunately. the.
countries of East Asia did not follow the logical implications of these hypotheses: Those
'counuies that have grown most rapidly over the past quarter century--the countries of the East
ASIa mirac:le--deliberalely pursued policies which reduced income inequality, They
emphasized universal education, including education of women. These countries
demonstrated that reducing inequality does not necessarily run counter to economic growth.
The Clinton Administration's Agenda for the 21st Century
Let me now turn to the:; key elements of this Administration's positive agenda for
expanding opportunity and enhancing economic security for all Americans. There is no
magic bullet, but a set of programs to address the multiple facets of what is an extremely
complicated problem, The 3 key elemems are:
•
•
•
Growing the economy in a manner that enhances opportunity for
all Americans;
Embracing change. by facilitating transitions
and
Finally. "doing no hann."
First .. growing the economy in a way that enhances opOOftunity for aU Americans.
Everyone wants the economy to grow faster. But wishing it so will not make it happen,
Exhortation will not make it happen. Only sound economic policies will make it happen.
For this reason, the Administration has enacted a four-pronged growth agenda, , It
includes:
o Reducing the deficit;
o [nvesting in people and teChnology;
o Expanding markets;' and
o M£tking government more efficient.
Let me talk briefly about 'hi, agenda. First, REDUCING THE DEFICIT. Both
President Clinton and Congress agree: the deficit must be zeroed-out The question is no
longer whether we should eliminate the deficit bur -- we, eliminate it.
how
Why? The reason' is clear. deficits can s'tunt long-term economic growth. BOITOwing
against our nation's savings to finance consumption ~~ rather than investing in things like
education and technology and infrastructure whicb will add to our future prqductivity -- will
limit economic growth down the road,
�In the previous three years, we have made great strides in reducing our budget deficit.
[CHARTJ Indeed. the Clinton Administration has for the first lime since President Truman
succeeded in reducing the deficit three years in a row.
For the first time since the late 1970s, the debtlODP ratio -- which is the nlill. measure
. of the burden we hand on to future generations -- began to stabilize. [CHART]
.
Because of this progress in reducing the deficit. we are now in a position to eliminate
tbe deficit bi' the year 2002.
And. most important, the Administration's 1993 deficit reduction effort created an
economic climate in which businesses could invest and create jobs and compete: almost 8
million jobs have been created since the Administration took office; unemployment is down;
inflation is under control; and inve:;;tmem i!; strong.
, That brings me to the second part of our growth agenda: investments that'raise living
standards and promote Jone-rem growth. The private sector clearly is responsible for most
of our natlon's investments. But. in certain key areas, government efforts are important. One
is education. The other is tethnology and R&D.
LeI me stan with education. Investments in education are more important «x1ay than
ever before. Education has become a fundame~ltal fault-line running through the workforce.
Demand for high-skilled workers is soaring, while demand for )es:s~skmed workers is
shrinking. In 1979, a full-time male worker over age 25 with at least a bachelor's degree
earned 49 percent more per year than a worker with only a high school degree. By 1993. that
difference had grown to 89 percent. [CHARl1
Education is also an important detenninant of economic growth. Between 1963 and
1992, increases in education added as much as 0.3 percentage points per year to our nadonls
economic growth -- meaning that education contributed about 20 percent to the growth in
incomes over that 30-year period,
The Federal government can not -- and should not .. be responsible and involved in
every classroom in our naTion, But, government investments in education can make a
difference.'
For instance: Head Stan and other compensatory pre~school programs have substantial
economic payOffs. Head Start and other programs give a substantial boost to academic
achievement: Head Start kids are less likely to be held back in school, less likely to be
classified as special~etJucatjon students. and more likely to graduate from high school. As a
result, the program yields benefits not only for the pre-schoolets but also for our nation's
taxpayers,
�And. the government can help students from lower~jncome familes get access 10 higher
education by guarenteeing student loans, This is especially imponant now. There is a
growing disparity between college enrollment rates for those who are most wen~off and those
who are struggling to make ends meet In recent years, the differences in cnrol1ment rates
between children from lower-income and upper-income families actually increased. [CHARTI
The other important government investment is in R&D and technology. Investments in
R&D may account for half or more of the growth in output per person. These investments
yield high returns .. both to thosc that perform the R&D and to society as a whole. High
social returns come from "spillovers" ~~ that is, benefits that accrue as other researchers use
new findings.
Bur tbe fact is: because of these spillovers. ftrlm will underinvest in R&D. That is
why the federal government has to step in,
Federal support of R&D is neither new, nor is it purely a Clinton Administration
initiative. The Federal government has a long record of successful R&D support, from its
suppOrt in 1842 of Samuel Morsc's original telegraph line from Washington to Baltimore to
the development in more recent years of the Internet, the Global Positioning' SateHite (GPS)
system, and suppOrt of basic research leading to the discovery of DNA. which is central to
our dynamic biotech i n d u s t r y . '
.
To put it simply: certain government investments ~~ tn things like education and
technology :.~ are important for longwtenn econ?mic growth and higher living .standards.
Unfortunately, during the balanced budget debate this past year, some in Congress'
suggested that critical investments, such as funding for education and training and R&D. be
put on the chopping block along with everything else. This is troubling· and extremely short
sighted. railing to make these necessary investments now will have serious longwtenn
damaging consequences to the h~alth
strength of our nation's economy.
and
Deficit reduction is not an end in itself -~ it is a means to an end: which is stronger
)ong~tenn economic growth and higher living standards for aH Americans. Reducing the
deficit in the .,a,TOng way -- by eliminating important investments ~- may actually be
counterproductive. Deficit reduction done the wrong way might actually lead to a slowdown
in economic growth and increases in inequality.
So, ! have talked about 2 important parts of the Clinton Administration', growth
agenda: deficit reduction and investments that promote growth. The third part of this
agenda is opening foreign markets to U.S. exports.
Since, President Clinton's first days in office. he has aggressively sought to open
markets abroad. This Administration fought for and won enactment of NAFfA. We b~oke 7
years of global gridlock and won passage of the Uruguay Round of GAIT, We forged a new
trade relationship with Japan w~ opening markets for lJ.S, exportS of autos and auto parts.
,
�In part because of these market opening efforts, U.S. merchandise ~xports since this
Administration took office have grown 33%. Let me repeat that: in just over 3 years.
American exports have grown 33%. This extraordinary growth in exports approaches that
experienced by the most successful EaSt Asian countries -- such ,as Taiwan or Korea.
And. finally. the founh prong of our growth agenda is making the ponioo of the
economy over which we have control -- that is, the Federal Government .- more efficiem and
perfonnance oriented. The Clinton Administration understands that there is an important -~
bur defined -- role for government. Government must be a panner in growth -- not a drag or
a roadblock.
This Administration's "Reinventing Government" effort. headed by Vice President
Gore. has focused on making government agencies more efficient and more performance and
customer oriented. by developing perfonnance measures and ensuring that those measures are
used for evaluation. This effort has also revised, reformed, streamlined and -- where
necessary ~- eliminated thousands of pages of regulations.
We have cut over 16,(X)O pages of federal regula~{)ns" The Environmental Protection
Agency alone win cut regulations by 25%, The Department of Agriculture has reduced the
number of its agencies from 43 to 29 and is in the process of closing or consolidating 1.200
field offices, America's farmers this year will fiU out 3 miUion pages fewer of government
fonns than in years past.
And, as a percemage of civilian nonfarm emp1oyment. the Federal workforce is the
smallest if has been since 1933 -- before the New Deal. At the same time our economy is so
much larger and 'there are $0 many more servic·es that we have come to expect government to
provide. As a result. we have had to make government more efficient and more performance
oriented.
We recognize ;. and have acted on the recognition -~ that our economy wJil never
achieve its fun potential if our entrepreneurs and our businesses are dragged down 'by
unnecessary regulation and inefficient and bureaucratic government.
Now. let me rurn to the seccmd key (;Je:m(,jnt of the Qinton Administration's ef;onQmic
agenda:
Embracing change by facilitating transitigns.
America has It dynamic. ever-changing economy. Our continued prosperity and wen·
being depend on our embracing ~- not retreating from -- the constant succession of new
opportunities and challenges in an ever-Changing world. In an effort to become more
competitive globally. American firms have restructured and become more efficient, Tbey
have taken a hard look at what they do. how they do it, and what they must do differently.
The result: in many sectors American firms are the most competitive in the world. For
�instance. America's world~class computer makers continue to lead the industry at a breakneck
pace of technical innovation. The explosive growth of the Internet and tbe increasing
popularity of the World Wide Web illustrate the capacity for invention, adaptation and
creativity by American entrepreneurs.
When finns and their workers embrace change as many of our most competitive
industries have done, the economy as a whole benefits in the fonn of higher real incomes,
lower prices for goods. a wider variety of products. and enhanced opportunities.
But.. while embracing change raises growth and living standards in the aggregate. not
everyone is immediately made bener off. In a rapidly changing economy, some wiU find
themselves without the skUls required for the new jobs being created. When workers with,
Outdated skills lose their jobs. they face the threat of prolonged unemployment or a new job
at lower wages. And, all too often the loss of a job means the loss of health insurance or
pension benefits. As a result. many Americans: are concerned about their economic future,
This Admi,nisrration is firmly committed to addressing these economic challenges and
enhancing economic security for aU Americans. We can do this by ensuring American
families will still be able to buy health insurance if they lose a job or if someone in their
family is sick; by ensuring the portability of pensions and health insurance; by encouraging
more firms to offer their workers pensions; and by providing training vOllchers so that
unemployed workers can get the skills they need in our changin~ economy.
That brings me to the third. and final element Of the Clinton Administration's
economic agenda for the 21s{ CenturY: ,doing nQ hann. We must not exacerbate the
dlfficultie:, of those working families who are struggling the hardest to make it in this new
economy.
In 1993. the Administration expanded the Earned Income Tax Credit (EITC) for 15
minion more low-income working families, The EITC is designed to ensure that a family
with a full-time wage earner should at least have a take-home pay to bring them out of
poverty. This expanded EITC is now worth about $1.800 a year for a family of four living
Some in Congress have suggested that this important effort to reduce taxes on
on $20,000.
working families be reversed, This is wrong and the Administration has oPP?sed it.
Finally, this Administration has proposed an increa~e in the minimum wage from
$4.25 an hour to $5.15 an hour. Within a year, the minimum wage will fall to nearly a 40
year low in purchasing power, This is especially troubling since the average minimum wage
worker brings home half Qf his or her famiiy's week)y earnings.,
Some question whether raising the minimum wage wiU hurt employment. I might
agree if we were talking about tripling the minimum wage. But, that is not tl;te case. We are
simply trying to restore its value to the 1983 level. And the econometric evidence shows little
negative employment effects for a minimum wage increa.lie of the size proposed.
�By raising the minimum wage we suppOrt the notion that work pays -- and we help
ensure a better smndard of living for minions of working families,
~
Conclusion
The first part of this economic agenda for the 21st Century -- growing the economy -
is pan of a long leon smiregy to enhance economic opportunity, the dividends of which will
only be realized years into the future', For instance, a child receiving the opportunity to take
part in Project Head Start will not enter the labor force for 14 or more years. These are, as I
have emphasized, long-term investrnems -- and it is often long-term investments which pay
rhe highest returns.
But while-we have embarked on a iong-tenn strategy. we cannot ignore those who are
confronting the problems of today. That is why we have pursued at the same lime a set of
policies which address the transitions 'American workers are experiencing in our changing
economy, These are policies that are designed 10 reduce uncertainty and "enhance economic
security, And. finally, while we cannot immediately redress what are, after all, long-tenn
economic forces. we should be careful nOt to exacerbate their consequences. We should not
add insult to injury. If we cannot in the shon run solve these important problems. at least
we should do no harm,
Yes, sOme look for easy
short~tenn
solutions to difficult, long-term economic
problems. It would be easy and perhaps tempting for us to focus our attention on strategies
which yield returns in tbe short~run, But such a strategy would be short-sighted. It would
not fair to our children and it would not be right for our country,
Now is not the time for shon-tenn thinking. We need to create opportunity, embrace
change, and help ease uncertainties in times of transition. These are the kind of tried and true
principJes on which to construct an economic agenda for the twenty-frrst century. An agenda
that builds on and fosters fundamental American values.
This Administration has a positive, constructive economic agenda that holds open the
promise of the 21st Century. lr is an agenda that will ensure not only that our economy
grows faster, but that the fruits of that growth are shared among all Americans; not only that
economists t<:I1 us that our aggregate economic statistics are strong, but that Americans truly
see their living standards improve and they are living richer and fuller lives.
��Actual and Trend Labor Productivity
Smoothed for cyclical fluctuations, labor productivity has grown at a steady
1.1 percent average annual rate since 1973.
Index, 1992 =100 (ralio scale)
110
,
100
t-
90
t
80
t
. Trend
1
\"'\
.I-X:;;
Actual
\
70 I
Trend = 1.1% (annual rate)'
(1973 04 to 1995 Q3)
. I"'"
,-",'-'~
60
t
/,'
Trend = 2.9% (annual rate)
(196002 to 197304)
J
50 L L l L L L I I
1.960
1965
1970
1975
1980
1985
1990
Note: Data are for the nonfarm business sector.
Source: Provisional estimates calculated by the Councilor Economic Advisers from data provided by the
Departments of Commerce and Labor.
1995
�Changes in Average Real Family Income by Quintile
Real incomes have fallen or stagnated for most American families since 1979.
Percent
40 r l - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
30
20
10 ,..
o
·10
,.
Lowest Quintile Second Quintile Third Quintile . Fourth Quintile Highest Quintile Top 5 Percont
•
1966·79
Note: Family income is deflated by the CPI-U-X1.
Source: Department of Commerce.
[i'i'jj
1979·93
�Percent of Men Aged 18·34 in Prison, Probation, or on Parole in 1992.
Percent
30 r-------
,
25
20
15
10
5
o
High School Dropouts
With H.S. Diplomas
��Merchandise Exports
.
.'
Goods exports have grown by 26. percent in real terms since the Administration took office.
.
..
.
Billions of chained (1992) dollars
600 ,------
.----------~--------------------__,
,
550
500 ,-
450
o
1992
Note: Data are at annual rates.
Sourcs: Department of Commerce.
1993
19114
1995
�Union Membership
Percent of employment
30
r~----------~~--~----------------~-----------------------------'
25
,~
•
20
--------
15
10
r
5
o
~~
L~--L---L-_----..e..I'---~::--=:--~O~-;;-_~' ~~_--,----L-_--.Ju
I I
~ 1971
1968
I
1974
1977
1980
1983
Note: The Union membership series between 1980 and 1983 Is
Source: Department of Labor~
1986
interpolated~
1989
1992
1995
�Job Growth by Occupation, 1993-1995
Managerial & Prof
,
r
1
11.
~
u
Crafts
Tech, Sales, Admin
u
o
"
iii'
'!: Operators & Laborers
11
0>
'f
Service Occupations
Farm, Fish, Forest
o
Source: Department of Labor.
10
20
40
30
Share of employment growth, 1993·1995
50
60
�s
'l1ie Canton Mministration 'Economic :9lgentfa .
for tlie 21st Century .
,
* (jrowing tlie T,amomy in a Way tfiat 'Enfiances
Opportunity- .
-- tJJeficit ~duction
-- Inve$ting in 'Education and %clinoCogy
-- Opening !MarKgt5
-- 9tlaI(ing (jovernment !More 'Efficient
* . 'Em6racing Cfiange 6y !Facifitating rrransitions
* tJJoing 9{p 9farm
�0
(D
S66~
~
""
0
v66~
N
N
<!J
S66~
N
r-
0
'"
Z66~
""
0>
N
~66~
N
CO
N
066~
6B6~
-
BB6~
~
()
<;::
'"
Q)
0>
"0
LB6~
'........ tt)
Q)o>
.go>
9B6~
:::J"
9B6~
.oN
- '"
Q) 1'
..co>
.,....
0
vB6~
co
0
'"
~
Q) <0
:::J Q)
SB6~
>co_
>.co
0
-co .'"
ZB6~
~
0
'"
~
~B6~
~
~
eLL
OB6~
~
"0
co
Q)
6L6~
~
BL6~
LL6~
<!J
<Xl
9L6~
~
9L6~
~
<Xl
~
vL6~
<0
"
0
~
~
0
0
~
0
~
N
0
0
N
SJ8110P
0
~
~
966 ~ )0 SUOIII'8
0
0
SL6~
0
~
0
�Federal Debt-to-GDP Ratio
After falling throughout the early postwar era, the Federal debt as a
percent of GOP rose in the 1980s and has now leveled off.
Ratio
1.0
•
0.8
0.6
0.4
0.2
o
1950
1955
·1960
1965
1970
1975
1980
Fiscal Years
Note: The GOP measure used is pre·January 1996 benchmark revision.
Source: Office of Management and Budget.
1985
1990
1995
�.
.
Percent Difference in Annual Earnings for. College and High School Graduates
Differences in meal] earnings by educational attainment have widened.
Percent
100 "
----------------------~----------------------------------,
•
80 .
74
60
40
20
o
Females
Males
•
.
1979
'
1m!
1993
.
Nole: Dala are lor year-round, lull-time workers, age 25 and over.
Source: Departmenl of Labor.
�College enrollment rates of 18-19ye?r olds,
by family income quartile
80%
13%
Top quartile
"
70%
64%
,60%
~
~
~,
-
50%
/' '
/ , ,, ,
- -.. . ---- . ----
C
~ 40%
e
........
......
.,...."
-
'" - '"
.
33Q/o
-. - .. -- --, •
.. -"'- . -.-",
c:
Ul 30%
~
---- -- -/,----~
~
/-
Second quartile
'43%
-.
ThIrd quartile
.-. . . -. -. . -. . . . . ....... -. -. . .
• •
•
---."
-
_ _ _ .. _
..
,"
----
..
-. .
-
21"
Bottom q u a r t i l e ' '
•
20%
10%
0%
I
77
I.
76
79
80
81
82
83
84
'85
8e
Source: Current PopulaUon Sulvey, October Supplemen~ 1917-1993.
87
88
89
90
91
92
93
�Remarks by Joseph E, Stiglitz
Chairman, Council of Economic Advisers
at the B,ookings Institution
February 15, 1996
re
Tax Reform
I am pleased to have the opponunily to speak to you tonight about the Administration's
approach to the question of tax reform. Clearly. tax refonn will be One of the major issues being
discusseu over the next few months. and I commend t~e Brookings Institution for organizing this
importar.t conference.
In looking for polis about American attitudes toward "",es and the IRS, my smiI found
. some
inleres~ng
data--l am not sure if they are good or bad, According to an October 1995
Gallup poU, the IRS is pated, but only slightly more than the Federal government as a whole.
Actually, the poll found that 60 percent' of the population, believes that the'Federal government
has too much power, and 63 percent of the population beHeves this of the illS.
. ! also had my staff do a linle econometric work, and they found that the lag structure on attitudes
toward government is roughly 2 1/2 years, so of course, these views primarily reflect attitudes
toward preyjous Administrations. But, ,the current tax system is an easy target to
auack~·jt
is
perceived as intnisive and complex, and it is downright scary for a lot of Americans. Many
Americans believe that the tax system is too complex, and that the system unfairly benefits the
,
'
�WhUe it is easy to take po·tshQts at the current system. ~e don'1 believe that there are any
easy answers. Many of the attributes of our current tax system stem from natural outcomes of
tho political process, from 'measures designed to ensure compliance. and even from measures
designed to ensure equity. For example. a tax system that bases tax liability on family structure
necessitates ·some rules to detennine who is part of the family and who is not This is bur one'
i~;ustra:ion
of how some complexities na~ura!ly enter almost. any tax system. Whatever the cause
of ;hese complexities, the demand for rax refoIJU is' reaL
There are several aspects to this dissatisfaction with the tax system, each requiring a
different remedy. First, the::e is a perception problem. Because so many ~ple receive large
packages of tax fonus and instructions, from the Federal government; with more fonns than they
could ever use, they vie,:-\, the tax system.as overwhelming.
;..' ' )
Perhaps more important, .they believe that it is unfair: If the lRS- is sending all.these forms, there
must be peopJe who know how to use lh~m to lower their tax bill.
This perceived problem of complexIty and unfairness is
important~~after
an. the more taxpayers'
view the lax system as simple and fair, the higher is voluntary compliance, the lowcT are
compliance COStS, and eqc.a11y as imponant, the lower is antagonism toward government
In reality, however. L'1e tax system is not that complex for most people, in pan due to the
A~ministration 's
efforts, In 1994, 17 'million households··or roughly 16 percent of filers~~ used
'he form £7_ The !040·EZ consistS of only 12 lines, and could in principle be placed on a
postcardT~the
current acid-test of simplicity,
An additional 18 percent used the 1040A, a
sOr:1ewha: ionger, ,but stll: relatively simple tax form.
�Fu;;.hennore. under this Administration's reinvention of government initiatives, more and more
file:s are able 10 file
~eir
entire return over the phone or electronically. even from thelr home
pc.
But, for individuals with
self~empl,?ymem
income or significant capital income, and for
most la:ge companies, our tax" system' is very complex, and !his true complexity is another source
of dissatisfaction with the current income tax system. As you. all know> much. of this complexity
comes from the facl that we taX different types of income differently, rather than from the fact
that we have different rates. Thus, the fact that capital gains are taxed on realization but interest
paid, on debt is deductible annually means that we need
arbittag~.
compJj~ated
provisions to prevent taX
Similarly, the taxation of US companies with foreign subsidiaries, or US subsidiaries
of foreign companies, requires complicated transfer pri<;ing rules .
,
.(")
.
The Administration fecogni?-Cs that the current tax system has some real problems, and
we are open to ideas about how to fix them, We have laid out a num~r of criteria by which we
feel laX refonn propo;a1s should be judged.
The fIrst criterion is fai:ness. Of course. havi~g a fair tax system means different things
10 different people. But, in this age of increasing dispersion of income. with the rich getting
richer and the middle class barely keeping up, major redistribution of taxes .
away from the rich
.
anc toward the poor and middle cla'ss lS unconscionable. unless you believe. in nickle~down
economics and impJausibly large incentive effects.
The second cri~erion is simplicity. If one of the main prohlems with the current taX code
is that it is tOO com?lex, then any tax refonn ol!ght to focus on simplicity. But, It is imponant
that the simplicity of a proposed tax refonn be evaluated re:alistically. Evaluating the simplicity
of a proposed tax refonn n:quires considering both the regulations that would be required in order.
�to ensure adequate compliance, as well a's the potential complexities introduced by the nature of
proposals wending their way through the political process.
The third criterion is efficiency. The issue of efficiency is a c~)ntemious one, Some argue
that a consumption tax ,Would enhance efficiency by reducing the tax on savings--but, it should
be recognized, our tax system cannot be described as a pure income tax system; it really is a
, hybrid
incQme~consumption
tax,
The availabmty of pensions, lRAs and the favorable tax
treatment of capital gains mea.. ) that much of capi~ income is untaxed. For most Americans,
most of their savings is already untaxfd. Thus, moving toward a pure consumption tax, while
reducing the tax on saving. wou)d necessarily be regressive,
FinaHYl in any consideration of a fundamental tax reform, the issue of the transition loom,s
large, While lump sum taxes have wonderful efficiency effects and may seem great in theOry,
in practice) they oflen' seem·unfair.
A business owner who, buys office equipment expecting 'to be able to depreciate it for tax
purposes. or a recent
ho~ebuyer
depending on the deductibility of mortgage interest, would find
repeal of these provisions quite unfair. It seems very likely that
the political process would
alleviate such losses, Thus, rrai1sition relief would undoubtedly be provided. And such relief is
likely to be complex, as
w~ll
.
as eroding some of the efficiency gains.
The complexity of the t:ransition does not mean that no major tax reforms should be enacted. but
il does mean that the promised benefits.of such a reform must be sufficiently large
~o
bear the
costs of the transition.
So, how do some of the tax proposals currently being
criteria? Well, 10 the extem that the tax
, ,:.' --1
'r'
p~posals.
disc~ssed
stack up against these
being discussed broaden the tax base and
lower tax rates, L1ey clearly have some advantages. Such base broadenerS can enhance efficiency
�by eliminating or reducing
tax
subsidies to certain types of consumption, and by reducing .
marginal taxes on labor and capital income: But, eliminating some of these subsidies also
involves some philosophical issues. In particular, what attributes should be taken into account
,
when determining ability
horizontal equity under a
to
pay tax'? Is number of chUdren sufficient? \Vbat would happen to
tax
that did not allow for deductions for state income and property
taxes? Should a taxpayer in ,good health be ~ed the same as a taxpayer who spends 50 percent
of his or her income on medical expenses'! These may seem like relatively unimportant concerns,
.bm to the affected taxpayers, they are central. Of course, the advantages of
addres~ing
lhe;;e
issues must be weighed against the costs of doing so.
Let':; talk about simplicity. While a flat tax might, in principle. bl;! simpler. it would not
avoid all the compUcations of CWTCnt tax law. Depending on the provisions, it is possibl~ that
/)
some things could even get more complicated. For instance, no ?oe is talking about a truly flat
tax~-most propo~aIs
provide an exemption for low jncome
workers~-so
who pays the
tax
could
still matter. If finns were simply denied the deduction for employee fringe benefits. for example.
then fmns with many ]ow~income employees would pay too high a
tax
on fringes, and fringe
benefits would actually be discouraged and low income people could actually lose their health
insurance. This would put a new and different wedge between health insurance and wages, while
replacing the current one. If, instead, the value.of the fringe benefits were imputed to employees
as part of their taxable income, then rules would be required on how to do such imputations. For
example, would workers of different ages be assigned different insurance values, or would they
aU be lumped together in a single group and assigned the average value?
�Anotber potential soarce of complication would be the rules requ:..red to ensure
compliance. Cnder a flat tax, the incentives to conven 'ordinary income into capital income
would be substantial. A few years ago, I showed how in a petfect capital market, preferential
tax treatmelll of capital gai~s allows peop~e
to c:1gage in schemes'that can eliminate income tax
liabilities. While 1 have not given much thought to the types of rran.sacrions one could undertake
to evade a flat t~,Jhe fact that capital income would be untaxed., that low-income workers would
-face a zero rate of tax, and the possibility of engaging in tran~action~ 'With foreign companies
operating under different tax systems leads me to believe that such possibnities exist. Of course
j
nor all tax avoidance schemes wou1d be discovered at once. But, ove~ time, more and more
avoidance schemes could be uncovered, followed by'either reductions in revenues or statutory
,,"': )
'changes aimed a1 preventi.''1g these tax avoidance games. These changes
w~uld
reintroduce
inefficiencies, not to lIlention complexities.
Of course, potential efficiency gains could make mis type of tax reronn worthwhile.
Evaluating the efficiency of fundamental tax reforms is 9.uite difficu1t~~at best, we are ablt'; to use
highly styli~ed models, requiring us. to plug in very uncertain parameter estimates.
Using such techniques, some ana1ys~s do find substantial efficiency effects .from going from a
pure income tax to a pure consumption tax. But, apart from the fact that the~ simulations rely
.OIl
highly uncerta:n estimates of key
ela~tici[ies--jn
particular, the savbgs elasticity--as well as
crude models of savi:1g behavior, these sim'Jlalions are often highly stylistic.
�The simulations used to evaluate the e:ticiency gains of tax reforms often rely on an
unrealistic description of our curren;
laX
syslem and of the
tax refonns that are likely to emerge
out of the politicat process. First of all, we don'! have a pure income tax now. So some of the
, benefits of consurr.ption taxation, to the extent there a:e any. are already being enjoyed. Second,
the prob~bility of moving to a pure consumption.tax "~. ~ith no transition relief, no special interest
provisions, and no lax avoidance. is close to nil For instance, even the Kemp Commission
backed away, from an aggressive: position on
deductib~lity
of mortgage interest and charita.bIe
contributions. and the Commission recommended that unspecified transition relief be provid~
for ex.isting assets.
As the purity of the consumption tax is reduced. so are the possible
efficiency effects.
Finally, let me discuss what is perbaps the most important problem with some of the tax
/)
proposals currently being discussed~~fairness.
It is clear that going from a system with a
progressive rate structure to one with a single rate welt below t<xiay's top marginal rate win.
lower taxes on the high end of the income spectrum, and raise them for those in the middle and
at the bottom: If, on tOp of this change in the rate structure, we also exempt capital income from
tax, the Federal tax system will become even Jess progressive,
And. this effect would be exacerbated if the earned income tax credit is repea1eq. Of coun;e. the
lack of tran$ition relief might also hurt
weallh~er
people who benefit from the elimination of
taxes on new saving.
One way to assess the fairness of a tax system, however, is to examine itS impact on
midd:e income families. According to Treasury estimates of the
Arrney~Shelby
flat lax proposal,
families with income of $200,000 or lower· would. on average. pay more tax than under the
. ,Y
current system, and those with income of $200.000 or more would, on average. recelve a lax cut.
�For example, the total tax '::iurden for a hypothetical married couple with $50,008 of wages. two
c~ildren, and employer-provided health insurance would increase by $1,604.
By this measure, the
Unll~ss
Anney~Shclby
tax is unfair.
a tax refonn can improve efficlency and simplicity without raising taxes on middle
income and lower-income families, the c.ase for a wholesale change in the tax system is be hard
to make.
I should perhaps [:lake a few comments ahout what.economic theory has to say about this
whole mattl~r. It would be nice if economic theo'}' had simple and dear prescriptions, but we
should be honest with ourselves, and with the' public, that it .does not Economic theory has
provided a framewo:k within which we can· address the question, what is the optimal structure
of taxes? It has even allowed us to ask questions about pareto optimal tax structures, that is tax
(.
"')
structures which have the property that no group can be made better off without making other
groups worse off. Is it a gC!lcral characteristic of pareto optimal tax structures, that taking into
-ac~ount impacts on di~ferenf generations, and" accordi~gly, on economic growth, that the return
to capltal is
no: taxed? The answer is, only under highly restrictive conditions.
Both practical and theoretkal concems about the tax reforms currently under discussion
shouldn't excuse us from thinking long and hard about how 'to change the tax syste:.m in ways~¥
small and large--that" could actuailv make jt bener according
' .
,
~ne
to these criteria
example is this Administration's proposal to greatly simplify ~he ruJes for setting up
employee pensions.
In the 20 years since Congress enacted ERJSA, the pension ,laws and
regulations have become extremely
co;npljca~eci And, while many of the rules and
regulations
were enacted for good cause, the cumulative result was to raise compliance and aciminis1:!ative
'f
costs to a leve1 whe:-e many
employers-~especially
small
businesses~~could
not afford to offer
�:etiremem plans to their' workers. Our 1997 budget includes a new, simple retirement savings
, plan (called the NEST, for National Employee Savings Trust) that allows fIrms with fewer than
100 workers"to set up an IRA-type pension plan, As long"as the employer foHows some simple
matching requirements and some minimum contribution le'lte1s, no testing for nondiscrimination
is required.
In the long run, other lypes of proposals are worth thinking about.
For e'SarnpJe,
Congressman Gibbons has touted the idea of a hybrid tax system which would combine a VAT
with an income tax on high.income taxpayers. Similarly. a simple collection system has been
,
,
in
pla~e
in the UK, where employers withhold taxes, and the vast majority of taxpayers never
file forms. However, roday's New York Times had an article Slating that the UK ,was largely
abandoning its fonn-free
tax
system, and moving toward the US system. The ankle was not
,
clear about what sparked this decision, but it is telling nonetheless-~in,[his day and age. with
tne
::r:emendQus array of frnancial instruments and methods of compensation, no Significant and fair
tax system is likely to be very simple,
But that does not mean we should give up. Small tax reforms that can make life easier
for people, without entailing any large revenue losses, should be adopted. Tax reforms that
significantly reduce complexity, withom doing major damage to revenue or to social goals,
,
'
should be .adopted. Various definitions, for example, need not be as complicated as they are,
even if in some cases, a simpler definition would only provide roogh justice. And larger
?foposals that broaden :he base and lower the rates, while maintaining the fairness of the system,
a."'e likely to be wonhwhile. The challenge is going to OO'to come up with an equitable, sjmple,
non-intrusive tax soucture that we aJ1 can live with. While none of the cur:ent proposals seems
to accomplish this goal. I look forward to the coming year, in which tax refunn proposals will
certainly be the subject of some very stimulating discussions.
"
�
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Clinton Administration History Project
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Cinton Administration History Project
Council of Economic Advisers
Department of Commerce
Central Intelligence Agency
Department of the Interior
Department of Defense
Corporation for National Service
Council on Environmental Quality
Department of Justice
Domestic Policy Council
Department of Education
Department of Energy
Environmental Protection Agency
Federal Emergency Management Agency
General Services Administration
Small Business Administration
Social Security Administration
United States Agency for International Development
National Economic Council
Office of Management & Budget
Office of National Drug Control Policy
Office of Personnel Management
Office of Science & Technology Policy
Office of the Vice President
United States Trade Representative
Date
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1993-2001
Description
An account of the resource
<p>The Clinton Administration History Project describes in detail the accomplishments of President Clinton's Administration for the period 1993-2001. The records consist of the histories of 32 agencies or departments within the Executive Branch. In general, each organization associated with the Project submitted a narrative history along with supporting documents. These narrative accounts are primarily overviews of the various missions, special projects, and accomplishments of the agencies. The supplementary records include substantive memos, press releases, briefing papers, and publications illustrated with photos and charts.</p>
<p>Agencies:<br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Council+of+Economic+Advisers&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Council of Economic Advisers</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Central+Intelligence+Agency&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Central Intelligence Agency</a><br /><a 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[Council of Economic Advisors] [9]
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History of the Council of Economic Advisers
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1993-2001
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1224798
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https://clinton.presidentiallibraries.us/files/original/3dff436f3ac469311165be1c8d12906f.pdf
86cd04c61b3d307cd5dab7a3fca0d433
PDF Text
Text
"
,
Remarks by.Laura D'Andrea Tyson
Chair of the Council of Economic Advisers
before the Committee on the Budget
United States Senate
Tuesday, February 7, 1995
Mr. Chainnan. before I gel started, I want to thank you and the
Committee for the opportunity to testify today. It is indeed a pleasure to.be
here as a member' of this Administration to' discuss both the eeanomic success
story of the past 2 years and the encouraging proseect~ for the future.
. Last year we witnessed an economic payoff to the tough fiscal decisions
embodied in the Omnibus Budget Reconciliation Act of 1993 (OBRA93). The
deficit shlUnk by $52 billion in fiscal year 1994 due to the initiatives si'e! forth in
OBRA93 ($72 billion if special factors such a< receipts from the sale of assets
acquired from failed thrifts are excluded). And we anticipate a cumulative total
of mOre than $600 billion in deficit reduction from the pre-OBRA93 baseline
through 1998. Of this amount, $505 billion comes from spending cuts and
revenue increases contained in OBRA93; the remainder is due to technical
revisions and the improved economic climate which, in pan, resulted from
OBRA93, The Administration's 1996 budget package adds another $81 billion
in budgetary savings through 2000. This Administration has clearly .
demonstr.ted to the American people that fiscal responsibility is not just \
political rhetoric bUI a linchpin of our entire economic agenda.
My testimony today consists of three parts: a review of the economy's
'perfonnance in 1994; a presentation of the Administration's economic forecast
.
.
for 1995; and an overview of the Administration's economic strategy -
embodied in its 1996 Budget -- for improving the living standards of all
Americans.
The Economic Situation in 1994
111e U.S. economy in 1994 enjoyed a balanced and broad-based
expansion. Real gros.' domestic product (GDP) grew 4 percent, the highest
annual growth rate since 1987. Payr~lls increased by 3.5 million. the largest
annual increase in employment since 1984. Consequently, the unemployment
�2
rate dropped over a full percentage point during 1994. Since the Administration
took office in January 1993, about 5.6 million jobs haye been created; of these
93 percent are in the private sector. The consumer price index (CPI) increased
by only 2.7 percent, about the same rate of increase as for the past 3 years.
When the volatile food and energy components are removed, however, the core
rate of consumer inflation registered its smallest increase in 28 years. The
combination of strong economic growth and low inflation makes 1994 one of
the best macroeconomic performances on record.
This strong performance took place in an environment in which the
Federal Reserve increased short term interest rates several times in an effort to
moderate the economy's growth to prevent future inflation. While these rate
increases should put a brake on economic growth, we are' optimistic about the
future prospects for the economy. Business confidence appears strong. as·
evidenced by high levels of business investmen~ in 1994. Similarly, consumer
confidence remains strong, as purchases of durable goods grew rapidly' over the
year.
While the overall economy appears to be performing 'well, we are
concerned that many Americans. are not full participants in the growing
prosperity. For instance, real median family income in 1993 is about' the same
level it was in 1973, despite an increase in real aggregate income of 57 percent
during the same time period .. Additional evidence of the trend of ~tagnant \
incomes for many Americans is the fact that houHy compensation in 1994 (as
. measured by the employment cost index) increased only 3 percent over the year,
barely outpacing the 2.7 percent increase in the CPI. The actual increase in
hourly compensation was lower than expected, based on a statistical relalionship
between the unemployment rate and the growth rate in hourly compensation.
This is statistical confirmation of the feeling of many Americans that they are
working. harder for less.
.
The stagnation of family incomes has been accompanied by an equally
disturbing trend of increasing income inequality. In contrast to the years J950
1973, when average real family incomes increased thrcllIghoul the income
distribution, between 1973 and 1993. the spread in,income inequality has gotten
larger. As an example of this fact, Chart J shows the share of aggregate income
received by fanlilies in different pans of the income distribution in 1973 and in
1993 (the most recent year for which these data arc available). -n,is Chan
�3
indicates that each of the four lowest quintiles'of the income distribution saw
their share of aggregate income decrease, while the share for the 20 percent of
the population with the highest incomes increased substantially (and much of
this increase was concentrated in the top 5 percent).
Over the pas! 2 years, the economy has grown at an average annual rate
of 3.6 percent, as aggregate demand rebounded from the 1990-9l recession and
the lackluster growth that initially followed it. In pan, the current expansion
was accomplished through an increase in the quantity and quality of the labor.
force and through net additions to the capital stock. To a significant extent,
output was able to meet strong increases in demand through re..,mployment of
workers who had been unemployed or underemployed and through the
utilization of capital that had been idle or underutilized. By the end of 1994,
however, both labor and capital utilization rates were in ranges that stl$gested
little remaining slack. When this happens, the economy's growth late becomes
increasingly constrained by the growth rate of the labor force. net additions to
the capital stock, and the productivity of labor and capital. Over the long run,
these factors detennine the economy's potential for growth or what economists
refer to as the growth rate of potential GOP. Based on current infonnation and
the econ,my's most recent historical perfonnance. most mainstream economists
believe that the economy's growth potential is around 2.5 percent per year. This
estimate of long-run real growth potential' is shown by most major economic
forecasts and the Administration forecast reflects this view,
.
.
\
The Administration's Economic
\
!1or~ast
111i8 Administration prides itself on making realistic forecasts of economic
conditions and we believe the evidence of the past 2 years suggests that our
forecasts have been conservative as well as credible, ·In fact. when I testified
before [his committee las! year, I said that "the economy is poised for a'
sustained expansion." Forecasting may be an inexact science. but it is definitely
satisfying when your forecasts prove correct. Indeed, the major surprise in the
perfonnance of the U,S. 'economy in 1994 was that real growth exceeded the
forecast by a significant amoun!, even though interest rates were much higher
than predicted and inOation slightly lower than predicted.
�4
This year's economic forecast continues the conservative tradition of our
prior forecasts. We are forecasting a moderation of growth in 1995 as the
effects Of increases in interest rates spread more broadly through the economy.
For 1995 as a whole, we are forecasting that real GDP will grow by 2.4 percent
relative to 1994. Then in 1996, the economy is expected to settle onto a path
consistent with its long-run growth potential of 2.5 percent. a so-called "soft
landing". We forecast the economy to maintain real output growth in line with
the grpWlh of potential output through the year 2000.
.
Inflation is forecast to rise slightly during 1995. Consumer prices are
p,rojected to increase by 3.2 p~rcent in 1995.· There3fter. consumer price
inflation is forecast tp remain at 3.2 percent through 1998. before failing to 3.1
percent in 1999 and 2000. More broadly, inflation as measured by the GDP
price deflator is forecast at 2.9 percent this year and next. Then we ewect
inflation to settle at about 3.0 percent over the remainder of the forecasthorizon.
The Administration forecast used in preparation of the bUdget predicts that
the unemployment rate will average around 5.8 percent in each year between
1995 and 2000. Since that forecast was made in November. more bas been
learned about the behavior of the actual unemployment rate. In the upcoming
Economic Report of the President. the Administration presents a forecast range
for the unemployment rate of 5.5 percent to 5.8 percent for each year from
1995-2000. We forecast 3\range both because we are unsure'about the impact
Of the 1994 improvements to the Current Population Survey used to eompuie the
unemployment rate and because some structural change may be underway in the
labor market. An important characteristic of our employment forecast is that it
incorporates a belief that economic growth over the next several years will be
sufficient to absorb all Ilew entrants to the labor force. Therefore, we anticipate
c
little upward pressure on the unemployment rate during this period.
Our forecast anticipated a 50 basis point increase in short-term interest
. rates (three-month Treasury bill rates) during the first quarter of 1995. As
growth moderates during the year. we expect short-tem1 interest rales to rail
about 50 basis poims by early 1996 and remain there throughout the remainder
of the forecast horizon. 111e forecast for interest rales on 'to-year Treasury notes
. was revised upward for 1995 to 7.9 percent from last year's lower leveL Our
forecast predicts a decline in these interest rates to an average of 7.0 percent
between 1997 and 2000. 111is forecast reflects the belief that the spread
�5
between shon and long term interest rates will return to a more traditional range
than the one experienced in 1994,'a5 the inflation and risk premiums built into
long-term rate gradually shrink,
Table I attached to my testimony compares the Administration's
economic forecast to the Congressional Budget Office and Blue Chip forecasts.
While there are some differences between these forecasts, the differences tend to
be small, and Table 1 indicate~ a high degree of consistency in these different
forecasts,
',
There are always some risks to any economic forecast. The possibility
exists ,that the interest rate increases engineered by the Federal Reserve will not
dampen growth as quickly as anticipated. Ihhis OCCUI'S, real economic growth
in 1995 could exceed the prediCted 2.4' percent rate. A higher than pr'ydicted
growth rate in tum could result in higher· than anticipated interest rates, which
could slow ,future economic growth more than expected.
'
,
Similarly, there are risks that the economy may grow more slowly than '
forecast. For instance, the interest rate increases already in the pipeline may
slow economic growth sooner than anticipated ,or by more than anticipated.
Compounding this risk is the possibility that foreign economic growth may stall,
reducing foreign demand for U,S. exports. ,In addition, the large inventory
a(JI:umlllation by businesses over the past year may not have been entirely
intentional. If this proves to be the case, then production could be scaled back
to reduce an inventory overhang, lowering growth. Finally, the course of the
economy depends Dn budgetary and other policy decisions made by Congress.
,11:,$ year there is an especially high degree of uncertainty about future
Congressional actions in matters that can affect output, growth, deficits, and
interest rates over the short, medium, and long term.
A Strategy for lmpro."ing Living Standards fo.r All Americans.
Administration's economic strategy for raising the living standards
for all Americans has three components. 111e first is to establish a sound fiscal
foundation for the Federal Govemmcnt. Getting the Nation's fiscal house in
order required a deficit reduction plan that is balanced and gradual, yet large
enough to be credible and to have a significant positive effect over time. The
Administration's mitial budget plan enacted us OBRA93 met lhis test, and this
'/llC
�6
year's budget follows up on that legacy by providing}urther deficit reduction.
To see the effects of these deficit reduction initiatives, consider that in 1992, the
Federal deficit had reached 4.9 percent of GOP. For fiscal year 1996, the
deficit is expected to be about 2.7 pereent of GOP. And, by 1998, we project it
to faU to 2.4 pereent of GOP, less than half its 1992 level.
Economists often prefer to focus on the structural budget deficit, which
adjusts the deficit compul1ltions by eliminating the effects of the business cycle.
By this measure, the burden of the Federal budget deficit has declined steadily
since 1993, with much of the credit for this improved fiscal picture attributed to
OBRA93. Chart 2 attached to my written testimony shows the, structural budget
deficit as a share of GOP and indicates the substantial effect that OBRA93. '
along with the additional deficit reduction in this year's Budget. has had on it.
,
,\
.
The second component of the economic strategy is a set of policies to
help American workers and businesses realize the opportunities that flow from
changes in technology and the global economy. The common theme of these
policies is investment: both public and private. On the public side, the Federal
Government is shifting spending away from current oonsumption and toward
investment in children, education and training, and science and technology. ,On
the private side, the Administration supports targeted subsidies to complement
market incentives and encourage investment by individuals and businesses in
physical, scientific, and human capitaL' Throughout, the Administration
rccogniu,s that government must not only spend less, it must also spend'better,
by focusing morc of its resources on the Nation'S future.
A third oomponent of the Administration's economic strategy is tax relief
for working families. The Administration first focused tax relief initiatives on
those working Americans with the lowest incomes. The result was the
substantial expansion of the earned income'tax credit in OBRA93. This
refundable tax credit increases the after-tax income for many lower-paid workers
and is an important step toward ensuring that families with full-time workers
will not live in poverty. This year's budget includes a second round of tax
relief, this one aimed at middle class families. '!he package of tax cutS
introduced by the President in December will help Americans meet the costs' of
raising their families, acquire more education and training, and save for a variety
of purposes,
.
�7
The Role of Deficit Reduction
When viewed in the context of the tllree components of the
Administration's economic strategy, it is clear that deficit reduction is not an
end in iL~elf, but rather a means to the end of greater national investment and
higher living standards. Deficit reduction has the beneficial effect of increasing
national saving .(by reducing the negative saving of the Federal Government).
This increased national saving is available to private entities. for investment in
physical capital like machinery and equipment. which in turn can increase"labor
productiviry. But squeezing worihwhile public' investments out of the budget to
make room for private investment is the wrong way to reduce the deficit.
Moreover, one should recognize that deficit reduction by itself is contractionary
fiscal policy and constrains aggregate demand. Therefore. there are limits to the
amount of deficit reduction that the economy can be expected to withs\lUld in a
short"period without endangering economic growth. Over the long nin, deficit
reduction makes room for more private investment. but in the short nin it
depresses aggregate demand and can even depress private investment.' For all
these reasons, the Administration prefers to engage in gradual and measured
deficit reduction. Our success to date in reducing the deficit is one reason why
the Administration opposes a balanced budget amendment to the Constitution ..
Shortcomings of a Balanced Budget Amendment
\
First. everyone should be aware that rhe proposed amendment by itself
would not reduce the Federal deficit by even one dollar. All the hard choices
about cutting expenditures or raising revenues (through either laxes or fees) .
would slill remain. Congressional consideration of a balanced budget
amendment without first specifying the changes to cxpendilUres and taxes
required to bring the budget into balance provide.s rio evidence of the fiscal
discipline .necessary to achieve real deficit reduction.
One of the great fallaCies behind the logic for a balanced budget is.the
premise that the size of rhe Federal budget deficit is purely the result of'
deliberate policy decisions. 111is is not the case: the pace of economic activity
has a major role. An economic slowdown automatically depresses tax revenues
and increases spending on programs such as unemployment and Food Stamps.
Consequcnlly. the deficit automatically widens and tlle additional disposable
income made availabie to consumers cushions the effects of the recession.
�7
The Role Of Deficit Reduction
\Vhen viewed in the context of the three components of the
Administriltion's economic strategy, it is clear that deficit reduction is not an
end in itself, but rather a means to the end of greater national investment and
higher living standards. Deficit reduction has the beneficial effect of increasing
national saving (by reducing the negative saving of the Federal Government).
This increased national saving is available to private entities for investment in
physical capital like machinery and equipment, which in tum can increase'labor
productivity. But squeezing worthwhile public investments out of the budget to
make room for private investment is the wrong way to reduce the deficit.
Moreover, one should recognize that deficit reduction by itself is contractionary
fiscal policy and constrains aggregate demand. Therefore. there are limits to the
amount of deficit reduction that the economy can be expected to withs\alld in a·
short period without endangering economic growth. Over the long run. deficit
reduction makes room for more private investment, but in the short run it
depresses aggregate demand and c!m even depress private investment. For all
these reasons, the Administration prefers to engage in gradual and measured
deficit reduction. Our success to date in reducing ihe deficit is one reason why
the Administration opposes a balanced budget amendment to the. Constitution.
Shortcomings of a Balanced' Budget Amendment
\
Fimt, everyone should be aware that the proposed amendment by itself
would not reduce the Federal deficit by even one dollar: All ihe hard choices
about cutting expenditures Or raising revenues (through either taxes or fees)
would still remain. CongreSSional consideration of a balanced budget
amendment without first specifying the changes to expenditures and taxes
required to bring the budget into balance provides no evidence of ihe fiscal
discipline necessary to achieve real deficit reductio~.
,
One of the great fallacies behind the logic for a balanced bUdget is the
premise that the size of the Federal budget deficit is purely the result of·
deliberat,· policy decisions. 'This is not the Case: the pace of economic activity
has a major role. An economic slowdown automatically depresses ·tax revenues
and increases spending on programs such as unemployment and Food Stamps.
Consequently, the deficit automatically widens and tl,e additional disposable
ineoJi)c made available to ~onsllmers cl!shions the "effects of the recession.
�7
The Role of Deficit Reduction
When viewed in the context of the three components of the
Administration's economic strategy, it is clear that deficit reduction is not an
end in itself, but rather a means to the end of greater national investment and
higher living standards. Deficit reduction has the beneficial effect of increasing
national saving,(by reducing the negative saving of the Federal Government).
This increased national saving is available to private entities for investtnent in
physical capital like machinery and equipment, which in tum can increase', labor
productivity. But squeezing worthwhile public investtnents out of Ibe budget to
make room for private investtnent is Ibe wrong way to reduce ,lbe deficit.',
Moreover, one should [CCOgnize Ibat deficit reduction by itself is contnlctionary
fiscal policy and constnlins aggregate demand. Therefore, Ibere are limits to the
amount of deficit reductlon Ibat the economy can ~ expected to wilbs\8lld in a
short period wilbout endangering economic growlh. Over Ibe long run, deficit
reduction makes room for more private investtnent, but in Ibe short run it
depresses aggregate demand and can even depress private investtnent.' For all
these reasons, Ibe Administration prefers to engage in gradual and measured
deficit reduction. Our success to date in reducing ihe deficit is one reason why
the Administration opposes a balanced budget amendment to Ibe Constitution,
Shortcomings of a Balanced Budget Amendment
\
First, everyone should be aware Ibat the proposed amendment by itself
would not reduce the Federal deficit by even one dollar. AU Ibe hard choices
about cul.ting expenditures or raising revenues (through either taxes Or fees)
would still remain, Congressional consideration of a balanced budget
amendment without first specifying the changes to expenditures and taxes
required to bring the budget into balance provides no evidence of the fiscal
diScipline necessary to achieve real deficit reduction,
One of Ibe great fallacies behind Ule logic for a balanced budget is the
premise that the size of the Federal budget deficit is purely the result of
deliberate policy decisions. 'Illi, is not the case: the pacc of economic activity
has a major role. An economic slowdownamomatically depresses tax revenues
and increases spending on programs such as unemploymem and Food Stamps.
ConscqueJ1lly, the deficit automatically widens and the additional disposable
i>lcomc made available 10 consumeLS cushions the cffcC1S of the recession.
�7
Tile Role of DefiCit Reduction
When viewed in the context ·of the three components of the
Administration's economic strategy, it is clear that deficit reduction is not an
end in itself, but rather a means to· the end of greater national investment and
higher liv lng standards. Deficit reduction lias the beneficial effect of increasing
national saving .(by reducing the negative saving of the Federal Government).
This increased national saving is available to private entities for investment in
physical capital like machinery and equipment, which in tum can increase· labor
productivity. But squeezing worthwhile public investments out of the budget to
make room for private investment is the wrong way to reduce the deficit.
Moreover, one should recognize that deficit reduction by itself is contractionary
fiscal policy and constrains aggregate demand. Therefore, there are limits to the
amount of deficit reduction that the economy can be expected to withS\a1ld in a
shon period without endangering economic growth. Over the long rim, deficit
reduction makes room for more private investment, but in the short tUn it
depresses aggregate demand and can even depress private investment For all
these reasons, the Administration prefers to engage in gradual and measured
deficit reduction. Our success to date in reducing the deficit is one reason why
the Administration opposes a balanced budget amendment to the Constitution.
Shortcomings of a Balanced Budget Amendment
\
First, everyone should be aware that the proposed amendment by itself
would not reduce the Fedeml deficit by even one dollar. All the hard choices
about CUlling expehditures or raiSing revenues (through either taxes or fees)
would still remain. Congressional consideration of a balaneed budget
amendment without first specifying the changes to expenditures and taxes
required to bring the budget into balance provides no evidence of the fiscal
discipline necessary to achieve real deficit reduction.
One of the great fallacies behind the logic for a balanced budget iuhe
premise that the size of the Federal budget deficit is purely the result of
deliberate policy decisions. This is not the case: the pace of economic activity
has a miljor role. An economic slowdown.automatically depresses tax revenues
and increases spending on programs such as unemployment and Food Stamps.
Consequently, the deficit automatically widens and the additional disposable
income made available 10 consumers cushions the effects of the recession.
�7
The Role of Deficit Reduction
When viewed in the context 'of the three components of the
Administration's economic strategy, it is clear that deficit reduction is not an
end in itself, but rather a means to the end of greater national investment and
higher living standards. Deficit reduction has the beneficial effect of increasing
national saving (by reducing the negative saving of the Federal Government).
This increased national saving is available to private entities for investment in
physical capital like machinery and equipment, which in tum can increase' labor ,
productivity. But squeezing worthwhile public investments out of the budget to
make room for private investment is the wrong way to reduce the deficit.,
Moreover. one should recognize that deficit reduction by itself is contractionary
fiscal policy and constrains aggregate demand. Therefore, there are limits to the
amount of deficit reduction that the economy can be expected to withs\and in a
short period without endangering economic growth. Over the long run, deficit
reduction makes room for more private investment. but in the short run it
depresses aggregate demand and can even depress private investment' For all
these reasons, the Administration p,refers to engage in gradual and measured
deficit reduction.. Our success to date in reducing the deficit is one reason why
the Administration opposes a balanced budget amendment to the Constitution.
.
,
.
.
Shortcomings of a Balanced Budget Amendment
,
.
\
First. everyone should be aware that the proposed amendment by itself
would no! reduce the Federal deficit by even one dollar. All the hard choices
about CUlling expenditures or raising revenues (through either taxes or fees)
would still remain. Congressiona!:consideration of a balanced budget
amendme~t without first speCifying the changes to expenditures and taxes
required to bring 'the budget into balance provides no evidence of the fiscal
discipline necessary to achieve reai deficit reduction.
One of Ole great fallacies behind the logic for a balanced budge! is the
premise that the size of the Federal budget deficit is purely the result of·
deliberate policy decisions, This is not the case: the ,pace of economic activity
has a major role, An economic slowdown automatically depresses tax revenues
and increases spending on progran'lS such as unemployment and Food Stamps.
Consc<pently. the deficit automatically widens and Ole additional disposable
income made available to consumers cushions the effects of the recession.
�8
During economic expansions, the process works in reverse, and the deficit
automatically narrows. These effects are tenmed "automatic stabilizers" because
they act by themselves to moderate the effect of business cycles.
But a balanced budget amendment would throw these automatic stabilizers
into reverse. Congress would be required to raise taxes or cut spending in the
face of a recession, to counteract temporary increases in the budget deficit.
Rather than moderate the ups and downs of the business cycle, fiscal policy
.
would be forced to aggravate them.
With fiscal policy deprived pf its counter-cyclical role, monetary policy,
conducted by the Federal Reserve, would be the only tool available to stabilize
the economy. But even well-executed monetary policy (wruch assumes the
Federal Reserve promptly recogrrizes changes in the business cycle and
aggressively acts to offset the effects) cannot completely compensate f1?r the
lack of fiscal policy flexibility. In part, the inability of monetary policy to fill
.
.
the void reflects the fact that monetary policy acts with a long, and uncertain,
lag. Moreover, the Federal Reserve could become handcuffed in the case of a
severe recession, its scope for action limited by the fact that it can reduce· ..
interest rales no lower than zero, and probably not even that low in practice.
Moreover, the more aggressive interest rate movements necessary to offset
macroeconomic fluctuations could· actually increase the volatility of financial
markets -.. something the Federal Reserve would probably try to avoid.
\
The role that fiscal policy can play in smoothing economic fluctuations is
one of the great discoveries of modem economics. A balanced budget
amendment to the Constitution would eliminate the automatic stabilizers from
fiscal policy, anG would essentially remove an imponant element from the
economic policy toolbcx .
.The Role of Investment
The Administration is embarked on an ambitious agenda to increase
. investment in many types of capital. One aspect is to increase the stock of
. human capital. by improving the education and training prospects for all
Americans. Examples of Administration initiatives in this area are: increased
funding for Head Stan, Goals 2000, the School-to-Work transition program,
. AmeriCorps (the l\:ational Service· Program), and the income contingent student
loan program. All these programs suppon human capital development
throughout a persoll's lifetime. .
,
�9
In the area of science and technology, the market itself may not provide
sufficient incentives for development of all socially desirable invesunems .. This
is because the benefits of research, do not always accrue to the inventor, but
. rather' to society as a whole through the dissemination of scientific and
technological advances. The Administration recognizes the importance of
scientific research, an area that has long received bipartisan support in budget
decisions. While total discretionary spending remains approximately fixed in .
nominal terms, Federal spending on science and technology has edged upward
during this Administration.
The Admirlistration policy toward opening foreign markets complements
its emphasis on investment. Exports play an increasingly important role in the
livelihood of American workers since over 10 million American jobs now
depend on exports and export-related jobs pay substantially higher thai,1 average
wages. In addition, the reduction of barries to trade raises the standard of
living by providing a wider variety of goods to American consumers at lower
. prices. And foreign competition can lead to greater efficiency and productivity
in U.S. businesses. Four examples of the Administration's commitment toward
opening ~oreign markets to U.S; goods and services are: NAFI'A, the Uruguay" .
. Round of the GAIT, and rhe trade discussions that took place at the Summit of
the Americas and the recent meeting of the Asia Pacific Economic Cooperation
(APEC) forum:
'
\
\
The Unfinished Agenda
Ov~r
the next 2 years the Administration plans several major policy
initiatives. One of these, middle-class tax relief, was announced by the
President in December. There are three main elements to the initiative -- a
child-based income tax credit; a deduction for some of the costs of post
secondary education: and an expansion of individual retirement accounts. All of
these proposals are intended to help average Americans cope with the demands
of today'f: economy. Secretary Rubin, in his testimony, will go over these in
detail.
.\ second initiative was detailed by the President last week -- an increase
in the minimum wage. 111is proposal reflects a detennination to ensure that
working /;unilies can liflthemsclves out of povClty, as well as a recognition that
Inflation has substantially eroded the real value of the minimum wage.
'n1C
�10
proposed increase of 90 cents per hour, phased in over 2 years, would go a long
, way toward reversing the effect of inflation, without any discernible impact on
employment prospects,
Othu .Administration initiatives include welfare .reform and health care
reform. In both these areas, the. Administration proposed legislation in f994.
We intend to work with the Congress in a bipartisan manner to ensure that
progress can be made in each of these crucial areas this year.
One last ongoing Administration initiative. is the effort to reinvent
government -- the National Performance Review (NPR), under· the direction of
Vice President Gore. Through the 'end of 1994, the Administration's reinventing
government reforms had reduced the Federal workforce by about 100,000
employees and had made substantial progress in the area of govemnient
• procurement. A second round of NPR reforms was announced in Decl\mber
. 1994, with projected savings of $26 billion over 5 years. While the NPR
generates savings in Federal spending, this is not the only reason to undertake
reinvention. The goal of the NPR reforms is to improve government and to
provide services that are in the national interest. That is, we want to create a
government that is leaner, not meaner.
Conclusion
,
.
\
As you know:' 1994 was a very good year for the American economy.
The solid economic growth, combined with a 'Iow rate of inflation and declining
unemployment made for the best overall economic performance in a generation.
But there ~re many challenges before us, the most fundamental of which is
restoring the American Dream to all families in a world of changing technology
and increasing competition.
.
.
Some important foundations to achieve the goal of higher living standards,
broadly shared, ha~e already been put in place. The fiscal 1996 budget
represe~ls another step. We look forward to working :with you and the
American people in this common endeavor.
�rabl~
1
-
1995 Forecast COII'fl"IrtSM
Arn.ml
1995
Gnr.
3.1
40/44 gr«rtb (X)
199'
,.,
tao .• ,... ,., ......... .,.,., •.•
Glue Chip •••••••••••••••••••••
2.1
Mi'd'Se-s&icn Re"'N (July) ......
~ini.tr.tion
GOP
~I.tot'. ~4Q
Z.,
2.'
forecast ••••••••
1.9
2.4
(2.1:)
l.S
2.6
2.S
'S
2.'
CBO ................ _........ ,.
2.'
2.'
I{\II': Chip .....................
3.'
3.2
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Mid'SHsicn Review (.Iuty) •••.••
'.B
Z••
2.9
2.9
3.'
Adlrinistr.tion Forecast•••••• ~.
,,!'OWl
CPI-t1. WItO
ClIO
sture
,.7
(X)
19'1.
Z.,
'.3
(2..3)
(2 • .6)
(2,4)
2.S
M
2.5
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'.3
...
2.5
3.•
3.l
3.'
(l.o}
3.'
{3.S}
3.4
(3.4)
3.4
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3.
3.1
•••
•••
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3.'
(l.7)
3.'
3.2
3.'
3.'
' 3.2
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5.7
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....'.1
3.2
'.2
r~t.~.~; •• ~
'.5
....
3.0
3.0
'-'
3.5
2.8
(3.0)
(l.1)
M
M
5.5
5.'
C~ip
2.'
U
(3.1)
2.'
...........................
.....................
Adalnt.tration
1m
2.J
1.8
growth (X)
19"
1996
'.S
'.S
1993
Real
I)~thif
w.
ANNUAl. AVEItAG£S
fh~ee·.onth
T-bill
!HUi!' Chip
3.'
\
,OO ............
\
~.~
~
4.3
6.2'
,
Hid-Sessio:) 1I<''''lew (July).., .•.
U
forecast ••••••••
1 en''(C'ar T-not(!
~~.-~
..,
............
................. ...
Ad.inigtr~tion
.
5.'
5.9
~~-~~.~~
•
S. \
4.•
,
..
S.l
5.0
5.5
S.S"
'.S
5.5
<.'
5.5
5.5
... ...
7.7
'.7
7.'
8.5
7.'
7.9
7.0
t"",,,,,..I.. t",
1/11"""".....,,'
,~.~
",. v....'.....,....v...., liQ........ ,
1935."" 1990' ..... ,.. "",d. I.. .;......... 'Y 1995. aM J"'_I.
• A 1I1".. C"'"10'....&1 1o,
.h<>
10·~ .... , '.'.
rc _1
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""'1''''.'''
..
'-'
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...... , ....... , ......
N ...... "'..,. i,., ~., .."tn--
..___
'.1
S.7
6.1
Kid'SeslOion Review (July} ••• , ••
Ad.inIstretiQO fQrcea$t.~ ••••••
• !:Il1IfI ChOp
"..
\
S••
W.
7.1
...........................
COO
&lvto Chip
6.1
'.1
(S.5 to 5.3)
'.2
.
Hid·sess;o~ R~view (Juty) ••• , ••
r~t ••••••••.
Adlilnlstrati(lfl
5.9
_
.................. , .,
x
Blue Chip
~
CflO ...........................
.
'.1
_
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(X)
~
btec
~
tk'IeIIpt~t
~
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7.'
<.7
7.'
6.7
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7.'
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"
1><0.,....., llt96 _ ... _ ... '" Oc..,lHM t1l1l4.
r ... ""'1><".'...... is ~~ N>o<.rt $0 " ...'. po"" .1>0"" tn. "",,,,,,.,.b..
aiv-"
"'.1_"
�Chart 1•. Share of Aggregate Family Income by Qulnllle
Between 1973 and 1993. the share of money income received by the 20 percent of families
with the highest incomes rose substantially. The shares for all other quintiles fell.
Percent
50
.
Ir-~~~----------------~~------------------~--------------,
40
30
. 20
10
o
Lowest QuintUs· Second QuintUs Third Quinti!e
II
Source: Department of Commerce.
1973
Fourth QuintUs Highest Quintile Top 5 Percent
~ 1993.
�J
Chart 2. Structural Budget Deficits
PolicY,changes enacted in 1993 arrested the upward trend of the deficit. and the President's
proposed budget for fisca11996 will achieve even more deficit reduction.
.
Percent of potential GDP
5
Without deficit reduction
\.
.. ..
4
.. .'
'
,
• .'
• '
..
'
.'
""" ...... .. ---"., ..
.. -.' .' --._-----
3
/
2
With OBRA93 and
1996 budget package
o
Ll
1993
~-
1994
1995
1997
1996
Rscal Years
1998
Note: Structural deficit excludes cyclical revenues and outlays.
Sources: Council of Economic Advisers and OHice of Management and Budget,
1999
2000
�..
Remarks by.Laura D' Andrea Tyson
Chair of the Council of Economic Advisers
before the Committee on the Budget
U,S, Senate
Thursday. February 10, 1994
Mr, Chairman; before 1 get started, I want to thank you and me Conunlttee for the
opportunity to testify today,
. Just about I year ago, President Clinton proposed a multi~faceted economic plan to
reverse the growth' of the Federal budget deficits and to redirect private and public sector
spending toward productivity--enhancing investment.
With the support of Congress. the economic plan proposed last year became the basis
for OBRA 1993, the largest deficit reduction plan in our Nation's history, This plan
strengthened the Budget Enforcement Act and extended the discretionary spending caps
through 1998. It proposed specific spending cuts in a wide variety of both djsc~tionary and
mandatory programs, Approximately one·half of the total estimated deficit reduction is
anributable to' savings on the spending side of the Federal budget. The remainder comes
from additionaJ reven~es. Over 80 percent of the tax increases contained in OBRA 1993 are
borne by those with annual incomes over $200,000. In fact, the income tax rate increases
contained in OBRA 1993 apply only to the 1.2 percent of households with the highest
incomes. For those workers at the bottom of the income scale. OERA 1993 substantially
increased the earned income lax credit {EITe). The result of these changes is a tax system
that is mo::'e progressive than at any time slnce 1977.
\
Th'c Situation in February 1993 .
Let us recall where the economy was last year. when the President's economic plan
was' proposed. The recovery had a stop and go feel to it. Throughout 1992. the
unemployment nue re;nained' above 7 percent. Too few jobs were being created, and there
was great uncertainty about the pace of economic expansion,
. Federal budget deficits were Jarge and growing. apparently on an unsustainable ·path.
Large amounts of Federal borrowing throughout the '1980, led to a legacy of debt.
'transforming the UnHed States from a net lender to the largest debtor nation in the world.
High levels of Federal borrowing Jed to real long-term interest rates that were very high by
historical standards. These high inte~est rates discouraged business~s from making
productivity-enhancing investments.
, As the Administration took office, the economy's long~term prospects looked quite
poor. Labor 'productivity grQ\.vth hap tailed off to an anemic 0.9 percent per year over the
1973~92 period.
Federal Government, by running large budget deficits. made it more
difficult for the private s~tor ,to invest for future prosperity, Measures of the quality and
The
�,,'.
2
.
quantity of public infrastructure suggested that the United States was also under~investing in
public capital: MHHons of Americans were functionally iUiterate and, on intematlonal test
scores, American school children suffered in comparison to their foreign counterparts in
mathematics and science education. On top of this, a rising chorus of isoiationist sentlment
its back on international trade agreements intended to open up
called for America'to
world markets for our goods and services.
tum
trends were ,WOrst for Jowwincome families. The 19805 saw a dramatic widening
in the inequallty of earnings. From: 1977-1990, the share of national income received by the
5 percent of the population with the highest incomes rose from 18.6 percent to 24.5 percent.
, In contrast, the share of national income received by the poorest 20 percent of the population,
fell from :..7 ~rcent to 4.3 percent. A widening of the wage dis.tribution caused much of trus
increase in inequaljty. Wages for those at the top of the income distribution significantly rose ,
in real tenns, while wages for those at the bottom of the income distribution acrually fell in
real terms. Wages for those in the middle 60 percent of the income distribution were
virtually stagnant Workers with little education or job skills were falling further and further
behind. Many low~jncome families with children justifiably felt that work did not pay sinc~
after-tax compensation from working often barely exceeded the potential benefits that could
be claimed through the welfare system.
Tht~
The Situation Today
In February 1994, the economy is poised for a sustained expansion. Real gross
domestic product (GDP) grew by 2.8 percent last year, with the second half of 1993 turning
ir. a much stronger performance than the first half. In fact, the economic growth in the fourth
quaner of 1993 was the strongest in 6 Yf!ars. Long~term interest rates have declined by a full
. percentage point since Election Day in November 1992, and the interest-sensitive components
of the economy have robustly responded to this decline. Overall•. these interest-sensitive
components of spending accounted for the lion's share of economic grov:lh in i993, Housing
starts rose 25 percent from July to December 1993, producer durable investment increased by
over 18 percent from the fourth quaner of 1992 to the fourth quarter of 1993, and consumers
are purchasing more in the way of durable goods, Consumer confidence has been improving'
since the.middle of 1993. All these are positive Signs.
Inflation figures for 1993 indicate that price increases have moderated. The consumer '
price index (CPI) increased a scant 2,7 percent in over 1993. the sm.allest increase 'since 1986.
The core CPI (excluding the volatile food and energy components) was 3.2 percent. the
smallest increase since 1972. And the implicit GDP price deflator increased at .a rate of 2.2
percent. the smallest increase since the Johnson Administration,
The decline in iong~terrn interest rates since January 1993 has tracked very closely the
fOl1unes of the Adminislralia:n's ecopomic plan. This is evidence that the financial markets
view the deficit reduction proposals as substantial and credible, The credibility of our deficit
reduction plan rests on four g~neral premises, First, discretlonary spending is fixed in
�3
nominal terms, an objective tcst that is rard to evade by budget gimmickry. Second, specific
spending cuts are proposed, showing that it is indeed possible to achieve the spending targets
in the proposal. Some of these proposed spending cuts take on budgetary sacred cows,
demonstrating the Clinton Administration's commitment to reduced spending, regardless of
past treatrn,ent of programs, Third, the revenues raised generally are permanent and real.
There is liltle in the revenue raising component of the President's economic plan that simply
accelerates revenues into the budget window or that pairs temporary (e,g.• .5 year) revenues
with perrmment spen~ing programs. Fourth. the economic forecasts on which the economic
plan is based are credible, All fOUf premises are important in convincing the financial
markets that the Federal Government will become a smaller player in the debt markets of the
future, This realization helps reduce the long-term cost of borrowing for all market
partkjpants.
In terms that are important to most Americans-jobs-the economy enters 1994 in a
much improved position from that at the start of 1993, During the past year, payroll
,employmem increased at a rate of over 160 1000 jobs per month. nearly 2 million jobs in all,
This is 1/4 of the way toward the Administration's goal of creating 8 mimon jobs in 4 years.
After 1 y~tr, private employment growth has exceeded the lota1 for the entire tenure of the
previous Administration. Moreover. the CounciJ anticipates more than 2 million jobs being
created in 1994, keeping the economy on track to meet the job creation goa1.
It is, true that most of tbe jobs created in 1993 are in the service sector. However, it
does nat follow that all of these are "bad jobs", For example, at the start.af 1994, there are
'almost 200,000 more construction workers than at the beginning of 1993 and almost 400.000
more retail workers: Household surveys indicate 1 million more workers in mana genal and
professional specialty positions over the same period. And with the factory workweek and
overtime at postwar record high levels, there is plenty of reason to expecl that many of the
'lobs created in 1994 win be in the manufacturing SeflOL
'
The Administration 1s Economic Forecast
The Administration has been· very concerned to keep its forecasts of key ~onomic
responsible and credible. Although practicing the art of forecasting economic
performance is certainly a way to keep one humble, it is easier to adjust econatn.ic policy to,
situations in which the economy outperforms the forecasts than to situations in which the
forecast outpe..-forms the economy. And our forecasts are not unduly optimistic. Indeed, they
are very similar to forecasts produced by \he Congressional Budget Office, Q1e Blue Chip
cotlsenst.:s forecast, nnd leading private sector ·forecasters" All of these forecasts ca:l for
variabl~
moderate real growth'jn tbe overalJ economy, declining unemployment rales, low inflation,
and fairly stable long~term interest rates,
.
As shown in Table 1. the Administration forecasts real econo;n.ic growth of 3.0
percent in 1994, tapering orr slightly' to 2.7 percent in 1995, and to 2.6 percent in 1998.
Inflation, as measured by the CPI. is forecast 10 be 3.0 percent in 1994,' gradually increasing
�4
to 3.4 percent in 1998. The civilian unemployment rate is forecast to average 6.3 percent in
1994, d:opping over time to an average of 5.5 percent in 1998.
There are two things to note about the forecasts of the unemployment rate. First, this
measure uSes the old definition of the unempl,oyment rate, computed using a survey method
used by the Census Bureau until 1994. The new measure of unemployment is expected tQ be
somewhat higher than the old rate, probably 0.3 • 0.9 percentage points higher on average
the precise: month-to~month discrepancy is impossible to know. We still forecast
unemployment using the oid definition beCause it makes comparisons with previous data .
easler and because mooels of the economy have not yet been adjusted to incorporate the new
definition. A second thing to note is that the forecast of the unemployment rate presented
here is somewhat lower than that contained in the Budget This is because the Budget went
to press using a forecast we made in early December. But the economy in the fourth quarter
of 1993 exhibited stronger growth and a sharper drop in unemployment than expected,
Incorporating this new information (as we do here) provides a slightly changed forecast for
future unemployment levels.
.
Regarding interest rates, we forecast that long-term interest rates wiH remain just about
at the levels they were when we made the forecast last month, Short-term interest rates (e.g.,
the 3~month Treasury bill rate) are forecast to increase somewhat over the 5-year budget
window as the economy strengthens and moves closer to capacity. Last week's
announcement by the Feccral Reserve that short~term interest rates will increase slightly is
consistent with our forecast. which calls for a 3-month Treasury bill rate averaging 3.4
percent in 1994.
As a measure of the effect of OBRA 199-3, consider the projected size of the Federal
deficit compared to Gross Domestic Product CODP) for the next several years. (See
Appendix,) In fiscal 1992. the Federal deficit was 4.9 percent of GDP, in fiscal 1993. it waS
4,0 percent of GOP, in 1995 it is projected to drop to 2,5 percent of GOP, and, by 1996 is
projected to fall still further to 2.3 percent of GOP, the lowest level since 1979.
Another way to measure the fiscal effect of OBRA 1993 is to examine the ,trend of
public debt to GOP, (See Appendix,) In 1981, Federal debt held by the public equaled 26.5
percent of GDP. Over the next dozen year's, this figure increased dramatically, nearly
doubling to 51.6 percent in 1993, As a result of OBRA 1993. this trend will be first
stabilized and then reversed. The relative level of Federal debt held by, the public will begin
to decrease: over the next several years.
No O!1C can accuse this Adminislratior. of incorporating rosy scenarios into its
forecasts. In fact, for 4 out of the 5 years in the budget period, the AdmJnislration forecasts a
higher defIcit than CBO (though the differences are quite small). We believe it is critical for
policy makers 10 craf~ economic poli~y based on credible da..a and not to be misled by (or to
mislead with) smoke and mirrors, The Clinton Administration prides itself in using cred:bJe
economic forecasts to craft its. economic policies,
\
�5
The Economic Agenda
The 1995 Budget was quite difficult to construct, as the discretior.ary spending caps
began to constrain the activities of the various agencies. For the first time in memory, agency
heads came to realize that increasing spending in aI'Y program meant that cuts in other
progralf'.5 had to be made. This was not a pleasant experience for the participants, and it will
only get more difficult in future years. However, it is necessary to reorient Federal spending
. priorities. And this Budget does just that, by providing for several new and expanded
investment initiatives. while scaling back or eliminating entirely programs that are less
valuable.
Federal employment will be reduced under our 1995 B~dget President Clinton has .
issued an executive order calling for a reduction of 100,000 full-time equivalent employees.
Our Buoget exceeds that goal. Further reductions. will be necessary to keep future Federal
spending within [he discretionary spending caps and to'meet the personnei reductions
recommended in.the Vice President's National Performance Review.
However, while discretionary spen.1ing is held fixed in nominal terms' and Federal
employment is reduced, o'ur Budget proposal calls for 'increases in much-needed public
investments. These investments will complement the increased levels of private sector
investment we are seeing as a result of lower long~tenn interest rates. They are intended to
increase productivity in both the private and public sector and to heip provide a strong .
. foundation for future eConornlc gro\\1:h. Investment initiatives fall into thr~e main categories:
(l)
Physical capital--including full funding for the core highways program under (STEA,
additional resources for Clea.'1 Water State revolving funds, and additionaJ funds for
high perfoImance computing and the information highways,
\
(2}
Human capital-including increased funding for Head Start. the National Service
.
.
Initiative, the innovative schoo!-to·work program jointly sponsored by the DepartC1ems
of Education and Labor, and the Workforce Security Initiative sponsored by the
Depa.t'~ment
Labor.
of
(3)
Technological advanccs·-including increased fundlng for the National Science
Foundation to support research, expansion of the manufaclurinE extensio:l programs,
and reorientjng the research priorities of the national defense and energy laboratories
toward collaborative work with industry,
This year's Budget contains a number of, these investment ir.itiatives. All are intended
to provide a new direction for Federal programs, One of helping .the private sector provide the
kind of 'econom)c growth that will improve the living standards of all Americans. Future
Budget.'. will continue this trend.
•
�6
In the Slate of the Union address,.ibe President stated that he will' proJXlse a welfare
reform program this spring. Since t~is plan is still under development, I am unable to discuss
specifics. However, the spring package will be the third part of a comprehensive approach to
"end welfare as we know it. The first step was the substantial increase in the earned income
lax credit (Erre) contained in OBRA 1993. When fully phased in (by 1996). the EITe
increases will help meet the goal that families with chlldren and a full-time worker shall no
longer live in poverty_ The second step toward we}fare reform is the Health SecuritiAct.
which will eliminate the current perverse situation where a person receiving welfare could
lose their Medicaid health care coverage by accepting a private sector job. Bot.i these steps
attempt to reach the simple goal of making work pay. The third step will be contained in the
spring proposal. By enacting all three sleps.,Americans will have helped transform welfare
into a program that moves people into p,r1vate sector jobs where they can provide for
themselves and their families.
The Balanced Budget Amendment
Ther:. has beeD much recent debate about the need for an amendment to the
Constituuon that would mandate that the unified Federal-budget be balanced on' an annual
basis (with possible exceptions for times of war and under COnd;1lons where a supennajority
of Congress approves an annual deficit). This Administration believes that such an
amendment would be counterproductive and that there is no need to modify the Constitution
in this manner.
By itself, an amendment to the Constitution would not reduce the Federal deficit by a
single penny. AU the hard choices about the appropriate amount and where to direct public
resources would -still remain, It takes leadership to make these difficult choices, the type of
;
leadership President ClInton provided when proposing the deficit reduction pian that
eventually became OBRA 1993.
On the economic front, a balanced budget amendment would put the fiscal policy of
the Federal Govcinment in a straitjacket that might imperil macroeconomic stability. The
Federal budget acts as an automatic stabilizer, adjusting to changing economic_ conditions.
When the economy is expanding, the tax system acts to take addhional resources out of the
private sector economy; preventing it from overheating and causing inflation. When the
economy is contracting, the transfer system i:1jccts resources into'the economy, moderating
the cc'onomic downturn. When the economy)s operatir:g at Jess than full capaclty, it is
natural for the Federal hudget to be in deficit: this is its stabilizing role. A balanced budget
amendment would prevent thi~ automatic stahilizer from operating as h has during the entire
post~waf pcr;od and would likely act 10 exacerbate recessions. Moreover. it is possible that a
balanced budget amendment could push economic policy decisions to the courts, hardly the
appropriate place for making macrocconor:lic p~licy.
.
.
.
�7
The economic effoctS of a balanced budget amendment could be sobering. For
mstance, !iUppOSe we enacted an amendment that required the Federal budget have no defici:
afl.er 1999, In crude tenns, this would require reducing the annual deficit by about $200
bililon in ]999, ~n top of the deficit reduction amounts contained in OBRA 1993. Simulation
analysis with rnacroeconomi,c models suggests that this would prove extremely detrimental to
the economy. In (he year 2000 real GDP would be about $85 billion lower; payroll
employmen;, over 2.5 million jobs lower~ and the unemployment rate more than 2 points
higher. And these numbers aSSume that the Federal Reserve acts to lower short· term interest
rates by 2 full percentage points below the baseline case. In short, even if monetary policy is
eased sliarply 10 cushion the effects of a balanced budget amendment. the required fiscal
contraction could pilt the economy through the proverbial wringer and' cost millions of jobs.
. Finally. a balanced budget amendment would pUt a premium on budget gimmickry. You, on
this Committee, hardly need to be told aboat the length to which decisions about resource
allocation have been distorted by pa;st budget rules. A balanced budget amendment would
just raise the stakes for budget gamesmanship, leading to programmatic decision made on the
basis of budget ru~es rather than On whether the initiative is actually good for the country.
Conclusion
In conclusion. let me. reiterate the main points of my testimony, Our economic
forecasts make clear that we believe the economy has entered a sustainable expansion phase,
accompanied by low inflation and significant job growth,
The 1995 fiscal budget is one mo.e step On the road toward fiscal responsibility. It
makes progress toward reorienting government spending priorities in favor of investmeill and
away from cUITfnt consu.mption. This is a prudent- strategy for us and for future generations.
Finally, we must avoid taking a detour off the road of fiscal responsibility by enacting
the Balanc-~d Budget Amendment. Last year, the Administration proposed about $500 billion
of deficit reduction .over 5 years. "rhis was good economic polley. a credible pJan that paSsed"
with the President's leadership. In contrast, a balanced budget amendment 10 the Constitution
would be poor economic policy. Moreo,{er, witho:.n the leadership necessary to ensure that
the tough decisions about spending cuts and higher taxes are made in :3 responsible manner, it
is unlikely that such an amendment would be viewed as credible poHcy.
ThiS- concludes my testimony. I would like to thank the committee for inviting me
here today. J would be. bappy. to respond to an"y questions that you may have.
�TABLE 1
~inlstratioo
and CBD
(c~i, ~sumptinns
Calendar Year
'''''
''''
RMt Gl>P, 40/40 growth
,m .
,,,6
,""
".,
'''''
'.S
(X)
CBG a:ss~tIOO$,.,., ...........
,.e
'-'
,.1
'.7
'.6
2.4
Administration fOr~b$t: •••••••
l.'
2.1
2.1
2.6,
'.6
2.5
COO ussU'l'pt ions. , •.•••••• : •••••
,.S
,.S
2.5
Administration forecast ....••••
2.7
'.6
,.e
'.0
'.0
,.0
,..
3.0
l.'
'-'
,.,
'.4
3.4
I'm' Def latar. '-'1/40 growth (X)
COO 8ss1JIptloos••••••••••••••••
'.0
,.,
8S$t.n~ttOf\$ ................
6.'
6. ,
5.'
s.•
5.7
5.7
~OrI!(:8st •••••••.•..
'.5
6.1
5.'
5.1
5.5
5.5
5.9
5.7
5.'
5;5
5.5
eivi t 'ill(! ~t~ itate
[Old basis, except where.
ceo
.".'
1995 Budget
(X)
nOte<l)
6.0
,.,
Adni'iisr.rbtion forecast ••••...•
6.6·7.2 6.2-6.6
t>.O~6.6 5.9-6.5 5.6-6.4
S.a-6.4
HIlli baSiS .. , ••••••••••••••
Thrt'"!!:-..onth l·biH
cae
J.(lO
3.5~
4,30
4."
4.60
4.70
4.70
Ad'IIInistr8tion formst •.••••••
Ten-y~r
IlSSll!pt i OflS •••• , . . . . . . . . . . .
3.40
3.80
4.10
4.40
4.(.0
(..40
CBO assut(ltions .• ,., ... , •••••••
5..!l0
6.00
b.l0
6.20
6.2:0
6.20
1995 Budget
5.80 .
5.110
5.80
5.80
"5.50
5.80
S.7l1
S.10
5.70
~.70
5.70
S.1e
5."
l-tlOlc
fQrt'C8St •••• , . . . . . .
Attr,\ni strbt j on forecast ... " ...
,
�TABLE 2
COMPOSITION OF GDP GROWTH, 1993.vs HISTORICAL AVERAGE
(Annual Peraenta~e Change)
Historical
·Average
1992,4 to 1993:4'
(1995-1992)
Int.erest-sensitive components·'
•
0.8%
2.6%
All other
2.1%
0.2%
2,9%
2:8%
TOTAL
,
Preliminar.y
.• Business fi.xed investment, housing; and expenditures on ConsUmer durables.
Source:
Bureau of Economic Analysis
�Federal Deficit as Percent of GDP
Percent
7 I
I
•
6 .
Pre-OBRA Baseline
\/~~
5
..... ......,.. .,..
•
4
\
3
1995 Budget
\/ •
..
• .....a...::..
~
~
•
2 .
/
I
•
. 1995 Budget
with Health Reform
1
o
""""--r
!
1980
1982
1984
1986
1988
1990
Fiscal Year
Note: Data for fiscal 1994·1999 are projections,
.1992
1994
..
1996
1998
�,.
, '
Net Federal Debt as Percent of GDP
Percent
60 ~I--~~------------------~------~------~------------~
Without Deficit
Reduction Plan
~
50
---_.....
...40
30
"
/
.~
,"
........
..... .
.
------
~.
•• •
With Deficit
Reduction Plan
.~
20'~
10
o
I
I
1980
.,
·1982
1984
1986
1988
1990
1992
1994
1996
Fiscal Year
Note: Excludes effects of health 'Care reform, Net Federal debt excludes debt held by
the Federal Reserve" Data for fiscal 1994-1998 are projections,
1998
�Ten-Year Treasury Note Yields
Percent
7 <0 1
««m<
President's Plan
Introducep (2117/93)
Election
6<5
•
Secretary Bentsen
Details Fiscal
Measures (1/24/93)
/
House Approves
Pr<8sident's Plan (5/27/93)
~<
6<0
•
5<5
1
Final Approval
of Budget (8/6/93)
5.0 1
1992
Source: Department of the Treasury.
,
1993
�,.
Statement of Laura D. Tyson
Chair
Council of Economic Advisers
to the
U. S. Senate Committee on Banking, Housing and Urban Affairs
October 26, 1993
S. 1527, The Fair Trade in Financial Services Act of 1993
I am pleased to be able to testify on S. 1527, the Fair Trade in Financial
Services Act of 1993. The Administration is united in its support of the objectives of
this legislation and expects to work closely with the Congress to see it passed.
. The overarching goal of Administration trade policy is enhanced access to
foreign markets for American exports. We seek open markets and active competition
both at horne and abroad.
We recognize the beneJits we receive from keeping our markets open.
The
United States is an important financial center in the world economy. Our role benefits
both domestic financial institutions and the U.S. finns and individuals that consume
financial services provided by U.S. or foreign firms. Foreign financial firms are active
in the U.S. market and the U.S. economy benefits from their presence. They are
. important provider~ of funds to U.S. firms and conu:ibute to a vigorous and dynamic
financial market. We must maintain open ·markets if we are to remain a major
\
financial center'.
The Administration also recognizes the importance of opening foreign markets
to U.S. provider~ .of financial services. Although U.S. financial firms enjoy open
markets in many countries, they are denied the competitive opportunities enjoyed by
local firms in other markets. Sometimes the barriers to equal competitive opponunities
are de jure. Other times they'are less fonnal.
The Fair Trade in Financial Services Act provides tools that will help us work
to open those markets that. are now closed to U.S. financial firms. We are currently
working to open foreign markets both in bilateral negotiations such as those under t~e
auspices of the United States - Japan Framework for a New Economic Pannership as
well as in multilateral negotiations that are part of the Uruguay round. The Fair Trade
in Financial Services Act will provide us with needed leverage in negotiations to
promote further liberalization.
1
�Although the Administration· would prefer that our trading partners commit to
open financial markets enabling us to undertake commitments on an MFN basis,
progress in eliminating barriers faced by U.S. financial firms has been slow and
. uneven. Our negotiating efforts would be reinforced by adopting. discretionary
authority that enables us to deny. under carefully denned circumstances, certain
benefits to countries that discriminate against foreign financial institutions.
The Act provides for negotiation unless the Secretary of the Treasury, after
interagency consultation, deems such negotiations futile or against U.S. economic
interests. The Act provides for the possibility of sanctions to assist these negotiations.
It does so in a judicious way. The Administration believes that this is essential since
the injudicious use of sanctions could disrupt U.S. financial markets and damage our
status as a world financial center, There is intense competition in the worJd' financial
services industry and restricting the actions of foreign institutions might cause them to
go elsewhere. 1f this were to happen. the harm to American economic interests could
far outweigh any potential gain.
There are two critical features of the Act as it relates to the possible imposition
of sanctions. The first is discretion. The Act accords first priority to effective
negotiation. Sanctions limiting aecess to the U.S. market are available only as a last
resort should negotiations faiL The Administration believes that it must be accorded
maximum discretion to negotiate and that sanctions should be used extremely
cautiously.
The second important aspect of the Act as it involves sanctions is the
. grandfathering of existing activities. Grandfatliering is essential' because it minimizes
the possibility that the potential use of sanctions might disrupt U.S. financial markets.
I want to thank you again for .the opportunlty to express the Administration's
support for faIr trade in financial services. The members of the Administration look
forward to working with you.
2
�Testimony of Laura D'Andrea Tyson
Chair, Council of Economic Advisers
, House Committee on Education and Labor,
Subcommittee on Labor-Management Relations
October 21, 1993
TIlE ECONOMIC EFFECfS OF HEALTH 'CARE REFORM'
Thank you, Mr. Chairman, for the opportunity to come before your Committee to discuss
the economic effects of heahh care refotm.
The United States is facing a health care crisis. The rapidly rising cost of ·health care
huns busine.sses, depresses wages, and contributes to fiscal imbalance. The average working
American will be charged, directly and indirectly, over $7,000 for health care in 1994. The lack
of health security makes many individu~ls afraid to leave their current jobs, discourages oth:rs
from working for small businesses or becoming self-employed, and keeps people on welfare
instead of working,
Reforming health care is a difficult challenge, but one that we must face. Let me first
'outline the problems that force us to take action, and then I will move on to the economic effects
of the Health Security plan.
Why Refoml Health Care?
There are five reasons why urgent health care act,ion is needed.
The first problem is thilt our heahh care system does not provide security to individuals.
When people get !lick, the cost of their insurance can increase dramatically, or they can be
dropped from coverage completely. This situation is a resuh of risk selection practices on the
pan of insurers. Insurers spend large amounts of money trying to select good health risks, and
, avoid bad'risks. This practice is profitable for anyone insurer but is socially wasteful. After
all, someone must,cover the costs incurred by. people who gel sick. The result is that many
people cannot get coverage. and many more fear for their ability to gel coverage in the future.
The second problem with our health insurance system is that it interferes with the
employment decisions of individuals. Almost 40 percent of insurers exclude pre-existing
conditions from their coverage of newly insured people, thus locking many people into their
current in:mrance policies and jobs, Up to 30 percent of employees feel "l9Cked" into their jobs.
Others do not fonn small businesses or become self-employed because of the difficulty of
1
�obtaining insurance. Finally. many people remain on welfare because they will lose their
Medicaid coverage if [hey take a job. lf we are to adapt to changing domestic and international
economic circumstances, we must not penaiize people every lime they change or lose a job.
The third problem with our health care system is that the number of people who do not
have access to affordabJe insurance is large and expanding. Over 37 million people do nO[ have
health insurance. And this is OO( a predicament unique to the unemployed. Three-quarters of
aU uninsured people are in working families, and over one~third of the uninsured are in families
_with at least one full-time year-round worker. We have a system in which millions of people,
many of them in working families. cannot afford the rising costs of heahh care coverage, and
they face the risk of being financially crippled by events ~yond their control, _.... _
II is a myth that insured people do not need 10 worry about the uninsured. Under our
current system, when the uninsured face catastrophic costs. the insured pick up the bill.
Currently, the uninsured pay only 20 percent of the health care costs they incur. while the
privately insured pay 130 percent of their actual health care costs, According to recent estimates.
there wi1l be about $25 billion of "uncompensated care" paid for by the insured In 1994.
Providing health insurance for all Americans could therefore l()wer premiums for the currently
insured by over 10 percent.
The fourth problem with (he health care system is that health care costs are high and
rising. No other country in the world spends more than 10 percent of j(S GDP on health care,
The United Stales spends 14 percent. American consumers spend more on health care than on
fuel oil, electricity, natural gas, other household operations, oU and gasoline. local transponation,
furniture, and other household equipment combined. Even though health care inflation has
moderated recently, during the last quarter it was stili three times as rapid as overall consumer
price inflati9n.
Health care s~nding per working Americ~tl" will be over 57.000 in 1994. American \
workers will, on average, pay $1,864 directly for health care in 1994. Their employers will pay
an additional $3,409. And Federal, S,a,e, and local taxes for health care will total $2,149.
Empirical research suggests that businesses generally respond to higher health care costs
by lowering the wages [hey pay to their employees. Similarly, the taxe!l required to pay for
government health spending are bOTl1e to some extern by workers in the fonn of lower wages,
Thus, if employer conrribulions to health insurance had remained constant at their 1975 share of
compensation through 1992. and if employers had passed these savings on to workers, real wages
per worker would have been over $1,000 higher in 1992,
The fifth problem with our health care system is that it is riddled with waste, exeelis
!iupply, a.nd inefficiencies. Despite Our massive. commitment of resources to health care spending.
the United States ranks 19th out of 26 countries in infant mortality and 18th in life expectancy.
We lose an ,t:stimmed $80 billion a
to fr::lud and abu:>c. Over 5 percent of our 101al health
care spending··conservatively $45 billion in 1992--covers administralive expenses and paperwork.
year
2
�As many as one-third of common medical procedures may be unnecessary and inappropriate.
Hospital prices continue to rise even though hospital beds are in excess supply in many pans of
the country. HMO experience indicates that the cost of medical care can be cm by as much as
1O~20 percent without reducing the quality of care. .
.
,
These diverse indicators' paint a compelling picture of the inefficiency and waste in our
current health care system. Perhaps the most important economic reason for reform is to improve
the efficiency of this system. This in [Urn will make resources avaHable to cover the uninsured
and to address our other pressing economic and social needs.
The Economic Effecls of Refonn
The Health Security plan addresses these fundamental problems with the current system.
It will lower costs, provide security, increase job opponunities and increase the efficiency of the
economy. .Many businesses will see their costs fall, and many others will have access to
covenlge previQusly denied them. Slower cOst growth will anow workers to enjoy faster growlh
in their real wages, and reduced job lock: will increase workers' abiHty to find bener jobs. Let
me describe what I believe to be the impommt economic effects of health care reform.
First. many employers who currentiy offer health insurance will see their costs fall
immediately. Under the Health Security plan, every individual win receive health insurance.
Eliminating uncompensated care in the current system wiJIlower costs to businesses that provide
care, thereby milking resources available for increased wages or additional hiring. Eliminating
corporate "free riders" will also reduce spending by companies that currently provide health
.benefils for their employees and for their spouses who are not covered by their own employers.
Second. the Health Security plan gradually lowers aggregate business spending on health
insurance. Although the business sector as a whole will initially pay more for health insurance.
the reduction in h.ealth care cost growth lowers the growth of premiums over time. In fact, by
the end of lhis decade, preliminary estimates indicate that aggregate business spending on
services covered by the Health Security plan will fall by $10 billion.
Businesses can do many things with the resulting COSt savings. They can: hire more
workers; rai~e wages or provide better benefits for existIng workers; invest in more piant,
equipment, <:ducation and tmining, and research and development~ increase dividends to
shareholders; or lower prices, thereby leaving consumers with more income to spend on other
goods. E<'lch of Ihese outcomes will have a stimulative effect on the economy and will increase
employment. Economic research has not reached clear conclusions about how to apportion the
savings among these effects, Almost all models suggest Ihat wage increases are a likely
response, bur {hey differ about whether illl of the savings win flow into wage increases.
Nevertheless, Ihe effects of lower health care spending are clearly beneficia.l for the economy.
SmtiH businesses will particularly benefit from the HealIh Security plan. Currently small
businesses that provide insurance face administrative COStS 'of up to 40 percent, while large
3
�businesses face costs of only 5 percent. Under refonTI. administrative COS!S (or small finns will
fall by up to 2S percent Additionally, many of those currently insuring small firms will receive
discounts on their premiums.
Although small businesses that do not cUITemly provide insurance win pay more. they are
likely to receive discounts to make health care affordable. There is a common myth that small
businesses cannot afford to pay anything for health insurance. In fact. many ·small businesses
report they would like to provide health insurance for their employees if it were mOre affordable.
According 10 a recent study for the N:folB performed by Charles Hall of Temple University, 64
percent of small business owners would like to provide some or better insurance for their
. workers. When asked why they do not offer insurance. the,~ost common respo~~.i?!65 perc~nt)
was that premiums 'are too high, Ninety~twO percent of small business Qwners agree that the cost
of health insurance is a serious business problem, Under the Health Security plan, with
, affordable health insurance and discounts for small businesses. this will no longer be the case.
TIlird. the Heahh Security plan will result in greater emplovment in the health care sector
in the short ron and a' more efficient health $CCtor in the long run. With the increase in the
number of insured Americans and the decrease in the administrative burden of health insurance,
there will be a significant expansion of employment of health care providers and a decrease.in
empio)'r.nenr of health administrators and insurance workers. By 1996, as many as 400,000 net
new jobs will be created in the health sector. As the cost savings of the plan begin to accrue,
employment in the health sector will grow more slowly, although there will be no absolute
decline in the number of employees,
Over time, the health sector will become more productive, This benefits all of us. We
will be able 10 have the same or better heallh care as weU as: mOre investment, research and
development, or just plain goods and services,
,
Fourth, the efficiency of the economy will also be increased,by reducing job lock and
welfare lock. By providing heallh care security, the refonn wilJ give workers the freedom to
move to jobs where t~ey might be more productive without having to worry about losing their
health insurance. Small finns should panicuJarly benefit from this. since they often have the
hardest time attracting highly skilled workers. In addition, fums should be more willing to hin::
workers with pre-existing wnditions because the new system does not penalize individuals with
a prior illness. This allows for better, ·more efficient matches between employers and employees
and increases the efficiency of the economy.
Som(~
workers may decide to. leave the labor force completely when there is continuous
health coverage. Evidence suggests that about 350·600,000 people will decide 10 retire early
under health care reform, This increase in voluntary retirement may increase employment
opponunities for younger workers"
As you know, some have clairr.eJ thai the Health Security plan will cause substantial
damage to the economy, There is no denying thal some firms and indivi,duals will pay more than
�{hey did prior 10 rcfonTI. In particular, the Heahh Security plan will increase costs for some
young, single individuals as well as for firms that did not prcvl0usly offer health insurance, The
vast majority of Americans, however, will benefit from the reduction in health insurance costs.
the portability of coverage, Ihe lower administrative costs. the reduction of job lock, the lower
costs for small businesses and the self-employed, and the reduction in welfare lock. 1n addition.
as already noted, many employers, bolh large and sman. currently providing insurance win enjoy
lower costs immedialely an,d the business sector as a whole win enjoy lower costs within three
years of the plan's full implementation.
Summarv Conclusions on the Likely Economic Effects of Health Care Reform
,
.'"'~
Neither lhe models nor the data are available to yield a precise estimate of the
employment effects of health care refoon. In many other areas of economics, there are models
that have been trie~ and tested for decades. and economists generally pLace a good deal of faith
, in the outcomes they predict Standard macroeconomic models t for example, can make
reasonably precise predictions about how a tax. increase or a spending cut will affect aggregate'
outpUl or employment
BUllhere arc no existing models that allow us to predict Ihe employment effects of health
care reform with the same degree of precision. ' This is because the appropriate model for such
an exercise would have to make distinctions both between firms that currently provide insurance
and those that do not and among the many ways that firms in either group might respond to a
change in their health care costs. Such a model would also have to predict how individuals
might respond to new incentives in the plan, panicularly those affecting small business creation•
. job mobility, welfare lock, and retirement.
\
In the absence of an approprialely specified 'model, one can generate either small net
positive or $mall net negative effects on employment with existing models depending on the
assumptions one is willing to rnake~~emonstrating the old adage that you get out what you put
in. No! surprisingly, several privatt;-sector ,economists have concluded. as we at the CEA have
<:ondUded. that the net effect of OUT health care plan on the aggregate employment level is likely
10 be sma!l~·our internal estimates suggest a range of plus or minus one~half of 1 percent of the
aggregate employment level. This is because althougb there are some factors in the plan that will
tend to decrease emp!oymern, there are others that
tend both to increase employment and
10 change its corr-positlon. These offsetting factors are likely to cMlceI each other out, although
over time as business spending falls below baseline, the factors encouraging an increase in
employment are Ilkely lO strengthen:
will
;:
On balance, ! am certain that the Health Security plan' is good for f\mcrican business and
lhe American peopie. it diminishes job lock and welrare lock and allows more people 10 become
self-employed. It gets health care cost.s under controL It guardntccS security to all Americans.
�·'
."
And it reduces waSIC and inefficiency in one-seventh of our economy. Reorganizing our nealtb
will help U!i realize O'Jf goal of realizing
Care sy:Her:l to usc OUT scarce resources more efficiently
higher living standards for ourselves and our chiJdren.
I will be delighted to answer any questions that you may nave at this time.
6
�.
-,
STATEMENT BY
LAURA D'ANDREA TYSON, CHAIR
PRESIDENT'S COUNCIL OF ECONOMIC ADVISERS
Before the
Joint Economic Commil.1ee
Juoe21,1993
Technology Policy
I would like to thank you; Mr. Chairman, and members of the Committee, for inviting
me to appear before this Committee to talk about technology policy and the economic
competitiveness
. There
of the United States.
is a popular perception that the Uruted Slates competitive position is and has been
weakening for some time, and that we have, allowed our economic leadership ·to erode4 As we
shall see, this perception is partly supported by
eco~omic
trends of the last two decades.
However, let me start witJ:! the go<Xi news firSt Today oor stancard of living is the
highest in the world; higher than such formidable ccmpetitofs as Japan and Germany. We are
<LSO
the most productive economy in the world. According to aUculations by BLS, GDP per
worker, the broa(1cst measure of
productivi~y.
is nearly 26 percent higher
in
the United S!.a:tes
�3
In the laUer half of the 1980's the oombination of a lower dollar and industrial
restructuring made U.S. prooucts more competitive in world markets,
OUf
exports have more
than doubled since 1985, and, once again, we have become the world's largest exporter.
Unfortunately, our improving trade performance has not translated Into a higher standard
of living for the average American family. Average real median family inoome fell in 1991, and
was virtually unchanged from its 1978 level. For 13 years, real family incomes have stagnated,
despite a large increase in the number of the two-eamer households.
In the long run the generation of new knowledge and its translation into new and
improved products and processes are the most imponant forces oonmbutlng to national growth.
It is estimated that, in the 1980's, research and development contributed about 0.4 percentage
point per year to the real GDP growth rate of 2.6 percent per year.
,
Technological change contributes to national competitiveness in two ways. First, new
technologies drive productivity increases, which, in ~um. allow companies to remain competitive
even as !.hey increase the wages of American workers.
Second. new technologies generate new products that compete on their quality and
innovative features, nol just on price. Companies that compete on innovation are often able to
capture large shares of lucrative markets.
�Past government policy has focused on the support of basic science and mission oriented
research. Although this approach has served us. well in the past, it is time we adjust our policies
to our new international environment.
OUf
goal must be not only to continue to be the world
leader in innovation t but also to translate those innovations inID successful prOducts that are sold
in the markel.
Throughout the Cold War, the bulk of federal spending on R&D flowed to military
research. At that time the applicability of military technology to civilian uses m"",t that our
miihary preeminence translated into techno1ogical superiority.
With time. however~ the
magnitude of these spillovers has diminished because technological advance is being driven by
commercial applications rather lI1an military ones in areas such .as biotechnology,
semiconductors, robotics, artificial intelligence. and high definition television.
Over the last two decades the United States has had one of the\slowest rates. of growth
in civilian R&D of alJ industrialized countries. Indeed, relative to our GDP we spend far less
than Germany (1..7 percert) and Japan (3.0 percent) on non-<lerense R&D (US: 1.9 percent).
We must, therefore. dedicate a larger share of federal R&D to
mthcr than military uses.
comrner~ial
applications
.
Today, only 41 percent of our Federal R&D dollars fund civilian
research. By 1998 we hope that federal support for civilian or dual use R&D accountS for at
least 50 percent of the total federal R&D budget. .
�,
,
..
7
ensure that these projects at partially funded and designed by companies so that the
resulting technology is used to develop marketable products and processes.
..
The Administration
i,s committed to improving our national information infra::;;tructure.
which is compesed of high
Speed
telecommunications and computer networks, The
purpose is not to disPlace' the rapid ~d successful private sedor efforts in this area.
Rather the government's role is to support private sector efforts by formulating forward
100king telecommunications and information JXllicies that promote investment and
competition. Specific mt"4SUres include:
Reforming government telecommunications policy to keep pace with the rapid
developments in ielCXX)mmunieations and computer technologies.
Increased suppert for the 'High Perfonnance Computing and Communications
Program to develop more powerful supercomputers. faster computer networks,
and more sophisticated software,
An lnformalion Infrastructure TechnolQgy and Applications Program to develop
advanced computing aIid nc{worlcing technologies for manufactu'ring, heaHh care,
life long learning. and Iibrarics,
Networking pilot programs funded through National" Telecommunic.1t)on and
�9
•
Expansion of me Small Business Innovation Research Program (SBrR) and me Small
Business Technology Transfer Program (STTR). The S1TR is provides grants to small
businesses so that they can work with University and National Labs to move tf:clmology
from !he laboratory to the market pi"'; (FY94 funding $24 billion) .
. In order for firms to successfully innovate, specific technology programs mUst be
supported by a general economic environment that is
~nducive
to investment in both physical
capital and human capital.
•
Making me Resean:h and Experimentation !ax credit permanent will permit businesses
10 pursue R&D without fear of a sudden change in the tax law. In me past the credit has
been extended periodically when it expired. raislng the rea1 possibility that it would not
be extended. and in fact it expired during July 1992, and has not yet been reinstated.
This'l.mcertainty needlessly adds to the eost of a firm', R&D proj,,£!, whiCh, in lum,
could lead 10 fewer R&D investments by U.S. industry.
..
ReformIng procurement practices of the ,federal government to purchase new products
based on leading technoiogies.
..
The administration is
programs.
{':ommltt~
to developing wodd-c1ass education and trJ.ining
Our long-term competitiveness depends on the skills of ou;- workers to
Innovate, to usc new tcchnology, and to bring newer and better goods and services 10 the
�.'
HEALTH CARE COSTS AND THE AMERICAN ECONOMY
TESTIMONY OF LAURA D'ANDREA TYSON
CHAIR, COUNCIL OF ECONOMIC ADVISERS
Senate Labor and Human Resources Committee
. May 20, 1993
TIlank you, Mr. Chairman, for the opportunity to come before your Committee
10 discuss the serious consequences for both individual American families and for the
American eeonomy as a whole if we do not act soon to change the way health care is
financed and delivered in this country.
As you all know, the Clinton AdminislTation is committed t.o reforming the
American health care system. I am nOt here today to talk to you about the speeifics of
the plan we are preparing. However, I would be happy to return another day to
discuss the plan after it is submitted. Today I.want to make the case for change. Over
36 million Americans currently lack health insurance coverage, and many more are in
danger of losing it if they iY'...come ill or switch jobs. Ever-escalating health care costs
are imPeding growth in American workers' wages, threatening our effons to rellue<: the
defiCit, ,md limiting' the ability of our economy to take advantage of new opportunities.
Without comprehensive health care reform, we cannot expeet that the economic future
will look any·brighter.
Let me first describe to. you how our Current health care system affects the
economy and what the future wi!! look like without health care reform, " I would then
be happy to take any questions that committee members may have,
•
�What We've Inherited
In 1980, America's tot.l health costs were $422 billion (in 1992 dollars), or 9%
of our GDP, In 1992, a mere twelve years later, national health expenditures totaled
$820 billion, nearly twice as high as the 1980 figure, and 14 percent of 1992 GDP,
Let me put it in human terms, Health care spending is now $3100 per person. By
comparison, we spend only $)700 per person on education (1991-1992) and $1200 per
person on national defense (1992), Over the next eight years, as we enter the next
century, .the Health Care Financing Administration actuary predicts that per capita
health spending will grow at an average annual real rate of 5 percent, and lotal national
health expenditures will reach'l8 percent of GDP -, or $1.7 trillion (current dollars)"
by 2000.
Escalating health care costs are not a new phenomenon, The real per capita
cost of health care (after adjusting for economy-wide inflation) has been increasing at
'.
,
an average annual rale of over 4.5% a year since 1965, more than twice as fast as real
per capita GDP, By contrast, the automobile
ind~strY
has grown only 1.4% a year
since 1965 and the manufacturing sectOr as a whole has grown only 2,8% a year since
1965, After so many years of neglect, it's time to bring health Care cost growth down
to a rate consistentwilh the growth of the whole economy,
Rising health care costs put a significant burden on the American economy, A
doiIar spent on health care is a dollar that cannot be spent on other goods and services
that COnSumers would like to purchase. And because of the waste and excess
paperwork that exists in today's health care system .. Americans' h'ealth care dollars,
are being thrown away. For example, according to one study, in 1987 Americans
spent about $1 billion on unnecessary Caesarean sections alone. AnOther recent study
,
,
,
estimates lhat fraud and abuse make up 10 percent of U.S. health care cOSts, These are
JUSt two examples of the unnecessary health costs that translate into a lower standard
of living.
•
2
�Finally, the United Slates spends about 1.5 times as much per capita on health
care as Canada, about 1.7 limes as much as Germany, and about 2.6 times as much as
the United Kingdom.
Impact on Families
American families pay' for rising health care costs through lower wages, fewer
non-health related fringe benefits, and reduced consumption of other goods and
,services.
Health insurance premiums consume an ever larger share of workers' total
compensation. The share 9f total compensation devoted to health insurance premiums
more than tripled between 1965 and 1990 -- from 1.5% ($23.5 billion, 1990 dollars) in
1965 to 5.3% ($173.4 billion) in 1990,
As employers have to pay more for health insurance, less money is available to
be paid out as real wages or other fonns of fringe benefits. If health insurance cost
growth had been held to the rate of growth of total compensation (8.3% per year)
between 1975 and 1991 (and the savings from reduced growth were fully rellected in
increased cash wages) the average full-time worker might have earned almost $1,000
more in cash wages in 1991. This is nearly one and one half , times as large as . the
.'
change in wages that actually occurred. Between 1975 and 1991, real wages per
worker rose by 2.5%, while real health benefit costs per worker rose by 201 %. If
health insurance COSt growth had been held
to
the rate of growth of total compensation,
real wages would have risen by an additional 3.5 percentage points (6%),
Some of the cost of rising employer health insurance premiums is passed along
to workers through reductions in other non-wa'ge fringe benefits. During the 1980s,
non,health care benefits were increasingly squeezed out of compensation packages, in
part to [:1ake room for increaSing health care costs. For example. retirement
benefi~s
alone as a share of [alai compensation have de,lined by 58% since] 980 alone,
,
.'
3
.
�American families also pay for higher health care costs through increased out
of-pocket spending on insurance premiums, coinsurance payments, deductibles and
non-covered health care services_ The share of American health care financed out-of
pocket, about 25%, is much higher than the corresponding fraction in other
industrialized countries. During the 1960s and 1970s, out-of-pocket spending
(including spending on premiums) grew more slowly than personal income. In the
19805, however, the level of out-of-pocket health care spending grew faster than
personal income .. Between 1980 and 1992, the share of out-of-pocket costs in Personal
income increased by over 20 percent (from 3.2% to 4.1%).
Finally, American families pay for health care through the taxes thill fund the
Medicare trust fund and through other Federal and State taxes used to fund Medicare,
Medicaid, and other government health programs. Slowing health cast growth would,
therefore, also lower Americans' tax burdens.
Impact through 2000
Without a change in .the existing ~ealth care system, American workers will
continue to see low rates of wage growth as an increasing share of their total
compensation is consumed by health care premiums. Their spending choices w,ill
continue to be narrowed by rising health care bills through the remainder of this
century. Projections of private health care cost growth suggest that under the current
system these costs will continue to rise about twice as fast
as total compensation
through :W()O.
If present growth trends continue, nearly g percent of the average American's
total compensation in 2000 will pay for health care, up from 6% today. ThaLrate is in
addition to the existing 2.9% payroll deduction that finances the Medicare trust fund.
If health Care cost growth could be ·held
to
tite rate of growth of total compensation,
however, real wages in 2000 would be 2.2 percent higher than currently projected.
,
4 .
�That means th3.t with comprehensive health care reform, real wages for each worker
would be $655 higher. Furthermore, if we can slow health care cost growth, out-of
pocket spending will also stop climbing, and American households will have a
cumulative total over the next 8 years' of about 55,300 more in 2000 in personal
income to spend
On
non-health goods and services, than currently projected.
Impact on the Labor Market and Productivuy
The current· method of financing and providing health insurance hamstrings the
U.S. economy by reducing America's flexibility to respond to new economic
opportunities both at home and abroad. Individuals and businesses alike make'
economic decisions that are distoned by today's health care system. For example, a
recent economic study suggests that if workers did not fear losing .their health
.
insurance or being forced to change doctors when they changed jobs, about 33% more
workers would have changed jobs last year than actually did. These workers could
have switched to jobs better suited to their needs and skills. When jobs and workers
are better matched, workers' skills are mOre fully utilized so that each employee can
. produce more output for each hour or work. Improvements in the productivity of the
American workforce are the key to increasing Americans' living standards.
The structure of loday's health care,system also reduces productivity by
encouraging people who would prefer to work to remain on welfare, Many cun:ent
welfare recipients rear that taking a job would mean losing Medicaid without gaining.
private health insurance coverage. Estimates suggest that if AFDC recipientS were
assured of maintaining health insurance benefits equivalent to Medicaid if they went to
work, the, number of people on welfare might be reduced by as much as 25%: In this
sense, health care reform may be an :mportant firs! step toward reforming' the welfare
system.
In addition to adversely influencing the decisions of individual workers. health
•
...
5
�care costs also dis,ort business decisions in ways tha, may reduce overall productivity.
For example, firms of,en seek to avoid paying high health insurance costs for low-paid
workers by employing COntractors or by increasing overtime hours, instead of hiring
. new full· time workers. The 1980, saw an enormous growth in the number of finns
that contract with other c9mpanies to· provide janitorial and other business services. At
the same time fmns increased hours worked for their aJready~insured workers, rather
than pay for'insurance for new hires. Overtime hours in manufacturing increased from
an average of 2.8' p"'..r week in 1980 to 3.8 per week in 1992.
Small businesses, who face higher administrative costs than large businesses for
health coverage, are particularly hard·hit by rising health costs. The high
co~i to small
business of providing health coverage makes it difficult for them to attraet employees
who expect decent health care as a benefit of employment.
.
.
Both large and small businesses could produce goods at lower total cost if their
hiring decisions were not distorted by rising health care spending. Instead of
contracling wi,h a middleman to provide business services or paying high overtime
" wages to existing workers simply to avoid health care costs! large companies could
hire new full-time workers. Small companies couldcompele more effectively in the
labor market if they wer",able to provide health coverage at a reasonable price. When
companies ~an choose workers based on their productivity, and n<:,t on their fringe
benefit costs, they can produce products at lower total COSI, and the produc,i vity of our
.
.
economy improves.
Finally, the ass.t value of many American firms has been reduced by the rising
cost of retiree heahh benefits. In 1988, the present value of retiree health liabilities for
current and future workers was between $227 billion and $332 billion. For some
firms, the reductions in aSSet value that occur because of rising retiree health liabilities'
may reduce their ability to raise capital an\! make new, productive i.nvestments.
.
Health care reform can make our economy more adaptable and better able to
.
.
6
�take advantage of new challenges and opportunities. If employers can choose more
efficient combinations of labor and capi tal, and workers can choose jobs that better
match their skills, productivity
wil~
improve and our economy will grow
fas~er.
Uninsured Americans
,Although our Nation is the world's richest, we do not provide basic health
coverage to tens of millions of our citizens, including over 8 million uninsu!ed
children, The share of people under 65 with private health insurance benefits has been
declining steadily since 1988 from 75.1% to 72.3%, While the 1990-1991 rate of
decline in the number of privately insured families slowed slightly, a 1992 survey still
found more firms dropping insurance than adding coverage.
As the economy recovers from the recession and unemployment declines,
of the uninsured may gain insurance through
e~ployment.
~ome
As firms currently offering
health insurance begin to hire again, the fraction of people privately insured is likely to
increase, while the number·of unemployed perso.ns receiving Medicaid is likely to fall.
But consider this: most ,uninsured families today (53%) already include a full-time
.
,
worker. A reduction in unemployment alone will not ensure that these workers are
'Covered. Our. estimates show that if the status quo is maintained, the number of
uninsur.ed Americans will continue to climb.
•
7
�Health Costs and the Federal Government
A central goal of our overall economic program is to change
~he
composition of
government spending, while simultaneously reducing the level of government spending
as a percentage ofoverall GDP. Our efforts are stymied by health care spending. The
two largest Federal health programs, Medicare and Medicaid. are projected to grow
10% and 13% annually over the remainder of this decade, far in excess of growth in
GOP. Health care spending currently accounts for about 19% of Federal e.penditures
. or about $277 billion. That share is e.pected to increase to 24% -- or $406 billion -
in 1997, despite proposed health care spending reductions in the President's budget.
Without reform, health care spending could consume as much as, 27% of the Federal
budget by 2000. By comparison, spending on education, training, and employment
services comprises only 3% of Federal expenditures.
Looming increases in Federal health care spending make deficit reduction very
difficult. If the growth in Federal health care spending were limited to the rate of
.
,
growth in compensation, then even without any other spending cuts and without any
tax
increase, we could Cut the projected year 2000 deficit ii} half. Without redl}cing
Federal health care spending, the deficit will rise from $212 bi!lion in 1996 to $31 I
billion in 2000 and as a share of GDP from 2.8% to 3.6%.
Increases in private health care spending also make it more difficult to balance
the Federal. budget., Private health care spending growth depresses Federal r~eipts
because employer spending On health insurance premiums· is not taxable income to
employees. Growing health spending leads to a growing tax expenditure for these
employer-provided benefits -- $44 billion in lost federal income tax revenue in fiscal
1993 alone. If we can slow the growth in private health care spending, the Federal
government will also benefit through a reduced rate of growth in this tax expenditure.
As the go~ernmem uses piivate savings
to
finance inc;eases in the deficit, less
and less remains for private sectOr\ investments in bus:ness plant, equipment, training,
8
,
�,.
and research. By reducing the pool of available savings, the deficit makes it harder for
American businesses 10 borrow the money
th~y
need to make these productive
investments. Without a sustained level of inveslment, our economy cannor generate
rising living standards.
The growing share of health care in the Federal budget limits the flexibility of
our government to respond
10
the current economic situation and
to
invest in the
future. Of the $222.5 billion increase in Federal outlays in President Clinton's birdget
proposal for
1993~1997,
over $128 billion, or 58 percent, is devoted to Medicare and
other health programs. With $149 billion going to Social Security, means-tested
entitlements, and interest payments on the debt, only $74 billion remains to meet other
. important needs of the American people,·
·These increases in spending are not confined to the Federal leveL State and
.
local government expenditures on health care are also accelerating. By the tum of the'
century, state and local health care spending is projected to uiple oyer 1990 levels. In
2000, state and local governments will spend 18% of their budgets on health care, a
.
share JUSt slightly lower than their current share oi spending on elementary and
secondary education.
Conclusion
The status quo is. unacceptable. Vv'ithau: health care refonn. American workers
w,i11 continue to lack the security that (hey will always have heaith insurance. even if
they lose or switch jobs; American families will give up a growing share of their
disposable income for health care; and Federal. State, and local governmems will be
unable to respond to new opportunities and
to
make investments for the future, The
Clinton Administration is committed to changing this dismal picture through
comprehe.nsive health care reform. The lime for change is
I will be happy to take any questions vou may have
•
•
n~w.
1I
this time.
�,.
. ..
STATEMENT BY
LAURA D'ANDREA TYSON, CHAIR
PRESIDENT'S COUNCIL OF ECONOMIC ADVISERS
Before the
Comminee on Science, Space, and Technology
Subcommittee on Technology, Environment and Aviation
. U.S. House of Representatives
March· 16. 1993
International Trade and Technology Policies
\
I would like to thank you Mr. Chairman, and members of the Committee, for asking me
to apPear before this Committee to talk about trade policy and technology policy.
OUT goal as economic policy makers is to ensure real and sustainable increases in our
standard of living for all Americans. Today OUT standard of living is the highest in the world;
hig~er than such competitors as Japan and Germany. We are also the most productive economy
in the world.. According to calculations by BLS, GDP peT worker, the broadest measure or
productivity. in the United States is nearly 26 percent higher than Japan and over 10 percent
higher t~an Gennany in 1991.
That is the good news .. Unfortunately, the story is not complete. While our economy
remains the richest"in the world, and despite the recent excellent results for GDP growth for the
third and founh quarters of 1992, economic growth has been decelerating for quite some time.
Looking decade by decade, GDP per capita growth rates have been falling decade by decade
since the 1950s. Just as worrisome, GDP per capita has grown more slowly in the United States
than in other major industrial countries for nearly two decades.
�,,
2
The same trends hold true for productivity growth. The United States has suffered an
overall slowdown in productivity growth since the 19705, and it has had the lowest productivity.
growth among industrial countries for a ,substantia) period of time. Overall our productivity
growth has been below one percent for the last 20 years.
\'i'hat was once considered an alannist view nas become a mainstream opinion: our
economic competitiveness--defined as our ability to produce goods and services that meet the test
of international competition whil~ our citizens enjoy a standard of living that is both rising and
susurinable--is in slow, but perceptible decline. Though [he demise of American business is often
overdone, there is no doubt that U.S. companies have lost market share to foreign competitors.
in many glilbal markets. even those in some critical high-technology industries.
Over the last several years we have witnessed a remarkable change in the world economic
system. For the last 50 yeaTS the United Stales was the only economic superpower. But in the
19905 the world has become a tripolar economic world, with three relatively equal economic,
superpowers~~the United States, the European eommunity. and Japan,
'
Th;s Dipolar. world is a world which is much more interdependent because of trade and
foreign investment flows. and it is a world that is increasingly competitive. In this highly
competitive tripolar world, how does the United States maintain its competitiveness through trade
and technology policies?
To strengthen our capacity to compete and to raise our overall standard of living. trade
and technology policies must be embedded in an overall economic program that thans a course
for the U,S. economy toward the next century.
This is exactly what this Administration has done, The Clinton plan weaves trade and
technology policies into an integrated economic policy, whose fundamental' goals are sustained
growth in our standard' of living and the creation of high wage jobs for American workers.
The firsl step that this Administration has taken, as it should nave, is to put our own
house in order. There is no doubt thai businesses' ability to' innovate and invest will benefit from
the lower interest rates that the Administration's credible deficit reduction proposals have
generated.
We need to supply our workers with modem capital and ("4uipment and with advanced
technology. To achieve this, we need to invest in plant and equipment. The Administration's
program includes specific proposals to help businesses, especially small businesses. invest, such
as a temporary innememaJ investment tax credi! for large businesses and a permanent one for
sm~lI businesses.
Our long.tenn competitiveness depends on the skiUs of our workers to innovate, to use
new technology. and to bring newer and better goods and services to the market place. For that
rea'ion, [his AdmlOlstration has stressed Ihe irnponance of improving our education system. A
�3
critical component of Our technology policy is to achieve world leadership in basic science.
mathematics and engineering.
Not only must we create high wage jobs, but we must retool our work force to fully
utilize these jobs. A key component of the PresidenCs economic package is to make training
accessible, cspedaHy for workers displa.ced by the rapid changes in Qur economic enVironment,
ranging from the reorientation of OUT defense industries to pressures arising from international
trade.
.
.
,
The last major element of the President's package is to change the composition of
government spending away'from consumption and toward investment, including investment in
infrastructure. Public investment complements investment by private firms. and enables our
private sector 10 be more competitive.
Technology Policy
. However imponant these broad macroeconomic policies are to creating a dynamic and
competitive American economy, they are not enough. "They must be complemented by policies
that focus on specific issues of technology and trade.
There are sound economic reasons why the government should focus on high-technology
industries, First, research and development in general, and specifically jn high-tech industries,
benefits both the firms that undenake it and other prooucers and consumers. As a result of these
spillovers. the social rale of relurn 10 R&D far eKceeds the private returns, One 1988 study
placed the social returns a(35 to 60 percent above the private returns.
,
Seeond. jobs in high-tech industries \pay better than Ihe rest of the economy, In 1989
average annual compensation in high~(ethnology indusmes was 22 percent higher than all of
manufacturing. If we focus purely on production workers, ·that is excluding most while collar
scientists and engineers, average compensation in high-technology firms was 15 percent higher
than 1n manufacturing as a whole,
Past government effort has focussed on the support of basic science and mission oriented
research, Although this has served us weB in the past. it is time we move on to polices
appropriate TO our new imernalional environment Our goal must be not only to continue to be
the world leader in innovation, but 10 transl;ue those innovations into successful products that are
sold in the market. The technology policy introduced last month by President Clinton does JUSf
that.
Throughout the Cold War, Ihe bulk of Federal spending on R&D flowed 10 military
research. At that time the applicability of mililary technology 10 civilian uses meanl that our
mHitary preeminence trdnsla1ed into teChnological superiority. With time, however, the
magnitude of these spillovers has diminished, We must, therefore. dedicate a larger share of
Federal R&D 10 commercia! applications rather than mIlitary uses. Today, only 41 percent Df
�4
our Federal R&D dollars fund civilian research. By 1998 we hope to have Federal support for
civilian or dual use R&D be more than 50 percent of the total R&D budget.
Over'the last two decades the United States has had one of the smallest increases in
civilian R&D of all the industrialized countries. Indeed. relative to our GDP we spend far less
than Geonany (2,7 percent) and lapan (3,0 percent) on non-defense R&D (US:L9 percent)_ In
addition to allocating Federal dollars to civilian R&D. the Administration proposes'to make the
research and experimentation tax credit permanent to spur private sectOr R&D.
As this committee has caned for 10 the pas~ we propose expanding the Advanced
Technology Program in the Commerce DepartmenL This program has been an example of
successful government-b~sincss pannership.
The ATP shares the COSt of industry~led and
industry-defined projects 'selected through merit-based competition,
In addition. the
Administration plans to increase the focus on dual-use technologies through the Advanced
'Rese.rch Projects Agency (ARPA). fonnerly called DARPA.
Other elements of the technology package to promote research include encouraging
jndustry consortia. to advance critical technologies; promoting pannerships with industty through
cooperative R&D agreements (CRADAs) with the national labs; and improving interagency
cooperation by strengthening the Federal Coordinating Council for Science. Engineering and
Technology (FCCSET).
)n addition, oor package recognizes the importance 'of diffusing new technologies as well
as the importance of creating them. To that end, the President proposes to create a national
network of manufacturing extension centers~ expand the manufacturing Experts in the Classroom
Program; and assist companies 1n implementing the principles of high performance work
organization, \
Fi,ially the competitive advantage of our companies will be enhanced through better
access to information. The Administration is committed to supportinI,; the development of
efficient, hjgh speed communications systelns, or infonnation superhighways.
Technology and Trade
Our ability to sell goods and services in the globaJ market place is the crucial test of our
compeutlveness. We can have the mOst efficient producers in the world. and find that
government restrictions impede their ability to sell in foreign markets. Because high-technology
industries benefit from economics of scale and learning curve effects, aCCeSs to foreign markets
is crucial for American finns 10 develop the size necessary to become efficient an(~ competitive
producers in world markels. So we mu!;t pursue an active :and forward.-looking trade policy to
open markets through multilateral trading armngemems, regional arrangements, and bilateral
agreements. "We must also use the Nation's trade laws, as they were designed, to deter or
compensau! for fo:-eign practices that lrc flOI adequately covered by existing multilateraJ rules or
trade agreements.
�·
.
,
.
5
At the same time, we must recognize that an active trade policy is not synonymous with
protectionism. Protectionist policies will not solve our comp<?titive problems; most often they
will only breed inefficient and high cost rums. An open trading system forces us to innovate,
puts U.S. businesses in touch with new customers every day and provides market opponunities
for U.S. exports and U.S. jobs. To put it simply the United States and every other nation-that
panicipal"es in an open and fair trading system becomes wealthier over time. As President
Clinton has said. "we muSt compete, not retreat"
�-.
,
Remarks by Dr. Lnura D'Andrea Tyson
Chair of the Council of Economic Advisers
before the
Joim Economic Committee
Monday, l'ebruary 22, 1993
Thank you, Mr, Chainnan, for the opportunity to testify before the Joint
Economic Committee.
.
a
The election of 1992 was, clear mandate for change--in particular, economic
change. No wonder voters expressed this preference. A number of disturbing
economic trends have developed in recent years. Let me name just a few of them:
median family real income has been stagnant-its 1991 level was actually below the
level reached in 1979-despite more two-earner families; the poverty rate in 1991
was higher than in any year during the 1970s; a growing gap between the rich and
the poor; a Federal Government thai is borrowing to pay almost a quarter of its
current bills; and escalating health care costs that are burdening finns and workers
as never before. It is little wonder that the voters gave a mandate for economic
change~
,
Underlying these disturbing trends are three fundamental problems in the
American economy: a recovery so anemic it has been unabJe to support substantial .
employment growth;· an erosion in the growth rate of productivity over, the past
twenty years:: and an increase in inequality .that has undermined the sense of fahness
in our economic system.
The President's economic package--consisting of a short-term stimulus, an
investment program and a deficit reduction plan--is designed to correct each of
these fundamental problems, The short-tenn stimulus is intended to ensure a
sustained economic recovery that is strong enough to generate employment growth.
The investment and deficit reduction components of the package are directed toward
boosting productivity' growth and living standards over the long-tenn, All elements
of the package are designed with an eye toward restoring basic fairness to the
system, Let me elaborate ,On the President's plan in the context of our fundamenL11
problems,
1
, F..-conomic Stimulus
The United States econoiny' has experienced a protracted period of poor
performance. Since 1989, the average annual rate of GDP growth has barely
exceeded one-half of one porcent--inadequate to keep up with population growth.
This period was marked first by sluggish growth in 1989 and early 1990, then a
�,
.
2
recession which lasted from July of 1990 until March of 1991, ·and finally a very
·slow recovery since March of 1991. The recovery has been so slow that most
Americans barely noticed it was underway. In the third quarter of Ille recovery, the
economy showed serious signs of falling back into recession--real GDP grew by
only 0.6 percent and real gross domestic purchases actually declined. Only SOO,OOO
jobs have been created in the 22 months of recovery--this is about 3 million fewer
jobs than would have been created in the first 22 months of a typical economic
recovery. Not surprisingly, the unemployment rate is still higher than it was at the
bottom of the recession. Although there has been a recent stream of.good economic
news. signs of weakness and cause for concern about the recovery remain ..
Many of the factors that contributed to recession or sluggish growth over the
past four years are still acring to depress the economy. Many U.S. companies are
in the midst of a painful restructuring process that will ultimately make them mOre
competitive, but currently generates large pennanent layoffs. This restructuring is
. manifest by the fact that the fraction of unemployed workers that have permanently
lost their previous jobs reached an all-time high of over 45 percent in October of
J992. Ongoing and future reductions in defense spending will require a significant
reallocation of resources that will continue to act as a drag on the economy, This
process actually began in the late 19805, and before it is completed may well
involve a shift of over 3 percent of our GDP from military to civilian purposes. In
several pam of the country the commercial real estate market remains considerably
depressed, a consequence of overbuilding that occurred in the I 980s; There is little
hope that commercial real estate construction will return to 1980, levels anytime
soon. Also, a number of our lTading partners are experiencing much slower growth
in recent months and that reduces growth in Our exports. Real GDP in both
Gennany and Japan, for example. declined in recent quarters. Furthermore, reduced
withholding of taxes last year will reduce tax refunds this spring, which is likely to
~ make consumer spending unseasonably low. Por all of these reasons we~ cannot be ~
overconfident about the continued strength of the recovery.
.
Given the fact that the recovery has sulled in the past, gains in employment
during the recovery have been small to date, and many forces will continue to exert
downward pressure on the economy, President Clinton's economic plan ind~des a
stimulus package of spending increases and targeted tax cuts to spur investment and
job growth in the near tenn. The short-term stimulus package is best viewed as an
insurance policy'designed to make sure that recovery does not falter again. and as a
downpaymem on the investment plan th;lt will largely occur in subsequent fiscal
years.
Three criteria have guided the design of this package: the potential for rapid
spend:out fates; consistency with the investment program; and modest size. All of
the items included in, ~he package are fast-acting and job-creating. The unemployed
�3
have already waited far too long, All of the items included in the package are
wonhwhile on their own merits and are consistent with the basic long-run goal of
shifting public expenditure toward investment, In that sense the package can be
appropriately thought of as a downpayment on the Administration's overall long-run
investment program, The size of the stimulus was limited by the deficit problem we
have inherited--a problem that turned out to be much larger than we had been told
-and by the fact that economic growth has picked up in the last two quaners, The
modest size also reflects a desire to avoid overstimulating the economy in the event
that the current recovery does continue at the pace of the last two quaners,
Our economic stimulus program comes to about $30 billion, composed of
roughly 50% spending increases and 50% tax ineentives. The spending side of the
package includes increased funding for the following programs: extended
unemployment benefits, highway construction, a summer jobs and training program
for underprivileged youth, community development block grants, education programs,
wastewater cleanup, and important environmental and teChnology programs, All of
these programs are consis1ent with Ihe philosophy of investing more in our people
and our infrastrocture.
The tax incentives are mostly in the form of investment tax credit programs
for large and small businesses. The investment tax credit is incremental and
temporary for large businesses (over $5 million in gross receipts). The basic rate is
7% (smaller for shorter-lived assets) on all equipment investmenl above 70% of a
historical b,se (a three-year average) in 1993 and 80% of Ihat same base in 1994,
The credit applies to equipment put in place between December 3, 1992 and
December 31, 1994, Small businesses, which would presumably find the
\
recordkeeping of an incremental ITC burdensome, are given a 7% ITC from the first
dollar for two years, dropping down to a permanent 5% rrc thereafter.
will add
The Administration estil1)aleS thai the slimulus package, taken 'by itself,
about 0.3% to the annual growth rales of real GDP in 1993 and 1994, creating
about 50(),OOO additional jobs by the end of 1994.
The Nation's Long-Term Problems
Sustainable increases in the Nation's standard of living can only be attained
through rising levels of prOductivity, As Ihe amount of output per worker increases
over time, ~o does the potential consumption peT worker. Because of this linkage.
the rate of productivity growth is a crucial indicator of how living standards are
changing over time,
From the end of World War II until 1973, productiYily grew at an annual rate
of about 2,5%, which implies a doubling in ,the standard of living in just under 30
�4
years. The notion that each generation could leave its children a better place and a
higher living standard was virtually taken for granted. Not any more. Since J973,
the average annual rate of productivity growth has fallen to about 0.8 percent, which
implies that living standards will double every 90 years (down from \03 after
adding 1992's high rate of productivity growth). The slowdown may be exaggerated
to some extent by our inability to measure productivity growth in the rapidly
growing service sector of the economy, as some observers claim, but a substantial
portion of this slowdown is a consequence of adverse economic events and policy
choices that promoted consumption rather than. investment.
Intuitively, our 'productivity'increases with improvements in technology or the
skill of our workforce and with illcreases in the amount of plant. equipment, and
infrastructure our workers use in the production process. All of these driving forces
of productivity growth require that we make investments--investments in research
and development to improve technology; investments in health, education, and
training to improve workers skills; and investments in buildings. machines. roads,
bridges, railways, airports and the like to increase our Nation's capital stock.
TIle amount of investment that the Nation achieves depends direcOy and
indirectly on government actions. Many government programs contribute directly to·
tile stock of public capital--health care, education, training, and infrastructure
spending, for example. Other government pelicies. especially taX pelicies, indirectly'
influence the amount of spending on private capital--research and developmen~
plant, and equipment--that firms choose to undertake.
'
Polides of the last twelve years have eroded produc!\vity growth in the
economy by undermining both public and private human and .physical capital
formation.· Conventional measures of public investment as a share of GDP have
fallen each decade since the 19605. Furthermore, the large budget deficits required
to finance growth in defense and other non~investment government spending
programs during the 1980s have reduced the peol of resources available for private
investments in human and physical capital. We must. reverse the fiscal poli~ies of
the last twelve years in order to increase capital formation and the rate of growth·in
our living slandards. The investment program and the deficit reduction plan are
intended to accomplish SUCh·3 policy reversal.
The Investment Program
The investment program includes 3' wide range of items that have benefits
that will be felt over long periods of time. and thus, fit the conceptual definition of
investment. The Clinton investment package delivers on all of the major public
investment initiatives promised by the President during his campaign~~iniliatives to
put people back to work; initiatives to facilitate lifelong learning from childhood
�"
5
through retirement; initiatives to reward work for those who work hard and play. by
the rules; initiatives to address urgent public health problems; and initiatives to
encourage private-sector investments that provide technological gains and improved
preductivity,
,
The investment program totals $160 billion over, four years, which redeems
most of the President's campaign promises under the following headings:
REBUILD AMERICA: $48 billion over four years concentrated in six key areas:
o Transportation infrastructure ($8.4 billion), which includes. full funding of the
Intermodal Surface Transportation Efficiency Act and investments in mass
transit. high speed· rail, and airports.
•
o Technology ($17,0 billion), which will fund the National Science Foundation,
science, engineering, and technology grants. high performance computing, and
extension of the research and development tax credit.
o Environment ($8,0 billion), which will fund water cleanup. environmental
technology. weatherization grants, forestry research, and natural resource
protection.
o Energy ($3.0 billion), for energy conservation and renewable energy programs,
fusion research, and more energy efficient Federal buildings,
o Housing and Community D.evelopment (9:6 billion), for Community Block
Grants, fifty enterprise zones, assisted housing, and extension of the Jow~
income housing taX credit.
,
o Ruml Development ($1.5 billion), for priorities such as rural water and waste
loans and grants and community and business development for rural areas,
LIFELONG LEARNING: $38 billion over four years for education and training of
people from early childhood through adulthood, This includes some measures
intended for defense conversion:
o
o
o
o
o
A National Service Program ($3,0 billion).
Pull funding for WIC ($1 billion).
Pull funding of Head Start by 1999 ($3,7 billion).
Education reform and initiatives (S3,2 billion),
Worker training programs ($4, I billion),
�6
o
o
Youth apprenticeship programs ($0.5 billion),
Parenting and Family Support ($0.5 billion),
'REWARDING WORK: $25 billion Qver four years, mainly accounted for by a'
dramatic increase in the Earned Income Tax Credit (EITe),
The EITC is
simplified and greatly liberalized. It is extended for the first time to workers
without children--at a 7.65% rate that offsets the employee portion of FlCA taxes,
And the credit for workers with ,cbildren is enricbed enougb so that a family of four
widl a parent working fullume at the minimum wage is lifted up to the poverty line.
This category also includes emergency unemployment compensation benefits and a
crime initiative.
HEALTH CARE: $26 billion over four years for AIDs, women's health, drug and
substance abuse prevention and treatment, nutrition assistance, USDA food safety
initiative. V A medical care, and improvements in Social Security disability insurance
processing,
TAX INCENTIVES: $24 billion over four years to encourage private investment
through investment tax credits. alternative minimum tax reHef for corporations,
targeted capital gains ,relief for small stan-up businesses; and real estate invesunent
incentives.
This program will stimulate private and· public investment in order to increase
our rate of growth in productivity and, ultimately, living standards. These new
investments are a central pan of the , President's plan,
,
The Deficit Reduction Plan
Finally, in order to reduce government demands on credit, markets, the
President's economic package includes a credible deficit-reduction plan, The intent',
of deficit reduction is as a means to greater capital formation, productivity growth
and living standards, not as an end in itself. Deficits require government 'borrowing
-either from the private sector, reducing funds available to private investors and
consumers and raising' their cost of borrowing, or from the rest of the world, so ·that
in the future a growing share of our tax dollars will be used to payoff foreigners
who lent us money.
The President's proposal features a four· year (FY94·FY97) gross
deficit-reduction program that is phased in gradually, By FY97 the plan will cut
nearly $2(1() billion from the deficit" with $112 billion in speoding cuts (rbis scores
the increased taxation of social security benefits as an entitlement Cut) and $83
billion ill revenue increases, After allowing for the $55 billion in new investment
�\
7
, initiatives that will be introduced as pan of the investment package, the program
achieves a net deficit reduction of $140 billion from the baseline deficit in FY97
alone.
The budget has no plugs, caps, gimmicks, or magic asterisks, All cuts are
identified in the OMB document "A Vision of Change for America: The 150
specific spending cuts reduce Federal government spending by $247 billion over 4
years (this counts $7 billion of increased taxation of social security benefits as a cut
in entitlement spending, rather than a tax increase). The spending cuts are nearly
matched in magnitude by specific revenue increases.
'
The spending savings in (he President's plan are in six general categories:
programs that don '( work or are no longer needed; eliminating subsidies for wasteful
programs and charging fees for government services; managing' government for cost
effectiveness and results; controlling health care costs; adjusting defense spending to
new posFCold War realities; and asking for shared contribution from all Americans.
Some of the larger items in the long list of spending culS are:
o Defense spending reductions of $37 billion in FY97 and $76 billion over a 4
year period,
o Reduction of federal pay, retirement benefits, the number of civilian
employees, and administrative budgets, of departments agencies for a total
savings of $11.7 billion in FY97.
o Higher taxation of social security benefits for taxpayers above $32,000 Gain!)
or $25,000 single: $6.9 billion in FY97,
o Shorten average maturity ,trucrure of the national debt: $3,9 billion in savings
in FY97,
o Savings in Medicare and Medicaid (the sum of 33 programmatic changes,
virtually all of which Cut provider reimbursements); $17,7 billion in FY97.
o AUCtioning part of the Federal Communications Commission spectrum: $2,1
billion in FY97,
The additional revenues raised in the President's plan arc a.ualoed primarily
b)' increasing taxes on the very wealthy, who have- benefitted most from the reduced
taxes of the 1980s, This burden sharing is also consistent with the President's
desire to reduce the growing gap between rich and pOOL
�Personal income tax rates are raised effective for approximately 1.2% of
returns with lite highest taxable income as follows:
o A 36% bracket begins at $140,000 for joint filers ($115.000 for singles).
o A 39.6% bracket begins at $250,000. regardless of filing status ..
o The maximum
laX
rate on capital gains remains 28%, as under current law.
o The Alternative Minimum Tax (AMT) becomes two-tiered: 26% up to
$175,000 of AMT income and 28% thereafter.
All these rate changes are estimated
to
raise $26.3 billion in FY97.
In order t.o raise revenue, encourage the conservation of energy, and reduce
harmful emissions, the President's plan also includes an energy tax that is phased in
gradually. When fully effective. the proposed new energy tax will be 25.7 cents per
million BTU, with an additional 34.2 cents per million BTU on oil. These amounts
are indexed, so lItat the tax rises slightly with the rate of inflation. The tax is
phased in in three stages: one-third in July 1994, one-third in July 1995, and the
final one-third in July 1996. Estimated impacts on retail energy prices are 3-8%,
depending on the specific product. But the tax will be levied and collected at tllC
source (production or import).
A higher tax rate is placed on oil for two reasons. One is as a national
security surcharge. A hidden cost of dependence on foreign oil'sources is the
additional money that must be spent on foreign aid and national defense in order to
protect our strategic interests. This surcharge makes consumers of oil bear part of
that burden more explicitly. The second reason for the higher rate on oil is thaI a
straight BTU tax would burden natural gas (a less polluting source) more heavily
than oil (a morc polluting source), ]0 order to discourage consumers' f~om
substituting to the more polluting source as a result of the tax change, an additional
levy on oil was required. Hence the oil supplement corrects twO negative
"externalities" associated with oil consumption.
The BTU tax is estimated .to raise $22.3 billion in FY97, after netting out
roughly $7 billion in reduced income and payroll tax receipts that Treasury revenue
estimators assume will result from the tax. )n addition. the Administration proposes
additions to Food Stamps, the EITC, and the Low Income Home Energy Assistance
Program (UHEAP) to offset the burden of the energy tax for low and moderate
income households. These additional programs cost roughly $10 billion, and ensure
that families with incomes below $30,000 will face vinually no nel lax increase,
�9
.
.
The basic corporate tax rate is raised from 34% to 36%. In addition, a number
of tax preferences and deductions are reduced or eliminated and tax enforcement is
increased. Total revenue' accruing to the government from these sources is estimated
to be $14.l'hiUion in FY97. In addition, a variety of other changes in "business
taxes" (which can appear on either personal or corporate returns) nets $8.4 biUion in
1997.
The health insurance portion of the payroll tax will apply to all earnings, rather
than being capped (as at present) at SJ35,OOO. The revenue yield from this change
in FY97 is projected to be $6.8 billion.
A brief rundown of the key features of the President's deficit reduction plan
verifies that these spending cuts and revenue increases are real and identifiable. But
the budget game is a complicated one, and this is only the first step we have IJIken
to make the package credible.
To allay any fears of "rosy scenarios," the budget projections are based on a
highly unusual procedure: We use the pessimistic forecast of the CBO, rather than
the Administration's more optimistic forecast--even though the latter virtually
matches the current Blue Chip consensus (see Table 2). Under the CBO's
pessimistic forecast: the deficit falls from 5.4% of GDP in fiscal 1993 to 2.7% in
1997. Under the Administration's forecast, the deficit falls even furtber--to 2.2% of
GDP in fiscal 1997--because of the higher level of GDP that is attained and the
increased IJIx revenues and reduced mandatory expenditures that accompanya'
healthier eConomy.
Finally, a credible plan requires an enforcement mechanism. Under the
President's plan, we propose to extend the Budget Enforcement Act, with continued
caps On discretionary spending, "pay-as-you-go" requirements, and sequesters when
necessary.
The President's plan is a bold one. but of course it is only the beginning of a
long budget process. We welcome your ideas about how to improve this package.
While .no one will be happy with everything in this package, let me underscore the
President's VIeW 1hat our deficit reduction goals will never be attained unless we are
willing to "iew these hundreds of speeific proposals as a single package. If we are
. going iO reStore a proposed spending Cot, we muSI propose specific alternatives to
take its place. If we do not hold ourselves to some rule. then we will not serve the
taxpayers and voters of this Nation welL
If the Congre..<;:s enacts this deficit reduction plan, tbe results will be dramatic,
But the reality is .hat deficits will begin to climb back up toward the end of the
�10
decade. The primary reason is skyrocketing health care costs. As a government
and as a society, we must reform health care to ensure quality, affordable care for
all Americans, Health care cOSts threaten the se<:urity of families. businesses. and
government alike. We must also act to ,cono-ol health care costs if we hope to
cono-ol deficits in the long tenn.
How the Packal!e Promotes Fairness
All three elements of the package will help restore a Sense of fairness, The
stimulus will promote job opponunities for some of the 9 million unemployed'
members of our labor force. Since the investment program includes a number of
programs, such as head stan, WIC, health care, worker o-aining and reo-aining,
education and the earned income tax credit, that directly increase opportunities for
the most disadvantaged members of society, it will also help level the playing field,
Finally, the manner in which revenues are raised for deficit reduction will ask the
most from those who can afford it-·the lOp 1.2 percent of American income earners.
All of these features of the total package will hel~ restore a sense of fairness in our
system and give meaning to the American dream for those members of society who
were .left behind by the policies of the past twelve years.
The Economic Outlook
Fore<:asting economic performance, is not an easy task. As the budget process
reminds us. there 'are many uncertainties which will have a great impact on the
future path of the e<:onomy, What is more important than any spe<:ific predictions
CBO or the' Administration make about e<:anomic performance is that we
sound chokes about policy that raise the our investment rate, our productivity, and
ultimately, our living standards.
mak"
, ,As noted i~, discussing the budget estimates, the Administration forecast for
real GDP growth is slightly higher than the CBO forecast on balance, In 1993 and
'1994, the AdminiSITation fore<:ast of 3.1 and 3.3 percent growth, respe<:tively,
corresponds exactly to the private Blue Chip consensus forecast. This is higher than
the CBO estimates of 2,8 and 3.0 percent. The Administration forecast assumes that
the stimulus package provides some additional growth in real GDP in the early
years, As the stimulus wears off and the ITC for large businesses is eliminated,
the Administration forecast' is·aetually below the CBO forecast in 1995.
From 1996 through 1998; the Administration forecast essentially assufI1cs that
the economy begins to feel some of the benefits of a higher capital stock as a result
of the investment program a~d the tax incentives provided in the'stlmulus.
Consequently, while the CBO assumes that growth falls off to less than 2 percent by
�11
1998, we feel Ihal a rate of 2.5 percenl is more realistic. In these "OUI years," the
Administration forecast is identical to the Blue Chip consensus.
MI. Chainnan, this concludes my lestimony for this morning, bul I wanted 10
take a momenl 10 thank you and your committee for your invitation and for your
welcome. I look forward to working with you during my tenure al Ihe Council of
Economic Advisers.. I know by working togelher we can all share in the effort 10
strengthen our economy by ensuring a stronger recovery, higher rates of public and
privale investment, and smaller Federal budgel deficits.
.
\
�Table 1.
Comprehensive Budget Impact of the package
FYl997
$346
BASELINE
Spending Cuts:
-37
Nondefense discretionary
-20
Entitlement
-41
Associated debt service
Subtotal;
Revenue increases
GROSS DEFICIT REDUCTION
Clinton inves~ment program:
Spending
\
,
Tax red\.ictlons
Subtotal:
NET DEFICIT REDUCTION
-83
-195
+39
+15
+55
-140
DEFICIT WITH CLINTON POLICY
Notes:
This scores savings generated by increasing the
taxation of social security benefits as B cut in
entitlement. Some may prefer to count it as a tax
increase.
�Table 2.
Comparison of Real GOP Forecasts·
Real GDP
g::ow~h
(Q4/Q4)
1993
1994
1995
1996
1997
1998
'CEO
2.8.
3.0%
2.8%
2.6%
2.2%
1. 8%
Administration
3.1%
3.3%
2.7%
2.5%
2.5%
2.5%
3.1% .
3.3%
2.5%
2.5%
2.5%
2.5%
Blue Chip
.
\
�The New Economy
Remarks by Martin N. Baily·
Chairman, Council of Economic Advisers
At The
Conference on Old Rules--New Rules: Corporate Structures"
Cultures and Governance of the New Economy
Munich, Germany
June 28, 2000
'Why are we talking about a new economv in the 1:. S.1
The first reason is that productivity giowth has accelerated from about onc and a half
percent a yeur 1973-95, to about 3 percent a yeflf
1995~99.
This acceleration is heavHy related to technology) both the investment in IT hardware und
software (i.e., the use of the technology), and also the extraordinary productivity of the industries
producing the technology.
Some part afth]s acceieration is surely temporary, the result of unusual growt'h in
demand und it is only abo'Jt four yeal's in duratior:. But a substantial fraction appears to be
st!"uctural and hence, poter.liaJ:y, wiJ: result in a sustained improvement in productivity
perfonnance, Moreover, the signs of jnfoITnatl0n technology as an enabler of bt:slness system
char,ge r.ave been visible for much longer than just four years
The second reason is that there has been a d:-amatic in::rease in the stock market valuation
of U. S. corporations. The rate of increase \-vas 16 ~rcent a year from January 1993 through
�2
M;!)' of 2000, resulting in nedrly $18 trillion of wealth held by shareholders The increase in
market valuation has been oriented to the high-tech sector, NASDAQ and Internet stocks
accounted for;t large fraction of U, S. market capitalization in March of 2ooQ.
1 am not going to comment on whether the market
w9uy is overvalued, undervalued 0:
just righi. But I note that even if someone (not me) believed that only a half of the growth in the
market since 93 werejusl speculation. there would s~m have been lrilliO::1S of stockmarket
wealth added due 10 fundamcntuls, the accumulation of know'ledge~based tangible and inl;lOgible
capitaL
The third reason is that there are direCt signs of acceleration in the accumulation of
knowledge and intangible capiull. R&D spending has soared. so has the number of patents. and
the number of trademark registrations. Use of the Intemet and the Web
of c\'idenco!
j5
exploding. This type
fefiee!s only the tip of an iceberg. but it all points in the srune directlOo,
A fourth rCaS:on is related to the others, but it is s~ill worth noling, The new economy is
generating a stream of new revenues, shifting the U. S. from large budget deficit to large
surpluses.
Size and Innovation in the New Economv
The increased importance of information and intangible capital results in 1\:V0
countervailing trends with respect to size, There are centrifugal and centripetal forces at work,
�3
First. since infonnation has high fixed costs anrl.1ow marginal costs of production, there
are economies of scale and scope. Large firm SIze and first mover advantages become important,
and the advantages of size are accentuated by globtlliztlliofi, which have resulted in new cross*
border mergers ane acquisjuons.
But, at the same time, lower costs of communication and interaction anow small
companies to compL::!c by entering a market at . f nmTOW point in {he value chain. This can force
large companies to outsource activities or downsize, to focus on core competencies. They may
choose to globalize on only a sliver of their overall business, As one would predict from'the
work of Nobd Prize winner Ronald Coase, the boundaries of firms and industries are being
changed by deve!opmc!11s in IT. In the end, new competHion win determine how the boundaries
of fi:ms und industries ure changed,
One activity being outsourced is technology development. In large companies,
burdensome review processes can stifle innovation. in part because innovation undennines
existing vested interests wjtbm the firm. In the past) lack of financing has provided a barrier to
mnovaijon in small firms, but loday's venture capital industry, and tbe active IPO market, have
reduced this barner and encouragcd)nnovation by small fims. The two work together, with
venture cupital used to start new companies and the IPO market providing capital for growth at
lower cost. Through stock options, the market has provided tremendous incentives fo successful
innovators,
�4
Anothe:- facilitator of innovation in the U, S. has been aCCess to talent. Higher education
in the U, S. provides a flow of ne~~trained graduates, Immigration has also been important.
Twenty-nine percent of the new start-up firms in Silicon VaHey 1995-98 had CEOs from India
or China,
The Interdction of the Old and the New Economics
The new economy is dramatically affecting the old economy, Fanners can use the
Internet to check meteorology and soil forecasts based on satellite information, Nurses carry
Palm Pilots that contain patient information from all parts of the hospital. Truckers get street
directions ffOrn the GPS system and arc tmcked by their companies. They use ihe Internet to
seek out new loods and avoid empty return tlips,
These impacts may oot always be visible in macro data. Productivity is poorly measured
ir. many old economy industries. And the innovations companies are adopting may not boost
market value when industry competitors are all doing the same thing. As Schumpeter noted
years ago, excess profit comes from innovating ahead of competitors.
The old economy is driving the lle'1' economy, The interaction is tWO~WtIY' For example,
a dynamIc evolving retail industry is using the new technology to communicate and coordinate
its value chain from marketing and design, to customer check out, to transpo!1ation, to
wholesaling, to purchasing and manufacturing. This creates demand for hardware, software and
�5
improved business systems. The same slOry applies over and over us tradilioilaJ industries
become the customers and end-users for the information sector.
It is appropriate to talk of a new economy. But recall.that most of the jobs and most of
the GDP remain in traditional industries. These are driving the new economy as they themselves
arc being ch~jngcd by it.
Policv in the New Economy
1. We know from (he macro data that investment has been a major part of the
aceelcrulieD of proollctivi{y. Fiscal discipline and sound monetary policy have been vital parts
of the low-interest-rate high-investment U. S. expansion of the 1990:;:
2. I mentioned the strong higher education system in the D, S. ]t is important, that
students from all backgrounds have the Opp01'tllfli[y to take advantage of the system. Moreover,
m a world where steelworkers sil at compu:er consoles controlling giant machines, computer
skilis 3re often needed by high schoo! graduates. Companies arc looking for workers at all.levels
that can keep records, understand instructions and solvc·problems. These are skills thaI schools
must teach in order that workers not be left behind.
�6
3,
Right now, some workers are struggling in the new economy. Old skills
becon:e obso:ete, Jobs are lost. To deal with this problem, access
to
trainjng and retrair.ing is
vital, plus a safety net that encourages work, including adjustment assistance and progrdms such
as the Earned Income Tax CrediL
4. The private sectoris the heart of the new technology. But at critical pOinL<; the
govemmem haS played a cc~tral role tnrough support for basic and precommetCi~J research.
A;)d while the fleW
te~hno;ogies
have prospered in u freewheellng, free-market culture, there are
times when government must set rules of the game-intcl]cctuuJ property protection,
international trade fules, privacy. anti-trust policy, worker support Government has a key role in
the establishment of the infr::structure of the new economy,
5. Finany, however, I want to stress t'JoHc:es toward competition, open markets and
change. Ne\1/ flrms, new technologies and new business systems are springing up. The nature
and pace of lechnology are new, but llle importance of change is not. St",dies of manufacturing
iJlants and
stlldi~s
of industries in different countries have revealed that productivity growth
depends on the entry of new establjshments and firms, the expansion of the most efficient
operations ar.d the reduc:ion or closure of the less efficlcnt-ln short, 11 depends on productive
evolution.
�7
To offer an analogy: At 4" Celsius water and ice rem'ain in equilibrium. The proportions
of each remain the same. But in actuality the ice is continuously melting and the water IS
continuously freez.ing. The apparent equilibrium conceals massive change at the micro leveL
Similurly, an economy may appear to be growing steadily. But undemeam there is
massive change. lobs arc being created and destroyed. New films are entering and old finns
leaving. New lech'nologies llre developed that gain competitive advantage for a period, and then
are ovenaken.
Policies and regulations that encourage flexible labor and product markets, competit10n
and openness are the pOlicies that support economic evolution and change.
These can and
must be given u human face. They promote leading edge performance in traditional industries,
which, in turn, drive innovation in the new economy,
One firml comment on l~e spread of the new economy 10 olher countries. Many of them
have more to gain from the new economy because their tradilior.al induslries have not evolved as
"fa!", .ar.d tbe pote:i:iul fot perfonnu;lce improvement;s g!'eatcL BUl the potentiul for social
disruption is also greuter. The adjustment to the new economy may be harder to manage in
economies that have traditionally been more tightly regulated, Countries that want to embrace
the new economy must embrace change in both the tmditional as well as the newly emerging
industries.
�\
EMBARGOED FOR RELEASE UNTIL
THURSDAY, FEBRUARY 10, 2000 AT 10:00 A.;V1,
REMARKS
On the'Release of the
. PRESIDENT'S 2000 ECONOMIC REPORT
By·
Dr. Martin N. Baily
Chairman
Council of Economic Advisers
To the
CENTER FOR NATIONAL POLICY
Thursda)\ February 10,2000
10:00 am,
National Press Club, Hofeman LQunge ,
\Vashington, D. C.
It is a great pleasure to come here to the Press Club to this event sponsored by the
, Center fcir National Policy and talk aboct the 2000 Econo:nic Report of the President
(ERP). I would like to than.x CNP and its director, Mo Steinbruner for their willingness
t
to ,host this session. I want to acknowledge the tremendous contributions to the ERP
from Robert L~wrence. Member of the Council, Kathryn Shaw, who has been r.ominated
as a Member ar.d Aud:ey Choi the Chief of Staff, who has contributed directly to the
Report, and worked extraordinarily hard in coordinating the efforts of all of us. The staff
of the Council is here today, and they h~ye done the bulk of the research and writing .
. They have worked insane hours a.'1d done er;dless rewriting. There are too many for me
to mention them indi'viduaHy, but I am deeply indebted to each a.'1d every one of them for'
their efforts. The statistical office;led by Kitty Furlong, and 'he support staff have done
amazing work, under great time pressure, Let me also thank Cathy Fibicb, the
Administrative Officer, who made sure that even through the snow storms the Report was
produced weB and on time.
We have broken with tradition for the 2000 Report, the cover design is new and
the' font and format are different., 1apologize to !overs of tradition," but the new
millenium is a good occasion for a change and the designers, ] think, carpe up with a
modem and very attractive design.
One other thing we~ve done a bit differently this year, in honor of this being the
2000 ERP, is that one or'the themes ofthe Report is a look back at the century past, i
will nN have time to do full justice to that part of the Report in my remarksloday, but I
hope you win look at some of the fascinating '\vays in which the economy has changed.
There is even some art in the Report, as each chapter stans with an historical picture. Let
me just take a minute to give you a flavor of the kinds of changes over the past century
that we have outlined in the report:
�At the tum of the century, fewer than 10 percent of homes had eiectricity, Fewer
than 2 percent of people had telephones, A car was a luxury for only the wealthy, Healt:'!
and sanitation problems, such as :yphoid fever spread·by contaminated water, were
, common. One in 10 children died in infancy. Average life expectancy was just 47 years.
Eighty percent ofchildren lived in a family with a bread\\riI'Ln.er~father and homemaker~
mother. Fewer than 10 percent lived in single-parent homes. Widowhood was far more
common than divorce. Fewer than 14 percent of Americans graduated high schooL More
than 40 percent of the work force worked on fanns. Average income per capita, in 1999
dollars, was about $4,200,
By contrasi, today, electricity, automobiles, telephones and videocassette
recorders, and computers are considered commonplace if not r.ecessities. Life expectallcy
has increased by 30 years as infant mortality has plummeted, Only 24 percent of children
live in what used to be the typical model of a bread'Ninner-father and homernaker~mother.
Only 3 percent of the labor force work on famls, a.'ld average income per capita is now
333,740 - more than eight times what it was in 1900, adjusted for inflation.
Cleariy. this past century has brought a number of amazing improvements in the
qt..:ality oflife and standard ofllving for Americans. ~"1d these past Seven years have been
a particuJarly fabulous'era for the eco::J.omy, r am in the fortunate position today of being
able to release the 2000 Economic Report, that documents the extraordinary economy we
now have. Back in the recession of the early 90s, no one foresa'.v that we would have the
longest expansion ever, with soaring investment. ur:employmem at 4 percent, a core
inflation rate of 1,9 percent and a budget surplus of$124 billion last year, Since 1993,
nearly 21 million jobs have been created, there has been almost 4 percent GDP growth
per year, real wages have grown, and average famity incomes are up $5,000. Amazingly
the economic news has become better and better over time. This expansion has gotten
stronger, yielding lower unemployment, lower inflation a.'1d stronger groVlth (Chan 1).
This contrasts 'Vfiili where things stood in 1992, with a fiscal year budget deficit of$290
. billion, unemployment averaging 75 percent, and real average earnings lower than they
were in 1981,
In my talk today t hope to identify the distinctive features of this expansion,
understfuid the drivers"of st!ccess in this record~breaking expansion and discuss the
chaHenges that still lie ahead. Despite the stellar economic perfonnance there remain
important steps to be taken to ensure all Americans are sharing in the prosperity that
abounds.
Distinctive Features of the Record Breaking Expansion
President Climon came into office promising jobs and he has delivered on that
promise. as the nearly 21 million new payroll jobs have pushed the unemploymem rate to
4 percent. During the 1970s and 80s, the unemployment rate was much higher on·
ave:age, even at cyclical peaks. And high unemployment and high inflation oflen went
together-stagfla!.ion, You have to go back to the 1960s to see unemployment rates as
low as they a:e today, and at that time inflation was accderati:1g sharply, This expansion
has been unique in combining stable inflatior. with a highwemployment economy.
2
�As yoc see in Chart 2, this expansion is also unique in the pattern of productivity
gro\.\'th. Typically there is a surge of productivity growth in the firSt year or so of an
expansion, This is the bounce back from the decline in prodl:.ctivity that occurs in the
recession that precedes an expansion. All three expansions show this initial surge In
productivity growth. B~t in the 60s and the 80s productivity growth fen after that initial
surge, and by the time these expansions were 7 years old they were looking tired and
listless. This is particularly so in the 80s expansion where productivity growth g:-ew
weaker and weaker, It averaged less than one percent in the last four,years of the 80s
expansIon,
The 90s expansion shows a strikingly diffe:ent pattern. This expanslon has been
gaining strength. Productivity has been accelerating. Productivity can be measured in
two ways, based upon how much has been produced in the non~farm business sector.
A..'1d on how much income has been generated by that sector. Based on a combination of
those two approaches, growth of output per hour has averaged 2.9 percent a year since
i 995. This is a sharp increase above the trend line of productivity gro\.vth Over the'
previous twemy-two years and whHe it's still too early to tell definitively, it suggests that
we may be on a path of faster productivity grov.'th that wiH help us have faster,
sustainahle growth in the future.
Chart j shows a third distinctive feature of this expansion. There are encouraging
signs that the fruits of growth are now being shared more evenly in contrast to eadier
periods. From 1973 to 1993 real family incomes grew very slowly and that grov."'oh was
very uneven. Only the top quintile of the income distributi~n moved up at a reasonable
pace, while tile bottom two quinti:es actually faced declining real incomes over this
twenty-year period, whe:l adjusted for inflatior. ,\.Ising the consumer price index. Over the
five years from 1993 to 1998, the picture is very different. All of the income groups have
seen good rates of income growth, and the lowest quintile has actually grov.n most
rapidly. There is similar good news in tenns ofeamings, starting in 1994. There have
been several press reports recently suggesting that despite the great economy overall,
inequality is still a growing problem. These reports neglect to mention the recent trends t
have just described.
'
The drivers of the record breaking expansion: Technology! Pro"Investment Fiscal
PoUey, Competition and Trade. and Skills
Technology, The role of technology in driving growt.' in this economy needs no
introduction. There are many ways one could illustrate the technology revolution taking
place in this country, . Chart 4 is taken from Chapter 3 of the Report and shows the rapid
increase in patents granted in the U.S. The surge has been particularly strong in the past
few years. Pater.t data do not provide a perfect :neasure of innovation! but in this case the
cpward !mrge in patents seen in the chart provides a correct v:sual story, showbg a surge
in technological opportunities,
In explainbg this wealth of opportunities, the dynamism of the private sectOr in
the U.S. economy gets a 101 of credit. But Federal support for technology has played un
3
�ir.dispen:ible role, providing the crucial funds for basic research and pre~comrr.ercial
research! for example, in information technology and biotechnology.
Even after technological opportu.-.uties have been developed productivity has not
always :1sen. Recall that prior to this expansion, there was a puzzle where people
questioned why the boom in technology in the 1980's seer:led to have no effect on the
productivity data. In order to trar.slate innovation into ~wth. companies have to
change the way they do business, develop new products and services, and respond to
changes in the competitive environment. Workers must master new skills and, in some
cases~ must move to different jobs. Making the transition from new ideas to realiZed
economic perfonnance always involves some fonn ofinvestmem-in physical capital,
pian! and equipment; in human. capital, education and training, or in intangible business
capital, the development of new business systems. Companies in the 19905 appear'to be
making those investments and reaping t..'le rewards of the faster productivity growth,
Stimulating economic groWth is like creating a chemical reaction. All the right
elements have to be in place, the mix has to be right. Policy cannot grow the economy on
its own. But growth from the private sector will not take off if the policies are not right.
The key to the longevity of this expansion r.as been that the dynamism of the private
sector has reacted wit.'l a superb monetary policy, and, crucially, the pro-investment fiscal
policy. The chemistry has been right.
,'
Pro~investmenl fiscal
policy. Fiscal policy has a major impact on the amount of
investment that takes place. Budget deficits are not always bad. They can help stimulate
an economy where demand is weak. But when the goal :5 to stimulate and sustain 11
supply~led, productivity~led expat1sion, persistent structural deficits are very damaging.
They drain savings [:om the economy, increase interest rates and discourage investment.
Chart 5 shows a dramatic picture of large and rising deficits in past expansions
. and of the turnarou:ld in the 1990s. The structural budget balance adjusts for the effect of
the business cycle. It estimates what the deficit or surplus would be if the economy were
~H its sustainable long run levet ofGDP, that is, at potential GOP. This expansion started
out with massive structural deficits. Three and a half percent of GOP in fiscal 1992. But
the situation has been i:ransfonned so that now there is a structural surplus, one that is
projected to grow into the furore. It is true that the budget agreement of 1990 took a step
forward in fiscal responsibHity and bipartisan credit is deserved for that first step. But it
was only a s.rnaH Step. The structural deficit continued to increase in 1991 and 1992, The
big shift occurred with the budget agreement of 1993 a.'1d with the subsequent strength of
revenues and restraints on spending.
'What you hope to see from a'shift to fiscal discipline is lower interest rates and
larger investment. That is exactly wnat we have seen, Real inlereSf rates have been 30
1050 percem lower in (his expansion than (hey were in rhe 80s expansion. And
investme!1t has responded in force. Not aU of the int<l:1gibie investment in process
improvement or in skills and trainir.g is measured ir. our ir.vestment data, But the
investment we can measure provices a proxy for the ('ota1. We have seen growth of
�;
at
equlpment investment and software 123 percent a year since 1993 (Chart 6), much of
it concentrated in the information technology and communications areas, allowing the
economy to take advamage of the innovation opportunities. This rapid step up in
investment has been a vital ingredien: allowing the acceleration of productivity growth
we saw a moment ago. There is a direct link from fiscal discipline to the key productivity
. driver of this longest expa!1sion.
Strong investment not only improves productiv:ty it adds to capacity. When
capacity shortages develop, there is upward pressure on margins that ca'l contribute to an
ir.fla:iona.ry spiral. So there is another direct link froCl5scal discipline to the persistence
of this expansion, In the 19905, we have built capacity and he!ped hold dOV.ll inflation.
In the 19805 capacity grov.'th slowed to a crawl as productivity growth slowed.
Th!s should come as no surprise. The adverse effects of chronic defici~s were
anticipated by one of my predecessor.;. Martin Feldstein' wrote in the 1984 Economic'
Report of the President (p37) as foHows: "The most important long-term economic
effect of the prospective budget deficits would be to absorb a large fraction of domestic
saving. and thereby reduce the tate of capital formation and the potentiallong~term
gro\Nth of the economy:;
In 1993. the Administration undertook a major shift in policy, away from
exploding budget deficits and towards fiscai discipline. At the time. the decision to
embark on a program of deficit reduction, which was then passed in Congress by the
narrowest of margins, was hailed by the press, and by experts such as Paul Volcker, The
bond market respo!1ded to the shift with a rally in the bond market. Subsequently, the:
President and Congress continued the steps towards fiscal discipline.
Today the same newspapers and newsmagazines that were demanding a change in
policy and supported that change when it happened, now seem to be suffering from an
extraordinary amnesia. It is time to remember what was said about the dangers of large
persistent de!icits und look at the benefits that we have gained from ending them. It is
time to recognize the vital role that fiscal discipline has played in the chemistry of
growth,
Competition and Trade" There is evidence that industries in which companies compete
vigorQusly are more productive industries. \Vithout the spur ofcompetition compa...,ies
l
become complacent and keep doing t..'tlr.gs the old way even when new methods are
available. Competition encourages change and for~es companies to be more productive.
Competing in the global economy adds additional benefits, The classical gain from trade
comes as industries that have comparative advantage grow and those that lack it; contract.
The res:llting shift of resources raises overall levels of productivity. In addition,
compet;ng in the global econot:1y also helps the spread of best ;;rac:rice production
methods around the world. Chart 7 shows how the U"S" economy has become more open
and more integrated with the world economy. Trade as a percent ofGDP has increased
rapidly, especially in this expa.'1sion. And as the international chapter of our report
5
�discusses, trade is only one element reflecting a broade~ ir.tegration w:th the glQba~
economy.
President Clinton has acted to enhance domestic competition, for example with
measures such as the Telecommunications Act of 19961 and he has made engagement in
the global economy a major policy thrust. Started by prior administrations, the Uruguay
Round agreement a..'1d the NAFTA agreement were both ratified during this
Admir.istration.
Education and Skills. Chart 8 shows that the return to education is high and has risen
over the past twenty years. Those with college degrees have, on average. earnings over
50 perceni higher than high school graduates, and a substantial differential persists even
after co·m.rolling for other determinants of earnings. The differential bet\veen high school
graduates and high school dropouts is just as great It thus makes eminent sense for Our
society to encourage young peopie, and not so young people. to acquire more education,
This Administration'has stepped up its efforts to provide loans and scholarships to allow
any student who is able to benefit from college to have the opportunity to anend. And
these policies have contributed to this expansion by adding to the pool of trained ~"orkcrs"
As well as education, perhaps the greatest gm\vth benefit on the labor force side
has peen in training, The policies that have given us a high employment economy have
encouraged employers to train workers to fill jobs th·at would otherwise be vacant
Companies complain about their inability to find workers with the skills that they need.
But this is a problem with a silver lining. It gives these companies a great incentive to
seek -out workers and train them themselves. This upgrades the quality of the workforce
and help!, sustain a producti,ve expansion.
Chart g gives on~ Stgn that tills phenomenon is important. Even though coUege
graduates are in high demand, and have, cwrently, an unemployment rate of only 1.8
percent, ,h. figure shows that the collegelhigh school earnings differential has stopped
. rising in this expansion. This suggests that high school grads are able to increase their
skill levels and keep up with the earnings increases being enjoyed by college grads.
Questioning the Causes ofInequality. As I showed earlier. an important feature of this
expansion is that all income groups have incomes rising at about the same rate, How
does this fit with the drivers of the expansion that I have just described. We argue in the
Report that this data suggest a re-evaluation of the conventional explanations that have
been given for rising inequality. The two most-frequently cited expla.'1ations have bee:]
technological change and foreign trade. Technology, it has been argued, is biased in its
impact 011 the labor market; holding dOVvn the wages of low-skill workers. Trade is said
to put lower-skilled US workers in direct competition with very low~wage workers
overseas. Of the two, technology has been seen as the larger culprit.
Those expianations were always rather problematic. In the 70s and 80s
productivity growth was very slow, suggesti:1g a rather modest impact of~ecr.nology on
t:te economy. And for trade, the proportion US workers i:1 direct competition with very
low-wage workers overseas is very small,
or
6
�But regardless of whether or 'not we can sort out correctly the reasons for the
inequality trends of the past, there is one simple lesson that we can iearn from this
expansion. It is possible to have an economy where technology is moving rapidly,
. where tmde is expanding, and yet there are also across~the-boa:d incor:1e gains, An
. important reason for this is that rapid technology change and openness to trade are both
factors kee)'.1ing inflation down and allowing us to operate a high employment economy,
When labor is scarce~ the worke:-s at the bonom of the wage distribution do better,
In Summary. This has been an ext.-raordinary expansion so far and we expect it to
continue well into the future. It has been driven by a dynamic private sector and the hard.
work of American workers. It has been kept on track by astute monetary policy that has . ,
given the economy room to run while keeping guard against inflation. It has been helped
by deregulation that started in the 19705 and continues today, But while recognizing
these important factors, we must ackno';Vledge the contribution of the policies of the
19905 to the expansion of the 19905. We need to guide policy in the future with the
lessons of what has worked so well. Most importantly, turning around the fiscal mess has
freed "up ilie resources needed to invest in capacity and in produ<:tivity improvement.
Maintaining an open and competitive economy and ir.vesting in technology, education
and skills have added to growth now and helped pave the way for more growth ahead.
Challenges Ahead
Last year1s Report analyzed the impact of the aging population. And the
challe.nges this poses remain at the forefront ofpoiicy today, Protecting social security
and Medicare are top priorities of the President's budget. in this year's Report we looked
at some challenges ~n different areas, In our chapter on Work and Learning we look at
how the nature of work has changed dramatically over the past 100 years and has lately
put a premium on a new set of skills. Chart 9 highlights both an achievement and a
challenge. If workers are to have access to good jobs today and in the future, they must
acquire the technical and computer skills those jobs require. The achievemc!1t is that in
lerms ofInte:net access, the gap between high and low poverty schools has been almost
closed. The challenge is that too many students emerge from our schools without the
computer skills they need. The President's budget that was released on Monday contains
several initiatives designed to meet the educational challenges.
The nature of work has changed over the past 100 years a."1d so has the nature of
the family (Chan 10). Today more ant! more women work. There are many more siegle
mothers than there used to be, who go out to work to support themselves and iheir
families. As we~show in Chapter 5 of the Report, these mothers have a tough time, with
family incomes concentrated in the low end of the distribution. Single mothers often find
it hard to meet the bills each month-they have money crunch, These families are being
helped by the Earned Income Tax Credit and the Child Care Credit and the Medicaid and
State SCHIPs programs in health care, And ofeourse the strong economy has given
them better opportunities.
Dual earner families are often in the upper part of the ir.come distribution,
Incomes are higher than ever before, but many families judge that they need the income
7
�of both partners to provide them w:ith the things that once were conside:ed luxuries but
now are seen as necessities. In addition, t.l-tese families face a problem of time scarcity,
Juggling two Careers and children is a very tough assigrimem. And this time crunch can
·be exacerbated for families that care for elderly parents as well as children. Tue Family
and Medical Leave Act and the long te~ car:e initiatives are directed towards the needs
·of t.~ese families.
One of the biggest challenges for the nexr century is ro find policies that will help
the environment and yet sustain growth. Chart 11 Hlustrates the progress being made and,
the challenge ahead. The amount of802 and NOX emissions per unit of GOP has gone'
down dramatically over the century. But of course the growth of GOP has been so great
that total emissions are still too high. Chapter 7 of the Report details the benefits of using
tradable pennits as a way to minimize the cost ofachieving envirorunental goals.
Conclusion
The challenges ahead are great but the strong economy has given us the resources
and the confidence that we
ceal with them. Chart 12 gives a projection of the gro\\'th
of business to business e-comrnerce. This is One of the fruits of the new tecMology that
promises continued economic growth ahead. With potential like this there is no need for
this expansion to end soon. And finally Chart 13 looks again at productivity. I guess
you Cllil tell productivity is my field as an economist. I have talked a lot about it Give a
kid a hwnmer and everything looks like a nail.
can
But the productivity story reaIly is an important one. Tnere was a very persistent
trend of slow productivity growth after 1973 that had negative implications for the
economy, especially when the limited gains were distributed unequally. To go back to
the earlier debate, this chart shows no sign of an 80s boost in produ~tivity. Today, there
does seem to be a new trend. We do not know for sute how long it will last, but by
staying the course of the policy path we have been on, combining fiscal discipline with
support for technology and the skills that are needed, we will give this economy its best
chance. It is the best chance of getting the chemistry of growth right
8
�Remarks by Martin N. Baily Chairman of the Economic
Advisers to the American Association for the Advancement
of Science
Thursday, September 2, 1999
I.
Introductory Remarks
Thank you. It is a pleasure to join you here today. I would like to
thank the American Association for the Advancement of Science
for inviting me to address this distinguished audience of young
)
leaders, who I am sure will make valuable contributions to both
..
the worlds of science and public policy.
As Science and Engineering Fellows with the AAAS, you will
have a unique opportunity this year to gain a deep understanding
of how scientific research and public policy interact and
influence one another.
�2
�II. The Economy and Technology
The U.S. is currently enjoying a fabulous period ofprosperity.
We have had 100 months of economic growth - marking the
longest peacetime expansion on record. Inflation has been
subdued despite strong real wage growth and, for the last two
years, the unemployment rate has been stunningly low - well
below 5%.
._J
,<'
'"
A major factor in powering this unprecedented period of growth
without inflation has been a recent resurgence in productivity
growth. In the period after World War II through to the early·
1970's, labor productivity increased sharply, clocking increases
ofnearly 3% annually.
3
�Butin the two decades that followed, productivity growth
slowed sharply and living standards stagnated. However, in this
expansion, productivity growth appears to be accelerating. Most
notably in the past 3 years, it has increased at about a 2% annual
rate. This productivity is fueling the growth in real wages and
the increase in the economic well being of all Americans.
Unfortunately, there is a lot ofunceltainty about why
.)
productivity grO\vth slowed in the 70s and how rapidly it will
.,.c.~
grow in the next few years. What is clear, however, is that the
ability of American businesses and workers to take the advances
made in science and turn them into productive new investments
and jobs has been a contributing factor. And to insure continued
growth, it is vital to encourage scientific progress and
innovation.
4
�The fruits of science and technology have played a central role
in shaping this economic expansion. Technological advances
are revolutionizing nearly all sectors of the economy and even
creating whole new industries. Information technology now
constitutes approximately 8.2% of GDP -- up from 4.9% in
!
1985. The IT sector accounted for one-third of real economic
growth from 1995-97. Employment in ~ computer services
has nearly doubled since 1994. And those jobs in the IT sector
•
. ) pay 80% above the average private wage. Supported by recent
computer innovations, "just in tinie" inventories have
revolutionized business practices, allowin& the inventory-to
sales ratio to fall to historic lows. And, of course, the Internet is
altering forever the way we do business and communicate with
each other. Nearly 64 million American adults currently use the
Internet up over 20% from only one year ago.
5
�ITI. The Role of the Government
As we consider the role that scientific discovery has played in
fueling our economy, it is important for us to consider how the
policy decisions we make affects the scientific community's
ability to continue that process of discovery and advancement.
()
.,p". fi" i)
I'
"
Certainly the private sector plays the dominant role: In 1997,
. ,
~
approximately 63% of all R&D, or about 121 billion dollars,
was spent by private companies on research and development
efforts across a wide variety of industries. However,
government policies designed to encourage innovation playa
critical role in providing the right incentives to innovate.
6
�· In fact, many of the products and services we now consider
indispensable - froin communication satellites that bring us live
television broadcasts to human insulin that saves and extends the
lives of millions of diabetics - have been facilitated by US
policies to encourage private sector investments in science and
technology.
F or many types of research,the costs of creating the first
.,
1 innovation are much higher than the costs of duplicating that
innovation. In the j argon of an economist, the fixed cosUs high,
but the marginal cost is low. If duplication is relatively easy,
there may be little or no economic incentive to innovate because
the initial innovator cannot recover its investment in fixed costs.
Therefore, one of the most fundamental roles of government is
to provide rules that protect the intellectual property Tights of
inventors through patent and copyright law.
7
�. Government's role in R&D, however, extends beyond simply
establishing the rules for the protection of intellectual property.
New technology and new innovations often depend on advances
in understanding promoted by "basic" scientific research.
By its very nature, much of that research, (including, no doubt,
some that has been conducted by members in the audience) is
J
not the type
~eMeh that'corporations find immediately
interesting.
J? part, .this reflects the fact that the primary output
of basic research is knowledge, -not patentable innovations.
Moreover, even if the new knowledge developed through basic
. research suggests a specific, patentable concept, there may not
be any obvious economic return in the near future.
8
�, In these circumstances, while the social returns to pursuing basic
research may be very high in the long run" the private return
available to a particular company may not justify further R&D.
In areas involving basic scientific research, therefore, there is an
important role for government to play in funding projects
designed to advance the frontiers of science even - or perhaps
especially - when there is no obvious, immediate commercial
/}
_T
application.
9
�Indeed, when the precursor to the Internet was invented, it was
not envisioned as a project designed for commercial purposes at
'all. Rather scientists working for the Defense Advanced
Research Projects Agency (DARPA) were looking for a way to
share data and programs across different computers located in
different parts ofthe country. From that early scientific and
academic communication network evolved what is now a major
driving force in new business ventures and new ways of doing
'}
-'
business.
It's very important that we continue to support fundamental,
curiosity-driven research in all science and engineering
disciplines. Many areas of research that seem like they would
have no practical application whatsoever turn out to be very
impol1.ant.
10
�For example, who would have predicted that studying the
extinction of dinosaurs would cause us to focus on near-earth
asteroids, which could wipe out human civilization? Or that an
obscure branch of mathematics would provide us with the tools
for secure electronic commerce.
Moreover, the research enterprise is interdependent. Biomedical
research, for example, is heavily dependent on advances in the
1 physical sCiences and engineering - such as CAT scans, gene _
chips, and supercomputers for more rapid development ofnew
drugs. We can not simply cut off somefields of research just
because we can't see its immediate relevance today.
JJ
�In addition to funding basic research like the type that created
the Internet, government can also be an important partner with
industry to bring technology to the point at which commercial
qevelopment becomes feasible.
Another example is the collaborative effort between the
government and private industry called the Partnership for a
New Generation of Vehicles. In this program, Ford, GM, and
.
)
Daimler-Chrysler have joined together with the Department of
Energy and other federal agencies and national laboratories to
work, on R&D efforts to advance automotive technology.
Will the Partnership succeed? Maybe, or maybe not, but that
may be the best reason for continuing to explore the co'ncept to
see ifthe technology can be developed to see if a cleaner, more
environmentally friendly alternative to existing technologies is
economically as well as technically possible.
12
�IV. Administration Policies
It is clear that the partnership between the Federal Government
and the scientific community has been a fruitful one. In
recognition of the strategic, important role that scientific
discovery plays in our long term economic welfare, President
Clinton and Vice President Gore have pursued a comprehensive,
plan of investing in people, investing in technology and
. : :' , .'
dramatically increasing our efforts in research and development,
while continuing to be mindful of the fiscal discipline that has
helped to make America's economy strong and stable.
The Administration's 2000 budget proposal reflects our
continued support of science and technology, providing $78
billion for R&D investments. The centerpiece of the
Administration's budget proposal is the 21 st Century Research
Fund.
!3
�This fund is intended to insure continued stability and growth
for the highest priority research funds by providing a proposed
. $38.1 billion be dedicated to R&D. $18 billion has been
dedicated to basic research and $239 million to the Advance
Technology Program - a program designed to encourage
collaboration between industry and government in the research
..
and .commercial development of new technologies. The
Administration has also proposed an Information Technology
Initiative that will invest in long term fundamental research in
,
computing and communications and will increase development
and purchases of extremely fast supercomputers to support a
broad range of civilian R&D.
14
�Any discussion of science and technology policy would be
incomplete with out mention of the most important input into the
production of new ideas and technologies -- human capital. The
government has taken and will continue to take an active role in
supporting the education of scientists so that there will be in the
future, as in the past, a cadre of highly trained American
scientists engaged in the pursuit of new and exciting
technologies.
That's why the Administration is particularly concerned that the
Congress has
~liminated
our proposed increase for the National
Science Foundation - the only agency that has the mission of
supporting all science and engineering disciplines.
15
�As well as his commitments to Social Security and debt
reduction, the President is committed to investments in the
future, including investments .in science and technology.
.
.
.
By contrast, the GOP budget actions threaten cuts in science and
technology in key areas. And the proposed GOP tax cut could
result in a 50% cut in R&D funds by 2009. I have argued today
that strong support for funding of basic science and pre
.. '
commercial R&D is important not only for the scientific
community, but for the whole economy.
16
�EXECUTIVE OFFICE OF THE PRESIDENT
'COUNCIL OF ECONOMIC ADVISERS
WASH!NG70N, D.C. 2CSOO
THt: CHAJRMAN
The 1998 Economic Report of the President
Dr. Janet Yellen
Chairn1an, President's Council of Economic Adviser~,
Center for National Policy
. February 10, 1998
T:'1e Employment Act of 1946. whicb created tbe Council of Economic Advisers; requires
the President to submit an Economic Report to the Congress each year. This Act, together with
its later amendments, gave the Federal government responsibility for stabilizing short-run
economic fluctuations, promoting balanced and noninflationary economic growth, and fostering
low unemployment. One purpose of the Economic Report is to tell Congress whether we have
met those responsibilities. r am hapP)~ to say. in this the fifty-second year after the Act, that the
state of the economy is truly extroordinary,
'
I will elaborate on this point in a moment, but I would also like to note that the Report of
the Council ofEconomic Advisers, has also traditionally been a vehicle for presenting a broad
range of analyses of current economic policy issues. This year, in addition to a chapter on
macroeconomic policy and perfonuance. the Report contains a chapter on the economic well
being of families and children, and a chapter on racial and ethrlic inequality--two central
concernS of this Administration, The report also contains two chapters on microeeonomic topics,
one focusing on improving economic efficiency in the areas of health and environmental policy, .
"and qne discussing recent trends in antitrust policy. Finally 1 the international chapter focuses Oil
the benefits of opening international markets,
In the remainder afmy remarks 1 win touch briefly on the current Slate of the economy.
and then discuss the broad and lasting benefits ofa "high-employment economy~' ~~ which one
of the key themes of this year's Economic Report. I will then talk about some of the key
challenges that still face our nation as we move into the 21st Century,
is
STATE OF THE ECONOMY
ow. Nation's economy is the strongest it has been in a generation, In 1997. growth wa's
strong and job creation was vigorous while inflation declined, Real GDP grew 3,9 percent, and
employment rose by 3.2 mmion~ for an average rate of 267 1000 jobs per month"The
unemployment rate dropped below 5 percent for the first time in 24 years, yet core inflation rose
just 2.2 percent. And, this occurred during a period of histone deficit reduction: the Federal
budget defici~ which reached $290 bi11l0n in the 1992 fiscal year, declined to only $22 billion in
I
�fiscal 1997. And. as you know, the President recently submitted to Congress a budget for fiscal
1999 that projects a balanced budget for the first time since 1969.
As 1998 begins, the prospects for continued growth with high employment and low
inflation are excellent The C{;onomy is remarkabiy free of the symptoms that often presage an
economic downturn -~ that is) inflationary pressures remain well under control; inventories are
lean in comparison with sales; and there is no evidence of any financial imbalance that could
disrupt the expansion. Economic ttinnnir in East Asia. assuming that stabHity is restored. may
work to permit continued U.S, growth and job creation with a more moderate outlook for interest
rates. Our economy is in fundamentally sound shape and weIl~equipped to handle any
unexpected bouts of rougher weather,
THE BEr;EFITS OF A HIGH EMPLOYMENT ECONOMY
The exceptionalJy strong economy that we are enjoying today is due in part to the sound
and credible economic strategy put in place by the Clinton Administration. The
Admirustration's strategy has focused on getting the fundamentals right ~- reducing the budget
deficit, investing in the American people, and opening markets at home and abroad. These were
the right policies to stimulate the job creation needed to mOVe the economy to full employment.
And, they ar(! the right polides for attacking the longer tenn problems of sluggish productivity
growth and widening income inequality that have amicted our nation!s economy since the early
1970,.
The Report underscores the enormous economic and social benefits to a "high
employment economy." An economy with slTOngjob creation and iow unemployment can make
a broad an_d Iasting contribution to the well-being of the American peopte. Let me talk briefly
about some of these benefits:
First, a high employment economy produces certaln direct and measurable benefits.
Returning the economy to full employment yields a direct and measurable benefit to our nation
by ensuring that the economy's resources~~human and material-are not squandered by needless
cyclical unemployment. On average. reducing the unemployment tate by a percentage point
raises output by approximately 2 percent; in 1997 ~ 2 percent ofGDP was $160 billion, or roughly
$600 for every American man, woman and child, Wasted resources from not producing at
potential, together with the human cost of unemployment. are intolerable; the elimination this
waste is the principal benefit of a sustained return to full employment.
.
.
j
of
Second, a high-employment economy can reduce long~term joblessness. A tight labor
market encourages participation by those who might otherwise be forced to sit on the sidelines.
and makes it easier to absorb less skilled or younger and more inexperienced workers into the
labor force, These new labor market entrants gain much~needed job experience. building the
skills they will need to hold down ajob in the future, The experience of some European countries
illustrates this point: in Europe, the profonged stagnation or recesslon may have led to a
2
�permanent increase in unemployment there, a~ the unemployed and lhe never~empJoyed have
seen their skills atrophy or become obsolete, For this reason, running a high-employment
. economy. may be one of the surest ways to ensure that an unacceptably large fraction of our
citizens are not consigned to tong-term joblessness and economic marginalization.
Third, it will help move welfare reCipients into the workforce. Keeping the
unemployment rate low and job growth high is necessary if we 'are to move current welfare
recipients into the work force. Early, indirect evidence on this point is encouraging; employment
and labor force participation rates among single \\-'Omen who maintain farnilies~~about two-thirds
of whom have children under IS-have increased in the past few years. This is probably in part
the result of recent welfare refonn: the 'greatest acceleration in e:nployment rates has occurred
among those single women most likely to be affected by welfare reform, namely~ those with
young children. Nevertheless, it is obvious that fostering an economy in which job opportunities
are plentiful plays a crucial part in aiding the transition fron:: welfare to work.
Fourth, it enhances personal economic securi!);, Knowing that work js available to those
who seek it, at wages sufficient to keep them and their families out of poverty, is a key to
personal economic security. A tight labor market increases the confidence ofjob losers that they
wili be able to return to work, lures discouraged workers back into the labor force, enhances the
prospects of those already at work to get ahead, enables those who want Of need to switch jobs to
do so without a long period ofjoblessness. and lowers the duration of a typical unemployment
spell.
And, finally, a high-employment economy may help reverse the trend toward greater
.economic inequality, From the 19805 until the early 19905, the economy's ability to reduce
poverty through growth alone WllS hampered by a strong headwind: for the poorest Americans,
the benefits of an expanding economy were offset by the sustained declines in wages at the low
end of the earnings distribution. Since' 993, living standards for all Americans are on the rise,
especially for those at the bottom of the income distribution. The poverty rate fell io 13,7 percent
in 1996, from 15,1 percent in 1993; the poverty rate for black Americans is at a historical low,
and in 1997 unemployment among blacks fell to itslow.st rate since 1973. Since 1993,
household income has grOVoll in each quintile of the income distribution t with the largest
percentage increase going to the poorest members of our society, Mruntaining a fulJ-employment
economy is essential ift~is progress is to continue.
CHALLENGES IN A CHANGING ECONOMY
Although our economy is strong and Americans are working in record numbers. our
Nation still faces other, broader challenges as we move into the 21st century. In many ways the
U.S. economy today is very different from that in which our parents and grandparents li"...,ed and
worked. Today, 24 percent of families are headed by a single parent, compared with 14 percent
25 years ago. Three in five married mothers with chBdren under 6 are in the work force-twice as
large a share llS in 1970, ' And the U,S, population is aging-- in the next ceatury there will be
3
�fewer workers for every, retiree, making issues related to retirement security more and more
important. The nature of the workplace also has changed significantly: few American workers
expect to be working for the same employer~~or even to be in the same career~-when they retire,
Infonnation teclmology is dominating industry: in the 19505 the information technology industry
ba. .ly existed; today it employs a larger share of the labor force than the automobile industry did
.
in the 1950, and 19605. Because information and technology and global commerce are leading
the transformation of me global economy. the new strength of a nation will be found in the skills,
knowledge and imagination of its people.
The Clinton Administration's agenda is designed to deal \Vith these changes and the
challenges they pose. It is designed to equip the American people with the strength, the skills,
the security and the flexibility needed to reap the rewards of our growing, changing economy,
The President recently laid out this broad agenda in his State of the Union and again in his
FY1999 budget In the remainder of my remarks, I will focus on 3 Dfthe key agenda areas:
retirement security. the challenges of chHdcare and racial and ethnic economic inequality.
First, tet me talk about issues related to the aging of the population, which we address in
Chapter I of the Economic Reporl ~~ refonni~g Social Security, For aimost 60 years, Social
Security has provided Americans with income security ~n retirement and protection against loss
of family income due to disability or death. A large share of elderly Americans, particularly
those with low incomes, re~y on Social Security as their primary source of pension income in
retirement. The system has enjoyed dramatic success in reducing poverty'rates among older
Americans.
Today, however, many Americans fear that Social Security will not be there for them
when they are ready to retire. This concem reflects the widespread recognition that, under current
"intermediate" projections of the Social Security trustees, the system faces a long-tenn funding
gap: beginning in 2012, unless the system is reformed by then, the government 'will be unable to
pay current Social Security benefits in full out of current payroll taxes; it wiH then have to ~raw
down the system's trust fund, and by 2029 those funds will be exhausted. If still nothing bee been
done, the government would then face several options which it could adopt singly Of tn
combination: it could reduce benefits umil they are in line with collections, ra:se payroll taxes to
cover nn unchanged level of benefits, or finance the shortfall from other parts of the budget. by
raising other taxes, cutting expenditures on other programs, or borrowing and allowing the
budget deficit to increase. One or more of these measures will have to be taken so long as no
changes are made to the present system,
Although the seriousness of the financial imbalance facing Social Security should not be
dowoplayed. its magnitude is not so large as to be insurmountable, particularly if early action is"
taken. For example. even jf nothjng is done and the trust fund is exhausted, payroH taxes wiH still
be sufficient to permanently finance roughly 75 percent of benefits. Put another way, the
difference between the anticipated income and the anticipated expenditures of the OASDI (Old
Age, Survivors', and Disability Insurance) program over the next. 75 years amounts to around 2~
4
�percentage points of taxable payroll, Ot approximately 1 percent of GDP, These facts suggest
that the problem of placing Soda! Security on a sound financial footing can admit of eventual
resolution.
The President is committed to Saving Social Security First. He has proposed reserving
100 percent of any budget surplus until steps have been taken to reform Social Security. He has
also proposed a process to devise an appropriate solution over me next 2 years.
A second major policy challenge involves children andjssues related to childcare.
Chapter 3 of this year's Report documents that there have been notable improvements in
children's well-being over the past three years~ although an unacceptable fraction of America's
children still live in poverty. Children have shared in the benefits of the recent economic
expansion: the ot11cial child poverty rate has fallen by 2.2 percentage points since 1993, And,
,under a bro.der measure of poverty which includes both 'axes (like the EITe) and non-medical
in-kind benefits, the poverty rate for children has decreased by 4 .7 percentage points from 1993
to i996, and is now below its level in 1989, The primary reason for this drop is because more
families were able to eam enough money to bring their incomes above me poverty line. Child
poverty has also declined due to an expansion of the Earned Income Tax Credit
Other measures of children's well~being have also improved. The share of children living
in households without enough to eat has fallen since the early 19905, and the share of households
with children living in housing in poor physical condition has also declined since the late 19703.
There have also have been increases in low-income children's utilization of basic health care
services and continued improvements in mortality rates ofinfants and young children during the
19905,
j
Despite these improvements, many children remain economicaHy vulnerable. One in five
children, and nearly one in two children in female-headed famities, had incomes below the
poverty level in 1996. Adequacy of family income is a critical predictor of both the present and
future we1l~being ofchildren. Children who grow up in low~income families score tower on
standardized tests. complete fewer years of school and tend to have lower earnings. With respect
to medical care, one in seven children did not have access to health insurance in 1996) despite
substantial increases in Medicaid coverage since 1989> due to a concurrent decline in children's
. private health insurance coverage; one in nine children Hv~ in households which paid more than
half their income for housing in 1995. Finally. a large share of children are not attaining even a
basic levels of proficiency in sdence, mathematics, and reading, Thus, too many children are at
risk of current and future hardship.
For this reason) the President has developed a number of initiatives to strengthen the
economic and social supports for America's children. This year, the Administration has begun
to implement the Children's Health Insunmce Program, which offers $24 billion over five years
to States to exprutd health insurance for uninsured children, For fiscal 1999. the President has
proposed to expand the suppiy of afforaable housing for low-income families. through a 40%
5
�increase in the low~incQme housing tax credit, and through cor.tinued expansions in the HOME
Investments Partnership Program, The President has also proposed WiO major new initiatives to
improve the quality ofelementary and secondary education. The first would invest $ !2A billion
over 7 years to bring down class sizes in public schools in grades 1 to 3 from a nationwide
average of 22 pUJ)Us in to an average of 18. The second would provide tax credits to pay interest
on nearly in $22 billion in bonds to support new construction and renovation of public school
buildings.
Today; more American workers are faced with the need to juggle the demands of the
workplace with the demands of family and home. In 1997, over 60 percent ofnHmied mothers
,""th a child under six were working--compared to 30 percent twenty years ago, For most of
these families, it is difficult 10 afford high quality day care. In 1993, child care expenditures
represented 25 percent of annual income for those families with annual incomes below $14,400
,
. with employed mothers and preschool children in paid care. Comparable families with annual
incomes above $54,000 spent only 6 percent of their income on child care. There is also reason
to be concerned about the quality ofchild care: A recent study of regulated child care providers
found that 86 percent of child care centerS surveyed provided mediocre or poor care when judged
from the perspective ofchild development, and 12 percent were of such poor quality that the
children's health and safety needs were only partly met.
The President's 1999 budget inciudes a $21 billion increase in funding for child care, to
make it accessible to more families and to raise its quality. An important part of this proposal is
increased tax credits fot 3 million working families to help the~ pay for child care, as \....eIl as an
increase in block grants to States that wilt directly subsidize child care for low-income families.
In addition. the proposal calls for a new EatIy Learning Fund. along with support for the
enforcement of State child c<lIe health and safety standards, scholarships for up to 50,000 child
care providers per year, and funding for research and consumer education. Finally. the proposal
includes $3.8 billion in additional funding Over 5 years to help to reach the goal of expanding .
participation in,Head Strut to 1 million children in 2002.
Finally, I'd like to talk about issues related to the progress of different racial and ethnic
groups. Chapter 4 of the Economic Report reviews trends in racial and etlmic economic,
inequality and concludes that this country's longstanding' goal of achieving racial equality has
not yet been attained. Although there has been progress in narrowing economic gaps among
rucial and ethnic groups in the postwar period, it has been very uneven, with rapid progress in the
1960, and early 1970s, followed by 20 years of stagnation between the early to mid· 1970s to the
. early 1990s.
The current,expansion has brought signs of renewed progress: since 1993, for example,
the median income of black families has risen more rapidly than that of non-Hispanic whites; in
1996, black family income reached a new high, and the poverty rate for blacks fell to a new low.
Data eompileg under the Home Mortgage Disclosure Act show [hat between 1993 and 1996,
conventional home mortgage lending to~blacks rose 67% and to Hispanics, 49%~~much larger
6
�than the percentage increase in conventional home mortgage lending overall during this period.
Such developments raise hope for renewed and sustained progress toward economic equality.
Nevertheless, substantial disparities in economic status across racial and ethnic groups
persist." For example, income gaps between black and white families are 3:S large today as they
were 30 years ago. The median wealth of white families is by some estimates 10 times that of
black and Hispanic families. Poverty rates of blacks and Hispanics are almost triple those of non
Hispanic whites; and differences in child poverty rates across racial and ethnic groups are stark,
with about 40 percent of black an.d Hispanic children in poverty in comp.arison with about 16%
for whites.
Because the largest share of most families' income is derived from earnings, labor market
outcomes across racial groups are important detenninants of econ~mic inequality across racial
groups. After increasing rapidly betWeen 1965 and the mid 1970s, the wages of black and
Hispanic men and women relative to those of non-Hispanic whites have stagnated or declined
between the mid 1970s and early 1990s. Part of this erosion of relative pay reflects a society
wide trend toward rising income inequality, due to an increase in the demand for more educated
workers and an increase in !he skilled-unskilled earnings differential. Because blacks, Hispanics
and Americ::m Indians are less likely to hold a college degree than whites and Asians, these
groups have been hurt disproportionately by changes in the economy that have raised the demand
for college educated workers. Over the last 30 years, educational attainment has increased for all
groups and blacks largely closed the high school attainment gap with whites; however, the
'.
college completion gap widened in the 1980s, as the reward to college educated workers rose.
~ Although differences in education across racial groups explain a portion of the trend
toward rising earnings inequality since the mid-1970s, racial earnings gaps have also increased
among individuals with similar educational levels, suggesting that other factors may also be at
work. For example; since the mid-1970s the wages of young black college graduates have fallen
relative to those of their white counterparts. Researchers debate whether this trend reflects
unmeasured skill differences potentially related to school quality, to discrimination in the labor
market, or to other factors.
Clearly, more needs to be done to promote equality of opportunity for all Americans.
Many of the Administration's current and proposed policies, such as those that encourage
community empowennent and those that promote improved quality and accessibility of
education at all levels are intended to address these disparities. Furthermore, the
Administration's 1999 budget proposal signals a renewed federal commitment to strong and
effective enforcement of the Nation's civil rights laws. It increases funding for federal civil rights
enforcement agencies by more than 16 percent. And, this January, in a Martin Luther King Day
address, Vice President Gore announced the Administration's package of proposed civil rights
enforcement initiatives. In addition to increasing funding, these initiatives place greater
emphasis on the nonlitigation and prevention remedies for discrimination, and provide for better
•
7
�coordination across Federal agencies and offices. The President has also initiated and devoted
great energy and resources to his Initiative on Race! an effort to further a national.djaiogue on
race in America.
CONCLUSION
Let me conclude by saying that over the past year the perfonnance of the u'S.- economy
has been extraordinary: strong gro\\th and low unemployment combined with low and stable
inflation. And there are enormous social and economic benefits to our high.employment
economy. But that success--and the economy's present strength--cannot be taken for granted.
Moreover~ there are still long-term changes and challenge; facing our nation as we enter the 21 st
Century. The Clinton Administration has an agenda for helping to equip the American people
with the skills and flexibility and security to take advantages of the opportunities and
"possibilities in this new economic era. We must finish the job of balancing the budget while
investing in people and opening markets at home and abroad. At the same time, we must ensure
that ull Americans, regardless of age or origin. have the skills they need to prosper in a world of
change and opportunity, .
.
•
8
�Racial and Ethnic Economic Inequality:
How much progress?
Janet Yellen, Chair
CouneiJ of Economic Advisers
January J4, J998
J.>resident's Initiative on Race Advisory Board Meeting
Before J,begin, I am pleased to announce that as part of the 1998 Economic Report ofthe
President, we will be including a chapter on racial and ethnic economic inequality. The Report,
which the Council of Econo,mic Advis.ers submits to Congrexs. each year, will be released in early
Pebruary. My presentation today will preview portions of tile Chapter that pertain to the topic of
today's Advisory Board meeting: racial and ethnic differences in economic wen~being and labor
market success, .
My goal today is to give you the numbers ~~ to give you a sense of the economic standing
of different racial and ethnic groups ~- where we are today and where we have been. Of course.
statistics are subject to interpretation, hut I hope that my presentation will help set the stage for
today's dil:;cussion.
Overview
I will begin with a snapshot of economic well-being' of different racial and ethnic groups,
including income, wealth, poverty, the 'em~rgence of the "m1ddle class," and inequality. I will
then tum to the labor market -- unemployment, earnings, educational 'H,lainment, and
occupations.
But f1rsllet me just make a brief note abollt data availability: In my remarks today, [will
mostly present data for blacks, whites, and Hispanics only, because the samples in our regular
surveys are c,ftcn noliarge enough to produce reliable estimates for smaller popUlations such as
Asians and Pacific Islanders and American Indians, 1 have included information about these
groups where it i~ available.
Themes
I will present a substantial amount of data, so let me give you an overview of the themes
that I hope you wiU take from my presentation.
First, over the Imil half century, disadvantaged minority groups have made substantial
progress, both in absotute terms and relative to whites, But that progress has been uneven. In the
19505. and especially the 1960s, economic growth was strong and improvements 1n economic
well-being were widely shared. The 19605 and early 1970s also witncs:;ed substantial narrowing
of economic differences between blacks and whites. But, this narrowing seems to have la~dled
some time in the early to mid J9705, There are some hopeful signs of renewed progress in the
199Os, but it is really too soon to tell if these signallhe beginning of a new period of declining
racial and ethnic economic disparities.
On average. the economic status of Hispanics, relative 10 whites, is lower today than in
the carly 19705. However, the Hispanic. population has gro~'n rapidly over this period, roughly
�doubling in ·~ize between 1980 and 1996. Therefore, in interpreting these trends, it is important
to keep in mind the mcreasing number of Hispanic jmmigrant~ with lower education levels. Just
to cite one example, college completion rates increased substantially among native-born
Hispanics over the 19808, even though college completion among all Hispanics was stagnant,
and the relative economic s~atus of Hispanics was deteriorating.
.
Unfortunately, our statistics for American Indians and Asian and Pacific Islanders are
much more limited. However, it is possible to draw some broad conclusions. The eC9nomic
status of As-ians. and Pacific Islanders is. similar to that of white nonwHispanics. But there b great
economic diversity within that group. For example, despite similar medirm incomes, pO\'e.1y
rates for Asians nnd Pacific Islanders nre about 70 percent higher than those of non-Hispanic
whites, although they are still far lower than rates for blacks, Hispanks, and American Indians.
According to the most recent data, American Indians had the lowest income and the
highest poverty rates of all groups .
. A second major theme is that large racial and ethnic disparities in economic status persist;
so there is much to be done.
Income an.d \Vealth
Now. 'let me begin my presentation of data with what is probably the most widely used
indIcator of economic well-being: income. The first chart presents family income since 1967.
InfJation~adjusted ramily income has risen for whites and is highest among whites and Asians
and Pacific blanders, Black family income grew only slowly while median Hispanic income
actually declined. Black family incmne as a fraction of white income rose in the 1960s, but this
trend reversed in the 1970s and 1980s.
Income measures economic status in only one year. Wealth, which measures the net
value of assets at a given point in lime, may be n more complete measure of economic v.'cll-being
because it is accumulated ovcr lifetimes and transferred acrosS generations .. \Vealth is important
because it can enable a family to maintain its standard of living when income falls due to job
loss. family changes such as divorcc or widowhood, or retirement Racial and ethnic di$pal'itics
in wealth are even greater than for income. As you can .l>ce from the bouom churt, the median net
worth of white households was 'more than ten times that of black ·01' Hispanic households in 1993,
And there arc also large racial and ethnic differences- in wealth among households with similar
incomes.
Growth of the uMiddJe Class"
The emergence of a large middle class is onc of the great accomplishments of the po:;t~
war economy. As you can see from the top chart. the pro~rtion of bJacks who were considered
"very poor" ~- which is defined here asJamily income below SO percent of the poverty line ~- {ell
dramatically between 1940 and 1970. By 1990, nearly 50 percent or blacks had incomes that
were more than twice the poverty line. The bottom chart shows a similar emergence of a large
white middle cla<;s. These charts use data from the decennial Census, so the preeise turning
points are a bit hidden, Other data indicate that, for both blacks and whites. the middle and upper
income group taker! together essentially stopped: growing in the early to fnid 19705, and family
income growth has picked up again in the J9905.
,
2
�Poverty
Poverty rates fen markedly in the 1960s. but stagnated starting in the early to mid l~nOs,
However, here again there are signs of renewed progress in the 1990s as the black poverty rate-
and the difference between the whj'te and b!~ck poverty rate -- fell to new lows in 1996,
As 1 noted carlier, despite median income comparable to that of whites, the Asian and
Pacific Islander populmion has a higher poverty rate than the white population.
The Hispanic poverty rate is high and has generally risen since ihe early 19705. It
surpassed the~ bJack rate in 1994 and has fallen gradually in this expansion. Finally, the latest
" data for American Indians from the 1990 Census indicate that poverty rates among this group
, were the highest of all the groups considered·· 31 percent
Inequality
It is helpful to put the data on income and pOverty in the context of more general trends in
income inequality. This cha~ show:; a widely used index of inequality. Family income inequality
ha.. been rising fairly steadily since the curly 1970s. Increasing inequality generally means t!lO~e
at the bottom will become worse off relative to those in the middle or top. Since minorities are
,over represented at t~e bottom of the incotJ}e distribution, widening inequality is expected to
widen income gaps between minority groups and whites.
Now, let me tum to the Jabor market. The link between labor market success and
economic w-el1~being is obvious. For example, wage and salary inc-orne makes up over 80 percent
of the income of people between the ages of 15 and 65, and lhe poverty rate among workers is
less than one~thjrd that of nonworkers,
'
Role of Edu.:ation
11 is important to undenHand that changes in mciai inequaJity~~and overall inequalitYM- are
intertwined with broader changes in the economy and labor market. J have already mentioned
how the genenil trend of rising income inequality is likely to exacerbate inc<luaiity across racial
and ethnic groups, One of the mOst important recent developme.nts in labof markets in the past
15 years is the rising demand for more-educated workers.
Economists have emphaslzed that technological changes in production processes., such a..
the increased use of computers, have increased the demand for workers with a college education.
This chan£e has increased the pay of college-educated workers compared 10 those with less
education. From the top chart, you can see that the earnings of college graduates compared to
those with only a high school degree ros.e rapidly in the 1970s and 19805.
So how does t~e increased vall,1e of a college education affect race difference..\; in labor
market outcomes? WelL 3..<;; you can see front the bottom chart, blacks and Hispanics are less:
likely to hold a college degree than whites and Asians, American Indians also have lower rates
of college attainment. Therefore. these groups have been ,hurt disproportionately by changes in
the economy that have raised the demand for college~educated workers.
'
Unemployment
An important indicator of success in the labor marker is the unemployment rate. The
economy is doing extremely well fight ~QW and the unemployment rate has been below 6 percent
3
�for more than 3 years. The unemployment rute in Arizona is currently under 4 percent A slrong
economy benefits nearly everyone, especially those at the bottom of the: earnings and income
distribution who are most likely to lose jobs during economic downturns.
Unemployment rates have fallen dramatically for all groups in the present recovery, and
in 1997, the black unemployment rate fell 10 it lowest level in over 20 years. But large disparities
are still apparent: in 1997. black and Hispanic unemployment rates were about tWice those of
. whites. Unemployment rales for minority teenagers remain high, currently al'Ound 30 percent,
and can exceed 50 percent in severe recessions, And. a<; you can see from the chart,
unemployment among blacks and Hi$p~mics is not only higher, but also tends,to rise more in
recessions.
So there is reason to celebrate the strong economy and low unemployment. But other
indicators of success in the labor market ~~ such as earnings -~ also influence racial and ethnic
differences in economic status.
Earnings.
Research has shown that. particularly in the 10 years following the passage of the Civil
Rights Act in 1964, differences in wages between blacks and'whites narrowed markedly, What
has happened since then? The upper chart :-.hows the ratio of black and Hisp;:mic male earnings
to white male earnings. As you can see, relative camings of Hispanic and bJack men have
generally fallen since 1979, Evidence suggests that the decline began some time in the mid
I970s.
Black women nearly reached pay parity with white women by the mid 19705. However,
as the bottom chart shows, this earnings gap has,widened again. Again, you can ;see that the
relative status of Hispanic women has declined.
Earnings & Education
'!'Ie have seen that earnings are lower for minorities than for whites. on average, and that
education has become increasingly important. It is also interesting to look at earnings gaps for
workers with similar educational attainment. This slide shows (hat earnings ratios for people with
similar level~ of education are much higher than the ovenll rntio, This pattern suggests that a
substantial fraction of the gap in "'lages between blacks and whites, and particularly between
Hispanics and whites. is due to differences in educational attainment. But even for workers with
similar education, disparities remain, suggesting that education is important, although not the
whole story,
Earnings Gaps
Thcre is considerable debate about how to explain the remaining earnings differences. A
number of facmrs may playa role, and this slide lists some possibilities, This list is by no means
exhaustive, and the causes of earnings gaps arc complex, Let me mention some of the leading
potential explanations: One possibility is that there may be differences in labor market skill.
These ski!! differences could be linked to the quality of schools, other InVI!.-;tmcnts in human
capital, and disadvantaged family backgrounds. Secor.dly, there is undeniable evidence that
discrimination is a continuing problem In the American workplace. A critical question is the
4
�extent to 'which racial n!)d ethnic earnings gups are due to discrimination or_to other factors.
These are sUlljects that our panelists have aU studied. so I !>uspect that we will be hearing more
about this soon,
Education & Experience
Let me offer a couple of additional possible explanations for the trend in camings
differentials between black and white women, The earlier chart shows that bJack women made
extraordinary progress relative to white women in the 1960s and the early 1970s, but the trend
then rever:.ed. As you can see from the lOp chart, attainment of a col1eg~ degree among while
women halO risen quickly, fa,.,ter than for black women, and this occurred at the same time that the
demand for college-educated workers was rising, This may explain some of the increase in the
black-white eamings gap since the mid 1970s, It is clear that education is not the whole story,
however, because earnings gaps for people with the same education level also ,,;,idened during
this period.
Another possible explanation relafes to laoor marke't experience. The bottom chan
shows that labor force participation has grown more rapidly for white women than for black
women since the 1970s, This meao's that their work experience was also growing more quickly,
And experience is rewarded with higher earnings.
Occupations
Like wealth, occupations may tell us more about long~term e'tonomic slatus than wages or
unemployment in a single year. There were significant improvements in the occupational status
of blacks in the 1940s, 50s, and 60s. 'For example, black men moved out of agricultural work
into higher-paying, bille-collar jobs in large numbers. and black women shifted out of domestic
service and into other service, clerical, and blue~collar occup<ltions during this period.
More recently. growth in the higher-paying managerial and professjonal occupations has
been strong, and over lite past 15 years, the increa,<;e in managerial and professional employment
has been especially sharp for women. These charts show that a far higher fracti.on of whites than
blacks or Hispanics work in managerial and professional occuputions, Hispanics are much less
likely to be working in managerial and professional occupations, nnd there has been Ijttle
improvement in the percent of Hispanics employed in these occupations over the past 15 years.
Since 1990, there has been noticeable growth in the proportion of black men in managerial and
professional poSitions, although they stillIag far behind whites and ~Jack women.
.
Themes
an
So, II:t me sum
this up by saying that, when it comes to racial and ethnic economic
inequality. we see major achievements over the last 50 years, but there was clearly a slowing of
progress from the mid 19705 to the early 19905. Recently, we have seen some signs 1hat progress
may be picking up, but it is too soon to tell. ln any case, it is dear that unacceptably large
economic disparities remain,
•
5
�USA·ROC Economic Council Plenary Session
Remarks by Dr . .Janet Yellen
Chairman, Council of E.conomic Advisers
December 2, 1997
INTRODUCTION
It is truly a pleasure to be here with you in San Diego representi~g the people of the
united States, It is an honor to share the podium with my fellow Keynote Speakers--Richard
Rosenberg, Chairman Chiang, Chairman of the Council for Economic Planning and
Development and a feHow economist; Minister Wang, a former BUSiness School professor like
myself and so many other distinguished individuals who arc here today: I want to particularly
thank our two Chairmen, Jeffrey Koo and Hill Clark. They'personify the dynamism which has
been the haHmark of these Councils and of the relationship hetween"the United States and
Taiwan,
In preparing for my presentation today, I looked back at addresses given by some of
my predecessors to these Joint Business Council meetings. One common theme was that all of
them paid homage to the "East Asian Economic Miracle," and offered analyses of what
produced it. Over the last several months, however, as the shadow of financial problems has
spread over the East Asian regiolJ. a new Gottage indu$try of commentators and critics has
developed reinterpretations of the economic model which has been the basis of the remarkable
growth in the region. While some seem sure that the Asian Model has been eclipsed, I am nor
prepared to join that Guild, In my view. the achievements of the last 20 years have not been
obliterated by the turmoil in Asian financial markets and the devaluations of the last several
months.
Today is neither a time to pay homage nor a time for euologies. Rather it's a time for
a sober~minded review of the policies that the East Asian economies have pursued that provide
the solid foundation for recovery and future growth, and it is a time to particularly stress the
importance of a continued conunitment to openness and economic integration.
.
r do not need to remind this group why this all matters to Taiwan. The linkages among
the economies of the region are extensive, Taiwan is a major investor in Southeast Asia. in
Chin:!, in the Hong Kong Special Administrative Region, Changes in the value of Taiw'an'S
currency immediately preceded a sharp downturn in Hong Kong's stock market. Problems
that began in Thailand have spread out of Southeast Asia into Northeast Asia. While each
economy in the region has lts own unique characteristics -- and certainly this applies toTaiwan
-- the interrelationships of the region's economies require each to pay attention to the
successes. and the failures, of its neighbors.
�2
So, this afternoon I will briefly discuss the fundamental economic conditions that I
believe have been -- and will continue to be -- the foundations for growth in East Asia, and
then turn briefly to some of the corrective policies that \vill be necessary to put Asian
economies back on track to solid growth.
THE FOUNDATIONS OF EAST ASIA'S GROWTH "MIRACLE"
As you know the East Asian economies have faced serious challenges in recent months_,
We have seen financial market problems arise -- first in Thailand and then spread -- that could
have important impacts on other emerging markets not only in Asia but around the world.
During these months of turmoil, it has been clear that each of the East Asian economies
its own unique set of circumstances. BU(, it is also clear that there are common
strengths which have fueled rapid growth in the past and which will provide the foundations
for solid growth once financial stability has been restored.
h~s 'faced
Among these common strengths are:
First, a stable business environment. This included low inflation, fostered by
sound monetary policy in many cases, and also stable and predictable rules of
the game for business, that are an essential prerequisite for a vibrant market
economy.
Second. high rates of saving and investment. There's no miracle here: many
. economies grew rapidly in large part because they invested heavily. And, governments
contributed by running sustain~ble budgets and by raising the returns to private saving.
But it was not only that successful governments had sound budgets--they made choices
about how to spend their limited money in ways which enhanced economic growth.
T!lCY had a clear sense of priorities.
For instance, and this is really the third ingredient, the most-successful governments
plact.:d a high priority on investing if! education. There was a particular emphasis on
primary and secondary education, but there was also a strong concern to make sure that
there was widespread access to education, for women as well as men. This experience
showed that egalitarian policies could enhance growth: One didn't need to rely on
trickle down economics.
Fourth. {he most successful economies were characterized by a basic openness to
technology, and strong efforts 'to l~arn from, and adapt, for~ign best practices.
�3
And, finally, policy makers in the most successful East Asian economies demonstrated
an ahility to know when 'goverrunent should get in and where government should stay
out. Achieving that delicate balance between doing what supports growth ~- such as
investing in infrastructure and R&D and providing appropriate banking system
supervision -- and not intervening tOO heavily is a very difficult task. The most
successful East Asian, economies were able to find that appropriate Ilfiddle ground, a
middle ground which so mallY countries, both developed an~ less developed, have
found difficult to locate.
.
.
To be sure, East Asian governments have made some mistakes,
In particular, where
they have protected uncompetitive industries from competition; where they have excluded
foreign investment or foreign competition; and, where they have failed to protecrintellectual
property, But on balance the five strengths that I just described have laid a foundation upon
whkh these economies can build and return to solid growth and healthy development when
stability has been restored to their financial markets. To achieve this return to growth,
however, it tS critical for the East Asian economies to first work to address the vulnerabilities
. which have helped fuel and prolong the financial crises.
RESTORING SOUND FINANCIAL CONDITIONS
Just last wL"ek in Vancouver, leaders from the 18 economies of the Asia~Pacific
Economic Cooperation forum -- Qr APEC •. embra.ced a common approach to restoring
financial mark~t stability. They agreed to strengthen the three lines of defense that protect an
economy from the type of financial market instability that we have seen in recent months,
All economy's first line of defense is. sound domestic
.
policies~
sound policy regimes
are a neces:):try precondition to restore confidence and calm fmancial markets, These include
the basics: a sustainable exchange ra~e regime, sound fiscal policy, and sensible and consistent"
monetary policy. But it also includes adequate supervision of banks and other financial'
institutions and timely, accurate reporting of economic statistics to gain the trust of investor
both at home and abroad, For that reason, APEC leaders reconunended that technical
assistance on banking and financial regulation should be expanded and strengthened.
The second line of defense is provided by the international financial institutions.
President Clinton'S economic team has been working closely with our partners in the region
and with inte-rnational financial institutions such as the IMF arid the World Bank to help re- .
establish linancial stability in Southeast Asia, Building on the "Manila Framework" developed
by 1he D~pUly Finance Ministers, APEC leaders agreed thaI Ihe IMF must continue to be the
centerpiece of any international response to financial criscs. For that reason, they
n:commellded strengthening the capacity of the IMF to respond rapidly and effectively to
financial crises, for instance by establishing a new short·term financing facility,
�But the regional reverberations of the financial turmoil in 'Asia have also pointed to the
importance of a third line of defense: regional cooperation. Recognizing that neighbors have a
disproporrioMte interest in each others' financial soundness, APEC leader~ agreed to establish
~ regional surveillance forum to provide a mechanism for expressing concerns frankly and
openly, They also agreed to a rapid-response mechanism for identifying additional resources
to supplement IMF programs on a case~by-case basis as needed.
Together, these three lines of defense -- if implemented rapidly and steadfastly -
should help to restore confidence and stability to the region's financial markets, creating
conditions for the restoration of growth.
Finally. there is one last ingredient that has been a central part of the region's past
recipe for success that I believe will continue to figure prominently, '
IMPORTANCE OF CONTINUED INTEGRATION
Perhaps more than any other region in the world, East Asia has benefitted from dose
,trade ties with other economies in the region and in the world, Over the past few years, the
economies of East Asia -- as well as the APEC region more broadly -- have become
increasingly integrated, Intra-regional investment, subcontracting. and trade in finished goods
occupy a growing share of the total trade for these economies, and, at the same time, trade
with APEC as a whole has grown rapidly.
Today's economic changes and challenges all poim to the jmportance of larger and
more.integrated markets: larger markets provide necessary economies of scaJe; intra-regional
investment provides the presence that is so often necessary for the delivery of modern .
servic'cs~ and, greater integration makes possible those instanUtneous communications that are
the heart and core of our most dynamic. creative industries.
And trade ties between East Asia and Amerjca are deep and growing fast, The
statistics are telling:
.
•
Eleven Asian APEC economies accounted for about' one-third of
America's merchandise trade in 1996. That is 60% more total
trade th;m between the United States' and Western Europe,
•
Taiwan is a key player in this ever expanding trade relationship .
As Chairman Wang noted, Taiwan is our 1tl1largest merchandise
export market; our 6th largest source of merchandise imports and
our 8th largest trading partner overall.
�5
With the recent financial market turmoil, some In East Askl may have been tempted to
turn inward, to retreat from international markets, Instead, al the recem meefing in
Vancouve:, APEC Leaders agreCd to embrace increased integration ~~ openmg trade in nine
new areas covering $1.5 trillion in goods and services w_ everything from chemicals to
environmental technology to medical equipment.
It is critical for the East Asian economies to continue thIS progress: increased economic
integration i5 necessary for the continuation of growth and development in East Asia ..
CO~CLUSfON
It is -:J:te people in this room and others like you who will be the drivjng force for future
integration in the APEC region. You -- the business men and women of America and East
Asia -- are the source and the energy for the changes and developments jo our economies,
You can help ensure that the East Asian economies continue to look outward and move
forward.
We hope and encourage-and indeed~ chaUenge--the members of these two Councils to
maintain your strong participation in trade and investment that has contributed so much to the
economic vitality oftbe Region. For 21 years you have understood the importance of the
economic and commercial relationship between the United States and Taiwan. Together
business men and women from Taiwan and the U,S, have created an important link between
our two peoples. The Joint Councils have been the anvil where that link has been forged. I
salute you for your accomplishments and look forward to your continued leadership'and
success.
*
*
•
•
�
Dublin Core
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Title
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Clinton Administration History Project
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Cinton Administration History Project
Council of Economic Advisers
Department of Commerce
Central Intelligence Agency
Department of the Interior
Department of Defense
Corporation for National Service
Council on Environmental Quality
Department of Justice
Domestic Policy Council
Department of Education
Department of Energy
Environmental Protection Agency
Federal Emergency Management Agency
General Services Administration
Small Business Administration
Social Security Administration
United States Agency for International Development
National Economic Council
Office of Management & Budget
Office of National Drug Control Policy
Office of Personnel Management
Office of Science & Technology Policy
Office of the Vice President
United States Trade Representative
Date
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1993-2001
Description
An account of the resource
<p>The Clinton Administration History Project describes in detail the accomplishments of President Clinton's Administration for the period 1993-2001. The records consist of the histories of 32 agencies or departments within the Executive Branch. In general, each organization associated with the Project submitted a narrative history along with supporting documents. These narrative accounts are primarily overviews of the various missions, special projects, and accomplishments of the agencies. The supplementary records include substantive memos, press releases, briefing papers, and publications illustrated with photos and charts.</p>
<p>Agencies:<br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Council+of+Economic+Advisers&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Council of Economic Advisers</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Central+Intelligence+Agency&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Central Intelligence Agency</a><br /><a 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1474 folders in 111 boxes
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[Council of Economic Advisors] [8]
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History of the Council of Economic Advisers
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1993-2001
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https://clinton.presidentiallibraries.us/files/original/a8347fe1a1c4e8919bc304c18f6d318c.pdf
4954349619f2e0f059f5944b4547b342
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Text
I
EXECUTIVE OFFICE OF T_HE PRESIDEN'T
COUNCIL
O~
ECONOMIC ADVISERS
WASHINGTON, D.C.
FOR IMMEIHATE RELEASE
Thursday> ,June 15,2000
2.050:?,
CONTACT: CHARLES STONE
(202) 395-5086
EDUCATIONAL ATTAINM£NT AND SUCCESS IN TIlE NEW ECONOMY:
AN ANALYSIS OF CHALLEI'<GES FOR IMPROVING HISPANIC STUDENTS'
ACHIEVE:\lENT
A Report by the Council of Econofl,lic Advisers
The President will announce today a new Council of Economic Advisers report on Hispanic
cdt:catio:1. This report focllses on education and the rewards to education arr.ollg L' 5. Hlspamcs.
At1er docJmcnting tbe gaps in educat,ional outcomes for Hispanics rela..ive to non-Hispanic
whiles, the report provides evidence about tbe increasing importance of education to economic
~
success by focusing on Hispanic:s working in the information technology ([T) sector of the new
economy, The report finds that those Hispanics who work In the highly paid, dynamk, arid
rapidly growing IT sector-where job:gro\\1h is much faster than in the etonomy at large-are
typically successful and cam far more than Hispanics who work in olher occupations, However,
Hispanics are' significantly underrcprcscl'.tcd in IT, primarily because they are less likely than
:hcir non~Hisranic peers to have the relatively high levels of education that IT jobs typically
ilurrovc the
;·cqGirc. Policic$ that close the ethnic education gap at alllcvt:!$ can be expected
future prosperity of Hispanic students and insure a greater flow into the labor force of worke:'S
prepared to contribute to the "new economy."
to
Among the Significant findings in the report are:
• The rnlJwnic populafion is a rapld!y growing, increasingly imporlant :·;egment of 11ie us.
POpuiOfion. In 20 years about I iii 6 C,S, residents will be of Hispanic origin, and by the
middl,; of this ccntury-wh~n today's yOU:lg cl:.ilcrcl'. ure middle aged-:his ralia win
incrca!;e to about 1 in 4. The future productivity of the U.S. labor force hinges to 'a
considerable degree on our nation's ability to provide high· quality education for Hispanic
young people, who will playa vital role in the labor market in future decades.
• Dcspil<'; fangible evidence of improvements for some groups, at present there are troubling
gaps In !he educational artainmcnt vf Hispanics. Over recent decades the average education
of U.S.-born Hispanics has i:1crca~d substantially. !.llld the gap between -them Jnd nOI1
Hispanic \.vhitcs i13S declined. r-.;oncthctcss, the high scbool completion nHe umung'young
Hispanic adults is only 63 perccrn-comparcd with about 8S percent for whites and African
Americans. And the fraction of Hispanics who graduate from 4-yc-ar colleges is less than
. balf that of whites, While these differences are partially attributable to the low education
�..
levels (If immigrant Hispanics, U,S,~born Hispanics also have relatively low edu<:utional
aHainment
'
importance of lroproving , " ,
edudtional outcomes for Hispanics is underscored by the increasing value of education' in .
the labor market. For example, two decades' ago. a male Hispanic' college graduate earned 67
percent more than a male Hispanic without a high school diploma, whereas today a male
Hispanic college graduate ea:":1S 146 percent more. These chrulges, in the rewards ·10 " ;,
cdu~ltion are similar to thQse observed for otber men. in the labor market.
• The economic advantages of education are growing, The
-',
",:
,'.
.
,',
'
• Currently, the rdalive(v low jcvcL~ of Hispanic earnings are explained in large measure by.
lower ievels ofeducational attainment. Earnings pr(!.miums associated with higher education
arc much the same for Hispanics as for non-HL\panic whites. Hispanics have much lower
c.l.\rnings tlum non-Hispanic whites; median earnings are 21 percent less for native·born
Hispanics. After accounting for differences in age and gender and in education) the eamings
gap declines to 6 percent for nati"e~born Hispanics (with the remaining "unexplained" gap
due to other factors not di~ectly examined in the study, such as quality of education,
geographic variation, and discrimimitory employment practices).
'. ..,"
• Hispanics are greatly underrepresented in the
high~paying
rr
seclOr, bUI those in iT
occupations are generally successful. While HtsjJanics are 11 percent of U,K workers, they
are only 4 percent of workers in five IT occupations, The Hispanic "digital divide" exists
because the rdatively low educational level of many Hispanics hinders entry into the IT labor
. ma~ket. This under-representation tn IT contributes to the economy-wIde Hispanic pay gap
bc-c<luso;: IT jobs pay considerably ntore than other jobs: non-Hispanic whites earn 62 perce:]1
more b IT t':lan non-Hispanic whlles in oth~r occupations, Dnd Hispanics cam twice as mueh
in 1T as in non-IT occupations. Hispanics who are in IT occupations cam O:1IY margina:ly
'less (3bout 6 to 8 percent) than non-Hispanic whites, after adjusting for differences in geeder,
age, and cducation.
.
2
'
�Educational Attainment and Success in the New Economy: An Analysis
of Challenges for Improving Hispanic Students' Achievement
June 2000
A Report by
The Council of Economic Advisers
�EXECUTIVE SUMMARY
Tbis repon focuses on education and Ihe rewards 10 education .among Hispanics in fhe United
Stale:!;' It documents the gaps in eduCational outcomes for Hispanics relative to non~Hispanjc
whiles The study also provides e\'idence about the increasing importance of education to the
economic su>ccess of Hispanics in the new economy, focusing particularly on a high~paying,
mpidly expanding sector. information technology (IT), Among the significant findings in the
report ;ue:
•
nU! I1ispa1lic population is a rapidly growing, increasingly important segment of the U.S,
population. In 20 yc<trs about 1 in 6 U$ residents will be of Hispanic origin. and by the
middle of this cemury-when 1(03)"S young children are middle aged~his ratio wtn
increase 10 about 1 in 4. The' future productivity of the U.S. labor foree hinges !O il
considerable degree on our nation's ability 10 provide high quality education for Hisp:inic
young people who will play ~ vita,l role in Ihe labor market of the future,
• Despile tangible evidence of improvements for ,,'ome groups, there are troubling lags ill tlte
eductltiulWI auaintr1CIll <if Hupanics. Over recent decades the average education of Hispanics
born in the United States has increased subslantiaUy. and the educational gap between U,S,~
born Hispanics and non-Hispanic whiles has narrowed. Nonetheless, the high school
Gompletion rate among all young Hispanic adults is only 63 percem--comparoo with 88
percent for whiles and African Americans, And the proponion of Hispanics who grJduate
from 4·year colleges is less than half that o(wrotes" While these differences firc partially
attributuble to the !ow education levels of immigrant Hispanics, U,S,·bom Hispanics also
have relatively low educa:ional attainment
• The ecmtomic reward. . oledlicatipn are on the r($(:. The importance of improving educational
outcomes for Hispunics is underscored by the increasing value of education in the tuhar
market. Two dec;)des ago, a male Hispanic college gruduate earned 67 percent more than u
Hispanic maJe with no high school education. an earnings premium that has increased to 146
" percem ,today" Similar increase:s in the earnings premium are observed for al! employed
males.
• Currently, the relatively low levels of lii.spattic eamings ore explained in large measure by,
. lower levels of educatio11al auainmem, Eamillgs premiums associmed with h.igher education
. are much' the same for Hispanic., as for non-Hispanics, Hispanics have much !ower earnings
than non-Hispanic whiles; median hourly earnings are 21 percenf les~ for US,~bom
Hispanics. After accounting for differences in age and gender, U.S.-born Hispanics earned
15 percenl less. and after controlling also fOf education. the gap narrows to 6 percent (with
the rent:lining "unexplained" gap due to other faciors not directly eJlamined in the study, such
as quality of educalion. geogmphic variation, and rli'scriminatory employment practices).
Educational differences also explain mu{;h of the wage gap for foreign-born Hispanics.
• Hispanics ure grcar;y underrepresenled in the high-puying IT sector, but ill gencrallhvse itl
IT occu[Jf1Iirms are successful. While Hispanics are I I percent of employed workers. they are
only 4 percent of workers in 5 IT occupations. This Hispanic "digital divide'· exists hc:causc
the relatively low educational level of m:my Hispanics hinders entry into the IT labor market.
'rhls undcrwreprescnt'ation conlributes 10 the cconomy~wide Hispanic pay gap becam.e these
IT jobs pll)' considcraMy more than olher jobs. Non-Hispanic whiles eam 62 percent more in
IT than nO!1 liispantc whites in (tlher occupations, :lnd Hispanics eam twice liS much in IT as
M
�in non-IT occupations. Hispanics who are in IT occupations earn only marginally less (about
6 to 8 percent) than non-Hispanic whiles after adjusting for differences in age, gender. and
education.
•
The IT ct....;e study iflustratcs tilm the consequences of u.ndcrachievemclIf in education are
fwofold: The students' future prosperity is harmed, and the economy aI large wiU have fewer
'Individuals prepared 10 contribute in "new economy" occupations, Individuals' economic
.succeSS in today's economy incr-casingly depends' on being well educated . .In tum. the strong
performance of tbe American economy is propelled by the ingenuity and ski!ls of our labor
force. exemplified by new economy Seclors like IT. Given the rapid grow!h of the U.S,
Hispanic population. the gap in educational achievement between Hispanics and their peers is
a maUer of critical importance for Hispanic young people and society generally.
"
�I. INTRODUCTION
Hispanics are an extmonHnarily vibrant.· rapidly g.rowing segment of the American
ye3f$, approximately I in 6 U,S, ('esidents will
be of Hispanic origin, and by the middle of the century, noou! one quarter of the population will
be Hispanic Clearly. Hispanic Americans will play an incfCusingly important role m American
life. In panicular, the success of the American economy qver the coming decades depends 10 a
considewhle degree Oil the pn:.'<iuctivity of a labor force in which Hispanic:> will play a
~pulallon. The Census Bureau projects that in 20
progressively larger role.
In this light, enhancing the current state of Hispanic education in the United Slates must
While Hispanic studcm achievement and educational
attainment have shown some progress over {he paSt decades, troubling gaps remain. Hispanics
lag behind non-Hispanics on a variety of educalional measures, A much smaller proportion of the
Hispanic population than the non-Hispanic population complcles high school. Similarly. college
entrance and completion ratcs arc much lower among Hi&panics than among non-Hispanic
whites,
be viewed as a public policy priority.
These educational achievement gaps are especially trouhling in a labor market in which
the economic rewards of education are large and increasing, Evidence suggests that demand has
increased for workers who bring strong proolem-solving ability and technical skills lO the
workpl:lce. Statistics presented below verify that the economic rewards of education are much
the Slime for Hispanics as for non~Hispanics. Those wno fall behind in educational achievement
wi!! aJso lag inlerms of economic success in the new economy.
-
-
To highlight these issues, this report focuses on one rapidly expanding, highly paid sector
of the economy-information technology (IT). An examination of labor market data indicates
that the generally well-educated Hispanics who attain positions in IT occupations earn twice as
much as Hispanics in Other occupations. Further, Hispanics in rr eam only slightly less than non
Hispanic whites with similar demof;raphk: characteristics and educalion, However. there is a
signiftcun~ "digital divide" in IT employm::!nt stemming from a dramatic underrcpresentation of
Hispanics in IT occupations. This undcrreprescntation appcurs in large measure to be the result
of educational differences between Hispanics and non-Hispanics. While Hispanic studeins who
ancnd college are as likely as other students to major in science and e.ngineering, Hispanics are
much less likely than Others fO attend college.
The JT case study iUuslrnles that the consequences of underacbievement in education are
Iwo-fold, Undcmchievcmen[ not only hurtslbe futuf"C prosperity of students themSelves, but also
leduces lhc number of individa,;tls ill the US, labor market prepared to contribute in new
,economy occupations. JndjyjdUllls' economic. success in the modem economy depends On their
hcing well educated. In turn Ihe performance of the American economy is strong in part because
of the ingenuity and skills of our tabor force, especially in new economy sectors like IT. In light
of the mpid growth of the U.S. Hispanic population. the gap ill educational achievement between
Hispanics and their peers is a rrmtler of critical importance for Hispanic young people themselves
and also to society more generally.
�.,,
.,
2. A GRIEF OVERVIEW Or' TRENDS IN HISI'ANle EUUCA nON
Over the past .5 decades there has been a marked increase in the educational attainment of
young Americans Recent data itldici.ue that high school completion rales for young adults (aged
25-29) are approximately 88 pereen! f~r both whites an~ African Americans, with the earlier
pronounced differences bclween the races
Chart 1. High School Compleuon Rates of 25-lo
Hispanics,
disappearing by 1998 (Chart, 1}.1
·29·YeQI.()kls by Race ar>u ElhO!c:1y
....
howcver, have not ,experienced the same gains.
'"
The proponion of those :Jged 25-29 completing
high &Choal remains relalively low--about 63'
percent in 1998-and, though dat<l,are unavailable
for t~is series on Hispanics prior (0 1974. there has
been little growth in high school graduation rates
since that time.
"
_ _ _ _ _ _ _- - '
Similarly. as demonstrated' in Chart 2, the
1(14(1
'&so
'91\0
lS1(1
1900
1st)C
colle!;!; completion rAte for Hispanics have la,gged
behind those of whites and African Americans.
For whites the college completion rJle-:.the
fraction
earning
bnchelor's
degrees-rose
significantly. from 6 percent in 1940 to 28 percent
in 1998. Despite some progress. mcial and ethnic
gaps in college graduation rates remain large,
Currently, only W percent of Hispanic -adults aged
-
..'.'
.
..
~~~~
j. '
L-_~~
10 :
,~~~~":w.=-'~:J
~
,
.
,.
25·29 have graduated from college.
One major reason for the lower levels of.
education for Hispanics relative to non~Hispanics
is that new immigrants are much less educated. 2. If we look only al Hispanics born in the United
Statts ("native~born"}, there has been clear growth in edUCa1i{)nal attainment Census data from
1970. 1980, and 1990 indicate that among working-age adults, nativCM and forcign~boro Hispanics
twi! nativcMbom whiles in average educluional levels (see Table 1 on the nexl page}, However,
the educmion gap belween whites·and native-born Hispanics has been narrowing. In (,:ontrast, the
gap in average c.ducation betwccn whites and immigrant Hispanics has bct:orne wider. Meas!nes
4)
HMO
19!1O
1116(1
HITa
liElO
1{100
of educational achievement for Hispanics such as those given in Charls I and 2 combine the
relatively !ess educ~ted immigrant Hispanic group with [hose born in the United Stales?
. .,
I Charts! and 2 ;irt; based on Census aata, which indude both Hispanic and non-Ilispanic whites among
"while,," and similarly has some Hispanics included in'the African American group, The gaps. between
Hi$p:>uk~ and r.on-Hispanic:-; nre Ihus even larger than those pictured. Prior 10 the mid-19M fUlltual data
are nol availabk (the dOls in lhe chartS todic:ue poinls for which data are available;.
1 As of 1997. 38 pcrcenl of the Hi~panic population were fnreign·born, compared ~ilh S pet~ent of whites
:lI1d 6 ptrctm of African Amt::rica!\~
.1 For addittOfl!J.] analy~j;; scc Julian R Betts and Mag,h)} wfslwrn, "The Educalinnal Anainmeot ,If
Immigrun!s: Trends and Implications," National Bureau of E(:uootntc Resc<lr...:h Work'ng Paper 6757,
October 1998.
�Tab!e l. Average Years of Education for Individuals Aged
16~64
1970
1990
J 1.6
9.5
8.8
Men
Native White
..\Ju;ivc Hispunic
Immlgr.mt Hispanic ,
1980
12.7
JO.9
9.1
12.9
11.4
8.9
Women
)Jative White
11-5
12.4
12.8
Native Hispanic
9,2
10.5
11.3
Immigrant Hispanic
8,4
9.0
9,)
Sour;;c: Betts and Lofstrom (1998). baSt."d on data from the U.S, CCllSUS.
While the educational attainment of U,S.-born Hispanics has been increasing over lime,
U.S.;.born Hispanics continue to havc lower school cOn:Ipietion rates than do non-Hispanic whiles,
The average high school completion rate for 25- to 29-ycar*olds stood at about 80 percent for the
1995-1999 period. compared 'with_ a rate of 93 percent for non-Hispanic whites (Cbart 3)." In
contrast. the' completion rate for foreign-born Hispanics averages below 50 percent. Data on
dropout mtes for those aged 16~24-the fraction of individuals who are neither enrolled in high
schoo! nor have completed high school-show similar pauems, The dropout rate (in Chart 4) is
espe{;ially high for foreign~born Hispanics ("firSt generation immigrants") and for native-born
Hispanic youth who had at least one parent born outside the United States ("'second generation
immignmfs"").s However, even. for Hispanics who were born in the United States aud whose
parents were alsO' born in the United States ("third generation" or higher). the dropoul rate was
approximately twice as high for Hispanics as for non~Hispanic whites-IS.S percent vs, 7.7
.percent, CIMrly the Hispanic' education g3.f! is not solely the consequence of relatively low
educational attainment among immigrant Hispanics. A centrnJ'challenge for improying Hispanic
educational outconlCS, then. lies in i.mproving the educational prospects of both immigrant and
nativewbom Hispanic youth.'
Chart 4. Dropout Rates
Ct,art3. High Schoo! Completion Rates 1995·
~ 999, Aged 25·29
for HispaniC IM/j'ij;"anlS
and Whites 1998, Aged 16·24
11)0
""
re;~.1
..
,:
..
·
·
:
•
.
Non,HI$?II1'\\C
while
·
·
'"
r::
-
."
l~t
\llIM'ao,Ot\
'-"""~IWI
·
·
:
I
i+~pw'\'c, l\all~t
1i~"",. lo.-".~n
\:i<)jr
born
"
4 This completion rate of 93 percent for non-Hispanic White.:> is higher than tr.e 5S percent completion rate
reponed in Chart I whieh is for \\'hlte~ generally (including Hispanic white.,,). This analysis uses Ihe
Omen! Populatit)o Survey"{CPS) fOf 1995 through 1999. Consistent with the definition used by Ihe
Census Bureau, this analysts (as well as all orher original analYSIS woouc!ed for this 'repon) define~
individuals as "native born" jf lhe.)' "'-ere born in the United States Of ;m (jullying area of the L'ni!t!d Swtes.
or were born in.J (meig.n country bu: had 1I1 lellS! onc p:lrem born in Ihe United Stale:'>
5 Phillip KaJfmaR cl aI., "DrnpoUl Rates in !hc Unit(;d Stales: 1998," U.S. Department of EduC.:Jtbn,
~1I1itlnal
Cemcr EJr EduCa!lOn StallSlks, Novemher 1999. Their <:tn;;ly;;\'.
:lta:es ~nd thc District of Columbia 10 those born elsewhere,
3
t:omr~res
thu.;;e born ill the 50
�3. THE PATH TO HJGHER EDUCATIONAL ATfAINMENT
Early education in Ihe,ho~ and at school appears 10' be critical to successfully following
.a path towards higher educational attainment. Evidence suggeSls that the ethnic education gap
can arise from learning differences at very young ages. One report using t999 daw indicates that
among 3- 10 5-year-olds not yet enrolled in kindergarten, Hispanic children were Jess likely than
non"Hlspanic children to regularly engage in such "home literacy" activities as being read to, told
a story, or taught lellers, words, or numbers. These home literacy activities in turn were found
generally to be ll$suciated with higher leveis of "children's emerging literacy," Thus, the
Hispanic children in the study were less likely to recognize all letters. count to 20 or higher, write
their names. Of read or pretend to read storybooks. 6 StatistiCs also indicate that Hispanic 3~ and
4-year..olds are less likely than their wbite cOlmterpans to be enrolled in early chHdhood
education programs. and are underrepresented in Hearl Start enrollment.
on
At older ages. Hispanics
aver.tgc trail non-Hispanic whites in reading and"
mathematics proficiency, (at ages 9. 13, and 11, as measured by the National Assessment of
Educational Progress),7 Not surprisingly then, Hispanics on average also score lower than noo
HJsp'anic whites on college entrance exams. This latter difference can be traced in part to family
background, Hispanic students who take the Scholastic Aptitude Test (SAT) are much less likely
than non~Hispanic whiles to have a pa.rt~nl with a college degree, who might be in a beuer
position to assist a child in the college~prepar:l!ion process.s Hispanic SAT takers are also less
likel;r than their non-Hispanic counterparts to have taken the Preliminary SAT (PSAT).'1,
Careful research shows that much of tOe disparity betweet\ the cducatiorutl attainments of
Hispanics and Jion~Hispanic whiteS stems from iurge difrerences in' family background and
income.)~ One'study found thaI by age 15, 44 percent of tlispanic children had fallen one or two
years behind the exPected grade level--apparently because these students started school at older
ages or were not advanced along with other children in their elementary school classes. Onty
about hulf'as many nOIl~Hispanic whil!! children (23 percent) had falle!!. behind their expected
grad~ levd Statislical <tflulysis indicates thu! 'much of this educational gap can be explained by
differences in family background characteristics, such as bousehold income and parents'
education. Furthennore. fUlure prospeCtS of completing higb scbool and going on to college are
greatly diminished for children who fall behind bya.ge 15. For students who were 2 years behind
the expected grade level, 67 percent of Hispanics and SO percent of non~Hjspanic whiles failed to
(, Sec Christine WinqUIst Nnrd.' et a!., '''Home L:tef:lcy ActivitJe~ and Signs of Children's Emerging
Lilcracy: 1993 .and 1999," U"S. IX:partment of Education, NUliona! Center for Education Slalistics, ::000.
7 From rhe early 19805 to present there has been improvement on these SCores for all a.ge groups of
Hispanic$, a.lthough only slightly for reading.
'
About ooe tbird'ofHispanic SAT takers have a parent with a college educalion, comp:ued with more than
half of non-Hispanic whites. See the National Science Foundation, Women, Miflorities, and PerMlIlS wilh
DmthiluicJ ill SciellCC am! £ngineerillg/ 1998. 1!}()9.
'
1 Statislics also indicate that for HispanJc group a~ wdi as for oiher racial and ethnic gwup~, performaflce
on the American College Test (ACT) is dearly c()rre;ated with family :nc()me - (National Science
K
Foundation. Womell, ,\-linoTific!> and Per,tims with Di.wbilities
If)
Science and Ellgiflcariflg: 1998, 1999.}
These findings are relevant for IlIspanic families 1n particular be{:ause family Incomes are far lower for
Hispanic households than non-Hispanic while huuseholds ..
Iii Tlw rese<lrch reponed in lh:s paragraph is from S!cphen V. Cameron and JlllfleS J. Heckman, ''The
Dynamics of Educ;nional Allainment for Blacks, Hispanics, and Whi~cs." Na1iooal Bureau of Economic
Research working paper 7249. July !9t;9 Tel!:: :J.ulhllfS emph;,l~jze the mit: thaI economic baekgmunJ vlays
on ;:hildrcn'~ educut!'mal achievement.
.
4
�complete high school or earn a GED by age 24, Virtually none of these students (l percent of
Hisranics und 2 percent of non-Hisp:inic whiles} had :iUcnded coJJege by age 24, Thus, a
disparity in educational outcomes appears aroong young children-long before they reach the
ages when they are making decisions about completing high school and continuing on to college,
This evidence indicates chat the ethnic disparilies in high school complelion and college
attendance stem in large measure from a lifetime of disadvantage. The existing disparilies must
be addressed among disadvantaged students well before they reach the ,ages at which they are
maSl likely to drop out of high schooL
.While evidence suggests that children rrom low-income families are less likely (0' be
(by failing to eam 11 high school degree or otherwise f<liling lO acquire skills or
prepare to attend college). researchers also <Irgue that low family income can be an important
direct determinant of collcge altendance. ! I The high cos! of college education can pose a serious'
detenent. As, indicated in Table 2, high-income families are much more likely lhan low-income
families to send their children to college, and they are p'articulatly likely [0 send'them to four-year
colleges,:l The vast majority (90 percent) of sludents whose parents were in the top quanile of
the income distribution were pursuing post~secondary education within 2(J months of high schoo!
graduation, compared with only 60 percent of students whose parents were in the bottom quartile.
And of those lower income s'tudents enrolling in post-secondary education. fewer than half
'enrolled in a 4-year college, compared with almos.t tnree-qu3I1erS of slUdenL<;: from the top incorne
group. Much of these differences in youths' college attendance may arise from the differences in
preparedl1ess for college just discussed, ra:hcr than from financial barriers. However. even after
considering such family backgrot;.nd influences., parent.'il income remains an important
determinant of college attendance.
coHege~read>'
in
Tublc 2. llercentage of Students from Families
Each lfK'OOle Quartile EnrQlling in Post~
Secondary Schools within 20 Months of High School Graduation
Purentallncome Quartile
Total
Vocational.
Technical
Top
90
5
Second
79
70
6
2-Year
College
19
25
25
22
Third
7
10
Bottom
60
Source: Kane (1999), based on data from the high school class of 1992.
4-Year
College
66.
48
38
28
Young people, their familles, and the broader community continue 10 face the ch:J:J1cnge
of filldlng ways to insure that mQre disadvuntugcd young people complete high schoolund have
college atceliS. This must indudt: imprOVing educational prospects fol' tlisadvant.'iged children ;l,t
ever)' leve.l. and insuring that financial barriers do no! prove to be an obstacle at the coUege l~veL
II A!> Dr 19:18 medlar. income fur llispa:lic:; w..:-; $28.330 comjXl.red with $42.439 for non-Hispunic Vr;'lles.
DJ!;} fmm the 1993 Survey of Incnme und Program Parlicip3tion suggest th:.! !he median net w{lrth of non
Hispanic white household!. wa.\ over 10 times that of Hispanic households, The 19% £COI.lOmtc Rt'jJorl (If
Ihe P'CSiO;f/!f provides a detailed overview of ruci.al and ethnic disparity in income and J.ssels.
11 Thumas J. Kane, "Relhin\';ill~ the Way Amefic~n$ Pay for College," The Ali/kell 1lls1!twe Review, Third
Quarter 1999"
�4. TIU: IMPORTANCE OF EmJCATIOi" FOR ECONOMICSUCCI?:SS
On average. higher levels of etiuc!ltion lead to better labor market outcomes-to higher
rates of employment, lower rates of unemployment, and higher wages, And the wage premium
associuted with education has risen over time. In 1999, Hispanic men with a college degree
earned J46 percent more than Hispanic men who bad not completed high schoot 10 contrast. in
1979111is same premium was a mud! smaller G7 percent for college completion. (Over thc same
period the premium for college education for all mer. in the work force rose similarly. from 57
percc:nt to l47 percent.) The increasing premium appears to stem from the increasing value that
the market places on technology-intensive skills. induding computer skills that are used in
servicc sector jobs. Thc wage premium for completing high school relative to dropping out has
also risen over time for Hispanic men. increasing from 33 percent in 1979 to 40 percent in 1999.
Recent research suggests that employers seeking to hire high-school educated individuals are
looking for those with strong cognitive skills (including mastery of basIc reading. malh. and
prOblem-solving skills). This preference for cognitive rather than manual skills might account for
tile rising pay premium for high school education.
The raw comparisons' in wages across
education level described above do no! take
DH"""NCI~~,,"br:m : . , account of any differences in age structure or
.
gender between workers in lhese groups Cbart 5
• ri"f>limc: """,,... 0<>
CNon-r"S~Ne_1o
demonstrates that after controlling for age and
gender, the premium for education is even higher
for U.S,-born Hispanics than for nou*Hispanic
wbiles.):! The earnings premiums. which show the
percent in{:rease in earnings for specific
~-"~'--'200' educationallcveJs relative to those who drop out of
high school after receiving 10 or more years of
education, ilre given separately for non~Hisp(lnic
whites. native-born Hispanics and foreign,bolll Hispanlcs.)4 The geneml relationship between
educational atlaimnen( and labor market success clearly holds for both Hispanics and non~
HispJnics whites.\~
Chart 5. EaminQ$ premium by EducaliOfi
Re!ative10 Comp)eliog Only Grade 10 or 11
,
"'"
13 Specifically, these resl.lhs aTe based on ~egres~ji)o models estimated for each ethnic/nativity group using a
pooled sample of the_ 1995 through :o.hrch :::000 monthly caia from the CPS (with respoodents in 1995·
1998 included only in their Ima survey momDs ttlid n:::!ipondeols io 2000 included only In their fiml"ln survey
rnumh). The depc:1dcm 'IuriOible l); the ;0& of inclIVlduub;' per hour enrnlng.'i, und c)tplllnillOry variables nre
gender. age (included at' indicator variable.\ for )-year age groupings), nnd edLlcaliona~ Calegury (less inJfl
grade .10, an omitted calegory of grade 10 or more bUI no high school diploffi.1. high schooL some college,
SA Of tiS, gruduate cUucation). The analysis focuses on full-time \\'Orkcrs aged 20 or older wbo are not
self-employed, Earnings are conveneil to December 1999 dollars using the monthly CPt-V. Sample si:r.es
are 262.843 non-Hispanic whites and 30.650 Hispanics (just over' half of whom are foreign-born), Median
regresiiion is used, which allows one safely to ignore earnings lop-coding of the CPS data. Coefficients"
reporh:d in Chart 5 are for educational !eveh:·ofhigh school and above. They are transformed to represcn:
percent change~ in hourly earnings.
I~ The "earnings prem,iums" reported in Chart 5 rdlect ltl part the l:uus.u: effect of cciucJtion 00 workcis'
earmngs (e,g., the increased earnings due 10 the higher pmduC11Vit)' 01 wOTker;; in the [abo, markets). In
principle. these numbers may also reflect lhat on :lvernge workers who :lllain higher education may also
have valued unobserved characteristiCS (such a.<;; mherent cognitive ability or perSOnal dri'ie) thai differ
from those with lower levels of education. evidence sugge1its lila! the premiums reported in ordinary
regress-ion analysis are reasorubly good measures of ihe cau..;;al effects of educalio;'l on earnings. {See
6
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..
,
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,.
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Since Hispanics have returns (0 education thaI arc at least as great ilS those of non·
Hispanic whites, the generally lower wages earned by Hispanics arise in large pan from their
"
lower levels of education. Specifically. over [he last half of the 19905. median hourly earnings of :: ·P,'}. i;" ";'
Hispanics were one~third less than those of non-Hispanic whites. Native-born Hispanics earned
21 percent less than white.s, while foreign~bom Hispanics earned 41 percent less (Chart 6). Part
of these wage gaps ure due to differences in gender and age composition; after adjusting fOf these
demogmphic factors, the gap is t5 percenl for native-b<un Hispanics and 39 percent for foreign·
"
born Hispunics, After controlling for available
Churt 6. Oilferences in W8ges oi Hispanic
measures of educational llnainmenl, the gap
ec mes ( urther to 6 percent for natiye~bom
Groups
d I'
SIil~jic~03P
Hispanics and J8 percent for foreign-born
Hispanics. Part of the remaining "unexplained
gaps" may be the consequence of differences in the
C(mtrol~ng lor
quality and type (If education at measured levels
(for example. if non-Hispanic whites typically live
Cor>!t¢lj,tlg fOf
In communities with higher quality public higb
1I~IJCr"opn ,,1$0
schools than Hispanics. or if immigranls educated
40
. so abroad
received
relatively
lower quality
"
education} Additionally, these gaps may reflect
differences In language ability, variations in regional labor markets. and any wage differentials
arising because of discriminatory employment practices. (Among foreign-born Hispanics [he
,differential might also stem in part from the inclusion of illegal immigrants.) The central
(;onciusion. though, is thaI for native·oom and immigrant Hispanics alike eamings disparities are
due in substantial measure;o differences in educational attainment Hi
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5. EDUCATION ASP gARNlNCS: A CASE STUDY OF TilE
rT SJ<::.CTOR
By most accounts the US. economy is: experiencing a technOlogical transforrna.tion that
has changed the nalure of work and placed a premIum on a new sel of skills. While this
transformation has affected many jobs in the economy, there is .a core set ofoccupations at the
forefront of the revolution-occupations in information technology (IT). In the last 10 years,
firms' expenditure on IT surg~d to be-come one of the largesl components of investment And
employers appear increasingly 10 need workers wilh lhe problem-solving skills and technical
expertise.necessary to efficiently utilize these new IT investments,
J);lVid Card, ''The Causal Effect of Education on Earnings," in J/rmdbo()k of Lahor Economics, 'volume 3.
edited by Orley Ashc:nfeher and David Card. North~Holland. 1999,)
;$ pm al! of the analysis ul>ing the CPS il
useful to note thaI some diffelCm:cfi between nadve~bom and
fmclgn.b(,rn His;mnics may slem from tl!!! inclusion in the CPS data of illegal immigrants. many of whom
lire presumably in a poor position to compete for good jobs in the Coiled Slates. For a discussion about the
pre.-.ence of illegal immiStants in the CPS data, see Gi.!illermina Jasso, et al.. 'Ihe New Immigrant Survey
Pitol (NlS·Pj:.O.. . erview i.ltld New Findings Aboul U.S. Legal1mmigmnts ai Admission," Demography.
is
FebnlalY 2000.
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1(. Tht~ results aboul Ihe importance of education ior explaining the ethnic \Vilge gap arc cnr.sislcnt with
recent research indicating thaI thrce·qv<!.rtcn; or the wage gap bclW0ell McxicJn Americans and nO:"l
Hbpanic while.;. ii' llt\ri~utllbJe to Mcxic;m American5' relative youth, English languilge del1ciencics, and
especially 1heir lower educational at1>1mmem (Sleven J, Trejo, "Why Do Mexican Americans Earn Low
Wage~T
,'.
Joumal of Political Economy, 1997).
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�This section exami~cs the role of Hispanic Americans in IT. The analysis provJdes a
vivid case study of the genera: problet:1 of l{pi" educational attainment for Hispanic Amcricuns,
and the importance dosing
cducatjm~a! gap.
or
!nc
Although there is no exact definition of an IT worker, there are a number of occupations
that quite clearly fnll into the general domain of IT:' The analysis in this repon. considers a
number of core IT occupations for which data lire available from the Currem Population Survey
(CPS), a large nationally representative sample with information -on workers' weekly earnings,
demographic characteristics, and occupation. These core IT occupations are:
•
•
•
•
•
electricalllnd electronic engineers;
computer systems analysts and scientists:
operations and sys!erns researchers and analysts:
computer programmers; and
computer operators"
Definitions of these occupations arc provided in the Appendix~
IT Occupations: Rapid Growth and
Hi~oh
Wages
The 'combined employment level in these five occupations has grown by almas! &1
percenl since 1983 (Chart 7), with 'particularly strong growth in the: last 5 years. [n contrast, lotal
employment in the overall economy gre\,i hy JUSt 32 percent since 1983. Today ihese IT
occupations comprise approximately 3.4 million
workers (about 2.6 percent of all employed
Chari 7. Workers EmplOyM J'lIT Occupations
workers). Employment projections by the Bureau
',000 ~;;;;;;;';;;-:---i
of Labor Statistics suggest that rapid growth for
00-_ _ __
PC--t>rt>9""""";'
computer-related occupalion.s is expected to
___
1'000
continue well into this century.
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Within specific occupations, the most
IT
"
~
notable feature is the strong and steady growth"of
computer systems analysts and scientists. In 1983.
1,000
o
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ChartS. Medlan We'i!',dy Earrings ot F"m·T:me
WCllkars
~,~-!
Icch~ology.
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this occupation had just O\'Cf a quanef of a million
workers, or 14 percem of the total IT workforce.
By 1999. there were 1.5 million workers ill this
occupation, or 45 percent of the lotal. Also notable
is the decline in the number of computer operators,
p~rlJaps stemming from changes in computing
2~
~oo
&00
a;;::
1m""" ..,
'000
11:lO
In addition to experiencing high
cmploymem growth, tbese .occupations arc also
characterized by high wages (Chan. 8). Median
wcekly earnings for four of the fivl1 IT
occupatIons-ail bUI computer opcrJ.ton;......-...easil y
11 POI a fUrlher discussion of these and felO,ted issues set: Carol Ann Meo're~ c1 aI., "The Digital Workforce:
Building infOlech Skills at the Speed of lnoo\'~ti{!n:' U.S. Dep:utmem of Cornrncn:c. Office of Tcchnolog.y
\loliey, June 1999_
�exceeded median weekI)' earnings for all workers in 1999 as well as: in 1989. The median
earnings for the highest-paid IT occupatiOll---electricaJ and elcclronic cllg)r.ee~-was almost
!wice that of all workers ($1.073 vs. $549 iYl 1999).
Hispanics in IT Oceupalions
As in many other higher-paid occup,Hions, Hispanic Americans are severely
underrepresented in IT. There is some indication lhat this llnderrepresentation htls improved
modest;}' over t~e last decade. It i\onethclcss, an examination of dala from the CPS snows that
over the late 1990s (1995 to the most recent available data, Murcb 2000}. Hispanics represented
11 percent of all employed workers. bUI only 4.1 percent of the workforce i~ these five IT
occupatkms .
. The underrepresentation of Hispanics in IT contributes to Ihe ethnic economic gap
because Hispanics and non-Hispanics alike earned far more in IT than in other occupations.
Median hourly earnings for non-Hispanic- whiteS in IT were 62 percent higher than for nOn
Hispanic whites in non-IT occupations. and Hispanics earned twice as much in IT as in other
occupations. Moreover, evidence sugges1s th:'H Hispanics in IT earned only modestly less than
similar non~Hispamc whites: In an analysis of earnings that accounts for differences in education.
age and gender. native-born Hispanics earn about 6 percent less than non~Hlspani.c whites. And
foreign-born Hispanics earn an additional 2 percentage points less than native·born Hispanics (a
difference that is not statistically significant}.19 The "unexplained" pay gap of 6 percent is
comparable to the 6 percent gap that emerges in tne general labor market for native-born
Hispanics when controlling for demographics and education.
, The general conclusions about Hispanics in IT-tbat Hispanics carn only 'slightly less
than non-Hispanics but ~re greatly underrepresemed in IT-are reinforced when a somewhat
broader set of science ~d technology occuputions is examined. w In this expanded sample an
analysis that controls fOT age, gender. and education indicates thilt nalive-bom Hispanics eam
IH Thi.~ conclusion corne" from comparing average representation of Hillplmks in IT (,ccupations in ! 987-89
wilh 1997-99 (using various issues of Empioymel1l wuJ Earnings from Ihe Bureau (l.f Labor Statistics).
There were IOcreases in Hispanic represemation in four of the occupations--computer operators {up J.J
percentage points to 7.1 pe:r~ent}, compmer programmers {up l.2 percentage pvints to 4.4 perccm}.
computer scientists {up 1.0 percenuige points 10 3.6 percent). an<! electrical engineers (up 1.5 pcrccnt!1ge
points to 3.9 percent}. There was .(i decline in Hispanic representation fOf operations researchers (a 0.8
r*er~e~i~ge poini drop to 3A ~cent)..
.
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, ThIs IS based on a regressIOn model estimated vSln!1, a pooJed sample of. Ihe 1995 through Mar~h 2000
monthly CPS dma. wjlh a dependenc variable. lug: of individu;;ls' per hour earnings, and explanatory
variables. gen<!er. age c;negory. Hispanic and foreign-horn Hispanic indicators. and educaliun;;l category
(less than high schooL high school, some college, :lsweialt!: degree, I3A nr BS, and graduate education).
The analysis focuses on ful!-lime workers aged 20 ()f older who afe not self-employed, Earnings are
convt:nct1 to December )999 dollars using (he monthly CPt-U. The "ample includes HisP3nics ,md oon·
Hispanic whiles, Tbe sample has 8.469 individuals. including 355 Hispanics. Median regreSSlOrl "''as u.sed.
The tOefficien! for the "Hispanic" indicator was .significanOy .differen! from 1.CTO (H,talistk of -2.0), and
"foreign-born Hispanic" wu~ nOt (t-sl(uislic of -0.5).
.
10 This broader set include:> the. ;5 IT occupations and 111~o engineers of all types (uerospllce, metallurgical
and nl1l1erlllls•. mining. pClmlowm, chemical, nudear, ciVIL agricllltuf:ll, industrinl. mechanical. marine and
naval architcct~). mathemntic:d sciemists (inc!\Jdinl,\ l!Ctuaries and SI:lliSlicillnS), niuural scientists
(physici~ts and astronomers, chemists. 'atmospheric and sp:lce sciel1lists, gcolngist£ Imd geodesisls, physku!
sdemtSlS. agricuf1Ural and f(lod scientists. biological and life scientists, (orestry and conservation scientbts.
and fI'ledic;,[ scien.tisls), aoo technicians of all sorts (c!eclficul and electronic:, industrial engineering.
mcch;mical engineering. er.ginecring. biological, chemical. and seier.!.'\! te<:hnicians).
9
�about 4 percent less thtln flon-Hispanic whiles, while forcign·bom Hispanics earn an additional 2
percentage ~oints less than r.a.tive~born Hispanics ((!;umings differences that are not statistically
significant).-! However, a large gap exists in Hispanic employment: Hispanics are 11 percent of
all {;mployed workers but only 4.3 percent of workers in· these science. and technQlogy
occupations.
As detailed in a 1999 Office of Technology Policy report, the Jack of Hispanic workers in
thes,; high-paid and rapidly-growing o;:;cupations stems from disparities in education that exist
umong young people prior to entering. the labor force. z2 In particular, the report indica~s that as
of 1996 Hispanic college students earned bachelor' $ degrees in science and engineering at the
same rate a~ whites (33 percent of students major in science, or engineering). And rates .are
comp~rahle also in engineering specifically (5.3 percent for Hispanics .and 4.9 percent for whites)
and computer science (1.8 percent for Hispanics and 1.7 percent for whiles), The shmtage of
Hispanic!; in new economy jobs is m;>i thc con'{equcncc of Hispanic college students shying away
from technical 1lelds. instead, the key to increasing Hispanic represerHation in science und
engineering appears 10 be identifying: and implementing strategies to increase the overall pool of
Hispanic undergraduates,
6. CONCLL'DING REMARKS
In light of the rapid growth of the U,S. Hispanic population. the gap in educ3tionul
uchievemcnt between Hispanics and their peers is a matter of critic;al policy importance" This
report emphasj~s a number of t;alient facts on Ihis issue. First, there is a large gap between the
education of Hispanics and non-Hispanic. The ethnic education gap stems in pan from the
comparatively low levels of education among immignmt Hispanics. However, while there has
been improvement in lhe educational ticlilevement of native-born Hispanic:;, much ot the g~p I.';
the I~onsequencc of poor educationul outcomes among native-born Hispar::ics, Closing: the
education gap will require improved educational outcomes for immigrolll und non-irmTIigranl
Hispariics alike. Second, this ethnic gap in educmion is a strong contribuling [actor to a
corresponding gap in economic outcomes, Hispanics e<lm substantially less than non-Hispanic
whites. in large measure because of the education gap. As a key example. the education gap
{';QnU ibutes to a serious "digilal divide" in employment in IT occupations and other science and
technology jobs. Hispanics '.vho work in these occupatio!1s generally have high earnings-only
modemteJy less (4 to 8 perCent) than similar J)Qn-Hisp>lnic whites. However, Hispanics are
sevclcly underrepresented in these new economy occupations in part because relatively few
Hispanics achieve the necessary educalional levels. Undcrachievement in education hurts the
future prosperity of the students themselves and also redu\:es the numtv~r of workers in thy labor
force. prepared \0 con~rjbute in new economy jobs.
Resc<tfch described in this reporl suggests Ibm the rcl<ttively poor educ.. tional outcomes
of Hispanic youth often stem from a lifetime ot disadvantage. The solution to the education gap
lies in finding and implementing initiatives that not only target students ut the ages when they afe
making decisions' about completing high school and continUing on IQ college, but that also focus
'I'll.: sample is 7lB Hi;.;panic~ and 16,495 non-Hisp.lOlC while;.;. The coeffiClcnl for "Hi:.panic" if; nO!
significant (t-statistic of - J £) nor :" the coefficient for "foreign-born Hispanic" {t-statistic of -(LO).
it ',he D:gital Work Fore;: Building Inf01ech Skills at the Speed of Innovation," U.S. Department of
Commerce, Office of Technology Policy, June 1999. This report also highlights that women generally arc
underrepresemed in IT OCCupatiOns. In contrast to racial and ethnic milloritie&, worne:-J are under
repre;.cnted becllUsc they are 1c~s likely to choo~ ;,cience and cnginC\!fing field5 when in college.
)j
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�on children earlier in the educational process. In short, the education gap must be addressed at all
uSc levels. The accompuuying box list): some of (he ways in which the federal government is
seeking to improve educational outcomes for US. youth-programs. that indeed focus OIl all
educutionallevels. J( the ethnic education gap is to be narrowed substantially and r..tpidly, major
efforts will be req\lircd from families and communl;ies. and from the pri\'2te and public seCtors at
all kvels.
r Examplcs of Federal Gu\"crnment Efforts to Improve Educational Opportunity.
Research indicates that the carly preschool years, when human ability and motivation are being
shaped, are critical. to sklll formation. Developmental programs that interve!l(! early in life have
been show~ to be more cosl-.effective than later attempts a1 remediation. One such program is the
federally funded Head StaJ1 program. which. since 1965. has provided comprehensive
developmental services for low~income preschool children as well as social services for their
families, This program has been shown to have large positive effects on test scores and schooling
attainment for Hispanic children s:pecifically, (See Janet Currie and Duncan Thomas. "Does Head
Stitt" Help Hispanic Children?" National Bureau of Economic Research, working- paper 5805,
1996.) The success of Head Start has prompted the Administration to nearly double funding for
the program since 1993 and to seek a $1 billion (19 percent) increase in funding for the program
as part of.he fiscal 2001 budget
As part of their agenda to improve publk education. President Clinton and Vice President Gore
have insisted on high standards for aU students; demanded accountability for results; and
expanded investmem in strategies aimed at raising student achievement. The Clinton-Gore
: education agenda has focused 00 redudng class size in the early grades, expanding after·school
: and summer·school opponuflities. ensuring access to educational technology, improving teacher
quality. and expanding public school choice. (The 201X) Economic Report of the President details
federal initiatives targeting each of thesc agenda items.) As part of the Hispanic Education
Action Plan, the Administ~tion has rcquested funding in the fiscal 2001 budget for programs that
will improve the education of Hispanic students, ineluding Title [ grants to local educational
agencies. bilingual education, migrant education. an adult English literacy initiative. and
programs to help students prepare for and complete college.
Finally, ·the federal government has a number' of programs to aid students in preparing for post·
secondary education <lnd to, hclp make college affordable. GEAR UP partnerships of middle
schOOls. colleges, and community organizations provide low-income students with n)Cntoring,
tutoring. and information on financia: aid, starting no laler (han 7th grade. Another example is- lhe
TRIO programs-educiltional outreach progmms designed to motivale and support students from
low-income families, Other examples include programs that provide financially needy students.
with assistance. most prominently the $4.9 billion Hope Scholarship. $2.4 billion Lifelong
Learning tax credits, and $7,6 billion rovided in the 2000 budget for Pell grants.
II
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ApPENDIX. DESCRIPTIONS OF IT OCCUI'A TIONS STUDIED IN THIS REPORT
Electrical and Electronic Engineers design. develop, test. and supervise the manufacturing of
electrical and electronic equipment. These engineers specialize in different areas such as power
generation, transmission. and distribution; communications; computer electronics; and electrical
equipment manufacturing ~ or a subdivision of these areas. They design new products, write
performance requirements, and develop maintenance schedules. They also test equipment:solve
operating problems, and estimate the time and cost of engineering projects.
Computer Systems Analysts. Engineers. and Scientists is a category which includes a wide range
of computer-related occupations. Systems analysts solve computer problems and enable
computer technology to meet the individual needs of an organization. Computer engineers work
with hardware and software aspects of systems design and development. Computer scientists
include a wide range of computer professionals who design computers and the software that runs
them, develop information technologies, and develop and adapt principles for applying computers
to new uses.
Operatiolls Researchers and AnalysIs conduct research and perform analyses to support
management in increasing the performance of an organization. Managers begin the process by
presenting the symptoms of an operations-related problem to the analyst. who then formany
defines the problem and selects the most appropriate analytical technique to examine it. Upon
completion of the analysis, the analy"st presents management with recommendations based on the
results of the analysis.
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Computer Programmers write, test, and maintain the detailed instructions, called programs or
software, that computers must follow to perfonn their functions. in many larger organizations,
programmers follow descriptions' that have been prepared by software engineers or systems
analysts. The transition from' mainframe to personal computers has blurred the once rigid
distinction between the programmer and Ihe user. increasingly, adcpt users are taking over many
of the lasks previously. performed by programmers. such as writing simple programs to assess
data or perform calculations.
Computer Opera/or.l· oversee the operation of computer hardware systems to ensure that they are
being used most efficiently. These systems include mainframes, minicomputers, or networks of
personal computers. Computer operators must amici pate problems and· take preventative action;
as well as solve problems that occui during operations. Increased automation and other
technological advances are 'shifting the responsibilities of many computer operators to areas such
as network operations, user SUppOI1, and dalubasc maintenance.
Source: 'Bureau of Labor Statistics, U.S. Department of Labor. Occupatio/wi Outlook Handbook, 2000-01
Edition. 2000.
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Clinton Presidcntial Rccords
Digital Records iVlarlwr
_JAW·'
Tili:; i,; not n presidential record. This is lIsed a, an administrativ\)
lIlarker by the Willial11 J. Clinton Presidential Library Stare
This l11arker ideilli lies the place or a publ icatioll.
Publications have nOI beell scanlled inlhcir entirely for the purpose
or digitizalion. To see the full publication plcase semch online or'
visit the Clinton Presidential Library's Research Room .
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REACHING THE UNINSURED:
ALTERNATIVE APPROACHES TO EXPANDING
,
HEALTH INSURANCE ACCESS
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September 2000
A Report by
The Council of Economic Advisers
1
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�THE·EcONOMIC 1MI'ACT OF THIRD-GESERATION WIRELESS TECHNOLOGY
. October 2000
. A Report by
The CounciJ of Economic Advisers
�THE ECO;-"'OMIC IMPACT OF TlHko-GeN£RATlON \VIlU~I.ESS TECU;-';OLOC\'
EXECIJTlVE SUMMA1H'
"rhird~generatiol1l1
(3G) wireless tec-hnology provides high~speed mobile access to the Intemet
and.other communications net~orks. This tediltOlogy offers significant benefits to consumers
and telecommunications providers and complementary benefits to the U,S. economy. It is urgent
that the United States follow other advanced countries in making adequate spectrum available for
3G applications. This report documents the likely beru!fitS of 30 technology and explains why
,,: adequate spectrum is needed to provide these services efficiently, The key points are these:
• Telccommunications and the Internet !lre among tbe most import.mt sectors of the New
Economy. Telecommunications represented.3 percent of GDP in J 998, having grown at a i
percent annual rate over the preyious 10 years, Wireless .carriers employ over 150,000 peo
ple In the United States and generate $44 billion in annual revenue, At the end of 1999, the
United States had 86 million wireless subscribers; today that number exceeds 100 mimon,
By year·end 2000 there will be over 600 million'wireless subscribers worldwide. The Inter
net has spawned thousands of companies, as entrepreneurs have raced to provide content,
commerce) and ncw services to consumers and firms, Consumers purchased $5.5 billion of
goods and services over the Internet during tht: second quarter or 2000 alone. Sales over the
Internet between businesses are estimated 10 hit $251 billion in 20001 up from only $43 bil
lion in 1998. The most successful Internet startup companies have created hundreds of bil
lions of dollars of market value.
• Third-generation wireless technology combines two powerfuJ innovations: wireless
communications and the Internet. Today's wireless devices are designed to transmit voice
and brief text messages and cannot handle digital multimedia and other high-bandwidtb
lntemet content 30 devices, by contrast; provide high-speed mohile cOlmections to the
lntemet and other communications networks, giving users full access to the rich content and
"commercial possibilities of the "information superhighway,"
• This new technolugy promises substantial benefits to eonsumcrs~ producers, and the
ecunumy as a "'hole. The annual.consumcr.benefit from today's wireless telephone services
is estimated at $53-$1] 1 billion. The consumer benefits from 30 services will likely be of
this order of magnitUde, , Providers also stand to reap substantial guins, Recently completed
3G spectrum" Iluctions in Europe have raised $150-$600 per capl1a, These at.:.ction revenues
indicHte the expected producer benefits from operating 30 licenses.
• To provide 3G applications most efficiently, adequatC' spectrum must be made available
for commercial use. ln telecommunications, the most important scarce resource is spec
trum. While current U.S. carriers can develop 30 applications uSlng currently allocated
5pectrum~ the allocation of additional spectrum could lower the cost of bringing 30 to U.S.
consumers, Ho\vevcr, parts of the spectrum being considered for 3G applications are already
In use.
�• Delays in introducing 3G produets and s{'rviccs can bt' C()stJ~'. Besides the foregone benc
HIS to 3G consumers and providers, delay may be hnnnfullO U.S, firms seeking to provide
complementary products and services. Early investments are necessary to deyelop a vibrant
U.S. industry for 3G applications. Knowledge spilloverS, which are important in hlgh~tech
industries) tend to be geographically lo,:alized .. Finland. which aHocated its 3G spectrur!1 Ii~
ccnses in March 1999, has already taken the lead in developing an industry 10 provide mobile
applications.
• Government poJicy in allocating spectrum must weigh carefully all benefits and costs.
Consumer benefits, provider profits, and the potential benefits of iadt:stry leadership sbould
be weighed against the possible costs of moving incumbent users to ensure that adequate
. spectrum is made-available for 3G applicatior;s.
2
�TilE ECOi\'Ol\'HC IMPAC1'OfTlIIRD~GEN£RATIOi\' \VIRELESS TECHNOLOG\'
1.
I~TnootJcTIO,.'I:
. The U.S. economy has perfonned rcmark?-bly over the last several years. Productivity
growth hus .')ccelerated from about 1Yl percent per year from 1973 10 1995 H? about 3 percent per
year from 1995 to 1999. This acceleration is heavily related 10 technology, both the investment
in IT hardware and software and the extraordinary productivity of the industries producing the
technology. Between January 1993 and September 2000 the total market value of finns on the
NYSE and ~ASD;\Q increased by 400 percent Knowledge and intangible capital arc incrctl.$~
iogly important: R&D spending has soared. along with the numOc!"s of patents.
.
At the heart of this "New Economy" lie a se:ics of dramatic technological innovations.
Advances in computing, information storage, and data transmission have reduced costs, created
new market!;, and expanded ~xisting markets. These innovations came from a remarkable flour
ishing of entrepreneurship, often concentrated in Silicon Valley and other high-technology corri~
dors in the United States. Firms and other organizations have moved quickly to exploit the OPA
portunities pruvided by these new technologies. Firms are spending billions on enterprise sys
tems, sophistit8ted software and hardware, packages that integrate ordering, procurement, in
vento!}', finance, and human resources, Consumers are offered an increasing array of goods and
services for communication, entertabunent, shopping, education, and other activities. In some
industries, firms arc taking advantage of technological improvements by expanding and consoli
dating their operatio:1s to reduce COStS; in other industries, startup companies are using technol~
ogy to create new products and markets, These changes explain a large portion of rccen1.LS,
productivity gains.
The tek'Communlcations sector has been a primary beneficiary of these technological ad~
vances. Radical improvements in computing power, along witb healthy competition in· the
comm;.tnications sector, have reduced the costs of communications dramatically. As costs have
fallcn, and capabilities have expanded, the wireless telephone and pager markets have expanded
rapidly. Wireless carriers employ mOre than 150,000 people in' the United States and generate
over $44 billion in annual revenue (see Figures 1 and 2). Mobile-phone penetration in the
Unitcd States now exceeds 35 percent. Today, the number of U.s. \\<1.reless subscribers exceeds
100 million. Experts estimate that by ye3r~end 2000, there will be over 600 million wireless sulr
scribers worldwide.! .
.
'The Internet is also transforming the \vays individuals and organizations communicate
and managc information. Nearly 54 percent ofU.8. households have access 10 the Internet and
sur\'c~s indicate that over 50 percent of U.S: businesses will scI] pr9ducts online in tbe year
2000."" Truditional firms and new firms alike are competing to deliver consumers higher~spccd
aCcess to the Jnternet and more sophisticated services for this new medium. Internet sales to
I Cellular Telephone industry Association (W\\::\~:,wo~\'.COt1l.C(lm); Electronic Trend Publications, "The \\iorldwide
WireJess Network." July 2000,
NUJ\ Internet. "How Many Online," Seplember 2000 (www.tl\l::l.ic:survc\.s/hnw
Indicators, Cktober 6, 2000 (www.inlcrnetimlicUlopj colll/facts,HPJ!).
2
3
InP.O\'
odhw); l;'ltemct Economy
�Flgur(l 1, AfHllud RIIvilfluo of U.S. Mobile.
Tllklphone Carriers (1985.1999)
Figure 2. Direct Wireless Employees of U.S.
Providers at Yeal·End
roTI----------------------~1
"
40
lS
30
CI Hoarrnr Revenue
iii Service Ravenue
"
'"
•
n
,
o
Source; CTIA Semi-Annual Wireless ~urvey, 1999.
consurners--s{)~ctilled B2C ecommerce-were $5.5 billion for the second quaner of 2000 alone. 3
Sales over the Internet between businesses (B2B) have increased even more dramatically. B2B
sales are estimated to hit $25 J billion in 2000, up from only $43 billion in 1998,'
The latest advance in mobile communications technology, "third-generation" (3G) wire
less, will be capable of combining the powerful technologies of wireless communications' and the
Jntcrnet. s Today's wireless service, used for·ar.alog and digital cellular phones and page:'s, was
designed 10 transmit voice l)l1d brief text messages. These devices transfer data at relatively slow
speeds) around 9.6 kilobits per second (kbps}6_signifi~a;!tly slower than conventional 56 kbps
dial-up modems. 30 devices, by cont:'ast, w)Jl transmit da1a at speeds between 144 kbps and 2
megabits per second, about as fast as a cable modem Or digital subscriber hne. Increasing the
data~transrer ralc allows mobile phones, hand~hcld computers, and other products to become
multimedia access devices. Further, the international standards that have been developed for 30
allow global roaming ....:1th a single device.?
'
The market for high-speed, or "broadband;" wireless access has tremendous potential.
Broadband appl~cations such as streaming audio and video are -already becoming increasingly
popular on the Internet, as evidenced by the rapid growth of high-speed cable and DSL modems,
U.S, Department of Commerce, Press Release, August 31,2000.
Forrester Research, tnc_, "Resizing Online Business Trade:' November 1998.
~ First-generation (lG) wireless phones, introduced in the United States in 1983, U5C analog techno!o-gy to transmit
voice caUs, &:cond~!;etletatl(l:') (2G) wireless phones use digital tedmoJogy and were introduced into widespread
commercial service in 1996 f(lllowing the FCC's auction of pes spectrum licenses in 1994 and 1995. While both
technologies are clUre-nlly lIsed in the United Stales, since 1999 the number of 2G subscribers has exceeded the
number uf IG subscriber.;. Judy Bcrck, "A Brief History of pes. (Oigital Cellular) Technology Development in the
United States," April 19-98 (W\\w,pcsdat,tcQm/histon'_hlm); Federal Communications Commission, Fifl-h CQmpeti.
lion Reporl, AllgUSt 18,2000..
6 Competitive Intclligence Public:ltioJ's, "3G Mobile: F'ulure Markets," Research Report #103, Chapter 2, May :WOO
(w\\'w. eI<.':ctrol'l ics.cnlrepGrtzh:)(}buJ/c i: ! 03 ,hIm I).
7 Throughout this doc-umcnl we g.enerally use "3G" to refer to the entire class of high~speed wireless communica
tions technologies, Other writers distinguish between 3G and an intermedillJ)' Set of technologies, "2.50," which
offer mobile data services al rates between 56 kbps and 144 kbps, the speeds of conventional modems ane' ISDN
lines, respectively. BOllI 3G and 2,5G wiE nffer subsUlmia) upgrades to the existing rnobi]e aa:a lransmlss;nn capa
bilities, and development of both technologies benefit from allocation of additional spectrum.
l
!
4
�As these and other applications multiply, wireless devices will require 3G capabilities to access
existing Interne1 materials, along with new lnterncr sites optimized for mobile aecess, The
bandwidth provi~ed by 30 facilitates secure mobIle commerce, real-time vidcotonferencing) onw
line gaming, and other, nOl-ret-imagined applications. The 30 technology also gives the user an
i'always-on;' mobile Internet connection.
More iI1.1portantly, tne development of 3G tcchnologies will encourage investment and
innovation in complementary services such as specialized content and billing and payment sys
tems. The Internet has spawned thousands of companies as entrepreneurs hi:wc raced 10 provide
eon tent, products and new services to consumers and to firms. The most successful of these
startup companies have created huncreds of hi:lions of dolhlrs of market \'alue .and havc im
. pactcd the economy dramatically. The combined market capitalization of 15 leading internet ap
plications companies-Yahoo, Verisign, eBay,lnktomi, Commerce One, Amazon, erv1G!,
Infospace, Vignette) Lycos. Inlernet Capital Group, Akamai, Real Networks, Hcal
theonfWebMD, and Cache flow-was '$193 billion on October 2, 2000, An appropriate .lIoe.
lion of commercial spectrum licenses and other policies that favor investment have the potential
to unleash a wave of innovation in 3G applications. The impact of these 'yet-to-be-developed
applications is impossible to predict precisely, but history suggests that they may be profound.
Severa! other counlries 1 including Finiand, Japan, Spain, the·l.l.K., the Netherlands, and
Gemluny, have already allocated nev·,' spectrum specifical1y for high~speed wireless devices and
applications. s It is urgent that the United States follow other ud":'anced countries in mak:in~ ade~
quate spectrum available for 3G applications. As explained below, delay is costly.
,
This report documents the likely benefits or 3G technology and expJains why an adequate
supply of commercial spccU'um licenses is needed to provide these services efficient;y. In gcn~
era.!, benefits oftcchnological innovation accrue to the consumers who use,tne nev.' technology,
the producers who provide it, and other firms that supply complementary goods and services,
Introducing new technologies is also costiy: research and development must be funded;. existing
technolo-gies must be modified or abandoned, and ne.. v capital must be provided. 1n telecommu
nications, the most important scarce resource is spectrum. Commercial spectrum licenses allow
fiW1S to transmit data Over a particular frequency in a particular orca. To provide high-speed and
other wireless applications efficiently, spectrum must be allocated to its highest valued use. This
may require a reallocation of spectrum.
2, Ill:NEFITS FROM NEW TECHNOLOGIES
Tech:lOlogical innovation does nOi'occur in a vacuum; it requires a particular Structure of
incentives and institutions. Finns' demands for new technologies are derived from consumers~
demands for new products and services. Those firms that quickly learn 10 satisfy consumer
net:ds stand to reap substantial gains, particularly in markets where network effects and firsl
mover advantages arc important. There can also be significant spillover benef.ts 10 firms that
provide complementary goods and se,viees.
9 European regulalors have manclHed that newly allocated spectrum be used only (or 30 Icch:!.ology_ C.S" law gen
erally permits carriers to use their allocated spectrum for a variety of technologies,
5
�A. Benefits to Consumers
The potcntial 'Consumer benefits from introducing 3G technology are substantial. While
it 1S impossible 10 predict the precise demand for any future product, one can see the order of
magnitude by studying the introduction of related technologies. For instanc-e, a well-knov.n
study attempts to measure the "consumer surplus H created by the introduction of analog cellular
service (IG),9 Eeonomists define consumer surplus as the difference'between the prkes con
sumers actually pay and the maximum amOunts they would be willing to pay for a particular
good or service. Consumer surplus is thus a measure of the net benefits to consumers created by
a particuhlT market. Using data on price and number of subscr1bcrs in the, top 30 cellular phone
markets between 1989 and 1993, the study estimates that consumer surplus generated -by the in
troduction of the cellular telepho.nc was in the range of $31 billion to S5Q billion per year in COfi¥
stant 1994 dollars,lo In light of sucn potential benefits. delays in the introduction of these serv
ices can be extremely cos-tiy to consumers.
How have the benefits- from the introduction of digital wireless (2G)cornpared with the
benefits of (l0)? Updated cakL:Jations estimate that the combined consumer surplus from IG
and 2G was between $53 and $111 billlon in 1999. t! This new consumer surplus is the product
of severn! factors. First, to the extent that consumers value the quality improvements such as
lmproved clarity provided by digital ~irdcss, their willingness to pay rises and overall demand
increases" Second, because digital wireless uses: spectrum more efficiently, providers can offer
the same service at lower cost. Consumers benefit to the extent that providers pass along these
gains through price reductions. 1l.ird, allocating new spectrum for digital ",;irclcss introduced
new competitors into the market Tbe avcrage number of <;:ompetitors in major metropolitan ar·
eas has incn.:ascd from t'\\'O to more than f{ju~, Increased competition pressures lirl11S to lower
costs; ~nsuring that the cost savings from technological improvement are passed on 10 consum~
crs,
The combined results have been dramatic, as shown in the figures below, Following the
allocation of new spectrum for digital ser\'ices starting in 1994~ total wireless use has risen
sharply, prices have fallen rapidly, and 5ubscribership has increased subS1antially, As 5ho\\1) in
Figure 3. Wta] minutes of use by U.S. \\~reless cusWmers more than tripled,Trom 199510 1999,
During the same period, consumers' fully weighted cos.t pCI' minute dropped by nearly 50 percent
(Figure 4); and average local monthly prices fell from SSI in 1995 $41 in 1999 (Figure 5). In
1999, m~re than half of all mobHe subscribers were using digital technology (Figure 6).
'0
Jerry A- Hausman, "Valuing the Effect of Regulation on New Services in Telecommunications," Brookings Papers
on Economic Activity, MiCTfJPconQmics (1997), pp. 1-37.
10 An earlier study concluded that the total consumer welfare loss from the !(J-year delay in licens:ng tbe cellular
(lO) spectrum a! $86 billion in 1991, or 2 percent ofGDP in 1983 when the Ikensing finally occurred. J. Rohlfs, C.
L. Jacks-on. and T. E, Kelley, "Estimate of the Loss 10 the Uniied States Caused by the FCC's Delay in Licensing
Cellular Telecommunications," Natlonnl Economic Res::arch Assodales Report (J 99!).
H Jerry A- Hausmnn, "Mnblle Telephone," H(lndboDk ofTei~comm/lnica{i(}/J5 Economics, forthcoming.
• 9-
6
�N9IJru 3. Total Minutu O'f Use fO'r u.s.
'"
Wir0leU $uba.criofttS (1991·1999)
>l()
Ftgure 4, Estimated Total &p*nse Per
Minut;) fOf All Calls Mad* by U.S. Wireless
Subscribers (1li91-1'999j
...
,,~------
MB
7.S
61.0
,
51.J
...
,
'"
Figure S. AVerage Lecal Monthly Bill for U.S.
Wireless Subscribers (1988.-1999)
-
-
~
·
~
.
O
15 ~
__________- -____-'
Agora 6. US. Analog and Digital Mobile
Telephone Subscribers .
a Dg~~1
OAnalog
e
eo
'11.1 69.1
~w
~7,1
g
:
PH'~ P~ ~,
Source: CTIA
P" PH P"
Semj~Anol.lal
m, m,
42,8 J\I_~ ~t2
m~!!-
I
'''''
1998
1if99
Wireless Survey, December 1999; fCC, Fi/th Report on Commercial Mobjle
Services, AU~!lSl IS. 2000,
'
.
Moreover'),digital wireless has allowed. new services) sllch as' voice messaging l text mes~
saging, and caller ID, to be integrated into mobile phones, The introduction of voice messaging
sen,kes for basic telephony created an estimated $1.3 hillion in COlis-umer surplus in constant
1994 dolbrs. 12 This t~chnology, which is included in the service provided to many digital wire
less subscribers) may be even more valuable to consumers when combined with the freedom that
mobility provides. J3
Consumers in other countries are already enjoying wireless Internet applications using
2G technology. In Japan, for example, Nippon Telegraph and Telephone's DoCoMo subsidiary
has launched a service called i-mode. Over 10. million lapanese customers have subscribed.
Subscribers use an i~mode phone that can send and receive e~mail as well as access websites op~
timlzed for tiny screens. With a thumb-controlled joystick, subscribers can tap into online newS t
browse through restaUfa:lt guides, buy airline tickets, and trade stocks, Using another technology
called wireless application protocol (WAP), several European finns have tumed phones into
12
Hausman. "Valuing the Effect of Regulation."
.
l~ Hausman, "Telecommunications: Building tbe lnfrastrJclure for Value Creation," in R. Nolan and S. Bradley,
eds., Sense and Respond (Cambridge, Mass.: Harva~d Business School Press, 1998), provides a method to estimate
fln upper and lower bound for consumer surplus for olher goods using limited earn, and he applies this method
internet access,
7
lO
�>
electronic waHets, allowing customers 10 pay for goods nnd services via their mobile phone bill
rather than via credit cards or cash, According 10 recent news reports, Finnish consumers can
make vending machine purchases~ pay rent, phone, or electricity bills, and pay for parking spaces
with their mobile phones.
'
Possible 3G applications me even more in~pressivc, According to the International Tele
communication Union (lTU), 30 devices will be compact enough to fit into a pocket or handbag
and win integrate the functions oCa range of existing devices, The ITe suggests that the 3G de
vice
will function as a phone, a computer, a television, a pager, a videoconferencing center, a
newspaper, a diary and even a credit carel. [It will] support n01 only voice communica
tions, but also real~time video and full-scale multimedia via a screen that can be pulled
out and flexible. It will olso runction as a portabll.) address book .md agenda, contoining
all tlw ,nfonnation about meetings and :.ontacts and able to remind you automal1cally be
fore an i;l)pOrumr arp(liml~\enl or automatically eonnccll0 an audio or videoconference at
a spcdfted lir:ll.). It will automatically search the lntemet for rclevant news and ilif()nnli~
tion on pre-selected subjecls, book your ne).! holiday for you ~n-Jine, and download a
bedtime story for your child, complete with moving pictures. 11 will even be able to pay
(or goods when you shop via wireless electronic funds transfer. in short, the nev.' mobile
handset will become the single, indispensable "life tooL" carried everywhere by every
one, just like a wallet or purse is today,14
B. Benefits to Providers
In a dynamic, rivalrous market such' as the U.s, telecommunications nlarketl firms com
pete aggress:vely to provide neW goods and se:vlces to COnSU!11CTS, First-mover advant.:tges can
be importa,nt in many telecommunications markets so the profits from esta~lishing an carly lead
in these markets can be substantial. Of course. the precise value 10 U.S. operamrs of additional
spectrum for 3G technology is uncertain. A simple analysis of the existing wireless industry in
dicates that, in thc aggregate, U.S. wireless operators earned $23B million of revenue per MHz
under the existing spectrum allocation in 1999. At simifar rates, an additional 150 MHz of spec
trum could bring an additional $35.7 billion of service revenues per year, depending on. what
services are provided. Mobile datu technology may also facilitate new business models for pro
viders, as revenues from 'adVertising, licensing content and applications providers, transaction
processing, and billing may augment or replace tbe traditkmal fee-for-service (subscription)
j
model.
A second, morc precise measure of the order of magnitude' of provider benefits is given
.by the recently completed auctions for 3G spectrum in Europe. Auctions in Germany and the
U.K. raised $46 and $-35 billio!1~ respectively, representing 10lal payments in excess of $500 per
inhabitant in these two countnes. An auction in the Netherlands raised about $2.5 billion, or
$ j 50 per inhabitant Table 1 describes the results of these auctions,
14 lntcrmH:onal TeleJ;:or:'lr:lu~katjon Cnino, ''The Next Generation of Mobile Communications," October 10. 2QO()
{jilin :/.'w'\\'\ \', it\l., in:(~ Jr. t iw;\,lt i ~t3 I'd \!, eniindcx. h\In I).
�Table 1. Comparison of European Spectrum Auctions
412712000
End Date
8/17/2000
712412000
Net
Proceeds
$35,4 billion
(£22.5}
$46.2 billion
(98.6 OM)
S2.5 billion
Net
I?(OCHd~;
$599
$503
$158.4
5'
6"
:5"·
per Caolla
."J<lmbe~ o~
licenses
Fees Paid by Win
ners
Wr,niflg :::irms
{parent company
country 01 origin)
$7.1 hiUion
$7.7
bU,~n
$0.5 b\:!ion
,
•
Vodafone Airlouch
•
BT Cellnet (UK)
Orange (FrartCo Tele
rom)
One20ne (Deutsche
Tefekom)
Te;esystem Interne:
lional Wireless {Tele·
(UK)
• Deutsche Telekom
(Gfmnsny)
•
•
Libe:1el (Nefhe;ftJTlds)
KPN Mc~ile (Nether
• Viag Te!ekcm (British
lands)
Telecom}
• Dutchlone (Nef.her~
• Manflesmann (Voda
lands)
!ono)
.' Telfort (British Tele.
•
• Telefonu I Sonera
com;
(Spain/Finlend)
• 3G Bluoconsorlium
•
• E-Plus (Netherlands)
(TeJe Danmalk /
globe - Ganado}
• MobllCom (Genn8nyJ
Deutsche Telecom /
Sc/gacom)
I France Telecom
Source: UMTS Forum; populatiOn figures (rom SU;tiSfiCa/ Abstrocf of the United Stotes, HUHi. All figur.es con
•
verted 10 current U.S. dollars.
.
"National licenses
~'Each opera:ot purchased 2 sets ol2x5 MHz llCe:tiSes. The result is 6 national licenses.
"'HNationallie-enses
The most a company will be willing 10 pay 10r a spectrum licc!ise is the present value of
~
,
,'16
',
t1 f uturc prOtlts (Iter tax) It expects to rnak "HEllig t l' I'
lC
u
e tram '
l1S tcensc.' 1n a competttive aL.;C~
tion with ~ult~p~e bidders~ the f!ice paid by eac-h witini.ng firm \\:ill come close to,. but wiH no:..
exceed, ttlJS wIllmgness to pay.. USlflg the data from 1able 1, thIS suggests that wmners of the
Gennan uuctions l for example, expect to earn at least $7.7 billion in present value of profits from
operating 3G.licenses in Germany. Annuitizing this p-resent nllue at a f 5 percent ra~e suggests
U The present value of expe<!cd future profits is the Sum of all expected fU1ure profits discounted by the projec!'s
COSt of enpitaL future pl'ofits are all cash Oows from operating !he :service less operating costs and additional in
vcStments required 10 brin~ the service onhne.
.
14 A more refined view also eonsl{lcrs the value of profits fo~goile If the finn does nOi win the licen~e Since 3G is
partly a substitute for existing services, incumbem firms must consider their expected reduNion in profits from IG
. and 2G sen'ice., in the case in which they do operate a 3G license ana- in the case in which they do not operate a 30
license. Fo: example, incumbents without the new technology may lose customers t() emrums that provide the
:lev,.er services:. In theory, this can incrense a firm's willingness to pay for the license (and will depend on its exist
ing, mar;;et share wilh the Cl:rrent technology). By contrast, new entr.mlS consider only their expected fu;ufe proEtf>
from operating using the license.
(1 11 is possible for a firm to ovcrpav jfits expectation and (hat or other bidders is 100 oplimislic
' -
9
.
�that each of the six winning firms expects future
year,li
ancr~tax
profits in excess of $1 billion per
\Vill 3G be as profitable for U.S. companies? While these auction results suggest that
European firms have high expectations for 3G, European and the C.S "vireless markets differ in
important ways. First. three of the bands under consideration for 30 applications in Jhe United
Statcs-the 306-960 MHz, 1710-1850 \1Hz, and 2500-2690 MHz bands-are currently used by
analog cellular phone providers, the Department of Defense, fixed wireless providers, satellite
broadcasters I school systems! and private video teleconferences, The u.K., GermanYr and the
Netherlands. by contrast, did no! face significant incumbency problems v.:hen sp!!ctrum was aue~
lioned for 3G applications,
';\1oreoyer, "",':ireless Internet access may be less popular here than abroad because D5,
prices for wireline Internet access arc already lo\v. The average monthly U.S. price for 30 hours
of Internet access at off~pe:1k times is $22; the average monthly price for
OECD countries IS
$3SY' To th,; extent that \Yirclcss and \vireline Internei access are substitutes these price differ
ences could recuce the potential mnrket for 3G services in the United States. On the other pand,
wireless and \\':ireline Internet access may be complements, a.nd providers could choos~ to pro:
vide combined service. or course, finns in the United States and abroad may change their pric~
ing strategies for wireline Internet access once 3G services become available.
all
j
Finally, finns' expectations about the profitability of 3G may change. Carriers willicam
more about the technology an.d about consumer demand between now and a U.s. auction. If 3G
applications developed within the next 2 years lurn OUt to be highly successful, carriers may de
cide that U.S. licenses arc more vaiuable tban previously thought Firms that win. 3G licenses in
other countries may also vicw U.S. licenses as more valuable if bargaining power with equip
ment suppliers and learning-by~doing decreases anticipated costs. Additionally; as information
about 30 emerges, financiul markets' willing:i.ess to finance license purchases may change.
Early eviden~e suggests that financial markets are not as willing 10 finance European 3G licenses
as firms had anticipated. After bidding an average of $7.7 bi!lion for German UMTS licenses,
companies including Deutsche Telckom have Seen their credir rulings fall. France Telecom's
credit rating was lowered from AA- to A after it supported winning hidders in the U,K, and
Germany. (Of course, 6cse do~ngrades may reflect Other factors as welL) A ratings downgrade
ofthig son typically increases 3 fiml's cost of borrowing signifieantly, Macroeconomic changes,
too, may have an impact OIl finns' cost of borrowing. A significant increase in U.S. interesl
rutes, for example, would likely depress finns' aids.
13 Besides the cost of the license, firms will h;;ve additional capital expenditJres to operate their ne:works in Ger~
mallY, Cash fiow from ot"crntit1!1s mil'll cover tl:c expense :~o;, :l1is as well,
\9 GEeD, D:rec!orate of Scic:1ce T<:tbnology und Industry, H:ntcrnct Access Price Comparison," September:;; J,
2000 (~'r.':.':';:. <ll'cd. (If-gIJs: i/~ti;i:: cn! i).
10
�C. Benefits to U.S. Industry
Besides the direct benefits to consumers and 30 providers, the introduction of this tech
nology could Imleash a wave of secondary innovations in related goods and services. and to fos
ter the development of new "technology corridorst , sueh as Silicon Valley, The spHlover bene
fits to the U.S economy could be significant.
The emergence of the Internet economy, particularly in ;-he United States, shows hm\'
technological innovation can generate large social 'rei'Jnts, Communication.) protocols such as.
Tep/IP and HTML provide a standard platform :or exchanging information between computers.
Opening a new platform stimulates investment not only for the provision of the necessary hard- ,
warC' and sortware, but also for applications and content delivered over that platform, Wide
spread diffusion of these communications standards has given rise 10 entire industries devoted to
providing Internet content and commercial services to consumers and businesses, Startup com~
panics, along with established retailers and information services, have created hundreds of bil
lions of dollars of shareholder wealth through Internet-related activities. Employment in severa!
IT sectors more than doubled between 1993 and 1999. 20 These investments in IT and .comple
mentary $CrVH::es have been major contributors to productivIty Improvements over the latter half
OflhcI990s,21,
,
Importantly, the sectors producing these technological innovations often cluster geo~
graphically. One reason is that knowledge spillovers betwee:l firms, and spillovers between
firms ilnd academic institutions, arc particularly ,significant in high-technology sectors, A recent
study of kn0wledge flows used patent citations to show that these spillovers tend to be geo~
grapnically localized, even af1er controlllng for pre~existing research activhy. 22 In the technol
ogy sector much of the relevant, knowledge is '''tacit!'' rather than explicit! making close social
23
. ties (between entrepreneurs and venture capitalists! for example) all the more important.
In
vestigators have sbown that spatial concentration of innovations was significantly higher in in·
dusuics in which knowledge generation-as measured by industry R&D/sales, the use of skilled
labor, and the importance of academic research-was particularly important 24 In shori) location
R
matters.
u.s, Department or Labor, Bureau of-Labor St::ui!nks, ")/ationa! Ern:p!oyment, Hours, <I:'ld Earnings," series
EEUOOlOOODl and EEUSOmOOJ.
21 Dale Jorgenson and Kev:n Stiroh, "Raising the Speed Limit: US Economic Growth in the Information Age,"
Working PUp<!f, Department o;Economics, Harvard Univc.rsity (May 2000); Stephen Qiiner lltlG Dar,iel Sichel, ''Tl:f
Resurgence orGrowth in the Late 19905: Is Inrormation Techno!osy the Sto~y?" Working Paper, Federal Reserve
Board (Pebruary 2000).
l2 Adam B. Jaffe, Manue! Traj:enberg. and Rebtx:ca He:1aerson, "Geographic Localization of Knowledge Spillovers
as Evideneed by Pmen! Citalions," QuartCl'iy Journal c:/Economics, VeL 108 (l993). PI", 577-98,
.
:'l Gunnar Eliassen" "Business Competence, Orsani41lional Learning, and Economic GroV.1I:: Establishing ,he
Smith~Schumpctc(- Wid:sell COImection," in F. M, Scherer and M. Pcrman, cds.• ElllreprCllCl1l'Shlj), Teclt/w/ogieal
, lnnovalion, una £c()Ilomic Growlh." Studies in 'he Schumpeteriatl Tradition (Ann Arbor:' University of Michigan
Press. 1992); Jacqueline Senker, "Tacit Knowledge and !\1ode!s of Innovation," industrial alla Corporate Change.
Vol. 4 (1995), flP, 425-77.
1( David 8, Audrelsch and M. P. Feldman, "R&D Spillovers and thc Geography of lnn(}valion ane Production,"
AmeriCan Economic RtJView, VoL 86 (l996), pp. 630-40.
:w
II
�Besides this acadeniic work on spillovers,' strong anecdotal evidence suggests ~hat
location can be important in the early-stages of high technology industries. Silicon .Valley is the
most famous example. Moreover, in Fbland-which allocated its 30 spcel!"1l111 i:1 March
1999-a vib~ant cluster of startups devdop:ng commercia! applications for 3G and existing
digital wiz-eless technologies has emerged. Nearly 3,000 companies in Finland are involved in
telecommunicutions and oilier IT industries, including work on wireless technologies and
applications ranging from bil1~payment systems to wireless portals and entertainment. Recently,
major companies such as Hewlett-Packard have chosen to base their ·wireless applications
development programs there, where wireless' penetration is the highest among the OECD
economics. (Sec Appendix 2 for a description of the Finnish wireless cluster.)
Economic clusters such as these playa major role in advanced economies.:5 Firms
within economic clusters are often able to perceive new customer needs more clearly and more
rapidly. According to one important study on economic dusters, "cluster participation also of~
fees advantages in perceiving new lcc1mological; operating, or delivery possibiilties,,,26 Moreo~
vcr. new business fonnation occurs more readily in economic clusters, because the barriers to
entry are lower there than elsewhere. The required assets, skills, inputs, and starr are readily
available at the cluster location and are more'easily assembled there?'
Finally; it should be noted that first-mover advantages are particularly important in mar
kets with network externalities.1!! Many In1c~et markets display strong network eXlcrnalitics,1.9
and wireless Internet markets may be subject to the same effects, In short, to promote a domestic
cluster of internationally competiti\;e wireless finns, it is essential that adequate spectrum be
made a\'ailable for commercial use,
.
3. THE NIttI) fOH ADEQUATE SPECTRUM
, If the benefits to firn1.s from operating 3G are so large, why aren't· U,S. mobile operators
and o\vners of other spectrum alrea~y scrambling to offer this service? No law pre\'ents provi'd
ers from using their currently licensed spectrum for mobile data services such as 3G. In princi
ple, ;some (or aU) of the roughly 200 MHz currently in use for wireless telephone technologies
could be convened by its owners to provide 3G service. However, there ate several reasons why
converting currently used spectrum to this new technology may he costly.
Michael E. Porter, "Location, Compe:ition, and Economic Development: Loeul Clusters in a Global Economy,"
pp. 15-34. ,Porter defmes economic dusters as "geographic con·
centraW:IOS of lnlerconoecled companies, spedalized suppliers, service providers, firms in related industries, and
associated institutions (e.g.• universities, standards agencies, trade associations) in a particular field thal compete but
also coopera!e.'· See also Ponc" The Compr!filtw: Am'an/ug(! o/Nariol?! (New York: The Free Press. 1990).
2/. Porter, "Localicn, Competit:on, and Economic Devclopment"
2:
Economic Dltve/cpmclIf Journal, VoL 14 (2000).
17
Jbid.
Michael L, Kh,tz arid Carl Shzpiro, "SYSlems Competitlor. and Network Effects," Journal olEcanomic !'crspcc~
Vol. S (1994), pp. 93-115,
:'J For example, consider !his explanation from CEO Meg Whitman for eSay's dominance of the online-auction
busi!"less: "We han: the largest r:larketplace by far. Thai dOC5 matter because the sellers want to be where the buyers
are and the buyers W,WI to be where the sellers are." Wall Sweet Joumol, November 22, 1999.
li
lives,
. 12
�First, as ba!1dwidth becomes in~
creasingly scorce, the costs and prices for
current mobHe phone services such as voice
will increase". Second, much of the existing
capital stock would have to be replaced.
Through the cnd of 1999, wireless carriers
had invested over $70 !>illion in capital
cquipmcm (see Figure 7). A carrier that
tried to use its cxisti:1g spectrum fo!' 3G
would fHld some fraction of its current
capito! stock obsolete. Third, the allocation
of new spect~um "licenses could luwer the
cos: of entry into the wireless market, re~
dueing costs by increasing competition.
Figure 1, Cumulative Capita! Investment of
U,S, Wire len Carriers by Year·End f1985
~r---------~1~~"~----------'~1
'"
ro
ItO
~so
:5",
;:.
.!2 30
a
oro
..
,
U.,
JM
:
·
·
·
·
u
Moreover, physical capacity limitations may set in with wireless technology before the
consumer demand for additional bandwidth is exhausted, Although technological improvements
have increased the amount of data that can be transmitted per unit of spectrum, transmitting more
wireless data will. at some point, require allocation of more spectrum for these services. 30
Given these considerations, the provision of additional spectrum for hjg:h~speed applica
tions should be considered a c-Ost reduction for mobile data services, Depending on competitive
conditions) (his cost reduction could lead to substantially lower prices and higher quantities for
consumers.
Cncertuinty itself can also cause firnls to delay investments and hinder the diffusion of
new technologies. 3l In the current environment, U.S. firms face th~ee types of uncertainty:
. regulatory, tl!chnical, qnd business. Whether and when the FCC will allocate new. spectrum li
censes are the key elements of regulatory uncertainty. 1f firms are required to use existing spec
trum to introduce 30 services, technical cnccrtainty will be high, because equipment manufac- .
turers and service providers must Jearn to squeeze both existing and 3G applications into existing
bandwidth. Customer demand for new services is the major source of business uncertainty. Be
cause the demand for mobile data servIces will be dependent on the applications de\'cloped for it
(i.e., the software that will run on the 3G hard\\:are). the timing of customer demand must also be
considered. The decisions made by sof1\\'are developers will depend on their estimates of the
size nfthe uscr base, If developers believe that the user base will be small or slow 10 develop
because of high service' prices or because service providers themselves will delay inveSlments
they will choose 10 develo~ fewer applications. This may, in turn; stall the development and
diffusion of the teciu)ology. 2
Splitting cells requires vcry expensing uddit:onal ne~w{)ri< bfrastructufc, especially in congested ureas ,(Berek, "A
Bricf Ilistory of reS"), Gokimna Sachs (W:re!ess Data. 2000) points oul that in large metro areas, c:ardws arc al
ready hiHir;g, capacity constrabts. This allows 1.hem \0 sustain higher prices.
}; Michael E. Porter and A. M1c~ae! Spence, "The Capacity Expansion Process in a Growing Ongopoly: The Case
of Corn We: Millir.g," in J. McCall, ed., The Economics ofInformation and Uncertainry (Chicago: University of
::hicugo P:es~ 1(82).
~; Kat?; and Shapiro, "Systems Competition and Network Effects."
J(
w
13
�In short, while some mobile data services would probably be forth<::oming without the
provision of additional commercial spectrum licenses: one can assume lhat the amount would be
dramatically lower (al significantly higher prices) without adequate spectrum,
4. COSTS OF J)£LA Y
The process of allocating additional U,S, spectrum for 30 applications is complicated by
the presence of incumbent users. The costs borne by these incumbents must be figured into any
calculation of costs and benefits. ;.Jonet!1cicss, the potential benefits from the allocation of ad~i~
tional spectrum that have been docun:ented in this paper are substantial. Each year of delay in
introducing 30 wi:1 deprive consumers of the surplus that technology will generate. Producers,
of cocrsc, will also lose the ·potential profits rrom providing 30 devices and app~ications, Fi
nally, the U.S. Treasury will lose the interest on delayed auction revenues, which could be s~b
SllintmJ.
Perhaps the most important cost of delay is the forgone benefits from the creation of in~
tCfnatioMlly competitive industry dusters dedicated to 3G products and services. As discussed
above, these clusters are already emerging in Finland and elsewhere. The most important pro~
viders of wifeline Internet services-finns like AOL 1 Amazon.com, Yahoo!, and eBay-ure lOA
cated in the United States, For U.S. fim1s to develop similar leadership in wireless technologies,
it is essential that the supporting institutions be developed as quickly as possible.
5. COSCLUSIO~
3G applications promise subS121ntial benefits. In the United States., however~ parts of 'the
spectrum suitable for 30 applications are already in use, In judging the costs of delaying 30 de~
velopmcnt, it is hnportan: to take into account not on!: the expected revenues from auctioning
spectrum lic~:nscs, but also the expected consumer benefits, These, benefits are likely to be sub~
stantinl-on the orde~ of tens ofbi!lions of dollars per year. f.urther, greater delay in providing
additional spectrum licenses for high~speed applications rcdw.:es the iikelihood that U,S, industry
wilt take ,the lead in developing wireless technology and appiicati.ons..
·14 .
�AI'PE::o.:DlX 1. CHARTS AND T AliLES
Table A~1, Schedule of Allocations of Commercial LIcenses to 3G Spectrum
Country
Date Scheduled
Comoleted
Mon:h
Y~llIr
Comment
Type
Mar
1999
,
Beauty Conteat
•
Mar
Apr
2000
2000
,
Beau:y Conies!
Auclic'1
• 4: nalionallicenses
• 5 national licenses
Beauty Conte~d
•
•
?
Ff~;and
Spain
United Klngdol)1
v
4 national licenses
awa~ded
awarded
Jun
Japa.-"
2000
v
·Jul
2000
y
Auction
Germany
Jwl
Jul
2000
2000
,
Aucton
Auction
France
Sep
2000
Beauty Contest
Sweden
Italy
No,
Nov
2000
2000
Year
end
Yea(
end
Jan
2000
Beauty Con:est
H1brid Auction! Beauty
Contest
Beauty Conlest
The Netherlands
New Zealand
-
South Korea
Singapore
Australia
lama;"!
U,S
Early
Sep...
2000
2001
2001
2002
•
•
•
•
•
•
•
•
$35 bililOt'!
3 licenses
awarded; service to
commence 5101
5 nalional licenses
$2.5 billion
4 national licenses
6 national licenses
$45 billion
4 nationa!licenscs
fixed cost of FFr
32,5 billion ($4 bil- '
lion} per license
4 nationa~ licenses
Hybrid Auction I B!'l8uty
Conlest
Auction
undecided
auction
Source. UMTS Forum, August 18,2000 (www.iJM:s-forum.o:o}.·
Note: In a beauty contest, license winners aYe ge.ierally chosen by government regulators on the basis of tnns:
competil1g business plans. Firms' business plans include desCriptions ot s(:Nice offerings, pricing, geographIC (:O\I$r
age, and timing of new teChnology inlroduction,
15
�Table A-2. Wireless Subscribers as a Fraction of the Population in G7 Countries and Scandinavia
1995
Norway
Sweden
Italy
Japan
5itO"/;
486
U.S,
Germany
Canada
61,8
57.6
52.5
44.9
40.3
19,1
:)4,9
25.5
16.9
17,6
8,2
9,6
2.5
11.8
4.6
8.8
France
1939
65,0%
46.5
356
377
25,6
6,'
UK
Sour~e:
1998
19.9%
22,6
22,6
Finland
31,5
28.8
22,7
OEeD Telecommunications Qatabase, 61' October 2000 1M U.S. figure exceeded 35 percent
Table A-3. Wireless Subscribers, Inter~et Access, and Wireless Internet Access as a Fraction of
the Population in G7 Countries and Scandinavia
rinland
Norway
Sweden
Mob:le phones,
year-end 1999
65,0%
61.8
57.S
'la!y
Japar
UK
France
U.S,
Germany
Canada
Internet access,
\tJireless Inlemet subscribers,
mid·year 2Q9Q.~~~~~-"2000",,, estimates
42,5
49-4
50.3
1R6
20.S
32.7
26.6
22,7
1.4
11.0
49.8
18.0
41.8
52.5
44.9
40.3
34.9
31.5
3,7%
3,.1
3.5
2.1
7,9 ~
1.5
1,3
1.2
NfA
Sources: 1999 OECG -:-elecommunieations Oatabase: Nielsen Netratings, September 7, 2000; Inlema:tiot,al Data:
Corporation-. S:atistica! Abstracts of the United Slates, 1999; FOt~e$ter Research, Inc., "Europe's Mobile Internet
Opens Up: December 1999; Goldman Sachs; (.} Estima:es for Japan are frem press releases claiming that i-mode
has 10 millIon subscribers,
.
16
�ApP£l\UlX 2. CASE STUnY Of FI:'\NISH WIRELESS CLUSTER
Michael Potter offers a framework for analyzing the sources of compctHivc advamage in geographi
cally concentrated industry cluslers such a~ the Caiifon'lia wine industry, the Dutch flower industry, or
Silicon Valley's high4cch indu51ry.33 !-lis framework identifies 4 complementary (aclors that promote
"Iocational competitive advantage," \\'hich is characterized by aoo\'c-avcrage productivity and profi!ahil~
it, among industry players in a particular region. These facfOrs are (t) the context (or firm strategy and
ri\'alry, (2) ruetOr (input) condition, (3) demand conditions, and (4) the existence of related and supporting
industries. Figure A-J diagrams the framcwork. used here to analyze the emerging Pinnish wireless
applications duster, The Finnish wireless industry displays ad""3J1ced characteristics in each of the four
areas,
Figure A-1. Sourc,es of Locational Competitive Advantage
Context for
Firm Strategy
and Rivalry
Factor
(lilput)
Conditions
Factor (input) quantity and
cost
- natural resources
• hum<ln re$OU(ces
~ capitaf resources
• scienoo and technoJ(}g!eal in.
frastrt,lclu '0
• informatiQn infr.lslrl,l~li(e
• p~ysio::at mfrastrudure
• acministr..live infraslruclure
Factor quality
Factor specialization
A local context that en
courages appropriate
forms of investment and
sustained upgrading
Vigorous competitior.
among locally based rivals
Related and
Supporting
Industries
Demand
Conditions
.' Sophisticated and de
mandlng local cus~
tomer{s}
Customers' needs that
anticipate those else
where
Presence of capable,
locally based suppli
ers
Presence of com
petitIVe related in
dustries
Unusual local demand in
specialized segments that
can be served glObally
Reoroduced from Porte'. "location, Competition, and Ecooomic Development"
)) Porter, The Compel/lire Adt'(Ht;uge vjNafi{)lts anc PO:1er, '"u.cmion, COf'!lpetiiion, and Economic Development."
17
�Finland is a eountry of 5.2 mi!lion people situated between Sweden and Russia, with per capita GDP
of$23,780 (1999), or- 69 per~ent of the U.S. per cllpila ODP in purchasing power parity terms.
Finland has had competition in lelccorilTnUliications throughout the 2011> century, The national Post
and Telecommunications ne\'er enjoyed a monopoly, After the U.K" Finland was the first country to de~.
regulate in several areas related to telecommunications: the manufacture of cnd~uscr terminals. basic tele
communications services, and data services. Today there are one hundred telecommunications operators
in Finland, or two operators per IOD,OOO residents.
Two mobile operators, Sonera and Radiolinja, have actively developed and launched new mobile
services and applications. 111is has created a favorable environmcnt for small companies in related areas,
Currently the Finnish telecommunications and IT seelor is populated by approximately 3,000 firms. A
consortium of more than JO smaller operators has recemly been gramed a license tQ build a competing
mobile network.
Bcsides domestic competition from Finnish caf1i~rS and equipment companies, finnish firms face
staunch comp~tjtion rrom neighboring Swedcn.
Factor (Input) Conditions
Finland was the first country to ,allocate licenses for third~generation wireless net\\'orks. These Ii·
censes wen: granted free of charge to Sonera, RadioHnja, 3G (a consonium of local phone t:ompanies and
Swedish "Kc:com), and Tdia {Sweden).3! Some of the fimls awarded 3G licenses plan to provide mainly
network opel1ltions l leasing their assets to other firms that will provide consumer marketing and service.
Tlte puhlic sector In Finland has bee!} supportive of R&D in telecommunieations. Tekes, Finland's
National Technology agency, 1:3s jointly spoll:;ored a progmm, "TLX: Creating a Global Village," with
1he private sector and Finnish research institutes. 'lb:s program has provided PIM 710 million ($120 mil
lion) over lhree years to fund technology dcvt'::opmcl1t, including d and 4th generation wireless systems
and wireless vuJuewaddcd sc:vicc$. Tckes has al~o funded the "Electronics for the Illformation Society
Programme," .:md the Academy of Finland has sp::J:isorcd a research program in ''Tdctronics.,,36 Tckcs
also l\mds R&D program:. conducted in m:<lll H:1d medium sized cnterprises,31
r
A' recent Financial Times Survcy of Finland indicates that private sector funding--outside of the
major equipment providers and carriers-for mobile applications has become widely availablc as welL In
this survey. a partner at venture capital I1rm Eavitcc claims that $2 billion in venture capital funding has
been made available in the last year .and a half.)
~ The major source for the following section is. Finland Ministry of Transport and Communication, "Telecommuni
cations StatistiC's 2000,"
)3 "Finland opposes auctioning, because it considers this a fonn of indirect taxation, 'slowing down the spread {;if new
tedlllologi~." ibid.
'
)6 Tekes Web site (www.r""kesJi).
31 \,ijay Maheshwari, "Survey-Finland 2000: All Wired Up and Going Many Places," Financial Timt!J, July 10,
2000.
31 Ibid.
1&
�Demand Conditions
Finnish \;Qnsumers r.1ay be the world's most sophisticated consumers of mobile technology.
A~
the
end of 1999, mobi;e phone penctra:iofl in Finland reached 65 percent, and by August 2000 penetration
reached 70 percent::<) TIle average hous'chold has 1.3 5 mobi Ie telephone connections (subscriptions). In
early 2000, 20 perc-enl of all Finnish households abandoned their wi:'ed telephones aitogether and opted
only for mobi:c phones. Wireless revenue exceeded wireiine revenue f9r tbe Erst time in 1997.
In ~ 999, more than 650 million short message services (SMSs) were sent tn Finland, SMSs are value
added mobile services that use the narrow-band data transmission capability of GSM. Examples of SMSs
include Instant news, financial informarion, or sports reports, and online chat
.
.
Because of its high mobile penetration rate, Finland has become a test-market for WAP (Wireless
Application Protocol} applica:iolls. Applications developed in Filtland include using phones to l1:ake
vending m<lchine p~rchases and 10 purchase time at parking lots, sending and recei'ving e-mail. and read"
ing public transportatioll timetables. As a result, major international cQrporations and venture capitalis:s
'have identif~ed Finland as the development site for mobile phone app!icatior:s. Hev.."le!l-Packard has
headquartered its WAP development unit in Hclsinki.4u Germany's largest technology company,
Sicrr.cns, has at'lllounced that it will locate a new mobile data unit in Finland. Extensive venture capik11
l11o:tey has been distributed in Finland to create mobi!e Internet productS. 41
Related Ilnd Supporting Industries
Nokia, the world's largest producer of mobile handsets, is headquartered in Finland. Formerly a
widely diversified company, Nokia has focused exclusively on mobile technQlogy since 1992, and has
shed its non-mobile businesses. Nokia has become onC of the world's most competitivc telccomm~njca*
lions equipment suppliers. Its market capi:alization of nearly $160 billion is second iargest among tele..
com t.'quipment producers al~d exceeds that of Lucent, Ericsson, Siemens, Alcatel, aud Motorola, and rep
rese:;ts about 65 percent o:thc Helsinki stock l!1arket's capitalization,42
.
~Q Mbistry ofTrnospml and Commu~ica!ion5 Press Release, August 17, 2evO (\',ww.mi;\tc.fi),
.n Teto Kllitlinen, "Finland· WAP Pioneer," Octobc: 6,2.000 (v"yv,.wHrlano.c{lI1:)•
.n MjheshwlIri,
41
Source
W\V",
"All Wjred Up and Going Many Plz;:es."
hedl!¢:>g" as of October 6, 20DO. Nokia s~ares also trade 011 the New York Stock exchange.
19
�Philanthropy in the American Economy
A Report by
The Council of Economic Advisers
November 25, 2000
�..
Philanthropy: in the Amcricnn Economy
A report by the Council of Economic Ad.visers
Executive Summary
As a
follow~up
to the 1999 White House Conference on Philanthropy) thiS report provides an
economic:, analysis of philanthropic behavior in the United States. It discusses trends in giving
over the past several decades and highlights the economic explanations behind the observed
increase in donations. The report also di.scusscs possible future directions fOf philanthropy and
how even greater giving might be encouraged. Among its main findings arc:
• CharitabJe giving reached
1I
record high in 1999. In 1999 Amencans donated over $190
billion, This represents an increase of 41 percent since 1995. Furthermorc t giving has increased
sharply as a fraction of the Gross Domestic Product. rising from 1.7 percem of GPP in 199:1' to
2.1 percent in 1999.
• Growth in lhe income and wealih of fhe population explains much of this trend, A \'erage net
worth ihr the sample of families we analyze g:cv.' by an estimmcd 28 percent between 1992 2.ild
1998 and average income increased by 15 percent oVcr the Simie period. BOlli income and
wealth are strongly positively related 10 the probability und amount of giving.
• Indi\'idua! giving accounJs for the largest frac1ion of ail charifable giving. In J ')98, 70 percent
of American households made a cbaritab1e contribution and individual giving accounted for 85
percent of 1111 dor.atlo)ls. Althougb the largest fraction of giving is attributable to indiv:duals) the
fastest growing component of philanthropic activity . .vas giving by foundations, whleh rose by 72
percent from 1995 to 1999.
• The elderly are more generous donors than any other age group. Controlling for differences in
income and wealth, those aged 65 and over arc approximately 25 perccn! more likely 10 make a
charitable contribution than younger individ~a:s, and ..vhen they do give) they give $500~$600
morc per year on average, FurthemlOre~ because these calculations do not include chnritable
bequests, the true difference in the total amounlS give!l by the elderly arid the non~elderly is
likely to be even larger.
• Single women are more likely /0 give than single men. When differences in economic
:;csources me accou:lled for, single women arc significantly more likely to make charitable
contributions than are single men. Within the population of unmarried women, womcn who have
never been married are more likely to give than widowed or divorced women.
• African Americans are morf! like(l' to give !hun whiles, After accounting for differcnces in
income, wealth, and education, Arric3:1 Amc:-icans are more likel)' to make charitable
contributions than whites, and on average give approxim8tcly the same amount as white
Americans. Other evidence suggests that minorities are under~used resources with respect to
philanthropic giving.
�• The New Economy has hrolfgh( changes in the methods of givil1g. The Internet has affected
philanthropy as it ha~ so many aspects of American iife. lnternet sites nov,l provide infonnation
ubout charitable organizations~ help match donors with causes, and provide a convenient way to
make contributions. Lc~sons learned from the venture capital sector are also being applied 10
philanthropy. Although stili in their infaacy, these dtvelopmen1s have the potential 10 increase
the umounl of giving anc 10 impro,:e the efficiency with whieh grants ·are used by the recipients.
• The aging of lite baby boomers is good news for philanthropy. Because both older Americans
and those with greater wealth give more) the aging of the baby boomers and the wealth of that
cohon point to the likelihood of a dramatic gro\\1h in giving, pcrhaps increasing by several
hundred percent over :he next couple of decades.
• The Administration's la>: policies will likely a/so lead In increases ill giving. Both cconomic
theory and empirical studies indicate that Americans respond to financial incentives' to give,
Through the tax deductibility of chari1able contributions} both inler vivos gifts and bequests urc
increased in number and size. Recent proposals 10 extend the deductibility of donations 10 those
who do not itemize on their income tax returns, and to simplify other aspects of the tax code l wiU
likely result in further tncreases in giving. Evidence suggests that eliI1!inating the estate tax will
decrease charitable bequests,
'
2
�INTRODUCTION
The tradition of philanthropy in the United States is as strong as ever.
Americans
donated 0 rtcord $190.2 billion in 1999~ Adjusted for ini1ation, this represents a 41 percent
.incrcDsejus: since 1995, and a more: tban'doubling since )980. Americans also gave generO:Jsly
of their tim\!. although volunteerism is not the focus of this study, In J998, citizens gave an
estimated 20 billion hours volunteering for charitable organizations, In fact) ovcr half (56
percent) of adults volunteered that year, the highest percentage in at least a decade, These gifts
of both time and mOlley help s~pport an estimated '1.6 minion nO;lpl'Ofit organizations and
religious congregations in the Lnited States.
.
Philanthropy is at an important crossroads in its development. As our nation becomes
more diverse) \vomen and minorities will likely piny a more prominent :-ole in charitable giving.
Technology is also ch~mging philanthropy. with the JIl:crnct providing ncw ways to give.
Moreover) new str<1tcgles arc being used to increase the efficacy of charitable work l such as path~
breaking partnerships between nonprofits, government: and business, as well as new-concepts in
giving such as those embraced in "venture philanthropy."
_ In October 1999 the President and the First Lady hos~ed the White Ho'Usc's first
Conference on Philamhropy to highlighl these trends in giving, and to emphasize the importance
of our philanthropic tradition and the responsibility of all Americans 10 teach and sustain that
tradition. At the conference the President asked the Council of Economic Advisers to prepare a
report on the role of philanthropy in the economy ilod on woys to encourage Americans to give
niorc.
This report provides that assessment. It begins with an o'.'e!"vicv.' of recent trends in
giving, pointing to the rise in giving relative to the size of the economy in recent years. At the
same :.ini~; however, th'.! report provides a cautionary analysis of individual giving, suggesting
that Americans may not be inherently more generous than the),' have been in the past 1n
p2r:.icular~ the amount that people give at 'any panicular level of income and wealth appears to be
about the same as in the past, but the sheer amount of wealth has increased dramatically) leading
to an increase in charitable donations. The New Economy and the explosion of wealth have also
fostered new metbods of giving that may result in even gn.::u\er contr:hudons'it. the future, To
ensure that the current high levels of giving continue even in limes of slower economic growth. it
is important that we invest now in strategies that encourage future philanthropic behavior.
I
3
�RECENT TRENDS IN GIVIl'iG
As background 'for further analysis, t~is section proviCes a concis~ overview of important
recent trends in charitable giving.
Overview
Philanthropic giving rose by OVer 40 percent between 1995 and 1999, fa $190 billion
This was JaSler rhan aggregate economic growth and giving as a share of GDP has
inc:.reased to levels close UJ those last seen in the i 960s
Totnl philan~hropic givIng has risen strongly in the past 5 years, increasing ove:- 40
percent from $:34.7 billion in 1995 to $190.2 billion in 1999, using inflation-adjusted :999
dollars (Sf:: Chan 1),' This lncrease is equally impressive when compared .to measures of
'eco!lOmic gro\\1h. Since ]995) 'growth in charitable giving hus oulpaced even ou:' s~rong
cco;)omic growth with the aggregate level of giving rising relative to t~c Gross Domestic Produc1
or GDP (51!>! Cha!1 2). This recent increase has reversed a decline in 6e early 1970s that left
chadtab;e giving fluctuating in l:.I range roughly around 1,75 percent ofGDP for two decades. At
a ratio of 2, 1 pe::cent in 1999, giving as a share of GDP has flea:!), re1ume<:i to the highest levds
of the 196(:$,
.
Chart 1. Total GiVing,
Chart 2. G.virg as iii Stwe Of GDP, 1960-99
1960~99
"
w,r---------------------,
----------------------,
"
1.'
,L-.~
__________________
"
"
"
~
"en
'-----c-~--~~------'---'
191)0
1970
1960
""
Sources of Giving
individual giving remains the primary source of American philanlhropy. w!lile g£fh by
foundalions have shown [he las/est growth
I AAFRC Tr!lSt for Philanthropy, Giving USA, 2000, Giving, by jndividual~ aac COrPOf:ll;ons' tn the years 1998 and
1999.is based on projections from Giving USA. Pr~ie(,Led va;ues are furye!iol:s of the levels ofpe:sonal ir.come and
the value of the stock market at (he end of. the year. Conclusions t:ase~ oa these :'lumbers shOJld therefore oc
viewed with caution. For our calculations in this report,. !10minal figures were infla:ior.·adJus:ed using the CPJ-U·
RS series v.'hcre available (19T(, to 1999) nne the C?[wU series for prior years, Giving USA uses the CP1-U series
only, so the inf1ation·adjus~cd figures presented :n tha: report d:!Ter somewr,at from :hose presented here. When
citing other research, we use the CP:~U it, an altt:mp: to be eOI:s.i~tem Wilh the assump~ions of these studies.
4
�including bo:h in"'/' vivos gifts and bequests, individuals accounted for nearly 85 percen"
of all giving in 1999, with the rest coming from foundations and corporations (see Chart 3), Totai
individual giving also accounted for the majority of the $55.5 billion increase in giving m
between 1995 and 1999, rising by $44 billion over this period, or approximately 40 percent
Ho\',:cve:, the fastest~g;o\.vir.g component of giving was giving by foundations, which increased
by 73 pe:"c-c:1l from $11.47 billion in 1995 to $19.8 billion in 1999. 2 Since 1960~ givir.g by
foundations has increased fivefold.
There has also been a large increase i11 giving by corporations) which increased by more
Ihan38 percent between 1995 and 1999 (see Chart 4),
Chart 4. T(eMS in Rea! Giving by Source
Chart 3. Sources of Giving, 1999
,r-------------------~
Irdlvi(lJa!s
$144 bllUCI'!
Corpolilbort
$'.1nl!.vr
Explanations for (he Inercase in Foundation Giving
ScV{:m! economic factors have contributed to the grow1h in fOllndatIon giv:ng. First)
. stocks comprise a large shure of foundations' portfolios, part:cularly among 1oundations with the
greatest assets. As the value of stocks increased sharply during the 19905, the aSSetS of
foundations did as well, Because private foundations must donate 5 percen~ of the value of their
2.ssets cach year to maimai:l their tax-exempt status, as the value of their endowments grew, the
amount given by foundations also increascd, Sl.:cond, the continued low inflation rate helped
maintain the real value of multi-year grants denominated in nominal dolhtrs. Third, a substantial
number of new foundations were established. Over half of all large foundations currently in
eXiSle:1Ce were fOllnded after 1980, and 30 percent were created after 1990. These newly active
foundations were responsible for 20 percent of the gro\\'th in foundation giving between 1997
I
~1~8
2 Of course. all philanthropy can be traced back to individuals. III addition to providing direct gifts to nonprofirs and
charilics individuals provide the seed money for foundations, and employees or olher stakeholc.ers provide the
resources for Cnrporate giving. To the extel:llhm foundations redistribute the funds received from individuals in the
s,amc year in which they afC r~cei\'ed, :hcre wi:! 00 a double-counting of donntions-both the donu:ion 10 the
foundmion and the fOJ:1d#ton's subsequen: donation 10 a charitable cause will be inch.:.de::l in total giving. An
approxlmanon nrcbe extcm aftois ovcr·couming can be derived by assuming that!<lUnd.nlons give away 5 percell!
of any increase in endowment Subtracting 5 percent of the value of individual .g:ifis to founca:ions fro:n thc total
givin!,; by foundations yields a reduction in giving by foundations in 1998 of approximately S1 billion.
5
�ImllHcations
Philanthropic activity as a percentage of GDP increased sharply in the second half of the .
1990s with the majority of this gro\\-1h corning through increases in individual gi"ing. This rapid
increase has allowed the nation to match the generous rates of giving as a fraction of GDP last
observed in the t 960s, If wetare to maintain these rates and avoid the declines experienced in the
197-0s, it i:; critical that we learn more about both indh'idu;;I! giving and the increasing
prominence of foundations.
As subscG.lIcnt sections of this report will
the strung economy is a key dct:::minant
of thC$C tre:ids. Di;ring the 1995-99 period, the econorny g:e\v at a:1 an:1uul rate of 4, 1 percent,
the unemployment rate averaged 4.9 percent, and inflation rCli.liiined low. Wealth also increased
dramatic~lly. Adjusting for inflation, the average net worth of American families increased f!'Om
$224,800 in 1995 to S282500 in 1998. The~e factors helped give Americans greater financial
resources to spend, invest, and don.ate to the causes they support. The rising stock market also
increased the assets of foundations, and because of legal requirements on distributions, the
amOunt foundations have given.
show~
In addition to assessing the extent 10 which the growing economy has contributed to the
increase in philanthropy, we also examine the possibility that the increase in giving may reflect,
in part, a new, more generous altitude to\vards philanthropy. We find little evidence to support
this hypo1hesis, Because this enormous increase in giving waS accomplished with little if any
change in individual generosity, initiatives designed to instill a greater desire to give remain a
potentially fruitful avenue to explore in an effort to increase giving fI.:rther.
THE CHARACTERISTICS OF INlllVmUAL GIVERS
Economic Mcans and Household Giving
. Perso/la! gh'ing is broadly based, with generosiry displayed hy filmiiies at all lerels of
income ana' \<veallh In terms of the tOlal /'C.'ue of churiwble gil'ing, however, a
disproporlionate share cames/rom those with higll'incqmex or considerabfe wealth
Charitable giving in the United States is a tradition practiced by a broad segment of the
population_ In 1998 an estimated 70 percent of households reported making a charitable
contribution. Even among those with incomes under 510)000, almost half (48 percent) made a
donation and the proportion of givers reached nearly 90 percent for families with incomes greater
than $100,000.
The breadth of charitable activity a'1d the variation in the resources of the donors suggests
that charitable giving can best be understood by examining behavior on an individual level. To
do so, we draw on the Federal Reserve Boa:-d's S'Jrvcy of Consumer Finances (SCF) using data
6
�3
from the years 1989, 1992. 1995. and 1998. We find that a small number of Americans are
responsible for much of the givIng, The 10 percent of respondents' making the largest gifts were
responsible lor 74 percent of the 10131 of all philanthropic contributions,
Not surprisingly. families in the SCF with higher incomes are both more likely to give
and give g:eatcr dollar amounts than lower income families. In 1998: 70 pcrcc.nt of families in
the lOp 20 percent of the income distribution milde a contribution of 5500 or more: and among
those who gave, thc average gift was $5,204. Bcea'Jse :he survey limits rcportltd gifts to those
over $500, the fraction of families making a comribution is undercs~imated, This omission is
likely to be particularly severe for the lowest quintitc where gifts arc expected to be smalle.r on
average. We find that just 9 perccJlt of families i!l the lowest 20 perccru of the income
distribution reportedly made contributions, but given the $50.0 cut~off~ the average amount was
substantial a1 $ 1.287.
Ahhl)ugh many studies of charitable glvmg have focused on 'the role of income, a
family's financial ability to make transfers is obviously detennined by other factors as welL In
particular, One would expect giving behavior to be strongly related {Q weulth. Because of data
limitations, this relationship has been ignored in many studies. By u~ing the SCF we can address
this issue. We find thaI when examined across wealth quinlile, very similar patterns to those for
income exist for both the probability and a:11O~Jlt of transfer: 69 percent of tho$c in the highest
wealth quir:,tile made a cO:ltribution, :;md the mean amount was $5,299; 10 percent of those b
lowest category ga\'e~ and gave $1,686 on average.
Chart 5. GfvilJg as a St'lare of Income and Wealth
"
I "'e
.
,
,
• 2
[h:?C"'h
1C.-40%
.().(jC'¥,
nO-flO%
eO.l00%
Chart 5 assesseS givbg relative to a
family's financial meanS. Both families making a
positive contribution and those making no transfer
are included in the chart. Excluding the lurge spike
for the !Ov.'est Income quintile/ the ratio of
contributions to income rises consistently with
income. Families in the 20~40 pt:rccnl range of the
income distribution on ll\'cragc contribute 1J
percent of their income; those in th.e highest quint:le
contribute 2 percent. If familics are instead grouped
based 0:1 their position in the wea;lh distribution,
we surprisingly find the reverSe pattern, the share of net worth contributed to charities actually
falls as net \vorth increases, Among those with positive net worth, families in the 20-40 percent
range of the wealth distribution gave 1 percent of their wealth to charituble organizations, while
the wealthiest gave just 0.4 percent. 4 Much of the wealth. held by the highest quintile is likely to
.
J The Survey nf Consumer Finances is a national survey conducted every 3 yearS by the Fedt:ral Rese:ve Board.
The data set contains information about household income, weallh, and demographic characteristics. It ulso conlains
information about whether the household made comribulkms: totaling $500 or moOf\' in the previolls year, and if so,
:he amoum. The survey has ihc unformnate drawback that this $500 minin:um or. reporting misses contributions
from families who gave less. ,Ho'h'ever, i! does allow IlS 10 examine the e!Tec!s of bo:h income and wealth for a
representative sample of the V.S popula!ion, lin imponact advamage_ ComriollliohS below the $500 limit are
estimmcd to actoullt for $-10 perc{Ont of lOla! giving.
4 11113 C{)mparison is based (ill;) 0:1 t:'{j~e w:th p05i:ive l()v.:ls of incor,!e and positive IcveJ.~ of wealth. A small
fruction of lumi;ies in the saMple heve n:!glltive net wortll. but make a contribution. 'rher,· ure also families with
7
/
�be in stocks. If these gnins have not yet been realized, wealthy individuals may not ye"t have
increased their giving in response to the~r newfound wealth. This hypothesis suggests tha.t the
giving of the: \vealthiest Americans may increase in time.
Chart S. Income, Weallh. and Giving oy Quintile
'oorT----~~----,_~----_rl
"
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fop :u,(t"'ft:
'E£J
!
•
'"
"
, ,,
,
, ,,
,
C
S"la'1l' oll"loor.e
ShIFt 01 \t(Ea:1'
Dcspitc the smaller share of net worth given to
charity by the wealthiest, the vas! majority of giving
comes from just such f2.mil:es '(Chart 6). The
wealthiest 2Q percent of families in the SCF made
67 percent of all charitable contributions. They held
81 percent of the wealth, and received about 47
percent of the income. In contrast, the bottom 20
percent contributed 3.2 percent of all donations,
held ~O.4 percent of the wealth, and received 7.4
pcrcen~ of the income,'
Sr,are Of Gi"ng
The Relationship between Income and Wealth; and Cbaritable Giving
Many factors affecT/he decision ofhow much to give. When we take into account tJ broad array
ofpersonal characteristics, we find thar changes in bOlh income and wealllI playa significant
role in defining recent trends in giving. Also, we find no evidence 10 support the view thaI
increases in giving have been driven by changes in fastes or preferences, leaving open lhe
possibililY offutllre changes in this direction.
'
The previous scc,1ion (\cparatcly examined the relationships between charitable giving and
the inc-orne an'd wealth of families, To obtain a mori! accum~e understand:ng of the factors that
influer.ce phila:11hropic behavior. it is nec,cssary to take into aCCoullt simultaneously a broad
array of characteristks, Ignoring important determinants of giving will likely lead to incorrect
conclusions about the observed relationships, For example, giving as a percent of GOP has risen
(Chart 2). Based on this observation alone. one might argue that Americans have become more
generous, in that they are giving a greater fraction of their incomes to charities. Ho\,\,cver, this
simple condusion ignores changes in factors other than in<.;ome that may have contributed to this
fiSC, In particular, it ignores any effect of the recem i;'lcresscs in wealth,
Beyond income and wealth, giving may also be hlOucnced by factors such as g~ndcr,
race, age, and education ~ we control for these factors in our analysis,6 Furthermore, because the
dat3 cover a span of years, we can also examine differences in giving over time, exclusive of
changes in these other facto!'s, lf1here are overall ine-rcasc-s in the propensity 10 give and/or,the
amount of gifts that are not explained by the observable- characteristics~ one could begin to
nega:ive income who ;nukc contribulions. To ;!Void the ditlicultie.& associated with thesc calculations. Ch:.rt 5 uses a
restricted .&k The numbers for the lowest quintile should therefore be viewed w:th caution."
! As noted in above, a substnntial fraction of total contributions (5~10 percent) arc not captured in the SCF because
of the $500 minimum, Thus the fraction {)f income and wealth donated is undereslimated_ If these smaller
coniribt:tions come disproportionately (rom lhe lilwest income (or wealt:t) quimiles, lnC'n giving as a share of income
(·.,<calth) wi!! be even lligt:or fractions amung the-se groups re1mive to uw other qt.ljn~ilC$,
(, The regrl.!ssion ar.alysis L1ses l10nlfncar specifications for income, we::l;lh, age, ad edu"Hion, and also il1cludes
con;rols fDr marital status lind number of children.
8
�contemplate the pO$sibility (If an incrt'a~e in gcnc:'osity, However, <1.:1)' obscrn;d change~ in
giving over time could olso be dl~c to changes in facto'rs no! included in our statistical model,
such as changes in govemmem transfers, tax laws, or expectations about future economic
conditions.
One of our key findings is tha: wealth .:;nd income have jndcpcndent e~fects on giving;
cbaritnble donations increase in response to increases in either variable. Because both income \
and wealth have increased throughout the period of analysis~ some of the observed increase in
charitable givjng highlighted in Chart 1 is attributable to a "income effect" and some to a "wealth
effect:'
At the san:e ti!11C. however, we do not find any cvide:lce of an iacrcased preference for
giving over time_ Rather, we find subtle indications thm preferences for giving may have actually
decreased slightly between 1989 and 1995, before rebounding in 1998. Thus there remains the
potential [0 build on recent increases in giving by impro\'i~g attiludes about giVIng,
Beyond the roles of income and wealth, our :f1ndings shed light on the variation in giving
by age, education, race a!1d ethukity, llnd sex. We- find that the relatiollship~ obscn'<.:d in our
multivariate analysis differ substantially from the conclusions drawn based on silnple cross~
tabulations of the data. We now discuss these results,
Older families (in which the family head is aged 65 or ove)~ (J{ every level of income arc
generous givers. Holding constant differences in jinwtcia{ resources, they'are more lfla:ly fo
mala: (1 contribution Ihan younger families, and when doing so, give a larger amounl.
The aging of tbe American population has been highlighted in discussions abo~!t the
future of Sodal Security and the impending difficulty of supporting a large population of retired
individuals. For charitable organizations) however, this trend may provide substantial benefit.
Preliminary'results from the forthcoming Giving and Volunteering 1999 demonstrate a
substantiall:; [ower propensity to give among. those under age 35, but no clear, age trend
thereafter; the probability of making a contribution peaks nt 7S percent f1!f the 65-74-ye'H old
age group. but is nearly identical to the 77 percent for those ages 45-54. I Similar pal1cms arc
found with respect to the amount. While the probability of giving and rhe ievels given are
similar across ages, there is a monotonic increase with age in giving as a fraction of income. This
, figure rises from 1.5 pe:cent for those ages 25-34 to 2.5 percent for those 65-74. Those aged 75
and over contribute an astOunding 4,6 percent of their inco~le.
m
A stronger, relationship exists between age and tile probability of a charitable
contribution in the SCF data. The percent of households making a donation peaks a1 4Q percent
for those ages 45~54 and falls slightlY 10 34 percent for those ages 75 and over. lbe difference
between the age patterns in the Giving and Volunleering data and the SCF data in part refleClS
7
The Independent Sedor, Giving ami Volunteering 1999,
9
�the $500 lower llmit on giving in the SCF, but also may :ef;ect changes over time, Data from
Chart 7, Arr,o;.ml Given by Head Of HOJse,"'old Age
Giving and l-"'olll.nieering J996 show a similar
sccc r - pattern to that in the SCF data. ~ Because our SCF
data arc compiled from the 1989, 1992) 1995, and
,1998 surveys, the patter:1S :n givi:1£, for 1996
reported in Giving and Vulu11leering may more
c;osely match the SCF data. Among those v;ho
make a charitable donatio11 in the SCF cata, the
amount increases with age, fro:n $2,536 for those
ages 35~44 to' $4,423 for donors ages 75 and over
(see Chart 7),
One would not want to conclude solely from
these descriptive results that the elderly an;: more gCI:erous than the non-elderly; there are. also
large differences in income al:d- wealth by age thal need 10 be controlled for. Few elderly are
employed, and ~hey therefore have lower incomes than lhe working age popUlation, while at 6e
same t:me they may have more weali];" Conversely, ymmgcr people in the early stages of their
careers may have relalively high incomes but little wealth, Ho\vever, eve!) conlrolling for these
and other variables, we find thaT the elderly do appear 10 be more generous; bolh the probability
and the amollnt of giv:ng bcreasc$ monotonically with age. Those age 65~74 arc 24 percent
more likely to make a gift than those aged 45-54 and condhional on making a gift, contribute
$46D more on average. Those aged 75 or older are even more likeiy to give (28 percent more
likely, than those aged 45-54) and give $620 l!1ore on average. FurthcmlOre t because reported
gifts in the survey do not include bequests, the total amount of giving in the older age brackets
will be even higher than reponed.
individuals in the age grOU}) 25~34 are significantly less likely to make donations than
those ages 45~54. but those who do give sirnibr amounts, On the one hand, one would imagine
...hat a 30~y(_ar~(l!d with the same levels of income and wealth as a 50 year old should be bener off
in lifetime terms, having many more years over which to cx.pcrier.cc growth in earnings and
wealth acc1.lmulation. On {he other hand, this group is also facing many demands on their
financial n!$ources) including those' of supporting children. Their relative ability to make
donmions i:; therefore unclear.
While the elderly do appea: to be more genc!"ou$ than other age groups, it is impossible lo
infer from these statistics whether U1C current young will be equally generollS when they reach
their retirement years, or \\'hether the current cohort of ,elderly hns ahvuys been excepliomlly
willing to give. However, the relatively low rate of giving among younger families does suggest
that recent initiatives to simulate giving among the young may be ~ell directed.
~ The IndcJ~cndent Sector, GivlI1g and Volunrecrhlg ,u/96.
]0
�Educntiou
Giving is s;gnijicanfl)' Mgher among more educated households in terms of Ihe percentage of
households making cnnlribution-;, the dollar amount of fhose conrribulions, and Ihe percentage
0/h(m~ehold income donated.
Bast!d on preliminary figures from Giving and Vo!unreering 1999, 61 percent of
respondents with a high school degree or less reported making a dona,jon in 1998, up from 59
percent in 1995. Among donors, the average household in this group gave $584 or 1.7 percent of
household inCOll'.c. A higher share (72 percent) (If households with some college educationr but
not a degree, rcported making a donation~ with an average level of giving among donqrs of $963,
or 1.9 percent of household income. HO\\'ever~ the fraction, of thls group making a donation was
lower th.m in J995. Giving was even higher for those with a college "degree: 82 percent of
hous.choJds gave nn average of $1,748, or 2.5 percent of hOl.:sehold income-nearly 50 percent
higher {han for those with only a high school degree. An identical trend of higher giving among
those with more cducntlon is found in the SCF data,
Of course~' more educated households also tend to be higher income, hig.her wcahh
households. So much of the relationship between giving ilnd education may be picking up the
cflccts of financial statu;; rather than those of education, Whl.Ctl holding income, wealth; nnd other
factors constant l we continue to find a strong positive relationship between education and giving.
If the head of the household has a collegc degree, then the family is both more likely to give and
tends Lo give greater arno;.Jnts, -This result indicates that there is a separate eiTcct of cducut:on in
addition to the effects of income and wealth. l\vo hypOtheses arc consistent vvith this finding.
First, education itself may instill a greater "preference l ' for giving as one learns more about the
world. Alternatively, coilege graduates may k.ve Ilfctimc camings prospects that arc not fully
represemed by their current income and wealth. Holding income, wealth, and age constant, a
co!!ege. grnduale may expeet greater future i,ncome than a high school grdduate and may
therefore t;.; more cot:nfonable giving <l lorgcr amount. Unfortunately, our data do not allow for II
test of either explanation.
Gender
"yomf/J1 dljfer suhsfantially by marital statu.\', ./\lever-married lHm1en give
more ofien and greater amount'.' than single males, while widovred or divorced women gNe less,
Paflerns
0/ gf\'ingfor
Examining differences in giving by gender is complicated hy the fact that surveys report
a single response for a household. This is true in both the survey used to collect data for the
Giving and Vo/un/cering reports and in the SCF, In these cases it is impossible to distinguish
between the ph:tanthropic behavior of husbands ;lI1d wives. To identify the relationship between
gender and giving we thererore categorize respondents as married couples, single maies t or
single females, and compare the actions of single males and single felna!es. Our results show that
single females are equally likely to make a transfer as married couples, but Single males nre
significantly less likely to do so. \\lith rcspecllO the amount given, single females give less than
single males; but the difference is not significant.
II
�Much ilttcntiol1 bas recently foc'Jsed on women and philanthi·opy (see box). We therefore
look morc closely at the pa:tcrns of giving for women. \Ve subdivide the category of single
\vomen into two groups, those who are widowed or divorced. and those who have never been
married. The results show thm never~marrjed women are aCHlnlly somewhat mOre likely to give
than couples although the estimated difference is not significantly different from zero, while
widows are lcss likely to give. Similar patterns arc cvident for (he amounts: single women give
slightly more than widows, but the difference is not signific~iln. While these differenccs cont:ol
for the number of chi!dre:1, there 1113Y be other factors in family relationships that affect giving
for \\'hicb we do not control. Depending on the underlying cause of the observed diJTcrcncc;
outreach programs designed to encourage gh'ing by women might be most effective if targeted at
widowed women.
Women & Philanthropy
American women have the potential to become leaders in philanthropic giving, Currcntly
they con~ro! morc than 51 percent of the persona! wealth in the United States and own a third of
aU privately held businesses. Furthermore) becal,:,se women typically outlive their husbands, they
are projected to inherit many trillions of collars in the comiag dec;1dc, This untapped potential
represents an important opportunity for the philanthropic community,
\\/o01C11'$ giving pattems have traditionally mirrored those of their busbands; however, a
shift in behavior has begun, with women becoming more involved in giving, Younger women )n
particular are more likeiy to make thc:r own choicl;;':s with respect to charitable gh'jng and there
is reason to believe that as older women become more confident in financial ma:mgcnicnt skills,
they too will begin to act independently.
j
Organizations are beginning t() reach out to encourage philanthropy among women l with
many colleges and universities leading the way, Institutions are expanding efforts 10 n01 only
cr.courage women's giving, but also to study, understand, and support women's philmllbropy, [n
1992 the University of Caiiromia, Los Angeles (llCLA) established "Women & Philanthropy at
eCLAt', As pan of its mission it cncoarages women to give, helps women tailor their giving to
areas that suit their own intcrests~ and helps women develop the skills necessary to as-sume
leadership positions on campus, tv1cmbers of the Women & Philanthropy program arc provided
opportunitits to meet with UCLA researchers and to attend special campus events, The program
has been D success, raising over $20 miflion in the ]999 fLseal year alone. Many other
institutions including Oklahoma State UniversitYl the University of Mis-souri at Kansas City~ and
Purdue Univc:-sity, lmve similar programs.
j
I
Anecdotal evidence suggests that women arc motivated to give by different factors than
men, in particular, women appear to be less interested than men in giving publicly. A recent
survey by the Committee of200, a group of successful business women, found that just 3 percent
of women donors indicated that they would be interested in having a buildhg named in their
bonor or even a plaque engraved with their mHIW, while 40 pcrccm preferred no :-ccognitiort
12
�Instead of publicity, women often C~1e personal gratification 0: having ae impact as the
for givir.g. In accordance with these principals, WOlnen prefer to maintain contact
with the prj)~iects they fund and with tbe people involved.. They also tend to cirect their gifts
moti\'a~ion
I
towards specific purpo$es such as athletic reruns, \vomen's scholarships, and specific facHides (a
new concert hall or a women's gymnasium, for example) rather than 10 endowment campaigns. :
However, as women take on new roles in the business world and !earn,more about philamhrop),>
this d'istiaction between men and women appears 10 be fading. In a 1999 follow~up to a 1992
1
survey~ UCLA s Women & Philanthropy group found that women are becoming less likely to
give soleiy because they are interested in the cause, and are beginning to treat phIlanthropy in a
more business~like manner.
Race and Ethnicity
Evidence suggests lltol col'lfribuJion.l' dijTer by race and elhnicily, When adequately lJ(;crnmling
for d(fferenceJ' in economic status, African Americans are mOte likely to give than whites, and
the amounts given are similar for tile two group...', This conclusion contrasts sharply with resuiIs
obtained whr!n diJferences in financial resources are ignored.
Despite significant increases over the past B years in the household incomes ofminoritlcs,
therc remains ~~ substantial gup bc"twecn the economic resources of African Amcricans and
Hispanics and those of whites, '1l1is gap is likely to be reflectcd in the amount of donations that
families CUll afford to make, Whcn ignoring these important differences in resources it docs
uppear tlwt both African American· and Hispanic families are less likely to give and give Jess
than white families. Preliminary results from Giving and Volunteering 1999 show that 75 percent
of whites reported making contributions in ] 998 compared to 52 percent of African Americans
und 63 percent of Hispanics. Because African Americans and Hispanics on average have lower
income and wealth than whites and nrc thercfo!c likeiv make smaller donations, one would
expect the )500 J'!linimulTI on giving in the SCF to miss n~ore minority giving. 9Jn facl~ giving by
all groups is Jov>'cr in the SCF than in Giving and Vo!uweering 1998, and the percentage change:
is the largest for Hispanics. Thirty~five percent of whites in the SCF made a donatio))'l compared
to 21 percent of African Americans and 12 percent of Hispanic-s. The dollar 'amounts given in
the SCF also differ by racc/clhnici!y. Whiles gave an average ofS3,356, African Americans gave
$2,459, and Hispanics $1 ,627.
When differences in income, wealth, schooling. and other obsef\:ahle characteristics are
lakcn into account, these conclusions change dramatically. With adequate controls for economic
status, our nnalysis shows that African Americans are actually significantly more likely to give
than whites, Hispanics remain significantly less likely than whites to have made a contribution, 10
~~
..
~~~~~-
We caution the reader that o1.lr conclusions "bom racial and c~hnic ciITerences arc based on: analyses or rclalivcly
small samples,
ll} However, Y-:cf.;use lhe difference bctwcc::l the SCF and the Giving and Vohmfeering numbers for :he fruction of
the population making II gin is significanlly larger for Hispunit:s tharr for whi,~s {Jr Al1icao Americaos, l! appears
thal measures of Hispanic givi:Jg are mQre wnsitive to the $500 cmooff, and giving may be substantially
underrcported There:o:c, \\'~ vicw [he resulls fOe Hispanics w:th cBL:tion.
9'
13
'.
�Among those who do give. African Americans g!\'e slightly larger amounts than whites, but the
ciiTctence is nOl sHdstically significant. This dmmatic change in the patten 01 giving by race
when a broad array of characteristics is controlled highlights the importance of multivariate
analysis. In particular, if we ignore the differences in wealth levels in our analysis, as is done in
many studi\~s~ but control for the other variables~ the slight difference between African American
and white giving is atten'Jated.
'
F~ctors
other than differences in fina!1cial resources and scbooling are also likely to be
important in explaining the c.ifferencc if: giving across racial and etlmlc groups. Differences in
exposure to opportunities lO give and the desired beneficiaries of charitable giving are also likeiy
[0 matteL Giving and VQlunteering }996 repons that African Americans and Hispanics are asked
to give much less often than whites. One study reported that H!spanies reee:ve an average of 15
to 20 requests for donations per year compa:ed to 300 for other grotlp~, And yet, another £!;udy
found that when asked, African Americans and Hispanics were more likely to respond positively
to a request than whites, If solicitntions serve to increase giving, tben organizatioliS arc
overlooking, an importont rcsou'rcc by llot sollciting donations from Arrican Americans and
.1"
•
·,lspamcs al greater rates. 1I
1
EXptlrts on philan:hropy in minority communities hm'e also a;gtlcd that minority giving is
less likely to be induded in existing d.ata on ·giving because much of it is done infomlally. For
instance, m~lny Hispanics send remittances to extended family in other countries.; estimates are
that Hispanics living in the United States send at least $3 billion per year to Mexico alone, By
excluding this type of giving, the survey data \.Is::d :n published studies may underestimate giving
by Hispanics relative 10 othe~ groups. J2
'
Even within the formal philanthropic 5..:(;tO:, !:linoritics choose different reciplcn1~ than
do whites. They arc less. likely to contribute to endowment campaigns, and instead focus their
giving on religious institutions and organizations or on efforts that meet pressing needs, The low
partidpation of minorities. in formal philanthropic giving i!i potentially n result of the services
provided by many charitable organizations, In 1997 just undcr 8 percent of ali roundation grants
went to minority concerns. Thus one way to motivate- minorities to give more is to provide
increased oppoTlunltie-s 10 give to organizations that more directly address their concernS. One
organiza:io!11hut docs nppeur to attrtlct a significant amount of gifts from minorities is thc United
Way. In a 1996 survey 26 percent of whites, 30 percent of African Americans; and 24 percent of
Latinos reponed making contributions to the United Way in the previous: 12 months. 13
Minorities, like women, have less of a history of giving to forma: philanthropic
organizations. This implies that outreach activities aimed particularly at these communities, like
those discus::cd earlier that target women, may yield increases in giving. Some organizations are
beginning to understand the potential. Fundraisilm programs using Spanish language matcnals
and foundmions using their grants 10 fund programs in Hispanic communities bave had
P The direction of tile rdailonship b1!!ween wlicilalio:1S Md gi\'ir.g is no: clear. As llOt~d later in the paper, it may
be that organizations ask for contributions from those wbo a:-c more likely 10 give (perhaps because of financial
capabilities) or ·...·110 have given g.encrously in {he past.
l! Giving USA Update, issue 2, 1999.
:, ihid.
)4
�increasing success. These efforts indicate that by addn:ssing the needs and concems of
minoritlc:::r charitable institutions ca:1 substamially incfe,ls~' the wntr:butlons of the,sc groups. 14
Bcquest~
Among lite! very \feu!rhy a large fruction of charifabJe giving is done through beque;;ts.
. Because the stl.ltis~ics ir', the ilfcvious section are cienvcd from survey respondents, there
is no informat~on nn the distribution of beq;JeSlS, Wc therefore ,know much less nboat trends in
charitable tcquests for representative samples of the population than we do about inter vivos
giving, Instead of surveys, past studies ~f bequests have drawn on data from estate'tax returns.
These tax retuDl5 are filed only by estateS that have made bequests and taxable gifts which total
to more than the taxwexempt limit ($675.000 in 2000). While these estates are !lot repn~sentative
of the estates of all decedents, they arc likely to be rcsponsi.bic for the vaSt majority of charitable
bequests.
For many wea}thy individuals, bequests are an import:mt mode of philanthropic giving.
In 1992 only 19 percent of estates filing tax returns made a charitable ~quest, but the lotal
amount given was $10.0 billion (inf1atioll-adjusted 1999 dollars), equal to 8.5 percent of the total
net worth of the estates and significantly higher than the fraction of income or wealth given in a
pal1~cclar year, Furthermore, among those who did make a charitable beques!, a significa:1t
fraction of the estate was donated with bequestS equal· to 27 percent of net worth,15
The magnimde of chari,table bequests made by the wealthy ofien surpaNses their imcr
vivvs giving in magnitude, Using estate and income tax rctum data, a reeent stud), finds that, on
average, v;eahhy decedents gave $8.9 mHlion (inflation-adjusted 1999 dollars) to charities at
death, compared [0 just $3.1 million during the 10 years prior to their death. For' the wealthiest
segment of the population, those with estates valued at more than $100 million) bequests
accour.ted fi}r 78 percent of charitable giving over the final 10 years of life,16
As with infer vivos giving, there arc, differences in bequest behavior by gender Bcca;Jse
Wives typically oUllive their hl'sbands~ female decedents arc much less likely than male
\0 be married .at the time of death, and to leave assets to a surviving spouse, Likely
because of 1his difference, females leave a greater fraction of their estates to charity. (11 1992
female decedents left 10.1 pen;:ent of their net worth to c.harit), on average; compared to 7.S
percent for males, This difference in philanthropic. behavior between males and females reverses
when onc examines only tlle behavior of those who have alxudy lost tileir spouse; widows left
12.1 percent of their net worth to charity while widowers Ic;-t l2,6 percent!7
decedents
14
Henry Ramcs, "Ltnino P!'!ilar.thropy: Expam:!ing US Mode!s of Giving and Civic Participation," 1999.
15 Internal ReV::nll~ Service, "Statistics ofIncome Bulletin:'
16
Rethinking Eslale lind Gift Taxation (2000).
17
Wimer 1996.97,
David Joulfaian, "ChnrilabJe Giving in Life and Dealh," forthcoming in Wi!1j~m Gale and Joel Slcmrod. tditors,
1RS, Winter 1996·97.
15
�Summary
Income and wC\ll!h arc important detem:inants of charitable giving, Over the pust decade
income and wealth have increased substantlal1y wHh charitable giving following suit Because
wc cnnnot guarantee equally strong ccoaomic gro\\'th into the indcfinite futurc, fUr',her inc::eases
in philanthropic bchavior can perhaps best be attained by tapping undcr~u$cd groups:
encouraging giving among the young; widQws~ sin£le men) and minorities. We return to this·
issue in the final section of the paper.
RECIPIENTS OF CHARITABLE GIVING
Contempora:-y philanthropy sup-ports a wide range of activities and causes. As the amount of
charitable giving hus grown, there have also been changes in the way in which money is
distributed to the various 'lypes of phibmhropic o:'ganil.ali::ms.
Religion is by far the single largesl recipient
of contributions, while gifts to /mmdalions
Chart 8. Recipients of Givinq. 1998
Gre file Jastesr growiJ7g"
Based on data from. Giving USA 1999.
Religion is by far the single largest recipient of
chariwblc giving, with about 44 percent of giving. in
1998 going, to religious organizations. 'S Education
is the second largest r~cipienl but trJ.i1s religion
significamly, with rcc'cipts of $27 billion in 1999,
compared to $82 billion for religion in the same
year.
N~_'
Although :l1c amount gIven to religion
Chart 9. Char.ge in Share of Giving, 1990·98
,
EdUU:.on
Publo~elf ~"
E'W"tm"""nt
r
foundations have t"xperienced tremendous
~
-
total giving
·10
·5
0
~fW1\l1~~ Ch~llP~
bCl\VCCll
1990 and 1998 c:.1Jne from
greater gifts to founilillions, while st:ch gifts were
responsible for on!)' 6 percent of the increase during
...a\
•
gfO\\'th~
increasing by 3) 3 percent in real terms between
1990 and 1998. Indeed, 29 percent of the rise in
I,
R~
remains large, its relative. importa:1ce has
diminishl-d recently.
In contmst, gifts to
the 1980,< In 1998 approximately $10 oul of every
5
$100 donated in the United Stales went to
foundations, up from Jess: than $4 in 1990. As a
result of the relatively slow grmvth rate ir. religiOl.:s
13 Link of wha1 is giVC1110 religious congregations is rediSlrlblll~d else\>'hcre, While approximutely 86 percent of
the revenue ofreligiolls congregations is derived from comributio['ls, 82 pcrccllI OfCXpC:llditures are for operating
expenses or capital improvcmcl1ls.
16
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Title
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Clinton Administration History Project
Creator
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Cinton Administration History Project
Council of Economic Advisers
Department of Commerce
Central Intelligence Agency
Department of the Interior
Department of Defense
Corporation for National Service
Council on Environmental Quality
Department of Justice
Domestic Policy Council
Department of Education
Department of Energy
Environmental Protection Agency
Federal Emergency Management Agency
General Services Administration
Small Business Administration
Social Security Administration
United States Agency for International Development
National Economic Council
Office of Management & Budget
Office of National Drug Control Policy
Office of Personnel Management
Office of Science & Technology Policy
Office of the Vice President
United States Trade Representative
Date
A point or period of time associated with an event in the lifecycle of the resource
1993-2001
Description
An account of the resource
<p>The Clinton Administration History Project describes in detail the accomplishments of President Clinton's Administration for the period 1993-2001. The records consist of the histories of 32 agencies or departments within the Executive Branch. In general, each organization associated with the Project submitted a narrative history along with supporting documents. These narrative accounts are primarily overviews of the various missions, special projects, and accomplishments of the agencies. The supplementary records include substantive memos, press releases, briefing papers, and publications illustrated with photos and charts.</p>
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EXoCUTIVE OFFle" 0, TlcE PRES:OENT
COUNCIL OF ECONOM!C ADVISERS
WASHiNGTON, oL 20502
Tf.E CHAIPMAN
CONTACT', AUDREY CHor
CHIEF OF STAFF, (202) 395·5084
TUESDAY, NOVEMBER 16, 1999
.
STATEMENT BY iYL-illTll'i N. BAILY
CHAlfu\L>\N, COUC;CIL OF ECOC;Oi\UC A!JvlSERS
Toc:uy, tho;; COJ.nci! of Eccnomic Advise~s :e!c:l$ed a :epcrt - America ':; Interest m the World Trade
Organi.~aliol1: An Economic Assessment. The report looks at the mcreasing importance of internattonal
(rade in the U.S. economy and the central role of the multilateral trading system in opening foreign
markets, strengthening the r~:e of law, and pro;:ncting economk g:owth and developmen! internationally.
The report cO;1ciuqcs that the L!:lited States looks to the future from a position of e:o~omi:; st:ength, cue
in no small part to its openness and flexibility, U.S. tariffs are among the world's lowest, averaging ani y
2.8 percen[ 011 inremarionally comparable ierrns. The Unii,ed $rares is also the world's leading trader in
goods a;,.d scrv:ces, accoun:ing :'"or abou: 14 ;;er:.ent of world expcr.:s and about 16 percent of impcr..s. '
The repo~ fi!:'tds that Americans benefit directly from open markets, as beth ex?c·rters and i:nporters. For
example, r~cent studies provide evidence of substantia.l wage advantages in jobs supported by goods
export.s - on the order of 15 percent. Americans a.lso,enjoy lower prices and mOre product variety .
•
For over.50 years the nil: 1:i later'al trading system, Erst consistbg of the Get-era; Agreement on Ta:iffs and
Trade, and more recently the World Trade Organization (WTO), has played a key par. in meeting U.S.
trade policy Jbjectives. It has helped reduce foreign barriers to trade, strengthen the rule of law, and
encourage economic gro'Wih and development 'Through succ?,sslve rounds of negotiations, tariffs on '
industrial products have falle:-. drar.:atically_ At the ead of WWII, the average tariff on i;,dustrial prOc.llciS
in c.evelopec ~ol.!ntries was about 40 percent. Today, the average is about 90 percent lower.
As a result of the Uruguay Round negotiations, the muttilateral trading syStem now more fully CQvers
agriculture, :extiles and'clothing, services, and inte!lectual property rights. There were als'o landmark
deciSions (0 create a WTO and institute a strc!1gther.ed syst~m for dispute resolu,ion. This new dispute
senler::er:t r::.echanlsm, wid:. its strengthened procedures, has proved ex:reme!y I.!seF.:.: to the United States,
which as a complaining party has so far prevailed in 22 out of 24 cases, having favorably settled :0
without litlgatkm and having won 12 in lirigatlon,
T:-.e success of the tradi;:.g system and
i~s
value
~n
reinforcing
rnarket·or:e;)~ed develop~.ent
st."J.tegies has.
become increasingly appreclated over time. Original!y dorr.bated by the developed countries,
'participation in the trading sysrem h~s grown as others have sought inclusion, Today, the v,'TO has 135
members and another 32 nations are seeking accession. Berween 1989 and 1997, developing countries
increased their share ofwodd trade.
,
While its achievements have been considerable, the multilateral trading syster:: remains a work :n
progress, A new rOund of negotiations offers opportunities to enhance market access, improve the
functioning of the WTO, more effectively imegra:e labor and e.rwi;onmental considerations, and enSure
t;l:1t tr_e benefits oftrJce :If: sheree mere widely,
�America's Interest in
the World Trade Organization:
An Economic Assessment
Executive Summary
•
;';ovember 16,1999
A Report by the Council of Economic Advisers
�r
Executi..-e Summary
'The US. economy looks to the future fron: a position of stre:1gth, due in no small par: to its
openness and flexibility. U.S. tariffs are among the world's lowest,. averaging only 2.8 percent
on intemationaEy comparable tenns. The United States is 'also the waddls leading trader in
goods and s(:rv<ices, accounting for about 14 percen~ of world exports and abo~t 10 po:cent of
tmports.' America;l$ benefit directly from open markets. U.s, producers benefit from exports of
high-tech manufactures, agriculture, and sen'lces, among other products. U.S. workers enjoy
higher paying jobs and U$, consumers enjoy !ower prices and morc product variety.
For over half a century the multilateral trading system, first consisting of the General Ag:-eerrient
on Tariffs and Trade (GATT) and more recently the World Trade Organization (.WTO), has
played a key part in meeting U$. trade policy objec:ives. I: has redt.:ced barriers to trade,
st:-engthcncd the rule of Jaw, and encouraged economic development inte01ationally. The POSl
WWII period has seen exceptional growth in much of the world as the global economy has
become increasingly integrated.
\\rhile its achievements have been considerable, the tradi:lg system remains a work in progress.
A new round offers opportunities to enhance market access, improve the functioning of the
WTO, more effectively integrate labor and environmental considerations, and ensu:-e that the
benefits of Irade are shared more widely,
America Benefits from Market Liberalization
2r
t
On the thre:lhold of the
Century, two 'related features of the U.S. economy are particularly
striking. First, it has never been more prosperous .and, second, it has never been ~ integrated
into the world economy, The U.S. economy Pfov:des its citizens with living standards (hat are
higher than those in many other major industrial economies - measured in terms of purchasing
power, per capita income in the United States is 27 percent higher than in Japa'1 a.1d 41 ~ercent
higher than in Gennany, The U.S, economy is able 10 provide such high living standa~ds" in part,
because Americans engage extensively in international trade. As ar. indka:or of its size and
scope, U.S ..trade's value relative to U.S, GNP has been almost 25 percent in recent yea:-s, the
highest it has been at any point in the past hundred years.
• On average, Americans expon. about II percent of all
and import a~out 13 percent of all they consume.
:he goods and services they produce
• Many high-tech U,S. t:1anufacturing industries, such as comi'H!ters ar.d electror.ics, export 25
percent or more of their total shipme:1ts; U.s, wheat and rice growers export over 40 perce:ll
of their total production.
• The United States is the world 's'\eading serv;ces exporter, accounting for over 18 percent of
all commercial service exports.
• Recent studies provide evidence of substant:a: wage advantages 10 jobs supported by goods
export:; - 0:1 the order of i 5 ·percent.
�The WTO Promotes Market Opening
Aml:ric~l gains most \-vhcn otlll!:- natio;)s low..::r ,heir ~r;v;lc barr:crs as \I.'C r;.;dL:.ct:.: ours. InJ0cd, as
out:.: ufthc wodd's m;:;:;! Opl..:!1 L:cocoliii..:s, we have a pJrtkular :nlercst in ;)rol1lotiag libcralizalio:l
,:broatL The system or bir;Jin~ cOlllmi:m<.:nt5 first cstab;is\1(.;d :n the GATT und no\V atlvancc'd
by ihG WTO hJ.S provic(;d a fra:m:\-vo~K t'or UbCfali7.aLioll. Consistent with U.S. goals for ar: open
multilat~:rnl trading systcn:, the GATT was founded ill 1948 on principles of rcc:procity a!'\d non
discrimination. On this basis, it has been extremely sllcccssfui in opening marKcts.
-
• . At the cnd of \V\VU, th<! average tarlIT on industria! products i:l devdopcd countries was,
about 4(} per..;;enL Today, Iht! avcrag<;:, is aboul90 percell! !Ovvtr.
The C:cugeay ROl.l:)d, concluded in 1994, n.:ducl.!d tariff::; 0;1 industrial pr0d~lct:.i :mt! Gxtenl~d
agre<.:me:'lts to pr;:vi0us\y n::.:gkclcd :;;cctOf::>, sue:l ;,5 agrkalturc, tcxtiks and clo\hing, :1\1~1
s~rviccs. Reecr.: ccor.om:c studies I.!\'alu<:tc po:cntlal gains ;ro:n the l;rugllay Round, but capture
only the dfc-cts. of certain conct.:ptuaHy qllUt"ti liable features, nameiy reduc;ng tariffs, reducing
export subsidio;;s, a:1d eliminating quotas or. some goods. They do not capture gains rron~
provisions .lor sf..'iviccs, dispute sett!cment, a:1d intelkcHial property
• Recent studies of some potentia: Uruguay Round benefits estimate that anr.llal global inco;ne
could rise 5171 billion to $2:4 billion upon f~t1j implementation, in 1992 dollars; for the
C':1itcd States alone, the gl1 i ns co:.Ild amOt:;'!! h) $27 billion to 537 blllion each year.
Post-Uruguay RO".lnd ncgo,iatiol:s yidded aJdi.ional m.lrkct ::ieef":::::; con:mitll1c:lts in fir.:lneia~
services, basie tt:!ccofnmunicn.l:ollS sClv'lces ar.d infomHltior. :echnctogy, opt.:!1!ng:.ljJ new
opportuniti'~s in some areas in which the U:1ited States is highly cOIr.petitive. Growth in C.S.
exports of private services point to potentiai gains from market opening.
j
• Since 1994, l,l.S. financial service exports have grown, on average, by 24 pcrcr..:!l\ ar.nually in
nomina! tertii:" U.S. insurance service exports have grown by \4 perccnt, uild U.S. business,
tcchn:cal, and professional service exports have grown by 12 perce;"}t.
The \VTO Promo··'!s the Rule of Law
.. "
To fully realize the. benefits of trude, however, requires more ~han agreement to rec.ucc barriers.
Sustaining support for the trading system also requires rules that are credible and equitable. For
f:rms to undertake'rhe necessary investments to service foreign markets, they need to believe that
new barriers will n';t be raised and that old ones will not reassert themselves, To rely on foreign
suppliers, buyers n'~cd to bclh:ve likewise that market access Will nOt be disrupted. Traders need
aSSurance that coml litr.)CnlS will be binding and that markets will remain open in the event of
chang~d circumstar' ;cs, Moreover, the nIles should CflS:lre that governments play fai:- - that they
not seck advantage :or favored int:.:rcsts by subsidizi:1g their pfoduccrs or passing rcgula:ions
that unnecessarily (1:5tort i:1temalional trade. Fairness also requires tho.: the g3ins from :rade a:--e
shared wjdely u:1d (1(' not come at the expense of core-labor s~;:ndard$ or the envlronrr:cnt. In so
doing, the WTO mu ;t strike an appropriate balance bct\veen the needs of the trading system and
those of sov-creign t'mions. The \VTO Agreements do not and w111 not preclude the United Slates
�from establishing and maintaining i~s own laws; impair the effective enforcement of U.S, laws;
or limit the ability of the United States to ,set and achieve its envircr.memal, laber, health, and
safety standards at the levels it considers appropri;:;.te. Through consensus, the ¥/TO ha<; done
much to achieve both credibility and fairness.
• WiO rules allow nations to lake anti~du:nping measures', countervailing-duty measures, and
action against import surges, providec ~hey follow certai!l procedures. The United St~tes has
used its own WTO-consistent trade laws to combat t:n~air for-eign practices .and to provide
safegu3rds for domestic producers.
• The WTO provides an improved framework for r~solving disputes. It has proved extrem~ly
useful to the United States, which as a complaining party has so far prevailed in 22 out of24
cases, having favorably settled 10 without litigation and having won 12 in litigation.
• The W'TO provides rilles for pfotecting"intellectua: property righ:s. For :he United States,
one c)f:he world's most i~lnOvatlve nations, such rights convey substar.tial value. In ]998.
U,S, exports royalties and li~ense fees amounted to about 537 billion,
of
By and large, WTO members have adhered to their commitm~nts. The sU,stained trend towards
market liberalization over the postwar period and the maintenance of commitments not to raise
barriers even in the face of international financial crises, stand ir:. sharp contrast to the trade
polley exp~:ricncc c:.Jring tte inter-war period,
The WTO Extends tbe Benefits of Trade and Encourages Growth
The United States has long a.dvocated the use of the multilaierai trading system to promote
economic development internationally, .The success of the tradir,g system anti its value in
reinforcing ma::ket-oriented development strategies has become i!lcreasingly apprec;ated over
time, Between 1989 and 1997, developing countries increased their share ofwortd trade.
Originally dommated by the developed countries', part;cipation in the multilateral trading system
has grown as others have sought inclusion. Today, the WTO has 135 members and another 32
nations are seeking accession, This allure of the trading system supports the view that
international trade is not a zero-sum game. Both the United States and its trading partners reap
the benefits, in fact, the shared aspect of the gains from,trade, between trading partners, is n core·
principle of ecor..o:nics, However, not all \\lTO members are currently well posi:ioned to "Jse the
system effectively. Some of its least developed members lack the necessllry institutions and
infrastructure to reap the full benefits of trade - in those cases, capacity huilding and technical
assistance, coupled with market opening. could heJp spread tile benefits,
.
The U.S. Agenda
l\'le~ts
the Cballenges of the 2Ilt Century
The prospect of another round ofmultila!ernl trade negotiations provides r)~w opportur.it:es to
advance U.S. interests in opening foreig;;) marke:s, eSlablishing an effective rule of law, and
promoting economic development internationally. Bar:iers remain high in agriculture and
services, sectors in whIch we are highly competitive. In agriculture, for example, bound tariff
rates average about 50 percent around the world compared with !e&s than 10 percent in tbe
�United States. Aver.ge fdod and related prices in the EU and Japan are 34 and 134 percent
highe:-, respectively, than l,n the Ur.ited Stlltes', Moreover, the system of commitments and rules,
though much improved, still requires further strengthening. And, much work remains to be done
to ensure thai developing countries - including the least developed - obtain the market access
ar.d technical assistance they need to realize the benefits that ir.temational trade Can afford. The
United States is also committed to putting a "human face~' on the globa: economy.
For these reasons, the United States is proposing to launch a new round, bst:ng no more than
three years) that focuses on market access in services, agriculture, and industrial products, It is
also seeking immediate tariff cuts in eight key areas, agreement
transparency in governme.nt
procurement, extension of the prohibition on e-commerce duties, and an agreement to make
additional inforrnati~n~technology products tariff free. The United States also sees the need to
st:engthen the \VTO's relaEonships with other international organizations and to make the WTO
more open and accessible. The United States has sought to create a trading system that spreads
the benefits of trade as widely as possible. both across and within countries, and is supportive of
COTe labor standards and the environment' Thus, the United States is:
on
• Seeking to bring more nations into the trading system and ensure that developing countries
fully benefit. The United States will work to· give the leas: developed countries greater
access H> global markets. The Uni:ed S:ates is a:so proposi:1g measures '.:0 provide technical
assistance on impiementing trade polley and strengthening institutions in developing
countries responsible for trade, labor, environmental, and other policies that influence the
gains to living standards from trade.
• Proposing to establish a WTa Working Group on Trade and Labor in Seattle and enhance
the institutional links between the Inte::1:;ltior.al Labor Organization (ItO) and the WTO by
gnmting the ::.0 obsen'er statt;s at the wro.
'
j
• Pursuing opportunities that can both open markets and yield environmental benefits, such as
eliminating fishery subsidies that contribute to over~fishing and'eliminating tariffs on
'environmental goods; seeking to strengthen cooperation between the WTO and international
organiz;1tlons dealing with cnvironrneiltal matters like the UN Environmental Program,
• Corr,:n:tting to conduct a U.S. environmental review of the likely conseq'clences of~he Rot.:!ld
and proposing that the WTO Trade and environment Committee help identi,fy environmental
implications as the Round proceeds.
The WTO provides its members with soniC of the conditions that are necessaiy for successful
economic perfonnance, but the benefits it ~onfers are not automatic.
fully realize the benefits
of trade, it is necessary to adoyt complementary domestic policies, such as those to help ensure
that displaced resources are successfully t't:~e:npJoyed" This requires eff:.'Ctlve mechanisms that
help workers, fanners, and fi:ms adjust to change when need arises - though economic studies
typically find that trade is a small factor in overall job displacement. The Clinton Administration
has made opening markets at home and abroad a major pillar of its economic strategy, but it has
also adopted the complementary policiesiof investing in people and fiscal prudence.
To
�America's Interest in
. the World Trade Organization:
An Economic Assessment .
November 16, 1999
A Report by the Council of Economic Advisers
�Table of Contents
L
Overview
II.
America Benefits from Market Liberalization
5
America in the Global Economy
Trade Raises Living Standards
G
11
The WTO Promotes RuJcs~Based Market Opening
J5
Ill.
.
The Trading System Provides a Framework for Liberali1.ation
Recent Negotiations Further U.S, Policy Objectlves
Countries Gain from Lower Barriers
"
New Rules Convey Additional Benefits
IV.
J6
20
22
24
29
The Multilateral Trading System Provides Opportunities for Growth
The Full Realization of Benefits R.cquircs Further Inte~;alio:l
30
31
The U.S. Agenda Meets the Challenges of the 21 S! Century
32
Much Remains to Be Done
U,S. Objecti\'es for Seattle and BeYO!ld
V.
The WTO Extends the Benefits of Trade and Encourages Growth
32
34
Appendix
Key Achievcments of the UlUguay
. Figures
Roun~
Negotiations
37
,
L :\1can Tariff Rates Weighted by World [mports !998
2, U,S. Trade as a Percent of GNP 1900-1998
3, U.s. Exports and Imports in 1998
4, Goods and Services Produced for Expon 1929~ 1998 '.
5. Average U.S. Tariff Rates 1900-J998
6, World Exports, GDP, and TarlffEstimates Post-WWII
7. Servic~s as a Percent of U.S. Trade and Production 1950-1998
8: U.S. Exports of Royalties and License Fees 1986-1998
9. Annual Growth of Real GDP Per Capita in Selected Developing Economies
10, Food, Beverage, and Tobacco Prices in Selected OEeD Economics 1996
5
6
7
10
16
17
26
28
29
33
Tables
1. U.S. Mandfaclnnng Trade as <I Percent olTatal
2. Eighl Rounds of GATT Negotiations
8
19
List of Frequently Used Acronyms
$hipmcli~s
and Cotlsump:ion
42
�I. Overview
The U.S. economy looks to the future n'om
j]
position of strength, due in no small part to its
QPClllleSs and flexibility. U.S. tariffs arc anxlDg the world's lowest, avcrnging only 2,8 percent
on internationally comparable temlS. The Lnitcc S:a~cs is also the world's leading trader in
goods and services, accounting for about 14 perce;]l ofworlc exports and about 16 percent of
imports. Americans benefit directly from opel'. markoHl. U.S. producers: benefit from expons of
high-tech manufactures. agricultl:re, and services, among other products. U.S, workers enjoy
higher paying jobs and U.S. consumers enjoy lower p:-iccs and more product variety.
For over half a century the muliii:iteraJ trading system, first consisting of the General Agreement
on Tariffs and Trade (GATT) and more recentlY the World Trade Organization (WTO), has
played a key part il: meeting U.S.' trade jiolicy objccth'cs. 11 has reduced barriers to trade. .
strengthened the n:le of law, and encouraged economic development mtcmational:y. TIle pos:
WWll period has seen exceptional growth 111 mueh ofthc.worid as the global economy has
become increasinglY integrated.
.
-
~
\Vhi1e its achievements have been considerable, the lradmg syslem remains a work in p:ugrcss,
'A new round offers opportunities to enhance market access, improve the functioning oftbe
WTO, more effectively integrate labor and environmental considerations l and ensure that the
benefits o[t,ade are shared.more widely.
America Bt:nefits from Market l,iberalization
On the threshold of the 21 M Century. two related fea:ures 0: C'1C US. eCOri01i1Y aiC particularly
striking. First, it has never been more prosperous and, second, it has never been as integrated
i:1to the world economy. The U.S. economy provides its eitizc:r:s with living stn.ndards that are
higher than those in many other major i:ldustrial economies'- measured In lerms of purchasing
po~ver, per capita income in the United Slates is 27 percent higher !han in Japan and 41 percent
higher than in Germany. The U.s. economy is able to ?mvide such high living standards, in part,
because Americans engage extensively in intemational trade. As an indicator of its size and
scope, U.s. trade's value relative to U.S. GNP has been almost 25 percent in recent years, the
highest it has been at any poin: in tbe pastl:undrcd years.
• On average, Americ<lns export about 11 percent aLall the goods and services they produce
and lmport about :3 perccl:t of all they consume.
• Many higb-:cch U.s. clanutacturing ll~dustrics, slIch as computers and electronics, export 25
percent or more 0: t~e:r total sbpments; U.S. \-",heat and rice growers export ovc:- 40 percent
of their total production.
• The
~I;I
Ul1i~cG
S:3.tcs is the world's ic<lding services exporter,. accoun:ing for over 18 percc:1i of.
commt.:rciul service exports.
• Recent studies provide evidence of substantial \vage advantlges in jo':Js SUPP0l1cd by goods
exports - on the order of 15 percent.
-1
�The \VTO Promotes Market Opening
Amenca gains most when other nations lower their irade balTiers as \ve reduce QUrs. Indeed, as
one oflhc \vorJd's most open economics, we bavc a particular imerest in promoting liberalization
abroad. The system ofhinding commitments first established ill the GATT .:tnd now advanced
by the WTO has provided a framev,:ork fo:-libc:-alizution. Consistcilt with U.S. goals for an open
multilateral trading system, the GAIT was founded in 1948 on principles of ]'(!ciprocity and non~
discnmination. On this basis, it has been extremely successful in opening markets.
• At the end of WWll, the average tariff on industrial products in developed countries was
about 40 percent Today, the average is about 90 percent lower.
The Uruguay Round, concluded in 1994. reduced tariffs on industrial products'and extended
agreements to previously neglected sectors. such as agriculture, textiles and clothing, and
scr't'ices. Recent economic studies evaluate potential gains from the Uruguay Round, but capture
only the effects of certain conceptually quantiiizlblc features. namely reducing tariffs, reducing
export subsidies. and eliminating quotas o'n some goods. They do not capture gains from
provisions for services. dispute settlement, and intellectual property_
• Recent studies of some potential Uruguay Round benefits estimate that annual global income
could rise $171 billion 10 $214 binion upon full implementation, in 1992 clolla~s; for the
United States alone, the gains could amount to $27 billion to $37 billion each year,
Post-Uruguay Round negotiations yieided additional market access commitments in f'inancLal
services,. basic telecommunications services, and information technology. opening up new
opportunities in some areas in which the United States is highly competitive, Growth in U.S.
exports of private services point LO potential gains from market opening.
• Since 1994, U.S. financial service exports have grown. on average, by 24 percent annually In
nominal tenns, U.S. insurance service exports have grown by 14 percent, and US. business,
technical, and professional service eXiJons have grown by 12 percent
The \VTO Promotes tbe nule of Law
To fully realize' the benefits oftradc, however, requires marc :han agreement to reduce barriers.
Sustaining support for the trading system also requtfC:s rules that are credible and equitable. For
fimls to undertake the neceSS<1ry investments to ser....ice foreign markets, thcy need to believe that
new barriers will not be raised and that Old ones will not reassert themselves, To rely on foreign
suppliers, buyers need to believe likewise that market access \"ill not be disrupted, Traders need
assurance that comnlitl11cnts will be binding and 1hal markets wilhemain opcn in ihe event of
changed circ.umslanccs. Moreover, the rules should ensure that governments play filiI' - that they
not seek advantage f~Jr favored interests by suhsidizing their producers or pnssing.rcgulutlons
that unnecessarily distort internationai tratie. Fatmcss also requires :hat the gains from trade arc
shared widely and do not come at the expense core labor standarcs or the cnvironl11cnL In so
doing, the WTO must strike an appropriate bal.met:: hetwcer. the needs of the trading system and
those of sov~3reign nations. The WTO Agrcements do not and will not preclude the United States
or
�/i'Olll cS1ublishing and maintaining its own l(lws~ impair the effective enforcement of US laws;
or Ii!))!! the ability of the United States to sct and achieve its environmental, labor, health, and
safety standards at the levels it considers appropriate. Thr(JlIgh consensus, the WTO has done
much to achieve both credibility and fairness.
na~ions to take ahti-dmnping measures, countervailing-duty measures, and
action against import surges, provided they follow certain procedures. The United Slales has
used its own WTO~consislcnt trade laws 10 combat unfair foreign practices and to provide
• WTO rules allov,,'
safeguards for domestic producers.
• The WTO provides an improved framework for resolving disputes, It has proved extremely
useful to the United States. which as a complaining p.lrty bas so far prevailed in 22 out of 24
cases) having fiJvarably settkd 10 without litigation and having won 12 in litigation.
• The WTO provides rules for protecting inteilcc('.Jal property rights. For the United Stutes,
one of the world's most innovative nations, such rights convey substantial value. In 1998,
U.S. exports of royalties and license fees amounted to about $37 billion:
By and large, WTO mcmbc!"S
ha\'~ adhered to their commitments, The sustained trend mwards
market libcralizutlon over the postwar period and the maintcn;.mce of commitments not to raise
barriers even in the face of intem'utionai financial crises, stand in sharp contrast to the trade
policy experience during the inter-war 'period,
Tile \VTO Extends the Benefits of Trade and Encotlr4tges Growth
The United States has long advocated the use oflhe multilateral trading system to promote
economic development internationally. The success of the trading systcm and its value in
reinforcing market~orjemed dcvciopmcnt strategies has become incrcasingly appreciated over
time. Between 1989 and 1997, developing countries increuscd their shure of world trude.
Originally dominated by the developed counlries, participation in the mul:ilateral trading system
has grown as others have sought inclusion. Today, the WTO has 135 mc"mbcrs and another 32
nations are seeking accessIon" This allure of the trading system supports the view that
. intcfnalionallraue IS Hot a zero-sum game. Both the United Stales and its trading partners rcap
the benefits, In fact, the shared aspect of the gains fron11radc, bet','Jccn trading partners, is a core,
principle of economics, However, not all WTO members are currently weB positioned to use the'
system effectivcly. Some of its least developed members lack the necessary institutions and.
infmstructure to rcap the full benefits of trade - in those cases, capacity building and technical
assistance, >;.:ouploo w:th market opening, could help sprcau the benefits.
The U.S. Agenda Meets the Challenges of the 21 S ! Century
The prospect of allother.round of multilateral trade negotiations provides new opportunities to·
advance U.s. interests in opening foreign markcls, establishing lIII eflcclivc rule oflaw, and
promoting economic development intemationally. Barriers remain high in agriculture and
services, sectors in which we nrc highly competitive, tn agriculture, for example. bound tariff
. rates average about 50 percent around the worid compared willi less than 10 percent in the
-3
�United Slates. Averagc food and related prices in the EU and Japan are 34 and 134 percent
higher, respectively, than in the United States. Moreover, the system of commitments and rules,
though much improved, still requires further strengthening. And, much work remains to be done
to cnsure that developing countries - including the least developed - obtain the market access
and technical assistance they need to realize the benefits that international trade can afford. The
United States is also committed 10 putting a "hum;:,n face" on the gloosJ economy.
For these reasons, the. United States is proposing 10 hmnch a ncw round> lasting no morc than
three years, that focuses on market uccess in services. ugriculture, and industrial products. It is
also seeking immediate tariff cuts in eight key areas, agreement on transparency in government
procurement, extension of the prohibition on e-commerce duties> and an agreement to make
additional jnfonnation~lcchnotogy products tariff free. The United States also sees the need to
strengthen the WTO's relationships with other mtcrna!lonal organizations and to make the wIO·'
more open and accessihle, The United Stales .has sought to create a trading syswm thaI spreads
the benefits oftnldc as widely as possibie, both across .md within countries, and is SUpp0l1ive of
core labor standards and the environment- Thus, the United States is:
• Seeking to bring more nations into the trading system and ensure that developing countries ..
funy benefit. The United States will work to give the least developed countries greater
access to global markets. The United States is also proposing measures to provide technical
assistance on implementing tmde policy and strengthening instilutions·in developing
countries responsible for lrade.labor, environmental, and other policles that influence the
gains to living standards from trade.
• P:oposing to establish n WTO Working Group on Trade and Labor in Seattle and ClIhi.lllCC
the ltJstiHltionllllinks hetween the Jfltcmational Labor Organif.<Ition (!LO) and the WTO, by
gruntmg the [LO observer status al the WTO,
• Pursuing opportunities that can both open markels ..m~ yield environmental benciits, such as
eliminating fishery subsidies that contribute to over~fishing and eliminating tariffs on
environmental goods; seeking to strengthen cooperation between the WTO and intemational
organizations dealing with em'ironmental mallers like the UN Environmental Program,
• Co.rnmitling to conduct a U.s, environmental review oflbe likely consequences of the Round· ..
and proposlng that the WTC Trade and Environment Committee help identify environmental
impEcations as the Round proceeds.
The WTO provides its members with some of the conditions that are necessary for successfuf
economic perfonTIaJ.lce, bUl1he benefits'it confers are not automatlc. To fully realize the hencfits
of trade, it is necessat)' to adopt complementary domeslic policies, such as.those to help ensure
tbut displaced reSOurces arc successfully re~employed. This requires effective mechanisms that
help \vorkers fanners and £11111S adjust to· change vvhen need arises - tbough economic studies
typically find tbat trade is a small factor in o\'erall job displacement. Tbe Clinton Administration
has made opening markets at home and abroad a major pillar of its economic strategy, but it h3s
also adopted the complementary policies of investing in peop1c and fiscal prudence,
j
j
·4·
�n. Amcrica Benefits from Market Libentlization
The United States approaches market liberalization from a position of strength in the global
economy, partly because of its openness and flcxibiHty. US. tariffs on imports are among the
lowest in the world, averaging about 2.8 percent on comparable tenns (Figure 1).1 And U.s.
producers arc among the most competitive in many scctors, including high-tech manufactures,
agriculture. and services. Today, the United States is more integrated into the global economy
than ever before - it is also the world's largest trader. The United States accounts for about 14
percent of the world's goods and services exports ,md about l6 p¢rcent of its imports.:'- Because
the U.S. market is already so open, i: stands to reason lhat Americi:ms,wQuld have much \0 gain
and relatively little to lose from additional muHilatcrallibcndizatloll" To date, the multilateral
trading system has provided an effective forum for working Inward open markets,
Figure]; Mean Tariff Raics \Vcigbted hy World Imports 1998
35
30
25
-
20
:!:
15
0
0
~
10
Uni;;;;;! ::w.tts
5
0
L:S. busines&es~ fanners~ workers; and consumers already benefit fro~n U$, pQlicies tbnt enable
the frce flow of goods and services at the US. border and froni imernational agreements that
provide access to foreign markets. U.S. businesses benefit direct:y'from export opportunities
some mdustries. such as electronics and computer equipment, sell allcasl a quartcr of their
, I In 1998, U $, tariffs lIveraged about 2.8 perci:::lt, weighted hy world imports; !mwevcr, the share of' lotal V,S, duties,'
collected in totallJ.S. imports fOf consumption ....,;j$ oilly 2 rerccnl. Flgun: I provides only 1I partial indicatinn or
('OImln:.:lI' op:.:nncss_ A ful: i:1tcr;ut:onai comparisoll would reqllire an unulysis of other mt'lISu:cs, sach liS
tr;.mspan:ncy 'lUd non~t:trirfbafTiers that arc not reflected in Figmt! 1.
t tJsmg dal;j fr(;m the World Trade Organization, 1111p:llwww.w!o.org(wto/statis!staLhtm (downloaded ~ovel:l£Y.:r
1),1999). 1bt dllUl atc for world trade in goo<ls and commercial services, inc:uding ill!ra~eU 1:ade.
-5
�merchandise overseas, They also enjoy access to low cost inputs,. which makes them more'
competitive domestically and intem3t;onully" Many U.S. farmers a:so ship large shares of their
p:--Oduclion abroad, U.S. workers enjoy highcr paying jobs and U.s. co~sur::le:'S enjoy lower
prices and more product variety,
Amcri~a
in the Glohal Economy
In recent years, trade's share in U.S. GNP, has approached 2,5 percent, a record high for this
century (Figure 2).3 'In 199&, U.S, goods and services exports and imports amounted to about
$966 billion and $1,ll6 billion, respectively, On average, Americans exported 11 percent oCthe·
goods and services they produced and imported 13 percent of those they consumed. Capital
goods accounted for the largest share ofU$. exports, ubout 31 percent, followed by SCrY1CCS,
then industrial supplies and materials (Figure 3a)_ Capital goods also accounted for the largest.
share of U.S. imports. about 24 percent, followed by consumer-goods, then services·(Figurc 3b).
The sectoral data suggest the importance of two~way trade within industries. The United Stales
is 'Competitive across a wide range of industries~ in part, because'U,S, linus have access to low~
cost components, resulting in lower production costs,
Figure 2: U.S. Trade as a Percellt of GNP 1900·1998
25
20
gxporls + hnp0l1s
-+
Imports
10
Exports
<1
L..u..;.!
0
,
.
. .
, , , , ,, , , ,
.n
,0
'"
'" '" '" '" ' "
'"
m
'"
,n
g;
•, , , ,•,, , , , , , ., •, , , ,
.n
. g
g
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§l
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5o\l«:e: The '.b:U1 for- 1900-1910 are flem lhe U.S, tlerurlment ofCemmerCt. Bmell\} "nile Cen~\l$.IIit1t)ri(Ylf SwisricJ fJj.lw UlIUM
SMlN, ['fin J lWasbil1gloo, DC: 1915); the dele for 1'111·1Wll are (10m Ilw Bureau o(E!:ooomit Aoaly~is.
(';Ot\:S, £XJ}<lfl and im;mrt Cat;; (......m J 9(\{)·1 'HI! doom irdude nOll'l;:: irarhllflions"; import tilt;; irem 1%0-191 If do nm indwk ~DiR(1
M:liw)' E\lmI,,-l1tI1ft!s."
1 The S!larc ortmde in GNP provides.a figurative bcm;hmark. While CXpoHS come out or domestic production,
:mporlS supplement domestic consumption.
'
- 6
�Figure 3a: U.S. Exports in J998
Total = $966 Billion
Figure 3b: U.S. Imports in 199X
Tot:.:l = $1,11 (i Billion
F{lOOS,
Feeds. and
Ho:vcrugcs
,%
Foods,
Inoustria!
Feeds, and Supplies
Beveruges
InduStrial
Supplies
"d
Services
17%
4%
:v1ul~'!iaJs
13%
Petroleum
OrhCT
uno
GilOG!:
Prooucts
~%
5%
Coods
19%
' Yo
AulOmOl.i\'e
Products
13%
Automot("e
Products
' Yo
Source: U.S. Department ofCornrncn:e, Bmeau of Econnrnic Analysis
More detailed data on U.S, trade in manufactunng 'agriculture and services provide even more
compelling evidence of the extent of US. l1l!cgration in the globaJ economy and the value of
open markets. For a variety of products - ranging from computers to wheat - access to global
m3:rkets contributes substantially to U.s. prodnctio:l.and consumption.
j
Mauujiu:turillg industries I.lre fsigllly integrated. A comparison of trade, production, and
c:onsumpi:on data suggests substantial 1::t1ematiomtl integration in a number of industries. and an
outwarc orienlalion in high·tcch manufacturing. On average, exports accounted tor about 15
percent of shipments in manu racturi ng and Imports accounted for about 19 percent of
consumption in 1996. Ranked on the basis of export shares, industrial and commercial
machinery and computer equipment, electronic and other electrical equipment and components,
and measuring, analyzing, ;llld controlling insthllncnts r~tcd highest (Table 1)" In each of these
industries, C;(ports accounted for roughly 25 percent or more of G.8. firms' tolal shipments.
Ranked 011 the basis orimpon shares, leather products, apparel, arid miscellaneous manufactures
rated highest - imports accounted [or at least 39 percent of domestic consumption in each
lI1dustry, But, imports also accounted for a significanl share of consumption in eicclronic and
other e1cetri<:al equipment mld components'and'in industrial and commerci~l machi;tcry ltnd
computer equipment - roughly 33 percent and 34 percent, respectively. As above, tbe data oe·,
industri~11 <Illd commercial :nachincrj and computer equipment suggest the importance oftwo~
way trade. A closer looi< at more recent 1998 data on U.S. trade, production, and consumptio:1111 .
compulcr cqtlipmcnt provides further evidence:
-7
�Table 1: U.S. Manufacturing Trade as a Percent of Total Shipments and Consumption 1996
SIC
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
3S
36
'"
38
39
.:.!
Percenlof
Product Description
Food and Kindred Products
Tobacco Products
Textile Mill Products
Apparel and Other Finished Products Made From Fabrics ...
Lumber and Wood Products, Except Fumiturc
FurnitufC and Fixtures
Paper and Allied Prod:.Jcts
Printing, Publishing. and Allied Industries
Cher.1icals and Allied Products
Petroleum Refining and Related Industries
Rubber and Miscellaneous Plastic Products
Leather and Leather Products
Slone, Clay) Gla.'.Is~ and Concrete Products
Primary Meta! Industries
Fabricated Metal Products. Except Machir:ery and Transportation"
industrial and Commercial Ylachi:1cry and Computer Equipment
E;cctronic a.'1d Other Electrical Equipment and Components ..
Transportation Equipment
Measuring, ~nalyzing, and Controlling Instruments ..
Miscellaneous Manufacturing Industries
All Manufacturing
1mports as a
Percent of
Shipments
Code
Exports as a
Consumption
6.82
;7.09
;000
10,43
6.14
7.62
5.63
9.02
3.19
17.73
3.98
8.26
23.46
0.96
l1A2
39.1 I
11.96
15.05
9.37
2-12
13.73
9.80
10.10
70.97
559
10.%
13,(>9
19.66
7.72
32.14
25.)5
21.45
2472
16.31
15.18
33.92
32.65
27.30
22.08
47.25 .
19.21
8.76
Source: US. Department of Commerce, International Trade Administration
• 1n the (,omputer industry, including computer hardware and peripherals, C.S. exports
accounted for about 43 percent of domestic prouacers' total shipments and imports accounted
4
for aboat 58 percent of final and intemlediate domestic cons<lmption.
• According to a recent rcport) more than 60 percent of the hardware value of a typical U.S.
personal computer system is made up of floppy and hard disc ,drives, video cnres, multimedia
4 The compt:.~er indt:.stry is defined hClc as SlC 3571,3572,3575, and 3577. The data arc fro:u a rcport prcpi\;ed by
lilt: !>.1cGraw· lUI Companies and the U,S. Department ofCmnmerce, lntemational Trade Admin:s!ration, U3
industry and TfUde OutlOOK '99 (1999), p. 27-5_
-8
�kits, monitors. mother boards. mouse dcvices, powcr supplies, and random access memory
imported from Asia.'
Forttlt!rs export large slUJrcs ofJ}rmiuctiOlt. Here also, the data show-that Americans benefit
[ron1 opportunities to sell their products intcmationaHy. In 1998, U.S. agricultural cxpo:",:s
;ota1OO about $54 billion, accounting for roughly ;J. quarter cash recelpls.6 However, for many
bulk commodities. high~value products, and horticultural products, the share of production'so!d
as exports was considerably hIgher. l.:.S. whea! and ricc growers exported over 40 percelll of
their productiOJ~, C.S. SU:10owcr seed oil producers ~xpor1ed over 80 pc:-ccnt of their pr'oduction,
and U.s, almond growers exported over 70 percent.:
.
0:
SerJ'icc e.x:ports hUl'C grow" dramatically. Tbough :yp:cal1y "'sI11311" rdative to total inuustry
production, U.S. exports of services have gro\'ln dramatically. providing'further evidence of tile
increasing importance of global linkages. U.S. servIce exports have grown as a share of
dQmc5-tic production of services (Figure 4) ..They have also grown as a share of total expot1~.
• u.s. service providers have almost tnpled thetr share of export-related production over the
past five decades. In 1950, only 2.2 percent of U,S.~produccd services were
.
.
! 998, that share was about 6 percent
cxpor1cd~
in '
• Over the same period, U.S. service cxp0!1s have generally grown more rapidly than
merchandise exports. As u result, their sbare of to lui U.S. exports has lI1creascd from about
17 percent in 1950 to about 29 percent in 1998.
• The l:nited Stales is the world's lcadinli services exporter, accounting jor over 18 percent of
all commercial service exports in 1998. Among the leaders were travel services,
transportation services, royalties and license fees, business, professional and technical
services, and financial services, togcthc:- accou:1ting for about 78 percent of all U.S. privute
,
9
servICe exports.
.
51bid' p. 27~1
(I Data are from Ihe U.S. DcpllItmell! of Agrit:ulturc, Foreibn Ag::-i.cul;ural Serv:ce (.bly 1999); reporting exports as u
.
share (If cash receipts less gove!'llnl!.:r.t payments,
'Data me from the U.S. Departmen! of Agriculture, Foreign Agricultural Service (July 1999); reporting esports a5 a
share (If domestic prod'Jc~ion, uSlllg 1996·98 il\'eragc volume.
! Sec W1.1dd Trade Organizatlur., http://www.w\().org/wlo.lst:tlis!p~crelcase.h\lll (downbudcd Oc\ub<:r 2l,' 1999),
.; Royahies and license fecs includes some receipts. such as those from woks. records and !apes and hrtfUdcasting
and ret;ording {,[live events, Ih:1I could be apportioned to spcclfie industT\I'!$,.·Within the category ofhusiness,
profC$sional, and technical services, the leaders are cons:ruclion, engineering, l.!lchitectl.lwi, and mining servICes;
inslailaiio)l, maintenance, and repair of cq;llpmcni; legal services; uperatkmallcasing; and computer and datu
processir.g servi::es - [og.ether accountir.g fo( alrr.os! 60 percent of nll-U,S. expnrts ofbusillCSS, proCessional. and
technical ~rvlces. Sec U.s. Department ofCorruncn:e, Economic Statistics Administratioll, Buteau nfEconomic
Ana;ysis, Survi,y of CurYcfII Busitwss (July 1999), p. 102 and {Ocmher 1999;, p. 64.
j
-9
�Figure 4: Goods and Services Produced ror l<:xport 1929-1998
,
-
40
35
"
Service Exports as a Percent of Service GDP
(right scale)
30
~
~
c
'"
0
25
0
....
0
v
"
4 .~
~
u
20
0
6
"
So
,.
\
0
.,,
15
~
(Il
J'0
E
Q
.'
~
~
"- 10
"
.
"
" , -•
5
'
,
,
.- .
,',
'.
..
"
"',
Goods E;.;pOtts llS:a PerCl:nt of Goods GOP
(left scnJe)
..
-- --
--
~
0.
o " .... ,.".,,", ...
.-
~
2
o
-
....... .......
SQUfce: U.S. Oep:artment of Commeree, Burenu of Econornk Am.ly.is
Note: f)~ta prior to 1959 arc r:ot subject to October 199<} d:lU Icyitioo
-
America '5 trading partners are located around the world - in Europe, Asia) Latin America, a.nd
Africa - but they tend to be concentrated in deveJoped and neighboring countries. Canada is
America '5 top ranking partner, accounting for about 21 percent of merchandise trade (exports
.and imports combined), Measured on the same basis, the EU is a very close second, accounting
for just over 20 percent oftbe toWl, followed by Japan, accounting for just over 11 percent, then
Mexico, accounting for just under 11 percent. In aggregate, non-OECD countries account for
about 31 percent of U,S, lrade, though the least developed countries account for,a small share
less than one percent the total.
of
Although the U.S. ec-Onorny is "open," in the sense that its average tariffs afC among the world's
lowest, the United States - by virtue or its size and its distance from many m'0or markets - is not
as dependent on trade as many other nations. ToW] trade's sharc in U.S" income is about 25
pcr.,;"cm - wen below total trade's share:n wor!d incol~lc, ubou1 46 percent. As a result, one
might argue that the United Stutes bcltcfi:s frol-:l trude rcliltions with countries in Europe, Asia,
Latin Amcrka, and Africa, whHc renwining relatively buffered from adverse global events by
the strength of its domestic markets. We sec evidence of. our resilience in the j'ccent financial
crisis,,\vbcrein poor economic conditions in Asia aml.clscwhcrc led to lJ tcmporal)' (eduction lJ:l
dcmund for U.s. cxports and contributed to a rise in our curren! account deficit Although sume"
sensitive sectors of the U.S. economy, illcllldi1~g jlllrlS of manufacturing and agriculturc, have
been adversely affected by ~his intcmational slowdown, our Qvef<!11 economy has becn able to
sustain robust growth a~d maintain full cmpioymenL
-10
�Trade Raist!s Li\'ing Standards
We have seen that America has low trade barriers and is heavily involved in the global economy,
but the question remains as to how we benefit htternational trade raises U.S. living standards by
improving the effideney with which we allocate resources and enhancing our produclivity.1U
Through exports, the expansion of intemationaUy competitive sectors boosts incomes and large
scnle production reduces costs. At the same time, the availability of imports increases buying
power, improves consumer choice, and helps stave off inflation.
In his famous treatise, The Wealth of Nations. Adam Smith pointed out the economic benefits of
specialization and the degree to which these benefits depend all a hlrge market The founding
fathers of tb(:'Unitcd States revealed an innate appreciation of tbis Insight when they enacted the
Constitution. In particular, they explicitly prohibited states from restricting trade with other
states, This prOhibition is arguably the most effective free lnlde agreement in history, 11
established open trade among the sta:es, creating a large i:llcnw.1 !Burkct that has helped to makc
the United States onc of the richest economics in the world, Because they can li'eely sell their
products on this large market, Californians can produce morc winc thali if they could.onlY to s~lJ
in their own state, Likewise, fanners in Kansas Can grow morc corn and factory workers in
Michigan can build more automobiles. As a result of these .tctivities. all Americans enjoy less
expensivc wines, com, and automobiles.
Today; we take our open internal market for granted. Few would likely argue that the East or
West of the United States would benefit if a bamer prevented trade between them. Yet the case
for free'international trade is fundamentally the same as the case for free domestic trade. Access
to large, diverse markets pemlits specialization and specialization yields gains to producers and
consumers. Open trade al10ws Americans to eam higher incomes than ifthcy sold only at home.
It also altows them to buy an array ofpro~ucts that is less expensive and more varied than if they
could only purchase domestically. Intcmational competition also exposes U.S. inrillstries to
foreign technologies and stimulates them to become morc inventive and productive,
However, it is important to remember t~at the internal market works. in part, because an
crrcctivc mh! oflaw !S0verns domestic transactions. Hath of the 50 stales cnjoys tom:iderable
latitude in setting i1s own local policies, but an overarching system of federal rules .md
gllidelines m:sllres openness across the country. Much in the same way, the multilateral trading
syslcn~ encourages trarispal'cnt and predictable rules of conduct.
spcciolizo(/tHf, \\/hCrl a country produces and exports those goods and
services thut it em produce relatively inexpensively, and impor;s those that are rcJiltivcly
inexpensive to produce abroad, that trade can improve standards of ljving on both sides of the
transaction.) 1 For example. the United States, with an abundant supply.ofhigh~skilled labor and
C()unlrie~' gt1h~fnm'
\0
The discU5Si<J!ls of Spcciaiiz(l1io!l, .::ompetition, and produ'clivity thaI follow dmw from the Economic Report of tile
President (Washington, DC: Februury \993), pp. 236·23.8.
II A cmllltry's relative strengths, Le., hs comparative advantage, derives in part fwm its "naturnl" endowment of
resources, such as capital, labor, and lund. But olher factors - including a coumry's domestic policies - are also
impor1::mt. 'nlt:y can affect both the quantity and quality of its resources. 111e U.S. economy, for example, benefits
-11
�capital, can produce financial services at lower cost, relative to olher products, than Can most
developing countries. Costa Rica. with an abt:ndant supply oflow-skillcd Jabor and appropriate
growing conditio:is can produce coffee Htlowcr cost, relative io other products, than Cali :hc
United States. 1,0 this example, lhe United Slates wot.:ld benefit from p;oducing and exporting
financial services and importing coffee; the reverse is true of Costa Rica. Through
specialization, each country pUIS its rcsoumcs to use where they CUll generate the most economic
value. Thus, when countries open their borders to trade, or rcthlcc existing barriers. they
reallocate resources to the uses in which they will be most profilable.
Competitiull enhances producrivUy. Foreign cornpetition gives domestic finns an incentive to
mise their productivity. Unlike other one-time ga:ns, these gnins arc reclining. 12 Once
competition is introduced, it leads to u c)~cle ofp:-oductivhy improvcments and quality
enhancements that contit)ue to benefit the economy indefinitely. Studies of the United States and
Japnn find a positive relationship betwccn imparl growth and productivity growth.13 TrJde can
also Increase growth by improving the now of knowledge and tnms[cr of technology. With
protection ofintellcctual property rights, foreign competition can promote research and
development and lead 10 innovatlon - in both new products and new production processes.
E.\'port~
provide clear hellefits, By selling overSeas, {inns C>JIl increase their sales and c<II1:ings,
In response, production expands tlnd more Americans are drawn into jobs in the most productive
and internationally competitive sectors of our economy. In 1994, tbe total number of U.S. jobs
supported directly and indirectly by manufacturing exports was one in five,l4 In agriculture the
share was one in three. Since that time, U.s. goods exports as a share ofU5. goods production
has risen, Access to larger markets can also reduce costs and increase innovation.
• Tile expansion olintenwrionally compefitive sectors boosts iucolln:s. Recent studies provide
evidence of $ubsttmtldl wage advan:t!gcs in jobs supported hy goods exports ~ roughly 011 the
order of 15 percent One such stuuy indicates that wage premiums for exporting plants range
from 1;:,5 to I g percent on average for pbnts of all sizes, locations, and industries,15 Another
study finds that the wages of all production and related workcrs',lnjobs supported by goods
exports were 13 percent higher than the national average, und the \vages qf 'workers in jobs
supported directly by those exports were 20 percent higher. It>
'
nom
;1[1
abupdau: supply 'ofhlg1H;killed lab!)r. Hi>W\:V;;f, such skills are uo! confcncJ by n;;;Ju;e, mIller they arc
confcm.-rl by educaliotl and training.
.
;: Among ~he one-time gains, foretgll competition can provide incentives for (inns to reduce their prices in
previously Mu-compcthke markets. For exantple, foreign competition. including the threat Qfforeigu competition,
call. help dilule domestic mOll.o?Qlies,.
•
13 See Robert Z. L:l'.l.'rence. ''Ones:1 Kick in the Pants Gel YOll Going or Docs Jt Jt!~l HlIrt? Toc Impac1 (If
In!ernation;:1 Co:npclilion O!i Technological Change in U.S: Manufacturing," tlllp\lblishcd draf: (July 1999) and
Robe:'! Z. Law~ence and David E. Wcmstcin, ''Tr~dc and Growth: I:-nport-Led {J~ Exp<j~t-Le:d! E\'itlt:rlcc from Japao '
.md Korea," NOEl{ Workir!g Pap(:r No. W72G4 (.lilly 1999):
.
~
14 Sec Lester A. Davis, "U.S. lobs Supported by Goods ar.\.!. Services E"p;,ds, 19SJ~94" (U.S, Depmirnenl or
Commerce, Economics tmd SUtiStlcS Adminisl~a:io:l, Washing!on, DC: Novemher 1996), p 3.
IS See). David Richardson and Ka:in Rimial. "\l,Ihy ExporlS Matter; Mord" ('Ine Institute for Intema:ionn!
Economics and The Manufacturing lnstilu!c, Washington. DC: february 1996), p. 9
10 See LeslcT A. Davis, pp. iit and 1·E.
-12
�•
Large~sca{c production reduces amI spreads cos/so The cco,!omies of scale achieved by
selling on world markets lower the costs,of production and increase the returns to inmwatlon.
For somt: goods, such as automobiles, Ihe average cos! of production falls as morc of the
good is produced - hel}ce, the larger lhe market, the lower the cost As a result, U.S.
producers become even more competitive and U.S. consumers enjoy lower prices.
Morc<n'cr, the ability to spread the fixed costs of research and development across a larger
sates volume allows globally competitive fim)s 10 be more innovative than those confined to
selling in smaller domestic markets.
Gailts/reml Irade a/so come from imports, As a result or imports, consumers enjoy lower
pnccs, h:ghor effective wages, and greater product selection. lmpor1s may 01;;'0 lead to increased
competition and faster productivity growth, Recently, Ollr ability to lmport has also provided an
antiwinflationary safety valve - helping us to combine lov., inflation. steady growth, and high
rates of employment.
• lmpo~'rs increase htlying power, . The ability lo buy less expensive foreign products is an
important complelnent to faster productivity growth in raising living standards and boosting
real wages. Today, a doBar buys 11 percent more imported goods and services than it did in
1995. And, over the same period, nominal average hourly eamings have risen from $11A7
Lo S 13.31, Taken together, these two facts imply that by working an hour, the typical
production worker can now buy 28 percent more imported goods and services than in 1995,
Morcov(>f, foreign competition creates incentives for U.S. businesses to prIce their prOducts
more competitively.
• Imports improve consumer choice. lUiports increasc the variety of produc~s and allow
cOnStllllcr::. to huy products that arc more precisely malci](,'{j to their taste. Because n'llIrkcts
arc open, U's. consumers can choose :'rol)1 seemingly countless models of 4-door sedans, 2
door hntdibaeks, sport utility vehiclcs. lInd pick~llP trucks; they can also purchase tropical
fruil ..l1 )'ei1:~round ... lmports,may also cOlltribute (0 higher productivity by giving producers
access to a wider array of inputs and equipment. The U.S. computer industry is among the
world's most competitive, in parL because it can combine U,S, software and microprocessors
with other components made in Asia and elscwhere.
• Imports stave offinflaiion. Recently. impons have provided an nnti~innatlonary safety.valye, .
Many economists ascribe some pan orthe recent quiescenl perfom13nce of inflation to our .
ability 10 draw on global capacity. They believe tbat this allows the economy to achieve
higher levels of emplo)'lTJent \vithQut igniting inflation. This has allowed the Federal Reserve
more leeway to keep interest rates Jow, which may, in tum~ have contributed to the current
low m!e orunemploynJenl.
Specializafitlll n'lJuires adjustments. The;gains from trade urc not zero-SUJll, in that one country
docs not "win" at the ex?cnse of anothcr, In·ract, thc shared HSpcct of the gams (rom.l.mac
across cowitrics is n cen!r>d ienct of economic!;, NCYCl1hcless, by its very lim'Jre, sfjecializnlion
invoivcs adjustments that !Hay create winncrs and l(lscrs within countries. 10 the race of open
markets and increased foreign competi:ion, some industries within a country will expand and
others may contract Adjusl:nents for businesses and workers in shrinking industries can he
-13
�costly and painful: Although economic studies typically find that trade is,a small factor
roughly 10 percent or less - in overall job displacement, some workers may face short-tcml
unemployment and others may even face pcmlancnt wage reductions if they arc unable to find
"
"
camparabl e.1o bS III expan d"IIlg sectors. 17
Trade, therefore, presents domestic challenges. But the fact that trade produces additional
income means that, in principle, resources are available to help those who are hurt either to
adapt, by becoming more productive and competitive in what they w.ere already doing, or to
switch to new activities. One way to help in the transition is to'develop programs that directly
address the problems of dislocation. Another way may be to encourage trade, while limiting the
pace at which change occurs. Such gradualism may be desirable under certain circumstailces,
but attempting to prevent liberalization would be counterproductive. Permanent protection'
inevitably costs more, in foregone benefits, than it saves. The key lies in an economy' that is
sufficiently flexible and vibrant to meet the ch~lIenges of reaping those benefits.
•
Domcsti(~
programs help workersjilldjohs. To address problems of worker dislocation
regardless of cause - the Clinton Administratior} has developed new programs to assist in job
search and training. These programs add to the assistance that is already available to, .
displaced workers through the Federal Trade Adjustment Assistance program. The.
Workforce Investment Act of 1998 retains a funding stream for dislocated workers and
promotes customer access and choice through a one-stop service delivery system and
Individual Training Accounts. The Administration has also ensured that lifelong learning tax
credits and scholarships are availabl~ to assist workers in preparing for new jobs. Federal job
and talent banks also provide new mechanisms for helping mi!lions of U.S. workers. On a
single day in October I 999,.Americu's Job Bank posted over 1.3 mi!lionjobs; that same
month, America's Talent Bank held over 400,000 resumes,
• The WTO Agreements (lnd U.S. trade laws provide cushions. For example, key features of
the Agreement on Agriculture and the Agreement all Textiles and Clothing phase-in
gradually over periods of six to ten years. The WTO Agreements also allow countries'to use
certain fonns of safeguards to protect temporarily against import surges that seriously injure
or threaten to seriously injure a domestic illdustl)'. The United States has invoked its oym
safeguard provisions three times since the creation of the WTO, in cases involving com
brooms, wheat gluten, and lamb meat.
17 Data from the 19805 show that trade contributcd at most 10 percent of the observed displacements from
manufacturing in the worst year of that decade. See Ecollomic Report oJthe President (1998), pp. 244·245. A 1994
study of pot enti ;II Uruguay Round effects estimated that about 0.2 percent of U.S. work force could change jobs as a
result of changes in patterns of trade. This compares with annual job changes for other reasons of JO percent or
more for the workforce. See Susan M. Collins and Barry P. Bosworth, editors, .The New GA IT. ImplicationsJor the
Ulliled Stmes (The Brookiogs Institution, Washington, DC: 1994), p. 2. A Congressional Budget Office report on
. NAFrA concluded that the agreement would result in relatively little job displacement. The total number of jobs
105\ would probably be wcllunder half a million, spread over at least a decade. By way of comparison, nearly 20
million workers were displaced during the 19805. Sec U.S. Congressional Budget Office, A Budgetwy lind
Economic Anulysis uJthe North Americlln Free Trade Agreement (July 1993), p. xv.
�III. The \VTO Promotes Rules·Based Market Opening"
A comparison of trade and protection patterns, pre- and post-GATT, illustrates the importance of
the multilateral trading system in opening foreign markets, establishing an effective rule of law,
and promoting economic growth intcrnationally. Before the GATT, trade was highly susceptible
\0 changes in economic and political circumstance. Barriers appeared during WWI and
worsened during the inter·war period. Since the ~reation of the.GA TT in 1948, markets have
becOl:ne increasingly open and integrated. Through eight successive rounds of negotiations,
major industrial nations', tariffs on manufactured goods have dropped by about 90 percent, some
non·tariff barriers have been brought under GAIT disciplines, more sectors have been covered
more fu.lly by trade rules, and participation has increased nearly six fold.
To what does the multilateral trading system owe its strength? Ultimately, it is to the belief of its
members that their participation, including adherence to trading rules, is in their own self·
interest. The WTO, which was established in 1995, reflects an agreement by eaeh of the
members to constrain its own behavior in return for other members constraining theirs. Nations
have voluntarily agreed to such commitments because on balance they are beneficial. In making
these conimitments, nations are exercising, not giving up their sovereignty ..
Moreover, the WTO has sought to strike an appropriate balance between the needs of the trading
system and those of individual members. The rules, such as those for resolving disputes and
setting standards, have become mor·e transparent and predictable, but they arc not \. . holly
prescriptive. They leave considerable scope for national autonomy and diversity. The WTO
Agreements do not and will not preclude th~ United States frol11 establishing and r:naintaining its
own laws; impair the effective enforcement of U.S. laws, including laws to combat unfair
imports; or limit the ability of the United States to set and achieve its environmental; labor,
health; and safety standards at the levels it considers appropriate. WTO panel rcp0l1s have no
direct effect on the U.S. legal system and do not change U.S. law.
For all of the reasons discussed, the United States, including its businesses,.·farmers, workers,
and consumers, benefits substantially frolll trade liberalization. Though it can be difficult to
separate the effects of liberalization from those of other economic and political events, economic
models can be used to assess some of the effects of reducing tariffs, reducing export subsidies,
and eliminating quotas on countries' trade,.production,.and income. Such models-partially
capture the I~ffects of specialization and resource reallocation in goods trade, but are less adept at
capturing the effects of changes in non-quantitative rules of conduct in goods and services trade,
of improvements in product selection, and of some. dynamic effects. On balance, they likely
.
understate the long-term benefits of market liberalization. Moreover, as industrial tariffs in
industrial countries have been so greatly reduced, trade negotiations have increasingly focused
on· services, nOIHariff measures, and changes in rules whose benefits cannot be rcadily captured
. in fonnal economic· models .. The scope of coverage of economic. effects captured in these
models Illay in fact be decreasing due.to the changing nature of trade agreements.
-15
�The Trading ~:ystern Provides. a Framework for
Libcruliz~ti()n
,
A comparison of trade and protection paHems, prc- and post~(jATT, provides compeiling
evidence the importance of the \VTO in promoting market liberalization and all effective rule
aflaw, III During tbe first half of the 20th Century, tariffs rose and sometimes feU~ depending on a
number of (heloTS (Figure 5). In the years preceding the GAIT, markets were susceptible to
political rressures and protectionist interests, Since :he 19505, trade hU5 hecome increasingly
open and the world economy increasingly integrated. The growth afworld t~ade has consistently
outpaced the growth of world output (Figure 6).
or
Figure 5: Average U,S. Tariff Rates 1900-1998
(i0
.
50
Average Tariff on All Imports
to
o
S<.)~r"<:
t; S. hl\Cn1Jlji()fl~1 Tf~d~ CummiS$i,m
Note: Aw:lllgc uritT ml<:$ ate (ldinijd .a~ 1~ mtio of dl,i.\i\!$ collected \0 iw.purt value,
t! The u:$cus:.km of the history of world lrade ill the·first half of !he 201h Century draws heavily from DQuglas A.
ltv/in, "The GAIT in Historical Perspective," American Economic Review (;'lllY 1995), pp. 323~328 und Douglns A.
Erwin, "The Smoot-Hawley l':nif!: A QUllJltitative Assessme:l1.," 1'1:1.' k-C1-'i:;w of ECOfwmics {Ilid Smrisrics (1998), pp.
3Ui':B4. Fm mOle on th<.l p:';wWW! period, set: ;rwj!l (1995), pp. 323-324.
-16
�Figure 6: \"orld Exports, GDP, and Tariff ..:sttmntcs
Post~\V\VIl
'5
1600
40
1400
35
llOO
30
World Real Exports
(right seale)
Industinliud Countries' Avcragerar:iffs
u
."",
(left scale)
•
E 25
v
1S
_____'
~-:...----
5
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~I 400
~
World Real
.
~
~
rn m m
, ,
'"
~
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~
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~
rn rn
,- =
ro
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~
ro
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m
~
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ID
ro
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GD!~
(tight seu:c)
~
~
200
,, 0
~
~
= = = = = = = =
- - - '" ro ro ro ro
-- -- -- - - - -
~
~
.
,
___- - - - - .
'"
X
600
•
~
~
,
10
"
0
80b
I
,
•
;;;
,
,
,
,
,
,
J
" 20
v
0.
0
~
0
1000 0
-- -
~
~
F.xp91't a:xl C:)P dlua awe: (rom An2.us Maddison, Momwrmg lil" World Ermumlyl G1ll-JV91(lxvdcpmcni Centre
cf the OI:(D 1<)9S). ;If!. tl1 r.m! 239. Tar'li estimates an: kmxl 00 Stoe<:ke! et ~I, We.Hern thldill!;: elOCJ(I900), I'Ip.1.;;,
..
NUIC; GDI' atd Ctpofl Cla:a uc c)(lrnpollih,:d to 1997 1I~;flg data from 1M Wrnid Trude Organization,
.
Markcts open 01 turn ofcenlllry. At the tum- of the 20 Century, Illiernatlonal trade was
'governed' by a loose network of bilateral treaties, subject to most-favored I1ntion (MFN)
clauses. Countries could alter their tariffs at wiJ1. For the most part, countries made use of
tariffs, rather than other Conns of marke,t protection. For some cou'!tries, including the United
States, tariffs were an important source of public revenue - roughly speaking, customs receipts
accounted far about halfofU,S, government revenue from 1870 through 1910. Absenl
imernational connict. this trading 'arrangement' \vorked reasonably well. Data on trade and
income for the same time period suggest that markets were relatively open":' for a group of 1 J
major countries exports grcw morc rapidly than output. l '}
,
Trade harriers ri~'e lVitlt onset of wwr With the onset of\VWI, some cO:Jlitries igtroduced
higher tari rfs; along whh import quotas and other norHarirrtratlc impediments, The trend did
not reverSe itself after the war - coun:ries' border measurcs grew more onerous, Ilot less, Owing
partly to the rise ofprotcctionisn'., world trade collapsed. In JUDe 1930, thc U.S. Congress
legislated the Smoot-H~l\vlcy tariff to protect U.S. agriculture and other sectors, Other countries
. followed, According to a recent study oflhc effects oflhe Smoot-Hawley tariff on U.S. imports
and economic well being, the legislation led to an lllcrease-in.impol1 duties of about 20 perce:ll.
on avcmgc, resulting in a 5 to 6 percent increase in the pnce of imports?3 Though it is difficult
10 separate the effects of trade policy from those of the Great Depression, the relationship
'" Irwin (1995), pp. 323-324_ The II major couqt."ies'are Austmlia, Belgium, Canada. France, Gennany, Italy, Jap:ln,
Nom'uy, Sweden, the United Kingdom. and tne United States.
;0 Im'in (1998), p, 333.
·17·
�between world trade and output is n:vcaling, Ofp<l:--ticular note . . VaS trade's failure.to keep pace
with real output during the early stages or economic recover), ~ for the s:mlC group of 11
coun~ries mentioned above, output was about 15 percent higher in 1938 than in t 929, but exports
were about 15 pertent lower. l1 The failure ofintemational trade to j01n the recovery suggests
tl~c significance of the lise in trade barriers.
Multilateral trading syMeill emerges after WW/l, At the cnd'ofWWH. faced with the legacy of
protectionism, the need fOT reconstruction, and the specter of CommU!:isn:, tbe Ul:ited States led
:he caH fOT an open trading system. Thc'Un:ted States sought to secure tbe benefits
trade for
itself and any other cOuntry willing 10 'play by the rules,' to promote economiC development in
Europe ane ASI3 t and to enlarge the scope oCtile market system to inc)ude as many countries as
posslble_ In 1947, 23 cO'Jntries gathered in Geneva to redJ.:.ce trade barriers; the multilateral.
trading system eventually emerged from these deliberations, bUl other discussions of a morc
broadJy b~sed International Trade Organization did not move forwJrd, For nearly 50 years~ tbe
GATT served as both a!1 ielemational agreement and an intcmational organization. Through
s'Jccessive 'rounds' ofnegoliations, the GAIT succeeded in three important reg.ards: First, it
established a rules-ba.<,;ed~Lrading system; second, It grea:ly reduced the tariffrates on industrial
prodl,tcts; third, it drew in new participants (Table 2).
or
�Table 2: Eight Rounds of GATr Kegotiations
, Years
J947
J949
J95J
J956
J960-6J
Place (Nam~)
Geneva
An:)ecy
Torquay
Geneva
Geneva
(Dillon Round)
Subjects Covered
Countries
23
Tariffs
Tariffs
J3
38
Tariffs
Ta.riffs
Tariffs
26
26
1964-67
Geneva
Tariffs and anti-dumping
(Kennedy Round)
measures
1973-79
Geneva
(Tokyo Round)
Tar;ffs, non-tariff measures,
311d plurilateral"framework"
62
J02
. agreements (also referred to
as '~codes")
1986-94
Geneva
Tariffs, non..'tariffmeasures,
(Uruguay Round)
'new rules for services,
intellectual property rights,
123
textiles ar.d clothing., and
agricuHure; creation ofthe
WTO .and strengthening of
tbe dispute set·Jement mechanism
Source: The World Trade Organization, "Roots: from Havana to Marrakcsh,"
http;//wlNW.wto.orgiabout!facts4.htm (downloaded September 19.1999)
• .Rules promote fiur and open trade. Consistent with U.s, goals for an opcc ~rading system,
the GATT was founded on principles of consensus, !"cciproe:ty) and non~discrimination - all
participants were granted MFN status and their preduc!s accorded national treatment. Any
concession granted to one partner would be granted to all partners and, upon entry inlo a
country, all products would be treated the same :-cgardlc::,s oCtheir onglo. The same basie
principles now apply generally to WTO members.
• indu:,;rriai tariffs decline dramatically. At the end of WWII, the average unIT on industrial
products in developed countries was abo.ut 40 percem. The Genev,a·negoiiatlQns of 1947·
involved 23 countries and resulted in 45,000 tariff concessions, direCting about o:lc·fifth of
-19
�the world's tradc,22 By the 19505, industrial (ariiTs in df.vclopcd countries averaged roughly
1J
25 percent Later rounds in Annec'y, Torquay, and Geneva led to further reduc:ions', By the
late 19605, the average tariff on indus!rial prodects in developed countries fell to about 12
percent By the end of the Uruguay Ruund phasc In, the average will be 3.8 percent,
• Parddpation increases nearly six/oid, Over time, the muliiiatcraltrading system has
become lIicreasingly attractive to a widening range of participants. It has helped maintain
stable truding retal;onships in the face of economic and political changes. The system has
provided a forum to engage the EU <'.r.l! draw il: developing, newly industrializing, and
transition economics. in 1947 there were only 23 "cont:acting parties." By the mid~ 1960s,
partlcipalion hud risen to 62 countries, The Tokyo Round of lhe 1970s involved 102
participants and the Uruguay Round involved 123 participants; both of these rounds included
l~lany developing cour-tries Morc and more co:-mtries have been ab:c to reap the·benefits of
open markets through oulward-oriented development stralegies. Today, the WTO claims 135
4
mef!lbers and another 32 nations are seeking accession,2
Recent Negotiations Purther tJ.S. Policy Objectives
Throtlgh thc 1960s, the GAIT focused on reducing industrial tariffs. In this regard it was quite.
successful, but the 19705 gave way to new and additional protections, including qy:otas,
voluntary export restralots, :l.'1d other non~tariff measures. Moreover, some important sectors.
such as services and agriculture, remained largely uncovered, Thus, the GA TT began to tum its
anention to l'lolHariffmeasurcs, sectoral expansion, and> to lesserextent, institul10nal refoml.
The Tokyo Round madc less progress than some might have hoped. but laid the groundwork for
more successful negotiatio!,s in the Lruguay Round. Although the Tokyo Round failed to bring
agriculture into the GAIT, it gave risc to plurilaterai agreements or "codes" in some' arcas,
including suhsidies, standards, impon licensing procedures, and government procurement. In
niuny other regards, t;,e GAIT was also failing behind the times. Tr<lde in services and the
p;otcctio!1 of intellectual property rights were bccomi!1g increasmgly important in the global
economy. but the GAIT lacked adequate treatment of either issue The Vruguay Round made'
significun! gains in many oi'lhese areas, thus helping 10 usher in a fleW era in intcmationaltradc.
,
.
Uruguay Routld opens markets amI streJlg/hem' rules. The Uruguay Ro:.md brought more
sectors more fully-into the multilateral trading syslcrn, strengther.ed the rules ofintcmational
trade, and established the WTO in 1995 (Appendix) The Uruguay Round brought agricultt;;-e
and textiles (:"Ind clothing f':10ro fully into the GA IT'and took 'first steps' toward liberalizing
trade in those sectors, The Uruguay Round also crc£ltei.l 6e WTO, with its separate agreements
011 s<:r:ices and inteHectual property, a more effective dispute settlement mechanism, and a
'::milt-in agenda' 10 promote liber:.l1izmion between fonnal rOl~nds.:5 Beginning in 1995, the
n See the World Trude Organlz.Jlwn. "RDotS: f~om Havana :0 Mrlrrakesh," Ilttr.:!iw",:'\V. wto.or,g,'::.boul/lhcts4JltIn.
(down!o<idc:tl S';p:ember :9, !999 and last updated .!;n:uary 14, 1998).
2} Andrew Stoeck,;:;, David Pearce, and Gary Banks, H\Vcstem Trade OIocks; Ganie, Set or !I.·latch fO! Asirl·PaciEc
and tbe W m;d Ecooomy?"' (Cent]"e for btcmrltl(;lla~ Economics, i'u:.slraliw 1990), pp. 7-8,
1. The 135 mcrnbers illC;U~': Estonia, Whl;;}; jOined lhe \VTO (~n November lJ, 1999.
11 Some oflhe Un;guay RO·Jnd Agl(:ements se1 timctabic& (or fafJre work, including new negotiatim:s in some arc<.lS
and assessmcrm afthe situation al specIfied limes in Glhers. See, :he World Tr<.\d(: Organization, "About the WTO,
Beyond the Agrccmer.t£," http:!tww",:,wto oq;!lIbout!bcyond2,htm (downloaded S(:ptcmbc: 19, 1999 j,
-20
�GATT no longer acts as an intclilatiol:al org~mization - inlhis capacity it has been replaced by
the WTO -- tbough it stt!! remains as an agreement on trade in goods, C:1dcr lhe auspices ortlle
WTO, the GATT now stands next to the General Agreement on Trade in SerVices (GATS) and
the Agreement on Trade-Related Aspects oflmcllectual Property RIghts (TRIPS)" Under the
Dispute Settlement Understanding (DSU), a single dispute senlement procedure covers disputes
among all WTO members pertaining to the WTO's multilateral ~greeme!its.
Many key accomplishments of the Un.:g~lUy Round play directly to C.$, policy ?bjeclivcs and
economic strengths. The Unite-d States 1m$. long recognized the imporlanee of n credible rules~
based system. both to open foreign markets and to spread the gains from trdde as w~dely as
possible, The Uruguay Round ofnegotialions moved much further toward creating such a
system. The United States is also a leader in many'areas, including higlHcch manufacturing.
agriculture, and services, whiclfstand' to benefit from the WTO Agreements a:ld ongoing
negotiations under the built~in agenda.
Post~UrllguuJ' Round "egO/ia/foUls continue process. Thc built-in agenda called for further
negoliations in agriculture and services and additional work in many areas. To dale, post
Uruguay Round negolialions'nave yielded market aceess commitments in financial-services,
basic telecommunications services, alid infoIT!:lulion technology, opening up new opportunities in
areas in whieh the United States is highly competitive?!;
• -Financial services, On December 13, 1997, 70 WTO members concluded negotiations on
financial services. They agreed to the broad liberalizatiQ)1 of their banking, securities, .
insurance. and financi ..l data sen'ices sectors. Based on recent estlrnalCs, the commitments
apply to about $18 1rillion in global securities assets. $38 trillion in global bank lending, und
:ahoLU $22 trillion in worldwide insurance premiums" This brought !o 102 the total nun:bcr
of WTO members with financial se:,vice5 commilments.
• Basic wlecommunications scnifces. On February 15, 1997, the United States and 69 other
WTO members concluded negotiations on basic telecommunications services, such as
!clcphonc services. The agreement commits cOl:.nlrics to provide market access and national
trealment to service sl~pplicrs from o:her WTO members. Sixty-five countries also agreed to
a set of speei ftc pro-competitive regulatory principles, The agreement eliminates cenam
restrictive practices. in countries that account for 95 percent of world telecommunications
revenues. ~lmounting to about £600 biiHon in 1996.
26,
• iJ!fimnwiOIl technology- On March
1997,40 countries 'lgrccd 10 eliminate import ulities
,and oth(:r charges on inro~ma(iolllechnoklgy products. mostly by 2000. Since 111at time, the
number of participants'has grown. 1hc agrecment Ci)\'Crs global infonnation technology
products such as. semiconduclors, telecommunications ctjuipmcnt, computers and computer
equipmcnt, and software. Participants ~\ccounl for ovcr 90 percent of trade in this sector, .,
2& Sumr:1ilry of rcsu;ls from the Ecr?!tiHllh. Re/Jorr o/the Pnwhleli! (1998), pp. 224-226,' and n'lIn the World Tr;;,dc
Orhani:wti~;n, h!tp:ff\\~'w ,v..10.o:WUPoiH (downlolded S"'''Pte;ntler 19. 199<)}- Jiscusskms :Jill{) cmllinued on ".he
!llovcment of lIa:ural perso-ns," i.e., thc entry and temporary Stay of pCfStmS for the purpose of pray,ding servizcs,
and on maritime transpon services. 'nle fonner discnssions were completed In July 1995. achicving modest results.
whlle fhe llltte. were suspended.
, .
·21·
�Countries Gain from Lower Barden;
The Uruguay Round continued the focus of the GATT on tariff reductiol~S, and extended
agreements to previously neglectcd sectors. such as agriculture, textiles and clothing. and
serVlces. Substantial breakthroughs were achieved in new areas, such a,<; trade-related aspects of
intellectual property rights. Moreover, the creation of the WTO provides an improved
institutional framework for resolving disputes and monitoring countries> perfonnance 1n the
trading system, While benefits are expected from each of these accomplishments, numerical
assessments are limiied 10 certain conceptually quantifiable features of the round, namely
reducing tariffs, reducing export subsidies, and eliminating quotas on some industrial products,
textiles and clothing, and agricultural products?' The assessments do not capture the gains from
strengthened rules, such as those found in the dispute seulement procedure and the new
agreem'ems on services and trade~rcbtcd aspects of intellectual property rights. Nor do they'
~apturc short-term adjus.tment cests. 2!1 Although restricted in sco~c, these assessments provide
estimates of some orthe potential benefits of the Uruguay Round.~9 They also provide insight as
to the distribution of effects across countries and across industries within countries,
Recent studies evaluating a narrow range oftne potential gains from the Uruguay Round,
estimate that annual global income could rise by 0.7 to 0.9 percent or S J 7l billion to $,214 billion
upon full implementation, in 1992 ·dollars.3o Most of these stu'dies sho,-\' gains accruing primarily
to dcvc1()pt~d countries, perhaps not surprisingly, because many of their commitments urc more
directly quantifiable, For the United Stutes, the annual gains could be about 0.4 to 0.6 percent of
GDP, amounting to about $27 billion to $37 billion in 1992 dollars, Thesestudics also show lhat
some developing countries stand to gain significantly, especially relative to the size of their
economics. Although the projected gains for many OEeD countries, including the United States,
2i Evcn m this rcgllld thc agscs~tncnis surfc:t c(l!lsiUc:•.:ble limllalions. None fully dcpiJ;:ts all ~EctO!$ of tht: U,S. or
global economics. In particular, they provide: more stylized representations Qf some of the m;mura.;:tn!ing scctcrs in
w!ilch thc United StaleS is highly c(lmpclitive. TIllS kind or"aggregatiol\ bias" may sigmficantiy understate the
benefits o(Dlc agf('cmeut to the United StlltCS. Sec Hugh ,\1. Arce and Kenneth A. ReineJt. "Aggrcgali.:.n and the
Welfllre Analys:s of US Tarifrs,":n journal ofEconomic Studies, Vol. 21, No_ 6 (1994), Pl'. 26·30.
It As nQted. previo'Jsly, 11 ! 99<: s\I.:dy cs1imatc-c thai about 0.1 percent of U.S, work force could clumge jobs as a
result of dlU!tgcs III pntterns or trade, See SU5lln M. Collins and Barry P, Bosworth, p. 2.
:9 )11e diSCUSSion b('low draws rrom the most reccn! revisions of four published modek nH:SC rcvisIons. based on
the ticl'J:!} >commitments made by the countric:s in the negotiations, tend to proji.'c{ slightly lower £<Jins than
prevIouslyeApected. See Ian Goldin and Duminique van der Mensbrugghe, " ..\ssessing Agricuhu(al Tarifflcation
Ul,der the Umguay Round," Thomas Hertel, \ViU Manin, Koji Yunagishitr.a. and Betina Djm~ral1..n. "Liberalizing
Manufactures Trade in a Changing World I~OnOll!Y:' Glenn W. Harrison, Tholmls F. Rutherford, and David G.
Tau, "Quamifying the Uruguay Round," {lnd Joseph F. Francois, Bf<ldiey McDonald, and Hak411 Norosly6m, "The
Uruguay Round: A !'\umcric<llly l1ascd Quantitalive Assessment," in The Uruguay Round ana tlte DevelopiJlg
Countrics, Will Martin and 1.. Alan Winters, eds. (\l/orld Bank and Cambridge University Press, U.K.: 1996}. pp,
156~291.
models differ in many respects. including the base periods chosen, parameter assumptions, and the
agreements emphasized (for example. Goldin et a!. focuses on agricultural' liberalization, while Hertel et al.
emphasizes textlle: and clothing liberallzation). As alcsull, the estimates are not fully comparable,
.w See lImris<)n eel aI., p, 23& and Fr.mcois et at, pp. 282-283. These estimates are from dYllamic ;;!1l\ulllttul1s,
incorpor:.ltlng incrnsing remms to scale alid imperfecl competition in their representations of the U.S and glowl
ecunomics and using 1992 as the he:nchm:lI'k for comparison. TIle dollar figures show g;;ms relative to U.S and
global income in 1992 in 1992 donors, \Vjth slatic sp;;cific:llion;;, the liberalizatIOn of trade in goods IS estimated!o
incnce llll annllll gam in the range 0.2 to 0.4 pcrrem of g.lobal income, or $40 bllioll to $99 billion, Whtle the
cynanm: $uuulations mly he more fc:OlirHic thall their sla<.::c counlerpar:s, lhey mclud<;- reatures thaI are a;so IT-me
difficult w clmractcr;zc l.IccuIlltcl ,\
The
�amount to less than one percent of their respective national incomes, the gains for several smaller
countries, such as Thailand, Malaysia, and Philippincs, could be as much as tcn percent or more
of their respective national incomes. 3 ] Some Icast-dcvcJoped countries could be affected
adversely in the short run, but possible negative impacts could be offset partially if they were to
(urther reduce their own trade barriers. Additional liberalization could also bring more rapid
growth and enhance technology transfers. Sectoral estimates vary widely:
• The annual benefits of the Agreement on Agriculture could amount to $5 billion to $68
billion. 32 Most of the studies show benefits accruing to OEeD countries, including.the
United States, and to S0111C upper-income developing countries. Though a significant 'first
stcp,' the major achievement in the Agreement on Agriculture is more in bringing the sector
into the GATT framework .than in actual liberalization.
• The annual benefits of the Agreement on Textiles and Clothing '(ATC), obtained through
abolishing the multi-fiber an'angemenl (MFA), could amount to $20 billion to $118 billion. 33
The United States and EU would derive substantial gains from eliminating the MFA quota
restrictions, mainly because their consumers and fimls using imported products as inputs see
significantly lower prices. The effects on other. countries are.mixed.·
• The annual benefits of Uruguay Round liberalization of industrial products, excluding
34
textiles and clothing, could amount to $59 billion'to $87 billion. The benefits of
liberalization in this sector are more evenly distributed among developed and developing
countries than in the cases of the Agreement on Agriculture or the A TC.
Taking a slightly different approach, estimates of the benefits of trade liberalization can also be
derived from analys~s of the costs of protection. For example, a study of the costs of protection
in the United States finds that tariffs and quantitative import restrictions ill place in 1990 cost
American consumers about $70 billion, over 1 percent ofGDP.35 The net welfare loss, after
deducting tariff revenues and transfe~s to domestic producers was $11 billion,
See Hertel et at, p. 203 and Harrison et al., p. 237.
See Goldin et al., p. 170, Harrison et al. p. 238. and Francois et al., pp. 282-283
33 See Harrison el al., p. 238 and Francois el al., pp. 282-283.
34 Ibid.
.
35 See Gary Clyde Ilufbauer and Kimberly Ann Elliot, Measuring the Costs ofProleelio/l in Ihe Unitcd Slaies
(Institute for International Economics, Washington, DC: 1994). Returning 10 the earlier discussion of.the Smoot
Hawley l<lrif1: quantitative assessments suggest that the tariff accounted for aboul 7 percent of the 40 percent decline
in imports in the two years after the legislution took cffeet. However, less is knowll <lbout the associated loss of .
economic welfare. Estimates of the effects of the Smoot-Hawky tariff on U.S, income range from less than $5
million in a partial equilibrium economic madelIa $60 billion 10 $460 million in general equilibrium models, all
measured in tenns of 1929 donars.and amounting to less than I percent ofONP. See Irwin (1998), pp. 331-333.
1l1ese figures tlo not, however, account for Ihe added effects of the similar actions laken by olher trading nations.
31
32
-23
�Nc'w Rules COJI"cy Additional
~t:ncfits
Among its most significant accomplishments, lhe Uruguay Round greatly strengthened the rules
of intemationallrade. Good govemunce,' i.e., an cfrcctiv,.e J1.lie of law, is esscl:dal. The promise
of market liberalization for U.S. businesses, ramlcrs, workers, and consumers, hinges crucially
on transparency and predictability, For example, if U.s. businesses lack certainty that their
products will be treated fairly in fOT~:gn markels. they may weigh the risks and opt against then:,
choQsing to rorgo opportunities for expansion. !f intellectual property rights are ambiguous, W.S, .
businesses may hesitate t9 trade in products that arc "knowlcdge~bascd." In effeel, they may not
'choose to spl!ciulize in the things they do best. Or, they may limit their sales to domestic markets
and affiliates. As a result, the U.S, economy may 110t reap the [ull benefits of trade. In these
ways, the multilateral trading system is more than "just" a trading system - it is a system of r.des
that positively impacts business decisions and stanc,Jrds Df living.
More specifically, the Uruguay Round introduced new mles for agriculture, textiles and c-lolhing,
services, illtellectual property, and dispute settlement, and other areas, Some of the rules were
quanlitaliv(~,
such as those requiring reductions in tariffs on certain agricultuml products. They
wcre djscu~;sed previously. Olhers we:e not, such (hose pcrtiLlning to na!ionaltreatmcllt for
services and prOtection for intellectual propcny righls, As noted above, economic models often
have difficulty capturing the direc-t economic benefits of non-quantitative changes, but careful
observation provides evidence of their importance. The discussion belo\'. highlights three such
arcas, dispute settlement. and services, and intellectual property_
. Di::.putc setliemelll proce~s illlprOl'cs. The DSU improves on GAIT dispute settlement
proceedings by expediting decision making and instituting an appeals process. 36 It also
establishes procedures to ensure consequences for failure iO implement panel rulings. One is ;hc
acceptance of cross-sector suspension of concessions for countries that cI:oosc not to abide by
the ruling. Note here, that the proccdlirc presents each member with a choice. A WTO dispuie
settlement r.ancl ca!1l10t force the United States, or Llny other member, to cbange its h1W5, Only
the United States determines exactly how it will respond to the recommendations ora WIO
panel, if at .tll. If a U.s. measure is found to be in violation of a \VTO provision, the United
States may I_h:cide on its 0\\,11 to change the :aw; compensate a foreign c-ouatry by lowering trade
barriers of equivalent amount tn the same or another sector; or do nothing and possibly face
retaliation by the affected country in the [01111 of increased barriers to U.S. exports .. The Uniled
Slates retains full sovcreignty in its decisions as do all other WTO members.
At limes, however, the results may be disappointing. as in the recent case of',he EU banana
import regime, The WTO panel found ra~'orably for the United States, concluding thut the EU
import regime was not WTO~consistent, but the recommendation did not bring about a
'
salisfuctory change in EU policy. In this instance. the WTO arbitrators found that the United
States .vas being harmed in the. amount of$191 A million annually and accordingly could
suspend trade concessions equivalent to that amount. The United States did so by imposing J 00
percent ad valorem duties on a range of products, including hulh preparations. handbags, and hed
Portions oflbis dis2'J!.sion are drawn from the ECONomic Report (Jfrhe f'rcsuicn( (;998), pp. 223·224. Tucy have
been :nooificd to inciude new auta from the Office (1r'the U"S. Trade Representative.
;\{>
-24
�illlcns. Nevertheiess, in the nearly five years since its
il~stitU!jon,
many countries, includin,:; the'
United States, have made efficient use of the new mechanism, largely to their satisfaction.
The introduction of a strengthened multilutcral dispute settlement system lfi the WTO; together
with the Agreement on Agriculture, the GATS, and the TRIPS Agreement, has broadc!1ed the
scope of enforcement tools available to tbe Wnited States. In the 19805, the United States had no
efrective dispute settlement mechanism available to address problems in the areus of intellectual
property, services, and agriculture, WhICh the GATT covered barely or nol at all, Beginning in
1995, however, the DSll and the new WTO roles have pennitted the United States to usc
multilateral dispute settlement procedures to address the majority of issues that face U.S.
exporters. For example, trade in agriculture and lntcllectual property has feutmed prominently
on the U.S. roster under the DSU.
The results of 49 complaints filed by the Uni:ed Stales st:.ggest that the dispute settlement.
process has proved effective. The United States has prevailed in 22 out of24 cases: so far.
having favorably settled in J 0 cases without litigation and having won in 12 cases in litigation. J7
Only two of the 12 cases, those relating to the EU b.mana and beef import regimes, resulted in
retaliatory measures. Six cases are still pencin~ before dispute settlement panels and 17 are still
in the consultative phase or otherwise inactive. S The United States has used the dispute
settlement process to address conflicts WIth a variety or countries, the majority of which afe
major trading partners, Of the 49 compl<lints filed by the United States, 20 involved the EU <lne
affili~les, 5 involved Japan. 5 involved Korea, 3 involved Canada. 3 lnvolved india, 2 involved
Australiu, and the remainder involved others,
. Services agreements provide first steps lewanl potential gaius. The U.S. services sector has
grown substantially, in terms of both US, income and exports, Private and public services,
including travel, transportation, retailing, <'ldvertising, insurance, accounting, engineering, and
education, accoul1led for 53 percent ofU,S, GDP in 1998, c'ompared with 32 percent in 1950
(Figure 7). Over time, the share of services in total U.s. exports has also increased, Private and
public services accounted for about 29 perCCnl oflJ.S. exports in 1998, compared with about 17
. pen;:ent in 1950. (During the same period, however, the share of services in U,S, imports was
mostly declining or flat.) In J998, the United States accounted for 18 percent of all comm~rciul
service exports, ranking first in the world,l9 Roughly speaking, the data are consistent with the
view that the service sector is one in which the United States enjoys,a comparative advantage.:
Taken together, the data suggest V,S. services exporters, and possibly some importers, stand to
benefit from continued market liheralization.
n The United Slates did not prevail in IWO matters, one of which involved three separate cumplaints.
)S Of the 33 comptain! brought against tbe United States, 10 were settled "out of court" 5 Were lost in litigaliolt, 7
.
are in panel c.r appellate phase, and 11 arc still in coasuliations or otherwise inaCtiH.'
J9 Wor!<l Trade Organization, hnp:flwww.wl(I.oriVwl0/Slatis/prerelease.iltm (downloaded November II, 1999).
-" Sce Catherine L Mann, Is the
Trade Defidr Susrainablc? (lnstiulic for lr.lcmational Economics, Washington,
DC: September 1999).
u.s.
-25
�Figure 7: Services as a Percent of U.S. Trade and Production 1950-1998·
60
50
Service Production as Percent orGDP
\
40
Service Imports as a Percent of Total Imports
o
o
=
=
=
=
=
u.s.
Source:
Department oj" Commerce, Bureau of Ecollomic Analysis
NlltC: jMa prior to 1~59 arc 1101 suhjccllo Ocloh~r I<J<J<J ,bin revisioll.
Reccnt data on traJc in private services alone point to potential areas of gain from GATS and
further negotiations. Betwecn 1994 and 1998, total U.S. exports of private services rose fro·m
about $186 billion to about $246 billion, growing on average by about 7 percent annually.41
Within this category of trade, U.S. financial service exports increased by about 24 percent
annually, U.S. insurance service exports increased by about'14 percent annually, and U.S.
business, professional, and technical service exports increased by about 12 percent annually.
U.S. exports of royalties and license fees grew by about 8 percent annually, just ahead of the
sectoral average. U.S. exports of financial services and insurance grew much more rapidly
between 1994 and 1998 than between 1986 and 1994, the period in which the Uruguay Round
was negotiated. By contrast, U.S. exports of business, professional, and technical services and
42
royalties and license fees slowed somewhat in the later period.
u.s. private service imports increased more rapidly in the later period than did U.S. private'
service exports, but· from a smaller base- they grew from about $119 billion in 1994 to about
$165 billion in 1998, at an average annual rate of almost 9 percent. Here, the top gainers were
financial servi.ces which increased by abollt 23 percent annually, business, professional, and
All cited growth rates arc derived from nominal trade figures.
The annual growth rate in U.S. exports of all private services was somewhat lower in the post-Uruguay Round
period, 7 percent between 1994 and 1998, than in the pre-Uruguay Round period, 12 percent between t 986 and
1994. The growth in U.S. exp0l1S of goods also slowed ill the later period, increasing by 8 percent annually between
1994 and 1998, compared with 11 percent annually between 1986 and 1994
41
42
-26
�technical serviccs~ which increased by ahout19 percent annually, and royalties and license fccs 1
which increased by about] 8 percent annually.4J
Inrellectual property rights cOllvey suhsttmtifl/ ~'uille. The WTO describes intellectual property'
rights as "the rights given to persons over the crcations of their minds." Such creations have
helped contribute to the success of the U.s, economy. A recent study conducted by the OEeD
reports that knowJedge~based industries and services (including community, social, and personal
services; fimmcc. insurance, and ol11cr business services: communications services; high
technology manufactures; and ll1edium·high"~echnology manufactures) accounted for over 50
44
percent of Ihe value added i:11hc US. business sector in 1996. The United Slates ranked
second only to Gennany in this regard .. Another recent study finds that corporate patent activity
in 1995 reflected U.$, technological strengths in developing new medical a.nd surgical devices,
electronics. telecommunications, advanced materials.,and biorechno!ogy:tS Strong intellectual
property pmteclion - and enforcement - helps splir innovation, by providing assurances that U.S.
businesses mId ilwenlOrs will reap the benefits of their research and development.
Though only one indicator among many, daw on U.S. trade in royalties and license fees heJp
illustrate the importance to u.s. businesses of protecting inteHec;ual property rights::'~ In 1998,
U.S. exports of royalties and license fees., deriving from industrial processes, books, records,
tapes, broadcasting and recording
live events, franchise fees, trademarks, and other sources,
amounted lo about $36.8 billion. accounting for about 15 percent of all U,S. private service
exports (Figurc 8). This share has increased over the past decade - U.S. exports of royalties and
license fees. have morc\han tripled in nominal temlS. thus outpacing the growth in U.S, privrite
service exports overalL However; as noted above, the growth in V,S, exports of royalties. and
license fees has slowed somewhat in recent years, The growth in U.S. im~of[s of royaities and
liccnse fees has also outpaced the growth,in U.S, private servLce)mports overall- but in this
case, still accotuHing fOf a :dalivcly small share of the tOlal. 101988, U.S. imports ofroyaltics
and license fees tolaled about $2,6 billion and :lccounted for about 3 percent of all U.S. pdvate
service impofls; In.1998, t:1Cy tota;cd aboll~ $11.3 billion and accounted for almost 7 percent of
uil U.s. private servicc imports.
or
~) Fur the :nOS! part, the a:mual growth rates betw:.:cn 199.: and 1998 cx<eed::d those between 1986 and. \ 994. The
llnnllill growth nne in U"S. irr:ports of all private services was also higher in the post-Uruguay Round period, almost
pe::-ce:m between 1994 and 1998, compared with about ~ percent between 1986 and 1994.
,
~~ See Org~mi;:a!ion for Economic Cooperatiun and Development, GEeD Science. TechnrAogy and induslr),
Scomb(j(ml 1999, Benchmarking Kl!ow/cdgr:.}ja~·cd Ecollomics (I 999}, p. 19.
.
~:I See the Nati<ll1al Science Board, Science lind Enginc!cring hu!ica(ars-1998, Arlington, VA, Nalional Science
Foundatknl, 1998 (NSB 98-1), pp. 6-21 and 6·22.
46 For more on U.S. trade in royaLties a:Jc license fees, see Ihe National Science Board, pp. 6·)4 to 6·J6,
I)
-27
�Figure 8: U.S. Export1i of Royalties and License Fees 1986-1998
45
40
16
U$. Exports of Royalties and License Fees as a Percent of
U.S. Sen'ice Exports (right stale)
_.-A>-_.....___/
~
35
30
14
12
10
25
20
V,S, ExportS of Royalties rind License Fees
(left scale)
15
~
g
~
u
~
"
"
6
4
10
l
2
o
o
1986 1987 1988 1989
$oU!«;: S!JnvfcjCllrrClu 8Iismcs!, Jllly
19~9,
1m 1991- 1992 1993 1994 1995 19% 1997 1998
U.S.lkpartmer!lofCommerce, BI!~{jfEconom!c A~ly .. i~, p.
8,
Palent data. which provide a rough indk:ator of national 'inventiveness,' also help illustrate the
importance of intcllcctcal property rigllts protections. Not surprisingly, the number of patents'
awarded anllually to U.S. fim1s and individu:lls is also increasing. Over a 13-year period, from
1982 to 1995, the number of patents issued annually by tbe U.S. Patent and Trademark Office
grew from under (iO,OOO to over i 00.000, with more than half of the patents granted in each year
going to U.s. invcntors:l1 Moreover, U.S. inventors have also been active in neighboring and .
some furawlIY markets. U.S. inventors received more patents in Mexico than did other nOTI
Mexican lllvcllturs and they received more patents in Canadu than did other non-Canadian
inventors. They also olll~paced other foreign inventors in some more distant markets, such as
4H
Japan, Brazil, Hong Kong, India, Malaysia, and Thailand.
~1Ibid., pp. 6-19.
,
Ibid., pp. 6.22 and 6-23.
48
-28
�IV.l'he WTO Extends the Benefibi of Trade and Encourages: Growth
US, trade policy has long sought 10 usc the tmdlng systcrn to help promote economic
development Trade is often described as an 'engine of growth,' The weight of the evidcnce~
, including both historical insight and stalistical indicators! supports this view. For example, the
correlation behveen outward orientation and growth suggest a mutuaily supponive relationship
(Figure 9). Data from 1974-1985 and 1986·1992 show developing'countries with inward
oriented economlc policies e-xpericncing less al1Iiuai growth of GDP per capita than tllOse with
outward-oriented economic policies, In the later period, the differences in growth patterns are
cnm,more apparent. Moreover, a rules-based system that creates incentives for counlries to
adopt transparent policies and procedures can also help further the development process.
figure 9: Annual Growth of Rcal CDP Per Capita
in Selected Developing Economies
7
6
5
~
~
/
Strongly Outward·Oriented
Developing Economies
Moderately Outward·Orlented
4
!'.1odcfa:dy
lnward·Oriented
3
if
S:rongly
Inward-Oriented
2
j
i
0
·1
1986·92 '
1974·85
As evidence orits appeal, the mu;tilatcrallrading system has grown substa:1tially since its
founding. Today, the "'¥fO claims 135 memoc(s, including over l 00 developing countries,
compared with only 23 contrac1ing pm1ies in ! 948. Since 1995 seven new members lwve joined
the WTO - Bulgaria, Ecuador, Estonia, Kyrgyzstan, Latvia, Mongolia, and-Panama - and
another 32 nlltions are seeking accession. However, not all WTO members are well positioned
to make usc of these opportunities. Some, especially,thc least developed among them, lack the
necessary institutions and infrastructure to reap the full benefits of the multilateral system,
j
The United States has a strong interest in promoting econof'l1ic development il1temattonally for a
combination of humanitarian, poEtical. and economic reasons, Among these reasons is our own
·29·
�self-interest. Growth abroad creates ccmund for our exports and yields new SOl!fCeS of inputs for
U.s. manufrlclures, In doing so. it promotes growth in the Uni!ed States. Thus. v.:e have a direct
interest in seeing our trading partners prosper. This means 11:Bt <I multilateral sYStcm that
promotes trade is beneficial, not only hecause i~ enhances economic development abn:;ad, as
history secms to suggest, but also because it is good for liS. Consistent with this view, the United
States has long sought to extend the benefits of trade <IS widely as possi?le,
The Multil<lteraJ Trading System Provides Opportunities for Growth
Historical insight supports the view that the multilateral trading system fa.cilitates trade, thereby
providing an engine of economic growth, The experience of the United Statcs,. pans of Europe,
and Japan after W\l.lll, as well as the 'emergence oflhe Asian Newly Industrializing Economles
(NIEs) in the 19705, provide evidence, The multilateral tntding system can also help advance the
economic developmcnt process by creating incentives for members to adopt more tra!)sparcnt
policies and procedures.
Trade flu'ls Iwst~WWl/ reCQllstr,UClim. a"d growth. The period following WWII was an
extremely prosperous perio& for much of the world; including the United States, Japan, and parts
of Europe. t't was a period in which Japan and the developed countries of El;.lrope were ahle to
approach America's rising productivity level.s, There are many possible reasons for 1~js
prosperity, but commonly cited among them is the creation of a mOre open tr.tding system. This
trading syswm allowed, outward-oriented lupan and parts of Europe to enjoy the kind of scale
economies that prevLously only the United SUites could enjoy, wit~ the strength of its domestic
markeL flU1 their development did no! come at the expense of the U:dted States, The post~
\VWIJ era was also a period of rapid growth for the U,S, economy,
Trade also ('ontribllles 10 ecmwmie deWl/0pmCJJl. In the early 19705, growth slowed
substantially in the United States and much of tile world. However, gro\vth remained strong i:)
the Asirui ;..J1Es and other ol1tward~oricnted Asi,ll1 economics. Although there is some debate as
to tbe source of their growth, many have argued tbat their ou!\vurd orientation played a major
role. Now, .some of these economies arc among our n~ajo!' trading partn..:rs. In 1998, Korea.
Singapore, Hong Kong, :tnd Taiwan accounted for a combined total of about 9 percent of U.S.
mcrchU11dist 'exports and imports, Moreover, economic evidence suggests that as tbese
ccono:nics grew; their workers. generally shurcd in the gains. 4<J
Tlte multiluleral fratling :'Jwtem prtmWle.'> }tood g(HI(!rmll1('e. As the history of the GATT.
demonstrates, the Un:ted States has long advocated the usc of the multilateral trading systeri110
promote economic development internationally, It has also sought to establish strong democra~ic
institutions .md 10 spread the 'rule of law,' nol just in the trading sys;cm per se but, more
generally. throtlghou11he world. The ncw dispute settlement systcm has advanced the mle of
law, by allowing the WTO to enforce trdding rules more effectively But other aspects of the
.WTO can help further this objective. By requiring trdl1sparency in its procedures and
establishing ncw mles [or transparency in govcrnment procuremcn~, the WTO can help promote
good governance worldwide. For these .re:tsons, the Uniled States has tispired to extend the
.
41< See U.S, Congressional Budget Office:, "Promolinlj Worker Rights in Developing Countries: U.S. Policies and
Their Rationale" (April 1997), p. 16.
-30
�benefits of trade as \\;idely as possible, both across and within countries, by opening WTO
membership to any country willing to 'play by the rules.'
The Full Realization of Benefits Requires Further Integnltioll
Today, dcvcJoping countries account for over three-quarters of the WTO's membership. Their
role in the trading system changed significantly in the Uruguay Round. Many were active in
negotiations, helping to bring agriculture more· fully into the GATT and to reach agreement on
phasing out the MFA. As discussed previously, trade can enhance countries' growth prospects,
as evidenced by .Japan and parts of Europe in the post-WWII period and, more recently, the
Asian NIEs. Currently, the developing countries stand to gain from further liberalization of trade
in agriculture, services, and industrial products. Trade in high-t~ch manufactures and services,
along with associated knowledge transfers, offers potential lor developing countries,.including
the least Jeveloped, to enter the global economy marc rapidly and effectivC\y. The developing
countries would gain not only from more trade with industrialized countries, but also from
increased trade among themselves. An importaI.lt next step in the next round should be to ensure
that more members of the global community are able to benefit more fully from participation in
the multilateral trading system and from adoption of outward-oriented trade regimes ..
Actil'e participallts mOI'e ahead. By and large, developing countries have come to account for
an increasingly large share of world trade, but some have moved ahead faster than others.
Overall, exports plus imports ·Of devel.oping countries rose at an annual rate of 9.9 percent
between 1989 and 1997,.exceeding the 7.6 percent growth rate of world trade. 50 Of the
developing country total, the trade ofWTO nicmbers grew slightly faster, at an annual rate of
10.5 percent. However, the 48 least developed countries havc to some extent been Icft behind.
For these countries, trade grew at an annual rate of 0.1 percent (through 1996). Some of these
countries have difficulty participating fully in the world trading system even irthey arc WTO
members - often because of lack of adequate dome~tic institutions and infrastructure.
Capacity built/ing, technical assistallce, (lIItilfberalizlltion could help spread benefits. The
intcmatiomd community, including all WTO members, cim do more to help spread the benefits
ofparticipalion in the global economy. Efforts should.address the specific needs ofdcvcioping
coulltries, especially the least developed, but therc are overall principles that can offer substantial
. assistance to 1ll0St. First, many of the poorest countries lack capacity.to implement effectively
their WTO obligations in a number of areas. Through the WTO, the international conlmlmity
can focus on offcring capacity building and technical assistance to those countries, as well as on
making more progress in further liberalization in priority arcas, such as agriculture and seryices.
In addition, the developing countries can take their own actions. They would benefit from
continued unilateral and bilateral liberalization, as significant gains can be derived from
increased South-South trade in addition to North·South tradc .
Numbt:rs cited here are derived from Constantine Michulopoulos, "Trade Policy and Market Acct:ss Issues fur
Developing Countries," unpublished draft (September 1999), pr. 4·5 and exclude intra·EU trade. The developing
country category is based on the WTO statistical c1assific<ltion with South Arrica included and Israel excluded.
.IU
-3\
�V. TIH:"U.S. Agenda Meets the Challenges of the 21 U CcntufJ
The United States is able to look to the future - and a new round of multilateral trade
negotiations - from a position of economic strength. The US. cool19my is enjoying an
unprecedented period of expansion and pcrfo~mancc. It is experiencing revolutions in
infonnation technology and biotechnology. It is highly competitive over a wide range of
activities in agriculture. services, a.nd industry. U.S. fanners have long been among the world's
rnost productive. U.S. r.1anufacturers have restored much of the competitiveness that had, in
some cases, eroded in the 19808 in both basic and high-iech indusHes. U.S. firms continue 10
lead i:1 business, financial, and other private services, To reach its fullest potentiai, however. the
United States continues to have an i!ltcn.:s~ in improving its access to foreign markets,
sil'cngthcning the operation of the WTC system ofn:les; and promoting the growth and
development of :oreign economies,
Much Remains to Be Done
Many Ihreign governments continue to allow or impose higb tariffs and burdensome rules on
imports: many also maintain lrade~distoning domestic subsidies, Agriculture provides a stark
example. Bound rariffrates on agricultural products average about 50 percent around the world'
compared with less than 10 percent in the United States,Sl Moreover, even after the Uruguay
Round commitments are implemented fully, the EU and Japan wiil be able to provide 3S much as
$78 billkm and $35 hillion, respecti\'ely~ of trade-distorting domestic support to their fanners
each y,car,52 By comparison, the Vnited States will be limited to ahout $19 billion, Partly
hccause orthcse policies, average food and related prices are'34 percent higher ill the EU and
134 percent higher in Japan than they are in the Unitell States (Figure J 0). Many ioreign barriers
to lrade a1;;o rcmam in the services sectOL
'
$,
1'1
D;na from the U.S. Department of Agnc'Jltu.fc, Foreign Aliricultut:l] Servtce (july J999j.
Da~a from the U.S. Oepartr.ltn: of Agricult'..uc·, Foreign Agricultural Service (November 1999).
-32
�Figure 10: Food, Be,\'erage, llnd Tobacco Prices in Selected OECD Economics 1996
250
225
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200
175
"
" ISO
-
"
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0
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SQ\lI-,;(!; f'Pf'$ 1996 fll'$!llIs, DECD 1998 (ull;Jublished)
In addition, the mles of the WTO and the maimer in which they are enforced have room for
improvement. Many commitments negotiated in the Uruguay Round hi.!\,c yet 10 be
implemented, in part bl.."C3use some members Jack the technic~l:l capacity to do SQ, In some
instances, the system's operation remains hidden from public scrutiny'tO a degree which impedes
public confidence and support, The dispute settlement process, in particular. while much··
, improved in the Uruguay Round, r,emains opaque and sometimes slow to deliver effective
resolution. For a credible system it is not sufficient for justice 10 be done; it must also be seen to
be done. TI1C system should also be seen to enhance the benefils it brings by supporting core
lubqr standards and environmental objectives; in doing so, it would broaden support among some
who remain skeptical about open trade.
The Urugmty Round negotiations were protracted ~ lasting from 1986 to 1994 - and even af~er
their conclusion. Pomch of tbe agenda was not completed. The next round should he dcsigned to
produce r0:sults Illllch faster, both to provide new and additional benefits sooner and to keep pace
with change. For this reasor!., the Unitc.d States has proposed a three-year deadline for
cQlnp1cting the next round, .
'
Probably the greatest challenge is to ensure that the least developed economies emerge and that
the emerging economies are integrated into.3 global system that promotes economic growth,
Although the United States still tends to trade most often with other developed or neighboring
economics, its trade with developing countries is already impol1anl and holds great promise for
the future - non-OSeO countries account for about 33 percent of U.S. impO!1.s and about 29
-33
�percent of U.s. exports. This us. interest in sustained economic development abroad has been
underscored by the financial crises that have afi'cclcd many developing countries over the past
two years. The s.lump in growth associated with the crisis has constrained U.S. exports and
caused cons.iderable disruption in imports. While the source of these problems has been
macroeconomic and financial, the resolution has included trade. In addition, the need for trading
rules has b1!en underscored by the problems engendered by i,lSU!Tlcicnt transpi.l;cncy.
U.S. Objec:tivcs for Seattle and Beyond
The United States is committed to expanding the circle of nations that benefit from trade and
putting a "human face" on the global economy. As such, U.S. proposals reflect key interests in
opet)ing foreign markets, strengthcning the rule of law. and promoting economic development.
The Unitcd States is proposing to launch a nc\v round that includes a broad-based market access
agenda, focusing on services, agriculture, and industrial tariffs, and lasling no more than three
years, The WTO's built-in agenda calJs for further negotiations on agriculture and services, .
beginning no latcr than December 31, 1999 and January 1, 2000, respectively. In agriculture, for
example, the United Slates is seeking to eliminate export subsidies, reduce tarifis and trade~
distorting domestic supports, and ensure that trade in agricultural biotechnology products is
based on transparent, predictable, and timely processes.
The United States is also seeking immediate !an IT cuts in eight key areas, agreement on
transparency in government p!''Ocllrement, extcnslon of the prohibition on c-commcrce duties,
and an agreement to make additional infomlation technology products tariff free. The United
Stales sees a need tQ strengthen the WTO's relationships with other international organizations
and for refonns to make the WTO itself 11,ore open and accessible.
• The United States is seeking accelerated tarHTlibcralizution in eight key arCaB - chemicals,
encrgy products, envlronmental products, fish, forest prooucts, jewelry, medical and
scientific equipment. and 10yS. These ;:treas accounl for $198 billion of US. exports,
• The l]nited SWtes, logcthcr with South Korc(I and Hungary, has proposed i.l worldwide
agrcen,h:nt on ~ransp,\rency in government procurement to promote good government
pr<.lctices. Such practices reduce the potential for bribery, corruption. and other inSIder deals,
Adoption of this proposal would pro~'ide nil nations with more opportunity to sell their goods
and services in the $3.1 trillion government procurement market.
• In, 1998, WTO Ministers agreed to a temporary prohibition on duties on electronic
commerce, The United States is seeking an extension of the prohibition to ensure the
continued growth of the high-technOlogy sector, to ensure that no WTO members take
actions to inhibit the growth of e-commcrce, and ensure tbat developing countries benefit
from the expansIOn of C-COn1nlcrce:'
• TIle United States has highlighted the need 10 make the WTO more open and more
accessible. To ucbieve this goa!, tbe United States has proposed opening the dispute
settlement procedures to the public, allowing J... on~govemrncnlal organizations (NGOs) to file
<Hll!cus curiae briefs in case~ inVOlving the environment. and crca:ing institutional structures
~34-
�to lllcrcase consultations with NGOs. The United States also sees the need to slrcngthcn.the
WTO's institutional relationships with other internationul orgunizntions, beyond the Bretton
Woods institutions, to include the International Labor Organization and UN Environmental
Prognnn (UNEP) for example_ .
TIle United States has sought to create a trading system that 5p'reuds the benefits oftmde as
widely as possible, both across and within countries and lS supponive of core labor standards
and the environment. To that end, the Untied States is;
j
• Seeking to bring morc'nations into the open trading system and ensure that developing
eountl'ics fully benefit from the system. The United Stales will work to give the least
dcvelopl:d countries greater access to globnl markets. The United States is also proposing
measures to provide technical assistance on implementing trade policy and strengthening·
institutions in developing countries responsible for trade, labor, environmental. and other
policies lhat inllucnce the gains to living staJ~dards from trade.
• Proposing. to establish a WTO Working Group on Trade tlnd Labor in ScaHIc, s.t:-cngthcn the
lLO, <{l1d enhance tbe instiwtionallinks between the llO and the WTO,.by·gnmling the lLO
observer st!lluS at the WTO, similar to that enjoyed by the World Bunk and others.
,
• Pursuing opportunities that can open markets and yield environmental benefits, such as
eliminating fishery subsidies that contribute to over~fishing and eliminatLng tariffs on
envIronmental goods; and seeking to strengthen cooperation between the WTO and
international organizations dealing with environmental issues like UNEP.
.. Committing io conduct aU,S, enviromnental review of the likely consequences of the Round
and pro'posing that the WTO Trade and Environment Committee help identify environmental
implications as the Round proceeds.
Much of the recent debate about trade has been earned out in exl:·emc and sterile te:ms, Trade
libcralizurio:1 is sometimes promoted by those \vno see no costs and opposed by those who see
110 b~nefits.
The truth is that trodc can provide benefits, on balance, but il ~ul1-1ike any other
source of growth - a:so impose costs. A key challenge for policy !s 10 Implement the
complementary policies that help compensate-and-aid tbose who arc burt,· ·Ukcwisc;membcrship
in the WTO is sometimes advocated as ifit imposes no constraints and it is sometimes
challenged :.IS all unw<llT!.lIlted invasion of our soverclgnty. The truth is, however, that we do
agree to constrain our behavior by agreeing to adhere to the rules ofihe trading system. Our
membership in the WTO is advantageous not because it cn!.ails nO obJig:.ltions, but because on
balance they are bcncfjctaL Finally, the:e are some who believe that trade agrcements should
only deal WIth lrad y barriers, while there are others who wOtlld have them almost mimic a glob.d
government Tbe trulh is thal for trace to be free i~ must command popular suppOrt, and to do so
it must be perceived as fair, This requires rulc-s that do more than simply reduce barric:-s; it also
reqll~res rules thal1c3ve considerable scope for national autonomy and diverSIty.
Some suggest that while the GAIT help,ed advance U.S. geopolitical interests during the Cold
War. the United States no longer needs the organization no~v that the Cold War is over.
-35
�However, the U.S. economy is more open now than ever before and in1cmalional trade is vitalI;)
U.S. economic interests. Our participalioll in the WTO is the centerpiece of our trade policy.
But, while freer trade brings benefits it important to recognize it is not a panacea. It is crucial
to ensure that the benefits of trade are shared widely and that the rule of law goveming it be fair.
. Trade policy also needs to part of broader ecoomr..ic strategy and it needs to be supplemented by
policies that facilitate change and promote equity. Tile Clinton Administration has made
opening markets at home and abroad one of the pillars of its economic policies, but it has also
rccognized the importance of macroeconomic policics to achieve fiscal discipline and
microcconomic policies to h:vest in peop:e and technology.
is
-36
�Appendix: Key Acbievcments Qfthc Uruguay Round Ncgotiations S3
For nearly 50 years. the General Agreement on Tariffs and Trade (GATT) served as both an
intemational agreement and international organization, 11 dealt with intcmationaJ trade in goods
and did not cover trade in services, such as transportation, tourism, insurance, and
.te1ccommullicatjons~ or trad<Hclated aspects ofill1cllectual property rights. The Uruguay Round
further reduced tariffs on industrial products, brought morc sectors more fully into the
multilateral fold, strengthened the rules of conduct for international trade, <!Od created a new
Institution - the World Trade Organization, As a result, the multilateral trading system now
morc fully covers agriculture, textiles and clothing, services. and inteHectual property rights,
As a result of the C'rugt:.ay Round, the negotiating govemmems greatly increased the proportion
ofthcir trade that is. "bound" by tariff concessions (legal commitments limiting maxi!nurn tariff
rates), .They also reduced tari ff rates, Some developing countries made and bargained for tariff
concessions for the firs! t'ime. Moreover. as a result
the Agreement on Agriculture, all
agricultural products of all WTO Members are no\\' bound by tariff concessions. Even if a
concession ;;imply fixed in place a tarifTmte that was already being applied on a de facto basis,
the tariff conceSSlon provides legJ-l certainty, which is definiwly positive even ;f i~s value may be
difficult to quantify.
.
or
Most importantly, the Uruguay Round created the World Trade Organization (WTO), and its
more effective dispute settlement mechanism. The GATT still has its place at the center of the
WTO systcrn, but it is now administered by the WTO, and is tied to other agreements on trade in
goods, as we]; as the General Agreement on Trade in Services (GATS) and the Agreement on
Tradc·Related Aspects ofIntcllec'tual Property Rights (TRIPS). Disputes concerning any of
these multilateral agreements are subject to one set of dispute settlement procedures, the
Understanding on Rules llnd Procedures Governmg the Settlement of Disputes or "Dispute
Settlement Understanding" (DS,U).
.
Imlus/rilll Products, In most cases, the Uruguay Round culs in developed countries' tariffs on
imports of industrial products, excluding textiles and Clothing, are being phased in over 5 years,
beginning January 1, 1995, ~y th<? end of the phase in, these tariffs will be cut by about 40
percent, from an average of 6.3 percent to an average of 3,8 percent. The proportion of imports
of industrial products thaI recelves duiy~frcc treatment in d..::veloped countrics will increase from
20 percent by value to 44 perccnt. Before ~he Uruguay Round, 78 percent of developed
countries' tariff lines were bound; after the Uruguay Round, 99 percent will be bound, In
developing countries, the percentage of bound tariff lines went from 21 percent to 73 percent.
Economies in tnmsition agreed to increase their bindings from 73 percent to 98 percent.
Agricullural PrcU/llctS.' The Uruguay Rou:1d succeeded in bringing agriculture,mOTe fuEy into,
the multilateral traomg system, Throi,,"gh the ncgotiation of the Agreemcnt on Agriculture, all
tariffs on agriculmral products are bound, and non-tariffbarriers were convcrtcd.to tariffs by
. "tariffication," Industrial countries agreed to cut tariffs on agricultural products by 36 percent on
13
This appendix draws from the World Trac::: O'rgauizatior_. hUp:iiwww,ww,nrgfabout (downloaded Seplemfu:r 19,
199Y) and tlw GA rr Sccn:tllriat, "-nil: Resu:t.. (If th:: UrLguny RO:Jd ,'f Multaalcrn( T fade l'kgotiatlolls, ;vimkcl
Access for Goods and Services: Overview urihe Res,dts" {November 1994),
-37
�uvcragc over six years; developing countries agreed to cut their tariffs by 24 percent on average
over ten years. For products subject to·tariffication, the Agreement permits special safeguards to
protect against import surges. The Agreem~nt also limits and reduces countries' use of export
subsidies and trade-distorting domestic supports. Agricul1ure is part of the WTO's buill~in
agenda, \vitll talks scheduIcd to begin by December 31, 1999.
Textiles amI Clothing. From 1974 until the end of the Uruguay Round, trade was governed by
the Multi-Fiber Ammgcmenl (MFA). The MFA was a fram(..'"Work for bilateral agreements and
unilateral actions, based on quantitative ~estrictions on imports. Tn 1995, the WTO's Agreement
on Textiles a.nd Clo~hlng (ATC) replaced the ~FA. The ATC will integrate the textile and
appnrel sector into the GATT rules, by eiiminating quota restrictions gradually over a ten~year
period. Like the Agreement on Agriculture, the ATC also allows special safeguards to protect
against import surges. By 2005, all import quotas and discrimination will end and the ATC will .
termi:mtc. The Uruguay Round also established a Textiles Monitoring Body to supervtse the
ATe's implementation,
Services, The GATS provides multilaterally agreed and legally enforceable rules, covering an
internationally traded services (except most air transport services). It extends MFN treatment to
all WTO members, with limited exceptions, and extends national treatment and market access
o'!Jligations i~ areas where a country has made a specific commitment, The GATS provides rules.
for regulatory transparencYI other aspex:ts of regulation, recognition of other countries'
qualifications, and international payments and transferS. As a result of bilateral negotiations,
individual countries made legally hindjng commitments to open markets and/or provide
nondiscriminatory treatment in specific service sectorS. A set of"schcdulcs" lists the sectors
being opened, the extent of market access being given in those sectors, and any limitations on
national treatment Although some commitments did nol go beyond the market access offercd al
the time they were made, they still prevent governmentS from backtracking on access; the GATS
met the objectives of bringing services into the muhilatemllrading system and providing the
certainty needed' for business dCclSlOflS. As in the case of agriculture. the service sector is
included in the WTO's buill-in agenda, wilh a fuil new round ofnegQtiations scheduled to begin
no later than January I, 2000.
.
A series of annexes to the GATS addresses particular concerns of differelJt industries, including
the movement of natural persons, financial services, telecommunications,' and Some air~transport
services, Negotiations on speci fie commitments in financial services and telecommunications
continued after the Uruguay Round, as part of the huilt~in agenda, and resulted in new
liberalization packages, Talks on the movement of natural persons also continued and achieved
modest results. Further talks on maritime services were scheduled, but suspe~ded.
IMcl/ftctflal Property. The TRIPS Agreement requires a fHinimum standard ofillteHectual
of inteliectual property rights.
It also provides for
~nd related
ngbts, in(',luding for computcr programs, duta hases, sound recordings am.! i"ilms~ 1rademarks and
service marks; geographical indications, including ~ppellations of origin; patents, Including the·
protection of new varieties of plants; inoustrial designs; layout designs of integrated circuits;
protection of undisclosed infoonulion, including lr~de secrets and test data, Substami\'e
property rights protection and enforcement
basic rights to nO!:1~discrimjnutory treatmenL The Agreement deals with.copyright
-38
�provisIons of the main international agrccments of ihc World Intellectual Property Organization
provide thc bas:s fOT pro~cction, with :ldditions and modifications. For example, ur;dcr TRlPS
the Beme Convention for the Protection of Literary Hnd Artistic Works now applies to computer
programs, Moreover, the TRIPS Agreement also addrc~ses patents by requiring th;)! patent
protection be available for a 20.year minimum for all inventions, whether products or processes,
in alinost all technology fields.
"
The TRIPS Agreement also requires WTO members to provide procedures ilnd remedies under
their domcs:ic law to ensure that foreign right holders can effectively enforce intc:!fcctua!
properiy rights. Under some circumstances, member countries may adopt measures to prevent or
control pra~tices in the licensing of intellectual property rights tbat arc abusive or anti~.
competitive. When the WTO Agreements took effect on January 1, 1995, developed countries
were given one year to bring their laws ;;!lid practices into confonnancc with the TRIPS
Agreement. Developing cot:ntrics a.nd some economies ilHransition were given iongcr transition
periods, The TRIPS Agreement, like the 0ATS and the agreerncn:s 011 trade in goods, can be
enforced lhfougb the WTO's dispute settlement procedures.
Other WTO Agreements. Th~ R~und also brought agreements relating 1o'lrade in goods, to
goveming anti~dumping measures, subsidies and eountetvailing duties, safeguards, and to
technical barriers,
.
• Anti~DumfJjllg Measures. The Anti-Dumping Agreement. more formally tbe Agreement on
the implementation of Ariic1e VI of the GATT 1994, pennits W1'O members to assess
an;idumping duties on imporis ofa product if i1 is damped (as defined by the agreement) and
If the dumped imj)Qris have been found to cause or threaten material injury to the domestic
industry producing the product. The Agreement also provides for due process and
transparency in anti .....i umping ;nvcstigations,
• SuhsirIies and Countervailing Measures. The Agreement on Subsidies and Countervailing
Measures provides rules for the use of domestic subsidies and countervailing duties offsetting
those subsidies, Under the Agreement. a countf)-' may seck the withdrawal of a subsidy or
removal of its adverse effects, by bringi:1g li WTO dispute. A country may also assess
cmmtcrvailing duties on imports of a subs~dizcd product. offsetting the value oftbe subsidy,
lfthe subsidized-imports have been found-to cause onhrcatcn ntateriali!1jury.to the domestic
industry producing a like product. The Agreement lipplies to both industnal products and
agriculture, although its application to agdclllture has been modified by the operation of a
temporary "peace clause" in the Agreement on Agriculture. Some exceptions apply to
Subsid~cs of aeveloping countries,
• EmergeNCY Prolecliollji'omJmporls. ·nlC Agreement on Safeguards allo\','s countr~cs to
tcmpor;!I'lly restrict impor:s ofa product iran :tbsolutc or relatlve import surge is cuusing or
thrCi1lCning to cause seriolls injury. to the domestic industry producing a liicc or directly
competitive product, and if the, importing country has conducted.lO investigation that
transparently and objectively examines ~ertain factors bearing on serious injury. (The
AgreenHmt prohibits thc usc of "gray area» U1C;tSUrcs. including voluntary export restraints
and orderly marketing arrangcments.)
\Vhel~
the serious injury bas been caused by an
·39·
�absolute imporl surge, and tile importing country cor.dtlcts a trI.I:lsparc/lf and ohjective
investigation consistent with the Safeguards Agrccmetll. its trading partners cannot take a
compensatory suspension of concessions against it for the first three years thal such a
"safeguard" measure is in place. Special rules apply for safeguard measures affecting
developing country products.
• Technical Barriers to Trade, The Agreement on Technical Barriers to Trade (TBT) tries to
ensure that ~egulations, standards, testing and certification procedures do not create
unnecessary obstacles to trade, The Agreement on TBT docs not prohibit countries from
'adopting· standards, or require that standar9s he hannoni:.:.ed intemationally. Rather.}t sets
out u 'code of good practice' for the prcparation~ adoption, and application of standards by
central government bodies and others,
• Health Regula/ions for Farm ProduCTS. Complementary 10 the Agreement on TBT and the
Agreement on Agriculture, the Agreement on Sanitary and Phytosanitary Measures
establishes rules for standards to protect human, animal, and p],an1 bealth. The Agreement
urges countries to adopt Internationally agreed standards 10 the extent possible, but it docs
not prohibit countries from setting their own, possibly higher, standards, However, it does.
requite lhat all standards be based on science and non-discriminatory.
•
ML~cell{,'neous.
The Uruguay Round agreements a;sQ include the Agreement on Import
Licensing Procedures; the Agreement on (mplementation of Article VII of the GATT 1994
and related ministerial decisions on customs valuation; the Agreement on PrcshipmC!1t
lnspcctkm; the Agreement on Rulys of Origin; and the Agreemen1 on rradc-Related
111ves:meni Measures.
.
Pluri/ateral Agreements. The WTO Agreement also provides the framework for two
agreements which only some not all, of the WTO Members have accepted. These are the
Agreements on Trade ir. Civil Aircraft and'oll Govemrnent Procurement. which 'were originally
:lcgotiawd during the Tokyo Round. DUrlng the Uruguay Round, the Agreement on Government
Procurement was renegotiated and replaced with a new agreement that now applies to more
entities and "to services. The procurement agrccmenrapplics only to agencies listed by each of
the govemmenls that is party to the agreement These agencies' procurement is then subject to
rules that guarantee fair and nQn-discrimill<l,tory conditions of llltcrnaliona: co.mpctition;.'
j
Dispute Settlement. The Dispute Settlement U:lderstanding improves upon previous rules nnd
procedures, It creates a single system for addressing d.isputes under each ofihe WTO's
ffi1.!Uilateral agreements 3!ld the Agreement on Government Procurement; provides an expedited
process with clearly defined stages; prcvents,indivicual coulltries from blocking the adoption.of
rulings; and authorizes countermeasures it an adopted I"ulir:g,is not in:plcm.cmcd. Ordinarily, a
<:ase should not take more than a year - or i 5 rnomhs if it is appeated, (If either side requests,
members of an,AppeJ\<lte Body hear appeals of panel rulings.) Moreover, in a reversal of the
GATT procedure, all dispute seulement rulings -including those of the Appellate Body - .are
adopted amofl,1UlicaHy, unless there is eonse~lsus to reject a ru,ling.
~40~
�After a ruling is adopted, a country faces three possible outcomes: II ca:l adhere to the
recommendations of the panel; it can compensate the c1aiman!; or the ciaimant can suspend
previously grunt0d concessions 'of like amount. The general principle is that the suspenslon
should occur illlhe same sector of trade (for example, a violation in the goods sector should be
mel with suspended concessions in the goods sector). 1f this is not practicable or cffcctivc~ the
suspension can occur in other sectors, and so the dispute settlement system helps integrate the
obligations of the entire WTO system.
Trude Policy Bedew Meclumi""m. The TPRl'v1 provides a regular forum' lor monitoring each
country's pcrfonnance in the WTO system,"through reports,by countries and the WTO
Secretariat and discussions hc!ween \'lTO member governments, The review is not legally
binding. Its o,bjeclives are to increase the transparency and understanding of countries' trade
pollees and practices through regular monitoring; improve lhe quality of public and
imergovernmC111al debate on the issues; and enable a multilateral assessment of the effects of
policies on the world tradmg sysh:::nL
-41
�List of Fr(;quently Used Acronyms
APEC
ATC
DSU
Asia-Pacific Economic CooperatJon
Agreement on Tcxtiles and Clothing
IOU
ILO
Eu;or~:lll
Dispute Settlement Understanding
Uriion
TBT
Intcrnational Labor Organization
General Agreement 011 Tariffs and Trade
General Agreement on Trade in Services
Gross Domestic Product
Gross Nalional Product
Multi-Fiber Arrangement
Most-Favored Nation
North American Free Trade Agreement
Non-Governmental Organization
Newly Industrializing Economy
Organizat~on for Economic Cooperation llnd Dcvc!opme:ll
Technical Barriers to Trade
TPR,\1
Trade Policy Re\'ie\'~' Mechanism
GATT
GATS
GOP
GNP
MFA
MFN
NAFTA
.NGO
NIE
OECD
TRIPS
TRIMS
UNEP
WTO
Trade-Related Aspects oflolellcetu.l Property Rights
Tradc-Rciated Investment Measures
United N,ations Environmental Program
World Trade Organization
-42
�20 Million Jobs:
January 1993 - November 1999
A Report by the
Council of Economk Advisers
and the
Office of the Chief Economist.
U.S. Department ~f Labor
December 3~ 1999
�EXECUTIVE SUMMARY
• Robust Job Growth+ Since January 1993, employment hus grown rapidly and 20 million
nct new jobs have been created. Employment is at an aU-time high-a larger percent of the
population is employed now than at any previous time, The unemployment rate, at 4,l
percent, is Ihe lowest it has been in 29 years.
• Uroad Employment Gains. Employment gains have been strong for all m<ljor subgroups of
the popuJ<.ttion. For African Americans and Hispanics, the pmportlOns of the poputation with
jobs rose 10 record highs and the unemployment rates feU to record lows. The unemployment
fmC for women is now lower thun at any time since 1953,
• More Hlgh-QuuUty Jobs. The 20 million jobs created since Jununry 1993 have
ovcrwh'~lmingly been good jobs. Eighty-one percent of the job growth was in
industry/occupation categories paying above-median wages. Sixty-five percent was in the
highest~paying Ibird of industry/occupation categories.
(in!lation~adjusted) earnings were widely
shared in the late 19905. This is in sharp contrast to the 1980s, when growth in real camings
wus conccntnned umong high-wage workers and real earnings fell for those at the lower end
of the wage distribution. Strong eanlings growth in the pWH few years produced gains in
household income, and the poverty rate has fallen to its lowcsllcvcl since 1979,
• Real Wage Growth for All. Increases in rcaJ
• Sectoral J)iffcrcnces. Services accounted for a substantial share of job growlh since January
1993, but construction, transportution, Hnd public ufilitics also nccouotcd for significant
portiOtHL Employment was growing in manufacturing until the Asian financial crisis, but it
started declining in the second quarter of t998, reducing net job creation in that sector.
• Most Jobs Remain FuU-Time. The majority of all jobs are
no increase in the proporHon of jobs that me p~lft-time
holding multiplc jobs.
rull~t[mc jobs-thcre
has been
or in the proportion of workers
• Dl.'Clining Worker Displacement. In a dynamic economy with r.tpid job growth, many
more johs Jrc being created than are bcing lost. And while somc workers have been
dis.placed from their jobs, job displacement rates have been on the decline .md workers'
reponed fCJf of job loss is abating,
�INTRODUCTION
Since January 1993, the economy has generated 20 million new jobs. A higher
proportion of the population aged J6 and over is employed now than ever before, ;:Ind at 4.l
percent the unemployment mle is lower than it has been since 1970, I Moreover, as (he evidence
in this puper shows, u very high proportion of the new jobs that people arc taking are good jobs
in industry/occupation categories that pay above-median wages. RC(ll wages are growing again.
And the benefits of a strong labor market arc being shared wldely among U.S. workers
including groups that saw little if any progress over the 1973-93 period.
20 MILLION JOBS
Between january 1993 and November 1999, employers added 20 million people to their
p.yrolls'(Chart I).
Chart 1: Payroll Employmenl Growth
25,-------------------------------------,
November 1999
20.0 million
----..
20
115
."
~
!!!
10 I
,
,
Ol~--~----~--~----~--------~--~
Jan·93
Jan-OO
JAn·97
Jan·sa
Jan-99
Source: Bureau 01 Labor Statistics. Eslablishmenl SU"IIey.
I Ernplnym.;ot am.! jobs data come fmm tW() ~OUfCes, The esl'lblisnmcn! survey asks emplnycrs how many
people they b:LVC un their payrolls; Ihe housdwld l1tlfvey asks peopk whether they have ajob or arc 1,)t)King fot a
job. Refcrcm:¢,~ 10 'jobs" in this paper generally refer to the establishment :mrvey, while rcJcrencc$ 10
"cmploymcnC' generally refer 10 rhe household survey,
'Although the CUfrent expansion Icchnk;dly began following (he business cycle lwugh in MtI~t.:h 1991, job
groWlh was vcry sluggi.sb for more than 11 year lind paywll cmp!oym..:nl had grown by only 1.2 million by January
199),
�2
More people arc working now than ever before, The proportion of the population ugcd
16 and over that is employed reached an all-time high this year and has been higher during this
expansion than it was at comparable points during the 19805 expansion (Charl 2), This high
Chart 2: Employmenl-Populalion Ratio
~rl------~~~~~~~~~~~~--------,
,
,
~-
64
i
63 I·
Ju.:1uary i 003
+
61
5.
..
57
,
55'
a
6
12
~
18
~
~
~
~
~
00
Morrt'ls ir el1p!!.tl$ on
Source: Buteau 01 Laoor S!a!lslK;s, Ho,.,sehOJd Survey,
00
n n
~
00
,--
96 100
Chart 3: The Unemployment Rate
11
10
9
,
$
)7
t
6
Ja~uary
1980s expansion
1993
5
4
199i'.ls axpansior
,
,
,-_~~_~~_~~_~_____~__~__~__J
3'
(;
6
12
18
24
30
36
42
48
54
60
66
Months in expansion
Source; BureaLl of labor Statistics, Household Survey.
72
78
84
90
96 102
�3
cmploymenl.population ratio reflects longer term trends:, but the very strong lahor market tlnd
policies designed to increusc the rewards to work surely have contributed as well by atlracting
new workers into the labor market. At the same time. the unemployment rate has been below 5
percent [01' 29 consecutive months and IS lower thtm it has becn in 29 years. While the
unemployment rate in January 1993 was about the same us it was at a comparable point in lhe
] 980s expansion, it has subsequently declined faster and further than it did in that expansion
(Chart 3).
EMPLOYMENT GAINS ARE WIDESPRMD
Labor market gains since January 1993 hu\'c been impressive across demogr-.1phic groups
(Table I). African Americans and HispaniCs, for example. experienced their lowest
unemployment roles on record during the past year (Cnal14).:l Employment-POPulation rutios
have reached record highs not only for all persons uged 16 and over but also for p~lrtlcular
subgroups such as: women, African Americans and Hispanics,4 The increased lahor force
activity of women, in particuJar, reflects a combination of forces, such as welfare reform and the
Earned Income Tax Credit (EITC), that improve the incentives to work among those with low
earnIngs. The unemployment rate for women is the lowest it has been since 1953,
Table 1
Indicators Qt Labor Market Activity for SelE1Cted Demographic Groups
1992 to NOWIrnt)er 1999
(percent, ci~lian workers, seasonally adjusted)
UnempSoyment
rate
Annual 1992
Nov, 1999
Change
Whi:e
7.5
6.6
African American
14,2
Hispanic
11.6
7.9
7.0
4.1
3.5
8.1
6.0
4.0
4.2
20.1
14.1
-3.4
-3.1
-6,1
-5.6
-3.9
-2.8
-6.0
Demographic group
TOlal
Men, 16 years and o\er
Women, 16 years and OWf
Teenagers
Employment-population ratio
Chango
Annual 1992 Nov. 1999
61.5
62.4
549
59.1
69.8
53.8
40.9
64.3
64.8
60.6
63.7
71.6
57.5
44.8
2.6
2.4
6.0
4.6
1.8
3.8
3.9
Source: Buraau of Labor Statistics, Household SUl\ey.
JScpamtc unemployment rates have been recorded since 1972 for ,\frican Am\!ricans and li)i'3 for
Hispanics. The record lows for these group;; were 7.3 percent for African Americans (June 1999) ::md 5,8 percent for
lii;;pani.cs (March 1999). Monthly rutcs for !hc~c gmups have a tendency to !lucIU1!IC somewhat, due I,) their small
sizes in Ihe monthly SllfVCyS of households,
~Rccord highs for ihese gmup~ incluu..! an emplny:ncm.p.,ptllaripo lJ.uio of 57.6 percenl for women
(January 19(9), 6J.2 pl!rccnt 11)[ Alh':lll\ Allicfi~urlS {January 1999) and (J4, I percent f"lf Ilispanics (Murch 19~h
�4
Chart 4: Unemployment Rates by Race and Ethnicity
,.
12
10
gB
"
0
~
•
While
2
o~--~--~--~--~--~~--~--~--~
1993
H,94
1995
t996
1997
Source: Bureau ollabar Statistics. Household SUMIIY,
1992
1999
Unemployment rales have declined for till educ;Jtiollul groups since 1992, with the largest
percentage point declines in the groups with the fewest years of schooling completed (Churt 5).
Chart 5: Unemployment Rates by Educational Attainment
in 1992 and November 1999
13,-----------~~~~~~~--~------------,
12
11
10
&
5
4
3
2
1 I
,
o
WitiloUl high school Hig!; sctloof waduale
Some COllege
dipioma
Source; Bureau of lab<!f Statistics, Household SI.lIWY.
College Qtaduala
�5
THE QUALITY OF JOBS
The 20 million jobs created since January 1993 have overwhelmingly been good jobs.
This conclusion is based on an analysis of employment growth in which total household
employment is divided into 90 industry/occupation categories, ranked by median camings, in
order to assess where the new employment growth occurred.:S This analysis indicates that
• 81 percent of the new Jobs created from 1993 to the pre-sentI> were in calegories paying
above-median wages; and
•
65 percent of the new jobs created were In job categories with wages in the hlghcst~paylng
third of industry/occupation categories.
Many of the good new jobs are in profc....sional and managerial occupations, and these
two categories account for almost 70 percent of college graduates in the workforce. But growth
in good jobs was not confined to college graduates,
First. while roughly 77 percent of employees in professional johs in 1998 had at Ic;,ls! a
bachelors degree, 51 percent of managers did not.
Second. the overwhelming majority of new jobs in industry/occupation categories marc
likely to be filled by non~college gmduatcs tire ;,lIse good jobs. When professional occupations
are excluded from the analysis, 71 percent of the remaining employment growth was 1n
categories that paid abovc~median wages (for the categories that remained). Sixty percent was in
the highest-paying third of induslry/occupation categories.
Finally, the ovcn:vhclming majority of employment growth Ulllong those with U high
school diploma {but no college) were goodjohs. A preliminary analysis confined to this group
found th~t! virtually ull (if the net growth in employment was in the highest-paying third of
industry/occupation categories for such workers, (Gains for the bottom third were lurgcly offset
by losses in the middle third.)
S The Illiu!>chl)td survey is used because the est.1bli5hmem survey does nOI contain inform:.i.lion about
o{'cupa!ions Hwt would allow this kind of brenkdown. The results from the household survey ate used lU infer where
1he job growth occurred. The Council of Economic Advisers and the Departmen! of ubot carlier CnndW':lOO a
:-imitar analysis of job grn\Vlh between rebnrury 1994 and FebrililrY 1996 based on a finer induslryloccupllthm
h~kd,)wn lsc,: Joh Crctllhm Gild EmploYll/ent Opportuuities' the United Slate, l.,a/Jm'Market, /993-1996, A
Report by the Council nfEc,lOomic Advisers wi1h the U,S, Dcp:trtment of Lab\lf. Oftkc of the Chief E'llnomi~l,
April 23, 1996). ThaI report fOllnd Ihilt 6S percent of Ihe net gmwth in full-time employment oceurred in
industry/occupation groups paying ;lbt)ve~medi..n wages.
~ecause the houschold data (Ire not seasonally adjusted. a comparisnn of Oclnber 1999 employment level;.;
wi1h January 19~3 employment leyels might be comaminalcd by seasonal factors, To minimize sea50nal effects lmd
to capture jobs crealed ill 1993·99, the analysis cnmparc.-;. avernge empk>Yffil!n! !11 January through Oclnhcr 1999
wi1h average employmen1 in 1992.
7 Indm.!ry/oc:.:upa!ion glOups were mnked by median c(lrningli in llie base year Jlnd separated illto Iw'u
groups, each containing hall' of Intal emplilj'mcnt. Eighty-olle ptn::cnt ot the {lmploymcnl growth was in the higher
p,.lying half.
�6
WAGE GAINS ACROSS·THE·BOARD
This expansion's strong labor market has created a large number of good new jobs and it
has generated rising rcal (inflation-adjusted) wages for most workers. Although illook some
time for growth in rcal average hourly earnings to gain momentum in this expansion. the past 4
years have witnessed solid gains (Char(6). By contrast, rcal wages declined at the end of the
1980s expansion and continued to decline in the !990-91 recession.
Chart 6: Real Average Hourly Earnings
'mr-------------------------------------,
1.06
1990S expansion
~ 1.05
~ 1,04
.~
1,ro
is.
~
'0 UJ2
£E:;
1.01
~
•
1.00
~ 09"
t
;)J)8
Jaemry 1003
0.9' I_ _ _ ~_~_" _ _.~__~__~_
o
6
12 18
~
00
~
U
~
~
00 00
n
Months in expansiOn
Source: Bureau 01 Labor Statistics. Establishment Survey.
~
~~~_..J
~
~
• am
Average real camings m the United States were relatively stagnant Of falling from 1979
through the mid-1990s, with low-wage earners cxperiencing the greatest losses of carnings and
ovcrall earnings inequality rising significanlly.~ However, the resumption in rcal carnings.
growth since: 1996 has been especially evident among low-wage workers. Since the second
quarter of 1996. median usual weekly carnings of full-time workers have grown by 5.3 percent.
Growth was 7,0 percent at the 25th percentile of earnings, and 8.5 percent at the 10th percentile.
Compared with the 1980s expansion, the growlh in these earnings has been much more evenly
diSlributcd since 1994 (Chart 7).
gRca! wage data in this report urc blllicd Of} inc ulTu;ia! consumer pricc indcxes (CP!) cmnputcd by the
Bureau 0: Labor Slatislics (BLS). However, methodological impmvementli made by the BLS would llavc rcdu(:oo
mcasured ioflalion belwccn 1979 and 1995 by almost a half percentage point per year, nn average, if they hud been
inlroduced earlier. Usc of an expenmental index dlllt incorporates these changes in earlier yean;: would raise real
wage growth slightly. but nnt change the basic conclusions of this report.
�7
Chart 7: Growth in Median Usual Weekly Eamings
",---------------------,
!J19Sl!·eg
L2
a199Hl8
~.GL---------------------------------------~
10th parcentilG
25th percentilo
Median
Sourco: 6urellu 01 Labor Statistics, HcuSllllold Survey,
75th pefcenWo
901h pIWcanHla
The resumption of significant reul wugc growth primarily reflects the return of high
productivilY growth. which has averaged over 2 percent per year for each of the past :3 years,
Furthcnnore. the higher rca! wage growth at the houom of the wage scale rcnccts other policy
developments, such us the increuscs in the Federal minimum wage that were implemented during
Oc<ober 1996 and September 1997.
Finally, the increases in employment and earnings experienced by workers have resulted
in rising real im:omcs and declining poverty rates for Amenc<ln families. Real median household
income reached an all~timc high of $38,885 in 1998, The poverty rate fell to 12.7 percent, the
lowest it has been since 1979. The effects of the EITC. which are not rencclcd in the oHicial
money income and poverty mCll.'iures, lifted un additiona[ 4.3 million people (Jut of poverty In
both 1997 and 1998. African Americans experienced a lurge 15,1 percent increase in real
mediun household income between 1993 and i998 and the poverty nHc for African Americans of
26.1 percent is the lowest ever re<::orded. Real median Hicome of Hispanic households grew by
4.8 percent in 1998. :.md thc povcrty rate dropped Hi the lowest it has been since 1979.
S~:CTORAL
DIFFERENCES
An industry hrcakdown of the 20 million new PHYTOl! jobs that holVe hecn created since
Janullry 1993 shows thut services accounted for about 50 percent of uU new jobs created, and
I'ctailtradc accounteil for another 17 percent (Charl 8). Although johs in the services industry
are commonly thought of as low-wage, the industry is in fuel quite heterogeneous, with
�8
predominantly high paying jobs. Of all jobs created in the services jndustry, nearly three~quartcrs
have been in the professional and managerial occupations that pay above-median wages.
Across all industries, employment in the professional and managerial job categories is
growing the most mpidly, und these two categories together account for over 60 percent of all nct
new job creation (Chart 9). They also account for aimost 70 percent of all college graduates in
the workforce, so rising employment in these occupations reflects the premium that our economy
now places on the acquisition of skills.
While profeSSionals und managers experienced the highest employment growth rates, the
robust growth of the economy also produced strong growth rates in high~wage jobs for those '
without college degrees. For example, there was significant employment growth in the sales,
ct'Jfls, and opcrativciJaboror occupational c.stcgorics. This included signlficnot growth in bluc~
collar jobs, reflecting the relative strength of the construction, transportiltion/communicution, and
wholesale trade sectors. Since January 1993, 1.8 million new construction jobs have been added,
The annual rate of job creation in construction over this period was substantially faster than it
was during the expilnsion of the 1980$,
Chart 8: Shares of Employment Growth by
Industry, Jan, ,1993· Nov. 1999
Chart 9: Shares of Employment Growth by
Major Occupation. 1992-1999
FI"(II1~O
1"lJ(jl!ll'(j! ,
IINI mill film
,,-~;
':....,- '~I
I,,--, L_~~~~~~~~~~~"'~I_J
c-I'L_-LI!!!J, ___~~__~
_~_~
_
,
_
-$
Q
5
10
SM"'~ IQlol
15
20)
25
QrOWlh (percenl)
",,0(,>. l"'llfId "" 08HOOaily ~diusted eSllme.le$.
3&
So<Jrw fIu.... ~ 01l.Jit>(>, SUl1js~~~ Hous<>holll Sur.-DY.
NQI$; T(> .A>I~ _"""'~!i III"ld 11) Ill'- ~.mS!a/l! ",:h tilt;.
S'Nn:f>: Sumau "Ilooo' S<$~~!;~. E$tabhlli"ron! $VMW
lO
",,"'y~m,
p'Ii\I;()on
""""\I<> OOI"""m ttm t.m""",
'h6li. 1'0"'$$ BflI 0006<1 "" th"
_ra...,'~ ,~, a"d 1>" l"m'r1" u.......
Q".., N9':t
After declining by 3 million jobs from an all-lime peak in 1979. manufacturing jobs rose
by 252,000 after hnuury 1993. However, the patiem of job growth in thi~ sector has been
uneven since then. A!most 800,000 new jobs were added between J~muary 1993 and February
1998, but since that time roughly two-thirds of thut number have been lost. This decline rcl1ccts
!he loss of exports to Asia since the financial crisis there, as well as s.tagnant cxpOI1S and rising
imports mOle broadly [hat reflect the strength of the U.S. economy relative to those of our
�9
lmding partners. It is. anticipated. however, that some of the lost jobs will return when fomign
markets reguin strength,
Chart H): Change in Ihe Number of
,.."
.
Manufacturing Jobs
r--=--~~:"::'-------'
""
")()
{
400
'"
b
!
t'i
")()
0
,200
.,,,
.,.,
.~~------------------------~
3196 10 11m
MOST .lOllS REMAIN
FUU~TIME
The majority of all jobs corllmuc to be fulJ~timc jobs. There has been no increase in the
limportion of jobs thal are part-time or that arc secondary jobs for workers.
The proportion of employed persons reporting parl-time employment hus dechncd
slightly in recent years, falling 2 percentage points since 1994 (Chart It). Most of the decrease
in part-lime employment has occurred because of a decrease in those taking part-time jobs for
"non-economic" reasons, such as illness or child-care responsibilities. If the new jobs were
disproportionately pun-Orne, average hours worked per job might be expected to fall, But
employer d.Jta show that average hour;.; worked for all jobs (including thc new jobs) remained
roughly con ;;tal1l: the number of nonfarm Jobs and the tOHtI number of hours worked both grew
Chart 11: Fraction of Workers with Part·Time Jobs
25r---~~~~~~~~~~~~~~~~=---~
20
15
Brook in series
1C
--~~~_~_~_~
1990
1991
199.2
11,93
1994
__ ...,... __~_~_~--l
11196
1996
S(;h,IICI:: Bureau of Lobo< Sth\i$(K;S, Household 501'\13)'.
1997
1998
1999
�10
at about the same rate since January 1993. Thus, Ihis evidence also suggests. that most of the
flew jobs are
full~time,
Multiple joh holding might raise concerns anout the quality ofjobs created ir Americans
have to work two or more jobs to make ends meet. The data, however, do not indicate any
significant change in multiple job holdjng, The percentage of employed persons working
multiple jobs has remained about 6 percent since the late 19805.
()ECLII"ING WORKER f)fSI'LACEMENT
In UII economy characterized by rapid net job growth, the volume of new jobs vtlstly
oUlnumbers the volume of job losses, But in any growing economy. particular jobs will be lost
as declining finns are replaced by new, growing firms or liS firms reorganize to remain
competitive, Unfortunately, these kinds of job losses often generate employment and cumings
losses. particularly among more experienced workers, who must then bear the costs of adjusting
to new jobs. An important question is, has the rapid growth of jobs in the 1990s also been
accompanied by a growth in the percent of workers who have been displaced from their jobs?
The datn show an increase in the probability of displacement 10 the late 19805 and early
19905, and a drop thereafter. The percent of all workers with 3 or more years of lenure who
became displaced from their job was 3.9 percent in the 1991·92 period. but then fell to 2.9
percent in the 1995~9(j period. Because the labor market has been so robust in the 19905, both
the rate of r(:~empl()ymenl following displacement and camings after re~employment have been
higher in this decade than lit compttruble points in the 19805.
Workers' fcurs of job loss have also declined in recent years. Survey results show (hat
!he percent of workers who believe job loss is likely in the next year has declined since the mid~
19905, from 12 percent in 1993 to 8 percent in 1998. A different survey, of workers employed
by large fimls, finds that the percent of workers who arc frequently concerned about being laid
off rose unlil 1996 and declined thereafter from 46 percent to 33 percent in 1999 (Chart 12).
Chart 12: Percent 01 Workers Surveyed Who Are
5O,-===c.::.:=========-,
Frequently Concerned About Being Laid 011
'5
.'"
.35
~.'O
w
"25
15
g2C
l15
to
5
o~~~--~----~~~--~----~
11.179 1981 ~9a3 H)S5 1987 19:89 1991 1993 1995 1997 1999
Source: llllemalional Survey Research.
�11
VI.
CONCLUSION
The lahor market in the United States has perfonncd extremely well over the past sevenll
years. Unemployment rates are as low .as they have been in 29 years, and many demographic
groups are experiencing their lowest uncrnploymtmt (or highest employment) ever recorded.
Welfare cascloads loo are their lowest level in over 30 years as record numbers of people are
moving frOIli welfare to work. Real wages, which had been stagnam or declining for almost two
decades, are- now rising again, particularly among (he lowest-wage workers, Reul household
income has reached a record high while poverty !'Utes arc dcclining. While the increased
earnings inequality in the 19805 and early 1990& has not been reversed, the gains from economic
gro\v'th are now being shared more widely,
Employment is growing in high·wagc job categories. Indeed, over 80 percent of the 20
mil1ion jobs created since January 1993 arc in categDries that pay wages above the median, and
65 percent arc in the top third of job catcgorie..<; ranked by median earnings.
Other evidence too suggests that the United Stutes is creating a large number of high.
quality jobs. The data show that there has been no increase in the share of employees who are
working part-time jobs or the fraction of the workforce holding multiple jobs. Recent research
has also indicated that job displacement mtes and workers' perceptions of the likelihood of job
loss have decreased in recent years.
Overall. the U.S. labor market is performing exceptionally well. but some sources of
.;:oncem remain, ,A.lthough manufacturing jobs are up since January 1993, in the wake of the
Asian financial crisis more than half a million jobs have been lost since March 1998, However,
strong domestic consumer demand, along with some stabilization in the economies of our trading
partners, have led to faster growth of output in manufacturing in 1999. If output gains continue
at their current pace, employment gains should follow,
Whl Ie the declines in unemployment rates for disadvantaged groups arc encouraging, the
rates themselves remain to9 high, Recognizing {hat continued investments in education and
lraining for these groups arc essential to improve their labor market performaoce, the
Clinton/Gore Administration has implemented initiatives such as lhe Youth Opportunity
Movement. America's Job Network, and tbe President's GEAR UP initiative. The President's
New Markels lnitiative, which encoumges businesses to tap consumer markets and labor pools in
underserved local arcas, also should contribute to continued improvements in employment rates
for all of these groups, The Administration also believes that those who suffer displacement
through no fault of their own should he gLlaranteed access (0 the kinds of reemployment services:
that will help them regain employment with minirnalloss of earnings,
Finally, the Administration continues to pursue policies that reduce inequality and "make
work pay" for all American workers, especially the lcust·educated, Minimum wage inCfCl,lSCS
implemented in 1996 and 1997 have been one factor that has contributed to earnings growth for
those with the lowest wages, and tbe President bas proposed an additional $1.00 increase in the
minimum wage ovcr:l two-year period to contribute fUl1hcr to strong wage growth among thosc
�[2
who suffewd the greatest deterioration in wages during the 1970& and 19805,
The creation of 20 million jobs since January 1993 IS a significant achievement. Even
more encouraging is the fact that the overwhelming majority of these jobs have been good jobs.
This accomplishment highlights the imporlance of sound policies to keep the economy strong
and to invest in people.
�EXECUTIVE OFFICE OF THE PRESIDENT
COUNC;L OF ECONOMIC ADvISERS
WASHINGTON, D.C. 20502
SATURD.,Y, APRIL 1,2000
CONTACT: AUDREY CHOI
CHIEf OF STAFF, (202) 395-5084
STATE~-IENT BY i\lARTlN N. BAILY
CHAlfu\lAN', COUNCIL OF ECONOMIC ADV'S£RS
Today, the Council of Eco:1omic Advisers reieased a brief report-The Uses o/Census
Dora: An Anatlyrical Review. This dcc'Jrnent provides an overview ofLhe myriad uses of
census data by many different sectors of society. The constitutionally designated purpose
of the decennial cenSus is to e:1Sure an accurate apportionment of seats in the House of
Representatives based on state populations. However, since the early 1800s policy,
makers have :'ecognized mat an nccurate ce!1SUS can provide other valuable infonnation to
:mprove :he policy pro-:ess, Currently, polley makers at all levels of government, as well
ns private businesses, households, researchers. and nonprofit organizations, rely on an
accmate census in many ways that range far-beyond the single fact of how many people
.
live i::1 each state,
The :-eview notes ilia: the Fecer;ll Government uses census data in a variety of
extraordinarily important ways. For example, census data provide inforr::1ation necessary
for monitoring compliance wit~ the Votmg Rights Act, the Civil Rights Act, and other
aP.ti~discrimination and affirmative action plan requirements. Accurate census data a:e
slrrdlarly essential for programs tha: identify arens e:igible for housing assistance and
rehabilitation loans; housing subsidies, job training and employment services; energy cost
assistance; and community economic development Accurate census data are critical to
;:,lIocating funds for suppleme;:nal food programs and other social services for women and
ch~id:en. The accuracy of census dam affe(ts the aHocation of funding for ;1umerocs
Federal education programs such as. vocatiorta! and adult education,
Slate and local governments also use cenSus data lil important ways. These include
decisions on redistricting and the detennina~ion of state and loca! voting dis:rict
boundaries; use by loc-al government agencies :rying to detennine the need for new
schools; and prograrr:. plahr.ing for infrastructure, public health and e:tviroCl.'11ental
protection,
The business community relies on accurate census data for product development,
:narkering, and location decisions, In macy cases, private social service agencies and
community groups depend on census data for the delivery of health, social, and
educational services. Accurate census data are vital to researchers in a wide variety of
endeavors, Finally, data from the dece:titial Census form a crucial input into the sample
designs of other nariona! surveys that are used in calculatir.g unemployment and inflation
statistics, as well as a wide range of other statistics used in eva~uating and formulati:ig
natIonal policy.
�THE USES OF CENSUS DATA:
AN ANALYTICAL REVIEW
BY
THE COUNCIL OF ECONOMIC ADVISERS
APRIL 1, 2000
�OVERVIEW:
Constitutiona!1y, the purpose of the decennial census is to ensure an accurate
apportionment of seats in the House of Representatives bas~ on state populations. Since the
early 1800s. however, polky makers have recognized that an accura~e census can provide other
valuable information to improve the policy ·process. Today, policy makers at aU levels of
government, as well as private businesses, households, researchers, and nonprofit organizations,
rely on an accurate census in myriad ways that range far beyond the sing!e fnet of how many
people live in each state. This report provides a brief overview of these uses.
I. FEDER.. L GOVERNMENT USES
Monitoring compliance with Federa! law. Questions on nncestry, gender. race,
Hispanic Origin, language spoken al home. place of b·irth. citizenship and year of
entry provide critical information for monitoring compJiam:e with the Voting
Rights Act, the Civil Rights Act. and other anti-discrimination and affirmative
action plan requirements.
Assessing economic well being. Accurate census data are critical for developing
:iccurate assessments of economic well-being for the Nation as a whole as well as
for different racial, ethnic, and regional populations.
Assisting families llnd low~incomc populations. Accu'rate census data are critical
for programs that aim to i~entify areas eligible for housing assistance and
rehabilitlltio:11ouns: housing subsidies; job training and employment serVlces;
energy cost assistance: and con:munlty economic development. Accumte census
data also are critical to allocating funds for supplemental food programs and other
social services for women and children.
AS5is.ting the eiderly. the disablcd,'and veterans, Accumtc censuS data are
required to determine and forecast the number of persons eligible for benefits
based on age, such us Social Security and Medicare and to forecas[ the number of
persons eligible for Social Security disability benefits. They are necessary to
develop baselines for reducing employment bamcrs faced by persons with
dis3bili!ies and to ullocJte funds for vocational education and rehabilitation
progrJ.ms for disableil workers. Accurate census data are required to determine
where to build veterans hospitals, to establish baselines for veteran population
projections, and to report 10 Congress on the needs of selected groups of veterans,
!lUCn as Vietnam-era and female veterans.
Education. The accumcy of census dala affects the allocmion of funding for
numerous Federal education progrums such as vocational and adult educmion.
Other. Census data on fann residence help USDA assess housing conditions and
needs on farms. Information On place of work and journey to work helps the
Federal gove:nment formulate national transpor.ation and cncrgy~use policies,
�"
II, STATE AND LOCAL GOVERNME"T USES
Drawing h;gislative boundaries. DecislOns on redistricting and the deterrninatlon
of stute and local voting districi boundaries require accurate census data,
Education, Accurate census data are critical to local government agencies and
school boards trying to determine the need for new schools, including what type
(elementary, middle, or high school),
Jnfrastructurc, public health and environmental protection, and program planning,·'
~umerous state nnd locai government planning responsibilities depend on
accurate census data, including determining (he need for schools, highways,
public transportation. hospimls, libraries. and police and fire protection, Water
and sewage disposal infonnation helps identify needs for water purificatIon,
treatment, or sewage facilities. Farm data are used to allocate funds to land grant
colleges, for cooperative extension activities., and for grants to agricultural
experiment stations. Accurate census data make for better planning and
implementation of a variety of programs. including education and training. health,
education, and social services. Accurate census data help public health officials
perfoon tasks such as locating areas in danger of ground water contamin',ation and
waterborne diseases, They help environmental agencies analyze energy
. consumption, identify conservation opportunities, and forecast energy needs,
Disaster relief. Accurate census infonnation helps iocal governments predict
transportation needs i;) disas~e:'" recovery and contingency pl:.mning initiati yes.
"The data help governments and relief agencies in assessing the amount of
displacement and the shelter and recovery needs: of populations affecled by natural
disasters such as floods. hurricanes, tornadoes, and earthquakes.
Assisting families. low~income populations. the elderlY, the disabled. and
veterans, Accurate census datu (i.re necessary for appropriate state implementation
of Federal programs for these groups in arcas such as housing assistance, energy
cost assistance, community development, and employment tlnd social services.
Accurate census data also help city and community officials pinpoint areas that
need special programs such as mcals·on-wnee!s and social service agenCies
identify special needs such as telephone access in case of medical emergency.
�Ill. BllSINESS USES
Product development and marketing. Accurate census data on where people of
different ages live helps businesses of all kinds to develop and market their
prooucts, For example:
Manufacturers of baby products such as baby food, clothes, diapers, and wj's, and
manufacturers of ma;ernity clothes and greeting cards need accurate
information on children as they develop and market their product lines, as
do television producers of children's programs and pla.nners of large
family amusement parks.
Architects, contractors. and real estate firms need accurate information on the size
and 'composition of households and their ho,using as they design: build,
and sell houses and apartments.
"Producers of consumer durables such as television sets. washing machines, and
home furnishings benefit from accurate infonnation on households and
their characteristics.
Accurate census information on language spoken at home helps television and
radio stations define foreign language service areas and marketing
companies develop prodt!cts and services tailored to those who speak
, languages other than English,
Forecasting demand. Businesses forecasting dcmund for 'their products require
accurate census data to develop these forecasts. utilities depend on accumte
census data to develop long-range plans for new facilities and networks.
,
Location decisions. A variety of business location decisions are improved by
accumte census data. Examples include: busines?es secking to pinpOint areas to
gauge potential markets for locating new stores, plants. or warehouses; businesses
interesred in finding shes having a labor force with certain education
'
characteristics,; building developers nn.d cootractors selecting sites for !'lew
housing developments; and businesses seeking to pinpoint areas of a city for
locating new rcstaurunts specializing in particular types of ethnic food"
Providing equaJ opPQrtunities and achieving compli:mce with Fcdcr..!llaw.
Accurate census data help businesses set up and monitor affirmative action and
anti-discrimination plans. And they help companies to comply with anti·
discriminat:on Jegislaliur: such as :h~ Equal Employment Opportunities Act.
�.':
:;,:'
~~'~j~~;~~;f~;h-~·,I:'~·~In~'·'f'-·O"rm·-·:'i~:mt~~~~~~~~J:a%~~~:~d~~rf;;;~
. ' An'independent television station in Philadelphia that is using ZIP'ewe !evel dnta
for a view~r profile to design program and advertiSing strategies.
• A ~o:rejgn larguage newspaper dlstribur~}l', seeking inaC:,;::;jl~,~;:!;~.;i
- YorlC, Ncw,-'Jer'sey,'an'd'Connecticut used"census datii'to
'h(;~e~'in ,'ea~h'i'c6uri'ty,6f tnttthree :states:C'.
• "A~~'aJor:a~~ertl~i~g' finn":~~;ed ~'ensUs da~a On languages spoke!! at hh'~"'
Chicago area to d,evelop'a new aoverti~ing campaign'for a ~Iient.'
• A district sales office for an automobile manufacturer is
pro,mes fC!r, Zl: market an~}>:sis that wjlf,p~ used to
loea] ~!,!~~~i;;~d;;~:I~;
sales cump'iugns:'"
',,"
help
"
• A real cSl~it6 company i'n,Colorado is using cen~us dat:,I to determine'which
i
languages to use on a series of instructional tapes on buying and selling real estate.
IV. COMMUNITY GROUP USES
,Delivering healih, social, and educat:onal service:>. 1:1 many cases, private social
service agencies and community groups have {he s~rne needs for a{:curute census
data as staie and'local government agencies that p:o\'ide social services. Private
groups benefit from aCcurate CenSuS data to set up ::md administer assistance
programs for children. teens, and older persons: to provide services that rellect
�cultural differences: to teach English. and condl!ct voter registration drives; to
provide housing and job training for displaced homemakers; to provide veteran
support servlces nnd promote the need f~r vcteran services and facilities.
pisaster.relief. As with social services, non-governmental organizations benefit
from accurate census information in much the same way as govemmems :when
planning for and responding to disasters like hurricanes, tornadoes, floods, and
earthquakes,
V. INDIVIDUAL USES
L.ocation decis.:on§. Individuals can make beuer choices about
home~buying,
job
relocation, or starting a small business if they can take advantage oJ accurate
census information.
VI. ACADE:vIIC RESEARCH USES
Accurate censuS: data are vital to researchers in a wide variety ofendeavors, Some
of the most important needs include the following:
Any research requiring comprehensi ve infonnurion m the neighborhood. level
must rely on the census. with its tract level information,
Research on cthnicity or other research requiring rcru;oI1ublc numbers of
observations of relatively small poPI,,;,Jution g;oups must rely on the census.
The decennial census is.the only consistent source of data for researchers
e~amining trends over periods of decades.
The Census is the best source ofinforrm.nion ror research on immigration
mobililY·
and
VII. USES IlY OTHER SURVEYS AND DATA COLLECTIOl'>'
Serving !;is nn important base for other surveys. Data from the decennial Census
form u crucial input into the sample dcs:gns of other nntion,alsurveys such as the
Current Population Survey (the source of the natio;1's uncmploymer:t statistics).
the Surveyor Income and Program Participutlon. the I\'miontll Crime
Vic·timiztltion Survey, the Survey of Recent College Gr:lduutes, the Consumer
Expenditure Survey (the source forexpcnditure weights used in ca\culMing the
Consumer Price Index), and statistics complied by the l'J.tional Center for '
Educational Statistics (NCESj and the NatIOnal Center for Health St:.ttistics
(NCHS).
�•
Calculating rates, Data from 'other sources are combined with data. from the
Census to compute rates of various indicators. For example, NCHS uses its own
survey data combined with Census data to calculate numerous viml statistics and
rates for health service utilization. Similarly, the Bureau of Justice Statistics uSes
Census data to calculate imprisonment and victimization rates, and the Federal
Bureau of Investigatio'n uses Census data to calculate crime rates.
·CJ'eating.o.~.tional estimates. Census"data are used to adju·st surveys to be
nationally representative. For example, the NCES uses Census data to make its
survey resulls on education indicators reflect the total United States population.
,
lhelabor··
~::~~":~t~:~~~1~~~~~t~;
Unemployment statistics from the CPS are ihcluded'in the allocation
distribute funds in ~any Federal progrurris~fU~e of.inaccurate pop~latic!f!
a shih of se~eral pcrcent in a state's allocation, Many FcdcruJ programs aie,tj~ to.the poverty
ritc-, which could also be affected by inacc'urate populatl,oI1 count~. This
other informa~ion
derived from the CPS affects evaluations of s.uch initiali yes as welfare rerorm, health'insunulce
legislation, 'and minimum wage legislalion,
M
"
•
and
�EXECUTIVE OFFICE OF THE PRESIDENT
COCNCIL OF ECONOMIC AOVISERS
WASHINGTON. D"C.
FOIl liIlMIWIA TE RELEASE
Thursday Muy 11! 2000
20502
CONTACT: AUDREY CHOI
(202) 395-5084
j
OPPORTUNITIES AND GE!'.'OER PAY EQt:JTY
IN NEW ECONOMY OCCt:l'ATlO!'lS
A Repo:1 by
tr.e COl:ncil of Economic Advisers
The President today announced a new Council of Economic Advisers report
0:1
women's
progress in the new economy, focusing on information techrlOlogy (IT) fields. This report notes
that IT is a highly paid, dynamic, and rapidly growing sector of the labor market, with job
growth th.at is far faster than the eco:lOmy at large. However, challenges remain to enable women
1O share fully in the benefits of IT jobs, Currently, \.\;omen are significantly underrepresented in
!T, especiolly in the higher~pajd occupations and much like in the economy at large, a gender
earnings gap exists v,:ithin IT jobs. The pay gap for women narrows dramatically as women
obtain mOre education. Policies that encourage greater numbers of college-educated worr.en to
choose IT~rel;;ned fields of study, and Erm practices tha: encourage these women to remain in rr
oL:cupatio:1s, cun be expected to he;p reduce:.he gender pay gap in IT.
Among the key findlngs of the report arc:
•
The field of Information Technology (I1) has provided extraordjnary job growth in the
United Stales. Since 1983, employment in five core IT-related occupations has gro\\'U by 81
percent-an increase that greatly exceeded the 32 percen: employment growth for the general
economy,
•
Employment in the five IT ~related occupations provides excellent pay for both men and
women. For example. the median annua! earnings of women empioyed full~time in IT is over
$38,OOQ-about 60 percent higher than the $23;900 earned by women working outside of IT.
•
However, an important gender e:npioyment gap exists 1:1 these [T occupations. Women
are currently undcF.epresented! making up only 29 percent of these occupations, comparee with
47 percent of the workforce i.r. the general ecol1o:ny,
Furthermore! women are :nost cnderrepresemcd in the IT occupations where pay is the
highest-fer example, ir: electrical engineering, which is just 10 percent fema.le. This
occupa:ional disparity contributes to a lack of women in the hig:1est paie. jobs. While 18 perccf"!t'
of InCH employed ir. IT eam $70,000 Or morc, only 8 percent ofworr..en earn :.his much,
•
�•
There is also a gender pay gap \\1thin [T occupntions. A woman with median earnings in
IT earns abmlt 22 perct:nt less than a man with mediar: enmir:gs Part of this gap stems from
differences in age, education~ race" and occupational composition. Taking these factors into
account lowers the gap to 12 percent-a gap similar to that estimated for the labor market mOrt
generally.
•
The gender pay gap narrows sharply for women in IT
education. Women who do not have bachelor's degrees face a pay
adjustIng for demographics and occupation, By contrast, women
more face a 9 to 1J percent gap, 10 [T jobs, education piays an
narro..ving the pay gap than in the economy at large.
who have higher levels of
gap of 15 to 21 percent, after
with a bachelor's degree or
even more impo:1ant role in
•
Reducing the pay gap in IT wiH require a relative increase in·the proportion of young
..vomen who choose educational programs that prepare them for the higher-paying occupa:ions in
IT. Policies that assist wqmen in their career development, such as on-the-job train:ng and
:nentoring, can also enhance women's investment in these occupational sk:lls and tbeir retention
rates, and can thus be expecled to help close the gender wage gap.
2
�\,
OPPORTUNITIES At\'D GEt\l)ER PAY EQUITY
IN NEW ECONOMY OCCUPATIONS
May 11, 2000
A Report by
The Council of Economic Advisers
�OPPORTUNITIES AND GENDER PAY EQUITY
IN NEW ECONOMY OCCUPA nONS
EXECUTIVE SUMMARV
• The field of Information Technology (IT) has pro\'ided extruordinary job growth in the
United States, Since 1983, employment in five core IT -related occupations has grown
by 81 percent-an increase that greatly e.\:;eeded the 32 percent employment growth for
the general economy.
• Employment in the five IT ~related occupations provides excellent pay for both men and
women, For example. the median annual earnings of women employed full-time in IT
is over S38,OOO-a[x)lit 60 percen~ bgher th.ar. the $23,900 earned by women working
outside of [T.
• However, an important gender employment gap exists in these IT occupations. Womt.'l1
are currently cnderrepresented, making up only 29 percent of these occupations,
compured with 47 percent of the workforee in the general economy.
• Furthermore, women are most underrepresented in the IT occupations where pay is the
highest-for example, in electrical engineering, which is just 10 percent female. This
occupational disparity contributes to a lack of women in the highest paid jobs. While 18
percent of men employed in IT eurn $70.000 or more, only 8 percent of women earn this
much.
• There is also a gender pay gap withi:1 IT occupations. A woman with media:1 earnings
in IT eams ubout 22 percent less than a man with median earnings. Part of this gap
stems from differences in age, education, race. and occupational composition. Taking
these facwrs into account lowers the gap to 12 percent-a ga.p similar to that estimated
for the labor market more generally.
• The gender pay gap narrows sharply for women in IT who have higher levels of
education. Women who do not have bachelor's degrees face a pay gap of 15 to 21
percent, after adjusting for demographics ilnd occupation. By contrast, wornen with a
bachelor's degree or more faee a 9 to 11 percent gap. In IT jobs, education plays an even
more important role in narrowing the pay gnp than in the economy at large,
• Reducing the pay gap in IT will require a. relative increase in the proportion of young
women who choose educational programs that prepare them for the higher-paying
occupations in iT. Policies that assist women in their career development, such as Qn~
the-job traimng and mentoring, can also enhance women's investment in these
occupational skills llnd their retention rates, and can thus be expected to help close the
gender wage gap.
�OPPORTUNITIES AND GENDER PAY EQUITY
IN NEW ECO~OMY OCCUPATlOl'OS
J.
IKTRODUCTION
The progress made by women in the paid labor market has been one of the most important
eco:lomic changes of the 20lh century. The past century has seen an enormous increase in the
proportion of women who work for pay. In 1999 about three~fifths of the ad'Jlt female populaHon
were in the labor force (either employed or looking for work), a rate three times as rugh as the r.lte
iIl 1900. And far more women today enter previously male..dominaled professions.
The opening of opportunities tn the labor J:n:.lrket for women has gone hand in hand with
improvements in their labor market outcomes. One way of assessing 'his progress is in the earnings
of women relative to men (see Chart 1). In 1960 a woman wllh median earnings was paid about 40
percent less ~han a man with mediaD earnings (b~sed on anr-unt e::tmings of full·time, full~year
workers), This pay gap, which resulted in ;):1 eumings ratio of about 0.60, remained little changed
over the 19605 and 1970$. bUI subsequentl)'
Chart 1. Ratio 01 Fef'J1ale io Mal& Median Annual
narrowed, so that the earnings rutin was 0,73 for
Earnings for Full·TIme, Year.Round Wo......ars
OJ;
1998 {the last year for which data on fuH·year
workers is available). In 1999 a slighlly different
measure of pay equity--the median weekly
earnings-indicated that the median fuH-time female
worker eamed about 77 percent of a man's earnings.
,.....=---_________--,
0,
This report provides evide!1ce about the
source of this pay gap by focusing on a nJrfOW, but
increasingly important. subset of occupations in the
11leC 18~ t910 19.15 1900 \\1" 1990 199;$
labor market-occupations related to information
~: o.PltI!I'I$m oj ~ (&u'uu olltw C_l
Technology (IT), The report's focus on IT stems
fr(lm ihe particularly visible role IT hus played in the new economy. IT is a. highly paid. dyn::Imlc,
and rapidJy growing sector of the labor market In fact. employment in the five core IT occupations
grew 81 percent since 19&3, dwarfing the 32 percent growth in the economy at large. Women in this
sector have earnings that considerably exceed those cutside IT. For example, a typical woman
working fu!Hime in the IT occupations we study earns $38,000 annually, c<lmpared to $23,900 in
other occupations, I .
"
' -_ _ _ _ _
~
_ _ _ _ ____l
However, challenges still remain to enable women to share fulty in the benefits of IT jobs.
Currently, women are s.ignificamly underrepresented in IT, especially in the higher~pajd occupations.
In addition, much like in the economy lH !Mge, a gender earnings gap exists within IT jobs; weekJy
pay in the IT occupations is 23 percent less for women than for men-about the same as in the rest
of the labor mar:tet The pay gap for women with college education is SignificantlY smaller than for
women with less education, A distinctive feature of toe IT Sector is that education plays an even
more important role in murowing: the pay gap than in the economy at large. Policies that encourage
greater numbers of college-educated watnen to choose IT~rclated fields of study.nnd firm practices
that encourage these women to remain in IT occupations. can be cxpeeted to help reduce the gender
pay g<lp in IT,
i
All annual earni::ig,5 figures in this report are based on hourly e3rnings caJcuJa!oo from the CPS (described
later in the text) trunsla;ed inio ye.\dy earnings for
Q
full-year worker employed 40 hours per week
2
�Studying the sources of this pay gap in IT is useful as a means of understanding the pay
structure in this rapidly growing sector, and is instructive for illuminating gender differences in pay
in the {:.loor market more generally. Sectlon 2 provides a brief background 0;1 the IT SC::tQT. and
Section 3 reports:.l statistical analysis of the gender wage g:lp in IT. Section 4 provides a discussion
placing results in a broader context. Section 5 concludes.
2. THE IT WORKFORCE
By most accounts the U.S. economy is experiencing a technological transformation that has
changed the nalu~e of work i!nd placed a premium on a new set of skills. While this transformJtion
has' affected many jobs in the economy, there is a core Sci of occupations at the forefront of the
revolution--occupations in information technology. Allhough there is no exact definition of an IT
worker, there are a number of occupations that quite c1ear!y faJi into the general domain ofIT. 2 The
unulysis in this report considers a number of core IT occupations for which data are availabie from
the Curren! Population Survey (CPS), Illarge nationally representative sample with informJtion on
workers' weekly earnings, demographic char3cteristics, and occupation. These core IT occupations
al"!:
•
electrical and electronic engineers;
•
computer systems analysts and scientists:
•
•
•
operations and sysrems researchers and analYSiS:
compute. programmers; and
computer operators.
Definitions of these occupations are provided jn Box 1,
1 Fot
a further discuSSlO:J of these an::] rela:ed issues see Caro; Ann Meares et aL "The Digital Workforce:
Buildint [nfotech Skills althe Speed of Innovation," U.S. Department of Commerce, Office of Technolog),
Policy, June 1999.
3
�am! selects the most appropriate imalytlcal tedmique to examine iL UpOn 'completion'of the analysis;l
't~~ '~n';,lys~ P~~l~lS f!1a~atg~I;t:vi,'~it~ ~~~:~ri~~i!~f'i~a~.'on thi l:,~~h~l~f:~~~ ~~~~~_~i~:',J~:;~':
'"''
,,_
Chl~J;er
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' ••
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1,','
1"~
'"~,,"
..
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• ,;,..
' . , : ,.... ,
:,
Programmers,'" ,"t~st.' and"." , tlle""'tletailed im.iJuctiQ;;§'~~ cnifel progril.li;S~"~1!j
·.\trite:- • .". maihtairf
"
»,
".~,.
#,'
",
"
" " ' •.
soft\vare;"tbat'computers must'follow , , ' " ,
to rx;rfonn,their, 'fUflctiomi:';In -'man'v larger organizations';~
- ",F". "
" y " ' " ' ' '.
'",,0 ' ' ' , . . .
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Tlie transition,from mainfuimc".to 'gerwnal computers• hitS olUri&t the once rigid'disunction between'
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IT Occupations: High Wages and Rapid Growth
The combined employment level in these five occupations has grown by almost 81 percent
since 1983 (Chart 2). with p:lrticularly strong growth in the last five Ye:ars, In contrast, total
employment in the overall economy grew hy just 32
Chart 2. Workers E~ployed in IT Occ\,calioos
percent since 1983. Today these five rroccup<ltions
4.000
comprise approximately 3.4 rnlllion workers (about
2,6 percent of nIl employed workers}, Employment
e 3,0)0 ,
~
projections by the Bureuu of Labor Statistics suggest
i '
that rapid groWth for computer-related occupations
is expected to continue weI! into the 21" century,
.
,
19&3
s~ o..~
<>I Labw \&I'"" <>I
1999
(.abo; ~WItu),
a""
.,,"
Looking al specific occupatlQos, the most
notable feature is the streng and steady growth of
computer systems analysts and scientists. In 1983.
this occupation had just over a q'Llaner of a million
workers, or 14 percent of the total IT workforce, By
1999, there were 1.5 minion worke~s in this
occupation, Of 45 percent of the total. Also notable
is the decline in tbe number of computer operators,
perhaps stemming from changes in computing
technology.
In addition to experie.'1cing high employment
growth. these occupations are also characterized by
" '" •
high wages, Median weekly earnings for fOUf of the
o 2-XI <00 6OC: &'Xi 100) 1200 five IT occupations-all but computer operators
!3~o,;,I.'$
easily exceeded median weekly earnings for aU
So",e!J:!;epln_"!oII..a0(J!!6"'molw<b-::'S.a1""le-I'
workers in 1999 as well as in 1989 (Chart 3). The
median. earnings for the highest·paid IT occupation-electrical and electronic engineers-were
almost twice that of all workers ($1.073 vs. $549 in 1999),
4
�Female Representation in IT
As in many other highly technil;::al occ-uparions, women arc underrepresented in IT, In 1999,
women represented 46.5 percent of "I! employed workers, ;'ut only 28.9 percent of the IT workforce
(Chart 4). The percentage of women in these occupatiorys h4ls actI.Wlly been declining since 1986,
when it was 40.2 percent. These aggregate per<:cnlages. moreover, mask considerable vanalion
across the five IT occupations. In 1999, women were p;utkularly underrepresented in the higherChart 4. Females as a Percefl! of Tola; Workers
puying IT occ',.lpations. For example. in electrical
und electronic engineering-the highest*paid of these
IT occup.itions-women made up just 10.1 percent.
In c-omparison, women made up 57.3 percent of
computer operators-the lowest paid lT occupution.
Part of the overall downward trend in female
represenlation in IT can be aecoLlnted fer by the
general shift in employment away from comptlter
E!oCl""'~ =iiiOo='-_______-'
operators towards occupations in which women are
o
!!
M:
,,.
less well represented. Programs geared towards
increasing ihe role of women in tedmicaJ fields are
, discussed below,
3. AN ANALYSIS OF mE GENOER WAGE GAP IN
IT
Although women in IT earn far more than women in other sectors, the median weelcly
earnings of women who work full time in IT is about 23 percent less than men's-about the same
pay gap as is experienced in the labor r!1afket generally. A small part of this difference is plausibly
due to women in the sample working fewer hours than men. but use of a tnCasure of earnings per
hour changes the gender pay gap only modeslly-to about 22 percent
The objective of this analysis JS to explore the factors that underlie this hourly pay gap. A
portion of the gap is due to differences in the characteristics of men and women. such as education
and age. Regression analysis car. control for these differences. and thus comptw.:: the wages of simila.r
men and women--of those with comparable educlition "na lige.'
The basic pay difference belween ·women and men-the 12 percent pny gap--dimi~lshe5 to
at~ainment, age, and race (see ell:u'! 5 and the Appendix
Table)."' Women tend to be less well educated und s.lightly younger thur. men in IT, thus conl1olling
for these differences narrows the gap slightly. This gnp might ulso narrow further if data were
availrtble (In women's Jabor force experience (rather thun a.ge). since lower levels of experience at
each age level could' limit women's pay growth relative to men's.
17 percent after controlling ror educational
31 n particular, a series of earnings regres~ion models are estimated using a pooled sample of~he 1997, ;998,
and 1999 monthly CPS daUl (with respondents in 1997 and 1998 included only in their last survey months).
The dependent variable is me log of individuals' per hour earnings. and explanatOry variables cnotrol :m.
individual characteristics, The analysis focuses on full-time workers aged 20 or older who are not self.
employed. Earnjns.~ :.re converted:o December 1999 dollars using the monthly CP1-U, The l'3mple size is
6,650. All coeffi-::ient:> have been standardized so that they can be interpreted as the percellt differellce in
eamings associated with the explamnory variable. (That is, l-) is reponed. where b is the estimated
cceffident from me regressions.)
4 The results :eported ir. the Appendix T uble were estimated using median regression. rather than ordinary least
squares (OLS). One .advantage of median regre:>sion is that it allows one 10 safely ignore earnings top·coding
of the CPS data (about 1.7 percent oflhe Slmple are top-(ooed), A second advantage i:> that this allows. easy
comparison to the olher quantile regressions discussed below. Differenceh in "average" or "typical"
irniividu.1;$, desc:ibed in the texI, always refer to differences in the median. The same regressions were
estimated using OLS. leading to similar inferences.
5
�Chart 5. Gonoer Gil;)
'I')
Medial') Hourly 2a't'liI'QS
Another factor affecting the differential pay
of men and women in rT is that women tend to be
employed in IT occupations thal Jre lower paying.
For example, women are more likely to be computer
operntors than men a.""e, and women are less likely to
be ele<:lr1cal and electronic engineers, Controlling
for these occupational differences within the IT
sector explains a sigr.ificant portion ofrhe pay gapICc
l~
~~
u the gap faUs to 12 percent after adding controls for
occupiHional composition.:; It may be tempting to
conclude tha( this estimated 12 percent pay gap is
therefore a rm.!gh meas.ure of the extent of ger.der discrimination in the IT labor market However,
this measure may underestiffiJte the true extent of pay discrimination. [f capable women are
p:omoted inte J:righer-paying computeNelated occupations at lower rates than men. [hen looking at
the pay differentials between men and women within each occupation doesn't reveal the extent of
pay discrimination-the glass ceiling limits women's promotions and rbus elevates the pay disparity
between women and men overall.6
,
0i0~ I::;S~~'b;'7~~R!'ln
a;« _.=~l'>"i'5lIii"" ~,,"""
• ,
Differences in the Pay Gnp Across Educational Levels
The avernge gender pay gap at the median-22 percent-masks striking differences 10 the
gap between men and women .:It varying revels of education. Among women and men who hove a
high school degree or less, the pay gap is 21 pe~cent even after accounting for differences in
demograpbics and occupation. The comparable gap for workers with some' college education is 1.5
percent. Stnce 16 percent of aU women in IT have a
Chart It Gender Gap :n Vodiafl Hour:y Earnings
high~sehool degree or less, and an additional 30
pert:ent have some college (but no bachelor's
degree), the persistently large pay gap between these
women and men is certainly nOtewOrthy. For women
OC;'1I,oIl !Qt
with higher levels of education, in contrast, the
gender pay gap is lower-about 9 to 11 percent
(Chart 6), This demonstrates the potential for
.CMl"".IO!
educadon to promote greater pay equity for womer..
In this regard, education is particularly imporumt in
Q
5
'0
l~~~
2S
3()
as IT occupations, Our analysis suggests that education
SC""'8 CEAt_"Nj"~!.....,,..,CPsalll
plays a more important role in narrowing the pay gap
in IT jobs than in the economy at large.
"
Oo""'Qt~ol»<:.la"~
~~~
This 12 percent "tmexplabed" pay gap is the ~me as one study featured in the Council of Economic Advisers
rl!port, "Explabing Trends in t.ie Gender Wage Gap," 1993.
~ To iliustratt': this point, consider n hypothetical example. Suppose thaI a firm pays all of ils progrnmmers
men and .....,omen alike-the same wage. This firm also pays all systems analysts-again. men and women
alike-a higher wage, Suppose further that this firm discriminates against women :0 promotion, so that a
higher fraction of men than wom~n are promoted from the programming pos;tions into (he higher-paying
systems analyst positions, Using a regression approach that looks ut pny onty within OCCOpatlO05 (as we did
(0 calculate Ine 12 percent reported above}, t.'cre would be 00 evidence of pay discrimination within
occupations in thi5 hypothetical fi~m, even though in fact pa), discriminarion exists-operating, through lower
promotion rates fer women.
!
6
�The Pay Gap Across the Pay Distribution
The IT sector is well known for its high average pay rates, but also for paying exc-eptionally
high wages to a substantial number of people, such as people in jobs with successful start-up
companies. In fact, in the IT occupations evaluated he:e, 18 percent or men and 8 percent of women
have earnings that translate to more tha:: $70,000 nnr.ualiy. Outside the IT sector far fewer people
eam these high income levels-only 7 percent of men and 2t,4 percent of women. Similarly, 10
pen;en: of men and 4 percent of women in IT cam more than S80,000, compared with 4 percent of
Polen and lift percent of women working outside the IT sector.
However. thes.e same numbers indicate that in IT, as in the rest of the labor market, wornen
do not fully share in high-eamings jobs. Women, in fact, are concentrated at the other end of the
distribution; 20 per;;em of all women in 1T have earnings that 1.r.lnslate to $24.900 or less per yer.tr.
but only 9 percent of men fall in this earnings
category. (Chart 7 shows the earnings distributions
for mcn and women,)
Sources of Pay Disparity at the Low and
High Earnings LeyefS, At every point of the
earnings distribution. women eam less than men,
Amotlg low-earning workers tbere is a large gap of
24 percent, while among high-earning workers the
Jln
gap IS a somewhat smal~cr 17 percent. intriguingly,
however, once demographics, edUcation, and
occupa.tion arc taken into account, there is a.
persistent "unexplained" 12 to 13 percent gender pay
gap at the low end of the earnings distribution. as welt as at {he median, and high end, The fa;;;t that
the same gAp persists a1 the upper end of (he eMnings distribution indicates that occupational choice
can only paniany explain why even highly-compensated women earn less thIm men,1
,
Irl:
Summary of Statistical Results
Analysis jndica~s that at the median, the gender pay gap in IT of 22 percent narrows to 17
percent among individuals with similar age, race, and educiltion, and to l2 percent when also
accounting for genae( differences in occupation, Other notuble findings that emerge from the
statistical analysis are:
• While women in IT generally earn considerably less than men, this gap is much smaller for
women who are college educ:ncd. Among [T workers with no cotlcge education, women earn
about 21 percent less than men with similar demographics and occupations. Ia contrast, the gap
for those with a bachelor's degree or graduate degree IS 9 to 11 percent.
• Much of the wage gap in IT is the consequence of differences in occupatioaal composition by
gender. Accounting for OCcljpation differences (along with demographics and education) the
wuge gap closes !O 12-13 percent for workers receiving jow earnings. median earnings, and high
earnings.
7 These results are based on qllamile regression results that compare women al Ihe gOil! percentile of their
di~!ribution to men III lhe 80mpercentile of their carning,s dihtributlon, introduci:lg controls for :lg¢, educmicn,
race, .and occupation. and on a similar quan:ile regression at the 20th percentile. See the Appendix table,
7
�4. LOWER REPRESENTATION OF WOME:< IN TECHNICAL FIEtOS
The results above indicate that women are paid less than men in IT occupations, even after
accounting for observed factors that influence pay. As nored, this gap is not by any means unique
to the IT sector. It largely mirrors what happens in the economy at large and is simi!ar to trends in
tbe brood fields of science and engineering. where women are also greatly underrepresented,
particularly in the highest paying jobs. A portion of the difference in pay in technical fields is a
consequence of !his underrepresentation. so il is importanllo understand why this disparity occurs.
Some of the gender differences in representation in scientific or IT occupations are due to
the differences in the proportion of men and women who prepare for lechnicaHy-oriented careers.
Whih:: the evidence suggcs~ that men and women are receiving the same level of science and math
pmparation in high school. among those earning bachelor's degrees women were much less likely
thun men to earn a degree in science and engineering. In 1996,41 percent of men and 29 percent of
W(H'J)t;n selected degrees in this area. The percetttage differences ure even larger wben focussing
specifically on engineering (9.4 percent versus 1.7 percent). A recent study by the Department of
Commerce concluded that "increasing women's panicipation in the education pipeline that :euds to
many IT jobs may require efforts lO gel more college·bound women to choose science and
engineering,as a field of stud;, espedully computer science and engineering disciplines.'-8 A number
of federal programs are now in place to facilitate Ihe entry of women into these fields (see Box 2).
, Carol Ann MeMes et at., -'The Digital Workforce: Building infoteeb skllls al the Speed of Innovation," US
Department of Commerce, Tecboology Administration. Office of Technology Poliei', June 1999. See p" 95.
8
�Among those women who do prepare for and enter technicaHy-oriented occupations, exit
rutes. are often high. further reducing the overall representation of women working in these
occupations. In gener31 bOlh male and female exit rates. from tlie science and engineering
occupations are higher than for other similar professional occupations (such as law and health
professions), but women exit from science and engineering at twice Ihe rate of men. One reason tOJ.t
is. cited by women for their higher exit rate is the greater responsibilities of women for family ca.re.
Wornen were also roughly twice as likely as men to have made location decisions arid sacrificed
career opportunities to satisfY:1 spouse's career. Thus. some women make the choice to compromise
their c:treers by choosing occupations that are more family~friendly," The results in this report-tnat
pay disparity persists broadly across occupations, educational attainment and pay levels~suggests
thaI there are many factors aside from persona! chences that contribute to pay inequity. Nonetheless.
policies that address these family needs are likely to raise retentio:l ratcs, thereby improving car:!er
prospects for women,
Women also cite differential treatmen~ as a primary reason for their higher exit rates relative
to men. Of coilege-educatec women who leave science, 19 percent state ~hat they left in part because
"science and engineering are: unfriendly 10 \Yomen," To explore this general response more fuUy,
52 women in science and engineering were interviewed at length,tO Based on (he~e interviews. rhe
study concludes that successful women who remain in science and engineering almost always have
important mentor~ ~upporting them, whereas those lacking mentors are more likely to exit lhe field.
More than half of women in the study also said they perceived thac the performance standards were
more stringent for women Ih:m for men. These perceptions, whether accurale or not, influence their
desin~ to stay and to Invesl in the ongoing development that is necessary in science-related fields,11
il
A;lne Preston, "Se:\, Kids, ::nd Commitmem to the Workplace: Employers, EmplQyeet: tmd l:,e Mommy
T~:lCj.;,"
working paper, 1999.
Anne PresIon. "Occupational Exit of Men and Women from Science and Eng:neering Jobs: A
Comprehensive Study," working paper. 1997. Evidence is from n sample of college-educau:d men:l.n¢ "''Omen
:0
who graduated from a large stall: college from 1960· 1991.
Although direct evidence of discrimina.:ion in hiring and promotlon is generally hard (0 come by, such
evidence does exist for some skilled (lccup:nions. tn auditiOns for symphony orchestras, females' cbances of
II
9
�•
If W!)C1eU have been passed ove~ for promoticr. or perceive that tbeir future professional opportunities
are poorer thilo those of men, lhey may rationally choose to focus more on their f.amHy
responsibilities. As a result, they may be further underrepresented in the higher paying occupations.
In generaL reduction of the pay gap in IT win require a relative increase in the proj)ortion
of young women who choose ed'J.:::atlonal programs that prepare them for the higher~paying
occupatkms in IT. Because the gender pay gap tends '10 be Jowe~ for individuals with higher levels
of education. an increase in.the education of wometl entering IT might prove an especially effective
means of narrowing the pay gap, In addition, policies that open greater possibHit:es for promotion
and that assist women in their career development, such as OtHhe-job trl'li;J:ing and mentoring, can
also enhance women's investment in these occupat:onal skills imd their retention rates, This in tum
co\.:ld contribute to <.l further reduction in tbe gender pay gap in IT,
S.
CONCLUSION
Women in IT occupations earn more than those women who hold other types of jobs: the
median earnings of women in IT is $38,000 compared to $23,900 for women in other occupations.
How:ver, the median pay for women within IT is considerably less than that of men within n;
women earn 22 percent less than men. Part o( this pay differential is associated with lower education
for women, so that after controlling for this factor, along with demographics, women earn 17 percent
less than men, An additional pill't of the gap occurs because women are underrcpresenied in the
highest~paid IT <xx:upations. When controls for occupational differences arc introduced, women earn
12 ~:rcent less than men. This 12 percent truly underestimate the true earnings gap if [here is, for
exampie. a "glass ceiling" that limits women's access to the higher paying occupations,
Women's underrepr-esentation in IT occupations remains pronounced, port1cu!arty in the
higher paying occupations such as computer systems analysts and electrical and electronic engineers.
Part of tbis differential is associated with less preparation among women for technical fields. But
if the evidence from scientific fields.as n whole is representativeof IT conditions for women, women
31so have higher exit rates for IT jobs than do men, Employers can address this gap in exit rates wirh
improved mentoring and training fOr women. The data show tha! more highly edUC2ted women eM!'!
wages that are more comparable to men's, 50 the hiring and retention oftbese well-educated won:ten
is a potential key for reducing the pay gap between men and women in IT.
-_._---------------
successful emfY are considernbly higher when the jury listening to the audition canno; see the gender oJ the
applicants (Claudia Goldin and Cecilia Rouse, '·Orcheslrnling Impartiality: The Impact of "BHnd' Auditions
on Female Musicians," N:lJlQ:1ill Bureau ofEcono~jc Research Working Paper. 1997). Sirnila:ly, in high~
Pllying restaurants, whete the waillitnff le:l.d 1.0 contain more men, when a man and WOr.1llfl submi: kientlc:d
resllm.:s. the man i> more Hkely :0 be hired (Oavid Neumark. Roy Blank and Kyie An NOr!, "Sex
Discrimination in Rescuuram Hiring: An Audit Study," Qutl.rteriy Journal of Economics, August 1996),
!O
�F,..stimated
Ol'eralll'ay Gap
1
-0.22
2
-0.17
AJ.pendb: Table
Wage Gap in lIourly Earnings
I~c.ccntllge
ZOwPercentilc
Medinn
3
4
··(U2
Pay Gap by Educalieltl
Blgll Selmal and Lest.
Some College
College (BA, as)
",fore than BA, BS
5
6)
,0.31
-0.20
-0.13
-0.14
·0.32
-0.21
-0.13
(IL
-0.17
No
Yo;;
Ye-.s
No
No
Yes
._m_---ill
·(UJ
·0.12
No
Yes
Ye,
No
No
Yes
-0.1l
Controls for education,
r:u'c/elilnitity nnd age
No
yo;
Yes
No'
Ye,
y"
Controls for education,
ract'Jctlmldly.age and occup.atJon
No
No
y~:s
No
No
..-
Note:
PL
0.20
-0.09
-0.13
.~12)
-0.21
-0.15
-OJ'"
1
.(U4
' - - lli Percentile
SO
.•
&ch moddis based on a quanule regression at either ihe: 20~~Oili, argQ'" percentile.
earnings. An coefficients presenlcd are statistically sigailicnllt at ule I percent levd,
l CUtltu')]s (or education only,
11
The dependent vilriable Js the log of hourly
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Thi:; i:; not a presidential record. This is lIscd as an administrative
mark"r by the William.l. Clinton Prcsidential Library Stafr.
This marker ickntilics the place: or a publication.
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Publications have not b"'Cll scanned in their entirety for the purpose
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�,
TEENS AND THEIR PARENTS IN THE 21 ST CENTURY:
AN EXAMINATION OF TRENDS IN TEEN BEHA VIOR
AND THE ROLE OF PARENTAL INVOLVEMENT
May 2000
·'t:
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, A Report by
The Council of Economic Advisers
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GOOD NEWS FOR Low INCOME FAMILlF.s: .
EXPANSIONS IN THE EARNED INCOME TAX CREDIT AND THE MINIMUM WAGE
December i 998
A report by
The Council of Economic Advisers
�EXECUTIVE SUMMARY
•
The strongest labor market in a generation has resulted in particularly large gains among
low-wage and dtsadvantaged workers, From ')979 to 1993, the real wages of low-wage
workers fell sharply. Recently, however, low-wage workers have experienced large
increases in real wages: For low~wage men, wages are up since 1996 by 5.7 percent after
lnnation. And for low-wage women, real wages have risen 6,1 percent.
•
These strong wage gains have been accompanied by a steep decline in unemployment. for
low-skilled workers_ In 1993, 1U percent of workers without a high school degree were
unemployed; today that rate has fallen to 7.2 percent. Among high school graduates (with
no college). the rate has fallen from 6.6 to 3,9 percent, Low~wage workers are thus
gaining both by working more and by earning more for every hour that they work.
•
The effects of a strong economy have been reInforced by successful policies designed to
make work pay. Expansions In the Eamed Income Tax Credit (EITC) since 1993 are
supplementing the incomes of low-wage working parent"!. The EITC is one of our most
SUCCj~ssful programs for fighting poverty and encouraging work:
Lifts more than 4 million Americans out of poverty, The EITe lifted 4.3 million
Americans out of poverty in 1997 ~~ more than double [he nllmber in 1993,
Dramatically reduces child poverty. In 1997, the EITe reduced the number of children
living in poverty by 2.2 million. This report tinds. that over half or'the decline in child
poverty between 1993 and 1997 can be explained by changes in taxes, most import<lntly
th" BITe
EncQura~es
work amQn~ sjn~le women with children. [0 1992,73.7 percent of single
women with children were in the labor force. In 1997,84.2 percent of such women were
in the labor forcc. The percentage of single women with children who received welfare
and did not work has been cut by more than half -- from 19.3 percent in 1992 to 8.3
percent in 1997, Research studies suggest that the increase in labor force participation
among single mothers is strongly linked to the expansion in the EITC
•
Increases in the minimum wage have been important in raising the earnings of lowwwage
workers. Empirical research suggests that recent minimum wage increases have had little
or no adverse effect on employment.
•
The combined effects of the minimum wage and the EITe have dramatically increased
the returns to work for families with children. Between 1993 and 1997. families with one
child and one earner who worked full-time at the minimum wage (i.e" $4,72 in 1993 and
$5.1:) in 1997, in 1997 dollars) experienced a 14 percent ~- $1 ,402 -- increase in their
income. after inflation, just because of these two policies alone. Similar families wllh
two children experienced a 27 percent -- $2,761 -- increase in their income,
�'I
GOOD NEWS FOR Low INCOME FAMILlIlS:
EXPANSIO~S l~ THE EARNED INCOME TAX CREDIT AND THE MINIMUM WAGE
1. The Labor Market Continues to Perform at a Record Pace
American workers are currently benefiting from the strongest labor market in a
generation. Employment is at an all*time high. with 132 million Americans at work in
November 1998. up from 119 million in lanuury of 1993. Only 4.4 percent of .he labor force is
unemployed. having fallen by 2.9 percentage points since this Administration took office; the
unemployment rate is now at its lowest level since 1969. Moreover, wages of workers are up
sharply in the past several years, with a gain in median wages (after inflation) of 4.4 percent from
1996 through August of this year. As this report indicates. these gains are particularly strong
among low-wage and disadvantaged workers, following more than a decade of labor market
losses, Administration policies have been important in helping those at (he bottom end of the
labor market begin to catch up and share in the overall economic growth of the (990$,
2. Low-Wage and Disadvantaged Workers are Making Particularly Large Gains
Low-wage and disadvantaged workers have experienced substantial gains in wages and
employment. The real wages of low-wage male workers have shown large increases in the past
few years, in contrast to the period from 1979 to 1993, when they declined by 14.7 percent (We
define low-wage as those workers at the bottom decile of the wage distribution,) Among low
wage women, the decline was 15,3 percent over this period. Charts I and 2 show recent
significant improvements in real wages among illi workers, but with particularly large gains
among the lowest paid. Since 1996, men in the bottom decile have increased their earoings by
5,7 percent after inflation (Chart I), while women have gained 6.1 percent (Chart 2).
At the same time, unemployment rates among the least skilled have plummeted, Wben
this Administration took office in J 993, 11, ~ percent of workers without a high school degree
were unemployed; toduy that rate hus fallen to 7.2 percent. Among high school graduates (with
no college), the rate has fallen from 6.6 to 3.9 percent Hence, low~wage workers fu'e working
more and earning more for every hour that they work.
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�One group in particular - single mothers -- has also experienced significant increases in
labor;force participation during this time period, Labor force participation rates among single
mothers began to climb in 1993 after remaining essentially unchanged at 74 percent since 1984.
By 1997,84 percent of single mothers were in the labor force, II marked change for a group that
has traditionally had extremely high rates of poverty and welfare usage.
3. Administration Policies Have Played a Key Rote in These Gains
The s.trong overall economy has been an important factOr in increasing the wages and
employment of less~skilled worker~. Typically. employment among workers with less education
is more sensitive to changes in tbe economy, with larger gains in recoveries and larger losses in
downturns. This Administration has worked hard to maintain an environment in whkh
economic growth can flourish and American businesses can compete fairly, both at home and
abroad. However, the strong economy is not the only reason for these gains among less skilled
workers. Administration policies to "muke work pay" by expanding the Earned Income Tax
Credit and raising the minimum wage have also been important. '
3.1 Expanding the Earned Income Tax Credit
Description of the EITe
The goals of the Earned Income Tax Credit (ErrC) are to make work pay, to help enSure
thut working parents do not have to raise their children in poverty. and to offset the total tax
burden of low and moderate income working fanlilies. As a result, the EITe eases the transition
from wei fan: to work. To achieve these goals, the EITC consists of a refundable tax credit for
working faIT'.ilies with low incomes that offsets a family's total tax burden. Because the credil is
refundable, individuals can receive the full amount to which they arc entitled even if the amount
exceeds the .ndividual income taxes they o,,:,e, About 80 percent of EITC payments offset
individual income, social security, and other Federal taxes borne by families receiving the credit
Only families that work are eligible for the tax credit, and the amount of the credit
depends on a family's labQr market earnings. In 1998, for every dollar a low-income worker
earns up to an established limit, as much as 40 cents is added to compensation in the fonn of a
tax credit. In particular. the amount of the credit rises with earnings up to a maximum credit of
$2,271 for a family w,th one child and $3,756 for a family with two or more children, The credit
is flat for a range of earnings and then is pha.'>ed out
2
�Chart 3: The Earned lrocome Tax Credil in 1993 and 1998
4.0001
------------,
,,.
i
1,000
/
/
..,'
il
Earnings
The EITC was significantly expanded in
the Omnibus Budget Reconciliation Acts (OBRA)
of 1990 and 1993. As a consequence of these
expansions, the EITC now provides a greater
incentive for labor force panicipi.l.tion than in
1991 In 1993, very low-income parents receive
un additional 19 to 20 cents for each additional
dollar earned, In 1998, a very low income parent
with one child will receive 34 cents for additional
earnings; if he or she has' two children, the EITC
will add 40 cents to their take-home pay (Chart 3).
OBRA 1993 significantly increased the
credit for families with two or more children. The
maximum credit was increased by over $1 ,500
(1998 dollars). while eligibility for ,he credit was
extended to families with incomes up to S30,050 (or abom $3,600 above the prior law level). In
addition, the 1993 expansion helped lower taxes for 15 million working families in 1996.
About 19.7 miHion workers are expected to claim the EITC in tax yea.r 1998, receiving an
average credit of $1,547. About 16.5 minion of these claims will be for' workers living with
children, who will receive an average credit of $1.807.
The EITC is n. non~bureaucratlc way to reward work effort. There are no middlemen
service providers, no long lines at government offices, and there 1S no need to take time off from
work to apply for the credit Working families apply directly to the Internal Revenue Service for
the EITe and generally receive the credit as part of their tax refund.
Participatiol1 in the EITe
While the EITC offers a substantial incentive to work ill1d move out of poverty. the credit
is effective if low~income families apply for it A relatively high fraction of families eligible for
the EITe -- 8t to 86 percent in 1990 ~¥ have claimed the credit, t The participation rate has been
substantially higher than those for other antipoverty programs. including AFDe (62 to 72 percent
in 1986/87). and Food Stamps (54 to 66 percent in 1986187)'
IScholz. J,K, (1 994}. "The Earned Income Tax Credit: PartiCipation, Compliance. and
Antipoverty Effectiveness." National Tax Journal, 59~81,
'Blank. R. and P. Ruggles (1996). "When Do Women Use AFDC and Food Stamps" The
Dynamics of Eligibility vs, Participation." Journal of Human Resources. 57-89.
3
�The EITe has reduced poverty
The EITe is targeted to families living in
Chart 4: NlJfT'ber of People Removed'rom Poverty
by the
povel.1Y with the goal of lifting their income above
ElTe
5,---------------------,
the poverty line. As shown in Chart 4, the latest
4
estimate from the Census Bureau shows that the
EITe removed 4.3 million persons from poverty in 2
~3
1997, which is more than double the number who
8.
were removed from poverty in t 993.
Over half of the people removed from
poverty by the BITe (2.2 million) were children
under the age of 18, and 1.8 million were living in
families headed by unmarried women. Updating
o
analyses reported in the 1998 Economic Report of
1993
1994
1995
1996
1997
the President, it is found that over half of the
decline in child poverty between 1993 and 1997 can be explained by changes in taxes, most
importantly the EITe (Table I), In addition, the EITC removed about I. t million African
Americans and nearly 1.2 million persons of Hispanic origin from poverty in 1997. It is clear
that the EITC has become a major weapon in our fight against poverty.
The EITe has increased the labor force particiJation ofsingle morhers
Between 1993 and 1997. the real value,of the maximum EITC payment increased by 38
percent for single mothers with one child and by 116 percent for single mothers with two or more
children. 3 These increases coincided with the period when the proportion of single mothers in the
labor force increased dramatically, from 73,7 percent in 1992 to 84.2 percent in 1997,
In contrast, the labor force participation of single women without children -- who became
eligible for a very small credit in 1994 if their earnings were very low -- did not change over this
period (Chart 5). As Chart 6 indicates, the difference in the labor force participation rates of
single women with and without children has closely tracked the growth in maximum EITC
Chan 6: MaxIrrun EITC aro Oi!!Bfance in l.abof Force
Partlcipellon Ber- Single Women Wllh and Withoul Children
Chart 5: l.abof Force participation Rates 01 Single Women
wut! and WiIhotJI CNk:Iren
3.500
100 , - - - - - - - - - - - - - - - ,
-
I
.!.'"
~
::.2,000
g 1,500
l.LI
~BO
~
~
~
,
,,
~
~
i
-8
70
-1986
E
1988
,- - ,
~
"'"
1990
1992
1994
"
"4'[
·16
.g 1,000
-~-
."
·18
•
j'
•
~
~
·20
·22
1996
""'"' ...,.199O,1ho ............ E1TCI.tI>e_a1ho ....r.unto/'
~ ~III """ a-..a and willi more IIIIrl """.;:Md.
3The same numbers apply to two-parent families.
4
�benefits.4
One recent study concluded that as much as 60 percent of the increase in employment of
singl~ mothers since 1984 was attributable to expansions in the EITC. s For the period between
1992 and 1996, the EITC explains 33 percent of the increase in annual employment. A second
study examined the 1986 EITC expansion, which was more modest than the 1993 expansion, and
found that it significantly increased labor force participation among single mothers, especially for
less educated women. 6 Yet another study found that the EITC could result in an increase in labor
supply of 19.9 million hours in 1996 relative to 1993 law and induce 516,000 families to move
from welfare into the workforce. 7
EITC benefits for married couples are based on the combined earnings of both husband
and wife. Hence, married couples are more likely than single parent families to fall in the range
of earnings where the EITC is being phased out. This has caused some researchers to predict that
the EITC might cause a decrease in hours of work among married couples. However, the limited
available evidence suggests that the expansions in 1986, 1990, and 1993 had modest disincentive
effects of 1.2 percentage points on labor force participation of wives, and they actually had a
small positive effect on married men (of 0.2 percentage points).8
How is the extra income from the EITC being used?
Most families receive their EITC dollars at tax payment time, in the fonn of a larger
refund. A recent study interviewed low-income workers who had gone to a volunteer tax
preparation office in Chicago for assistance with their tax return. The study asked the workers
what they planned to do with the EITC they were expecting to receive and found that 61 percent
planned to u,se at least some of their refund for investment purposes, such as to pay for education
(9 percent), repair, buy, or finance a car (10 percent), or to pay for a move.(5 percent). Twenty
4Liebman, 1.B. (1998). "The Impact of the Earned Income Tax Credit on Incentives and
Income Distribution." Tax Policy and the Economy, 12,83-119,
SMeyer, B., and D.T. Rosenbaum (1998). "Welfare, the Earned Income Tax Credit, and
the Employment of Single Mothers." Department of Economics, Northwestern University.
6Eissa, N. and 1.R Liebman (1996). "Labor Supply Response to the Earned Income Tax.
Credit." Quarterly Journal of Economics, 111(2): 605-637.
7Dickert. 5., S. Houser, and 1.K. Scholz (1995). "The Earned Income Tax Credit and
Transfer Programs: A Study of Labor Market and Program Participation." Tax Policy and the
Economy, 9, I-50.
"Eissa, N. and H.W. Hoynes (1998). "The Earned Income Tax Credit and the Labor
Supply of Married Couples." Department of Economics, University of California, Berkeley.
5
�eight percenl said they were saving at least some of the EITC for future
use,~
3.2 increasing the MinimuDl Wage
The Administration has fought for
increuses in the minimum wage, and on October I,
1996 the rate was raised from $4,25 to $4,75, The
rate was increased again to $5,15 on September 1.
1997. Prior to these increases. it had been five
years since the minimum wage was last raised, and
its real value h:ul decreased by 15 percent (Chart
7.00,------------,
7),
As shown in Charts 1 and 2, the wages of
low-wage workers increased substantially since
1996, and the recent minimum wage increases are
likely to explain much of this rise, It has been
estimated thut atmost 10 million workers benefited
from the recent minimum wage hikes,lo
Most of the workers benefiting from the wage increases are adults from lower income
families, and their wages are a major source of their family's earnings. Among workers who
were earning between $4.25 and $5.15 just prior to the minimum wage increases, 71 percent
were adults (20 or older), 5& percent were women. and one~third were black or Hispanic workers. '
Almost half of the affected workers (46 percent) worked full·time. and most of the low-wage
workers were in low~income households. That is, over half of the benefits from the minimum
wage increases were received by households in the bottom 40 percent of the income djstribution.
And in 1997, the earnings of the average minimum wage worker accounted for 54 percent of
their family's total earnings.
One of the potential side effects of increa.<;ing the minimum wage is a reduction in
empfoyment. That is. with labor more expensive, some finns may hire fewer workers, Many
empirical studies have examined this issue, and the weight of the evidence suggests that modest
increases in the minimum wage have had very little or no effect on employment. In fact, a recent
study of the 1996«97 wage increases used several different methods and found that the
employment effects were statistically insignificant. Moreover, the unemployment rates of
A,frican~Am{:riclln teens and high schoof dropouts. who are two groups of workers most likely to
'Sme,ding, T" K, Ross, M, O'Connor, and M, Simon (1998), "The Economic Impact of
the Earned Income Tax Credit (ErrC)," Center for Policy Research, Maxwell School of Public
Policy, Syracuse University.
l&rhis finding, and the subsequent two paragraphs are based on: Bernstein. 1., and I,
Schmitt (1998). Making Work Pay: The impact o/rhe i996-97 Minimwn Wage increase,
Economic Policy Institute, Washington. D,C.
6
�be affected by the wage hike, are lower today than they were just prior to the increases.
4. The Combined Effects of EITC and Minimum Wage Expansions
Increases in the minimum wage and expansions in the EITe reinforce each other. Among
low-wage workers, these changes have produced substantial increases in income. Table 2
demonstrates the combined effect of the two policies (after inflation), comparing 1993 and 1997
(as if the minimum wage was in effect the full year). During this period the minimum wage rose
by 9 percent, while the maximum EITC credit rose by 38 percent for one-child families (116 .
percent for two-child families). For families with one earner working full-time at the minimum
wage, their c:ombined earnings-plus-tax. refund would have risen 14 percent if they had one child
(27 percent jf they had two or more children). This is a significant gain in real purchasing power
among these parents.
As the bottom of Table 2 demonstrates, full-time work at the minimum wage no longer
leaves familtes below the poverty line. As a result of these policy changes, one and two-child
families with a single fuJI-time minimum wage worker now earn enough to escape poverty.
S. Conclusion
The past several years have been very good ones for less-skilled workers in the labor
market. Wages are up and unemployment is down. Among single mothers, many more are
participating in the labor market, while welfare caseloads have declined steeply. The research
evidence indicates that these gains partially reflect the strong economy, but that the gains have
been reinforced by Administration policies that have increased the financial rewards for low
wage and less skilled persons to work.
Providing the economic incentives to work are an important legacy of this
Administration. These gains mesh well with other goals this Administration has pursued, such as
adequate child care for the children of working mothers and available training for those workers
who want to increase their skills and work opportunities. In the long run, a healthy strong
economy must rely on a trained and hard-working labor force, with opportunities for both the
more and less educated. There has been real progress toward this goal in recent years.
7
�Table I. Factors Accounting for Changes in Child Poverty
1979-97
1979-89
1989-93
1993-97
Family structure
2,1%
1.2%
0,8%
0,3%
Earnings and other before-tax-and-after income
IA%
LI%
3.5%
-3,6%
Cash social insurance and welfare paYfflents
0,3%
1.0%
-Ll9'o
05%
Total cbange in official poverty measure
3,8%
3,2%
3,1%
-2,8%
Means-tested food and housing transfers
0.4%
0,4%
-0.3%
0,4%
Taxes
-2.3%
0,3%
0,0%
-2,6%
1.9%
4,0%
2,9%
-5,0%
Changes to official poverty rate attributable to
changes in:
Change in extended poverty rate attributable to
changes in:
Total change in extende~..P.2~:~Y rate
8
�•
Table 2, The Effects of Changing Minimum Wage and EITC on Earnings of Single Parents
(All numbers in $1997)
1993
1997
Percent Change
$4.72
$5.15
9
One-chdd family
$1.602
52,210
38
Two-child family
51,689
$3,656
116
One--child famity
510,320
$lI,722
14
Two-child family
$10,407
$13,168
27
0.93
1.06
Proicum fnrameters
Minimum wage
Maximum EITC
Earnings minus
tax es *
Ratio of earnings
minus taxes to
poverty lin\:;
One-child family
0.80
1.02
Two-child family
*Assumes one earner works fulHimelfull-year (2000 hours) at minimum wage. Taxes include
income taxes (including the EITe) and 'employee share of social security taxes.
9
�Latest Jobs Report Indicates That the Current Expansion Has
Achieved Record Length
A Report by the
Council of Economic Advisers
January 8, 1999
.
.
With loday's strowgjobs r:::por., the CEA believes that December will be rung up us lhe 93rd
month of the current economic expansion, making it 1M.jQDge.SJ peacetime expansioo 00
rt=J:ll.
. '
• The longest previous ~acelirne expansion ran 92 months, from December 1982 to July
1990.
• When wartime expansions arc included, the current expansion is the second longest on
record; lhccxpansion from March 1961 to December 19691astOO 106 months (Chart 1).
CharT
r' Durariml a/Business Cycles sillce ~855
Expansions
•
o
100
50
o
50
Duration (months)
P&&ce: mil' e~punsio"
Wl!~ rn/;1 &XpnOSKm
100
150
�The Dating of Bl/siMSS Cycles
, ,
TilC consensus of pdvalc forecasters sees the expansion continuing in 1999, but its precise
length \VilI
nOI
be known until some time after It has cnded,
• The dating of business cycles is not an official U.S. govcrnmenl function. Instead, once
it has become clear that the economy has reversed direction, the Business Cycle Outing
Committee of the National Bureau of Economic Research (NBER) meets to detennine
the turning point fOi historical and 'statistical purposes. For example, the July J990
business cycle peak was announced April 25, 1991 and the March 1991 trough was
:mo01.lnccd December 22. 1992.
• A popular rccess:on indicmor is two consecut1ve quaners of declme 10 rcal GOP, but the
NHER docs not usc this approach. R'lther, a recession is LI recuning period of dcdjnc in
lotal DUlpu:, income. employment, LInd trade, usually lasting rrom (\ months to u year,
The Policy Framework
According 10 NBER dating, the ccor:omy was out of the
Clinton look offi;:c.
1990~91
:1)ce:ssion when President
• BUi Inc recovery was weak and job growth appcllred slow. In facI, the unemploymcnt
rate rose a full point [0 7.8 percent between the March 1991 trough and June 1992.
• And, of course, the recession bad aggravated the problem of Jarge
inherited from 1he 198Q5,
bud~et
defieits
, The President put in place an economic strategy grounded in deficit [cduction, investment,
and opening markcts abroad.
• In contrast 10 the previous two long expansions, which were In1l:rkcd by luX cuts and a
stimulative fiscul policy, the President's program was based on the idea that reducing Ib~
Ecderul tu.HJget deficit would ai)ow 'merest rates 10 come down and stimu!me prlvute
~llW1J,
• This policy of fiscal discipline, together with an appropriately :JccommoJati-.:e monetary
polley by the Pede!'al Reserve, produced a favorable climate for busjness investment and
a s;roOg investment-led recovery.
• WhJlc reducing ovcrall Federal govcm;nen1 spending as a share of GDP, the
Admmistration hus pushed fQr more spending in (mica] areas such as cducmiQu .md
lmirlinii,. children. the envjronment. bct;lth care, and research and development,
�•
Ih~_L'r.:tcd
Stales has been successful in~nlindjoj; jts fe;11 exp(If":~ by almost 8 percent
;Jer yellr siuk' 1223, even though the tr.Jde deficit hlls widened dl.lI11alically as the strong
U.S. economy, has continued to altract :rnportS whi;" slower gro'sth abroad has reduced
'
demand for U.S, expol1s.
Achievi.~1g
the Employment Acc's ObjeClives
The Employment Act of 1946 esu::.blishcd l.l policy framework in which the Fede~.ll
govemment assumed responsi:Ji;ity for trying lO,stabillze short-run economic llucwatJOr.s,
promote babnced and non.jn:1ationary economic growtp, and fosler Imv uner.1ploymcnt
The th:-et: longest expansions of the past century-including the current one-have OCCUlTed
sjnce the Act was pllssed
•
Judged by the objectives of stabiEzat:on policy (inflation und unemployment), the current
economic expansion is ~..Of the most successful jn the NaliQn.:..s~bistory,
• Jobs, The ur.cmplQymenl rale is the lQwest it hilS been it) almas: 30 YCUf$ and more
~icans are working than ever before..
Between the March 1991 trough and December 1993, I Kg million jobs have been
created (17,7 mi;lion of them sjnce Jllnunrv 1.223).
Emp!Q)'me!Jl is al an gil-tjme high, with 132.5 million Americans working in
December (64.2 pereenl of the workir:g .age popUlation) and only 4.3 percent of the
labor force u'1cmployed.
Demographic chu:1ge ar.d other factors have altered the relationship between the
ulIe:rr:ploymcnt n1le and the risk of inflation over time, and the unemiJloyment fate
h'lS not come down quite so low in this expansion as II did:o :he- J 9603 (Chart 2).
But \vjth a responsible fiscal policy in place and UtYQrablc inflation and produclivity
Qj::ve!QDmems. there was 1J1lle pressure for :U1e;est nlte hikes that .could have choked
.QJ( tbk expansion prematurely - .
• f!ljIatioll. Three-quarters of the way through the eighth YCDr of expar:sion, jnflatjon {both
~md
tOJ:uU rerowns teme ever. {hough the unemployment rate has been very low for
almost 2 years.
This situatlOn stands in marked .contTast to the sharply rising inDation experienced
a: the end of the 19605 expansion and the milder price acceleration seer. at the end
of the 1980, expansion (Chart 3)
3
�Churl 2: The Unemployment Rate in Three Long
1::,~\pUllSio/JS
Percent
'2 ,-------------------------------------------
.'.
.
8
....
6
.
..
'
, "
............
82·90
...
4
,
91-present
61·69
o
6
12
18
24
30
36
42
48
54
60
66
72
78
84
90
96 102
Months , expansion
01
CharI 3: Core CPlllljlalion in Three LOl/g Expallsions
12-month percent change
;'
,-------,--------~-
• 6,1-69
i ...
.,/"'~"\
\
,
\
\~~\
.
\
\1\ '.
,
~/
'
/~ ....
•
,....-•..-.~..........,.•.. .. ,'/;.~
...• ."
•........ .....-.. .
..'
\~.•/'\"",...!\
I
,
4
\'.
!
.
. .,.
.I
829'
-
,
• '.'
'--
..."
3
.
," i
'."'.. .",--.....' ','
.'
...
. .
..
.'
/~
-
," f
o
.'.
i'.
..... '
'. '...... /",,.,.'~'
6
12
18
~
91,prcsellt
.
....
.
,,'
\ /"~..'\'
;',
,~
.., " ....
'
,,..
~
~
42
~
~
M
~
Months ot expansion
4
n n
M
00
%
1~
.'
�This good inflation performance has been aided by favorable conditions such as the
continuing sharp decline in computer prices, a drop in oil prices, rapid growth of
induslIial capacity, and downward pressure on traded goods prices due to weakness
in the world economy.
• A very low misery index. The combination of low inDation and low unemplovment in
this expansion is comparable to the low "misery index" (the SUID oftbe two) achieved in
the late 1960s (Chan 4). This time, howevcr, inDation is tame rather tban rising.
Charr 4: Tile Mi.\·ery Illdex ill Three Long c'J:pwuirJll.l'
I'ercent
" ,-------------------------------------------,
,.
'\..j \
',4
.......
...../~\...
.•.......
\..~.-.....
~J'.~
-
\
[\/...
/\
'-'
!
\
82·90
('\
.....~....
.. .
f · · · ... ....../
\.....
...,'
..........J.
61·69.,
8
".
." .
,
'·~, . .'''''i ...
,
.""
.. ,....
:
'.'
".,
"/
'.
'.
/'..'
:
.....
............
"'" ,r··.,.;
91·prosont
o
6
12
18
24
30
36
42
48
54
60
66
72
78
84
90
96 102
Months of expansion
Sustained productivity growth over the course of this expansion has been an imponant
contributor to growth.
• With slower growth in the working-age population and lower trend productivity growth
since the early 19705, aggregate GDP could not have grown as fast as it did in the 1960s.
• Productivity growth-which is what malters for real wages and a rising standard of living
over the longer (elm-has continued to be rclmively strong .well into this expansion
(rather than exhibiting the decline that often occurs latc in expansions, Chan 5).
However, the rate of productivity growth over this expansion remains well below that
achieved prior to the productivity slowdown of the early 1970s.
5
�Chart 5: Non/arm ProduaiFiry in Three Long 0,:pansiolls
Index {trough:o 100)
135
,......... ", ' .. "'"
,.'
130
61·09
i
125
!
12{) -
./
r
~
110 t
1;5 i
.
,
f
,
100 ;
o
2
4
6
8
10 12 1. 16 18 W
~
~
~
a m
D
M
Ouarters of 6>:paru;;01'1
An Inlles{mellt~Led Recovery
The deficit red'Jct:on strategy underlying thc C:1J'l'Cnt expansion has paid off in highcr private
investment.
• As the largest component of GOP, consumption wns the largest contributor to growth in
all lhree long expansions. However, the contribution of jnyestment 10 ~JQwlb in this
~lsjQn has been almost twice as litem as it was in the other two long <':~PMDSjL:()S. and
'lbc f;;\)otOQI.UiQD Qf gQvernment spendi.n~.bl\sJleen subslamialh' 'smaller (Chan 6).
• Business invcstme-nt, especially in producers' durable cqutpmcot, has grown particularly
rapidly on a sustained basis over this expansion (Chart 7)
• Net CXp0l1S have subtracted from growth in this expansion. In contrast to the current
<lC(;Otlnt deficits of the 19S0s, however, when both nat:ona! saving und dom::slJc
inveslment were falling as a share of GDP over much of tbe period, the current account
deficits of the 1990s reflect generally rising nct national investment that is greater t~un
generally rising net national saving,
• Federal govcmment spending has pro\'ided no stimulus in this expunsioo, The small
contrIbution of government has been due to state and local government spending, '
6
�Chart 6: C011tributio11S
(0
Growth ill Three Lo"ng Expansions
Share of tolal increase in GOP (percent) .
[ ] Consumption
80
•
InvlIstlTl\lnt
B
[lill
Government
Net lixports
60
40
o
-20 L_-'--_ _ _-'--_ _ _-'--_ _ _-'--_ _ _-'--_--"
1961-69
1991-present
1982-90
Chart 7: Producers' Durable Equipment ill Three Expa/!siolls
Index (trough = 100)
~40
:0'20
91-presenl
..... ".. .•....•.. ,.-
200
"
"
.
'
....
180
160
-.
_.............................
....-....... ~........
...........
.0
2
4
6
8
10
12
14 '16
18
20
22
Quarters of expansion
7
24
26
28
30
32
34
�Be1lefits of{{ Strong Lobor Market
"
American workers. including groups. that had fullen behind over the prua two decades or so,
have been major beneficiaries of the sustained tight labor market thls expansion has
produced.
With strong increases in the past 2 to 3 years, real WI1/WS have ~fQwn more over the CQuni~
of this e>.pansiQu than they did ,in the 1980s eXllimsiQD (Chart 8).
Chari 8: The Real Wage ill, TwoJ~ollg Expansions
Inde:x (hough .. 1(0)
100
9'·presenl
,04
97
D
•
6
12
'8
~
~
$
~
~
M 00
Months 01 '5xpa,'Ision
00
n
~
~
00
Renl hourly earnings of production and nonsJpervisory workers rose by ,5A percem
belwcen Jtmu,ury t 993 and November 1998.
•
The widely documented long-~crrn slide in the real wages of men (a drop of 11.4 percent
in the media:! between 1979 <1nd i 996) has been checked by increases of L7 percent in
1997 and 2.3 pe:-cent in the lin.;t 10 months of J998, according to CEA calculations for
full- and part~time workers, aged 16 and over.
•
Real hourly wages in the two !owcsl~paid tenths of {he distribution for maie workers l\ged
16 and older huve increased by 5 to 6 percent since J993. The increases for women were
significant as well, with wages in the second tenth of Ihe distribution increasing by 4
percent since 1993.
8
�More people arc finding work than evcr before and they arc finding ii faster than they would
in a le:;.s strong labot mUrk!!L
• The average length of unemployment among workers searching fot a job declincd to 14.1
weeks in December 1998. Jt was 18.8 weeks in J994, the earliest yeur with comparable
data.
• Almos! three-quarters of those who \\lere unemployed in December hud been unemployed
for l~ss than 15 weeks; only 13.7 percent were looking for work for more than 27 weeks.
Recent analyses suggest that thr.:; eml2iQxment relatjonship is strong.
• job di.\placemenr. Job losses due to layoffs, plant closures, and the like have declined
substantially since the 1993-95 period, and among those who have been displaced, the
share thUI have found new \vork has increased. These reemployed workers shll typically
cam less on the new job than ut the job they lost, but these wage losses are the smallest
on record.
The popUlar assertion that sccure lifetime jobs have disappeared is
oversw.led: In 1996, a substantial 27 percent of maJe workers aged 45~64 had iong~tenn
jobs (20 or more years with the same employer), even though this fraction had fallen by.
7 percentage points between 1979 and 1996. Moreover, the fraction of similarly aged
. women holding long~term jobs ~ietually Increased during this period.
• Job lenure.
• Discouraged workers. The number of workers who arc not employed und who have nm
looked for \vork in the past 4 weeks hccausc they did not think they co·uld find a job has
shrunk by one~third sim:e 1994, the earliest year for which comparable data are available.
The strong lahor market has ulso generated l;ains aITIonia'roups whose labor markctstutus
hud
nOl
jjnproved in tile past dccudcs.
• Median rca} wages of bl1.lcks and Hispunics huve riscn rapidly in the p~ISt 2 years (based
on CEA. calculations for full- and part-time workers uged 16 and over). The inf1ati()n~
adjusted increase between 1996 and the tirs! 10 months of 1998 was 5.8 percent for black
men, 4.0 percent for Hispanic men, 6,2 percent for black women, and 2.6 percent for
His~xmic women. Furtherrnore, the black and Hispanic unemployment rates for 1998 are
at historic lows-B.9 percent for blacks and 7.2 percent for Hispanics.
• Welfare reform, the expansion of the Eamed Income Tax Credit, and the strong economy
have c3:.Ised the labor force participation arnqng single women with children to increase.
to unp:e.cedented levels.
9
�• Employment among male high school drOI)Outs, immigrants, and blacks und Hispanics
has increused.
• High-school dropouts have experienced a much larger relativc increase in their
employment rate since 1993 than those with morc education, due to incrcased labor force
panicipation among dropouts and decreased unemployment among those dropouts who
are in the labor force.
Conclusion
The economic policies of the past 6 years have nunured and sustained what is now the
longest peacetime expansion in,the Nation's history. More Americans are working than ever
before, the unemployment rate is the lowest it has becn in a generation, and innation remains
tame. In addition, disadvantaged groups that have been left behind in the past are beginning
to experience the benefits of a sustained tight labor market. Turmoil in world financial
markets and a slowdown in world growth have tested the strength of this expansion, but the
economy remains fundumentally strong. Moreover, evidence suggests that expansions do
not die of old age. If we continue to pursue sound policies and enjoy good fortune, we can·
reasonably look forward to achieving the lon·gest expansion ever in February 2000.
10
�PROGRESS REpORT:
GROWTH AND COMPETITION IN
,
U.S. TELECOMMUNICATIONS
1993-1998
February 8, 1999
The Council of Economic Advisers
�EXECUTIVE SUMMARY
Since 1993 the U,S, telecommunications industry has prospered. Telecommunications,
markets in the United States have continued to open and firms have competed to meet new
consumer demands. to build the infrastructure to support the growing information industry
spurred by tbe internet, and to provide the foundation for future innovations in communications.
The benefits for the D.K economy have been substantial:.
•
The telecommunications sector has created hundreds of thousands of new jobs stnce ..
1993, The telephone services and 'equipment sectors, long areas of declining employment- , ...
as technology increased productivity, are directly responsible for the net creation of
approximately 200,000 new jobs in the past 5 years.
.
•
. Hundreds of new finns have entered all sectors of the industry. with the number of
publicly held teiecommWlica1ions companies alone nearly doubling in the past 5 years,
New competitors have been responsible for much of the growth in the local, long~
distance, wireless, and equipment sectors.
•
New and incumbent firms have collectively invested tens'ofbillions of dollars in
facilities, services, and research and development. leading to increased network capacity,
. deployment of new technolgy, and roH-out of advanced communications services.
•
Output of services has increased and prices hu,:,e deciined industry-wide.
This progress has been supported by the' Administration~s long-standing commitment to
make competition and regulatory flexibility the fundamental principles on which U.S.
telecommunications policy is based. In 1993. when Vice President Gore announced those
principles in the Administration's National Information lnfrastructure agenda. there were
predictions that the approach would lead to substantial industry growth. The above results bear
those predictions out.'
The benefits of it policy approach geared towards opening markets and promoting
competition can be seen sector~by-sector in the telecommunications industry:
•
l&llg~dis{ance telepbQne services: Growing competition in long-distance services has
eroded AT&T's market share from its former monopoly level to about 50 percent. With
thi~ competition has come increasing availability of low-cos! calling plans for a broad
range of consumers. As a result, average revenue per minute earned by carriers has been,
declining steadily for several years and long-distance usage bas increased substantially.
Consumers will likely reap further benefi.ts as -competition grows in the long~distance
market under the Telecommunic'ltions Act of 1996.
•
LQcaile-lephQoe services: Many new carriers have cn~ered the wireline 10\;,,1 services
.- ..
�market since the 1996 Act, providing both switched voice and high-spe<?d data services to
customers, To date they have created morc than 50,000 new jobs and attracted over 30
billion dollars worth of capital investment, not counting debt or private venture financing,
Recent entrants, including reseilers, have so far captured between 2 and 3 percent of the
local services market measured by lines and about 5 percent of the market measured by
revenues, The competitive empbasis to date has been on business rather than residential
customers, due partly to underlying economic and regulatory factors" AB competitors
establish their businesses and expand their networks, and now that the Supreme Court has
, affirmed the FCC's broad authority to implement the '1996 Act's market-opening
provisions, local competition for residential customers is likdy to increase,
•
WirelcssJeiSl'hQlle service: Increased capacity and competition have led to fast growth
of wireless services: over 60 miUion Americans nQw subscribe to mobile service; four
times the number in 1993. Median prices per minute have fallen, depending on usage
levels, between 30 and 40 percent for residential users and as much as 50 percent for
business ¥sers, Wireless carriers directly created more than 100,000 new jobs fTom 1993
thwugh 1998. Wireless service revenues have grown an average 24 percent annually
stnce 1993, to $30 hill ion'. Capital investment by the industry has reached a cumulative
$50 billion.
•
lliecQmmunications eguimnent: The telecommunications equipment industry in the
U,S. has grown substantially. Total revenues in 1998 are estimated at $120 billion. a
thrce·fold increase since 1993, A growing proportion of manufacturing consists of
innovative equipment for integrated voice and data communications ovcr digit~
networks, Annual U.S, telecommunications equipment expons doubled from 1993 to
1998. 10 over $25 billion.
•
aes:ommunlcations infrastructure and the information sCGior: The telecommunications"
industry provides'the infrastructure for fast and reliable transport ofinforrnation. With
the surge in Internet usage in the past 5 years, the number of «hosts" for Internet sites
grew from fewer than 3 million to over 30 million and electronic commerce has become a
multi~bmion dollar industry.. Driven by the growing information industry. high~speed
data services have spread as providers Invest in facilities to provide customers with a
variety of «broadband" options; deployment of high capacity fiber grew by at least 16
percent in 1997; and production of innovative data networking equipment has increased.
Demand for additional Jines has increased with data traffic, from about 9 mlllion lines in
.
1993 to aboullS million lines in 1997.
, In some of the above markets. such as long~distance, growth is tbe effect of more than,a
decade of competition. In others:, i1ke local telephone service, the regulatory and legislative
changes thut opened the market 10 entry occurred much more recently. While more remains to be
done for entry to occur iIi parts of the lopal market, notably residential service, the lesson from
markets with a longer history of entry is that, with time and opportunity, competition can grow
and produce the expected benefits.'
�INTRODUCTION'
This report describes developments in the U.S. telecommunications market since 1993.1
It presents an overview of the growth of the industry, discusses key developments in the
long~
distance,loi;al. wireless, and equipment sectors., and describes the dramatic rise in lise orthe
Internet and the increasingly interdependent relationship between the information and
telecomm\Ulic~ti,ons industries. The goal of this report is not to examine the economic issues'
underlying specific regulatory proceedings, nor is the purpose to analyze whether particular
refinements to current laws or regulations would be useful. It is instead to discuss overall trends
and to assess the broad impact of the current regulatory framework.
The evidence reviewed demonstrates that the telecommunications industry has been a
substantial part of the outstanding performance of the U.s, economy-now in the longest
peacetime expansion in American history. Since 1993, the teJecomm\lnicatiQns industry has
created hundreds of thousands of new jobs, seen entry by hundreds of new companies, made tens
of billions of dollars of new investment in infrastructure and innovation, raised exports, and
fostere~
a n::volution in lhe scope of communications services available Lo consumers.
The ,growth of the American telecommunications industry has been supported by a
flexible, competjtion-oriente~ approach to policy and regulation. The princ,iples of market
competition and regulatory flexibility are implemented in the Omnibus Budget Reconciliation
Act of 1993, through which President Clinton signed into iaw authorization for auctions of ~
spectrum for wireless communications; in the NatlOnallnformation Infrastructure (NII}Jnitiativ~
developed by the Administration in 1993 and overseen by Vice President
.
Gore~
.
and in provisions
of the Telecommunications Act of 1996. They appear also in the Administration's initiatives to
cf!sure the stlccessful growth of electro~ic commerce and to keep the Internet, a key driver of
!This report focuses on the telephone industryJ which includes related carrier services like
data transport It does not address cable> broadcast, saleHites, or otber mass media services.
1
�demand for telecommunications infrastructure, free from eco~o~ic regula,\ion.
To be sure, there remain important challenges for telecommunications policy to address
for example. ensuring that competition develops further and mo~ quickly in certain markets and
that anti-consumer tactics like "slamming" and <'cranuning" are stopped. Moreover, innovation
and change in a variety of markets, for example in the markets for satellite, cab,le, and fixed~
wireless services. may alter the assumptions underlying some current regulations and require
policies to adapt But by any fair measur~. the development of the telecommunications market in
the United States must be considered a success. This success provides no basis for complacency,
but neither do remaining challenges provide a reason to change the current regulatory approach.
Instead, both are strong reasons to adhere more strongly to the underlying principle of open
competition that is bringing great economic benefits to American workers, consumers:, and
businesses, and
to 'make sure that competition has the opportunity to dev~lop in markets where it
so far has been unable to do so.
2
�Policy Developments
Traditional market structure and regulation. For much of this century, most
telecommunications service in the United States was provided by a single, regulated monopoly.
Competition first arose in long-distance service. That market was fully opened to new entrants in
1984, when the Department of Justice's antitrust suit led to the break-up of the integrated BeU
system into 7 separatt? iocal companies, the Regional Bell Operating Companies C"RBOCs" or
,
"baby Bells") and one unaffiliated long-distance company. AT&T. Telecommunications markets·
noneth~less
continued to be highly reguhlted. Local telephone service remained, for the most
part, the province of monopolies overseen by state uti,lities commissions. The ]ong-dis~ance
market became more competitive but. in order to ensure that it remained so, entry i,nto the market
was barred for the RBOCs because they controlled access to local networks and could therefore
discriminate against rivals needing that access to originate or termin~te 1ong..<fistance calls. The
nascent cellular industry started with two licenses in each service market being issued by the
FCC, one to the incumbent local carrier nod the other to an unaffiliated entrant. Partly due to
regulatory limitations on availabJc spectrum, the market remained a duopoly for several years.
Policv evolution, Recognizing that the telecommunications industry was changing al an
increasingly rapid pace d,ue to technological and m'arket innovations, and th_auhe regulatory
framework needed t? adapt to those changes. the Administration launched th.:= National
Information Infrastructure (NIl) initiative in September 1993. To complement and advance the
NIl initiative. the Administration proposed in January 1994 a set of princIples for overhauling the
regulatory framework of telecommunications and fostering investment and competition, The NIl
initiative envisioned advanced networks that would make it easy and affordable to connect
people to each other. to computers, and to a vast array .of services and infQnnation resources, On
thtt wireless side, the Omnibus Budget Reconciliation Act of 1993, signed by the President,
nuthorized the
rcc to in'crease competition in the wireless industry by auctioning major blocks
of radio spGctrum across the country,
3
�Fundamental principles for regulatory reform. Along with the need for a modem, flexible
regulatory framework, the Administration promoted from its earliest days the benefits of
comp~tition
for both consumer choice and innovation, Vice President Gore tims set f~rth five
fundamental principles to guide the study and formulation of legislative proposals for regulatory
reform:
•
Encouraging private investment in information infrastructure;
•
Promoting and protecting competition;
•
Providing open access to advanced telecommunications networks for
consumers and service providers;
•
Preserving and advancing universal service to avoid creating a society of
infonnation "haves" and "'have nots"; and
•
Ensuring flexibility so that the
~dapt to
newly~ad(}pted
regulatory framework can
.rapid technologlcaillftd market changes in the
telecommunications and information industries.
The Telecommunications Act Qf 1996. The principles of the NIl initiative are reflected in
many instances in the Telecommunications Act of 1996; which Congress passed with .
overwhelming bipartisan support. When President Clinton Signed the Act into law on February
8, 1996, ht~ called the legislation an important step in the Administration's commitment "to
refonn our telecommunications laws in a manner that leads to competition and private
iIlVeSlment, promotes universal service and open access. to infonnation networks1 and provides
for flexible government regulation." The 1996 Act eliminated legal barriers to entry and further
opened tht: door to tocal phone competition by requiring incumbent local telephone companies to
interconnect and exchange traffic with t;ew entrants into the market
4
0:1 non~discriminatory
terms,
�to Iease one or more parts of their networks ("unbundled network elements") to new entrants at
cost~based
~
prices, and to provide service at whQlesale rates to new competitors so they could gain
foothold in the local market througb resale to customers. Tbe Supreme Court recently upheld
the FCC's autbority to implement many of the market-opening provisions of the Act after tbe
,
scope of that authority was challenged hy incumhent local carriers and certain states,
1n addition to imposing market-opening obligations on incumbents, the 1996 Act
withholds
au~hority
for the RBOCs to enter tbe long-distance services market until they have
fully complied with those obligations. The RBOCs have been barred from that market since
1984, when an antitrust settlement caused their divestiture from AT&T. The 1996 Act,liftS .that
restriction once the FCC finds that an RBOC has met certain market-opening requirements set
forth in the statute, providing a further measure to achieve the Act's goal of opening the local
market to competition.
'me FCC's policy efforts since the Act have focused on implementation.
Defining and
restlucturing universal services, reforming access charges, and establishing the rules under which
incumbent local telephone companies can provide ''"advanced'' services over their networks are
examples
t)f
issues on which the Commission has been working. Further policy developments
will foUow as markets continue to change in response .to the ,1996 Act and to new investment and
technologicai innovation.
5
�Economic Growth and Competition in Telecommunications Markets,
Revenue growth and contribution to tbe national economy, At the time the
Administration announced the NII initiative in 1993, it was estimated that industries related to
the NIl would create $300 billion in new sales for the telecommunications industry and
contribute a comparable amount to GNP by 2007. These levels are already.being achieved and
even surpassed: Communications services and.equipment companies had revenues of about $250
billion in 1993. which grew to $408 billion in 1998 (Chart I). Telecomrnunications services.
contributed about $25 billion to GDP growth from 1996 to 1997, and increased their share of
GDP by more than 20 percent.'
~eraJi
job creatjon. The teleconunurucations services and equipment sectors are directly
responsible rOT the net creation of, conservatively, about 200;000 new jobs since i 993 (Chart 2):3 ,
This increase is extremely significant: prior to 1993, telecommunications employment was
,
decreasing. even as the production of telecommunications services was expanding. For example,
from 1981 to ) 992, the number of phone lines-ulocalloops"- in the United States increased
. by nearly 40 million, and the amount ofjong~distance calling more than doubled,4 But over that
same time period. the number of workers in the U,S. telecorrununicmjons services industry fell
by 200,OOQ,' Indeed, labor productivity in the telecommunications industry-.measured as output
Total telecommunications revenues are the sum ofteiecommunications. equipment sales
reported by MMTA and telephone communications services revenues reported by the Census,
projected to year-end 1998. U.S. Census Bureau. 199&. Annual Communications Services'
Survey. Also, MultiMedia Telecommunications Association. 1998. 1998 MullfA1edia
2
Tclccommpnicativns Market Review and Forecasi.
JBureau of Labor Statistics (BLS). 1999. National Employment, Hours, and Earnings.
Hereafter. "BLS:~
" ~ Federal Communications Commission. Industry Analysis Division. 1998, Trends in,
Telephone Service, pp. 63, 97, Hereafter, "FCC. Trends in Telephone' Service,"
, BLS.
.6
�per hour-increased by 80 percent from 19&1 to 1992. reducing the number of workers needed
even as business grew rapidly.6 Labor productivity in telecommunications has continued to grow
at least as fast since J992,1 But lower prices, new and innovative services, dramatic growth of
wireless communications. and new demand for services and infrastructure from the infonnation
sector have caused the growth ofthe telecommunications industry to outpace productivity
increases and create large numbers of new jobs.
Telecommunications finns have been particularly important in providing crucial inputs to
other industries, thereby contributing to the progress and growth of those sectOrs. By providing
the advanced infrastructure and services essential to data processors and infonnation providers l
the telecommunications industry has contributed to the creation of an additional 600,000 new
jobs s.ince 1993 in data services, whose growth depends significantly on communications
infrastructure (Chart 2).8 That figure does not-count indirect employment effects in the software
and computer hardware industries, or in the many other economic sectors that have become
increasingly reliant on telecommunications and information teclmology.9
En1ry by new firms, The structure of the telecomml.mications industry today is radically
>1
FCC. Trend\' in Telephone Service. p. 19.
7
FCC. Trends in Telephone Service. p. 19.
8
BLS. Data for employment in the SIC'category of:~computer.services and data
processing,'? excluding the subcategories of pre-packaged software and computer repair 3J.ld
servicing.
The number ofjobs that would not exist today without the growth of the
telecommunications industry is likely much higher, although hard to estimate with precision, An
example oftne broader "ripple effect"' can be seen in data the Cellular Telephone Industry
Association has compiled on employment effects of the wireless industry. Beyond the more than
130,000 jobs created directly by wireless carriers, as·ofthe end of 1998 there are an estimated
260,000 sales and distribution jobs, 45,000 manufacturingjobs 1 and over 600,000 support
service, construction and product development jobs related to wireless. Such multiplier effects
exist in all sectors of the tclecommunicatio~s industry.
"
'
9
7
�different from that of 15 years ago, Numerous finns have entered each sector ofihe
telecommunications market. with the number of public telecommunications companIes swelling
from under 100 in 1984 to over 200 in 1993 and surging to just under 400 in 1997. In critical
sectors like local telephone service. the majority of entrants are private companies not counted in
the above figures, The Association for Local Telephone Services (ALTS) lists 145 private
companies in the local exchange market alone, Consolidation and acquisitions keep the number
of companies ~n flux, but market data show that many of the fastest grO'hing and most successful
firms in the industry are unrelated to AT&T, its Regional BeU Operating Company progeny. or
any oftheil' subsequent spin-offs. In the long-distance, local, and equipment sectors of the
telecommunications market, small, recent entrants have outpaced larger and more estahlished
firms in their rate of growth of both market capitalization and revenue.
Competition and market yalue. Vihen concentrated or monopoly industries become
competitive, economic theory suggests that, unless the market grows. profits decline as rival
finns oiTer lower prices and transfer more value to consumers. What is good for customers may
be viewed differently by shareholders. It is thus indicative of grov,.th .and innovation in the
telecommunications market that, despite major changes in the regulatory environment, increased
competition, lower prices, Ilnd some predictions to the contrary, the market value of public
telecommunications firms since 1993 has kept pace with the sos:dng U,S. stock market and
increased by over $800 billion-more than doubling in s,ize (Chart 3). The many private
companies have created substantial, additional value and investment, More than half of this
grov.'lh is [mm companies-that did not exist priorto the breakup of AT&T's integrated monopoly
in 1984.10
New jnfrastru£tl!~. The growth of the telecommunications: industry has led to
construction of more advanced infrastructure, The conversion of the wireless industry to digital
technology and expanded use of fiber optic cable in wireline systems . two examples. FCC
are
,
10
Calculated using Compllstat data.
�figures show that from 1993 through 1997, fiber deployment increased from 2.3 million to 3.4
million miles in long-distance networks:. from 6.6 million to 12.2 million miles in incumbent
locul telephone networks, and from 0,2 million to 1.8 million miles in competitive local
exchange networks.: t Fiber mileage overall increased an estimated 16 percent in 1997 akme.
The above figures are estimates based on incomplete dara, Actual fiber capacity by the end of
1998 was almost certainJy much higher. Moreover,.the above data do not include the 800,000
fiber miles in place by the end of 1998 in systems financed_by the Rural Utilities Service of the
, United States Department of Agriculture, or the fiber systems installed by others such as electric
utility companies or state governments. U
Infrastructure that will advance the telecommunication sector, and the consumers and
industries that increasingly rely on jt~ conlinues to develop in circuit-switched telephone
networks as well as 1n data networks, satellite operations. and, cable systems. The current
. emphasis is on expanding the broadband connections availabJe to households and businesses,
New entrants into all of those sectors are constructing new facilities and upgrading existing ones,
and promise to provide an increa.<;.ing range of services on more competitive tcnns for consumers,
Federal Communications Commission. 1998. FCC Fiber Deployment Data ~ End of
Yeor 1997.
11
United States Department of Agriculture. 1998. 1997 Slatislica! Report
T.elecommunications Borrowers. p. 33., .
12
9
�Chart 1 Telecom Services and Equipment Revenue
450,-----------------------------------,
~
400
o
;;; 350
m
m
~ 300
.~
m ,
250 c
,
i·
200L~-----L------~----~~----~~----~.
1993
1994
1995
1996
1997
1998
Nole: Revenues dQlwl include !elevitmn, radio,.Q( cabln.
S01lrce: Bureau fit tho Census and 1991 an(j 199a oditlons of "MultiMedia
Telecommunications Marke! Review ilnd Forecast."
Chart 2 Employment in the Telecom Industry
lA
1,3
Telecom services
and eq~ment
1,2
11
~
c
0
=
~
"
1.0 ..
Data services
O,g :.
1994
1995
1996
1997
1998
No!e: 01\111 '0.. 199& baaed gn September. Te!ecom $6Nices inCh,Jde wirelt'$s
and equipmenl illclude$ on!y mMvfacturing.
Souree: Department of Labor (Bureau of !.,.abor Statistics).
10
�Chart 3 Market Capitalization of Telecom Industry
Compared to Market Indexes
2S0.---------------------------------~
8
~
SSP 500
200
Dow
"
~
'g 150
~.'
? / -......
...
'x.;::: "
,.,- "~
Telecom
",.
~
()
~
•
100
,
::;
~'__
_LJl
50 ""
,______-'-____--'______-'-____
____
1993
1994
1995
1996
1997
1998
Nole: 199a dala
1$
for 03.
Sources: Compm.tat lind Haver Analylics.
11
�Long-Distance Telephony, .
Long-distance telephone service was for decades a monopoly of AT&T. That monopoly
was attacked at the margins in the 1970s and early 19805 and more fully after the Department of
Justice's antitrust suit successfully opened the market
by breaking up AT&T in 1984.
While
AT&T's share of longMdisrance revenueS at first eroded slowly against competition by. Mel and
Sprint, it has declined from over 90 percent in 1984 to under 50 percent today.ll
Sirlce the 1980's, increasing numbets of resldentia~ and business customers have been
offered sUbscription plans and incentive programs that lower their actual long-dis lance prices
below the basic tariff rates, or posted prices. While the tariff rates rell steadily through the 1980,
and then, starting in 1991, began to rise Slightly, the proliferation of discount options has meant
that the basic tariff rate alone overstates actual prices paid in most cases', With
programs and
low~rate
incenti~e
.
plans available not only 10 high volume callers. but also to customers
whose monthly long~distance bills average as little as $ J,o. it is extremely difficult to calculate
how much particular customers are paying per minute
o~long-distancc
usc. But one indication
ofactual prices is the FCC's data on average revenue collected by long-distance companies per .
. minute of usage.
By this measure, effective rates have declined steadily over the last five years
(Chart 4). Long-distance usage, meanwhile, went from about 370 billion minutes in 1993 to 500
billion minutes in 1997 (Chart 5).]4 This increase is. partly a function of the availability of lower .
rates, but also of an outward shift in long-distance demand due to increased transport ofdata and
infonnatl0o ..
The combination· of lower long-distance prices and increased long-distance usage has
been driven by competition. In the past 'five years, many new firms have entered the
loog~
distance market both as rescUers and by building their own facilities. According to FCC data.
n FCC.
14
Tnmds in Telephon.e Service. pp. 55,58.
FCC. Trends in Telephone Serpico: p. 63.
12
�the numerous companies with tiny individual market shares raised their collective share by 7.5
percentage paints-from 12,3 to 19.8 percent of the market-from 1993 to 1997, and together
have made the largest market-share gains in the long-distance marekt.: 5 That smaH firms have
become more competitively significant both as a group and individually is indicated by the
expanding list of finns whose individual shares are reported by the" FCC. New carriers have
continued to bri~g additional competition to the long-distance market, in some cases depioying
substantial new facilities. There hus also been entry into the market by
101O~xxx Hdiat~around"
services and consumer substitution of the internet for increasing amounts of data and voice
traffic. Recent data show a dip in long-distance prices that corresponds to this entry,
The substantial competitive advances in the long-distance market do not preclude benefits
from further entry, In addition to the possihility of even lower rates throug~ competitiv~ erosion
of existing profit margins, one of the principal benefits of additional competition could arise
from more widespread offerings o~bundled looal and Jong~distance services. Most observers
have concluded that such bundled offerings would be attractive to consumers-particularly
residential consumers-and may create s!gnificant cost-saving opportunities (from joint
marketing, billing, etc.) for carriers that would lead to lower prices. Greater availability of such
bund~ed
offedngs depends on the abilities both of long~djstance carriers to be effective providers
of local service, and of the Bell companies and other loca' c'arriers to offer long-distance service,
Thus, completion of the loeat market-opening process requ.ircd by the 1996 Act~ which will
enable such cross-entry to occur, can yield additional consumer benefits.
IS
FCC. Trends in Telephone Service, p. 55,
13
�Chart 4 Average Revenue Per Minute for Long Distance
Calling (All Domestic Interstate Switched Services)
16"----------------------~--------~
J!l
c 13
S
12
11 '
10L-----~------~-----L----~------~
1992
1993,
1994
1995
1996
1997
Source:: FCC MPOrt "T IQ'!1d:s, in Telepnooe SeNice." Ju!y 1998.
Chart 5 Total Minutes of Long Distance Calling,
550r-------------------------------,
500
y>
.~
CD
450
:
400"
350
,
300 '-'-------'-----'------'-----'-------'-','
1992
1993
1994
1995
1996
Scurce: FCC report 'Trends In Telepht;HW Setvice." July 1S96
14
1997
�Lucal Telepbone Service
After the 1984 divestiture of AT&T, lo?ill telephone service remained a franchise
monopoly throughout the United States. The regional "baby Bells" and GTE were, and remain,
the largest local~service providers, while over one thousand ,independent companies and
cooperatives serve small, primarily rurnl, territories. The regulatory barriers to entry into the
local market were substantial and, for the most part, within the jurisdiction of state public utilities
commissions, A variety ofjustifications were advanced for Jocal monopolies: the economics of
"natura~
monopoly," preserving geographical rate averaging or other cros!,H>ubsidies that support
universal~s(:rvice
goals, and ensuring timely network upgrades and extensions. Competition was
eventually allowed in the provision of enhanced services and access to the long-distance
network, but not generally in switched, local voice service.
The 1996 Act radically changed that regulatory environment by pre-empting and
prohibiting regulations that ptotect monopolies over local telephone servi~. The Act thus
dismantled a legal and administrative structure that had evolved over decades and
replac~d
it
with a fundamental rule: the local teleph{)oe market must be open to cOmpetition. The Act
pushes this principle beyond the regulatory agencies to the incumbent local exchange carriers
("ILECs") themselves, It requires incumbent local companies to open their networks so
competitor!; can "interconnect" (i,e, exchange traffic) with incumbent networks and lease
"elements" of the incumbent networks (facilities like switches and customer lines) thal the
entrants Jack.
Competitive entry since the Act has focused principally on full-service, local telephony
for urban business customers. Residential local service has seen some competitive entry bUl has
not developed in a manner comparable to business service. The market opening provisions of the
1996 Act have also spurred entry by firms providing high-speed data services 10 local exchange
customers I)ver unbundled loops leased from the incumbent carriers,
15
�Pll:·gress by the CLECs: Competitive local exchange companies ("CLEC.") have
invested bi Hions ofdollars and have come to employ over 50,000 workers since 1992.16 Several
of these companies started as competitive 'access providers that offered business customers
bypass of Ihe local exchange and connection to the long-distance network at tower prices. Some
CLECs began to acquire the numbering codes necessary to operate competing local switches as
early as rnid-1994.11 but little competing service actually existed. Since the 1996 Act~ when
CLECs began_to acquire numbering codes more rapidly and, in addition, were able to enter the
market for switched, local voice service through resale and use of the fLEe's unbundled network '
elements, they have captured between 2 and 3 percent of local lines from the incumbents (Chart
6). Because competitors have focused on serving the Jargest and most profitable customers first,
the business they have WOn represents about 5 percent of the local services market measured by
revenues (Chart 7). I B Current data show local telephone revenues overall to be growing about 5
percent luumaHy, driven by the ~emand for data and Internet service and for "vertical features"
like voice mail and caller ID. The shares the CLEes: are gaining rue thus of an expanding
market.
Recent data show the,publicly traded CLECs 10 be gaining between 600,000 and 700,000
,customer lines per quarter, most of them business customers (Chart
8V
9
It would take the
CLECs ab,:ut ten years t,9 capture half the 60 million business lines now in service if they
continue to add Hnes: at the current pace. Of course, botb the number of business lines and the
rate ofmarke1. growth of the CLECs are likely to change, making lhe actual rotc ofmarkct share
change unccrtuin, But as a benchmark, ilJook -more than a dozen years after the 1984 dive~titure,
\1>
A.ssociation for Local Telephone Service: Hereafter) "ALTs.n
11 FeCI industry Anaiy~is Division. 1998. Local Campa/ilion. p.55.
,. Merrill Lynch. 199&. CLECVital Signs: Update For 3Q98 Resulls and· Trends. Table
II.
Merrill Lynch, 1998. CLEe Update: Continued Weakness in the Sector Creates a
Great Buying Opportunity p. 26.
19
16
�for long-distance competitors to gain a 50 percent share of market revenues, and their shares of
pre-subscribed lines and long-distance access minutes has not yet reached that leveL20
More: than 70 percent of lines served by CLEes ~ through resale of the incumbents'
services or through combination of the ILECs' unbundled network elements with the CLECs'
own facilities. 21 Competition by new entrants serving customers mostly on their own.'
networks-Hfacilities-based" competition-accounts for the remainder. However. it 1S estimated
that more than one third of the lines added by Ihe CLEC, in the third quarter of 1998 were.on the
CLECs' own networks. This very slightly raised the proportion of10tal CLEC Jines that are
independent of the ILECs' facilities to 27 percent, and suggests that facilities-based competition
.
"
for local i>ervice is becoming more
common.2l:
The growth of facilities-based competition
relative to resale is also documented by the Telecommunications Resellers Association, which
reports that, from 1995 to 1998, the proportion of it., members thai owned or leased facilities (as
opposed to oompeting through pure resale) increased from 34 percent to 54 percent." The FCC
estimates that the number of Wlbundled loops leased by CLECs from large incumbents in order
to provide partially facilities-based service increased by 10 percent in the third quarter of 1998,
The number ~f switches owned by CLECs grew from 65 before the Act to nearly 700 by
the end of 1998.24 As new entrants continue to build out their networks, the relative growth of
facilities-based service will likely accelerate. Several sources of data show the CLECs to be
building out their fiber networks at a fast dip. although the data are sketchy and incomplete,
20
FCC. Trends in Telephone SCn'ice. pp, 45, 46, 49.
" Merrill Lynch. 1998. CLEC Vital Signs: Update For 3Q98 Resulls and Trends. p. 6.
", :Vlcrrill Lynch. Gp. Cit.
;n The Telecommunications Resellers Association, 1998. Report submitted to the HOllSC~,
Commerce Committee.
,., ALTS.
17
�Merrill Lynch estimates from its survey of public CLECs th.t those companies added over
40,00{) route miles of fiber to their networks in each of the first three quarters of 1998, and that
the rate <If deployment was increasing through that
period.2~
FCC data show the amount of fiber'
deployed by CLECs to have tripled from 1993 to 1997, with particularly rapid deployment from
J994to 1997." .
The marketplace clearly expects local competitors to flourish, Although CLECs are still
in the early stages of accumulating market share, and only one has so far posted a profit. they
have created nearly 20 percent of the growth in local telecommunications market value since
1993,27 The market capitalization ofCLECs h,lS gone from almost nothing to over $30 billion
~ince 1993,:a The value of the numerous privately held CLEes is n01 captured by the above
figure. Employment by competitive local service companies has also groVIU dramatically since
the 1996 ACL Data from 23 small, local entrants that voluntarily reported employment figures to
the Association for Local Telephone Services (ALTS) show employment increasing by over 100
peleent in 1998 alone--from roughly 9,000 jobs in January 1998 to over 18,000 jobs at year's
cnd in the sample companies alone, The ALTS sample did not include employment data for
large companies like Mel WorldCom. AT&T~ Sprint or others that have entered the local
market, not does it account for the vast bulk of CLECs. The gro\'t1h rate. however, is indicative
,
of the investment being committed to local competition. CLEes are plying their-trade in all of '
,
.
the top 100 urban markets in the United States, and in 250 smaller business trading areas as
.wel1. 29
:<5- Merrill Lynch. Op. Cil. p, 7. Data from several companies were not available to be
included in that calculation.
Federal Communications Commission. 1998. FCC Fiber Deployment Data - End of
Year 1997. p. 40.
16
1.7
Compustat datu.
11 ALTS
data.
" ALTS data.
18
�Residential vews business cQmpetWQO. Competition in the provision of local
telecommunications services to residential customers has proceeded more slowly and tentativeIy
than competition to serve business customers, Some CLECs target business customers
exclusively_ Comptel. an industry association representing CLECs; recently surveyed its
members about local competition. Twelve of seventeen respondents reported providing
residential service in at least one state. OveraH. of the roughly 5 million hnes estimated to be
served by CLECs., less than one third probably belong to residential customers, The United
States Telephone Association, the iudustry,associa1ion for incumbent local carriers, reports that
about 1,3 million residentiai lines are being resold by CLECs.)(l The fCC makes a similar
estimate of 1.2 million lines.)!
Resale remains the primary means by which CLECs are serving residential customers .
.
The Telecommunications Rescllers Association (TRA) represents numerous competitors. 175 of
which provide local phone services through a combination of resale and deployment of their own
facilities. Of the customers served by TRA's members, 21 percent are reported to be residential.
And 94 percent of the residential business is through pure resale rather than through use of
facilities that the CLECs either own or [ease from the incumbent n The FCC finds that,_ while
CLECs serve 1.2 million residential lines through resale, they serve about 260,OOOsustomers
through a combination of their own facilities and unbundled network elements leased from the
ILECs, ~J Fully facilities-based co~pctition by CLECs for residential customers, at least on a
broad scale, seems distant. Such competing facilities may (;ome sooner from cable entrants into
local telephony, AT&T has made
acquisitio~s
and formed a joiytt venture to provide telephone
service over cable systems that pass over 40 percent of American households. Other cable
30
United States Telephone Association. 1998. Local Market Wide Open to Competition.
)1
Federal Communications Commission, Industry Analysis Division data.-··
51 'fhe Telecommunications ReseHers AssociatIon. 1998. Report submitted to the House
Commerce Committee.
:>J
Federal Communications Commission. Jndustry Analysis Division data.
19
�systems have slowly been upgrading their networks and marketing local phone servke to their
cable customers.
There are several possible explanations for why competition has been slower to develop
in the residential local service market than in the busi~ess market. Some parties point to
problems of compliance \\1th the 1996 Act-the FCC has not yet found any of the incumbent
carriers
to ha~c satisfied all ofthe Act's market~opening requiremepls.
But, the pace of
residential competition is also strongly affected by underlying' economic factors, The economics
of residelltiallocal service-with its regulated rates and comparatively lower sales of profitable,
vertical services-arguably do not make pursuit of the average residential customer as interesting
a business prospect when there is lower-hanging froit in the business market.
,
Regulation keeps rates for residentia110cal service low> and the revenues gained from
access charges that )ong·distance carriers pay to local networks are generally lower for
,
residential than for business customers. But the costs of providing a phone line are about the
same for residential and bu~iness customers, making· the latter a sourc~ of higher profit margins,
A CLEC incurring the fixed costs of entry will therefore reeoup itS investment more quickly by
focusing on the business sector. Moreover, marketing costs per line are probably lower for
business customers, which often have multiple lineS., than for residential customers that typically
have one, and at most two or three, lines, A reflection of the relative deSirability of business
customers) and of the greater geographic concentration of business customers, is that the
switching centers in which CLECs have collocation arrangements serve 50 percent of fLEe
business lines, but only 35 percent of residential lines, Moreover, those switching centers serve
at least 57 percen~ of the incumbents 1 high·capacity lines, which are connected to the largest nnd
most profitable business and government customers.:>4
Regulation also produces below-cost rates for locrul'crvice :n arcas where the costs of
H
FCC, Local Competition. p.38: Also, FCC Industry Analysis Division datil.
20
�providing service are high, and above-cost rates for local service in areas where the costs of
providing service are low, In other words, revenues from
above~cost
rates implicitly subsidize
below-cost rates" Entrants thus have artificial incentives to provide service to customers paying
above-cost prices (e,g, business customers and urban residential customers) and artificial
disincentives to serve those customers paying below-cost p~ces (e.g. rural customers). The FCC
,
and state regulators are working to restructure the current system of rates for local telephone
service in
Ii way
that both preserves universal service and makes serving residential and rural
customers more attractive for competitors. But until regulation of residential and rural rates are
made competitively neutral. entry incentives will remain skewed,
The residential market remains an area in which competition needs to deye10p further to
meet the goals of the 1996 Act. But developments in local competition so far are not necessarily
as limited or unpromising as some portray them to be, History indicates that ron~out takes time
and generally starts, for sound economic reasons, with higher~revenue customers. The
construction of the original Bell Sys.tem itself is a lesson in the move from commercial centers to
more ruml arcas. And Bell was merely repeating a strategy followed decades before by Western
Union in buHding out its telegraph network. Mel's entry into the long-distance market similarly
, started with private business service, wcr.t to public business service, and eventually to
residential offerings.
The aggressive entry by CLECs into the business market. and their construction of
facilities for both voice and data., are likely to have benefits for residential customers over time."
For exampl~. CLECs have been con~trucling urban fiber networks that pass not only businesses,
but apartment houses as well, Once the infrastructure is in place, serving resldential customerS in
"multiple dwelling units" beComes easier and may entail only incrementaLcost. As the most
profitable customers provide the CLECs with the revenue necessary for ~ffecti\'e entry into the
local
markcl~
competitors will be able to expand service oferrings to customers from which they
cam less ralum,
21
�Because of the long institutional history of local
monopo~y
and the economic complexity
of entry into the local'residential market, the uneven development of competition does not in
itself show that the 1996 Act's
market~opening
provisions are a failure or should be changed.
Indeed. the developments in the business market suggest otherwise. To ensure that the potentia)
for residential benefits is realized, continued a.pplication of the proven, competitive principles of
the Act is the course better supported by the economic evidence .
.Q.rua CLECs and broadMnd oompetili;Qn. A developing area ofloeal competition has
, been in the market for high-speed data services, Numerous companies have taken advantage of
the 1996 Act to lease customer lines ("loops") and space m the incumb'ents' switching centers
("collocation" space) in order to offer customers digital subscriber line (DSL) service, primarily
for high-sp,!ed access to the Internet, DSL technology uses special modems to transmit digital
infonnation over existing copper lines, Most or'the data CLECs are still small, privately held
companies. Although there is little avaiiable data on DSL
d~loyment,
it is estimated that about
30.000 lines are so far being served, By comparison, about ten times that number of customerS
receive broadband service from cable companies over "cable modems:'35 But competition in
_data services over the telephone network shows promise, Data eLECs have invested heavily in
facilities, pushed DSL prices down, and created thousands of new jobs in the services and
manufacturing sectors. Several competitive DSL providers have entered multiple markets· in
which they compete against each other, the ILECs, and cable modem providers, For example"
competi1ion among broadband service providers in the San Francisco area has recently pushed
DSL service prices. down to about $40 per month.,·,
Competition In DSL service faces several challenges as it grows, First, DSL must
overcome certain technological impediments. Transmission via DSL is generally most effective
for customers located a short distance, for example about three mHcs, from the central switching
La-..vyer, Gail. 1998. "Leader of the PackH ill X-Change, October 1998, p,22, Y10re
formal data are not yet reported,
)$
22
�office. Performance of DSL transmission declines with loop length, but varies also with
condition of the loop and the quality of equipment attached to the loop. Technological advances'
are starting to provide improvements, but for now DSL rema~ns an option primarily in densely
populated areas where loops are short.
A second challenge-for DSL providers. like other CLECs, is getting collocation· .
everywhere they need it> and therefore in gaining access to some customers lines. As more
competitors have entered the market and sought collocation in central offices serving the most
desirable regions, entrants have reported difficulty in negotiating collocation arrangements.
Technical issues such as whether collocation at remote tenninals outside of central offices is
necessary to serve customers who do not have a direct copper line to the central office, is another
unresolved proplem for eLEes. These challenges are intensified by the fact that incumbent local
service providers offer both DSL service themselYe$ and control inputs-notably loops and
collocation space-needed by their DSL competitors. Nonetheless, the DSL market is growing
and, if the above challenges can be met, data CLECs could grow into a substantial competitive
presence in a greater, number of markets a.nd offer a broader range of services than is.the case
today_
23
�·Chart 6 CLEC.' Share of Local Market by Lines
3.0
2.5
2.0
'E
"
~
"
1.5
"-
1.0
0.5
0.0
199704
1998 Ql
199802
199803
199804
Note: 1996 04 is eslimated.
5t>lJrce: Merrill Lynch industry report on locallelecom sefVit;e5. NovcmotH 1998.
Chart 7 Share of Local ?ervice Revenues by
New Entrants
10
8
"
~
0.
~.
I
,
,
6 "
4
2
..
0
•
. 1993
1994
'In
1995
1996
1997
1998
Mole: The i SSB fl9Ufl,i is
estimate for tnt': lourlh qUllrtec
Sources: Memll LynCh :ndustry report (In loC"! telcc()1"(1 $eNices. November 1995.
FCC report "Trc:'/ds in 'Telephone Service." Juy 1996.
24
�Chart 8 Total Local Access Lines in Service
(New Entrants)
6,-----------------------~----~
1
o
199704
199801
199B 02
199B 03
199B 04
Note: 1998 04 is eslimaled.
$oorce: Mel'liK Lynch industry report on 10Gai telecuw servloos. Novl)mber H!SS,
25
�\Virelcss Telephone Service
The wireless telephone industry has experienced remarkable growth in the pal\t 5 years.
From 1992- to 1998, the number of Americans subscribing to cellular service grew from about 16
million to' over 60 million (Chart 9),36 Policies that set the stage for increased competition in the
wireless market and fostered investment in advanced digital technology directly contributed to
this growth.
The FCC assigned the first licenses to use radio spectrum for cellular telephone service in
1983, introducing competition through a "duopoly rule" under which one license in each market
was given to the incumbent local telephone provider and another t? an unaffiliated competitor.
By June 1985, cellular companies altogether had just over 200,000 subscribers, 600,"cell sites"
(~ch site cOJ?tains the transmission equipment that serves a loca1 cell), and 1,700 emptoyees.J1
]n JWle 1995, subscribership had climbed to 28 million, a total of 20,000 eel! sites were
operative, and the number of people employed by wireless service companies was 61,000,31
[n J995, as authorized hy the President and Congress in the Omnibus Budget
Reconciliation Act of 1993, the FCC held the first auctions for broadband spectrum to be used
for digital "pcrsonal communications services" (peS), creating new wireless licensees in U,S,
markets. As tbe successful bidders entered the market, and as subsequent licenses were
auctioned, the duopoJy market structu~ gave way loJull-tledged competition among multiple
providers. By the middle of 1998, there were nearly 61 million cellular subscribers and over·
57,000 cell sites, and by end of 1998, over l60,OOO Americans were holding jobs with wireless
;,~
Cellular Telecommunications Industry Association. 1998. Semi~Annual Dow Survey:
June 1985 10 June 1998. Hereafter, "CTIA.Survey.results.".
)1
CTIA Survey results.
" CTIA' Survey results.
26
�telephone companies (Charts 9, 10, and 11 )," The average monthly bill for wireless telephone
service feU by more than half from its level a decade earlier, probably reflecting both declining
prices and changes in average monthly usage as more individual, as opposed to business,
customers used wireless service,4Qo
Today) more than 200 million Americans, or over 80 percent of the population. live in
wireless service-areas with at least 1 new competitor to the 2 original cel1ular systems, and more
than half of all Americans live in areas with at least 3 new competitors. 41 This new competition,.
as well as increased investment in new technology, has caused prices 10 plummet while
increasing the: variety of available caning plans. Although reliable data on revenues per minute
are unavailable, existing price and billing data indicate that wireless telephony is becoming ever
more affordable. One study finds that in 1997. median prices per minute-what the typlcal user
pays-fell as much as 30 to 40 percent for residential users and 30 to 50 percent for business
users, due primarily to new pes competition,42 As mentioned, the average monthly bill for
mobile customers has fallen by more than half in the last decade,"}
Wireless telephony (cellular, pes, and ESMR) is now a nearly $30 billion industry, as
measured by service revenues, growing an average 24 percent a year since 1993,44 Capital
investment, a leading indicator of future industry growth, has nQw'grown to a cumulative $50
3'1
CT!A Survey resuli.~. Also, BLS employment data.
411
eTtA Survey results.
FederarComrnunications Commission. 1998, Third AnnuaJ CMRS Competition,
Report, Appendix B, p, B-4, Hereafter, "FCC CMRS Rcport,"
41
"FCC CMRS Repnrt, pp, 19,20"
·n CTIA Survey results.
44
eTlA Survey results, adjustedJor 'inflation using the Consumer Price Index (CPI).
27
"
'
�. billion (Chart 12)." Extraordinary growth in subscribership is the cause: more than 60 million
Americans, o~ more than I in 4 American adults, now subscribe to a mobile service, That is
nearly 60 percent higher than in 1996 and five times the number in 1993.
There is anecdotal evidence that wireless telephone service is beginning to substitute on
the margins for traditional (wireline) teiephone serv!ce; and it may do so increasingly as
technology improves, competition and subscribership increase, and prices fall. Wireless
companies have excess capacity on their networks and have been able to offer packages that
.
.
provide a maximum number of minutes-whether local or long.-distance, and from anywhere in
the country--for a fixed price. In the second half of 199&, prices for these packages Cell as low as
$50 for 500 "anytime, anywhere" minutes. Such low~pri~ packages have the possibility of
making wireless service an alternative to wireline service for som~ users, particularly those who
.
travel a lot or desire an additional line from home.
In addition to the main wireless telephone technologies of cellular,
pes, and ESMR
discussed above, \\fireless communications also encompass su'ch services as paging, SMR, and
fixed point-to-point, as weJJ as such new services as fixed wireless local loop and Third
GeneratlOn mobile services. These services could have a profound effect on growth and
competition in telecommunications. not just in the wireless market, but in the local, long-distance,
and advanced services markets as welt
Further challenges.remain for, the wireless industry. As Americans-increasingly demand.
infonnation services and mobile access to those services, data traffic will become an increasing
component of wireless telephony_ As wireless use grows a.nd services expand, teChnologies to
manage increased traffic demands will need to be developed" But the succesS. of the industry so
far in innovating and growing to the benefit of American consumers leaves little doubt that
wireless communications will be a central and growing part of telecommunications in the fUlure.
·45
eTtA Survey results.
28
�Chart 9 Wireless Subscribership and
Average Monthly Bill
100
70
- 60
,
~ 50 ~
J
'.g
,
0
60 -
.:, 40
1:
0
~
"'
30 "
~
Number j)f
.~
subscribers
(right scale)
20 ~
20
10
1994
1999
1995
1997
Source: CIlIIII,I!<lf Telecomrrwnic.lkms Industry Anociatlon.
Chart 10 Cell Sites in Commercial Use
60~-~--------------_
50
o
1993
Source: Cellular
1994
1995
Tel~mrnur.icallona
1996
1997
Inl'II)$11) AssociatIOn.
29
1996
�Chart 11 Direct Employment by
Wireless Service Providers
200r---------~------~------------__,
150
w
~
c
w
"
100
~
0
;::
50
1993
1994
1995
1996
1997
1998
Source: Cellular Telecommunications Industry Association and Department of
Labor (St,lreau of labor $tati$ties},
Chart 12 Cumulative Capital Investment
60
<5
~
30,·
,
,2
co
20
!
~.
10LL~----~----~~----~~--~~~--~~,
1993
1994
1995
1996
Source: CelbJ!'H Te1e-cowlT'un'cat.ons.lnduslry Assoctalic.n.
30
1997
1998
�Telecommunications Equipment
The telecommunications equipment industry in the U .5. has grown substantially. Total
production in 1997 topped $70 billion and is estimated to have reached $120 billion in 1998, a
growth of $80 billion since 1993 (Chart 13). New service markets created by wireless auctions,
the 1996 Act, and the Internet have created a large demand for innovative telecommunications
equipment. The many new entrants into equipment design and manufacturing have created
thousands of jobs, invested billions in producing novel solutions to technical challenges faced, by
ncw entrants and incumbents alike in providing new services, and doubled U.S, exports of .
telecommunications equipment from about $13 billion in 1993 to over $25 biHion in 1997. 4&
,There are now more than 100 publicly traded companies that list telecommunications
,
.
.
equipment as their primary line of business. :r-;early 50 additional public companies list their
primary tine of business as data networking equipment. The joint market capitalization of
traditional telecommunications equipment manufacturers and data networking equipment makers
has more ~han tripled since 1993 (Chart 14), Again, numerous private companies add economic
value ~hat is not captured by the market capitalization data. The telecommunications,equipment
market as a whole is responsible'for about one-third of the value created in the
.
telecommunications market in recent.years, with data networking equipment companies growing
faster than traditional equipment companies since 1994.
The growth of data networking companies reflects the shlfting,demands of, . .
telecommunications consumers away from conventional voke telephoay and toward fast and
reliable d£Ltu transport,
Digitiz~lion
is requiring systems to provide integrated voice and data
services. and competition among conventional telec9mmunications equipment manufacturers and
newer data network equipment makers is leading to research and development along several
promising Pllths, both wireless and wireline:
46
U.S. Department ofCommerr;~.
31
�The 1elecommunications equipment industry will playa crucial role in solvjng the myriad
technical problems faced by new communications service providers, whether they be cable
systems~
data CLECs, or full-service CLECs seeking to build out their own facilities. The
equipment industry in the United States also faces substantial global competition, particularly in
the area of mobile communications, and U.S. policy is working through appropriate channels to
prevent harrn to American manufactmers from the technical standards adopted in various
international markets.
32
�Chart 13 Revenues of Telecom Equipment
ManUfacturers
140
r :- - - - -
,
- - - - - - - - - - - -
60
40 L'- _ - " " - '_ _ _ _ _ _ _" __ _ _ _ _ _ __ ' _ j;
'1993
1994
1995
1996
1997
1998
~
C'
~
Source: 11)97 and 1998 ediliorn; o!NMulliMedia TfI',ecomrnunlcatiOns Market
Review and Forecast:
Chart 14 Market Capitalization of Telecom
Equipment and Data Networking Firms
350r--------~---------~
300
To-tal
"
"
··~250'il
"
!Xl
g;
~
,
Eqt,lipment
200 :.
;
,
"0 'i50 ~
o
'
'
~ 100 •• ::::::-~::::::::==_----,~I
,~ 5: I·
,'
----------:D:atandwo'''ng ,
1993
1994
1995
1996
Note: Data 'Of 1939 based on C3.
Scu~ce: CompUSlat.
33
1997
199B
�The Internet
The pace of technological advance) the importance of forward-looking infrastructure) and
the growing desire for information are all manifest in the rapid growth of the Internet' an~ its
associated industries. This relatively young sector of the U.S. economy has been boosted by the
successful confluence of a market-oriented and non-regulatory government policy. private
investment and innovation, and the public's growing demand for information services,47
Regulatory forbearance and policies to encourage usage, as well as continuing investment in
information infrastructure, have made possible unprecedented growth in-both the development
and adoption of this communications medium. For example, the Administration has successfully
opposed taxation on Internet usage: the internet Tax Freedom Act creates a 3-year moratoriUm on
new taxes for electrQIDc.commerce. and the World Trade Organization has agreed to place a
moratorium on customs duties for e-commerce, The Administration has also supported protection
of intellectual property rights in the digital environment and has worked to establish a legal
framework for electronic contracting" Furthermore, the Next Generation Intemet Research Act
.authorizes an initiative to provide universities with the most advanced connections to the Internet
and to support long-term research on Internet technologies,
The Internet's evolution from a government-sponsored research projcct to a global,'
network that connects individuals, businesses, and institutions of all kinds has been propelled by'
increasing computing power at falling prices. l1te digitization of information has bl.urred the lines,
between1data, video, anp voice, with aU these types_available for transmission at ever lower cost·,
The cost oftrallsmitting one bit of data over a kilometer of fiber optic cable fell hy three orders of
magnitude between tl~e mid-! 970s -:md the early 1990s.~~ The cost of processi,ng one million
47See the U.S: Government Working Group on Electronic Cvmmerce, First Annual
Report. November 1998, and A Frameworkfor Global Electronic Commerce issued by President
Clinton on July I, 1997,
Atkinson, Robert D .• and Randolph H, Court, 1998, New Economy Index:
Understanding America's Economic Tr~miformati{)n..Washtngton~ D.C.: Progressive Policy
4&
34
�instructions per seoond (rnips) was $480 in 1978. By 1995, processing costs had tumbled to $4
per mips,"'1 And the cost of mformation processing continues to plununet, increasing the
capability of the infonnation industry and expanding the demand for information services.
Notwithstanding the technical advances mentioned above, the recent growth trajectory of
the Internet would not have been possib\e without the gri<fof telephone lines, cables, optic fibers,
signal processing and routing equipment that [omls the "backbone" of the U,S,
telecommunications infrastructure. The increasing public demand for-and provision of-fast
and ready information has driven this "backbone"industry, motivating tremendous private
" investment and market capitalization as well as job creation. The f;,'rowing demand for carrying
.
,
capacity. or '''bandwidth,'' has ~ushed the roll-out of yet more physicai equipment and wiring, as
well as the deployment ofsuch technologies as cable modems, ISDN lines, DSL services, and
new methods ofdigital compression ..
Investment in high~capacit)' fiber by telecommunications systems has also grmvn rapidly
to meet new infrastructure demands. The number of"tiber miles," calculated by multiplying the
number of miles of sheathed fiber times the number of fibers in the sheathe:! bundle, is one
measure of system capacity. As mentioned previously, the number of such fiber miles
constructed by telecommunications carriers in the United States grew by about 16 percent in 1997
according to FCC
estirn3tes.~o
On the cons'qmer end, increasing numbers of American
households are purchasing addi1ional1elephone lines. Although some of these lines are probably
: used mostly for voice service. many are used for dedicated data Jines. The rrumber of households'
with additional lines grew from 8.8 million in 1993 (9.4 percent ofrcsidences) to 15.7 million in ,
Institute, p. 19. Hereafte: New Economy Index
49
New Economy Index. p, 8,
so Federal Communications Commission. !998, Fiber Deployment Updale.
35
�, i 996 (16,5 percent of residences).)] Those numb~rs have most likeJy grown sharply since the end
of 1997 with increased use of the Internet by Amerkan conswners.
Co~axial
networks used by
cable tel,evision.systems, which increasingly now offer Internet access) are· another major source
of information infrastructure that will be importa"1t for bringing broadband access to residential
customers.
'me equipment industry has also been driven by the need for more advanced information
transport, Companies engaged in manufacturing equipment for data networks are developing the
advanced electronics for broadband transmission and routing of digital material-:-whether voice.
video. or data-that innovative service providers are using to construct the networks that link
users to information un the Internet and other sources.
And such advanced links are increasingly in demand, Altogether. over 35 million Internet
"hosts"·--computers that store sources of infonnatiun on the Intemel~were active wurl~-wide by
early 1998. up from 20 million only six munths earlier and from fewer than 3 ,minion in 1993 (See
Chart 15). Tha.nk.s to tremendous investment in infrastructure, the United States ranks far above
Japan Gennany. and the United Kingdom in public participation in the Internet) as measured by'
j
the number of hosts per capita.52 Only Finland has a higher concentration than the U.s. In 1993.
there was rqughty 1 Internet host in the Cnited States for every 200 Americans. By 1997; the'
ratio had changed ten-fold, to 1 host for every 20 people-about)
Interne~
host for every 4
American adults who use the Intemet S3 In the two years between 1995 and 1997) the number of
people in the United States who used the Internet grew from'about 28.millidn to over 73 million.
or about one in four people. 54 This year. nearly one in three American adults is expected to be
51
FCC Trends. Table 19.3.
~2 New Economy Index~ .p,
~J
30,.
New Economy index, .p. 30.
54 TIie estimates of adult users are from Pew survey results and the adult population of the
United Stat<;s.. "The Pew ~esearch Center for the Peopte and the Press. Technology Survey J998·
36
�"online." The latest Pew Center survey finds that the total number of American Internet users
today is over 80 million (See Chart 16).
Recent data also show that Internet use is reaching a broader sPectrum of society. In 1995
the average household income of an Internet user was over $50,000. The latest Pew Center
survey shows that t~e fastest growing groups of new Internet users are those \vith much lower
income and t;ducationallevels than in the past. The survey finds that 23 percent of new users
have annual household incomes below S30,OOO-whkh is below median household inco.me in the
U.S,-and that 40 percent of new users never attended college:~5 As use expands to all economic
segments of society, so too will the range of services and uses available through the Internet.
Challenges nonetheless remain. There'is evidence of a "digital divide" whereby some
racial and ethnic groups in the United States use the Internet disproportionately less than others.
The «c-rate" program for wiring schools and public Hbraries. created under the
Telecommunications Act of 1996, will be an important means of increasing diffusion ofIntemet
~se
and ensuring that access to jnfonnation is widely available. To date, the e-rate program has
disbursed over $750 million, with the goal of connecting up to 40,000 American public schools
and 7,000 libraries to the Internet. Such policies ensure that an increasing spectrum, of Americans
'NiII grow up with the skins to participate in an increasingly jnformation~driven economy.
Th~
broad reach of the Internet has ~ade it suitable for an increasing variety of
applications. "Distance learning".and telemedicine, for example. are already-flourishing, . Many
businesses see a future in online transactions, or "e-cornmerce." The volum!? of retail sales over
the Internet r,1ore (han doubled between 1997 and 1998 and electronic commerce as a whole is
results and report. "Online Newcomers More Middle-Brow. Less Work-Oriented: Tne Internet
Audience Goes Ordinary," Hereafter, "Pew survey results,"
,1$
New Economy index, pJl,
37
�forecast to reach $300 billion by 2002," At the same time, widespread and growing public
participation in this medium heralds new possibilities for the dissemination of public interest
infonnation, whether political discourse, community news, health resources, or scientific research.
The telecommunications system IS the foundation upon which tbese possibilities will develop,
S(
Survey, .
jn~ernet sales
data from Boston Consulting Group and shop.org~ Online Retailer
'
38.
�Chart 15 Growth in internet Hosts
40r-~----------------------------'
30
o~-L--
1993
1994
1995
1996
1997
1998
Source: Netwol1l WiU,OIl, hltp:flwww.nw.com.
Chart 16 Growth in internet Users
100
60
~
c
60 -
0
"=
:i:
40
20
I'
I
,
,
,
,
0
,
1995
,
1996
1997
1998
Note: Data repre:senls the number of Ame:icans whO ellef go oolin'.!! to Ieee$$.
the inleffllill or World Wide Web Of ~o saM and receive email.
Source: The Pew Rflsearch Center's "1998 T&ehnology QLleslionntlile."
39
'
�Conclusions. and Future Challenges
Competition and innovation have been vital catalysts for the wowth of the U.S.
telecommunications: industry since 1993, Both of those forces have benefitted from a transformed
regulatory approach that opens markets and rewards deployment of new services and
tec~ologies,
In each of the market sectors examined. the path to increased output and lower
prices has been the implementation of market opening policies, followed by investment,
innovation, and competition. Fiber optics in long-distance networks, digital networks for wireless
telephony, advanced services in the local ner.vork, and the equipment to support them, have all
folio wed frOiDthe opening of those respective markets to competition. As a result, conswners pay
less for larger amounts oflong-dhiance service, wireless subscribershlp has soared as wireless
rates have moved closer to those for conventional phone service. and households and businesses
are finding the prices ofhjgh~speed, advanced services within reach a') the services themseJves
become increasingly avaHable.
While progre'ss in telecommunications ha."i been excellent. challenges remain and will
continue to arise as tecJmo!ogy and markets change. In the near term, ensuring that local markets
continue to open, and that regulatory distortions on competitive inecntives in those markets
diminish', will be important. Moreover, unless the current system ofrare averaging is restructured.
the equitable goals ofuruversal service policy-'availability of essential services on fair terms for
poor as we.~l as rich. rural as wel1 a.<i urban-wil1 be more difficult to .achieve in an increasingly
competitive telecommunications market Specific competition issues like the pricing of
interconnection and unbundled network elements, and the conditions on which lLECs may
participate-in the advanced services market. present cballenges of opening markets while
preserving efficient incentives to invest in and deploy new services, 'facilities, and R&D.
Although this report addresses the U,S, market only, there are also challenges on the
international front of importance to American ielecommunications consumers. The increasing
volume of in'fonnation and communications mat flow globally make international
40
�'telecommunications infrastructure and interconnection vital to businesses, institutions and other
consumers. 'The FCC, the U.S. Trade Representative, the State Department, and the Department
of Commerce have all worked to obtain fair terms for U.s, carriers that need access to networks in
..
foreign markets and to open those markets to competition. Much progress has been made and
telecommunications markets in many areas of the world have moved from a structure of state
sponsored monopoly to open competition. ·It is important that bottlenecks that impose
discriminatory terms on new competitors in glol?al communications do not develop or persist at
our borders. The infrastructure investment that has increased capacity, lowered prices, and
supported the information economy domestically will alw benefit the growth of electronic
commerce and other infonnation~intensivc sectors world-wide, Insuring that the same
competitive incentives that have developed domestically also develop for investment in facilities
between the United States and other countries, and \vithin other countries themselves, will speed
the arrival of those benefits,
Finally, as innovative services and technologies affect the structure of the
telecommunications market, telecommunications policy will more effectively sen:e the public,
interest if it retains sufficient flexibility to,cnange when regulatory assumptions no longer hold,
The changes that innovative systems will bring to the telecoJUmunlcatlons market are hard to
predict. New kinds of data networks,' Jnternet~bi1sed alternatives for voice traffic, and' important
changes in the scope and competitive struc-ture of the satenite industry are just a few examples of
current developments, It win become increasingly important to ensure that regulation is
,
technologically neutral,'and that competition is not handicapped by disparities in the regulation of
different systems tbat, through convergence, have come to provide the same services. The lesson
from the telecommunications industry over the past 5 years is that cons,umers and the American
ccono~ny
will continue to benefit a-o; competition has the opportunity to ta.ke hold in all markets.
41
�FAMILIES AND THE LABOR'MARKET, 1969-1999: .
ANALYZING THE "TIME CRUNCH"
.
,
MAY 1999
.
A Report by. tbe
Council of Economic Advisers
•
'
,,'
�EXECUTIVE SUMMARY
The American family has experienced dramatic changes over the last three decades - changes
, in the amount oftime parents work for pay; changes in income and who earns it; changes in family
size; and changes in how child care and household tasks are accomplished. This report assesses
some of these changes and the challenges they create. The report seeks to further our national
discussion concerning balancing work and family and to encourage a discussion of policies that'
could help strengthen American famiHes. The major conclusions of the report include:
•
[ocrease in Hours Worked. The hours American parents work in paid jobs have increased
enormously since 1969 due to a dramatic shift of mothers' time from the household to the
labor market. In 1969,38 percent of married mothers worked for pay~ in 1996.68 percent
did so. Both married mothers and single parents are working more for pay today than 30
years ago.
•
Reductions in Time AvailabJe for Children. Although the evidence on time use within
families is limited and needs further study. the increase in work from 1969 to 1996 has
produced a reduction in the time available for parents to spend with children. The increase
in hours mothers spend in paid work, combined with th.e shin toward singJe-parent families,
resulted in families on average experiencing a decrease of22 hours a week (14 percent) in
parental time available outside of paid work that tbey couJd spend with their child~en .
.
..
Burdens on Women. Virtually all of the increase in total hours families spend on paid
work has corne from increases in women's hours. While annual houtS of paid work by all
wives increased greatly - by 576 hours, or 93 percent - husbands' hours of paid work
decreased slightly from 1969 to 1996. The "time crunch" falls heavily on employed women
who spend over one third less time on child care and household tasks than women wHhout
paid JODS, but still have 25 to 30 percent less free time.
..
Changes in Family income. The l.lV~rage American family is better off economically today
than in 1969. Not everyone has gained by working harder, however. Since 1969. the top
quarter of families gained. while the lower quarter lost and the middle has remained nearly
constant in per capita income, adjusted for inflation. The situation oflower~incoine families
has been improving, however, in the strong economic expansion of the i 990s.
•
Rise of the Single Parent. At the same time) the share of families with a single parent has'
expanded greatly since 1969. Single parents have half as much total time as two pnrents
have and typically have less than halfas much potential income. The rising number of single
parents has increased the proportion of families that are "cash-strapped" and 'Itime-poor."
•
Need for Policies to Help FamHies: Increased time in market work among parents raises
a key set of cha.llenges to po!icy.makers seeking to help promote strong families, including
the need for flexibility in paid work hours, the need for available and affordable child care.
the need for effective ways to support tbe earnings of families with iow~wage earning
paTents, and the need to encourage two~parent families to form and stay together.
�I.
INTRODUCTION
Dramatic changes have occurred over the last thirty years in how families combine work and
family life, Clearly onc of the most significant changes in the last three decades is the increasing
amount of time women have devoted to market work - work that is perfotmed for wages. Combined
with hourly earnings increases among.women, this means women's earnings have gone up
substantially. while their time available in the horne has declined, In contrast, men's average hours
. of paid work and earnings have remained relatively stable, As a resu;lt, farn~Jjes have higher
incomes, but they have less lime for other activities. !" short, American families have been in the
midst of change - change in time worked for pay; change in income and by whom it is earned;
change in family size;,and change in how chUd care and household tasks are accomplished. This
report assesses these changes since 1969 for families with children under age 18.
,Two other imPortant trends in family life are
also likely to affect the well-being of families with
~,r-------------------'
chlldren. occurring along with changes in their income
and time allocations. First, the share of families with
children that are headed by a single' parent ha'>
increased significantly (see figure 1), Since single
parents typically have both lower incomes and less E20
~
total adult time available for work in the home than If. 15
married~couple families, this trend tends to increase the
10
proportion of families who are '"'cash:strapped" and
5
"time POOL" Second, families have decreased in size
as the average number of children in familles with
o
children has declined'(see figure 2).
This paper will examine how families with
children ate faring in th,c face of all these changes.
Key. questions to be addressed include:
•
How much have hours of market work
increased for families?
I
v
•
•
How have the extra hours worked by families
affi!cted family incomes? How have these
trends differentially affected families that
differ in skill level. minority status~ and
number of parents in the household?
10091900
19691996
19691996.
MaIl\eIJ cou~e
SmgIe parerrt
AIIlamllea
How have these chnnges in market ~ork and income affected how families use their time in
the home? In panicular, how,hnve these changes affected parental time available for
children?
�Some have argued that Americans are facing more and more ofa "time bind" as they work
longer and longer h,ours in order to attain an increasing standard of living. I Others have argued that,
even with increases in hours of paid work, families are nOt realizing significant income gains, or that
families irn~ working harder and harder "just to stay in the same place."2 No such "one size fits alr'
characterization adequately captures the variety of experience in different segments of the
population. Different types of families have experienced different changes in paid work time and
income.
II.
ECONOMlC OVERVIEW
In general, we find that parents today are spending more time in paid work and have
increased resources available to them. For most groups,Jamily income has increased and family size
is smaller, The average American child - particularly ifhe or she is living in a family headed by a
married couple - is better off economically today than in 1969.
There are some groups for whom the economic picture is not as rosy. The continuing
increase in the share of.children living in single-parcnt families has substantially diminished the
economic progress that families with children would othefV..;5e have made, limiting both their
income and their tJme, Less·educated parents. who have not experienced the wage gains of other.
parents, arc working more hours . . . ithout a commensurate increase in income. It is encouraging to
note, however, that most oftbese families have experienced income gains in recent years during the
strong economic expansion of the 199{)s. making it somewhat easier for them to combine work and
family life effectively.
Undetlying and reinforcing the trends toward more paid work time and smaller families has
been the long~term growth of women '5 wages. Rising wages pull women into the Jabor market by
making it more expensive for them to stay at home, in terms of foregone income. Higher v.,rage
levels for women in the labor market, ~{)mbined with changes in social attitudes toward market work
among women, have dramatically changed participation rates among women in the labor force since
1969. There is little indication that this pattern 'Will be substantially reversed In the near future.
1
Hochochild(1997); SChor(1991).
2 Bluestone a."d Rose (t997).
2
�III.
TRENDS IN HOURS OF MARKET WORK
The most dramatic change in the time allocation of families has been in time spent at work
for pay. "Since 1969. l>olh married-couple and single-parent families have substantially increased
their annual hours of paid work. These increases have come almost entirely from the women in
these families, who are working more outside the home - more weeks in the year and more hours
in the week - than they did thirty years ago. However, while the increase in paid work time has been
widespread, the size of the increase has varied considerably across famiJies, depending on the
number of parents, their education, whether they have a preschoolwage child, arid their race or
. ethnicity.
The estimates of annual. hours of work presented in this section are based on the March
Current Population Survey (CPS), a large representative survey of about 50,000 households each
year,} \V11ilc the CPS is the oniy large-scale representative sample which consistently measures
hours of work and family incomes on an annual basis and is therefore the standard data set used for
labor mark!~t analyses, some have ~gued that the CPS may be inaccwate because individtla~s may
not be able to recaU accurately their usual hours of work during the last year,· In section V oftbis
report we discuss alternative estimates of paid work time based upon "time diaries," which require
individuals to maintain detailed accounts of how they spent their time during a day,
For thls analysis, we use the same definition ofa "family'! as the Census Bureau: all related
individuals living together in the same household. We restrict the analysts to families whose head
is at least eighteen years old and where there is a child under age l8, A mother (or couple) and her
(lheir) children living in a household headed by another family member are part of the bead', family,
and an unmarried parent co-habiting v.ith a domestic partner is classified as a single parent.
Throughout this paper, unless. otherwise specified, the tenns "'husbands:' "wives," and "married
women" refer only to those with children.
As sho'WJl in figures 3 and 4, annual hours of paid work have increased substantially for both
and single-parent families. (All families. with children under 18 are included in
figures 3 through 6, including parents with zerO hours of paid work.) A person who works forty
hours a week for.50 weeks a year (a traditional "full-time" job) will work 2,000 hours in a year. For
two~parent families (figure 3) annual hours of paid work increased by 497 hours 08 percent) from
married~couple
1969 to 1996; for single-parent households (figure 4) they increased by 297 hours (28 percent).
), WI! are using the Marth 1971}, 1980, 1990, and 1997 CPS data sets,
TIlC
daia collected each March refer
to Ihe previo;:s enlenc.ar JoaL 11ms we refer to data for !969, 1979, 1989; and 1996, We chose those years because
they repros.;::n.t peak years (or upt;wlng, in 1996) in the business cycle and thus pemllt valid histQri.;::at comparisons.
For 1979. J9S9, and 1996. informal ion on annual hours of work was derived from two questioni,which ask how
many weeks .:acll individual worked in the previous year and how many hours !hey "usually worked'" in thc weeks
they worked. Multiplying weeks worked by usual hours worked per week provides a measure of annual bouts of
work. The )969 data are not strictly comparable to later years due to differences In datu roporting. We have
developed an imputation procedure to make these data more comparable to infonnallon in later years,
<I
Juster and ,StaffOrd (1991); Robinson and Godbey (1991), chapter 4.
3
�1.600 r ...... - - - - - - - - - - - ,
1,400
Virtually all of the increase in families' hours of market work has come from increases in
women' 5 hours, Conceptually, the increase in women'5 hours can be divided into three components:
more wornen are employed: employed women are working more hours per week. and employ~d
women are working more weeks per year.
. The most dramatic change has been in the percentage of women employed. In 1969,38
percent of married women with children worked for pay, while in 1996, 68. percent did so - a 79
percent increase in employment. The increase in employment for single mothers' JUtS been less
dramatic: 53 percent worked for pay in 1969 and 66 percent in 1996.
Average annual 'hours worked by those who worked for pay also increased over time,
showing that not all of the increase in hours came simply from more women entering the labor force.
This increHSC was much greater for wives (who experienced a 24 percent increase) than for single
parents (who experienced an 8 percent increase). This is not surprising since on average, single
parents in i 969 worked more hours per year for pay than-wives did in 1996. Both h<?UfS worked per
week and weeks worked per year increased for wives and singie parents, among those who worked
for pay. Each of these components of annual hours, like the total, increased more for wives than for.
single parents. Increases in weeks worked per year were more dramatic than increases in hours
worked per week.
While annual hours of paid work by all wives increased greatly - by 576 hours, or 93 percent
- husbands' hours of paid work decreased slightly from 1969 to 1996. This is the result of husbands
working both slightly fewer weeks per year and hours per week. These trends are consistent with
estimates reported elsewhere in the literature, based on a variety of data sour~es.s
The increase in families'. hours of paid work has been widespread throughout the"population.
All types of families·- whether defined by the,head's education'level. spouse's edl,lcation level,
SEllwood (J 998), Rones, Jig and Oa:dner (1997) and Leete and Schor (1994) used CPS data, Bluestone
and Rose (1997) used data from the Panel Study of Income Dynamics, and McGrattan and Rogerson (1998) used
decennial Census data. All oftbese studies show increases in hours of work for women and decreasing or Siable
hours of work for men when nonemployment is taken inlo. account.
4
�presence of young children, or race or ethnicity of the household head - have experienced substantial
increases in hours of paid work from 1969 to 1996. In virtual1y every case, the increase in family
hours ofpald work reflects incre?Ses hy wives and by single parents.~ rather than by husbands.
While the basic trends have been simiiar, the magnirude ofthe increase in hours of paid work
has differed substantially across different demographic groups. In part, this is because some groups,
such as women with preschool-age chikin..~~ had lower hoUTS to start with and therefore more room
for expansion than others..
•
Fwriilies whose head had gone to college have
'increased their hours ofpaid work much more
{/ran those whose head had less education (see
figure 5), For married couples with a college
educated husband: annual hours of paid work
increased by 644 hours (23 percent) - more
than twice the increase for couples in which the
husband had a high school diploma or less. The
difference wa<; due to the wives' hours
jncreasing more and the hll'ibands' hours
decreasing less in the college-educated
families. For single parents with a college
degree:, hours of paid work increased by 320
hours (20 percent), compared to 165 hours (16
percent) for single parents with a high school
diplomn or less,
•
5 Charge irI NU')UD HO\lI'$ ,~, 100Q-!16
, by ~on level It Hell>:! of HlJur.el1ek!
e-
I:l-
'~-.------~==~=--------,
.11!$"_"''''''
5,~;/'\AnI'lillil~~
by Plesem:.e
1959·00
mChild tl!\Get AgO S
&mr.I·~~~~~~~'~~~------~-----
Families wirh a young child increased their
Ell No' <Ml1.Nl« ..... ~ ~
hours ofpaid work more rhan those with only
~
I
. school~age children (see figure 6). For single
,
parents with a child under age five, hours of
!. 400 ~
i.
paid work increased by 400 hours (50 percenl), e
.
""
.
compared to 246 hours (21 percent) for single %
"'
parents without a young child. For married
couples, hours of paid work increased by 537
hours (20 percent) for families v.rilh a child
under age five, compared to 457 hours (15
percent) for families without a young child.,
Why have parents 'Changed their hours of paid work? Trends in wages and trends.in paid., "
work hours influence each other. Rising wages tend 10 draw more individuals into the Jabor tbrce~
while falling wages tend 10 reduce participation. In tum, more work eXllerience leads to faster wage
growth ,md vice versa. As a result, wages ~nd paid w~rk time tend to move up or down together.
j
5
�Trends in hours of paid work for both men and women have roughly paralleled the trends in
their wages since J969 (discussed in section IVMA beloW),6 However~ the magnitudes of"the changes
in paid work time are s.till not completely understood. and are not easily explained by changes in key
economic variabIes,7 The increases in paid work among women seem to be more closely related 10.
increases in their own wages than to the changes in their husband's wages over this period.'
Increased work among women may be affected by sllch haro~to~measure factors as changes in
assumptions about women's role in the family, diminish'ed discrimination against women in the
workpiace, or fruling barriers to women entering non-traditional occupations. Highly educated
women have benefited more from.diminjshed discrimination than have women wit11less education.,
as higher-level professional and management jobs have opened up to them. Whatever the reason,
large increases in market work hours among women have substantiaIJy changed the time allocation
and income offamHies.
IV.
TRENDS IN FAMILY INCOME
The upward trend in hours of market work raises questions about trends in faplily well-being,
A family's economic well-being is typically measured by its income. Earnings are,the larg~st part
of family income. which also includes transfer payments such as welfare and unemployment
insurance, interest, . dividends, and other unearned income such as child support. 'Earning~ come
,
from wages and/or salary, plus any overtime. tips, or conunissions. Rising work bours should lead
to rising incomes. but the magnitude of this effect depends on changes in wages an'ifother'Income
sources that might be occurring at the same time,
.~
A.
,r~'
. Wages
During the same period in which women's hours of paid work have increased, inflation
adjusted wages have been increasing for women on average. Female college graduates' wages have
risen more than w~ges among the less educated. In fact, female high school dropouts' wages have
stagnated or even declined slightly, Men's wages have grown very littlc.on average. They have
fallen for men without college degrees and remained virtually constant for men with at least a SA.9
Because fringe benefits have grown since 1969, workers' hourly compensation (including the value
of fringe benefits) has improved more than their wages alone.
f,
Blank (1997), chapter 3; juhn and Murphy (1997l
7 Blau (199~); Danziger and Reed (1991).
~ Juhn and Murph)' (1997).
" Siau (1998). lbesc are the trends In mean weekly earnings of full-time w<ltkers aged 25-64. Other wage
measures such as average hourly earnings or median weekly earnings show slightly different trends, bUi nil show a
similar relationship between education levels,
6
�AS we discussed above, these wage changes are positively related to changes in hours of
work. More educated women have shown the largest increase in their market work, and their
earnings have gone up even faster as wages and hours of work rose together. Less educated men
have experienced both declining wages and declining hours of work, leading to earnings reductions.
B.
Total Family Income
Putting the trend;;; in wages and hours together, to what extent have increases in hours of paid
work within families translated into increases in family income? To answer this question. we present
estimates of average family incomes, by income component, to provide one ilSsess~ent of how the
. changes in hours have affected the standard of living offamities in the United States,10 Our income
measure is based upon before-tax cash income only, includiog cash benefits such as welfare and
unemployment insurance benefits, and does not include other family resources, such as fringe
benefits) food stamps, and the Earned Income Tax Credit (EITe), \\'hile these other resources and
taxes are important, they are difficult to measure accurately or consistently for individual families,
Because food stamp use grew rapidly in the I970s ond the EITe exponded greatly in the 1990s. the
income measure we use omits more of the resources availablt: to low·income families today than in
the 196Os, Our estimates therefore understate the gains made by low·income families since 1969,11
, 1.
Trends in Income by Family Structure
,Trends in income and in the various components ofinoome (earnings, government transfers,
other sources of income) have varied aCrOSS different, types of famities,12 Both married..couple
families and single-parent families achieved increases in inflation-adjusted income from J969 to
1996 (see figures 7 and 8). However, even though single parents had substantially higher rotes of
growth in paid work hours, married-couple families experienced a much larger average increase in
income;
Iv Tn adjust for changes ill prices over time, these estimates USe the CP1~U~X 1 price index measure. The
CPI·U·X I, auulternative to the CPI·U (Consumer Price Index for Urban Consumers), uses the renlal equiYlllcnce
approach 10 improve the treatment of home ownership costs.
!J
For estimates ofcl1anges in family incomes using a broader definition of income, see Levy (19%).
1Z ThroUghO;1t the fonowing analysis we use mean (that is, average) income. rather than the median or'
another indicator of the disldbutlon. Changes in mean income can be d.ecomposed into changes in means of the
components of income, whereas changes in the median cannot. There has been II more positive change in mean
income thau in median income. as disproportionate growth in Ihe upper tail of the income distribution pulls up the
mean without affecting the median, We mUltiplied topcoded values< by 1A5 before laking the means of the
distnbutiQQs so that the means would not be underestimmed.
7
�tt
A~
famly Ineorre 0( S;ngle.f'artml FM'Jhes
0C\Mr~ 1M~rr.n"""
30 ."••0 ' 0 _
Ie""·
•
Tm' incomes ofmarried~couplefami1ies increased by more'than their increase in paid work
lime, Their avelllge,family income increased by almost a third from 1969 to 1996 ($14,800
in 1996 dollaJ'll), while their annual hours of paid work increased by less than a fifth,
/
..
For single-parent families. incomes increased by much less than paid work time. They also
increased much less than the incomes of married~couple families over this period, after
,adjusting for inflation. Average income of single~p~ent families increased by less than ten
pe=nt ($1,920 in 19% dollars) from 1969 to 1996. while their paid work hours increased
by more than a quarter.
Increases in the earnings of wives and single parents generated most ofthe income gro'Wth
from 1969 to 1996. Singie parent')' earnings int.'feased more than their total_family inqomes did, as
earnings increases were offset by a forty percent decline in average government cash transfer
payments, For tw<rparent families, increases in the wives' earnings represented two thirds of the .
increase in family income~ with the remain~er attributable to an increase in the husbands' earnings
and an increase in unearned income from sources other than government transfer payments,
Among both wives and single parents, increased earnings reflect an increase in hours of
work and ,an increase in hourly earnings rates. Rising earnings among wives reflected a startling 93
percent im:rease in their hours and a 52. percent increase in their earnings per hour. For single
parents, hours of work increased by 28 percent, while hourly eaml~g~ increased by 17 percent.
2.
Trends in Income by Othe-r.Demographic Characteristics
As with hours of paid work, trends in average family incomes differ substantially across
groups of families classified by education, race or ethnicity, or presence of young children. Income
growth ha~i been greater for families whose head is highly skilled, for families headed by a non
Hispanic person t and for families with preschool-age children.
�•
More highly educa/edjamilies had greater income grow/hfram 1969/0 1996, Married
couples' income grew by alrn,ost a third if the husband had a college education, but less than
ten percent if the husband had a high school diploma or less, For single parents, inflation
adjusted incomes grew by eight percent if they had a college degree, ~ut incomes fell by four
perl:;ent for sin£le parents with a higb school diploma or less, Much of this difference in
income growth reflects larger"hours increases fur highly skilled wives and single parents, and
earnings declines for low skilled husbands. Erosion of the purchasing power ofcash welfare
benefits also helps explain why the inflation-adjusted incomes ofless-educated single parents
felL
•
Average income growlhfor whites and blacks was substantially higher than/or Hispanics.
Among families headed by a white person, average incomes grew-for both married couples
(1 g percent) and single parents {2 percent) fipm 1979 to 1996. l~ For blacks, average incomes
grew by 18 percent for two-parent families and by 6 percent tor single-parent families.
Finally, for Hispanics, average incomes fell for both married couples (4 percent) and single
parents (3 percent), The results for single parents are striking, given the relatively large
increases in hours worked for pay by Hispanic single parents over this period, The results
for married couples,are less surprising, given that Hispanic couples increased their hQurs of
paid work only about half as much as white or black married couples, An increasing share
of recent im.migrants with lower education and wage levels in the Hispanic population also
helps explain why Hispanics' incomes felL In addition, wages and cash welfare benefi~
. declined,
•
Families with a child under age five had greater average income growfh than families with
older children. For married couples, average incomes increased by 38 percent for families
with a child under age five1 compared to 27 percent for families with only older children.
For single parent families~ mean incomes increased by 17 percent for those with young
children. but by just 6 percent for families with only older children,"
3.
Recent Trends in Family Income
,
Trends in family income from 1992 to 1996 are considerably more favorable than the longer
term trend sjnce 1969. Even families headed by single parents with a high school dipJoma or less,
. whose real income deteriorated from 1969 through 1992, made income gains from 1992 to J996
during the sustained period of economic expansion under the Clinton Administratio~.
n Our race nod ethnicily compatisons:begln in 1979 because the CPS did not identjfy Hispanics: in 1969.
>!! Of course. having a younger child often implies being a younger patent We do not c()ntro! for the age
of !he parent in thjs analYSIS.
9
�C.
Tf!e Distribution of Family Per Capita Income
To assess the implications of income growth for families with children. we need to take
famities~ whose incomes are lower and grew much
less than the incomes of married-couple families (see sectJon (V~B-J above). We also need to
consider the decrease in family size, because a given family income provides more resources per
child when there are fewer children in the-family. Moreover, because less-skilled, lower-income
parents have had slower income growth than highly skilled, higher-income parents, it is important I
to consider the trends in income for lower-income and higher~income families, not just the average
family.
account of the increasing s]lare of single-parent
Figure 9 presents estimates which incorporate the combined effects of the increasing share
of single-parent families and decreasing average 1luni'ly s.ize, to assess changes in incomes for
families with children. To reflect changes in the
share of single-parent families, the diagram shows
changes for the combined family income distribution
ofsingle-parent and tWQ-parent families. In addition,
as a crude way of adjusting for the differences in
family size between two~parent and one-parent .i
families and for the decreases in family size over :g
time, family incomes nre presented in per capita m
terms. (This is a crude measure because it does not
cost twice as much to support two people as one. On
the other hand, two do cost more to support than one,
The true measure of equivalent income for different
famiIy sizes lies somewhere between per capita and
total income,) The figure shows the ch3l1ge in average income per person for the lowest quarter, the
highest quarter, and the middle half o.fthe distribution of all families' per capita incomes.'
These estimates indicate that white there has been substantial growth in income per person
for families with high per capita income, income per person has been either stable Of decreasing for
other families when 1996 is compared with 1969. During the economic expansion from· 1992 to
1996, however, families with lower per capita incomes also experien~ed rising income per person,
•
Since 1969, the top quarter o/families gained, while the lower (IUarler lost and the middle
hal/remailU!d nearly constant in per capita income lerms, after adjustingjor injIdlion. The
top quarter gained 20 percent ($4,420 in 1996 dollars) from 1969 (0 1996, while families in
the lower quarter of the per capita income distribution had declines of 11 percent ($410),
For families in the middle half of the per capita income distribution,"(lverage income per
person has remained relatively constant, with income gains of 4 percent ($452). _
Since family size has been decreasing, it follows logically that incretlses in mean. income are
less dramatic; and decreases are more dramatic, when calculated on a family basis rather than on a
per capit,1 basis.
10
�V.
HOW DO FAMILIES RESPO:>lD?
IMPLICATIONS FOR FAMILY TIME USE OUTSIDE THE JOB
The trends in hours of paid work and family incomes described above have had a major
impact on family life. Increasing hours of paid work lTIay mean higher incomes, which provide more
resources fix parents and children. But increasing paid work time also means less time for other
activities. The evidence on time allocation to non-market activities is much more limited than the
data on hours of paid work and income) and conclusions must therefore be more tentative.
The CPS, \v1th its larger sample size, only allows us to examine hours spent in paid work
(and therefore hours availabJe for other activities) along with changes in family size and structure.
We have limited data on what people actually do with the time they do not spend in paid' work,
mainly from time-u~e diary studies, These studies have complete data only for a small sample of
peopie. We begin with the CPS data regarding basic trends and then discuss the more detailed time
use diary data,
A.
Trends in Current Populat~on Survey Data-
What can the CPS ten us about how the changes of the past several decades have affected
the number of home hours that families have available for caring for children and maintaining a
household? The data indicate that families have less total time to devote to unpaid a.ctivlties,
including time with children, because they are spending more time in the labOr market and because
the share of families witb a single parent is growing.
Figure 10 shows the trends in nonrmarket time
that custodial paren:ts potentially had available to
spend with all their children, after subtracting time
spent at paid work and allowing eight hours per day
for sleep. We emphasize the fact tha.t this is only time
potentially available .in the, home; there is no
information in the CPS about how parents actually
spend their time outside paid work. Figure 10 shows
thaI from 1969 to 19961 both married-couple and
single-parent fiul1ities eXpcflenced a decrea.qe in time
not spent on paid work, The overall decrease is
greatt:r than the dt:crcases within either family type
because the proportion of sjngJe~parent famHies .
increased 'over this: period .
10.....VI!Ubie Tllnt of C",t!Odial flartnls
Oulslde "'it! WOI'k end Sleep
. It can also be noted that changes in family size would affect the parental time potentially
available per child. Statistics· indicate that despite increas.es in paid work hours for each type of
family, tbe amount of non~market time potentiaUy available per child has increased for both married·'
couple and single~parent families since 1969, This measure is obviously misleading because it
11
�assumes that a single child who spends time with a parent gets twice as much parental attention as
each of two children who spend that same time with a parent In any eVent, the increasing number
of singie~parent famBies has meant that overall the average amount of family time potentially
available per child has remained relatively constant when single-parent and married-couple families
are considered as a whole.
j
B. Time Usc in tbe Home Estimated from Time-use Diaries .
Fortunately, we have a supplementary source of data: time~use diary surveys. which ask
respondents to keep a delailed diary recording how they spend their time during a specific day.
These surveys provide an alternative, more'accurate method of measuring paid work time, as well
as time spent in various kinds of unpaid activities, such as commuting, housework. child care,
shopping. recreation, and personal care. The trends in hours of paid work time and non-market time
described ahove
based on data which report individuals' estimates of their, usual hours worked
per week in the previous year. Such estimates may not accurately portray the actual hours worked
for pay because the question is somewhat ambiguous and respondents may not be able to report
accurately on a "usual" week in the few minutes allowed during the CPS interview, Time~use diary
m~ tend to show shorter paid work hours and sometimes even different trends than the CPS.15
are
Unfortunately, such lime~use diary surveys are conducted much less frequently and with
much smaller samples than the CPS. The latest available data were collected in 1985~ results ofa
survey done in 1992-94 arc not yet publicly available. Because of the small samples, time-use diary
surveys cannot be used to examine trends for smaller subgroups of the population, such as single
parents or blacks: Moreover. the individuals who complete the diaries may not represent the U.S.
populalion as well as the CPS sample does. l1lese surveys ~o, however, provide infonnation about
hbw'much time is spent in different types ofunpaid work at borne, such as cbild care and housework~
in leisure pursuits, and sleep.
I.
Averages
Time~use diaries indicate that the entry of many mothers into the w~rkforce hus placed them
into what can be termed a "tlme crunch." While botb employed and nonemployed women have
managed to keep the amount oflime spent with children relatively constant, many more women with
children have moved from the "nonemployed" to "employedl> category. The "time crunch" is best
illustrated by the fact that in'any single year, employed women spend over one third less time on
child care and household tasks than women without paid jobs, but still have 25 to 30 percent less free
time. l (>
)5
Robinson and Godbey (1991). chapter 5.
16 Robinson and Godbey (!997}, Tables 3 and 6.
12
�Time-use surveys conducted in the U.S. in 1%5 and 1985 show that employed mothers spent
virtually the same amount of time taking care of children in 1985 (6,7 hours per week) as in 1965
(6.3 hours per week). Mothers without paid jobs also maintained a consistent amount ofti~e with
children, spending 12 hours a week on child care in both years, The child care category in the time
diaries includes only time spent on direct caregiying, not time shared with children while engaging
in other activities.
'00,-______________________--,
When the shift of women into employment
(shown in figure 11) is taken into aCCQunt, mothers'
time in cbild care declined by 10 percent overall,
from ten to nine hours per week, Fathers did not
make up the difference; their child care time
remained about 2,6 hours per week from 1965 to
1985. This suggests that the increase in market
"'
work among women has reduced parents' total child
care time.
Mothers have reduced their child care time by much less than they have increased their time
in paid work because they have cut back on other activities. Women have markedly reduced time.
they spend on household chores (see figure 12), Men have somewhat increased the time they spend
on housework (see figure 13)j but it does not make up for all of the reduction by' women. Since the
"child care" category only captures activities that are directly focused On taking ~ oftne child. any
reductions in time parents spend with children while they are primarily engaged in another activity.
such as cooking, cleaning, or shopping, are not reflected in the time-use data.
12. WOf"IeIl's DMtiol!ofTime
O"tHUI Paie \'I.'or\I and Slap
13.101$11'. 0MU:m l)filfllCl
¢.mid. r.., Wort< and S~
Time spent in commuting to wo'rk increased 13 percent (2,5 minutes per trip) between! 983
and 1995, according to a Federal Hjg~way Administration survey.
13
�2.
Differences among Families
The effect of women's increased hours in the labor market on families is HkeJy to vary
between college-educated parents, whose lncomes have been rising because their hours and wages
both increased, and less-educa.ted parents, whose incomes may have fallen despite increased work
hOUTS because of falling wages. The effect of women's increased hours in the labor market on
,
families is also likely to vary between married couples, who can shift some housework and child care
from working wife to husband, and single parents, who cannot Within malTied-couple families,
moreover, there are likely to be differences acr~ss education levels in this shifting of tasks, as-child
care time by fathers rises with their education. Unfortunately, the time-use diary survey samples are
too small to be broken down into these subsamples. Thus. the above~quoted estimates are based on
average trends and may miss important: distinctions between high~ and low~income groups, or
between single-parent and two-parent families.
VI.
KEY POLICY ISSUES RELATED TO THESE CHANGES IN FAMILY LIFE
The changes in American families and work patterns h~ve created new opportunities~ but
also present significant policy challenges to private employers and government. In this section we
identify four areas of policy thal are important in helping families seeking to ba.Jance work and
family life: jncreasing the flexibility of market work; supporting income among low-irico"me
working families; improving access to high 'quality and affordable child care; and encouraging the
formation and maintenance of two-parent families.
A.
<
Increasing the Flexibility of Paid Work
To an important extent, the effect of parents' market work time on children depends on when
and where it is performed. By shifting from work in the home to work in the market. many women
find themselves with far less flexibility in responding to family needs. Key employment
arrangements that affect hours flexibility for parents include:·
•
Flexible work arrangements (defined as allowing workers to vary the time they begin or end
work). TIlcse arrangements are an increasingly popular approach to decreasing the tension .
between work and family, In 1997,28 percent of full-time wage and salary workers had'
flexible work schedules. 111is was up sharply from 15 percent in 1991, the most recent prior
year when data were coHected. 17
Maintaining high productivity need not be inconsistent with a.lIowing flexipiUty in work '
arrangements, as many private sector employers .have discovered, The Federal government has led
by example, instituting "flextime<),which allows employees some discretion in when they work their
allotted hours, The President has proposed ~ flextime initiative that would aHow all workers to take
Ii
Dala on alternative work ft."11lfigements comes from the! 991 and 1997 May supplements to the CPS,
14
�"time·and-a·half' overtime compensation in the fonn of compensatory time for family and medical
leave purposes or vacation instead of cash.
•
Flexibility in shift work. This approach enables parents to share child care more easily by
working different shifts. In order for shift work to make combining paid work and child care
easier, however, the choice of shifts must be voluntary. For those workers who' cannot
determine their own schedules, the combination of shift work and work in the home is a
potential source of stress and expense. Non·standard ~orking hours may make it difficult
both to find time to spend with children when they are awake and not in school and to
arrange for child care while working. In 1997, 83 percent of full-time wage and salary
workers were on regular daytime schedules, 4.6 percent were on evening shifts, 3.9 percent
were on employer-arranged irregular schedules, 3.5 percent were on night shifts, and.2.9
percent were on rotating shifts ..
'This Administration has also played a major role in increasing flexibility among families by
helping enact the Family and Medical Leave Act (FMLA), which enables workers to take up to 12
weeks lUlpaid leave to care for a new baby or ailing family member without jeopardizing their jobs:
Since its inception in 1993, millions of workers have taken advantage of the FMLA to spend
necessary'ti~e with their families. The President has also proposed expanding the FMLA to cover
more workers and to allow FMLA·covered workers up to 24 hours per year for parent-teacher
conferences or to accompany a child, spouse, or elderly parent for routine medical and dental care.
•
Working at home Jor pay. This arrangement can increase parents' flexibility. In 1997, 3.3
percent of all wage and salary workers were doing work at home for pay, up from 1.9 percent
in 1991. An additional ten percent of all wage' and salary workers in 1997 were doing work
at home without receiving extra pay for it. Nearly 9 out of 10 workers who were paid for
work at home'were in white-collar occupations.
B.
Giving All Pare":ts, Especially Low-Income Parents, More Choices
While incomes have been rising for most people, families at the bottom of the income
distribution, particularly the less educated and single parents whose inflation-adjusted incomes were
lower in 1996 than in 1969, still face serious economic hardship. Many low-income parents are
forced work harder and spend less time with their families just to make ends meet. Recent policy
changes that have helped these families cope include:
'
to
•
Expansions in the Eamed Income Tax Credit (ElTC), to ensure that persons who work hard
all their jobs can take home enough money to support their families;
•
Providing a $500·per-child tax credit to help offset the expense of raising children;
•
Increases in the minimum wage from $4.25 in 1993 to $5.15 in 1997;'
15
�•
Expanded child support enforcement provisions, which help ease the economic burden on
single mothers and enforce responsibility for economic support ofchildren on both parents~
•
Major welfare refonn legis1ation that has helped singJe mothers move from welfare to work;
•
Employer tax credits to help create jobs for welfare recipients;
•
Substantial expansions in support for vocational education. community college, and skin
development among persons in lower~income families, including the creatJon of Hope
Scholarships, increases in the maximum Pen Grant. and the passage of the Workforce
InvIlstment Act of J998.'
These steps, and the strong economy and steady economic growth of the jast six years, have
combined to create jobs, reduce unemployment, and raise \\-'ages for all workers - especially the less
skilled who are most affected when jobs are scarce.
C.
Iml,roving Access to High Quality, Affordable Child Care
Most parents adjust to an increase in their paid work time by increasing their use of child care
providers. The availability, cost, and quality of child care are crucial to the well-being of our
children and the ability of parents adequately to balance the needs of work and family.
The primary child care arrangements for preschool-age children of employed mothers in the
faB of 1994 were divided roughly equally among care in the child's home (by a relative or
nonrelative)1 care in another home (by a relative or nOrl:relative). and care in an organized child care
facility. Since comparable data were first collected in 1986. the trend shows a slight increase in ~e
proportion of children receiving care in their own homes, relatively fewer children receiving care
in another home, and relatively more children receiving care in an organized facility. In addition,
the share of monthly income spent on child care by those purchasing this service rose from 6.3
percent to 7.3 percent between 1986 and 1993,'S
The Clinton Administration has consistently emphasized the importance of child care
availability and quality. Since J993, child care subsidies for low:-income families have grovm by
80 percent. In addition. the Administration's hudget proposal for the fiscal year 2000 includes a
variety of proposals to help make child care more affordable and improve its qualitY1 including an
investment rif S7.? billion over five years in the Child Care and Development Block Grant:
combined with the funds provided in welfare rerorm. this new investment would enab1e the program
to serVe over one million additional children by, fiscal 2004. Also" the President's budget includes.
$5.1 biHlon over five years to increase the Child and Dependent Care Tax Credit for three million-
d,;ta
The earliest comprehensive
on,families' child care arrangements were collected by the BtIN:!lu of
the Census in 1977, The earliest data that are {;ompatihle with the most recenl data are from fall 1986. We use the
1986 data for consistency.
It
16
�familie? earning under $60,000 a year, and $3 billion over five years in a proposed Early Learning
Fund to improve the quality of care children receive.
In addition, the Administration is addressing the need for after-school care for children.
Since 1970 the percentage ofmarried couples who work full time, year round and have school-age
children has nearly doubled (from 18.7 percent in 1970 to 37.3 percent in 1997). Today, the parents
of over 28 million school-age children work outside the home. This has led to a strong demand for
quality programs to ensure that children are safe and learning in the hours in which they are not
supervised by a parent. In fact, experts estimate that every day roughly 5 to 7 million children are'
left unattended at home. The Clinton Administration has responded to this demand by increasing
its investment in after-school programs from $40 million to $200 million in the 1999 fiscal year,
which is estimated to reach roughly 400,000 children this year. And the President's fiscal year 2000
budget would triple the investment in these programs to $600 million.
Together, these initiatives help parents ensure that their children are receiving quality care
while they work.
D.
Encouraging Two-Pa.rent Families
When two-parent families form and stay together in a supportive relationship, many of the
economic and emotional stresses of balancing work and family are eased. Two-parent families have
greater eaming potential and more potential time to spend with their children than single-parent
families. Among the recent policies which have helped maintain married-couple families, the
eligibility rules for Medicaid and other programs have been changed so as not to penalize two-parent
families for staying together.
VII.
CONCLUSION
This study indicates that there has been a large-scale shift of time spent by women from the
home to the labor market over the last generation. For most families, this change has led to an
increase in family income. The study also indicates that there has been a very large shift from
married-couple to single·parent families over the last '30 ye'ars, reducing both income and parental
time available for many children. While smaller family sizes have helped offset the increase in
market work, many parents find it difficult to balance jobs and children.
This report denl0nstrates that single parents face the most difficulties. They have·only half
as much total time available as two parents, and single mothers typically have less than half as much
eaming power as a married couple because women's wages are lower than men's. Lack of income
limits most single parents' ability to.purchas~ time-saving goods and services and high quality child
care. Thus, they face a severe "time crunch" as well as a "money bind."
17
�Men without college educations have faced declining wages. ""'hile increased work by their
wives has helped maintain their fa!TIilies' standard of living, it is stiH difficult for these families to
afford child care. Moreover, less~educa1ed workers are less likely to have jobs that pennit parents
to arrange their hours to accommodate family needs.
A·lore educated parents, whose increased time in the labor market has been rewarded with
. considerably higher incomes than in I %9, can more easily afford high quality child care, household
help, and other lime~saving goods and services, Married"'\':ouple families, particularly those where
the husband has a college degree, have seen substantial improvements in their economic situation"
over tbe laSt three decades. Even these couples, however, face the stress involved in balancing
increased work and family.
'
.
the
While it is beyond the scope ofthis study to ~peculate about
causes of changing work and
family patterns, what is dear is the magnitude of the Change and the importance of the challenge.
There is no more vital task for our society than raising our children well. Parents in aU different
income brackets and settings face every day the e>..iraoroinary task of dividing meir time to maximize
familial, economic and p~rsonal well-being.
. '~';P
It is the responsibility of employers and public policy-makers to continue the search for
methods to help productive workers function as effective parents and responsible family members,
If children, families, and our communities are going to withstand the stresses of the trends of the
last 30 years, employers ~d public policy makers have n responsibility to do everything they can
,to help panmts balance work and frunily. Workplaces and work hours must become more flexible.
parents need more supports and more choices, and more children need to live with solid families in
their lives,
18
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.
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.
.
Bluestone. Barry and Stephen Rose. 1997. <I Unraveling an Economic Enigma: Overworked and
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'
Juhn, ChinilUi and Kevin Murphy. 1997. "Wage Inequality and Family Labor Supply," Journnl
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,
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19
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20
�THE EFFECTS OF \VELl<"ARE POLICY AND THE ECO;"JOMIC EXPANSION 0:"1 WELFARE
CASE-LOADS:
A.."II UPDATE
August 3, 1999
A Report by the Council of Economic Advisers
This study could not have been completed without the generous assistance of the Depa."1r:lent of
Healt.i-t u;1d Hurr.an Se:~tices in providing data and program information.
�THE EFFECtS OF \VELFARE POLICY AND THE
ECONOMIC EXf'ANSIO~ ON WELFARE C,;'SELOADS: Ai" UPDATE
EXECL"fIVE SUMMARY
This study investigates the causes behind recent changes in welfare caseloads, updating a 1997 eEA
report of case!oad cha:1ge.
• The fall in welfare caseloads has been unprecedented, wide-spread. and continuous, and
employment a/welfare recipients has increased. 14.1 minion people received welfare in
January 199:1, and this nu:nber had fallen to 7.3 million by March i999, according to estin8tes
:e:eased t0day (August 3, 1999). In 31 states the caseload is less than half of wha: it was when
President Clir..~on took office, and all states have experienced dO:.J.ble~digit percentage declines.
For 22 states,' the percent drop during 1998 was larger than during 1997 (froc January to
December). Previous analyses by the Department of Health and Human Services show that the
percentage of welfare recipients working tripled between 1992 and 1997, and an estimated 1,5
millie!.: aduhs who were on welfare in ! 997 were working it: 1998.
• The 1996 legislation has been a key contributor to the recent declines, PRWORA produced a
dra.rr:atic c~a.."lge in welfare policy: work and self-sufficiency became a primary goal; state and loca!
governments were given much greater control ofthei: progx:ams; ar.a states expenmcnted with a host
of progran: designs. The evidence suggests that tt.ese changes caused a large drop in welfare
participation) a drop that is independent of the effects of the strong labor market. The estlmates
imply lhat T ANF has accounled for :oughly one-lhird of rhe reduction from 1996 to 1998, lhe lasl
year ofdata analyzed in tms study, In the earlier years, 1993·1996. most of the decline was due to
the strong labor market. while welfare waivers p:ayed a smaller yet' important :ole.
• The strong labor market has made work opportunities relatively more attractive, drawing people off
welfare and into jobs. The unemployment rate has not declined as much in the post~TA...hfF period as
it did ir. the 199~-96 waiver period, As a result, the share of the desHne in the caseload that is
attributable to improvements in the labor rr,arke[ was much higher in the 1993~96 period (rocghly 26
to 36 perce':l) rha." in rhe 1996-98 perioe (8 to 10 percenl).
• Past increases in the minimum wage have made work more attractive and, as a result, caused
welfare panicipation to decline, Tne estirmtes imply that about 10 percent of the caseload decline
\V2.S due to increases in state and federal minimum wages.
"' The specific program design adopted by a Slate can affect its case/oad declines, The study
examines the effects of a numbe: of specific policies, including fa.-nily caps, earnings disregards,
t~me Emits, work exemptions, ar.d work sanctions on the size of the caseload,
The large sus~ained declines l:l caseloads provide one piece of evidence about the effectiveness of
welfare reform efforts. However, there are r:1ultiple indicators of the impac~ ofwe1fare refonn,
including cha..'lges in work and earnings among welfare leavers, in marriage rates and out-of·wed~ock
pregnancies, and in poverty ra:es. The CEntor: Administration is collecting and trackir.g info::nation
on a:l of the~,e me::tS"JIes in order to fully assess the impact of welfa:e reform,
2
�THE EFFECTS OF \VELFARE POLICY AND THE
ECONOMIC EXPAl'ISION ON 'WELFARE CASELOADS: AN UPDATE
OBJECTIVE OF STUDY & SUMMARY OF FtNfHNCS
From the start of the Cli:1ton Adminis~ration to Ma1'Ch 1999, the number of people receiving welfare
declined by 6.8 million. In 31 states the caseload lS less than half of what it was when President
Clinton took office. Not since 1967 has such a smail share of the population received welfare. Not
onh- have the c.ecijnes been large, they have also bee:l widespread ace cO:1t:nuo;J.S (Table 1). Between
1993 and 1998 (the ;ast year of data analyzed in this study), ;!ll 5C states and the District of Co:ulT.bia
experienced double-aigii. percent reductior.s in welfare participation, and in most states the declines
were unprecedented. Al:hough a substant~al share of the reduction occurred between 1994 and 1996, in
many st<!.~es the largest declines have occurred more recently, rn fact, (n 22 states the percentage
declir.e durl:1g 1998 (frorr. Jam.:rtry to December) was greater than it was in : 997,
This study updates and extends a 1997 Council of Economic Advisers (CEA) report exn•
.'nining the
relative importance of a variety of economic and policy changes on case:load declines,1 The earlier
st'..ldy examined changes in welfare participation between 1993 and 1996; the cunent study updates
that report by including data through. 1998. It also analyzes the effects of additional factors, such as
changes in the minimum wage as well as the welfare refonns enacted in 1996.
This report uses data from 1976 to 1998 and finds that from 1996~98 policy factors were extremely
important, which is not surprising given the scope of the 1996 reform. The 33 percent decline in the
recipiency rate between 1996 and 1998 was due in large part to the changes in state welfare programs
implemented under the Temporary Assistance for Needy Family (TANF) block grant. Specifically,
roughly one~third of the case!oad decline between 1996 and 1998 was due to program reforms
implemented tmder TANF, 8-10 percent was due to the improve~ labor m~ket, about i 0 percer.t \-vas
due to the higher miniml.!m wage, and 1-5 pe:cent was due to lower cash welfare benefits.
During 1993-96, roughly 26-36 percent of the caseload decline was due to the improved labor r:larket
The relatively large effect of labor market conditions on the easeland over th~s period reflects the fact
that the dec!ine in unemployment betweea i 996-98 was mueh s::naller than the decline exper:enced
between 1993-96. A.t.1other 12~ 1:5 percent of t.'1e decline in welfare participation was due :0 welfare
.
waive:s, WI:ich were issced to states to allow them to experiment W'iL'i alternative progra:n designs.
The caseload fell 6-22 percent because of lower inflation~adjusted welfare benefits. The real value of
the minL'11um wage fell between 1993 and 1996 (the increase in the mir.imum wage in 1996 occurred
in October, so it was not effective most of the year), which by itself would have caused the case10ad to
increase by about I 0 perce~t. The remaini::1g ch~ge was due to other factors.
Council of Economic ·Advlsers 0.997). "Explaining the Deeline in Welfa.-e Receipt, 1993-1996: Technical Report:·
Executive Office of the President of the United Stites,
!
3
�Table 1. Changes in the Number
or Recipients in Each Stale
Number of recipients
State
A__
1993
1998
Percentage Change From
'93 to '96
,26
..,
'96 to '98
138,465
""'''
AriWlla
Atl:.ansas
~llfomia
54,635
37,U78
29,S81
"
,19
199,]53
71,989
2,511,293
102,511
,16
,39
32,633
1,998,616
·21
,
."
.2)
CoIoo>do
122..890
SO,1«<i
·22
162,481
117,111
.,
"7
~ticill
27.736
IS,sao
·16
695-49
·32
·21
Delaw;rre
DC
Plruid,
691.053
54,.356
261,581
0
·22
Georgia
Hawaii
398.011
57,336
185.052
46,724
·15
,.
''''
Illir.Gi$
694,050
476,516
''''''
.,
lOOiJna
2l5,367
·35
10_
""",,
K<:nlliCky
I02.t:J8
88.363
1W.766
lH.l76
6S.665
)U36
119.300
UllIisiana
:U?762
124.800
Maine:
Maryland
66,914
119,998
Massacbuoe:!li
:m.219
Michig;an
68'1.139
:92,1;3
Minncsotl
Mississippi
Missollri
MOntall3
Ntbraska
Nc:v~d~
New Himpshire
Nc:w Jer.;ey
New MeJ;ieQ
New York
North Clrolin~
North Oakotl
tJhj,
_00
O~!ahQml
Pennsylvania
Rhode Island
Soolh CarQuna
South DnIr.:DU
T==
T~
Ub"
Vermoot
Vifglni~
WasrungtOtl
2L&77
;68,92-4
2G2,3J)2
34,87S
'?,8M.!
36,009
29,797
345,370
97,246
1,215,5i6
335,620
18,213
712.:271
135.762
1 !7,J!S2
610,.m
~2,187
146,280
19,913
310,486
784,&16
S2,144
2ll,)OI
194,765
."
.,.
·22
.; z
39,423
~lg
116,456
167,043
·11
332.240
t43,6S5
$2,523
l47,HJS
19,540
;)fi,66S
2$,472
15,409
l%,941
74,170
a86,746
169,144
."
·2'
-12
-26
."
.1)
'·20
.,
·ii
.!9
·26
,
·52
...
·30
~3
to '98
-6,
-211
..,
·55
·20
·SO
..,
.2S
·21
·62
."
.!9
.B3
·82
·26
.2!
.4,
.,.
...,
.",
...
."
...,
·27
·ll
·IS
·53
•)5
.
·35
·211
·34
-;l:b
-25
·31
·36
·61
.4'
·52
4'
.
4'
,
·52
.Z5
-6•
-44
-44
.2)
·29
'"
...,
.,.
8,S4l
.,
."
·i8
·35
·53
340,119
·24
·37
·51
61.191
46,001
360,009
S4,150
60,1)0
9,M3
14'}.O89
37Q,8S7
28,i5l1
19,643
99,{)S3
201,573
jS,fi3S
40,167
1;,471
.:n
289.965
West Virginia
113.113
Wi$COfisin
235,241
Wyoming
rUI59
14,00i,46e
8.199,666
Tntal
Data are the average monlhly caseloads for the calendar year,
2
.2)
.)7
.,.
·27
."
·32
.,
."
·22
·48
·21
·20
.1<
.]9
·59
·52
·52
.2S
·28
.3t
-14
.,
4]
·40
.44
·12
.7!
·'0
.,
.]6
."
::1J
.2S
.,.
·75
~,
-4,
·13
."
....
_3t
."
.]0
~,
.i3
·32
.j]O
·SO
·13
·J3
.<i
�,I
WELFARE PARTICIPATION ANUTHE LABOR MARKET
Caseloads normally f1uctuate with the business cycle. nsing in periods of high unemployment and.
declining when unemployment falls. Chart 1 illustrates ~his relationsnlp between labor market
opportunities and welfare participation over the past three decades. When unemployment increased in
the carty 19705, so did welfare participation. The increase in welfare panicipation in the late 1980s and
early 19905, as well as the decline that began in 1994. also correspond with changes in employment
opportunities during these periods. However. the trend in welfare participation does not always match
that in unemployment, most notably when other important changes are taking place, including changes
in family structure and welfare policies.
Chart L \Velfare ParticipatIon and Unemployment Rates
rv
10'
8
E
.
"
e
1\
t!! 4 C
V~
1970·98: 0,28
1970·79: 0.41
198(}.89: 0.23
1990·98: D.7S
2 ,~
,
c
I
1970
I
!
I
!
1974
j
,,~~--'~"
'\
Welfare
participation rate
CorrdariQllJ."
,
'~
I
rale
--" '----,-~-~~'
"
,
0
)'
I 0
N--~~-,,,
6
Unemployment
! 1 I I
1978
I
1982
' !
I'
! I !
1986 1990
!
'
!
'
!
I
I
1994 ,:998
Economic conditions vary across stateS as well as over time. Chart 2 displays a scatterplot of the
unemployment rate versus the welfare participation rate for each state and the District of Columbia in
1994 when participation was near its peak. This relationship is quite strong, With a simple correlation
pf 0.65, While this correlation suggests a strong role for economic factors, it is likely to overstate their
true role. Characteristics of states that influence their unemployment rates may also influence welfare
participatiOn. These characteristics include the age distribution, educational level, metropolitan/rural
?opulation shares, and ns.cial and ethnic composition. While these factors may change over time, such
change occurs more slowly than changes in policy or economic conditions.
One way to eliminate the effects of these "fixed" factors is to examine changes over time within states,
which is the approach employed in this study. Chart 3 displays the simple relationship between the
change in the unemployment rate and the change in the welfare participation rate in each state between
1994 and 1998. It demonstrates that once unchanging state characteristics are removed, the
relationship between the unemployment rate and caselQads is not nearly as strong as the simple cross
sectional one, with a correlation of 0.17.
4
�Chart 2, Welfare Participation Rate Versus
Unemploy:nent ~te for Each State. 1994
,
Caudation: 0.65
,
-" ..
"" ... '''.
•• -I I _ ",
• t
-
• • ,
oL-~-L~
o
•
,,
- .' -- -
-"
,
__L-~-L~__~~__
4
2
6
8
10
Unemployment rate
)
Chart 3, Change in Welfare Participation Rate ;versus
Change in Unemployment Rate for Each State. 1994-98
£
Or------------------------
Correlation.: 0,/7
E
8
"~
p.
-!
'0
1-2
~
-3 ,.
1 ·
·
·
,
.5
·
~-4
c
•
u'
"
-5
,
-
• •
•• • •
•
•
• • •, - - -, • , • •
,
I I' ,
•
• • ,
,
..
-
•
c
•
•
•
•
I
-4
,
·3
- -2
-
--
•
•
-1
Change in unemployment rate
5
0
1
�The changes over time for the nation as a whole also suggest that factors other than the economy have
a substantial effect on welfare participation (Chart 1). For example, inctenses in welfare participation
dunng the recesslon of the early 19805 were truncated by eHgibility restrictions that were part of
President Reagan's welfare reform efforts 111 1982, As a result, over the entire 19805 the simple
correlation between unemploymen~ and welfare participation was much lower (0.23) than it was in the
1970, (0.41) or the 1990s (0.78).
FEDERAL AND STATE POLICIES
A number of key policy changes have been implemented in recent years and might be expected to have
had an impact on welfare participation and caseloads:
\Vclfare Waivers
Since 1962 the Secretary of Health and Human Services has had the authority to waive federal
program requirements in the Aid to Families with Dependent Children (AFDC) program if a state
proposed ex.perimental or pilot programs thaI furthered the goaJs of AFDC Although there were a few
waivers granted in the early 1980s, it was. nat until the early to mld~1990s that major, state-wide
waivers became widespr~ad. Between 1993 and 1996, the Clinton Administration issued welfare
waivers to 43 states, more than any previous Administration, TabJe 2 lists the date that each state
implemented a major state waiver.
These wai vers varied substantially across states.' and in many cases they differed greatly from the ruies
under Arne Some waivers increased the amount of earnings recipients were aUowed to keep and still
be eUgib\e for welfare. Other waiverS expanded work requirements to a larger number of recipients,
establis.hed limits on the length of lime recipients could remaln on ald, pennitted states to sanction
participantS who failed to meet work requirements, or allowed Stales to eliminate benefit increases to
families who conceived and gave birth to children while On welfare (lhe so~:;at1ed "family cap"), Given
the widespread use of waivers and the degree to which these pOlicies differed from traditional AFDC
policy, there is substantial reason to believe that waivers contributed lochanges in welfare caseloads.
Like the 1997 CEA studf" this report focuses on six '<major" types of waivers that received approval to be
implemented state-wide: termination time limits, work requirement time limits, family caps, JOBS
exemptions, J08S sanctions, and the earnings disregard. Each of these policies was discussed in detail in
the appendix to the 1997 CEA Technical Report.'
2
[n a few instances waivers were examined which were not approved to be implememed state-wide but affected a large
share orlhe st.<\te's caseload,
'tt was determined that the waiver in West Virginia, which
was cor.sidered e "major" waiver in the 1997 CEA study, did
not in fact meet this requirement (Martini and Wiseman, 1997). whicb is ref.e<:ted in Table At.
6
�Table 2. Dates of l\.-lajor Welfare Wah'ers and
TANF Implementation
Date of First
Major Waiver
Implementation
Implementation
Date
11115/96
111197
Alab:una
Alwll
Am:ona
TANF
! 111195
711194
1011196
Arkansas
California
1211/92
111198
71li97
ll1r%
1011195
1011196
3110197
3/i/97
1011196
j11194
11l/97
711197
Colorado
Connecticut
Delaware
DC
Florida
Georgia
!:Iawaii
211197
itl!97
7!lJf}?
1"",0
Illinois:
Indiar.a
iowa
11f.D193
511/95
1011193
Kansas
Kentucky
L.ouisiana
71H97
IOtlf96
111197
10/1/96
10118196
111/97
Maine
1111/%
Maryland
Massachusetts
311196
1219!%
Il!li9S
tvt.chiglltl
IO!ll92
9130/96
9130196
7flt<;7
Minnesota
Missouri
6ill9.5
Monuma
2111%
7/1197
1211196
211m
Nebraska
Nevada
New Hampshire
1011;95
12ilf96
New Jersey
Mexico
New York
.'lorth Carolina
tOl1192
7/1197
7/1196
711/96
711197
llft197
1/1197
71IJ97
toill96
211193
1011196
Mississippi
tOlt!95
12/3/96
1011196
~ew
,~orlh
Dakota
Ohio
}011!9(i.
Oklahoma
Oregon
Pennsylvania
3/3/97
Rhode [sland
South ClL"UHnll
5/t197
101[2196
SOLl~h Dakota
6/1/94
Tennessee
T""",
Utah
9J\I!}6
1211196
1011/96
6Jlt%
11\193
10/1/96
Vennont
7!1/94
Virginia
711195
Wash:ngwfl
IJ!!96
West Vrrgi:;ia
WiSconsln
lW96
Wyom:ng
1115196
9120196
211197
l/lOt97
1111197
9JJ197
111/97
�Some of the waivers that were approved for state-wide implementation were initially implemented state
wide, some were implemented in selected areas of the state, while still others began in small regions of the
state but were eventually phased in state-wide. Information on the pace of implementation is not available
for all states. Therefore, the date that is used to signal implementation is the date that the waiver began to
4
be implemented.
The statistical analysis in this report, as in the earlier CEA report, compares states that did and did not have
welfare waivers, determining whether those states that implemented waivers experienced larger caseload
declines than those that did not. It improves on the earlier report by using the actual date the waivers were
implemented in the states rather than the dates they were approved by HHS. In making these comparisons,
the current analysis also adjusts for other differences across these states that may account for the differential
decline, including economic conditions, cash benefit levels, and the minimum wage.
PRWORA
Enacted in August of 1996, the Personal Responsibility and Work Opportunity Reconciliation Act
(PRWORA) is designed to emphasize self-sufficiency and employment in place of welfare dependency
and gives states greater flexibility to design and implement programs to achieve these goals. Benefits
are time-limited; adults usually cannot receive Federal aid for more than 5 years d~ring their lifetime,
and some States have chosen to set shorter time limits. Most recipients must also participate in a work.
activity within two years to continue receiving aid ..
PR WORA abolished the AFDC program and established the Temporary Assistance for Needy
Families (T ANF) block grant to help states fund their welfare programs. Under the T ANF block grant,
Federal assistance consists of an annual fixed transfer to each state equal to the amount of federal
transfers the state received in fiscal year 1994, 1995, or the average of 1992-4, whichever was higher.
In addition, most of the authority to design welfare programs was passed along to the States, who are
required to have half of all recipients working by 2002 (40 percent by 2000). As a result, there are now
substantial differences in how welfare programs operate across the nati,on. Some states increase
benefits to welfare families who have additional children, while others do not. Some states stop
payment of benefits to the entire family at the first instance of their failure to meet work activity
requirements, while other states never sanction more than the adult. Most Slates allow welfare
recipients to keep a substantial portion of their labor market earnings without.reducing their welfare
payments, while others do not. We investigate both the overall effect ofTANF-funded programs on
.caseloads, as well as the impact of specific policy choices made by the states as part of their waiver or
TANF-funded plan.
The effects of the new state programs implemented under th~ TANF block grant are estimated by
examining changes in each state's caseload before and after it implemented TANF, again, after
adjusting for other factors such as the unemployment rate and the minimum wage. States were
required to submit their TANF plans to the Department of Health and Human Services for approval no
later than July 1, 1997. Some states moved quickly after PRWORA was passed to enact TANF-funded
programs, building on their welfare reform waivers, while other states operated for a period of time
Somewhat larger effects are estimated when the dute of approval, which was utilized in the 1997 CEA study. is used
instead of the date of implementatiqn. as described in appendix A of the technical report.
4
7
�under the older AFDC program rules.' The date that each state implemented its TANF progiam is
listed in Table 2.
Minimum Wage
A higher minimum wage can make work more attractive, giving welfare recipients;] greater incentive
to enter the workforce and leave public assistance. On the negative side, if a higher minimum wage
reduces employment of Jow~skiUed workers, some people may lose their jobs and enter welfare. At the
same time, an increase in the minimum wage may lead employers to substitute away from teenagers (a
relatively large' share of whom work for the minimum wage) and towards older welfare workers (who
are perhaps not as likely to work at the minimum wage, but more likely than teenagers to be working
just above the minimum). The latest empirica1 evidence is mixed. bUl most studies find either modest
or no disemployment effects associated with pa.st increases in the minimum wage,
The minimum wage also varies among states, :vitb 15 states having minirfmms above the federal floor
a( some point during the period analyzed in the study (1976·1998), Therefore, the study compares the
relationship oo!ween welfare participation and minimum wages over time and across states.
AFDcnANF Senefit Levels
States have long set their 9'wn level of maximum monthly benefit payments. with varia.tion by family
size 3nd composition. AU else equal, higher benefit levels are expected to increase the number of
participants. Over the period of this study, the jnflation~adjusted level of welfare benefits fell in
almost all stutes, In some cases the state explicitly lowered (or raised) benefits, but in most states
benefit levels were fixed and eroded over time with inflation.
DATA AND METHOOOLOGY
Using annual calendar year dar. from 1976 to 1998 on all states and the Distnct of Columbia, the
analysis is 0itSed on 1,173 observations. A set of models are estimated. which correlate movements ~n
welfare panicipalion with movements in state unemployment rates. state AFDCfTANF benefit levels,
state/federal minimum wage levels, the implementation of state waivers. and the implementation of
state TANF-funded welfare programs.6
:The estimated models also control for the characteristics of states that are largely unchanged over the
entire (1976~98) time period, and for changes in each year that are common to an states. In technical
jargon this is known as contrOlling for state and year fixed effects; this technique is used in most
existing studies of annual caseload changes, The estimates are based on a technique known as
, In most cases, the waiver concept becomes meaningless once T ANF was implemented becaus~ states were giY"n broad
control over their welfare policies, In particular, states could operate the broad categories of policies under T A.."'fF. whelher
or not they were continuing a waiver- However. if a state continued a time limit waiver. then participants' time clocks in
. that stale wo,lld hlVe been running prior to T~"{F implemenUltlon. As a result. these par.:icipants would re«<::h theIr hme
limiw more quickl}' than if their ciock would have beer; reset on the dale of T AA'F imj:)lememation.
6Mos t of the data used ir. the analysls come from weH~knowr. sources, v.ith a few exceptions. The infommuon on
implememation dales as well as program waivers and T t\.NF were obtained from the Department of Health and HUI'r.tln
Services and the Vrban Institute (Gallagher et at, 1998),
8
�weighted least squares, which uses the data across states and over time, and weights the data in each
state by its overall population. A Technical Report is available which provides m.ore details on the
data and the estimation procedures for interested readers. As always in such studies, we estimate a
variety of slightly different models to test the robustnes~ of our results to the exact set of variables
included.
The results of this methodology are to estimate the effect of changes in the economy or in policies over
time within a state on the caseload in that state. Hence, the results are the direct result of asking "If .
variable X changes over time within a state, what will be the effect on caseloads in that state?" ThIs is
clearly the question in which we are most interested. It allows us to measure the effects of (say}
waiver implemen.tation or unemployment changes on caseload changes over time.
This approach is very similar to the approach used in the 1997 study. One difference is that the earlier
study emphasized models that incorporated a "lead" effect of waiver policies. That is, waivers were
allowed to affect caseloads one year prior to the date they were approved. While the current study also
reports models that incorporate leads, the preferred models do "not contain leads, since the leads may
capture more than the causal effects of these policies. (For example, perhaps states with recently
declining caseloads had slack resources and manpower to design and submit a waiver.) This
difference ex'plains why waivers were found to account for 31 percent of the change between 1993 and
1996 in the 1997 study, but only 12·15 percent of the change in the current study.
RESULTS
These results report the estimated effects on caseloads of each of the variables discussed above over
the 1976-98 period, holding constant the effects of changes in all other variables. Based on these
estimated relationships, chart 4 shows the contribution of various factors in the recent 1996·98 period.
The 1996 welfare refonn legislation has been a key contributor to caseload declines since it was
enacted. The average state experienced an 18 percent decline in welfare participation following the
implementation of their TANF·funded state welfare plan, holding all other policy and economic
variables constant. These new state programs funded by the TANF block grant account for roughly
one-third of the 33 percent decline in the recipiency rate that has occurred since 1996 (Chart 4).
As reported in the earlier eEA study, welfare waivers that were implemented prior to PRWORA
explain a substantial share of the caseload decline/rom 1993 to 1996. States that implemented major
waivers experienced an 8-9 percent greater decline in welfare participation than states that did not,
holding all other policy and economic variables constant. This accounts for 12·15 percent of the
overall decline between 1993-96.
The strong labor market has made work opportunities relatively more attractive, drawing people off
welfare and into jobs. The unemployment rate has not declined as much in the post-T ANF period
(1996-98) as it did in the 1993-96 waiver period. As a result, the share of the decline in the caseload
that is attributable to improvements in the labor market was much higher in the 1993-96 period (26 to
36 percent) than in the 1996-98 period (8 to 10 percent). This study reaffirms the importance of
maintaining a health;>, macroeconomy with low unemployment rates in order to helpJamilies move off
9
�and remain off of welfare. Any future l~percentage-point increase in unemployment is likely to
produce a 5 to 7 percent increase in welfare caseloads.
The study also finds that increases in ehe minimum wage have made work more attractive and. as a
resull, caused welfare participation to decline. The estimates suggest that a $0,50 increase in the
minimum wage has been associated with a decline in welfare pnrticipation of 4 to 6 percent. Hence.
the recent minimum wage increases have helped reduce welfare rolls (Chart 4).
,
As many other studies have conftnned, higher welfare benefit levels result in higher caseloads. As
noted above, this need not reflect any behavioral differences in higher-benefit states, but may only be
due to the fact that higher benefits typically imply that a larger share of the population is eligible to
.
receive puhlic a s s i s t a n c e , '
Chart 4. Percentage of Change in ParticIpation from
1996·98 Attributable to Each Factor
.
Minimum wage:
10· J6 peIcer.t
Cash bcnciits:
1·5 percent
Other factors:
35·45 percent
TIle specific pr'Jgram design adopted by a slate can affect its caseload declines. The study examines
lhe effects of a number of specific poliCies, including time limits, earr.ings disregards, work sanctions,
family caps, and work exemptions on the size of the caseload, ¥le estimate the effects of these
policies regardless of whether they were implemented ns part of a state's waiver plan Qf a TANF~
funded plan. Our results on the effects of specific policies should be interpreted with caution, since
.onlya limited number of states have impiemented many of these policies for only a relatively shon
period of time. The primary results with regard to these policies are:
•
Time limlt& have the expected negative effect. but this is not precisely est:;matcd (very few
participants have actually hit time limits in uny st:;lte.)
•
Higher earnings disregards raise participation modestly.'
10
�..
Strong work sanctions are associated with declines in welfare participation.
•
Contrary to expectations, family caps are associated with an increase in caseloads.
•
Vlork ex.emption policies based on the age of (he youngest chBd do nOt playa substantial
roie in determining cascloads.
.
CONCLUSIONS
The large sustained declines in caseloads provide one piece of evidence about the effectiveness of :.
welfare reform efforts. This study suggests that caseload declines have occurred in part becaus{of a
strong economy with low unemployment rates, However, policy changes by state and Federal
governments have been even more important in ex.plaining the post~1996 decline than the strong labor
market. The new state progmms implemented following the enactment of PRWORA, most of them
focused on increasing work effort among welfare participants, have been the most important
identifiable factor explaining the decline from 1996-1998. Increases in the minimum wage, at the
Federal level and among some stateS, have also reduced caseloads.
However, there are m4ltlpJe 'indicators of the impact of welfare reform, including changes in work and
earnings among welfare le3~ers:. in marriage rates and out..()f~wedlock pregnancies, and in poverty
rates, The Clinton Administration is collecting and tracking information on all of these measures in
order to fully ass~ss the impact of welfare reform.
11
�Technical Report:
THE EFFECTS OF WELFARE POLICY AND THE ECONOMIC
EXPANSION ON WELFARE CASELOADS: AN UPDATE
August 3, 1999
A Report by the Council of Economic Advisers
This study could not have been completed wilhout the generous ussistancc of the Department of
Health and Human Services in providing data and program infonnation.
�TIm EFFECTS OF WJ;:LFARE POI,ICY A!\OTHE
ECONOMIC EXPANSION or-; \VELFAHE CAS~1.0Aj)S: AN UPDATE
EXRCUTJVg SUMMARY
This study invc!'tigates the causes behind recent changes 111 welfare caseloads, updating a 1997 CEA
report of caseload change,
.. The fall in welfare' c(Jseloads has been unprecedenJed, widcpsl'read, and cominuous. and
employment afwelfare recipients has increased. 14.1 mimoD people received welfare in
January! 993, a:1d this number had fallen to 7.3 millio:1 by Murch 1999, according to estimate!"
released ((Iday (Augus! 3. 1999), In 3 J states the caseload:s less than half of what it was when
President Clinton lOOK office, .lnd all states have experienced double-digit percentage declines.
For 22 stales, the pcrcem drop during 1998 was larger than during )997 (from January to
Dct.:emhcr), Previous analyses by the Department of Hcat~h and Human Se.rvices show that the
perccnwg(! of \vclfare recipients working tripled between 1992 and 1997, and an estimated 1"5
million adults who were on welfare in 1997 were "'lorking in 1998.
• The 19961egislarioll has been a key contributor to the recel1t declines. PRWORA produced a
dramatic Change in welfare policy: ~ork and self-sufficiency became a primary goal; state and local
government." were given much greater control of their programs; and stuteS experimented with a hma
of program designs. The evidence suggests that these Changes caused a large drop in welfare
participation, a drop that is independent of the effects of the strong labor market- The estimates
irnply that TANF hus accounted for roughly one-third of tne reduction from 199610 1998, the la.'it
year of datu analy'ZCd in this study. In the eurlier years, 1993-1996. most of the decline was due to
the strong labor market, while welfare waivers played a smaller yet important roie .
.. Tht: .1'11'0111.; lahor market has mode work opportunities n;lati;lely mare attractive, drowinX pe(jph~ off
welfare. and inJo jobs. The unemployment rate hus not declined a)' much i:1 the post~ TANF period as
it did ir. lhl;. [993-96 waiver period. As a result the share of the decline in the caseJoad that is
aHrihutitbJe 10 improvements in the Jabor market was much higher in the J993~96 period (roughly 26
10 36 pcrcG.nt) tbill~ in the "1996-98 period (8 to ! 0 percent).
• Pas! illcrease,\" ill flU! minimum wage-have matie work marc aUrae1iva and, as a result, (:mised
welfarc participation 10 decline. The estimates imply that about 10 percent of the caseload.decline
was due to increases in state and federal minimum wages.
• The specijic program design adopted by a stale call affecr its caseload declines. The study
cxamines the effects of a number of specific policies, including family caps, earnings disregards,
time limit:>, work exemptions, and work sanctions on the size of the c.a;;clooo,
The largo;: sustaincd declines in caselouds provide one piece of evidence about the efrectivcl1css of
wei fare reform efforts. However, there arc multiple indicators of the impact of welfare reform,
including challg(,!~ in work and carnings among welfare lcavcrs, in manlagc rates and oUI-of-wedlock
pregnancies, and in poveny rates, The C]ieton Administration is collecting and tracking information
on aJl of these mcusures in order lo fully assess the impact of welfare reform,
2
�THE EFFECTS OF \VELFARI~ POLICY AND THE
ECONOMIC EXPANSION ON WELFARE CASF.LOADS: AN UPDATE
INTRODUCTJON
The number of people receiving welfare has been declining at record rateS. After peaking in March
1994, welfare ca;.;eloads have dropped by 48 percent through March 1999; At that time, just 7.3
million people representing 2.7 percent of the population were receiving welfare, Not since J 967 has
such a smail share 0: the population relied on welfare,
Not only have the declines been large, they have been widespread and continuous (Table I),
Between J993 and 1998 {this report ex.amines ca,'>Clo~i.d changes through December (998). all 50
)l.lates and the District of Columbia experienced double digit percent reductions in welfare
participation. and in most slates the declines were unprecedented,
Thirty~seven
states have
..
experienced drops of at least one-third. and in 23 states the nllmber of participants is less than half of
what it was in 1993. A.nd although a substantial shure of the reduction occurred between 1994 nnd
1996, in many slates the largest declines have occurred more recently. In fact, in 22 s,tates the
percentage decline in 1998 was greater than it was in 1997 (rrom January to December). And in
almo:-:t all states (45) ca~eJoad" were still declining during the final months of J 998,
Two primary factors have beer.
n:.urkct,
llOd
po~ii:ed
to explain the recent caseload changes: the strong
l~lbQr
changes in welfare policy. The nation is in the midst of the longest peacetime expansion
in its history, with low unemployment and rising wages. Moreover, gains in employment and wages
have been experienced'by groups who have iypically had high rates of welfare use. Expanding Jabor
market opportunities hove made work more attractive to potential welfare participants, reducing their
need for public transfers.
Whilc the labor market has improved since 1992, there bave been substantial changes in weI fax
policies throughout thi.: past decade. In'the carly 19905 a growing number of stales requcsted waivers
from the trad:t!onal welfare pro£ram, Aid
to
families with Dependent Children (AFDe), allowing
:I:cm to experiment with alternative policies sl;ch as time limits: family caps, work requiremcllIs. and
3
�Table 1. Changes in the Number of Recipients in Em'h State
Number of recipients
Slale
1993
!lSA65
:\7,1}18
tW.IS)
A~OlllSitS
CaJilwnia
C.4maJ"
Cuun::':licut
Percentage Change From
93
1998
to
96
'96 \0 '98.
~3 to
98
;'I4,6l5
29582
102511
11.989
32.6~J
2,:'il1,29j
1,99!U.I&
122,890
t62,4l11
;'10,146
111,177
lkiawlUc
21,136
lK
69.549
1:'i.SUI
.'i4.l\.5\.
',,),,,i;1;\
6'J!,(}S:I
:1(,15)';;
Ch.".lfFiJ
:W):;p11
;&~,()'2
Hawa!;
5U)6
2!,lIii
4(,,12'(
i,l:illl'
!Hi",:j~
694,(''50
H6i
41".51('
!:hli~n~
!1$J61
1lJ,l7(1
IQ'Il.'U
102,43ii
65.655
88,36)
34.53&
K"""m;
Kcnludy
12(),1ri6
1!9,~
t.<l\li~i;lUa
259,762
-l4
-41
124,&0(1
Main~
66,914
Mary!.:mJ
39.413
2]9,998
116,45{,
Manactl\.l5I:m
32J.219
167,043
Miehi&aI!
6!s9,!39
Mirlf\~.~')/l
192,173
332.240
143,{,85
Missi~sippi
ltiS,li24
52,513
Mi,si)(lri
262,:'1H2
147,IUS
M""larm
:U,1I75
I'J,540
Nd'1l!SKa
47,11110
~("(,(S
Ncv:j,la
36.(l()~;
2.<;,472
N~w
19.797
:.~.409
~4SJ10
196.947
JI:uu;>.,hil\!
N~ ... J~I";Y
Nc...\1c~I<'"
I"!!'" Y\llk
N(l!\h
C:UI)!iIl~
Nonh j),,\;>lI:;o
97,::46
14,11:1
1.2!5526
~&6,7MI
)35.620
169,144
.&,215
&.541
340,179
(i!egllil
112,:m
Ill.162
m,8S2
I'<.:m\~yll'mtia
6lO.531
300,001)
RIIiXk b!.md
62.Jll"l
54,150
Ohio
Otbhm,J;:'
ikllJlt\
Carvlin~
14{,,2&(}
61,1\11
46,UU!
{,(l.!
III
!9.411
<),65:
T<.1l1!tIkMW
J 10.4\6
'fe""
71\4,81<>
m;,l!.'i]
U\;;I!
52,:44
2il,25"
-25
V"l1:1(m!
18.Jili
I'tJ;4~
.;1
V;!Gih~
194,76)
Wt,.hingHIl
2119.%5
W~.d Vkgi11l~
Ill!, II ~
3l!.6J~
Wi;:{',)!!s;"
21i.241
40,,(,1
Wyum,ng
17,859
.52
l4'JJAlY
2.411
Soulh I)akn!a
Towl
·21
·]6
.;21
2C2.51:
1-4.007,468
BJ99Nl!.
Dnla un: lhc average monthly caseloads !or tbe calendar ~al'.
-3:\
�a variety of other options, During the Clinton Administratioi) (from the beginning of 1993 to 1996),
43
stateS
received welfare waive.rs, more than any ptevious Adminis.tration. At the fcdemllevel.
welfare policy
wa~
changed dramatically by the Personal Responsibility and Work Opportunity
Reconciliation Act of 1996 (rRWORA). which rcplaced the AFDC program with the Temporary
A~sislance
for Needy Families (TANF) block grant Under PRWORA, we1fare became more work
focused and tlme·:imited: w1th few exceptions, fedetal ,welfare assistance is st:,oIigly linked to the
rc(;ipicn:'s cfior'.s to find a job. In most ~ases. adults cannot fC'ccivc federal aid for more than a lotal
or 5 YL)<lI'S dl!ring their lifetime, and some stales huvc chosen to set shorter time limits.
PRWORA
also shir:cd primary resp0:lsibility for welfare progmln design and management to States and
localitic.....
.
In J997, the Council of Economic Advisers issoed a report using 1976 to J996 data that examined
the reasons for the decline in caseloads between 1993 and 1996. That study found that roughly 45
percent of the.decline was accounted for by improved labor market conditions, about 30 percent was
due to welfare waivers, and the remaining 25 percent was explained by ot?er factors. Several
subsequent studies wen: conducted that examined changcs"in welfare caseJoads during this and
carlier periods (Bartik and Eberts, 1998; Blank, 19l)7; Figlio and Ziliak, 1998; Levine and Whitmore,
1998; Moffitt, 1999; Stapel tor., 1998; Wallace: and Blank, 1998; Ziliak, Figlio, Davi;.;, and Connolly,
1997).
Since 1996 c:'lseloads have continued 10 fall, the labor market has grown even stronger, and welfare
policy has been fumlamcnLally changed. making it important to update the earlier report. This study,
extends the earlier study on several dimensions. Most importantly, the effects of TANF are assessed
by analyzing data through 1998. In addition, the study provides more recent evidence of the effects
uf labor market conditions on changes in caseloads. and the study examines whether
increa~c:;
in the
l;liniOlum w:Jgc al... o played a role.
The large suslaincQ declmcs in c}l<.;cloads provide one piece of eVldcnce about the effectiveness of'
welfare reform dforts. However. there arc multiple HHIlcal0rs of the impact of welfare I'efonn,
including chungcs in work and eaming$ ,among wc:r.are lcavers, in murrillge rates and out-of·wedloci<
4
�pregnancies, and in poverty rates, The CHnton Adminislration is collecting and tracking information
0:1
all of tnc!'e measure." in order 10 fuHy assess tbe impact of welfare reform.
f ACTORS Al<'Ff~CTlNG CASELOAU TkENJJS
Economic Conditions
Caseloads normally fluctuate with the business cycle, rising in periods of high unemployment and
declining when unemployment falls, Chart I illustrates this relatiohship between labor market
opportunities and welfare participation (i.e., the numher of welfare recipients divided by.the total
populaticm) over the past three decades. When unemployment increased in the early 19705. so too
did welfare participation. The increase in welfare participation in the lale 19805 and early 19905, as
well at; the decline that began in 1994, ul;;.o correspond" with changes in employment opportunities
during these periods. However, the trend in welfare participation does not always match that in
unemployment. most notably when other important changes are laking place. including changes in
family structure and welfare policies. Indeed, increases in welfare participation during the recession
of the early 1980" were truncated by eligibility restrictions that were part of President Reagan's
welfare reform efforts in 1982. Over the entire 1980$ the simple correlation between unemployment
and welfare participatiun was much lower (0,23) than in the 1970s (0.41) Of the 1990s (O.78).
Chart 1, Welfare: Participation and Unemployment Rates
6
4
C(Jrrc{miwls;
Welfare
J970·98: O.U
parliclJXil101l r"Jtc
:
,
J97(}·79; OAI
2'
"
1!J!W.89: 0.23
199(H8: 0.78
o LU,:i,j:,"i,S,S::,I,J,I,i'-l'-,''-'-'-"-"--'..''c'-l'-1L.l.-1..',c,-,'~~'-"-"_'LL~:
I
1970
1974
1978
1982
5
1986
1990
1994
1998
�Chan 2. Welfare Participation Rate Versus
Unemployment Rate for Each Stale, 1994
:';J
16
Co!'relalhm: (}'65
CuHf,ia .' ,
,
New York
",, , "
.. __.. ,I.
. '.
,
,
.. 'I ,I
,
I
o'~~~
o
__
• •'
J-~
2
- I.
I
•
,
,'
I'
I.
__~~__L - - L_ _L-~
~
6
Unemployment rate
4
,.
10
Economic conditions vary across !\tates as wei! as over lime. Chait 2 displays a scatterplot of the
unemployment rate versus the welfare participation rate for each
s~~te
and the District of Columbia
in 1994. when participation wa.. near its peak. (California tmd New .York are highlighted because
they are home to roughly one·third of the nation '5 welrare recipients! and DC is highlighted because
it is
aTl
outlier on this CharL) This rela.tionsbip is quite strong, with a simple correlation of 0.65.
While this correlation suggests a strong role for economic ractors,il is likely to ovcr·state the troe
role of economic factors, Fixcd dmraclcristic's of stutes that cause them lO have high unemploymc:1t
rates may also lead tbem to.high welfare participation"
dlslribution,
cdu<..:aliO!~ullcvcl.
TIle~e
characferistics inciude the state's age
mctropo!ilanh-ural population shures, and racial and ethnic
composition .. While thest fm.:lors rnay
~hange
over time, such change occurs more siowly than
changes in policy or economic conditions. One way to absl:'lIct from these fnctors is to exa:nine
changes over time within !It'ltC:;, which is (he approach employed
!fi
the econometric models below"
Chart 3 displays the simple relationship between the change in the unemployment rate and the
dumg(! in the welfare participation rale in each state between 1994 and 1998 to jllustrate the
potemLal importance of these fixed characteristics The churl demonstrates that once state fixed
effects are removed hy exan)inlllg chungc:\ in the-lie variables, the relationship is not nearly as strong
as the simple cross·secliQnal one, with a correlation of 0, l7.
6
�Chart 3. Change in Welfare Participation Rate Versus
Cbange in Unemployment Rate for Each Statc, 1994-98
,
.
o
~
e
g
•
•
•• • • • • ••
•
••
•• •
• • •
'. .
• •
L'
•
,
" •
•
Ncw;York
Callfomia •
•
•
•• •
• •
•
•
-1
'[
·
u
~ ~2
~
U
.<
Condatiol!: 0.17
-3
~
-/-
.
•
·3
·4
·2
o
·1
1
Change in ..:nemployment rate
·Federal and State I-olides
Welfare Waivers, Since 1962, the Secretary of Health and Human Services has had the authority to
waive fedel'a! welfare requirements jf a state proposed experimental or pilot programs that furthered
the goah of AFDe
Al1ho~gh
there were a·few waivers granted in thc early 19805, it was not until
the carly to mid-1990s that major, state-wide waivers became widespread.
These waivers varied substantially across states, and in many cases they differed greatly from
the rules ullder AFDC. Some waivers increased the amount of earnings
recipient~
were allowed
10 keep 'lnd sti!] be eligible for welfare. Other wuiv'crs expanded work requirement~ to a larger
number of recipients. e;;iublj~hed limits on the length oftime recipiems could remain on aid,
permJUed stateS hi sanction participant" who failed to meet work requirements, or allowed states.
to eliminate benefit increases to families who conceived and gave birth to children while on
welfare {the so-cal:ed "family cap"), Given the
wide~pread
use of waivers and the degree
10
,which thcs(! policies .differed from traditional AFDC policy, there is substantial rcason to
believe thal waivers cor.lribuled to c:'anges in wcdare caseloads.
PJ?'l:fORA In August of 1996, Pre.,)ldent Clinton signed the Persona! Responsibility and Work .
0pp0rlnnHy ReconciIJalion Act
ir~to Ill'W,
drammicaJly changing fo!deral welfare policy. PRWORA
7
�was designed to emphaIJize,self-sufficiency and employment in, place of welfare dependencY"and it
.
,
gave slates greater flexibility to design and unplement programs to achieve these goals, Benefils are
time-limited: adults USlially can:1Ot rece: ve federal aid for more than 5 years during their lifetime, and
some sta:C5 h,we cho:;en to set sborter time limits, Most recipients must also
participa1(~
in a work
actlvny wlthin two years to continue receiving aid. '
Under tllc TANF block grant eslablis,hed by PRWORA, federal assistance consist:; of an annual fixed
transfer to each state eql::aJ to the amount of federallransfers the state received in fiscal year 1994,
',:
1995, 0r the average of 1992-4, whichever was higheL In <tddition, most of the authority to design
wdflln: programs W<tS passed along to the states" who are required to have haJf of all recipients
wOlkmg hy 2002 (40 percent by 20(0), As a result, there arc now substantial differences in how
welfare programs operale across the nation. Some states increase benefits to welfare families who
have additional children, while others do not. Some stales stop
pay~ent
of benefits to the entire
family at the first instance of their failure to meet w,ork activity requirements, while other states
never sanction more than the adult. And some states allow welfare recipients 10 keep a substantial
portion of their labor market earnings without reducing their welfare payments, while others do not.
AFDCllj.1NF l1cnejit Levels. States have long set their own level of maximum mOllth;) benefit
p:lymcnl'i, with variation by family size and composition. All else,equal, higher benefit levels are
expected to increase the number of pllrtic,ipants, Over the period of this study, the inflation-adjusted
level of welfa:e benefi~s fell in aimost all states, In"some cases the state explicitly changed benefits,
but in most states benefit levels were fixed and eroded over time ·with.inflatioll.
AtiTll'mum Wag(;\ The rcal value of the federal minimum wage decreased substanti,ally between 1976
and: 92;9. A $0,45 legisla:ed mcrease in 1990, followed by a $0.45 increase in 199 J, offset some of
this long-run declme, but by 1995 the real minimum wage ($4.55) was
nf~ar1)
as low as il was in
!989. The minimum was then legislatively rai,'jed by $050 in 1996 and an additional $OAO in 1997.
During the period analyzed in Ihis "lady, 1976-1998, several ,';;!ates established minimum wage levels
8
'".'
�that were J;bovc the fede:-al minimum that prevaiied at that time.!
A higher minimum wage can make work more attract;vc, givi:lg wclfa--e participants a greater
incentive to emer the workforce and leave public
assistanc~,
On the negative side, if a higher
minimum wage reOlJCeS employment of to\.v~.i,;kilied wo:-kers, some people may
lo~e
their jobs and
CIHe!' welfare: At the salYle time, an increase in the minimum wage may lead employers to substitute
away from
teenagcr~
(a relatively large share of whom work for the minimum wage) and towards
older wclf<t!'e workers (who are perhap<; not as likely to work at the minimurn wage, but more likely
to be working just above the minimum than teenagers). The evidence on the disemployment effects
of the minimum wage is mixed. Some studic<; have found that a 10 percent increase in the minimum
wage cau;>e~ a 1 to 2 percent decline in employment (e g" Neumafk and Wa~cher, .1992; Neu!mtrk
and Was::.:her. J 994; or the estimates surveyed by Brown et al., 1982), while other studies haye found
no disempJoyment effects (e.g .. Katz and Krueger, 1992; Card, 1992a; Card. 1992b; Card, Katz, and
Krueger, ;994; Bernstein and Schmitt, 1998; Card and Krueger, 1998). Two recent studies have
examined the effects of minimum wages
On
welfare caseloads, with onc finding a negative effect
over the 1990 9! period (Turner, 1999) and the other finding a positive effect over the
w
19&3~96
period (Page. Spetz, Millar, J 999).
There are a variety of other factors that may affe-ct caseloads, induding the Earned Income Tax
Credit, the availability of child care, transportation, and Medicaid coverage, family structure. and
out-aC-wedlock births. Although
controls
:Of them
O'Jf
models. do not directly examine these factors, our approach
indirectly. a.) described in the next section.~
ECU~O:rvrE1'RJC SPECll'1CATlON
Two approaches are implemented to estimate the effects of policy and economic conditions over the
'The ~t;\Ie., Ihttl had lIuf'li:l\u:n wages above the fcdcra: level ullring 1976·915, (\nd the ycrrfS in which they had such
p(]hcy, arc: Ab:.kll i~om !'976-98, Cllh:-omiu fr(Dll ]%9-90. Connecticlli from J 976-90 '!nO 1992·9};, DC fmm
;':.175-98, Havuii [tOrn 1976-77. 1999-~m, and 1993-98, Iewa rrom 1990 and; 992·95, Maine fmm j 985-1990,.
M;.,;;!wr.:h\l~c!t; ffom 1987·89 a1\d 1995, Minnesota fmm 19B~"9(). New Hampsnirc from 1987-lS9, New Jersey fwm
1993-1)6, Oregon from :990·98, Rhode island fro~n J987"90 and 1992·96, VCn;t!lill from :987·1\9 and lY95·9H,
Wasningl.)1) from 19S9·90 and 1995-:,i6,
lor pani:.:"J!ar inlcrcl;t it, the EITe, but !;.,;CllUSC the moc;: significant EITe changes arc enacted ni1!ionally IltlU cffec:
9
�period 1976w i 998, Bo(h approaches utilize the same dependent variable, use the unemployment rate
to capture the effects of labor market conditions, and spcclfy the mi:1imum wage and \veifare benefit
levels in idcilticat ways. The difference between the two models is the specificalion of the remaining
welfare policy variables, The first model uses two simple 011 indicator vafiables: one to capture the
period during which a major waiver was in effect in each state, and one to capture the period during
wh!ch TANF
WaS
in effect in each ;:tate, Spedftcally, Modei 0) is:
,"
(J)
lnR;: """ Waiver"1 Pw +TANF A P;n,.; + lnBmcfits"I!3h + fnMinlVage,., f3 ffI'" + Unemployment" Pit
+ y, + II + trend */, + e,\/
,The variable:.; are define-d for st'atc s in calendar year t as follows:
R:
the ratio of the number of recipients to the population under 65 years
of age (the number of recipiems is obtained from administrative reportS on
AFDCrr ANF); the model estimates the natural log of this ratio.
Waiva:
an indicator variable that takes the
va~ue
of one if the stale had a major
waiver in effect; the indicator is turned off when TANF i~ implemented in
the state"3
1:4lI/F:
a:l indicator variable that takes the value of one if T ANF was in effect
in the glVen stute (the TANf implementation date varied across states,
as discussed below).
Benefil.r:
t:1C lT~aXimLlm montbly benefit for a family of three on AFDCffANF.
the vulu:: of the state-specific minimum .wage expressed as a monthly.··
;~mollnt
(to make comparable wilh the benefits variable) assuming
employment for 30 hours per week
fOf
4.33 weeks. (In mos.t case;;,
this. is' the'federal minim'Jm wage.)4
all pCri<,n!l at the. Kame tim::, th:::,c effcc\s are "ub$mned by the mooel'" lime fixed effects.
'In most L:I:>Co., the waiver concept hCCOnlLti mcmwJglcss o:"!cc TANF was implcDcntcc bocausc s:ute$ were glven
hnmJ umtroJ '(lVer thelf welfare polides. in rJrlicwlu~, $:;;[C$ could opc:alc the broad calc'gones or puhcie~ under
TANi<, wl:':thCf or n(!'. they werc cOJ;tinl.lir.g a WaiV(;r. However, if it str1te continued a lime limit wnivcr, then
pilrt;Cipllflt,' lir:1C ckx;ks ir, Ihat ~late w{luld hUH: bcen running prior til TANF implementation. As n result. thc....-:c
pD.rtkipaJ1L~ would reach Iheir lime li11111$ more quickly than If (bei:· clock wpu:d have· been resc: on thc dare of
TANF impJ.cmentation ..
10
�Unemployment: the unemployment ratc (current, lugged one year, lagged lwo years)
stale fixed effects
yeur fixed effects
lrelld*r~:
All dollar
vulu~
linear state-specific time trends
are expressed in 1998 dollars using the CPT-U-X L
The second approach examines the effects of specific ~e1fare policies, regardless of whether the
policy was implemented under waivers or TANF. That is:
(2)
ln1\.lI;;: X .11 f3 .x + lnBcnefi!!,'u fJ b + lnMinWage Sl fJ mw +'Unemp/o),mcnl Sf Pu
r
+ 1., + l + Irena '* 'Ys + Cst
In M,Klcl (2), X..: reprc.-:cnl:-; a vector of Itnriables that describe specific pulicies that arc in effect in
slate S 111 y{!ar I. There are a variety of policies that could be analyzed. The five policies that were
examined were chosen because,:1 priori, they were expected to significantly influence parlicipation
and they cc.uld be quantified based on available sources, The five policies are:
1. Termination or work requirement time limits are represented by an indicator vurinb!e for
whether the state either terminale;;; eligibility, reduces benefits, or requil'e;S participants to
work
(notju~t p~lrtlcipme
in a "work activity") after a given dUration on aid. The date that
participants first began to reach the time limit was used as the dale that this policy carne
into effect. (These time limits had become binding in too few slates for us to examine the
distinct crree1s of each of these three policies.)
2. A second indicator variable takes the value of I (0 otherwise) if the state has u familv cap,
that is. the silite does not increase benefits fo:- participants who give birth to or conceive a
Cblld while on aid,
3. Work exemptions arc represented by three indicator variables based on the
~tate's
po:icy
toward rulllilies \vilh young children: tbe first take, the vHlue of- J if the stale exempts
moll:crs \\'ith a cl:ild as old as 6 Hlonths to 3 years, 0 otherwise; a second indicHtor takes ..
411 the $\;";') had 1\ range of minimow wagt<s: the i:ighcs: minim"Jnl w<lge 'Was lvcd 10 t'.:)!l~tmcl ll:is varin!!lc, In Ihe
year Ill"! Ihe minimum wage dmllgcd, tin,; wclgln~c ~IYCrage. cf:hc Clinimums in cfll:ct during that yeur were usud in
Ihe ana:ys16, "\ohare the :veights ure eqLal !O thc ~hafe (Jf thc year in which each minimum wage WitS in cffect.
II
�the value of 1 if the exemption applies to mothers with u child newly born to 6 months old
(and not older), 0 otherwise; and a third takes. the value on If the state allows no
exemptions based on the age of the mother's children, 0 olherwisc" Years in which a state
h:'IS a traditional AFOCJJOBS exemption policy serves as the reference group. These four
groups arc mutually exclusive.
4. A set of three indicator variubles capture the aggressiveness of work sanction policies, ·One
indicatOr rcplcsents states that impose full family sanctions with the first offense
.' ...,
("fuillfull"), a second indicator represents states thot impose full fmnily sanctions only
after repeated Qffenses ("partial/full"), and a third indicatOr represents states
who~e
maximum sanctlon is a panial family sanction ("partial/partial"). States that impose no
sanction or some lesser
~anctiOI1,
which was the case under traditional AFDC, serve
,L'i
tbe
reference grOl.lp,
,
5. The Hggrc~~ivencss of disregarding earned income is represented by the amount of car!1in~
disregard if a welfare recipient earns $750 per month (in J 998 dolh:lfs). When the disregard
formula vade;;; with duration on welfare, the disregard applicable for the longest dur.llion
(Iypically morc lhan 3 months) is assumed.
The "policy oriented" approach used in Model (2) has the advantage of being able to identify the
specific policies that inl1ucnce ca!;;clQads~ However, there a number of TANF policies and practices
that may affect participation that could not
<1:'
~
captured in Model 2 because of data limitations. such
diversion policies, work reqUirements and targets, and welfare office culture. The :.imple
indicator-variable approach used In
~1odel.l
is more effective in capturing the tolal effect of waiver
and TANF policies,
Sta..e, year, and
s\ate~specitic
time trends are included to capture u[iobserved factors, such as family
s..ruCi\lrc .tnd other pOlicies, lhat may be correlated with the ob~ervcd variables. Most policies were
riO!
in crfect the entire calcndur year that they were implemented. In lhcse cases, fwctional values are
u~cd
corresponding 10 the share: of the
cakt~dar
year that the policy was in effect. The model i:r
estimated with weighted least squures, where the weight is lhc population und::r 65 in sH\!c sin y:;ar
I.
The standard error:.: of the coefficienl estimate:.: arc corrected for general forms of
12
:.-",
�hmcros.cedasticity, ~
Before discussing the results, it should be acknowledged that a maintained assumption in this study
is 10'1! Wclf:lfC policies arc exogenous to welfare participation (after controlling forthc factors in the
model,s dClicribcd above). All previous studies have also made this assumption. Endogenous policy is
probably ly<ore likely to affect the estimates of Model 2. While most SImes received waivers, and
CVI.!l'Y slale has irnplemcnted TANF, the spccific lypes of poljcj~$ vary considcnlbl),. For example.
Slales who,;e caseloads were increasing (or not decreasing as much as desired), may have adopted
relatively hal"$;l pOlicies. 6
DATA.
,
Using annual calendar year data from 1976 to 1998 on all states and the District of Columbia. !he
analysis is based on 1.173 observations, Most of the data used in the analysis come from well-known
SOUl'ee::;, with a few exceptions {described below}, The federal and state miOlmum wage data were
obtuined from the Wage and Hours Division of the Bureau of Labor Statistic:;.
\V eU'are Waivers
11)e dut;;, that arc unique !O ihis study arc the waiver implementation dates and TANF policies. These
policies am difficult to categorize and measure, and the pace and intensity of their implemen1atlon
typically vary acrosS and within states. Experts from the Department of Health and Human Services
as well as- non-government research institutions were consulted to characlcrize these policies as fully
as possihle. Specifically, information on waivers was obtained from the Depa.rtment of Health and
Human Services. Mos,t waivers permitted simultaneous implementation of variou;; provisions. For
cxumph:, the Caiifornia Work Pays Demonstration increased the AFDe resource limit for recipients
to $2,000, incre;tsed the excludable equity value for a vehicle to $4,500, allowed recipients to plate
~A':;;j cheek of the mouSlness of the elllimlllc;;, model I in 'ruble 2 was rc-eslimated wilholll currecling :hc sta:;dl1nJ
crWI1I, ami all slutis.litally sigllific:mi coc!liciems remainctl1.o at thc 0.01 level. Es.timalc;;·when Ine weights nre !lDI
used are reponed in Tllhlc: 4.
j'Onc set Df s!udies bls modeled welfare cl1sclouds by including Ihc lagged value of tile dependent variable ns an
eXlllllnulory 'tllrillble (ZiJalk ct.a1. 1991; Figlio and Ziliuk, (998). 11tis approach is art alternatlvc way 10 control ror
pasi history. We h:we nOt chosen tbis specification, however, and we instead incluce YC:lf effects, ,qatc effects, and
Sltllc-Speci fic lilllC trends in models of the level ()f welfare parlicip<:1ilOn.
13
�up to $5,000 in restricted accounts whicb did not count against the resource limit and which may
only be withdrawn for certain uses, and (among other things) required pregnant or parenting teens
(under 19) who did not possess a high school diploma or equivalent to participate in CalLEARN.
Like the 1997 CEA study. this report focuses on six "major" types of waivers that received approvaJ
to be implemented state-wide7: termination time limits, work requirement time limiis, famity caps,
JOBS exemptions. JOBS sanctions, and the earnings disregard. Each of these policies wus discussed
in dctuil in the appendix to the 1997 CEA Technical Report. 1i
Some of the waivers that were approved for state-wide implementation were initially implemenled
state~widc.
some were jmplemented in selected areas of the stale, while stlll others began in small
regions of the state but were eventually phascd~in state-wide. Information on the pace of
implementation is not available for all states. Therefore, the date that is used 10 signal
implementation is the date that lhe waiver began to be implemented. The earliest dales that these
waivers were approved and implemented in each state arc listed in Table A1.Q
I'RWORA & TANF
PI( WORA was signed into law in August of 1996, but a given state could oot begin its TANF
funded program until that state submitted its TANF phm and it was certified as complete by the
federal government. Beginning on the date the state formally implemented its T ANF plan. the slate
couid begin to draw down federal funds and was subject t,: all of the requirements and restrictions in
T ANF. The earliest official implementation date was September 1996 and the latest wns July 1997,·,
'lr. ~ few itL~L;.mces waiver;; were examined which 'Were out appmved
\0
be implemented ;;ti\!~widc bu\urre<:too a
large .;;hare of the .~!J.te" s caseloud,
~ It was determined that the waiver tn Wc,'1! Vlrginiu. whkh WU;i c~msiderod u "major" waiver in the 1997 CEA
study, did 00\ in fae! meet this requirement (Martlm und WiM':man, 1997), which is reflected in Tublc AL
~ Snmewhllt smullcr effects are estimated, when the dale <;Jf implementation is used instead of the dule (If npPr()vul,
which was utilized in the 1997 CEA study, liS described in llppendix A.
14
L!:
�when all stales were required to begin operatmg under TANF. The date that the state formally
implemented its TANF plan is the date that is used to construct the TANF indicator variable in
Model (I). However, in some states the initial plan was simply
<I
placeholder. designed to allow the
state to begin to draw down its Ti\NF block grant, and some,state policies were not changed until a
later date. Therefore. the aewu! implementation date tmlY diffcr from the official date. In particular,
in five
Sl4Itcs
(California. Mississippi, New Jersey, New York, and Wisconsin) specific information
was available indicaling that the policies most associated with TANF - time limits. work
requirement.s, sanction:;., etc, - were no: implemented until a later date: in these cases, the later date
Wol!, used
\(1
consUuCi the TANF indicator. W T'lble A 1 reports tbe official and actual T A~P
impiemcnlniion
d~ttes
for each state.
To specify Model (2) the policies tbat were in effect in each state in each year were determined. To
construct Indicator variables for the existence of a termination or work requirement time limit and a
family cap, we u1>cd the date that the relevant waiver was implemenlcd (for time limits, the date that
participant~
began to hit the limit) and ass.umed that the waiver cominued to be in effect until (tit
least) TANF was implemented in that state (i.e., the dale listed in Table A 1).11
For the l'ANF period, we llse information on state TANF plans as of October 1997 (Gallagher et al.,
1998) along with the date the current poliCy (as of OClObcr 1997) was implemented to determine
whit:h policies
WCie
in effect b each state in each year. It is assumed that the policies in place in
October ]997 were not ehttnged by December 1998,
wh~ch
is {he cnd of our sample period. If a
policy was implemented and rescinded between the dale !hat TANF was implemented and October
1997, we would not capture this po hey change. However. Ihe earliest TANF imp;ementation, was
October 1996, j1.ls1 one year prior to our TANF information, and many stales implemented TANF in
the flrsl 6 months of 1997, Therefore, it is unlikely that a policy wa<.; both implemented and
rescinded within such a shan period.
12
IO M{ldd j in Tank 2 WtiS rc~:;til11ated without using this lIJdiliuO(l1 informtllJOIl for Ihese five stales. TIle
t:m:Jficicn( estimates chnnged \-ery liule: the largest change was for the TANF indicator, which increased 10 ·23J~
\'I1\h a 1·"lalislic of2.7Q,
II Again, the dnle that was used was the date that Ihe policy initiully began to he phllSCd in within tbc sltUC.
'2 Nuw McxiGO implcrncnled ils TANF program in July 1997. bul il was found unconstitutional in September of
II)a( year. A revised TANF program was implemented in April 199'8.
15
�RESULTS
Table 2 contai~s the estimates of Models J and 2, The table als,?
models that excludes state-specific time trends, The ratlonale
r~ports
a version of each of these
for,!,~.chl~ing
these trends is to control
for unobserved changes over time tnat are speciflc to each state, Fo'r example, if there is a long-run
.
' '
increase in female-hetlded households, and the rate Oflhis increase varies between states, other
variubles in the models may be biased if this factor is not controlled. On the other hand,.some
of the
jnteresting and important variation for identifying effects'of some of the variables of intcrest may be
reduced substantially by the inclusion of these trends, making it difficult to identify their'cffects_ For
cX<lmplc, cash benefit levels follow a long-run trend in some stales, und including the state-specific
trends lenves much less variation in benefits to identify its effects. there~ore. estimates with (Models
1 and 2) and without (Models lA and 2A) the
statc~specific
trends are reported"
Estimates from Modell
Waivers had a large and precisely estimated effect 011 welfare participation (fable 2), The estimates
in Models I and lA impiy that states that implemented a major waiver expe.rienced a decline in
participation that was g to 9 percent greater than other states. The lmpiemenwxion of TANF is
associated with a decline in participation of 18 percent, roughly double the size of the effect of
WaiVers.
All other statistically significant estimates in Models I and 1A alter panicipJ.lion in the expected
direction. Higher cash welfare benefits raise participation. The estimates in Modell imply that a $50
increase in tbe monthly benefit above its 1998 average monthly v<llue would increase participation by
La percent.
For the reasons described above. the estimates from Model lA, which ex-elude the state
specific linear trends, are much larger and imply thal the S<lmc $50 increase would lead to a 6.2
percent increase in participation.
16
�Tabl;.: :1.
Ba.~eJinc Specifications
'::
(Coefficient estimates are multiplied by 100)
AllY wai\cr
TANf'
Log nmximum n:;>nlhly hene!!:
Lng :llOll1itl) minimum wage
Unc:nployttlcl1t nue;
Cmre1\l
Modell
Bela
Hlat
·9.40 VI()
·1&,84 4,)7
14.9. 1.93
·39.59 4,{J2
j·YCllf lag
.0.36
1.50
2-y<.:ur 1..\&
4.27
Mode! IA
I-slat
2.90
·1.99
·18, 12
1.75
51.74 6.20
·63,91
HiJ
Bela
0,74
n.2f}
2.40
K92
5.13
1.70
0.30
UIS
7.4(}
:' Model 2 "
Beta
I-stat
15.01
·25,59
2.31
2.21
-0.30
0.6\
L29 ' 2.06
lUt.
3.94
Modcl2A '
Hllat
Bcta
53.84
7.63
-51,95
2,74
-0.1:1
4,71
0,20
1.92
7 ..39
1.65
Mea;'!
0,08
0.09
1.55
1.91
6,63
6.79
6.8;
Specific WdfiJFt' pulicy variaMes {Xl
-3-.75
6.71
0.76
-4.30
0.73
0.03
2.19
8.21
2.35
0.05
t2.37
11.56
2A6
1.53
-2.79
4.86
Tcrmination/wurk req. li.me limit
Family cup
Work c_\emption based on age of y()llf1gC$:\ child:
Traditional AFDC &: JOBS
exemption (reference group)
Child as old as 6 months to:3 yean;.
Child newly born to 6 months old
Nu. exemptions based on age of youngCSl child
077
(1$7
0040
(t 12
0.05
0.03
0,01
-9.71
-18.14
-39.36
5.38
Yes
2.52
3.16
3.05
0.8)
Work sanctiuns.:
Traditi,ma: AFDC or JOBS (reference gmup)
l';ntial/P,mini
l'artialfFu11
l~ullfl'ull
Leg <::>1 :lh!l;l/> disH:,:;[ud
Sla!c·;';'icci!1,; trends'?
yc~
No
5:57
2.40
·1.36
-22.76
-33.53
5.&6
N"
AI! nlOdcls include state ~lOd year effects: Estimates UH: tIle population under 65 as weights
hJ)d robust calculation of standard errors. N= 1173. Weighted mean of the dependent varillblc; 1.589
o.n
4.20
4.51
2,Oil
0.05
(UM
(I,Oj
OJv1
�Increases in the minimum wage are found to decrc3.$C welfare participation. In particular, consider
an incrca;.;e in the minimum wage by $0.50. If this increase were on lOp of the avcrdge minimum that
exi;.;ted in 1998, monthly earnings at the minimum wage (evaluated at 30 hours per week. full month)
would increase by $65. This rise
woul~
translate into a decline in welfare participation of roughly 3.7
to 5.9 percent. 13
Tight labor markets, as
meas~!red
by the unemployment rate, reduce welfare participation. The
models demonstrate the lagged nature of the unemployment effects', 1n fact, the largest effects are for
unemployment lagged two years. Model I implies that a one percentage point de.crcill:ie in the
unemployment rate that persists for three years is associaled with a 5.41 percent (4.27+ 1.50-0.36)
decline in welfare participation. The estimates are substantially higher if state-specific time trends
arc not included in the model.
E..'itimates rrom Model 2
The effects of ca"b benefits, minimum wages, and the unemployment rate estimated for Models 2
and 2A are similar
lO
those estimated in Models I and lA, respectively. The welfare reform policy
v;lriablcs included in Models 2 :lI1d 2A show mixed rcsuit.'i. The coefficient on the time-limit
indicator variable is ncga!ive, as expected, but it is not precisely estimated. it is important to noh!
that all p;.1I1icipants who have hit time limits by the end of 1998 were doing so under a waiver policy..
And because only a small Dumber of states had time limit waivers, a reJatively small number of
participants had hit a time limit. Therefore, it is Dot surprising that, through 1998, lime limits had
not significantly altered naiional caseloads. t4
n Sume studies Df the disempLoyml:JJ.1 effects oflhe :ninimum wage have includcd a measure of average stalc WJ.gCli
in their specificatiol1s. Although Ihem nrc problems that arise from inclmling this varinhle {$(Ie Card, Katz, Krueger,
1994 for a di!'Cussion), Modd J in Table 2 wus rc-estimated including ,he llverage wages of proouction workers
ho.:ctlu:>c !lti~ variable i~ Incorporated in a brgt numhcl of studh:~. (This vlIriahle is not available for DC or for
lndi:lnil in somc yeurs.) Including thi:> variable CfiUM.:S the eff-cct of the minimum wage: 10 bll somewhat, but it is
sli II larij\! {-;'0,45; and pr,,\'::~ely C$Hmillcd (H;tmijl!ti; of ~.J9).
'4 TUlle hmits Illay i1;\cr p.\rl.ici?ant,;' hcblvior bef(.I'\! they actually bilihe lim!:. Por example. H(Jmc recipient,,; may
leave :11c rolL, sonner or no! corne ,m 111(; mlls (i1 (i[ iI: orcie-f to save up lime J:Jat cuulci Dc used at a laler date-. Whcn
the date d 1I11plcmellt;;ticn was lls~d 1.0 ccn.~!'llctlhi~ ·..ariuhlc iJ\~lclid of {hI! dale thaI peo?ie first he-gan to hit IIlI!
limit, the cSliJll<lte.J eliecls we~e ac~ually pmi:: VC. Thi,~ ClJuntc: inwilivc fe-SUl! is iikcly due to the cndogcndly l);~tl!,jS
17
�A~
expected, u higher earnings disregard mi~es panidpation (at !ea:H in the ShOrl-nln), but this effect
is relatively srnall. The estimate') suggest that an increase in the disreg<lrd equivalent to $50 on a
monthly basi;; :s associated with less than a 1 percent increase i::l padcipation, Family caps do not
have tne expected negative effect; in fact, they are positive and precisely estimated. Similarly,
looking ucross Model 2 and 2A, It appear::. that work exemptiOn policies based or. the age of the'
youngest chid do r.ot pl;!.y a substantial role in deterf!1ining casdoad". In
cffec~ L...
:~act,
the one significant
of U;)(~xpcctcd sign.
Not surprisingly, policies ,hat sanction recipients who do not go to work are associated with large
declines !n welfare panicip<ulon. The effects of the work ;;.anction policies may be due to the faci thal
impending 6anctions cause welfare recipients (or potential recipient,,) to accelerate their job search
and find employment, or the effect may be due to the fact that recipients did not find a job and were
sanctioned, States with full family sanctions on the first violation of work requirement.s have much
lower caseloads than other states. Staups whose most severe work sanction policy is a partial
reductIO!: in benefits also have lower participation. but not nearly as low as the rates for states wHit
full family :;anctions. As with all policies cxammcd in rhe m.odel. the effects of [hese sanctioning
poU{;icS on the case10ad mLlY be distlnct from their effects on other lmportam factors. such us child
~lealth
;!nd develo;Hnent,
iHegilim~tcy,
education,
?ove~.y,
and work participation.
Relative Contrihution of Each Fador
I9Y3·96 Wdj'arc Waiver Period_ Table 3 provides
e~timate!'
of the relati vc contribution of e<lch
factor 10 :he change in welfare partIcipation during two periods: 1993-1996 (the wLliver period under
the ClinllJll Adm:nislr.ttion) and 1996-98 (the TANF period). Specifically, the change 10 the nutionul
aveage of eaeh vilriable (obtained by weighting by the state pOpUla!10n under 65) 1S multiplied by its
respective coefficient estimate to determine the change induced by that factor. The ratio of the share
r.esed e;u:icr in the I'epvr: In pOrlietlID~, the smtes tLu: cLose ll1 un?lcmenl time lil!\.i:s: under waivers may 1::1\.C
flee» the :.DlC" whose "m;doads were. increasing, Or perl:mps no! dcdHllng lL~ much ns ueslru.L
18
�Table 3.
Percentage of Change iI:
Particip<ltion AuribetabJe to Each Factor.
(Based on Estimates of Models 1 and I A iJ1"Table 2)
Factor
Welfare waivers
Ba..ed on Mode! 1
1993-96
1996-98
14.6%'
TANF
Decline in unemployment .
Incrc.:scd l-:linimum wage
Lower cash benefits
Other
~6,2%
26.4%
-9.7%
6.3%
62.4%
7.8%
9.6%
1.4%
45.0%
Based on Model 1A
1993-96
1996·98
12.4%
34.8%
35.6%
10.4%
-!5.6%
15.5%
21.7%
4.7%
45.9%
34.5%
~;:
,~.'
-
,
of this change to the lOtal change in participation during
thi~
period is reponed in Table 3. For
example, 22 percent of the population under 65 lIved in states with major waivers in place in 1993.
By 1996. thi.o.: ...hardncreased to 53 percent. MUltiplying the change in the share living under waivers
(0.53-0.22=0.3\) by the respective coefficient estimate in Modell (-9.40), it is found that the
expansion of waivers led to 11 2.9 J percent decline in participation durin-g this period. Participation
ir. total dtopped 9Y aboul20 percent between 1993 and 1996, which implies that roughly 14 percent
of the decline can be attributed to tbe increase in waivers.
While waivers accounted (or about 14 percent of the decline from 1993-96 according to Model 1, the
lower unemployment rate was responsible for 26 to 36 percent of the decline (depending on the
model). Cash benefits declined hy ajout 8 percent from
participation. The actual amount of the decline {hat can
~ubst<iitiially
~993
b~
to
~996,
which led to a decline In
nttributed to thc benefit reduction differs
between the two models; 6 percent for Modell and 22 percent for Model I A The reul
value of the minimum wage fell between 1993 and 1996 (rhe increase in 1996 was in Oc1Ooo:. so it
was not effective most of the yearf', which is wby tbe minimum wage explains a negative share of
I~ RG..cIlI! that the minimum waglO l!)eaSU('; uscd in the analysis is IhlO wciglltl.;-O average of the rmnimtlm wagc~ in
19
t
�the case/cad decline; the caseload would have incre;L<;ed between t 993 and 1996 if the only change
that had occurred were the decline in the real minimum wage.
TANF Per/Of1: 1996·98. Welfare participation declined by roughly 33 percent between 1996 und
1998, und TANF was a major contributing factor. Roughly onc~thjrd of the decline is du!! to TANF.
Eco:lOmic factors are still imponanl in drnwing people off welfare, bUl since the unemployment' rate
has dccl;ned reiatively little since 1996, it accounts for just 8 to 10 percent of the decline in
parlidpati(,n over this period" Higher minimum wages accounted for about j 0 percenl or the drop in
participation, and reduclions ill cash benefits accounted for an additional 1 to 5 percent decline. The
remaining share is unexplained and m,!y be due to other changes in policy, practice, or behavior.
ALTERNATIVE SP£CJF'ICATIO~S
Several <tltcITll.uive specitications' were estimntcd to examlne the robustness of the findings. and some
of these results are reported in Table 4., All of the models in Table 4 include $tatc~.spccjfic time
trends, and the estimates from Model I of Table 2 (,'Baseline") are listed for comparison.
II has been
arg~ed
that analyses of waiver policies should not utilize population weighL'i (Martini and
Wiseman, 1997). Comparison I demonstrates that the effects of wai,:,crs, T ANF, cash benefits. and
the unernployrncnt rate are not very scnsiti ve to whether weighting is used. However, the effects of
the minimum wage arc substantially lal'ger when the weights axe not used.
Quite often it is said tbat welfare reform would not have been as effective in reducing caseloads if it
had not been for the strength of the labor market. This hy?otnesis is tested in Comparison 2 by
df(x;l it: 11\:: siale in the given ycur, ",here the weighls att: c(jcld to the share of the yenr thaI the res;x:clive minimum
w:t~ in cffl'C;.
20
�Table 4.
Alternative Specifications of Model I
(Coefficient estimates arc multiplie~ by 100)
Co~p~ris~r:~!~~~
Baseline
Modell
Beta
Any waiver
-9.40
I-stat
2.90
Comparison 2
Without
Policy & Economy
Populatloll Weights
Interactions
Beta
·7.34
Beta
Ha~u
t~~>lat
0.21
-1.90
2.95
Comparison 3
Changing Economic Effects
Model A
aetn
-S.R6
t-stal
2.42
t-,'lodel B
Beta
-9.34
t-stat
-18.84
4.37
-18.04
With Leads of
TANF and Waivers
Beta
-5.5:'1
1,82
4.14
-6.84
·15.19
-46.23
2.77
·21.28
4.23
3,34
20.92
-67,)1
CUrrenl
One lag
·0.36
1.50
0.74
0.63
l.EO
4.27
3.66
-6.10
.47.44
3.01
-15.94'
3.94
29.06
4.27
lAS
14.91
3.44
-40.28
4.26
-1 S, 14
0.54
2.44
0.74
1.25
2,68
8.12
0.78
3.73
·6.99
0.87
4.01
·5.44
-53.00
~51.59
3.81
1.36
3.2i
8.51
3.17
8.80
I-s!al
-8.29
0.75
3.23
Two lags
Beta
-0.26
-22.07
...U4
1.93
4.02
Explanatory
Variable
1.51
4.17
2.38
14.9&
-39.59
Comparison 5
Population as an
2.39
3.20
1.19
1.95
TANF, lead
Log max, monthly benefit
Log monthly min. WR,gC
t·stat
2.54
Any waiver, lead
TANF
Comparison 4
Unemployment rale
2.40
8.92
Currcnl'"1976-80
1.48
Curreot"'1981-86
Current"1987·92
1.20
3.87
6.03
4,37
6.04
1.93
'/,97
Current'" 1993·98
8.78
1.70
2.31
3.54
-1.01
\Vaiver"'Currcnl
T ANP·Current
5.32
0.63
157
f:?~S~~I)\jlation und;~r 65)
All models include slate effec($, year efft'c~, and ~t.al<>specific lime Ilends.
except in Comparison 1 where the \veights are nOI U5f"(}.
.
".,
:\
.
E~tima:te."
-136.77 4.62
usc the population under 65 as: weights and robust calculation of standard errors.
"I
�interacting the unemployment rate with the waIver indicator and with the TANF indicator. 16
Although lhe precision of the estimate of the
i1lter~ction
between TANF and the unemployment rate
is slightly below standard lcvc:s for detelTI'.ining stmistic;}l significancc (with a p-v<llue of 0, 12), the
coefficient estimate impjic.s thal TANF policy is more effective when unemployment is low, For
ex~mple,
after adjusting for other factors, TANF is estimated to reduce participation by 14.8 percent
if the unernpioymentrate were 5.9 (as it was in California when it implemented TANF in 1998) and
by 20.2 percent if the unemployment rate were 4.9 (as it was in !V1ichlgan when it implemented
TANFin 1996).
II has been argued that the dfects of waivers may be accounted for by an increase in the sensitivity of
the caseload to labor market conditions ip the 1990" (Moffitt, 1999), For this argument to hold,
economic conditions mUSl be correlated with waivers, the caseload must have become more sensitive
to the unemployment fate over time, and the model must not have allowed the effects of the
economic factors to change over time. Comparison 3 (Model B) tests this hypothesls'by allowing the
effects of the unemployment rate to differ between four periods: 1976-80, 1981 ~g6, 1987-92, and
1993-98, (While Model 13 allows the eHects of unemployment to vary ticnJSs lime, it does not
include lagged unemployment effects. Therefore, the baseline model, which does not incorporate
lime-varying unemployment effects, is
re~estimated
with no lags in unemployment so that proper
comparisons can be made. This specification appc:lf:; as Model A in Comparison 3.) Indeed, the
cascload has become more sensitive over the pa.;';lIWO decades. A one percemage poiru iIicrease in
unemployment led
percent in the
[0
an increase in welfare. panicipution of 1.5 percent in the 1976-80 period, 3,2
19SI~S6
period, 3.9 percent fro:n !987-92, and 4.4 percent since 1993. (The J976-80
)1crlod is statistically signific~mt!y difiCrent froll1 each of the other three periods, but the three laner
periods are nol statistically significantly different from each other.) This rise may be due to the fact
lhat most of the Changes
[0
AFDC introduced by waivers and TANF emphasize employment. This
also suggests tbat the estimates of the contribution of the unemployment rate reported in Table 4 may
be a lower bound, Most importantly for this study, bowever, the effects of waivers and TANF are
'1'111 refllll;. fA!ople who make ~1J(.!h ~lalcments arc sotll(.!limc'; c!;ferrlng 10 the (.Ercd effect d lnbor market
conditions on pllrticipatinl1, and nOI the inleractiOn,
21
�robust to this specification, changing very little from the ba,>eline model.
Comparison 4 permits "lcad" effects of TANF and waivcnt The 1997 CEA !'ludy argued that
welfare policies
1T',ay
hegin LO have
3:1
effec:
O[i
behavior ir. the year leading up to their enactment
because of tbe heightened nwareness generated by the debate surrounding their p'l!>sagc. Indeed. the
1997 study found that state ca,>eloads were declining signlricaotly in the year prior to receiving' .
approval for a waiver. The estimate..<; with the
d~hi
through 1998 and incorporating TANF imply a
fairly large and statistically significant association between welfare participation nndJhe one·year
lead of waivers; the lead of TANF is. not s.ignificant However, it is difficult to interpret these
estimates. While a true causal interpretation is. plausible, an alternative interpretation is that the ieads
arc picking up unobserved differences across stales or within states
acrO~S
time, For example,
perhaps states with fecently declining caseloads (Of cascloads declining more ~- Of increasing less·
Ihan expected) had slack resources and manpower to design and submit a waiver. In this case,
waivers themselves may not be causing the decline, For this reason, the estimates without the leads
arc emphasized. n
The final alternZllive specification, Comparison 5. uses a less restrictive functional Conn by using the
population variable as an explanatory vafiable instead of using it as the denominator in the dependent
\.
vafiable, In this model the dependent variable is simply the natural log of the number of recipients.
,;;~:
The results are fairly st::lble to this. s.pecification change. However, the coefficient estimate
on the
l1iinimum wage, while still negative, is feduced, and ii hat; a p-value of 0, 14.
CONCLUSIONS
Tbere has been an unprecedented decline in welfare caselOClds. The drop has occurred in every stare
iii the nation, and
jt
bus persisted nQw for almost 5 years: In the earlier years, from 1993 to 1996,
most of the decline was due to the strong labor market and welfafe waivers. The declines in the more
!? Mpdc:::: lhnl meldc bgged vnlw.:s ,.! the wHiv"r and TANf indicllor variables were al;;o cx(ullin1!d to dcll!nnine '
wllclla;r there wr;s lin effect oftLcse poliey d'mnsc,,- ::hovc ilad o,,::yol1tl lli(: :niti31·ycar chulll,;c. Altllnugh in smTIC
specificatIOns there were suhslunti;lllaggcd (l;leCIS, the cSlinw!I.:s were quile sensitive tel spccifi..:alion. espct:!.\lly
s;lmple wdghllflg and indusio!'! of .bt:! rrom CalifornLi lInJ N..:w York.
22
�recenl period, from 1996 to 1998, have been very large, and the single most
import~lIlt
factor thai can
be identified is the implementation of TANF. PRWORA produced a dramatic change ltl welfare
policy: work and self-sufficiency became a primary goal; state and local governments were given
much greater control of the programs they fan; .and states experimented with a host of program
design changes. The evidence suggests that these changes have c<lused a large drop in welfare
pllrlicip;.t! i()!~, a drop that i:-; independent of the effects of the strong labor market during this period.
The c:-;timatcs imply that TANF alone has accounted for roughly one-third of the reduction from
1996-98,
The sllOng labor market hl.L'i mtldc work opportunities relatively more auractive. drawing people off
welfare and into jobs. In fact, the size of the ca"e\oad has become more sensitive to labor market
changes in recent periods. However, the unemployment rate has not declined as much in the
po~t-
T ANF period (1996-98) as it did in the 1993-96 waiver period. As a result, the share of the decline
in the caseioad that is attributable 10 improvement.; in the labor murkct was much larger in the 1993
96 period (roughly 26 to 36 percellt) thall illlhc 1996-98 period (8 to 10 percent),
While this study helps to explain !he
post~TANF
about welfare participation that is unknown. In
changes in welfare participation, there is much
mo~t
models·thut were estimated, a large share of ihe
. variation over time could not Ix explained. The variation across states in welfare policy and
manageme.nt om; increased a.'I a result of TANF, and the research com"1unity will struggle to keep
abreast of these changes. Merely documenting the changes, let alone understanding their effects on
case-loads,
WOl k.
self-sufficienc.y. child
wel1~heing
23
and Ihe likc,.is a major challenge ..
�Appendix A
,
'
Comparison w'th rhe 1997 CEA Study'
A replication of the estimates reported in the 1997 CEA study is provided in Table A2. There are
"
five reason~ why the "old" estimates may differ from the "new" e::;~imates:
~.
different lime periods of analysis
2. different variables included in the models
3. use of approval vs. implementation dute of waivers
4, use of calendar vs (heal year data
5, usc of population u:lder 65 instead of all population in calcuiating participation fate::;,
All models in Table A2 analyze the 1976-1996 period and include the same explanatory v;Jriables.
Comparison between the "old CEA" estImates and the estimates in Model J of Table A2 shows that
of nsca! year data" This
...
finding is not surprising because the caseload continued to decline , the end of 1996. and some of
at
the effects. of waivers are larger when calendar year. data is used
.
in~[cad
this decline j,:; attributed to waivers in Model L l~ Table A2 also demonstrates that the effects of
waivers is somewhat smaller when the implementation date (Mode,IIV) is used instead of the
approvaJ date (Model II). U.;,;e of the population under 65 (.\iodellV) instead of the tow I population
{Modellll) in the denominator of the recipjency rate alters the results very little.
Although tbe usc of tbe implementation date instead of the approval d'lte and a different populatjon
control docs nm aller our results substantially, two other choices do.
of the unemployment
f<lte
in
OUf
Fi~t,
we include tt second lag
models in the current study (Table 2)_ The effect of the secOI;d Jag is
quite large and precisely e!'tim:lted. It turns Ollt thaI
th~
inclm;ioll of the second lag explains an
important difference in the reported results between the two studies. With only one lag in
ullc:npJoymcnt, the 1997 study found that unemployment could explain 45 perce;)t of tbe change in
:rtSume cr !he ef;cCL~ of waiver;; in 1996muy be picking up !he effects of PRWORA,,(ll' the heighlened puhiir
awareness of n:form prior 10 PRWORA (!\1offiu, 19!>l9j. Re~c5lim:ml1g Model IV in '1':.'.hle A2 without 1996 dt\tn
leads to a coefficient on the waiver dummy of -3,65- {t-stHlislic of I,60}.
24
�paI1icipatior. from ;993-96, (See Table 3. column labeled (3), in the 1997 report.) Usmg the 1976
1998 data, ;:mc the fun specification reported as Model I ir. Table 2 but without the second
unemployment, we nnd results that are ulmoM identical to those reported in the 1997
~ag
in
s~udy:
unemployment explains 42 percent of the change between 1993 and 1996. But with the second lag
included. the share exp:aincd by unempiclymcnt falls to 26 percent.
Ther~fore,
the specification of
the Ing strw:::~urc does alter the results from the sirr.t:lations. However, the effects of waivers change
very little with the specification of the l<tg structure of unemployment: the share explained by
waivers hetween 1993-96 based on Model I in Table 2 is approximalely 15 percent \vith either O:1C
or ~wo lags.
The swdje::. also differ in their findings regarding the Importance of waivers. However, the primary
difference is not due LO different e..stimatc;; within the same specification, but in the cholce of which
specifica~ion
to emphasize. The J 997 sludy empha.'iized results from a speclfication That included a
lead value of the waiver vanables (model 6 .in Table 2 of the 1997 report) while the current study
¢mphaslzes modelsYlat exclude the Jeads (model 3 in Table 2 of the 1997 report). As described in
the 1997 technical report, ",n il may be that the waiver application process, [he publicIty surrounding
it, and potential cbanges in case workers' behavior and attitudes. may provide a signal to potential
recipients that the environment in which t:-tc welfare system operates is about to change. It may lead
some Individuals contemplating applying for benefits to find other sources of income support,
whether from work or elsewhere (p. 15)." While this is a plausible scenario, an alternative
interpretation is thaI the leads arc picking up unobserved differences aero:;s states or within states
across time, For example, perhttps states with recently declining caseloads (or easeloads declining
more -- or increasing leS!> - :han expected) had slack resources anc. rnanpower to design and suD!"!.i! a
waiver. For thi .. reason, the current st:Jdy uses the simple COlltemponii1eous value for waivers and
TANE
Exdudll1g the leads does not change ibe estimates of the effect of ~memployment rates. However,
the waiver effecu; arc substantially smaller without the leads. As reported ir. Table 3 of the 1997
.-ltudy, the shan:: of the 1991·96 change expiained by waivers falls from 31 percent if the leads are
2S
�i~lcluded
10 13 percent if the leads are not Included. The 13 percent e'stimate in the 1997 study is
'comparable to the esti,mate of 14.6 percent in Table 3 of the current study.
OIlier that: thes?:,differences, the updated study is quite consistent with the earlier report. Most
in;portantly, strong labur markets, as measured by the :-memployment rate. and welfare waivers
played important roles in explaining the declines from J 993-96, The new study huilds on the 1997
report and finds that TANF has had an even more profound effect on participation than did waivers.
26
�Table Al. Dates of TANF lmplcmentlltion and Major Welfare Waiver.;
Date of Fir;;! Majer Waiver
lmplcm::ntalioll
Approval
Nov"mbm,%
Ah,bll!;;~
11l1y·97
Al;l~k~
'\liwn~
Ar~:mSlTh
California
M;;y·9$
N"\'cml:J~r-95
~HIix:!·')6
AJlril·94
July·94
July,97
Octobo!{-92
D~mber-<;I2
Nevemoor·%
CO:o.'";ldD
c.cU\<Xlfc\>1
llebwiltli
TANF lmriemcnlation
Aclual, if Different
from Official
Ofl1dal
Jarmary·98
July·,)?
A~h,hl-')4:
J;II)IJa1y-Ol6
Od<.>bc,,%
114&),·')5
()ctut;"r·95
M:ueb,91
Mm:b·91
DC
Flllril1l
'''''''f'"
ll11wuii
J\J:mo
JIlr,c·<;6
Otlu.'lcr8b
Nt)vcmbl;l,'IJ
1.lIIuary·<:4
Jnmm;;,'n
hme,94
lwruuf,'-97
July'V?
Nllvember_93
11.11)'_97
OW'\>.:r8()
July·t17
A~g<l~I'%
IIbn"i~
NovernOOr.93
hJil'll;l.
Ikccmbct·94
M~ly-95
Ao&OM·9~
Oelohef-9J
I"wu
J:I.'I:uty.?l
K;ms:J,S
Cktober·9(,
Kcultid'f
October,\)(!
i'<>I<isiwu
)lIOOlliY-y1
Mmn>:
No~<!mt>:r·9!,j
Jupe'%
M:llylMd
Augu~HtS
Mm:n.%
l),;,temVef·96
MasSlthu ...·!I;s
AulJ;uSl·95
N<w~mber-95
Sepb.l!l1ber·<J6
"'L~hlj;1IIl
Augusl-92
O~1l)oor-92
$~pwmi'l<Jt.\l6
Septembe!-·<J5
Ochibo:r-9S
Octo\:!et·96
April·95
Il1n1'--9~
j)~111b!:t_96
Af>I"iI·'J5
PWru·1fY_%
Fcbnm,y.')7
F..'lmlnry-');'i
O~lDh"_'f.95
j)"ctmh¢f·9(;
Minn~~otn
Minirti(>l»
Missouri
M,)I1t1J1II
Ntt>HI,ka
Jul~·\i7
,
N.:va<!..
N.:w H:unpsllift'
N~w
)Cfll<!y
D!:OOlIhet·%
OCttibo!f·96
Jupe,%
July·<)2
{klut..rr-')2
:--lew Mni"!J
February,,9?
Dce.;mb¢f.<Jo
Fcbruary-96
July_96
MJlf,,·'j(,
JuJy·!J(,
0;::1,l:tr-%
1uly·'}2
p".,hruruy,,93
Oclo!x:r.%
July-In
OH;.hcrr...
Orego."1
Novmnbcr·97
JOl1unry·97
NUllil [l~kCl"
Olli"
JII1;"",,7
11.1y·91
New York
Nm1h Cnro1illo
J\lly-91
O~lohel·96
I'.:maylv:loi:;
Mllf>:h·;n
!tbm.h" lsbnrl
May.\ii
Sool/l C;uaillia
SOOlh
Doi.ol:~
TCIIIl"'Sw<:
Texas
Ocl\lb(;I·%
M.l.),'';ll'
M:lfcll-<J~
JU!\e.94
luly·'H,
M",ch.<jr,
Sl:plt.1!lber-96
Ocwbcr-%
Jlmc-'J(i
N"vclllh~'t.%
Dec.:mbcHi{i
OcI"ooHil
Jallu;,ry_"}
Oclubcr·96
V~"mml
April-,}}
July·94
5~ph::mbcr·%
V,lg:nin
July·9S
)ul}-9S
FehfUlfy·91
Sl:jJl>!lJ'rn:r-9;'>
J1\!IIlf\:;,-96
JUlUI)·9 i
June_';4
jalU!llf)'-96
Sqrtcmbel·96
Ulai>
Wm;i'(>:£l,m
Wt:f,( Virga,ia
Wisconsin
WY'-'llljng
J:muruy.y;
Scp!ember,S/1
JanU~IY·97
a"I1;.,,_ Mexkli imp!cmen:r.d jl~ TA;-"'F p:ut;ram in July 1,97, II WM fmmd '.InCoflst1iu:i(>nll:
A n:vbed TANF prog:am was Impll.-·TIK!fl\I.!U in April l\lSl!:!,
\1\
S('.;>lemhef ! 9~7
�~Old
Table A2.
eEA" Compared with "NewCEA" for the 1976~1996 Period
(Coeffi<:ient estim.tlcs multiplied by 1(0)
NewCEA
Any wal\'c!
Unltmp!Qyment
Cunent
I <agged
Log max. monthly benefit
Old CEA
Rela
I· !.lntistic
5.17
2.91
-090
4.97
7.93
Modell
Bet1t
HJAltislic
-6.74
3.33
US
2.09
11.83
-0.58
4.60
9.50
1.65
6.57
1.02
Model II
l,slati~lic
Be'"
..{}.81
3.33
·063
4.66
5.75
1.28
9.52
0.88
Model III
(·slatistl(:
Beta
/..67
-5.66
-O.6!
4.61
1.24
9.47
7.06
U19
Model IV
Beta
(-statistic
;?l
2.67
-0.66
l.ll
4.67
6.23
9.49
096
Years
1976-1996
197( 1996
....
1976-1996
1976· [996
1976-1996
Date of wa!"t:I.~
Approval
Approval
Approval
Imp!ementation
implementation
Population
All
AI!
Under 65
All
Uru..let 65
Calendar vs flscal
Fiscal
Calendar
Calendar
Calendar
Calendar
All models include stafC effects, year effects, and state-specific time trends. "Old CEA" refers to Ihe estimates for Model 3 in
'table 2 of the 1997 CEA report To be consistent wilh the 1997 CEA repQrl, Ihe wal'VCrln WesLVirginill is assumed 10 be a "major" waiveL
,.
yt
t ,
:1"
�References
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Bernstein, Jared, and John Schmitt (1998). Muking Work Pu),; The Impact of the
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C:ird, David (l992b). "Do Minimum Wages Reduce Employmem? A Ca.lie Study of California,
1987-1989," ftulusrriol and Labor Relations Review, 46( 1): 38-54
Cilrd, David, Lawrence F. Katz, and A.ian B. Krueger (J 994). "Comment on David Nellmark and
William
Wu~cher,
"Employment Effect$ of Minimum and Subminimum \Vages:. P:.lllcl Data on State
Minimum Wage Laws," Industrial and /.•,avor Relations Review, 47(3): 487-496.
Card, Duvid. an(: Alan B, Krueger (199.!5), "A Reanalysis. of the Effect of the New Jersey Minimum
27
�Wage Increase on the
Fast~Food
Industry with Representative Payroll Dala," National Bureau of
Economic Research Working Paper 6386.
Council of Economic Advisers (1997). "Explaining the Decline in Welfare Receipt, 1993-1996:
Technical Report," Executive Oftlce of the President of the United States,
Figlio, David N., and James P. ZHiak (1998). "Welfare Reform, the Business: Cycle, and the Decline
in AFDC Casclond:.:," mimeograph, October. Ur-ive::.ity of Florida.
Gallagher, L. Jerome, Megan Gallagher, Kevin Perese, Susan Schreiber, and Keith Watson (1998).
"One Year after Fecieral Welfare Reform: A Description of State Temporary Assistance for Needy
Families (fANf) Decisions as of October 1991." Urban Institute Occasional Paper Number 6.
Kntz, Lawrence E, and Alan B. Krueger (1992). 'The Effect of the Minimum Wage on the Fast
Food Industry:' Industrial and Labor Relations Review, 46(\): 6-21,
Levine, Phillip B. and Diane M. Whitmore (l998). "The Impact of Welfare Reform on the AFDC
Cuscload," National Tw: Association Proceedings ~ 1997. \Vashing!on, DC; Nationa! Tax
Assuciation, pp. 24-33.
Marlini, Alberto, and Michael Wiseman (1997). "Explaining the Recent DecHne in Welfare
Ctsc!oacs: Is the Council of Economic Advisers Right?" mimeograph, July, Urban
In~litute.
Momo, Robert A. (1999). ''The Effects of Pre·PRWORA Waivers on AFDC C.scloads and Female
Earning:;. [ncome, and Lahar Force Bebavior," mimeograph, May, Johns Hopkins University.
,
Ncumark, David, and William Wascher (1997). "The New Jersey-Penm:ylvania Minimum Wage
Experiment: A Re-Evaluation Using Payroll Records," mimeo, )"1arch, Michigun Slale University"
Nctlmark,. David, and William Wa:-:cher (1992), "Employment Effects of MiHimum and
28
�Subminimum Wage-<;: Panel Data on Stale Mi:limurn Wage L2.WS," Indllstrial w'ld Labor Relations
Review, 46( I): 55-8 L
Ncumark, David, and \>./illiam Wascher (1994). "Employment Effects of Minimum and
S'.lbrnimmum Wages: Reply to Card, Katz, and K;uege:-," Industrial Qn£! Lahor Relations Review,
47(3): 497-512.
Page, Marianne E., loanne S~tz, and hne Millar (1999). "Does the Minimum W"ge Affect Welfare
Cus,elo~d;;'!"
mimeograph, Pubhc Policy lnslitute of Califof:1ia.
Scholz, John Karl (1994). "The Earned Income Tax Credit: Participation, Compliance, and
Anlipoverty Effectiveness," National Tax Journal,
Stnpcllon, David
59~81,
c., Gina Livermore, and Adam Tucke~ (1998). "Determinants of AFDC Caseload
Growth," report by the Lewin Group to the Assistant Secretary for Planning and EvaluatJOn,
Dcparlment of Health and Hum:m
Service~.
July 1997,
Turner, Mark (\999). "The Effects of Minimum Wages on. Welfare Recipiency," mimeo, June,
Urban lnstilUtc and Johns Hopkins LJmversity,
Wallace. Geoffrey, and Rebecca M. Blank (1998), "What Goes Up Must Come Down? Expluining
Reccn: Ch;3.:)ges in Public Assistance CaseJoads," mimeograph, Northwestern CnivcrsHy Department
of Et,.:onomir.:,s.
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fOf
EJjZ~lbeth
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on Poveny Discussion Paper No. t 151-97, UniversllY of Wisconsin.
29
�
Dublin Core
The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/.
Title
A name given to the resource
Clinton Administration History Project
Creator
An entity primarily responsible for making the resource
Cinton Administration History Project
Council of Economic Advisers
Department of Commerce
Central Intelligence Agency
Department of the Interior
Department of Defense
Corporation for National Service
Council on Environmental Quality
Department of Justice
Domestic Policy Council
Department of Education
Department of Energy
Environmental Protection Agency
Federal Emergency Management Agency
General Services Administration
Small Business Administration
Social Security Administration
United States Agency for International Development
National Economic Council
Office of Management & Budget
Office of National Drug Control Policy
Office of Personnel Management
Office of Science & Technology Policy
Office of the Vice President
United States Trade Representative
Date
A point or period of time associated with an event in the lifecycle of the resource
1993-2001
Description
An account of the resource
<p>The Clinton Administration History Project describes in detail the accomplishments of President Clinton's Administration for the period 1993-2001. The records consist of the histories of 32 agencies or departments within the Executive Branch. In general, each organization associated with the Project submitted a narrative history along with supporting documents. These narrative accounts are primarily overviews of the various missions, special projects, and accomplishments of the agencies. The supplementary records include substantive memos, press releases, briefing papers, and publications illustrated with photos and charts.</p>
<p>Agencies:<br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Council+of+Economic+Advisers&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Council of Economic Advisers</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Central+Intelligence+Agency&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Central Intelligence Agency</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Commerce&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Commerce</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+the+Interior&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of the Interior</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Defense&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Defense</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Corporation+for+National+Service&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Corporation for National Service</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Council+on+Environmental+Quality&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Council on Environmental Quality</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Justice&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Justice</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Domestic+Policy+Council&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Domestic Policy Council</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Education&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Education</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Energy&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Energy</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Environmental+Protection+Agency&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Environmental Protection Agency</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Federal+Emergency+Management+Agency&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Federal Emergency Management Agency</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+General+Services+Administration&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the General Services Administration</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Health+and+Human+Services&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Health and Human Services</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Housing+and+Urban+Development&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Housing and Urban Development</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Labor&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Labor</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+National+Economic+Council&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the National Economic Council</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Office+of+Management+and+Budget&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Office of Management and Budget</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Office+of+National+Drug+Control+Policy&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Office of National Drug Control Policy</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Office+of+Personnel+Management&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Office of Personnel Management</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Office+of+Science+and+Technology+Policy&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Office of Science and Technology Policy</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Office+of+the+Vice+President&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Office of the Vice President</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Small+Business+Administration&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Small Business Administration</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Social+Security+Administration&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Social Security Administration</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+State&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of State</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Transportation&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Transportation</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+the+Treasury&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of the Treasury</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+United+States+Agency+for+International+Development&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the United States Agency for International Development</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+United+States+Department+of+Agriculture&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the United States Department of Agriculture</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+United+States+Trade+Representative&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the United States Trade Representative</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Veterans+Affairs&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Veterans Affairs</a></p>
Is Part Of
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<a href="http://clinton.presidentiallibraries.us/items/show/36051">Collection Finding Aid</a>
Provenance
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Clinton Presidential Records: White House Staff and Office Files
Publisher
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Clinton Presidential Library & Museum
Format
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Adobe Acrobat Document
Extent
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1474 folders in 111 boxes
Text
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Original Format
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Paper
Dublin Core
The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/.
Title
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[Council of Economic Advisors] [5]
Creator
An entity primarily responsible for making the resource
History of the Council of Economic Advisers
Clinton Administration History Project
Date
A point or period of time associated with an event in the lifecycle of the resource
1993-2001
Is Part Of
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Box 1
<a href="http://clintonlibrary.gov/assets/Documents/Finding-Aids/Systematic/Administration-History-finding-aid.pdf">Collection Finding Aid</a>
<a href="http://catalog.archives.gov/id/1224798">National Archives Catalog Description</a>
Provenance
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Clinton Presidential Records: White House Staff and Office Files
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Adobe Acrobat Document
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Clinton Presidential Library & Museum
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6/24/2011
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1224798-council-economic-advisors-5
1224798
-
https://clinton.presidentiallibraries.us/files/original/ded78a9d7911ed95a47532c46951f24b.pdf
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The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/.
Title
A name given to the resource
Clinton Administration History Project
Creator
An entity primarily responsible for making the resource
Cinton Administration History Project
Council of Economic Advisers
Department of Commerce
Central Intelligence Agency
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Text
EXPLAINING THE DECLINE IN
'iVELFARERECEIPT, 1993-1996
.'
May 9, 1997 ,
A Report by the
Council of Economic Advisers
�EXPLA[KING THE DECLINE L'I WELFARE RECEIPT, 1993-1996'
During the first four years afthe Clinton Administration, from January 1993 to January 1997,
.the number ofindividuals receiving welfare fell by 20 percent, or 2,75 million recipients - the largest
decline in over 50 years,2 Three potential explanations for this decline are (1) economic growth,
which created 12 million new jobs ave; the period, (2) Federal waivers, which allowed 43 states to
experimeilt \vi:h Innovative ideas 10 help reduce'welfare dependency. and (3) other policies affectbg
. work-related incentive"s, including the 1990 and 1993 expansions of the Earned Income Tax Credit
(EITe) and the recent rise in federal and state spending on cruId care, It·15 important to determine
the causes of this decline in light of the recently enacted welfare reform legislation. If economic
g:o'Wth was the major contributor, then continued growth seems essential for further progress in
moving peop;e from ·welfare to work. If federal policies played a significant role, however, then
'continued efforts along these lines are likely to lead to additional red\lct!ons, A statistical analysis
(described in the companion technical paper to this report) shows that over 40 percent of the decline
resulted from a f.'llling unemployment rate associated with the economic expansion and almost ono
third :rom statewide weIfare reform waivers (Figure 1),~ Other factors (which might include other
policy initiatives, such as the EITe) account for the remainder.
Figure 1
Reasons for the Decline in Welfare Caseloads, 1993-1996
Economjc expansion
Welfare waivers
~~~rOtheffac:ors
.
lWe are gr~ful to the U,S. Department of Health and Human ServiCes, Oftke of the ASS1Slallt Secretary for
Planning and Evaluation for providing technical assiStance in preparing this repon.
lT~e statistical analysis: presented here uses data on the average momMy s~are of the population receiving
welfare in a f15ca! year, BeN.teen the 1993 and ;996 fiscal yearn (October 1, 1992 w September 30. 19%). the average
mO:U.'lly share of ~.he population r~eiving welfare felHrom 5.4 percent ro 4.7 perten:.
~Eight Stales rro!ived waivers that affected owy a small part of the state,' typically a few counries. Waivers
grapred.ro these StateS are not included in tbis aIWysis.
I
�WELFARE CASELOADS AND TIlE BUSINESS CYCLE
Welfare caseloads tend to fluctuate over the business cycle, rising when the economy moves
into recession and declining once a recovery is undervtay and the economy is expa:1ding, FOf
example, the proportion of the population receiving welfare fell during the expansion of the late 1970s
and rose as the economy went into recession in 1980 (Figure 2).4 Between" 1989 and 1993, the
proportion of'the population receiving welfare shot up 25 percent, reaching its highest level ever,
The recession of 1990-1991 and the weak labor market through 1992 certainly contributed to this
increase, hindl~ring the efforts of those welfare recipients seeklng work. One might be tempted to
argue that tr.e ~;ubsequent decline between 1993 and 1996 simply reflected the normal return to work
of welfare recipients who were unable to find jobs when the economy was weak.
Figure 2
Unemployment Rate and .Rate 01 Weilare Receipt
11 , - - - - - - - - - - - - - - - - - - , 6 . 0
'0
.:\,
Unemploymenl
{:efta~
/
f
Welfare reC:~ier,l.
(light axis)
\'
\
\
"
"
5,5,Q
-.....
;;
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g
.......
5.0
.....
-
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e
..
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'0
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"-'l .
','
(U
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(f)
,
4 I
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!
1 •Q
4
19nI9nI9~19aI9Ml~6t~819.1~219Nl~6
Fiscal year
. The business cycle' alone. however;' is unlikely to account for the entire decline in welfare
recipiency after 1993, The 1990-1991 recession was relatively mild; the annual unemployment rate
peaked at 7.5 percent in .1992, much lower ,than tbe peak. rates in the 1974~75 and 1981 ~82
recessions. It t:eems improbable that a moderate recession would lead to such severe swings in tbe'
rate of welfare receipt Moreover, some states with large reductions in their unemployment rate
during this period did not experience big drops in their welfare caseload, :~vhi1e other states saw a big
drop in welfare receipt even though their unemployment decline was moderate (see attached map),
For that reasor! it is important to look at other factors. including the possible impact of changes in
welfare programs during thaftime"
'"Two np.omalow: episodes occurred as well First, \\-'clfare recipiency declined sharply in 1982 despite a worsening
economy. ms: WlI!l 'oecause policy chnnges enru::tcd in Lite OtT.nibw: Budget Re<:onciliation Act of 198 I $ubsta..,tia!ly reduced
welfare ctigibilHY. Secood, the eramatic $Wing:n \\-'Clfare recipiency berween 1989 and 1996 was. larger thn,n mighl have
been e.xpccted bused on the relatively rr.ild 1990·91 recession.
2
�FEDERAL WELFARE WAIVERS
Aid ~o Families with Dependent Children (AFDC) was the Nation '5 primary welfare program
, until last year. The AFDC program was administered by the states, subject to Federal requirements.
Since 1962, the Secretary ofHealth and Human Services has had the autbority to waive some of these
requiremer.ts if states proposed experimental or pilot programmatic changes that furthered the goals
of the AFDe program. The Bush Administration was the first to use this authority extens:vely,.
especial!y in its final year. But the Clinton ,Administration ex:panded the number of waivers
dramatically after 1993, graining waivers to a total of 43 states,
Waivers granted to states to implement experimental welfare policies generally contained a
number of provisions that varied greatly in scope. Some were pilot programs that could not have had
much effect on the size of a state's overaU welfare caseload. Others covere~ a larger share of the
state's welfare population but included some relatively minor provisions that pmbably had little effect
on the number of welfare recipients s!atewide. Six broad categories ofwalve~s that potentially lr.ighl
have had an observable effect in reducing state welfare caseloads are:
.
• Termination time limits. States receiving this type of waiver are allowed ,to limit the length
of time recipients can collect benefits, Once that limit. is' reached, benefits are terminated.
• Work-requirement time limits. These waivers are similar to termination time limits, but
once the limit is reached. recipients are required to accept work or enter a training program
ir. exchange for their benefits.
,. Reduced JOBS exemptions. The Job Opportunities and Basic Skills (JOBS) traini:1g
program, enacted in 1988, required a snare oftne welfare caseload to participate in work
and/or training programs. Waivers were granted to some states 10 reduce the number of
. recipients who were exempt from participating in the progr.arrL
,.
Increased JOBS sanctions. Some states argued that sanctions for recipients who refused
to participate in JOBS were inadequate and requeSted the ability to strengthen those
. sanctions-includjng termination of benefits in some cases,
• Family cap. Welfare benefits are scaled to family size and normally increase when a redpier.t
h?s an additional child. Some states requested waivers to 'eliminate the additional benefit for
wome~ who had a cruld while receiving welfare.
.
• IncrefLsed earnings disregard. For many reci?ients, a doHar"ir. earnings led tOo almost a
'dollar reduction in their welfare benefit, providing a disincentive to work, Some states
requested waivers to increase the amount of earnings that welfare recipients eouid keep,
,
j
I
3
I
j
I
�The number of states with statewide waivers of these types rose dramatically between 1993
and 1996 (Figure 3} Some states that experienced large drops in welfare receipt are also states that
, received waivers (see attached map).
Figure 3
Number of Approved Statewide Waivers
40,----------------------------,
:g 30
;;
-
;;
0 20
~
.8
§
Z 10
o
TIme LirM RequlrelT\4lnt c.p
.• FY 1993
mil FY 1996
THE STATISTlCAL ANALYSIS
Several factors besides economic conditions and waivers are likely to a.ffect the rate of welfare
receipt. An in:rease in female~headed families will tend to increase this rate because the welfare
sys~em strongly favors single mothers v.ith children. The generosity of welfare benefits also may
affect the number of poor individuals who seek benefits. Labor market returns for less-skilled
workers, nat;onal changes in welfare policy, and cultural attitudes towards welfare receipt. aIso may
playa role. The task of a statistical analysis is to disentangle the separate effects of these factors in
order to identify the relationship between each of them and welfare receipt
The exercise reported here uses state-lever data from 1976 through ]996 to estimate the
contributions of economic growth (measured by the change in the unemployment rate) and approved
state waivers to the recent decline in welfare receipt. The use of state level data allows us to control
for changes that affect welfare receipt across the entire country at a point in tim.t._such as nation~l
4
!
j
!
.
.
�changes in welfare policy.3 The relationship between, say, economic conditions and tbe rate of
welfare receipt can stin be identified because recessions tend to be worse in some parts of the country
than in others and could lead to differences across states in patterns of welfare receipL Using data
over severa! years allows us to control for long-run differences in welfare receipt that exist across
states, The "relationship between waivers and welfare receipt, for example, can be observed by
fonowing changes in welfare receipt ,\",ithht a state before and after the waiver. Using techniques like
these, a statistical analysis can estimate the effects of economic activity and waivers on the size of the
welfare rolls holding other things that affect welfare receipt constant /I
An EX:lmplc
Figure 4 presents a comparison of Florida and Georgia that is intended to provide some
intuition for the statistical methodology and the manner in which the effects of economic activity arc
estimated separately from other potential confounding factors. It should not be considered a rigorous
test. The fig\lre plots the difference between the two states lli unemployment rates between 1984 and
19')6 and in the share of the population receiving AFDC'over the 'same period. Taking the difference
between the two states in each year controls for any differences that affect both states simultaneously.
Because neither state received a waiver until late in the 1996 fiscal year, the difference in trends
through vlTtually ail of this time" period are unaffected by differences in waiver provisions or their
effectiveness. Throughout most of the expansion of the middle to late 19305, unemployment in
Georgia had been somewhat rugher than in Florida. When the 1990~91 recession hit, unemployment
in Florida rose considerably relatIve to that in Georgia, and the difference has been slow to recede.
Subsequently, AFDe receipt shows an incTC?se in Florida'relative to Georgia. The full statistical
analysis uses this sort ofapproach to identift the effects of both waivers and eConomle activity on the
rate' of welfare receipt in all states over time.
!Although the effects of changes in national we-lb.re policy cannot be determined using this metllodol08Y, some
recent policies may have contributed fl) the decline. The 1993 increase in the Earned Income Tax Credit increased the
remms 10 work. locreases in chi!d tare .subsidies made it easier (or parents to work. Enhanced efforts to coltect more
child suppon mised the incomes of some mothers, reducing their reli:m::e on welfare. The impact of these policies Oil
-tI'.e mte of wdfare f<:teipt cannot be identified separately in this analysis because they apply equally in aU states at any
time; it is incorporated into the eff~t of orner, unidentified (aCIDr1I.
~ methodology does include some limitations that may preclude a "causal" interpretation of the estimated
relationsbip between, say. waivers and the rare of welfare receipt, First, jf factors like ou(..(}f~wedkx:k birl.1l rales
suddenly feU in w-aiver /Hates at precisely !he time that their waivers were approved. a negative estimated relationship
between waivers llnd the rate of welfare receipt would be misleading. Second. it is possible Ilwt ~e estlil'.ated effect of
waivers Q:l A.>:'DC receipt may be capturin---gilie tendency for states with shrinking welfare rolls to be the ones most willing
to experiment wi!.., thl.l sort ofwaiver pollcies examir.ed here.
5
�Figure 4
A Comparison of Florida and Georgia
2 . 0 , - - - - - - - -_ _ , - - - - - - - - " 0
Unemployment rale .
(Jelt :;calf:)
APDC recipients as
a s ..,are 01 populaticr".
(noht ~a\e)
j
,
f
M~
.o.s j
0
The Timing of the Welfare Caseload Response
A number of other tests were conducted to explore more complicated relationships between
economic activity, waivers, and the welfare case/cad, particularly the possibility that impacts on the
rate of welfare receipt might not be conterr:poraneous with changes in unemployment or
implementation of waivers:
..
1
Delnyed respons"es. Changes in unemployment may affect the welfare caseload only after a
delay, For instance, the onset of a recession may lead those low-income workers who lose
their jobs to spend some time looking for a new one while drawing down their limited assets
before applying for welfare: When a recession ends, these typically less-skilled workers may
be the last ones hired,
•
Adv~ln-.::e
responses. Waiver policies may have some effect on the welfare caseload even
befo;--e the waiver is actually approved, Ths effect could occur if publicity regarding the new
.propost.'d policies led potential welfare recipients to seek work mQre intensively than they
might have otherwise or because they chose not to apply for benefits, perhaps concerned that
they would be treated more harshly by welfare officials.
I
I
,
6
I
�RESULTS
The results of this analysis indicate a strong relationship between the welfare easeload and
both economic activity and Federal welfare waivers.'
,
• Changes in the welfare caselcad do appear to respond to changes in the unemployment f?te
with a delay,
• States that instituted a major, -statewide waiver did experience a decline in the welfare
caseload in advance of the actual waiver approvat
" Waivers that included strengthened JOBS sanctions were related to a dedine in
welfare n!ceipt that did not precede the waiver approval,
t~e
rate of,
• Overall, over 40 percent of the decline in welfare receipt between 1993 and (996 can be
attributed to economic grov.1h;almost one-third was related to federal welfare waivers, and
the rerpainder was due to other, unidentified fa~tors"
.
These findings say nothing about the outcomes for those individuals who otherwise would
have collected benefits had waivers not been granted, Additional research that can detennine how
individuals fared under the alternative waiver provisions, rather than an aggregate anafysis examining
th~ st~tewide caseload; clearly is desirabte to help address thls issue.
•i
,
,
!
i
1
I
7
I
�I
.
Reduction in·Welfare Recipients and Ijnemployment Rate
1993 to 1996
;~
,
u
u
\W
".'"c
"..-~--- ~\
'
"C'"
.
/...:r
I.
c
c
- "t~f::O~"'. ~~~, .
.... ~"'" ~-
C,
'!t~
~'O
w~>
t,
Reduction in welfare recipients
(share of population):
III Over 25 percent
~ 15 - 25 percent
o
Less than 15 percent
1.6 percentage points or more
U reduction in unemployment rate
(larger than. national average)
W Major statewide waiver approved
�TECHNICAL REPORT:
EXPLAINING THE DECLINE IN
WELFARE RECEIPT, ·1993-1996
May 9, 1997
t .
.;
A Report by the·
Council of Economic Advisers
,
I
J.
1
I
I
,
�EXPLAINING THE DECLINE IN WELFARE RECEIPT, 1993-1996'
During the first 4 years of the Clinton Administration, from January 1993 to Janua!"y of
1997. the number of individuals receiving welfare benefits fell by 20 percent, or 2.75 million
the largest 'decEne in over SO years.l Three potential factors that may have
:ecipiems -
contributed to the dramatic decline in the welfare roUs over the period are economic growth,
federal welfare waivers, and oth.er policies affecting work-related incentives. First, the recession'
of 1990-1991 may have hindered the efforts of welfare recipients who were seekJng work~ as the
.
. labor market s;Jbsequently became more robust, creatin'g almost 12 million new jobs from January
1993 to January 1997. these individuals may have found jobs more easily and left the welfare'
rolls. Second, over. this peeiod federal waivers granted to states to experiment with innovative
approaches LO ending welfare dependence' may have also played a role. The Clinton Admlnistra
\
I
tien granted waivers to 43 states between 1993 and 1996 that included provisions which may
requlre work and/or training, sanctions for those who do not comply with these requirements, and
limits on the duration of benefit receipt, among other things. Third, other policies like the 1990
.
and 1993 exoansions of the Earned . .
Income Tax. Credit (EITC) and the recent rise in federal and
1
•
!
state spending on child care made it easier to enter the labor market and ir.creased the rewards to
work
for Individuals that might have otherwise chosen ~elfare.
'We. are grateful to the U.S. Department of Health and Human Service)), Oflice of !he ASSistant Secretary for
PliU1ning_and Evah.littion for providing !eChnicai assistance in preparing lhis report. .
1The statistical apalysis presemtd bere uses data on tb.tlyerage monthly share of the population receiving
welflU'e ill a fiscal year. Between me 1993 and 19% fiscal years (Ocrober 1. 1992 to September 30, 1996), the average
monthly share of !lle population receiving welfare fell from 5.4 percent to 4,7 percent.
I
,
�It is particularly important to determine the causes of this decline in light of recently
emictee welfare reform legislation that completely overhauls hie system of providing aid to the
poor. If economic growth was the major contributor to the decline. then continued growth is
essential for further progress in moving people from welfare to work. On. the other hand, if
,federal policies played a significant role, then continued efforts along these lines are likely to lead,
to additional reductions.
This paper ~iII, examine the recent decline in receipt of welfare benefits and provide
estimates of [he contribution made' by economic growth and one particular federal policy, welfare
waivers. State-Ie.vel data from 1976~19% are used in the ana)ysis, The statistical methodology
employed control:} for differences in the rate of welfare receipt across states that are roughly constant
i
,
over time, differences over time that are constant across states, and trends over time th,at may differ
I
,
between states This approach allows us to isolate the effects ofeconomic growth and waivers on
,
I
welfare receipt assuming that none of these other factors had changed. The results indicate that over
I
.
40 percent.ofthe decline can be attributed to economlc gro\.vth and that almost one-third is related
to waivers, partic:.t!arly those that sanction recipients who do not comply with work requirements:
Other factors, which might include additional policy initiatives (like the ?ITC), account fer the
remainde:".
WELFARE RECEIl'T AND THE llUSINESS CYCLE
Figure 1 d:splays the trend. in the unemployment rate and the snare of the
popblatio~
receiving
welfare benefits between 1976 and 1996. The expansion of the late 197~s is reflected in a deciining
share of the poputation receiving welfare over that period. As the economy fell into a recession in
)
I
-,.
,
2
I
�~ 980-81.
welfare rolls began to in"crease. However. the massive recession of 1981-82 actually
•
coincided wit'l a decline in the rate of welfare feeipiency. The explanation for ,this paradox is the
Omnibus Budget Reconciliation Act of 1981 (OBRA 1981), which reduced AFDC eligibility at
exactly the time when one might have expected to see a large increase in AFDC receipt. The
extended reco'lery of 1983·1989 appareJllly had little effect on the welfare rolls, perhaps because
those wr.o otherwise would have entered the welfare rolls were prever.ted from doing so in that
recession.
, The recession of 1990-91 had a dramatic impact on the :ate of welfare receipt; the share
of the 'population receiving welfare rose 25 percent b~tv.'een -1989 and 1993 to its highest leve!
ever. Giver. r.h,e large increase during that recession, the decline
In
the rate of benefit receipt
between 1993 and 1996 might have reflected a return to work of welfare recipients who
, unable to nnd jobs during bad times_ But the 1990-91 recession was relatively
unemploy~ent
~jld,
~"ere
with a peak
rate of 7.8 percent in June] 992! much lower than t.fte peak rates in the 1974-75
.
and 1981-82 recessions, It seems improbable.thar a moderate recession would lead to such severe
swings in the nne of welfare receipt.
Moreover, geographic variation in changes in the unemployment rate and_ the rate of
welfare recipiency indicates that factOrs other than economic growth also comribured to the fa!!
in the rolls. Figure 2 displays the change
In the share of the population receiv.ing AFDC and the
change in the unemployment ra~ in each ,state between 1993 and 1996, The correlation between
changes in unemployment and welfare receipt is not perfect. For instance, between fiscal years
i993 and 1996, the unemployment rate in Pennsylvania fell by more than the nationa"! average of
1.6 percen:. yet the declIne 1n the share of the state's population receiving welfare was smaller
3
�than the average, Virginia, by comrast, experienced almost a 20 percent prop ,in welfare receipt
over the perioc even though it experienced a below average cecline in its unemployment
rat~,
.OTHER FACTORS THAT AFFECT WELFARE RECEIPT
Factors
be~ides
economic conditions might be related to the rate of welfare receipt and
could explain recent trends. These factors include federal waivers awarded to states to ~ntroduce
. .
.
new welfa~e policies. other changes in fe~era! policy that alter Ihe environment fo~ low~income
households, and changes in
demograp~ic
composition that may alter the share of the
pop~latjon
eligible for welfare.
WAlVERS
The most recent policy change directly linked to welfare receipt, and the focus of much
of th.e remainder of this analysis, is the substantial increase in federal waivers granted [,0 states
to implement new and
innova~ve
welfare policies. The
A~DC
program was administered by
States, but was sUbject to federal .requirements. Since 1962, the Secretary of Health and Human
,
Services had die ability to waive some Of these requirements for states proposing experimental or
pilot progcammatic changes that furthered the goals of the AF[)C system,
The Reagan
Adm1:'1istration made some use oflhis authority, granting a ~mited numbe: of waivers that either
affec[ed a very small share of a state's caseload or were superseded by narional legisiative
.
changes? The RJsh Administration granted more waivers, affecting larger numbers of individuals
'UtcauSt: (:f tbs, the analysis that follows only examines L.'1e effect of waive:s approved during !he Bush and
.
Clinton Adminls[rntions,
4
�within a state, particularly in its last }'ear or so. Since 1993', however. the Clinton Administration
has used waiver authority extensively allowing 43 states to experiment in ,some way with their
, welfare programs.
This analysis examines the effects of implementing six important waiver provisions in
most, .ifnot all ofa state (major, state~wide waivers). Waivers thai only applied to pilot sites, ,
.
j'
such as a few <;oumies are not examined here because the magnitude of any effect on the state's
j
caseload wili be too small to detect-" Many state waivers also include a multitude of provisions
that affect few individuals and are unlikely to have a substantial impact on the overall rare of
: welfare receipt in the state, Thus. we focus 'on the foliowing'six types of waivers: te:mination
and work-requirement time limits, reduced JOBS (Job Opportunities and Basic Sldlls) exemptions,
increased lOBS sanctions, family caps, and increased ea~ings disregards.
d~scribes
The data appendix
each type of waiver and identifies the dates that each'statewide waiver was approved.
Figure 3 displays the n~mber of major. statewide waivers in effect in fiscal 1993 and 1996.
By the end of the 1993 fiscal year, seven such waivers had been approved~ the most common form
was an increase in the
~mings
disregard. If this type of waiver has any effect on the welfare rolls
in !he sr,ol1-run, it would increase welfare recipiency because it increases the number of low-earnings
workers eligible for benefits, By fiscal 1996. however, 35 states were granted major, statewide
I
I
waivers. S Sanctions imposed upon workers wh-;' did not live up to their 'work or job search
requirements ar.;: the most common, Because these and most Q'f the 9ther types of major waivers
-
. "Resu\:;,LQ: prelimina.")' analysis indicated that pilot programs h3Q no discernible effect on the size of a stale's
welfare rolls.
.
.
I
I
.!SLllC:: 1993, 43 states have received waivers, but wme of them appiit:d to a small share of the Stare.
5 .
.~,
�would be predicte"d to reduce the likelihood of benefit receipt, their expansion over the 1993-1996
period may have helped reduce the welfare rolls beyond that brought about by economic growth. 6
The map in Figure 2 also shows the states that have implemented major, statewide waivers.
Some states that have experienced 'large drops in their welfare rolls without large drops in
unemployment, like Virginia. have also received waiv~rs,
In contrast. other states in which
unemployment has fallen considerably, but in which large drops in welfare rolls have not occurred,
like Pennsylvania, have not received any major statewide waiver·, A systematic analysis that
separately identifies the effects of waivers and econorUc conditions is reported below.
,
OTHER WORK-RELATED INCENTIVES
Several other federal policies introduced over the past several years also may have contributed
to changes in the rate ofwelfure receipt. .For instance, the EITC was signiiicantly expanded in 1990
and 1993. This Utx credit, available to low-wage workers, increasedJrom 14 percent in 1990 to
40 percent in 19% and may have made work a better alternative than welfare. leading to a decline
in the ,welfare mUs. 'Since 1993, enhanced efforts to co!~ect more child support raised the incomes
of some mothers, and may have reduced their reliance on welfare. Additional state and Federal
spending on day care may have also made it ~sier for single mothe:-s to work:
Changes in Medlcaid eligibility over the past decade or so also may have
~!fected
the size
Qfthe welfare rolls. Since 1986 the link between AFDC and Medicaid eligibility has been broken.
and over time the ·!lumber of poor children eligible for.Medicaid has
~isen
dramatically. The fact
6Moffil1 (1996) has argued that the JOBS program (and, by jmpiication. an extension of the JOBS pf(}granl)
may provide incentives for some to participate in welfare programs so that Illey can receive the potential bcaefiu of
these policies and could lead to an increaSe in the c.ase1oad.
6
�that some low-income individuals can now work without lostng Medicaid benefits.for thei:
children may reduce the rate of welfare receipt. 7 In fact. Yelowitz (1996) finds that cr.anges 1n
Medicaid eligibility through 1)191 led to a moderate reduction. Although eligibility has continued
to expand since then, the expansions have been smaller than those that took place in the late 19805
and are unlikely to account for a substantial share of the reduction in welfare receipt.'
~
DEMOGRAPHIC CHANGE
The AFDC program was largely targeted to single mothers with children and this
demographic group has grown over time, The share of families headed"by women rose from 10
percent to 18 percent between 1970 and 1995, which fuliy explains the increase in child pove:ty
over (he periS'ld. OutMof-w"edJock hinh rates have also been on the rise. The relationship betw~n
these factors and AFDC eligibility suggests that the welfare rolls should have increased over time.
In fact, Gabe (1992) argues that the grow;.h in never-married fema!e~headed families was largely
.
.
responsible for the increase in welfare caseloads between 1987 and 1991. These factors actually
suggest t.iat we should have expected to see a continued expansion in the rate of welfare receipt;
the
o~served
decline between 1993 and 1996 means that other offsetting factors were more
important in determining recent trends.
tlt is also possible that expandoj Medkaid eUgibifuy may have increased AFDC participatiou. As more people
come ioto contact with the social welfare system through Medicaid. they may find thac dley are eligible for AFDC
benefits as well.
tThis analysis dots cootrol for some of the recent Changes in Medicaid eligibility that have occured at :he
aatior-albel even ';hough t.beir eftCt;;ts cannot be stpantely identified from other factors that affect all states in a given
year.
7
�DATA AND DESCRIPTIVE STATISTICS
This analysis employs state~leve! data between the 1976 and I 996 fiscal years. Descriptive
statistics for 1993 and 1996 are reported in Table 1, separately for those states with and without
approved waivers.' Columns 1 and 2 indicate that the share of the population receiving AFDC in
"nonwaiver states" fell 0.6 percentage points) from 5.3 fa 4.7 percent The fall in AFOe recipiency
was larger in "waiver states"; the 'share fell 0.8 percentage points, from 5.5 to 4.7 percent in these
states. HI Th~ unemployment rate in the two sets of states "is virtually identical in these ~'ears>
i:ldicating that the larger fall in the :welfare rolls in waiver states cannot be attributed to better
. economic conditions. 11 Although AFDC benefits are more generous in nonwaiver states, real benefits
have declined at roughly the same rate in both sets of states over the time span.
Other factors besides unemployment and benefit generosity ma~ be
relat~d
to diffe:"ences in
the relative size of the welfare rol1s across states. In particular. the categoricai nature of the AFDe
9All'AFDC n::cipieti:s are COUll:ed here. inclttding thOSe in two~parent families who receive AFDC~UP. ThOl,e
in :he ianet cll!egor;! are 'probably more rtSp<.l11!jive to business cycle conditions because constraints facing single~
parenl5, like tinding affordable day CBIe fQt their children while !hey work, are smaller in two~parent famlJJcs.
l1lt::refore, :,hey are more able to work when jobs are available. Still, AFDC-UP families represent a very small par!
of the cotal AFD~ ~ and including them in 'dtiJ> anal)"Sls should have mi::ninlal effectS on the estimated parameters,
l'1'he difference in the average reduction across waiver and nonwaiver states is not sutistically significant.
The power of this lest, however, is very weak in that waiver stares may have had a IN.uver in effect {or a very small
pa.'1 of this three yeat period. In addition,' the nonna! variation across States in the share of the population receiving
wdfare swamps any variation across rhe gmups states over time. The regression analysis reported below adjusts
for, these problems and results from model specifications that mimic this simple "difference-in-.difference" test statistiC
. inrliclI.:e u:at the r::duction in waiver States is significantly larger d-..an that in nonwaiver States,
of
1111115 analysis m;es the unemployment rate in cacb state and fiscal year, .Because state level unemp!oymem
data have only been available ~ince 1976. the 1976 fiscal year unemployment race is measured JUSt for the last three
quarteC! (January thrOush September) of that fiscal year. Other measures of unemployment mayJx": more appropriate
for !his analysis. For instmce. a measUre of unemployment for younger women may better rep-resell! the laoor market
opportunities or potential weUa:re recipientS. 1'lWi measure may be somewhat endogenous, however, because cbangeL
that affect the labor ~upply of welfare recipients will to some extent, ab:o affect the unemployment rate of younger
women. Therefore, Olle might \W.I1( to use the prime-age male unemployment rate because it does nOl suffer from this
~Ort of endogeqeity. Unfortunately; neither of these alternative measures is available on a state/year basis.
8
�program that mainly provided benefits to low-income unmarried mothers and their children suggests
that the extent of poverty and the share ,of households headed by women, may also ma:tcr.
C':lfortunatcly, obtaming reliable estimates
of these measures by state is hampered by srnaH sample
, sizes in the main source of household data, the Current Population Survey. Research concerned with
trends across states in variables such as these generally Tely on Census data that are only available
every 10 years.
The iower block of Table 1 presents povertyntes and the share ofhousebolds headed by
women frorr: the 1980 and 1990 Censuses by waiver status in 1996. These statistics'can highlight
whether any long-term trends across states could influence a statistical analysis of welfare receipt.
In both types of states, both measures have been increasing over time, but increases were larger in
nonwaiver states" For.instance, the share offema1e-headed households increased by 2.0 and 2.5
percentage poirls in waJ:"er states and nonwaiver states, respect'iv~ly. If thes~ differential trends
continued through the 19905, then one would expect the welfare roBs to fall in waiver states relative
to nonwaiver states because a smaller relative share of the population would be categorically eligible
. foi benefits, These trends would bias an analysis of the effects of waivers on welfare receipt towards
the finding thaI waivers matter. Controls for these trends were inciuded in tne statistical analysis to
.
help remove ,his fonn of bias (as discussed'below).
METHODOLOGY
.
.
The statistical approach employed in this analysis is designed to estimate the effects of
economic conditions and federal waiver policy on 'the size-of the welfare rons, holdbg other
I
r
1
factors that may affect the rate of welfare receipt constant. To that end. we estimated mULtivariate
9
j
�models of the natural log of the share of the population receiving welfare in a state/year. Ii:
Spe;;:ifically, we estimate OLS regression m~de!s of th~ following form: 'J
(I)
In R.. = 1],,~,
+ W,,~, + In B.~, + y, + y, + trend·y. + € .
(2)
where R represents the sbare of the population receiving AFDC, U is the unemployment rate, W
is an indicator variable for welfare waiver status. B represents real maximum AFDC benefits in
1996 dollars for a three-person family, s indexes states, t
'and ye..'U' fixed effects, and
€
ind~xes
time, Y. and Yt represent state
represents a residuaL Year fixed effects capture time-varying factors
.
,
that affect all sUtes in a given year. Such factors might include changes in welfare policy (like
OERA 1981), other changes in policies targeted to low-income individuals (like the Earned
Income Tax Credit), or changes in national attitudes regarding welfare receipt that may have been
linked to the welfare refonn debate.'" This approach incorpOrates the contribution of factors like
these, although we cannot specifically identify the effects of each one on the rate of welfare
receipt. Similarly I state fixed effects control for time-invariant differer,ces across states, such as
I~Another measure ()( welfare receiPi that could be used as the dependent variable for !his analysis is the
number of families, or cases, receiving benefits, Patterns in the welfare ca.seload over rime may differ across scares
as the munber of child-<lnfy cases has proliferated at differential rates. All of the models reponed below have also been
estimated using the log of the welfare caseload as the dependent vari.able and mainly find similar results. The main
difference is that JOBS sanctions apparently have a latger effect on recipienlS than on cases. Tltis is consistent with
tlle fae: that many of these waivers only sanction !he parent and maintain benefits for the children so that the case
remains open even though the number of recipients fell.
tJTI}e~e regressions are weighted by the State populatioo in each ycar to yield parameter e!!timates tlUK are
representative of the entire .country,
!~Previou;; studies of the \velfan: caseJoad thal use naMnal time series data (CEO, 1993) have diffiC1;.!ty
comrolllng for·:tris rfPe of pattern in the data, The results presented in Moffitt (19S7) imply that it is important (0
control for such "Structural shifts. ,.
,
10'
!
�differences in industrial composition that may affect
less~skjned
workers or attitude-II towarcs
welfare recipients,
As shown earlier, it is also J'Xlssible that changes may be occ~rring over lime in otherwise
unmeasured factors that differ across states, particularly demographic characteristics like the share
of fema'e-headed households,
Unfortunately, . published 'data on detailed demographic
characteristics such as these are unavailablt~ at the state level each year. S'uch differences could
be fully accounted for by including the interaction of state and Yf!:3.I fixed' effects, but a model
including these interactions is under-identified. As an altemative, we include a state-specific time
trend.' If the rate of increase in, say, female-headed households in a state is constant. this
approach will control for these changes and provide an unbiased estimate of the effects of waivers
and economic conditions on the welfare rolls. IS The effects of such changes, however, cannot be
separately identiqed.
Figure 4 presents a comparison of Florida and Georgia that, is intended to provide some.
,"
,
intuition for th~: statisticafmethodology and the manner in which the'effects of economic activity
are estimated separately from other potential confounding factors, It should not be considered a
rigorous test. The figure plots the difference between the two states in unemployment
~tes
between 1984 and 1996 and in the share of the population receiving AFDC over !he same period,
Taking the difference between the two states in each year controls. for any differences that affect
<;:1' diffe,ences acruss states over time are nonlinear they will not be capturoo by tbe~ trends IlOd, if thtrl;e
diiferen<:e4 are correlated with waiver awartl.$, the eslimated elT«i of waivers 00 the rate of welfare receipt will btl bjlls~{1.
Although few candidates for such changes are readily apparent, one possibility may be the growth 1D. income inequality
since ihe 1m 19701>, documented in the EcQoQmj" RewO pf the President (l997). 13lank and-Gard (1993) show thac
the rate of grO\\lih in inequality has OOt been constant -and has va.rted across regions of me country; if these differences
occur across StateS and are correlated with waiver policies they may intrtXfuce a bias in the results reported here. Future
research should investigate this possibility in more detaiL
II
1
�, both suttes simultaneously. Because neither state received a waiver until late in the 1996 fiscal
year, the di:ference in trends through virtually aU ofthis time period are unaffected by
difference.~
in waiver provisions or their effectiveness.
Throughout most of the expansion ,of the middle to late 19805, unemployment in Georgia
had been· somewhat higher than in Florida, Over this period. a steady difference, in the r,ate of
AFDC recipiency is also apparent. This difference may be attributed to differences in the two
states' welfare systems 'that do not change over time, attirudes towards welfare receipt and th~ like
that are controlled for in the analysis conducted here.
When the 1990-91 recession hit,
-
unemployment in Florida rose considerably relative to that in Georgia, and the difference has been
slow to re:;ede. Subsequently. AFDC
r~ceipt
shows an increase in Florida relative to Georgia,
It is irnporta'1t to note that a delay in this ~nse is apparent as Florida's AFDC caseload did !lot
begin to rise relative to Georgia's until 1991 or 1992. This timing of the response in the rate of
AFDe receipt to changes in unemployment (and waivers) will be examined more carefully in ,the
empirical a!1al ysis below,
RESULTS
Table 2 presents estimates from different statistical specifications based on the regression
models represented by equations (1) and (2), In column I, the model does not include state
speCific lInear time trends and provides a baseline set of estimates to identify the effect of
including these trends. In this model, the unemployment rate is shown to have a substantial effect
on the rate of welfare receipt; a one percentage point increase in the unemployment
12
~te
increases
�the rate of welfare receipt by almost 5 percent. 16 States that were granted any major, statewide
waiver had almost a 10 percent faU in the share of the population receiving welfare, based on
'estimates in this mode1. Finally. benefit generosity is shown to be significantly positively related
'0 APDC receip.; the share of the population receiving benefits increases by 3.2 percent for every
10 percent increase in maximum monthly benefit payments.
Column 2 presents estimates of the same
specifi~alion
except that
state~specific
linear
tre:1ds are inclllded. Omitting these trends will introduce bias if they are correlated with the rate'
of welfare redpiency and any of the other explanatory variables. Estimates presented here
indicate that these conditions are present. As illustrated 1n TabJe I, trends in factors Hke female-
headed households and }X}verty t:&te5 across states are c?rrelated with waiver status, and ignoring
these trends biases the estimated effect of waivers upwards. The estimated effect of introducing
a major, 'statewide waiver falls from 9.4 percent in column 1 to 5.8 percent in column 2. The
estimated responsiveness of welfare receipt to unemployment is also smaller in'this specification,
One surprising finding in this specification is that more generous benefits are estimated to
reduce the welfare rolls, although this effect is not significantly different from zero, n This
finding is counterintuitive' and is the result of the statistical procedure that has absorbed a
significant share of the variability in the data. In a model with State and year,fixed effe.cis and
state-specific linear trends, the only type of'lariatlon that can provide statistical identificatio'n are
'~Addi!iOtlaJ measures of cyclical activity besides. the unemploymem rate may have a signific3.Dt effeci on
'l.'elfare receipt. Preliminary estimalCS using the rale of employment grov.1h v.ithin stares over time. however. added
no additional exp:anatory power in models that also included tags of the unemployment rate.
'
lilt is possible that tbis result is driven by a sort of policy endogeneity where shurp ilhanges
cuts in benefit levels cx:cur in 'I'OOJXm!I<!' to swelling welfare rolls, provlding a oegative relat:ooship between these vltr;rlble-~,
-Benefit cuts in California in the early 1990s:that occurred as CAWlrutds were rising in that state may be' an examp:e of this
endogenel!y,
13
1
\
�those resultir.g from sharp changes within a state over time'in the respective variables. Changes
like rhLs are exactly whit are observed in variables like unemployment and, particularly. in
indicator variables like U10se representing waiver status. AFDC benefits generally exhibit little
of this sort of b.:!hav.ior; typlcally benefit increases are small and ben.efit cuts largely
occ~r
as
inflation slow!y erodes the purchasing power of the benefit. Therefore l with little variation left
"to ide.'1tify the effect of changes in· AFDC .benefits l the estimated effect becomes less robust, This
becomes clear in ·the subsequent model specifications reported in this table where an increase b
AFDC bC:1ef::ts
i,)
estimated to inc·r~ welfare receipt) although some of these effects are on:y·
c
margi.:1uJiy statistically significant.
In essence. these results indicate that the methodology
employed here is not a particularly powerful one to deterrnine the effects of the generos:ty
of
AFDC benefits '.'n the level of welfare receipt.
Estimates In column 3 are obtained from a m~el that includes a one-year lagged measure
of the unemployment rate within a state, providi.ng a more flexible specification of the timing of
the response in .welfare receipt to ecoo.omic conditions. Lagged unemployment may be related
to welfare
receip~
if, for instance, the onset of a recession leads those low-income workers who
lose their jobs to spend some time looking for a new one while drawing down their limited assets
before applying for welfare. As a recession ends, these typically
less~skined
workers may be the
last ones hired. Evidence appears to support this intuition, as lagged unemploymc·nt is strongly
re:ared to .the share ·of the population receiving welfare. To interpret these findings, consider a
1,percentage point inc~ in the unemploymenl rate that lasts fo: two years. In the second year,
the sha.'"e of the population receiving welfare will be 4 percent larger (because the coefficier.:s on
14
�the two unemployment measures are summed). States awarded a major statewide wajver are
estimated to experience a 5.2 percent decline in welfare recipiency in this model.
So far. waivers have been aggregated into a simple indicator variable that measures
whether any waiver had been approved. Column 4 Pfesents estimates of the effects of each of the
six major types of waivers studied in this analysis on the rate of welfare receipt. In this model,
the only type of waiver that significantly affects the extent of welfare receipt is JOBS sanctions, Ii
This type of waiver is estimated to reduce the share of the populatio:1 receiving welfare benefits
by almost 10 percent. 19 Disaggn;gation of the waiver categories did not substantially cha.'1ge the
estimated impact of an increase in unemployment. ".
Or.e pOicntial shortcoming of the model presented in column 4 is that many 'waivers include
several of the diffe....-ent types ~U at once, limiting the ability of the statistical analysis to sepa:ately
identify their effects: Column 5 preSents estimates of a more parsimonious model that includes'
whether the state r~ved any major statewide waiver and whether that waiver included JOBS
sanctions, In ,this specification as well) no other type of waiver is shown to have a significant
effect on, welfare receipt besides JOBS sanctions. Again, the responsiveness
o~ the
welfare roIts
to the business cycle is relatively unaffected by the changes in waiver specification, The analysis
reported so far has restricte,d the effect of waivers to be observed no sooner than the time the waive:
was approved, This restriction does not all9w for the possibility that the waiver application process,
the publicity surrounding it. and potential changes in case workers' behavior and attitudes may
:~This
fmtiing is consistent with Pavettl and Duke (1995).
:i'J'ennin:ltiCnrlme limit \\-".livers are also: estimated to reduce the rare of welfare receipt, ,but the estimated effect
is only Statistically significant at the 10 pen:ent !evel.
15
1
f
�provide a signal to potential recipients that the environmen! in which the welfare system operates is
about to change, It may lead some individuals contemplating applying for benefits to find other,
sources ofincomf! suppon, whether from work or elsewhere. This possibi:ity is considered in column
6, where the presence ofany statewide waiver and those including a sanctior. provision are included
in the model at
thl~
time the waiver was approved and, in separate variables, "a year before the waiver
was approved (a "lead").
Estimates ofmedeIs including leads ofthe waiver measures are reported in Column 6 ofTa"le
2.· The ''threat effh:e' ofapplying for'a waiver does appear to reduce the number ofindi\.':iduaJs who
receive benefits the year before the waiver is approved; the share of the population receiving welfare
is estimated to fall by 6.3 percent in that yesL In the following year no additional reduction is
,
observed. On the other hand, the effect of waivers that include JOBS sanctions is not observed until
the year such a waiver is approved.
~
,
One alternative to a causal interpretation of these fir-dings :s that those states whl:h
. implemented waivers were
am~ng
the ones that experienced the most dramatic run-up in the:r
welfare rolls' in' the late 1980s and 'early 1990s, This trend may have inspired the waiver request
and r:1ean reverSion may be responsible for the subseq~ent decline in the rate of welfare 'rece:jJt
relative to "other states, Tests of this hypothesis, however, indicate that waiver states did not
,
experience a larger-than-ave.rage increase in their welfare rolls between 1989 and 1993, In fae:,
litfle
relation~hip
across states is apparent between the 1989-1993 increase and the 1993-96
decline.
The resdts reported i!'l Table 2 can be used to estimate the share of the reduction in we:fare
receipt between ;993 and 1996 that can be attributed to economic g:-ow1:h and federal welfare
waiveiS grar:ted
':0
states, The product of the estimated parameters fOf say, unemployment and its
j
16
�lag and the rt!spective changes in unemployment in each state between 1993 and 1996 provides an
estimate of the predicted change in welfare recipiency over the period based' solely on cha!1ges in
unemployment. The ratio of the predicted,change to the actual change indicates the share of the
reduction attributed .to unemployment. An analogous
extent
e~ercise
can be conducted to estimate the
to which waivers contributed to the dedine in the welfare roils,.· Other unidentified factors
wodd be responsible for the difference remaining after accounting for these 1\'-'0 eifects.2(1
Table J p:esents the results ofthis exercise for several ~fthe statistical specifications reported
in Table 2'. The results indicate that the decline in unemployment that continued through the
economic expansion contributed about 44 percent towards the dec~ne in we:fare recipiency in mode:s
that included both contemporaneous and lagged unem~loyment.ll Walvers accounted for roughly
w 20 percent of the decline in models that ignore the pot.ential effects of an impending waiver
15
grant. Once these effects aie induded (Column 6 afTable 2). estimates indicate that waivers can
,
,i
explain 31 percent of the decline in the share of the population receiving welfare. In this mo~el, other
unidentified factors explain an additional 25 percent
A similar exercise
coul~
I
be conducted for the 1989-1993 period that saw a tremendous
in:;rease in'the rate of welfare receipt. As discussed earlier, the magnitude of the inc'rease is
,
,
somewhat st.:.rprising given the,relatively mild recession in the period, The estimates provided here
reinforce the mystery; changes in unemployment can only explain abo!.;; 30 percent of the rise in
,
,
'
'
WSimply st>bttactiog I.be sum of the two effects frOID tOO ooly indjc:ues we contribution of other factors if no
interaction between changes in unemplo>'IDen( and waiver policy on welfare receipt occurs. [t may be me case; [or
example, d13.t waiver policies are more effective in states with low unempJo)'llleUt cales. Models that incorporateiJ this
possibility were als:) estimated but the results indicated that the inieraction between unemployment and waivers was
!lot st:lOs(£ca:ly significantly different frmn z.;:ro at conventionai significance levels. '
"Based on estimates from a model of the duration of welfare spells and permanent cltanSes in labor market
conditiDns, Hoyues (1996) estimates that a ~a1 economk expansion would rum: in an 8 to to percent reduction
in the welfa:e castload. This estimate is somewhat higher than the findings presented here and the difference is
consistent with the fact that !he current expansion is ongomg and, i!lerefcre, does no! represent a permanent change
in labor market conditions.
,
17
j
1
1
�welfare rolls, Waivers were relatively new by 1993 and are found to have very little impact on the
share of the population receiving welfare; in fact, they are expected to lead to a-small decline. That
leaves roughly 70 percent of the rise ur:explained by tins statistical analysis. Other forces that are
more difficult to quantify must have been changing over this period> contributing to the increase.
DISCUSSION
The findings presented in this paper indicate that a robust economy and federal waivers
~:owlng
states to experiment with new welfare policies
ha~e
each made large contributions: towards
reducing the rate of welfare receipt. The estimates provided here suggest that over 40 percent of the
decline in welfare receipt between 1993 and 1996 may be attributed to the falling unemployment rate
and almost one-third can be attributed to the waivers. Other factors that are not identified in this
analysis are responsible for the remainder,
The methodology employed in this analysis poses two problems in interpreting these results.,
First, it is possible that the estimated effect of waivers on AFDC receipt may. be capturing the
ten~ency for states ""ith shriOking welfare rolls to be the ones most willing ,to experiment witb waiver
,
policies. 21 Another sl!.ortcoming of this research is t~at it cannot detenmne the outcomes for those
individuals who otherwise would have coUected benefits ~ad waivers nor been granted. Additiona1
-
research that can determine how .individuals' fare under the alternative waiver provisions, ra~her than
.
an aggregate analysis examining the share'ofthe population receiving welfare', is dearly desirabie to
help address this issue,
oown
:.roue might expect stateS with difficulties in holding
their welfare rolls w experiment withllpproacht:s
to achieVe that em!. This sort of pOlicy endQgeoeity would bias the resu.lts towanls finding a positive relaflonship
betw:;:t::n waivers and the rate of welfare receipt
18
�References
Congressional Budget Office, Forecasting AEDC Casdpads. with an Emphasis on Economic Factors.
Washington, DC. July 1993,
, Coune-it ofEconomic Advisers. Economic RePOO orlhe President. Washington, DC: Government
Prbting Office, February 1997,
.
Gabe, Thomas. Demographic Trends Affecting Aid to Families with Dependent Children (AFPC)
Case10ad Grov..lb. Congressional Research Service, December 9, 1992.
Hoynes, Hilary Williamson, "Local Labor Markets 'and Welfare Spells: Do Demand Conditions
Matter?" Ni!tllJoal Bureau ofEconomic Research, working paper 5643, June 1996:
" Moffitt, Robert. <!Historical Growth in Participation in Aid to Families with Dependent Children:
Was There a Structural Shift?" loom31 nepoS! KtO'Desiao ECQljomics. Spring 1987. pp,' 347-363.
Moffitt, Robert A "The Effect of Employment and Training Programs on Entry and Exit from th,e
WelfareCaselond." JouroillQfPQlic;:Analysisand Management. Vol. 15, No, 1 (1996), pp,32-50,
Pavetti, I~aDonna -A and Amy~Ellen Duke.. Increasing Eartjcipatlon in '\fork and Work-Related
Activities" Lessons from Five Staje Welfare Reform Demonstration Projects, The Urban Institute:
.
Washington, DC September 1995.
Yelowitz, Aaron S. "The Medicaid Notch~ Labor Supply, and Welfare Participation: Evidence from
Eligibility Expansions," Q~a[le!!Y Journal QfEcomics, November 1995: pp. 909-939,
,
i
i
I
I
19
�DATA APPENDIX: DEFINING AND CODING WELFARE WAIVERS
Most waivers awarded to states include a multitude ofprcivisions that vary in the degree of
their implicmicns, Some affect the entire caseload while others affect a very small segment, like those
:hat were introduced in pilot sites, such as a few counties. Some contain generally standard
provisioas while mhers are more complicated and require some judgement in categorizing them. In
this paper, six major types of,waivers that were implemented in most, if not all, of the state are
considered. This appendix will provide some background regarding each of these different types of
waiver'S) and how they have been coded for this analysis.
Tenllill:ttion and \\lorkwRequirement Time Limits.
Under AFDC, families were entitled to
receive benefits as long as they met the e1igibility requirements; states could only impose a time limit
. on the duration of benefit receipt uthey were granted a waiver. Several states received such a waiver.
to implement to two main types of time limits. Termination time limits result in the loss Qfbenefits
for the entire family or just for the adult members, -depending on the individual state's plan. While
most states set a limit of24 months or so for all recipients, other states had variable time limits. For
example; Iowa's plan called for recipients to develop a self-sufficiency plan that included individually
based time lirr.its, and Texas limited benents to 12) 24, or 36 months depending on the recipient's
e~ucation
and work experience. Illinois provides an example of a state that
contai~ed
this type of
waiver provision but that is not coded as such here because it applied to a small fraction of the
recipients (those with no children under a.ge 13).
2Q
�Work-requirement
~ime
limit waivers continue to provide benefits to adult
recipie~ts
who
reach the time limit as long as they comply with mandatory work requirements" For example,
Massachusetts requires recipients unemployed after 60 days of l\FDC receipt to do community
service and job search to earn a cash "subsidy." California requires individuals who received AFDC
for 22 of the previous 24 months to participate in a community service program for 100 hol.:!"s per
mor.:h. New Hampshire alternates 26 weeks e3;ch of job search' and work·related activities for
re:::ipients; West Virginia's plan only requires participation in its work experience program by one
parent in two-parent AFDe-up cases, which are a small share ofthe total caseload, so it is not coded
. as a work.requircment time !imit
Some time limit waivers contain more complicated provisions that make them diffic'Jlt to
code. For im:tance, Delaware req~ires "employable" adults to participate in a pay-for-performance
work experience program after receiving benefits for 24· months~ after 24 months of program
pa."iicipatiort, the family completely loses cash benefits, Time limits with provisions such as this have
been coded
~s
containing both termination and work requirement provisions. Washington's plan is
a grant-reduction time limit, rubtractmg 10 percent ofthe benefit for those who have received benefits'
for 48 of60 months, then 10' percent for every 12 months thereafter. Because the time fraf':1e before
a significan~ redlJction in benefits could occur is so long, no time limit is coded for Washington.
Family Caps., Under AFDC, a famity's benefit level depended upon its size, so if a recipient had a
baby the grant amount rose. Family cap waivers allowed states to eliwJnate Or' reduce the increase
t"'1 benefits when an additional crjld was born. A few states, like South Caroiina, provide vouchers
for goods ar.d services wonh up to the amount of the denied benefit increase~Others ?!Iow child
21
1
I
i
I
�SU;lport cOllected for the additional child to be excluded from MDe income calculation, Ai! family
cap waivers except New Jersey's exempt children conceived as a result ofrape or incest from the
family cap,
S~veral
states, such as Wisconsin, Massachusetts and Illinois. specify that a child born
or conceived after a family no longer receives AFDC can be denied benefits if the family returns to
,
AFDC'
JOBS Exemptions, The Job Opportunities and Basic Skills Training Program (JOBS), part of the
1988 Family
Supp~)[t
Act, provides education, training and work experience activities to .4..FDC
recipients who did nOt fall into one of the exemption categories, "The exemption categories were
rather large, however. For instance, parents with children under age 3 were exempt and those'with "
chiidre~
under age 6 could only be required to participate if the state guaranteed child Care. Some
states requested a waiver to narrow the exemption criteria. The most commonly requested_ walyer'
requi:-ed parents with young children (sometimes as young as 12 weeks) to participate in JOBS.
Otber waivers allowed teen par:::nts attending school and people 'working 30 hours a week to be
cons;cered as JOBS participants. Ha:vaii had a JOBS waiver approved for a pilo: site in Oahu, where
a large share of the state's population lives, so it was coded as statewide.
JOBS Sanctions. Some states found that the sanctions for non~compliance \Io1th JOBS were not
strong enough to motivate unwilling participants; they requested and were granted waivers to impose
harsher sanctions. Twenty-two of the states were allowed to impose full-family sanctions (stich as
suspension of the entire family'S AFDe grant) after"a continued period ofnorihcornpliance. Other
states :-equested lougher sanctions imposed upon the recipient omy, leaving the children on the
22
�welfare rolls regardless of the parent's behavior. An informal survey of state welfare agencies
conducted by the Council of Economic Advisers indicates that the l..:.se of sanctions has varied
cor,siderably across states. Some states have been very aggressive~ sanctioning large numbers of
recipients while others have sanctioned few, if any, For example, over the 1996 fiscal year Missouri
reported sanctioning an average on, 100 people per month, including sanctions of different severity'
levels, Masstlchusetts terminated benefits for 1,200 families in 1996 for failure to comply with
t~ininglwo!k
requirements. On the Qthe~ hand, Georgia sanctioned few recipients in 1996,
Eornings D'isregard. Without a waiver, indi"";duals are aIlmved to keep $30 plus one-third of all
additional eariLings for the first three months of benefit receipt (the "standard AFOe disregard").
After that almost every dollar ofeamings results in a dollar reduction' in benefits. Some states
received state\"'llide waivers to improve the economic incentives for recipients to work by increasing
.
.
earned income disregards. The changes ranged from removing the time limit on the standard MDe
disregard·:o disregarding aU earned income up to the poverty line.
23
�-
~,~~,-
- ---
Approval
Dllt~
-
.
of Major Sialewide Welfare Wai\'eIS in lhe Bush.nnd Clinlon Adininisu alions
---
-
----
,
--
,
-
----
Any Major
leITH.
wort: req.
Statewide Waiver
time limit
Arizona
5(22/95
5(22/95
Arkansas
415194
California
10129192 9/11195 8119196
JOBS
time limit
Slale
---.
~
Alabrurta
Alaska
family cap
Sanctiolls
Esmings Disregard
,
5(22195
--
-5122195
415194
8119/96
911 1195
10129192
,
Colorado
-
8129194 12/]8195
Delaware
12118/95
51Rt»S
Connecticut
5~5
DC
Geolg)S
5/li/95
5/8/95
Hawaii
61261%
•
11/1193 6r.W94'
6124194 8/16J96
-
i 112319J 9130195 '6126196
Im:!irulll
12115194 &116196
12/15/94
Iowa
8/13193 4111/96
8129194
5/8/95
5/li195
5IRNS
6124{94
11Jtl93
6(261%
.
-
8116196
·6124194
8/19196
Illinois
.
8129194
111l/93
8116196
Idaho
8/29194 12118195
12118/95
.
6/26196
,
Flmida
&'1 ]193
8119196
913{WS
.
12115194
8119/96
9n0195
11/23193
.12115194
.
6/26/96
8I1619l1
8/1.)193
8/1-3/93 4/11/96
8113193
,
I
Kansas
KentuckY '
I
Louisilma
Maine
.
-
,
6/101%
8114/95
8/4195,
Michie:atl
"'llL
24
-...
"
8/161%
81l6i96
814/95
814195
814/95
10/6194
8/1192
8116/96
S/4195
8/4/95
811192.10/6/94
Mas.<tachusetls
-
6/10/96
S/!4f1$ 8I1619l1
Maryland
M'
,
8/}/92
101_
�--
---
--
Stale
Mississi...... j
---.
. AO'lMajor
S!'nlewide Wai....er
--
l!::ml.
time limit
----
~.---
\\.Qrk req.
lime lintil
_.
sims
family cap
-
-----
r..amings Disregard
.-
911195
4/18195
4118195
Montana
4/1iN5
' 2f27N5
4!liNS
4t!8195
4118/95
2/27/95
2127195
2/27/9$
.
Nevada
lk\:.:'J~
4/iR1?5
2127195
2/27/95
,
-
New Hamnshirc
6/18/96
___ ___
6/l8196 .
6ftS/96
__7/Im
711192
New Mexico
6/18196
7/1/92
7/1192
611&196
711192
-
Ne\v York
- -
North ClUulina
i
-----
9/1195
Missouri
Nebra3kn
--
Sanctions
2/5196
.
215196
2/5196
2/5/96
2/5196
North Dakota
Ohio
Oktah(nntl.
3/13196
01'('11011
,
3/13196
3/13196
111 $192 31281%
I
312&'96
3113196
7115192 31281%
1128/96
513/96
5/3/%
Pennsvlvania
I
Rhode Island
5/3/96'
South Cllrolina
i
513/96
S/3!96
,
Souto Dakota
3/14/94
Tennessee
7/25196 '
7/25/96
Texlls
3122196
3122196
Jfl.2/%
Uiah
lo/S192
-----
1015192
IO/sm
10/5/92
Vennonl
4112193
4/12193
4/12193
4/12/93
711f95
7/1/95
711/95
Virninia
I
711195
Wasbinaion
7/25/96
4112193
I
9/29/95
Wesl Vir'fi!;ia
3114194
711195
711195
~lt4~-L_
7/25/96
7/25196
3n2/96
7/31/95
Wisconsin
7flS!%
9fl9195
,
7/3l/95
6t24194 8114195
6h4194
•
.
25
8/14/95
8/14/95
.
.
�Table I: State Characteristics Over Time, by Welfare \VaiVfJf Status
,
,
,
States without Major
Statewide Waiver
States with Major Statewide
Waiver
Short-Term Changes, 1993-1996
,
(I)
Characteristic
;%
(2)
1993
of population receiving
iAFDC
,
,
,
,
'1996
,
,
,
5.3
,
4.7
•
II unemployment rate
,
,
max AFDC benefit (3 person
family, 1996 dollars)
7.1
5.5
453
,
,
,
,
(4)
(3)
1993
,
,
,
,
I
,
,
,
,
,
421
1996·
5.5
4.7
7.1
420
,
,
,
5.4
386
·
·
·
Long-Term Changes, 1980-1990
,
,
,
Poverty Rate
1990 .
1980
13.1
,
1980
1990
14.0
12.3
12.9
17.0
13.7
15.7
"
Ii
,
,
,
% of Families Headed
bvWomen
I
,
,
,
14.5
,
,
,
,
,
.
.
,
,
�,
,
Table 2: Effect of Economic Activity and Federal Welfare \\'aivers
on Rate of AFDC Recipiency
(coefficients multiplied by 100. standard errors in parentheses)
,
,
,
,
,
,
"VARIABLE
II
,
(2)
(1 )
(4) .
(3)
(5)
lag of ma:<imum
AFDe benefit
,
,
.,
(6)
,
,
)2,23
·5.91
(4,80)
7.93
(4,80)
11,0)
(4.88)
9.99
(4,82)
3,10
4,73
,
, (0,26)
(0.35)
·0,90
,
(0,43)
-0.86
(0.43)
·0,91
(0,42)
4.97
(0,42)
4.86
(0,42)
, (5.10)
,
,
,
unemployment fate
,
,
,
,
8.61
(4,83)
~.
unemployment rate
any'statewide
welfare waiver
-9,40
(2.26)
(0,42)
,
,
,
,
,
termination
time limits
,
I
,
,
,
work requirement
time limits
,
!I
family cap'
"
I
,
,
earnings disregard
,
I
,
,
,
i
,
,
,
,
,
·8.35 '
(2.59)
2,64
! ·0.49
,
I
,
,
(2,76)
,
,
,
.
,
I.
,
,
,
,
,
,
,
,
,
,
,
,
,
I
-6,28
(2,21)
,
-
·1.50
(2,60)
I
state fixed effects
x
,
,
year fixed effects
x
state-specific trends,
,
,
,
,
.,
,
x
x
x
x
x
x
x
Ii
Ii
,
,
,
,
lead ofJOBS
sanction waiver
·6,96
(3,11)
0.11
(2,16)
lead of any
statewide waiver
,
,
,
2,86
(2,83)
i
,
,
,
2,26
,
,
,
(3,09)
,
,
,
,
,
I
' ·6.37
(3.74)
,
,
-
,
,
,
(2.38)
(3.00)
,
,
i
i
,
·1.64
(2.05)
·9,69
,
'I
(OA1)
i
,
i
,
,
,
i
JOBS exemptions
,
,
4,79
4.94
(OA1)
-5,17
(1,74)
·5,18
(1,94)
!
JOBS sanctions
,
,
,
,
·0,77
,
, lagged
i
,
x
x
x
x
X
X-
x
X
,
Note: The dependent variable is the share of the population receiving welfare, measured in
natural logs.
,
,
I
�r
Table 3: Percentage of Change in Welfare Recipients
Att'btbltD'f!ierentFetors
n ua e 0 1
a
{Standard Errors tn Parentheses)
•
•
·
·
·
·
(2)
. Based on Results in Table 2, Coluum:
(3)
(5)
·
.:
(6)
1993·1996
·
·
I
change ift unemployment
447
'-. "')
P·k
31.3
(2.7)
:: welfare waiver approval
14.9
(5.0)
••
·other
:
•
·
•
·
13.3
(4.5)
53.8
42.0
,
·
·
44.4
(3.2) .
44.1
(3.2)
21.8
(6.2)
i
30.9
(9.2)
33.8
25.0
I
I
•
·
i
•
,
·
•
: char;ge in unemployment
.
..
other
.
1989·93
23.9
(2.0)
•
·
·
·
76.1
30.8
(2.7)
,
·
•
·
•
·
··
.
30.5
(2.7)
69.2
69.5
.
•
.
,
30.4
(2.7)
•
69.6
•
·
·
•
�Figure 1
Unemployment Rate and Rate of Welfare Receipt
11
I
I
10 [-
Unemployment
(left axis)
.
~
........
(1)
8
U
l....
(1)
0...
:\
'
.. \
,.
•
Welfare recipients
(right axis)
"
•
··
·
·
•
•
,•
9
C
.
~
',
, ',
,
,,
•,
•
••
7
6 I-
C
0
5.5 .
........
C'O
::J
0..
,,
~
-
0
. -.•,
-. "..
•,
•
••
••
••
_.
6.0
5.0 0...
.~~
••
••
••
•
••
••
••
•
•
,•
••
••
••
••• •••
••
•
••
"+
0
(1)
l
C'O
4.5 ..c
C/)
5 1
.,
4
I
I
I!,
!
!
!
!
I
,
I.
~
I.!
!
!
I
!
I
!
I
,
!!
4. a
19761978198019821984198619881990199219941996
Fiscal year
�Figure 2
Reduction in Welfare Recipients and Unemployment Rate
.
.
1993 to '1996
U
\W
~.
§~l o~,
~
"'l'
, 2~;P~~
"t",~
W{)
Reduction in welfare recipients
(share of population):
. III Over 25 percent
~ 15 - 25 percent·
o Less than 15 percent
1.6 perc.entage points or more
U reduction in unemployment rate
(larger than national average)
W Major statewide waiver approved
�Figure 3
Number of Approved Statewide Waivers
40
rlll--------------------------~------~--~
gs 30
.......
co
.......
en
4
~ 20
(i)
..0
E
:::J
Z
10
o
Family
Any
Termination
Work
.
Waiver* Time Limit Requirement Cap
.
-
JOBS
Earnings Sanctions
Disregard
FY 1993 ~ FY 1996
* 43 states have received waivers under the Clinton Administration, but not all are statewide.
�,
Figure 4
I
A Comparison of Florida and Georgia
2.0
,-1
-
-
-
-
-
'
-
-
-
-
'
-
-
-
-
-
-
-
-
......................, 1.
.~
u:
1.5
Unemployment rate
(left scale) '.
"-'
*
°
--'
«
C!)
'"
-, 0.5 .....I
u..
"-'
.....,
a.
.:: 1.0'
c:
~
<D
E
>.
~
.. , 0,0
o 0,5
a.
E
::3
c:
0.0
AFDC recipients as
8
a5
a share of population
-. -0.5 ....
~
(right scale)
-0.5
~
o
,~
o
-1.0
1984
o
.c:
<D
~
(j
«
..
U
c:
~
u..
<D
c:
i:l
1-1.0
1996
I
1986
1988
1990
1992
Fiscal year
1994
�..
,
'
,
",
THE ECONOMICS OF CHILD CARE
A Report by the Council of Economic Advisers
December 1997
�CONTENTS
. Page
Executive Summary...................... :.................,...,.,....................... ,..,.... .i
Overview of Child Care ......................................................................... l
Current fede(a! Child Care Policies ..................................................... .4
Economic Rationales For Intervention................................ :................. 5
The Effects oflnrervention................................................ "' .......... ,...... 12
The Need for More Re'earch ................. "' .....:....................................... 24
Summary................................................................................................25
Appendix 1................................................................................... :.........27
Appendix 2............................................................................................ .30
References.,.........."." .. ,...:., ..".",...... ,.... ,.,""'" ...... ,..."..... ,", ... ,"" ..."" ...32
�EXECUTIVE SUMMARY
•
Laz'ge increas~s over the last t'VIenty years in the numbers of employed' moth'ers ,
young child.-en has more than doubled the number of young children !n non-pare
by 1995 there were almost 10 million crildren under 6 with employed mothers
parer.tal care. This trend is likely to continue as wetfare reform,moves many mot
young children off welfare and into the workplace.
'f
•
•
..
',.,,'
Potential economic arguments for intervention in the chHd care market include e:
benefits, infonnation problems and redistribution. Ths paper reviews these ariw
and the related evidence.
•
.. :
There is also reason to be concerned about the quality ofcare: Recent surveys
care centers, and family day care bomes'fow:d tha! t.'le majority ofchild care was
high enough standard to have a positive impact on child development, and a d.isn·
fraction was of a level that could threaten ""e child's health and safety. Quality p
are particularly serious for infants and toddlers and for children from low-incomt
families.
.
•
,
Many families with young children and employed mothers rely on informal, low
cost care supplied by relatives. But over half of these families p1Zchase child can
those 'WithOut access to subsidized care, child care costs can be a sizable fmanda'
This burden is particularly heavy for poor families: Poor families who pay for ch
for their young children spend an average of 18 perc""t of their income on child,
compared to 7 percent for non-poor families.
Subsidizing ,?ork-related child care expenses raises the effective return to workil
thereby increasing the mcentive to work. Evidence suggests that child care subsi
increase both the employment of mothers and the use of paid care among workil
motherS. Based on the estimates from the ernpiricalliterature. it appears that a 2(
decrease in the cost of care for working mothers V.1th young c..llildren who are be
percent of poverty is associated with an increase of 122,000 to 490,000 more rna
working and 124,000 to 318,000 more young children in peid ·care. Regulations 1
increase the quality ofcare but may also increase provider costS and the price pa
thus driving some providers ou: of the market and inducing some parents to swit
unregulated .care.,
•
Remaining gaps in knowledge prevent comprehensive analysis of policy options'
are virtually no s'Jldies that examine the responses of the low~income populatior,
care policy; most of the evidence reviewed in this report is based on studies of a
general population. Since the responses of the low~income population are likely
from those of the population as a whole, our ability to estimate the responses of
income population to child care policy is r.ecessarily limited. In addition, there a
,'
.' " .'
of
�areas in which additional information is needed to evaluate policy options. First, while
there is a large body of evidence On the relationship between child care quality and child
development, policy design would benefit from more specific information about the
nature ofthe link between attributes of ca.--e arid child outcomes; one unresolved question,
for example, is how different attribu:es of care interact with each other in affecting child
outcomes. Second) we lack information abou~ the effect of regulations on the price ofcare
and on parental use of regulated care. Finally, we have only limited - and incomplete
evide,ce ofL"e effect of child ca.." subsidies on the quality of care purchased; althouglf
the existing evidence suggests that parents do not respond to child care subsidies by
purchasing higher quality care, there have been only a few studies on this topic. Finally,
L'lere is virtually no infonnation about the quality and supply ofun...gulated care. These
.
areas should receive high priority in future research,
II
�OVERVIEW OF CHILD CARE
.
Between 1977 and 1993, the number of children under 5 v,ith employed mothers in non-parental
care more than doubled' (see graph). By 1995, there were almost 10 million children under 6
with employed mothers in non-parental care.: This surge is attribu:able to a combination of
•
'increases in haL'! the nu.'1lber of young children in dualMeamer famities and the numbe: ii:. one~
parent fa."Ililies with an employed pa.rentl
T-
Number of Children with Employed Mo:hers in Non-.parental Care
Modes of care
Non~parcntal
care can take many
different forms. A distinction
7
should be Grawn between unpaid
care iL'1d paid care. Care provided
by relatives is usually unpaid ~~ in
,1993,only 17 percent of care
provided by a relative involved
payment -- while 90 percent of care
, provided by centers or family day
4
care hones involved payments."
Over time employed mothers have·
3~--~~-~·---··'--~_~~---W
shifted their care arrangements from
, 1977 1979 1981 1983 1985 1987 19S9 1991 1993 patents or relatives to modes of
child care" more likely to involve
direct payments.' In 1993, about 56 percent of fa.'11ilies with an employed mother and a child
1.l:J1der 5 used paid cate. 6 Some families use mult:ple m9des ofcare for a'given child; for example,
in 1995, 9 percent of parentS used mUltiple child care arrangements.' MUltiple arrangements are
'Casper (1996).
.'U.S. Department ofEducation (1995). Numbers refer to children not yet in kindergarten"
In addition. there were approximateiy 3.4 minion children under 6 with non-employed mothers in
non-parental care.
'
'Hernandez (1995).
'Casper (1995).
'Hofferth (1996).
'Casper (1995).
'Hoffer,h (1996)
1
�particularly common for low~income single mothers: 45 percent ofiow-mct?me preschoolers in
families headed by an employed single mother were in more than one care arrangements on a·
regular basis. S
Paid cafe comes in several varieties. The most comnlon are child care centers, fa.~ily day care
home.s (in which a non-relative car~s for one or more unrelated children in the provider>s home),
and in~home. non~relative sitters. There has l:!een a shift over time toward more use of center care
and less use offamily day care. In 19&3,26 percent of young children with an employed mother
had t...'1eir primary care arrangement in center care and 24 percent in a family day care home; by
1993, these numbers had changed to 30 percent and 17 percent respectively.' (see graph). Use of
cer:ter~based care tends to increase·
Percent of Ct)lIdren of Emp(oyed M¢thef"$ in Differef'i~ Types of Care, 1993 with the age of the child and with
the income of the family. to
/'ion>Rellltive in
Ctilld's.Hof!l$
,
The cost of c'arc
m_......... »>t"'........ -"""II""_
The price of paid care represents a
substa1.tial fmancial burden to
parents who l~ck subsidized care,
and a prapo'rtionaHy much larger
burden for IQwer~income families,
In 1993, among families with
employed mothers and young
chHdren who paid far care, those
earning less than $14,400 per year
spent ~ average of25 percent of their income on child care compare'd to under 6 percent for
, families with annual incomes over $54,000, 1hls financial burden varies with the mode of care;
the average weekly cost ofcare in 1993 was $57 for family day care, $65 for organized child care
(center or preschool/nursery), and $83 for an inRhome sitter. I I
The quality of care
In addition to concern about the fmancial burden ofcare. there is concern about the quality of
'Phillips (1995).
'Cusper (1996).
"HofferL~
(1996).
"Casper (1995)
2
�care. If children are placed· in child care settings that are unsafe or unsanitaryl they can be in
grave danger of harm. Co:e that endangers children's health and safety imposes costs au the
children, their pare"ts Il1ld society as large. Among these costs are the fInancial COSts of
children's ilbess and hospitalization, and resultant parent.labse"ce, from work." In addition to
making sure that chHdren are not harmed in their care envirol'lment, there is a COncern over
whether the care promotes and enhances the child's developm."t.
'Quality' is n multi~irnensional concept. It is not easy to give a u.~~demensional 'quality racing'
to a chHd care setting "'Yhen a wide varie:ty of factors interact to determine the quality of care
received. Additionally, • dearth of infoan.tion about unregulated child care providers
compounds the problem ofaccurately assessing the <quality' ofcare that children are receiving:
However, two recent studies of regulated providers - one of child care centers and Due of family
day care homes - produced some disturbing evidence of the quality of child care. The ,tudy of
centers found that 86 percent of the centers surveyed provided mediocre or poor~qua1ity care ~~
when judged from the perspective of child deve10pment - and 12 percent were of such poor
quality that the children', basic health and safety needs were only partly met. The family d.y
care study found similar results: 91 percent were judged to be of inadequate or of only adequate
quaHty, II (t is: not dear whether centers or family day care homes are cn average of vJgher
quality. Centers tend to have more highly trained staff. but also have larger g:-oup sizes and lower
staff·chlid ratios tha."l family day eare,14
The quality of care varies ",ith the age and income of the children, Evicence suggests that infants
and toddlers may be disproportionately in unsafe and unsanitary care settings. The study of
centers, fbI' example, found tpat almost ha{fofinfants an~ toddlers were in rooms where
. children's basic heal!." and safety needs were not met" And while the distribution of children
across centers ofdiffering quality does not appear to vary v.ith the income of the children, there
is evidence that the informal and home~based care for Jow·income children is of lower quality
than that rec:eived by higher~income children, L6 Given that poor children are much less likely to
use center based care,17 this observation suggests that these children tend to be in lower quality
4
"See e.g. Beli et al. (1989).
"Helbu.'11 and Howes (1996).
"Walker (1992); Blau and Hagy (forthcoming); Blau (under revision); Waite et al.
(1991).
.
.
."Cost, Quality and Child Outcomes .in Child Care Centers (1995).
"Phillips (1995).
"Casper (1996). Twenty percent of poor children under 5 with employed mOloers were in
center~based care in 1993, compared with 31 percent of non-poor children.
,
3
�care than higher income children.
CURRENT FEDERAL CHILD CARE POLICIES
Federal policies to reduce the cost
of care
Several policies of the federal government reduce the costs of child care for working parents. ,
These include the Child and Dependent Care Tax Credit (CDCTC), the Exclusion of Employer
Contributions for Child Care Expenses, and the Child Care and Development Block Grant
(CCDBG). (,ee box on next page).
Although we know wh~t the state income eligibility requirements are for CCDBG funds, we do
not have any available data on the percentage of their eligible population that states are currently
funding. Some data from the four programs that preceded the current CCDBG suggested that
approximately 1 million children under the age of 13 were receiving federally subsidized care,
out of approximately 10 million children under 13 with working mothers and family income that
was less than 200 percent of poverty. \8 Although some of these families can benefit from the
CDCTC, many do not; they either cannot claim the credit at all because they do not have any
income tax liability, or they do not receive the full benefit of the credit because of low income
tax liability. Consequently, the vast majority ofchildren with working mothers below 200 percent
ofpoverty receive no -- or almost no -- federal subsidies for their child care.
...
Government policy that pertains to the quality of care
The 1996 Personal Responsibility and Work Opportunity Reconciliation Act requires states to
spend no less than 4 percent of their CCDBe} funds on 'quality-enhancing' activities. 19 The
federal government also requires states to certify that they have requirements to protect the
'health and safety' of children served by CCDBy providers. States, however, are free to design
the actual requirements that meet these aims.2°
"Child Care Bureau (1997).
19U.S. House of Representatives (1996). No data are currently available on how much the
states spend and how they spend it..However, under the earlier program, 7 pe~ent of CCDBG
expenditures in fiscal year 1995 were used to improve the quality of child care. Of these funds,
two thirds were used for monitoring and child care resource and referral (Child Care Bureau
1997).
2°Child Care and Development Block Grant Act Section 658E.
4
�FederAl Policies to Reduce Ibe cost of child carc
-
gram
Average
DeKription
Eligibility
-
To! I Federal
Exr endirures
award
-----
eTC]
Non~refundable,
tAX credIt for taxpayers
who incurwork·related child care
?pense5. Rate phased down for higher
$443 in fiscal
year 1%8.
Those with federal income tax liability. According to Treasury estimates, this
generaUy includes taxpayers: with income above the poverty level. Due to low
tax liabilities, a !!!:)(p~yer may not receive the full amount of the credut until his
or her income excee<is •• depending on family composition ~~ 140 to 160 percent
of poverty.
' .
..
For families
wilh high
margimli tax
rales, worth
much more
than
Families with participating employees,
Incomes·
ployer Exclusion
Employers are allowed to exclude the
pravision of child and dependent care
or emplfJyee contributions to such care
accounts from employees' taxable
income and social security eamings,
Est imllted to be
o million in
Co" 1 year 1995,
$g~
,
CDCTC.
.
----
DBG
!'IF
Block !j.rant to states that can be used
to subSIdize child care for parents who
are working or partic~ating in work~
relnled activities or e ucation
progr.ams.1
PRWORA allows states to transfer up
to 30% cflheir TANF block grant into
the child cate Clr social services block
¥rants. but no more than 10% of the
'ANF block graut can be used for the
sodal services block grant
Aveufe'
federa
sub$idy is
$66[1'
wee '
Esl mated to be
$2. hillion in
Fisl a! Year
19! 8.
. Federallnw ensnres that states can only use block grant limds to serve families
wilh incomes. below 85% of stale medIan income and must use at leasl 70% of
.Iheir mandalory and matching funds for ramilies on TANF, transitioning ftOm
TANF. or at fisk of becoming eH$ible for TANF. Within these requirements,
state$ have set a wide range of eligibility thresholds. ", Data on who ·~among the
eTi~ible ~~ has been funded are not yet availnble for the current program, bUI
19 5 data on the old CeOBG program indicate that over S5% of families funded
were under 150% of poverty. and all but 1% wefe under 200 percent of poverty.!
.
.
£2.9 billion in
FY ,I 997,.
.
n.
grar to t.he
stalt s is capped
,,$ 6.4 billion
. ISource: Treasury materials.
~This program is a consolidation (under PRWORA 1996) of (OU( previous subsidy programs: Aid to Families with Dependent Childfell. Transitional Child
Care, At~Risk Child Care Dnd the ChUd Care and Development Block Grant Program. It has been estimated Ihal PRWORA increased federal funding compared to the
programs it replaced by about $4 hiUion over the six: years FY 1997· FY 2002. (U.S. House of Representalives 1996).
'
.
'JIBS materials based
on CeDRO data from Fi$¢Ill Year 199$.
4American Public Welfare Association (1991).
lChild Care Bureall (1997):
otal annual
TAl F block
.
�· Regulations and licensing provisions are determined at the state or local level a.1.d va.; wideiy.:u
Licensing standards apply only 10 licensed or regulated child care providers, and S\ales are free to
detennine the providers to which licensing standards will apply." In the case of family day care
homes, most states exempt small providers from licensing requirements. 2J Consequently, an
estimated 82 to 90 perce;:}t of-family day care homes were unregulated in 1990.14 These
l4'1.Iegulated homes are all eligible to receive CCOBO fundir.g, as long as they fulfil the state's
<health and s.uety' requirements.1$
ECONOMlC RATIONALES FOR INTERVENTION
*
Child care is a rapidly growing industry> involving substantial costs to large numbers of parents.
the government current:y intervenes in this market, as discussed in the previous section. Here,
we review the economic rationale for government intervention in the child care market, as well
as the choice of policy instrument.
OVERVIEW: WHY AND HOW DO GOVER."'MENTS INTERVENE IN MARKETS?
From an economlc perspective, two issues must be addressed in thinking about child care policy,
First, is there an economic rationale for the government to intervene? Second, if SOt what is the
appropriate type of" intervention?·
.
Reasons for government intervention can be broadly grouped into two categories: market
imperfections and redistribution. Market imperfectior.s fall into two types: external effects and
informational. imperfections. If private actions impose: benefits or costs on society which the
market participants do not reap Or bear, L'1cn the decisions of private individuals may not be
socially optimaL If consumers do not have the infonnation necessary to make appropriate
choicesr the government may be able to provide ,information t.+tat improves their ability to make
choices. Government intetventlon on redistributive grounds might be motivated by a desire to
decrease in,~ome inequality! or to ensure that access to a particular service or conunodity is not
conditioned on income,
The economic justification for government intervention requires more than the identification of a
market failure or rerustibutional goal. In the case of an intervention to correct a market failu..--e.
"U.S. House ofRepre~en\atives (1996). Sec also CCDBGA Section 658£
"CCDBG Act Section 658E.
"U.S. House of Repre,entatives (1996) and Children's Foundation (1997).
"National Association for the Education of Young Children (1991).
"CCDBG Act Section 658£
5
�. the government must also be able to identify a policy that allows it to intervene in such a way
that the costs of interve!1tion a.--e less than the benefits. Even when the goal is redistributive, it is
important for the government to seek policies th?t achieve the desired redistribution at the lowest
cost.
The goverrunent has a variety oftocls at its disposZ1 including regulation, mandates, information
provision, subsidies. and direct provision oft.i.e good in questior., The appropriate poHey tool
depends on the rationale, for intervention,
•
lfthe problem is one of an external benefit, then the government might want to induce
greater consumption through subsidies or through direct provision. Which is more
appropriate depends on the respoIl5iveness ofconsumers to the relative price of the good,
as wel! as to the government's efficiency - relative to the private sectOr- in producing the
good. Regulations or mandates are also a possible tool for addressing external benefits
although the benefits from regulation mUSt be weighed against the costs of regulation,
These costs indude the potential for regulations to drive up the cost of the good and to
drive-: providers of the good out of the market; in additio:l. the government incurs
administrative expenses in regulating and enforcing the regulation. Providing
information is unlikely to be an effective instnunent for adcL.-essing under-consumption
caused by extern2l benefits.
•
If the issue is one of information imperfections, then the provision of information, or of
regulations that reduce W1certamty about quality are possibilities, Subsidies are unlikely
to prove useful in addressing an information problem..
•
If the goal is redistributive, then subsidies or direct provision could be appropriate.
Further consideration should be given to whether the government should ;>TOvide a
general i.ncome transfer or a subsIdy that is specifically tied to the good or service in
question.
GOVERl\'NlENT INTERVENTION IN THE CHlLD CARE MARKET
External benefits from child care
In recent years tl;tere has been a growing awarehess of the substantial and long-lasting effects on
children ofthelr experiences in their first few years. Children's health and emotional weB-being
in these early years are critical to their future behavior and development. Consequently, .
government investments in young children can yield substantial returns over the child's life,16
Such govemment intervention may be desirable jf parents do not invest enough in children since
26See COWlcii ofEco:1omic Advisers (1997) for a discUssion of the long lasting effects on
children of investments made in the first few years.
6
�,
._, ..
.-.'
"
the parents are not the only beneficiaries. Such an external benefits argument has often i
made to justify government intervention in education.v Ifchild care in the early yearS (
also produces benefits to the child and to society in the fo:m of the child's current and
subsequent development and behavior, then the government might want to intervene to .
that chilcren receive such care. Given the importance of the early years for future devel(
if a li.'1k can be established between child ca...e and developmental outcomes, arguments
government intervention in eiementary and secondary education apply with even more f
the child care market,
The question of whether child care can enhance child developmem is separate from the i
\ffiSafe and unsanitary child care can endanger children. There is no question that unsafe
unsanitary cl>ild care can hann children, and another section of this paper exa."!1lnes pote
government policy, to protect children from harmful care environmer.ts. Here we examin
whether child care can promote child developmenl The link tha: is usua!ly made -. the e
is reviewed below _. is not berween child care per se and chi!d development. but betweel
quality child care aild child development. Therefore. goverrunent intervention for reason
exte:na! benefits sl;lould be de'signed to promote high q'.illJity ehiid care, rat..\er than child
.more generally,
Evidence of benefits of child care
Children's development is determined by many factors; characteristics of the child, the f
environment, care outside the home, and the larger social environment all influence
development. But as part of L.i.is intricate. interactive process, child care can have import
effects on child development. Much of what the field has 1ea."Tl:ed about the effects of ch
quality on child development come from studies ofprograms such as Head Start and oth
educationally~oriented programs designed to promote cr..il~ development and improve c1
readiness for schooL Such programs, which are typically offered as part-<1ay programs f(
to five.yeat olds" are different from the full-day care needed by manY employed mother.
provision and promotion of educationally~based programs such as Head Start is an impo.
topic beyond the scope of this report Here we examine what is known about the effects!
attributes of child care more broadly on child development,
Comprehensive reviews of the large literature of the effecjs of child care report that the c
child care·· in both centers and filmily day care·· is closely linked with children's soei,
cognitive and language development, both at the time of receiving care and in late: '
"See Cohn . . Geske (1990) for an overview .
and
"Gomby etal. (I995).
7 '
�deve!opmen'." Children from low-income families may benefit the most from high quality
progmms.JO
However the revie~'S note several ;1foblems Viith using this literature as a policy guide. Most of
the studies use giobru or summary measures of quality (i.e. high, medium or low), which do OOt
clearly identfy the aspects of child care quruity that affect development. Additionally. there has
been little analysis of the magn~tude ofimprovemet}t in children's development associated with
measW'ed improvements in quality; hence these smdies do not make it possible to conduct" a cost
benefit anruysis of policies designed to imp:-ove child care quality."
Some research has addressed the relationship between child care quality as measured by specific
child care attributes and ddld outcomes. For these purposes, measures of child care quality can
be broadly grouped into twO categories, One approach measures the quality of the child's
experience in care; •child experience measures' examin'e t.lte way in which the care giver
interacts v.'ith the child (including verba! and empathetic behavior) 'and the children's exposure to
materials and activities that enhance leaming~ the continuity of chUd care 'Nit'1 the same provider
is another important aspect of the child's e.xperience. A second approach focllses on physical and
structural features of care (,structural measures') sllch as staffi'chlld ratios, group size~ and
provider education. Child experieace measures are more broadly accepted by developmental
psychologists, For practical reasons, state regulations are based on structural measures. H
Although chUd,experience measures have a closer link to developmental outcomes than do
structural measure,ss structural attributes appear to support and facilitate the type of optimal
interac"tions that child experience attributes measure. ~ For exa.i1ple.low staff-child ratios may
make it easier for providers to develop wann and caring relationships with the children; such
"Hayes et.1. (1990) and Howes and He!brun (1996). See Cost, Quruity & Child
O~tcomes Study Team (1995) for a recent srudy 'hat confirms these fmdings.
''Phillips (1995)
"See Hayes et .1. (1990) for a further discussion.
"Helbum and Howes (1996). See also Hayes et aI. (1990) and U.S. House of
Representatives (1996).
lJIn some sense, the relationship between child experience measures and c,hild
development is tautological, since the child experience measures were designed as m'easu.--es of
aspects thought important for child development (Blau 1997).
14Hayes et al (1990). More recent evidence of the effect of child experience measures on
. child development is provided by the Cost, Qual,ty &. Child Outcomes Study Team (1995).
8
�relationShlps in tum affect child development,l5
Despite encouraging findings. surveys of this literature note several shortcomings: .Many studies
are based on small, unrepresentative samples. Additionally, they often do not properly control for
developmental inputs received by the children at home, as wen as other socio-economit factors '
that may affect chll~ development and may be correiated with the quality of care,)6 Thus, whi~e
there is broad evidence that high quality child care beneficial to the child and society, better
understanding of the relevance of specific inputs (or combinations of inputs), as well as the
magnitude of their impact, could greatly improve the design .of appropri"ate policy.
is
The above srudies all compare child outcomes across paid child care settings.of different
qualities, Hence they are only able to address questions about effects of low versus high quality
paid care. Two sept3:fate issues are the relative effects of different modes of non~matemal care,
and the effects of maternal versus non-maternal care, Studies have established that non~mate:.":.1al
care is nOt a source ofhann to children and that aspects of it can be beneficial. Stronger evidence
tb.at child care had positive developmental outcomes relatl ve to maternal care wo-uld provide an
argument for government intervention not just to provide child care for children of working
parents, but possibly for all children.' Consistent ,\\it.l:t this principle, in~ensiye earlyec!uca~ion
progra.'11S for low-income children like Head Start do not make eligibility contingent on :>arcntal
employmem.)7
If the government wanted to inc:ease use of care tbat has external benefits. its options would
include regulating the qUality of care, subsidizing care, subsidizing only high-quality care,
directly providing care with developmental attributes, and subsidizing the wages or training of
child care providers. It is impo~t that policy is designed to increase"usage ofcare with external
benefits. Policy designed simply to promote use of child care irrespective ofquality would riot be
appropriate if only high-quality care has been shown to have external benefits, More research is
needed to determine which attributes - or combination ofattributes - have i~pacts on child
'outcomes~ and the magnitude of these effects.
3SHowever a recent srudy - Blau (1997) - calls into question whether improvements in
structural measures have effects on child experience measures; the study, using data f.'"Om the
National Child Care StaffIng study, fails to find any robust effects ofchild sta."f ratios orstm
education on child experience measure. The author notes, however, that this does not rule out the
possibility that structural inputs have a direct effect on d~velopment.
"S<:e Hayes et a1. (1990) or Blau (1997) for discussions of the proble:ns with this
literature, See also Kisker: The Imponance ofquality in child care' in 'Child Ca..." Challenges far
Low-Income Families'
''U.s. House afRepresentatives (1996).
9
�InformatiQn imperiections
Severahypes ofinformation imperfectior.s may exist in t.t:!e child care market A free market may
not provide information to parents on the advanmges and attributes of quality crJJd care,
Providers may be unable to obtain current information needed to ensure quality care, It may also
be difficult for parents to fir..d OU~ who provides day care in their area, a'1d what the attributes of
the various choices are,
' "
Ir.deed, there is evidence that parents lack infoI'l'r.ation. For example. pareo!s report that they
value good quality child care, but it turns out that they substantially overestimate the quality
care their child is receiving;3! in other words, parents have trouble evaluating the quality of care
their child is receiving, Some indirect evidence
information imperfections is provided by
Hotz and Kilburn (1994) who find that, holding the price of care conslllnt, more stringe~t q""lity
regulations are associated ..vim 3."1 increase in the dema.'1d for non~parental care; they interpret
this finding as evidence that the increased standards provide a higher degree of quality assurance
and hence parents demand more non~parental care.39
of
of
If information is the issue. then government provision of informaticr. could be appropriate. One
role for government is to provide jnformation - or encourage private agencies to provide:
. information ~- that educates parents and providers about the aspects of care that are important for
child health and safety, a.'1d for development. Another possible role is to provide information to,
parents about the attributes of various care options. Such a role' makes sense ifgovemment or
private agencies have access to better inforrr.ation than the individl,:al, or at least the ability to
acquire this information at a lower cost. Regulations t..'1at increase the minir.:mm quality and
therefore reduce the uncertainty faced by parents are another possibility. Regulations may also
set minimum standards for health and safety and thereby reduce parents' information and search
'costs,
Distributional Issues
Two sorts of distribu~ona1 a.rgwnents could be made for policies designed to increase t.lJ.e
affordability of child care, First, such policy could'serve as an employment-related income
transfer to working parents, Policies designed to increase the affordability of child care may
complement other redistribution programs. For example, the 1996 welfare refonn legislation is
intended to help move welfare recipients into the workforce. Since child care costs are a sizable
burden to low income families. reductions in the cost ofchild care would ease the trailsition.
Second, in so fu as there can be benefits to children from child care - or high quality child care
, "Cost, Quality & Child Outcomes Study Team (1995),
as
weakness of this study is that ~~ discussed above ~A a substantial a.'11ount of non
parental car,e: operate legally but it not subject to licensing standards.
3'>A
10
�~ d-JJd ca...~ ;K>licy could also ensm:e ~at children whose parents have low resources have 'equal
opportunities,! Again, such an argument has been made to explain govemment involvement in
primary and secondary education.'I\!
.
Wnet.lter the goal is to provide an err.ploymenHe1ated income transfer or equai opportunities to
children, two qcestions must be addressed in designing a redistributive policy. First, should thls
transfer be tied to the good in question (i.e. child care) or provided as ~ cash transfer? And
second. if the transfer is tied to a particular good, should the government directly provide the "
good, or reduce the cost to parents of pcrchasing the privately~provided. good?
,
.
A cash transfer provides a working fa.'11ily with additional cash that they can choose to sp:end as
they wish. Chlld care subsidies or government-provided chlld care, on the other hand, provide
money that can be used only for child care, Economic theory suggests that recipient wel1~being
can be increased more efficiently throug11 a cash transfer, It is weB~known that the utility gain
from transferring a bundle of goods (such as child care) cannot be mOre and is frequently less
than from the equivalent amount of cash.~l This inefficiency results from the distortional)' nature
of an in-kind transfer. By distorting the relative prices of various goods, the transfer influences
recipients' decisions concerning how much care to purchase and how much to work. Ifwe
believe there are benefits to child care that are not being taken into account. there is an argument
for distorting the cost faced by the parents. But as a pure transfer policy, this represents an
inefficiency compared with a cash transfer.
However, there are redistributive reasons to favor an in~kind subsidy, One reason for tying the
subsidy a particular good is to ensure that the money is spent on that good. Making the
subsidy only for child care ensures that the parents spend the money 0:1 their children.
Particularly if we thlnk that there are 'equal opportunity' arguments for child care, such an in
kind tranSfer might make sense to ensure that parents do spend the money on child care. A
second reason for tying the income transfer to purchases of child care is horizontal equity:
Working .dults with children have greater costs than those without. Of course, they presumably
also receive benefits from having children. But if the government wants to target people with a .
specific need th~t places an additio:w burden on them, it would make sense to alleviate some of
the additional financial burden to those working adults with children, Fir.ally, if the increased
demand for paid child care increases employment opportunities in ct.ild care fot workers who a.--e
trying to move off welfare. this is a recismbutive benefit from chiid care subsidies wort.i-t
considering.'Il
,0
"See, for example, Poterba (1996).
"See, e.g. Rosen (1995)
4llndeed the initial federal involvement in the child care industry -- federal funded
nu.~ery schools for poor children were established during the New Dea:l'-- was motiva:ed not ~
j
.ll
�Ev~n
if an in-kine! transfer is chosen, there remai:ls the question of :-vhether the government
should subsidize the cost to parents of buying private care, or provide public care. One reason it
makes sense for the government to be a direct provider of education is that parents do not appear
very price responsive in their demand for their child's education:" Hence) subsidizing the cost is
unlikely to produce 'equal oppo:tunity.' However, there is evidence of a fairly responsive
demand for child care.« In ad,dition. were the government to provide care, it could only provide
center~based care, As discussed previously, many far.lilies cboose family day care homes. and
since there is no clear quality tradeoff. it does not seem v.ise for the govern.-nent to,distort these
choices by providing one kind of care.
'
THE EFFECTS OF INTERVENTION
We have seen that the current quality of chHd care is often very poor and L>:tiS may have adverse
effects on children, that there may be iriormation problems in the child care market. a."'ld that for
those without access to significant subsidies for child care, child care costs can be a significant
fmandaI burden. All of t.1ese provide potential economic rationales for further government
intervention in the child care market. In oreer to ~"1de:rstand some of the effects of differer.t
policies. we need to understand how parents and providers respond to changes in the price of
care. To this end. we review the effects of subsidies on matemai employment and the demand for
child care, and of subsidies and regulation on the quality of care purchased.
THE EFFECT OF SUBSIDIES
The effect of subsidies on the cost of care
Subsidies lower the cost of child care to parents and are therefore likely to increase the demand
for care. If the aF.lount of child care available were fixed, the increase in demand would drive cp
prices. The price would rise by the amount of the subsidy, so that parents would end up paying
the same amount as they had been before the introduction of the subsidy, and the providers of
care would receive an increase in tees equal to the a.'D.ount of the subsidy. Tne benefit ~fthe
subsidy POJiCYl in other words, would accrue entirely to ~e providers.
However, the available evidence'indicates that the supply of care will rise to me~t an increase in
demand for care without much of a change in the cwrent price. For example, although the
much 'to provide cr.Jld care for working families but to provide jobs for unemployed teachers and
nu."'Ses and others as weB as a wholesome environment for chilc.ren in poverty. (U.S. House of
Representati~es 1996)
"Poterba {I 996)
44See the next section for evidence of demand responslveness.
12
�number of children in paid child care has approximately doubled over the past twenty years, the
real price ofcare has r..ot cbanged.4's In addition, direct estimates indicate that small changes in
the price of chHd'ca..""e induce large supply responses. 4oS As a result, in,the absence of other
changes. the benefits of a subsidy accrue to the consumer. .
How will consumers responq to a decrease in the co?t of child care? We consider three decisions
that may be influenced by the price of child care: the mot-1et'S decision to work; the decision
whether to purchase paid child care or to use unpaid care; and, if paid car~ is chosen, the choice
of the quality of care,
The effect of subsidies on
e~ployment
decisions
Appendix 1 sllIl'lIlUJ.I'izes a number of stUdies that indicate that lower child care prices are
associated ~th a higher probability that a mother will work, The magnitude of this effect varies
, across studies; a 10 percent red~ction in the price of child care increases the probability, that a
married mother vAll work by 2 to 8 percent.41 !'ioweve:. given that the mother is working, there is
little evidence that the child care price affects the decision of the number afbours to work;~&
,
'
There is less evidence on the employment response of poor mothers or single mothers. A GAO
study4? estimates the response ofdifferent income groups, and finds that a 10 per"cent decrease in
the price ofchild ca..-e increases the probability that a poor mother will work by 5 percent,
compared to 3.4 percent fer Lear-poor mothers, and 1.9 percent for non-poor mothers; the study
does not report whether these differences are statistically significant. Another study finds that the .
employment response is somewhat greater for single motherS than married mothers, but the
"Blau (1992), Casper and Q'Connel (1997), U.s, Departmeet of Edueation 1990,
"Blau 1993,
"Blau and Robins (1988), Cor.nelly (1992), Ribar (1992), Averett et ai, (1997), Ribar
(1995)'s estimate lies outside tllis "mge, Biau and Hag)' (forthcoming) look.t a sample that
includes both single and married ",others and fmd an effect at the bottom of this range, For more
information on these studies, see Appendix 1.
"See Micbalopoulos et at (1992), Berger and Black (1992), Chaplin and Hofferth (1995),
One study estimates the unconditional effect of the price ofchild care on the mother's hotlt'S of
work; Averett et ,I. (1997) report that a 20 percent decrease in the hourly cost of care is
associated with about a 16 percent increase in the mother's hows of work, This estimate, which
takes into account both increased hours from mothers who enter employment and those already
working, is broadly consistent v,.ith the other fmdings reponed here,
"GAO (1995),
13
�~ifference is not statistically significant:~o Furthermore, once she controls for whether the single
mother reeei ves ~CI the response for single mothers falls' to that of married mothers, This
suggests that the greater response to the price of care by single mothers (and per¥aps also by
poor mot..1ers) was due to a viable non-empioyr.'lent option.
' .
.
The effect of subsidies on th~ dem~nd for paid care
Pa:ents choose among ~ va.;ety of modes of carel some ~f which a..--e paid and sorr:.e of which are
unpaid. The bclk ofresea:rch has focused on the effect of the price of care on the use of paid care
among working mothers. Hence, in order to get a sense of the total effect of a decrease in the
price ofchild care on the demand for paid care, one must combine estimates of the increase in
labor supply with those afthe increase in the demand for paid care among mothers who work. H
Studies find that in places with'lower prices ofcare, work!ng mothers a..--e more likely to use paid
care. Again. there is a large range of magnitud.es but most of the studies suggest that a 10 percer.t '
decrease in the hourly cost of care results in a 1.5 to 2.3 percent increase in the prQbabillty that a
. working mother with a young child will purchase care,li, .
As the price of paid care falls. mothers are likely to substitute paid care for unpaid care. Such
substitution is particularly' likely given that parents ter.ci to express more dissatisfaction with non~
paid care. j1 Unfortunately, we can.r.ot infer from the avaiIable evidence how much of the increase
in the propensity of working mothers to use paid care is due to a higher propensity to use paid
care among the newly ~tering mothers~ and how much is cue to a cha.;ge in t.."1e propensity of
those mothers already working to use paid care~ as a result afthe price change:
.
.
A useful supplement to these studies of utilization is the effect of child care subsidies On the
hours of paid care purchased as a result of a change in the price of care, Some parents use
multiple modes ofcare. An increase in utilization of paid care may therefore reflect the decision
"Klmmel (1994).
. "There is also evidence (Blau and Hagy (forthi:oming), Hott and Kilburn (1992) and
Hot? and Kilburn (1994)) that among all mothers (including those that do not work) the demand
for paid care is sens:tive to the price of ci'lfe. These estima:es are not as useful for evaluating the
likely impact of govern.r.lent policy since this polky currently affects only working mothers and .
there is evidenc~ that the response of non-working mothers is considerable (H9tz and Kilburn
(1992) and (1994)).
"Hot? and Kilburn 1992; Ribar 1995; Ribar 1992; Blau and Hagy (fortilCOming). Studies
lying outside the range are Hatt a.~d Kilburn 1994 and Blau and Robins 1988. See Appendix 2
for more details on these studies. '
"Hofferth (1995)
14
�of some parents to purchase only a few hours of paid care, rather than no paid care. On the other
hand. parents that were already using some paid care may increase the number of hoUrs of paid
care in response to tie price decrease adjusting the ~e!atI\'e amounts of paid and unpaid c~e
purchased; such behavior would not show up in utilization measu.--es.
j
Three sIDdies look at the effect of the price of care on the: houtS of paid care used by working
mothers, TIUs measmement considers both the effect caused by sv.itcrung from zero hours to
positive hou..."S) and also changes among those already using positive hours.54 Again, there is a,'
range ofestimates; a doBar decrease in the hourly cost of paid care is associated .......ith a 3 to 22
hour per month increase in the use of paid care. Ribar (1992) fmds that the increase in hours of
paid care and t.1.e decrease in hours of unpaid care ar.J.ong working mothers are roughly similar in
magnitude. This suggests that the result of price decreases is a relative increase ar.long working
mot.~ers in the usage of paid versus unpaid care, rather than an increase ~ the total a.nlount of
non~matemal care used. Such a condusion is consistent with the fmding that hours of work
among working mothers appears Ull.--esponsive to the price of care.
purrING IT ALL TOGETHER
How much will the use of paid,care increase in response to a policy that reduces the cost of,
care? The fact that the supply of child care will respond to meet increased demand without much
of a change in the price of care suggests we can consider a subsidy as transtating almost dollar
for doBar into a decrease in the price to the consumer in the long run.
As an example. consider the effect of a 20 percent subsidy for child care expenses. Our analysis
below'suggests that a 20 percent reduction in the cost o/paid care would result in 500,000 to 1.3
million mOre children under 6 with employed mothers using paid care. Ifthe 20 percent subsidy
were appli<djust to mothers below 200 percent a/poverty, the result would be 124,000-318,000
mare low income children under 6 in paid care.
.
Increases in the use ufpaid care by working mothers with young .children3'
."Sec Hot: and Kllbum (1992), Ribar (! 992) and Kimmel (1992).
$$Throughout this section, <young children' are defined as those under 6. We·have chosen
to base this analysis on the responses of mQt.~ers with children under 6 because almost two-thirds
of the children served by CCDBG·fundecl child care were under 6, according to the most recent
available data (Child Care Bureau 1997). In so far as subsidies
provided to: mothers \\>it.~
chHdren above 6,.the total response woui'd be larger than that estimated here. Alfdata are baSed
on tabulations from the 1993 SIPP unless otherwise indicated.
are
15
�, About 9,4 mi:!ion mothers with children under 6 (56 percent of mothers with chi!dren under 6;')
worked full Or part time in 1994. A 20 percent decrease in the cost ofcare is associated with a 4
to 16 percent increase in the probability that a mother works, In other words, between 380,000
and 1.5 mHlion more moth,ers with children ullder 6 would take a job in response to this decrease
in the cost of ca:e.-S?
In addition to this employment effect, the 20 percenr de<:rease in the price of paid care W1>uId also
have an effect on the demand for paid care among working mothers. A 20 percent decrease in the
price of paid care is associated with a 3,1$ percent increase in demand for paid care among
,
working motherS. In other words the percent of working mothers with young children who use
paid care would increase from 51 percent to 53 percentS!
j
Combining these two estimates, a 20 percent decrease in the price of care would increase tIle
number of working mothers with young children who use paid care by '380,00 to I million."
Since families who have children under 6 have on average 1J children under 6, this means tha.t a
20 percent decrease in the cost of care will be associated with an increase of 500,000 to 1.3
million mOre children using paid care.
Breaking do~'n this effect
How much elf the increase in working mothers' use of paid care is due to an increase in maternal
employment, and how much is due to an increase in the working mothers' average propensity to
use paid care? It depends on what the employment response is asswned to be. \\'hen the lower
bOI.4'1d of the employment respor.se is used, a little over haJf of the increase in young children in
paid care ca.'1 be attributed to mothers ent~ring employment; without a change in the average
propensity to use paid care. When the upper bound of the employment response is used, about 80
percent of the increase is due to mothers entering employment.
"Tabulations from Match 1995 CPS.
,
.
following calculations apply: A 4 percent (respectively, 16 percent) increase in the
probability the mother works brings the probability that L'le mother works from 56 peroe"t to
60.3 pe:-cent (65 percen:), Since the total number of mothers "'ith child:'en under 6 is 16.7
miHion, the resultant 2.3 (9) percentage point increase in the probability, that the mother works is
equivalent to 380,00Q (1.5 million) more mothers working.
S7Th!!
S%e 3;8 percent increase is an average of the 3and 4.6 p·erc~r.t incre"ases from the lower
and .upper bound estimates of the response in paid care use to a change in L.1.e price ofpaid care.
Because this range is so small, we take the average rather than reporting upper and lower bounds.
' l The calculations a:e as foHows:
(0.53' 9.8). (0.5! +9.4) = 380,000
(0.53 • 10.9)' (.51*9.4) = ! ,000,000
16
,
'
�.~ncreases in tbe use of paid care
by Jow i~come working mothers witb young .children
CCDSG recipients are nearly aU below.200 percent of the poverty Ene. It is therefore wort..1.
considering the increase in paid cru.:e use from subsidizing mothers below 200 percent of poverty.
most of whom are currently not receiving any CCDSO subsidy. Although we lack estimates·of .
the responses ofthe low·income population to changes in the price ofchild care, we estir.utte t.~e
employment an~ pa:d care utiliZation from estimates for the general population,
.
3:1 million mothers belOW 200 percent of poverty with young children (43 percent of the total
number of mothers below 200 percent of poverty with young children) worked full or part time
in 1993." 39 percent of these working mothers paid for "",-e. By a similar set of calcul.tion"o
the previous ones, a 2Q percent decrease in the cost of care for low income families would be
a.ssoci~ted with an increase of 124,000 to 318,000 mOre low income young children using paid
care,~! The CCDBG subsidy to families is considerably larger than 20 percent;62 larger subsidies
would be expected to have even l;;p-ger effects on maternal employment ~.:ld use of paid care.
How sure can we be?
The estimates presented here are based on 11 review of the evidence from numerous economic
analyses, These analyses are almo~t unanimous in their con~lusions about whether there is an
.effect, and the direction of the effect However t.~ere is considerable variation in the magnitude of
the effects reported. We present the fun ra"lge of estimates) and when applicable1 a des~r. ption of
where the bulk afthe estimates He. But we are left at best with only a range) and the ability to
suggest an upper and lower bound to the effect,63.
"The 2.6 million is from SIPP 1993 data. The total number is from 1994 CPS.
alBased on the foHowing calculations: A 4 petcer..t (respectively t 16 percent) increase in
the probability the mother works brings that probability from 43 percent to 45 percent (50
percent). Since the total number of mothers with young chiidren below 200 percent of poverty is
7.2 million (CPS March 1995), the resultant 2 (7) percentage point inctease in the probability
that the mother works is equivalent to 122,000 (490,000) more mothers working. In addition the
decrease in the price of care would result in 41 percent of these employed mothers using paid
child care. Therefore the total increase in the number of these mothers using paid care would be
95,000 to 245,000. With an average of L3 young children in such families, we arrive at the
numbe: in the text.
"The average weekly cost ofcare was $74 in 1993 (Casper 1995), and the average federal
subsidy' administered through the CCDBG was $66 in fiscal year 1995.
One issue v,'ith almost all of these studies is that they pred:ct the hourly price ofcare
using setection correction mechanisms, since data are often available on the price of paid care
only for working mothers who purchase care, The instnunents used vary across studies, and there
63
17
�In addition to the lack Qf consensus a.."Dong t.ie various estimates, caution is also in order in
- d.ra\\-ing inference about the likely effec:s of current poHcy cha.-'lges. First, t.~ese estimates are of
the average resp<lnse to price changes; if the response does not vary lir.early \\-ith the change in
price, our estimates of the response to different price changes will r:.ot be accurate. Second, these
estirnates were made in t."Ie pre-welfare :efonu era. One might expect responses to be different in
a world where work requiremer.ts are stronger and in which non-employment alternatives mav be
more Hrotted, ,And third, the studies reviewed did not gen~rally focus on the low-income
~
popUlation. Ifwe want to estimate the effect of subsidies targeted·al: this population, we must,'
consider how applicable the results from a broader.populati9n are to a low income population.
In general, One might expect the employment responses of low-income faci1ics and single
mothers to be less responsjve to child care prices, as the need for income is greater. However, the
studies that too ked at such responses found tha~ single and low-income mothers' emp~oyment
decisions tended to be more responsive to the price of care, One plausib!e explanation'is that,
under the previous welfare syste~ low~income singie mothers decidiog whether or not to take a
job had the fall-back option of-welfare. Therefore they were more free to choose whether or not
work was worthwhile on the basis of child care prices; and we have seen that child care costs are
a proportionately larger burden to low-income mothers. But as welfare reform makes non~
employment !ess of an option for these mothe:-s, it is likely that the employment decisions: of
lowwincome single mothers would become less sensitive to the price ofchild care. indeed,
IUrnmel (1994) found that controlling for AFDC recipiency reduces the employment
responsiveness of single mothers to t.'1.e price of child care, and. brings it into line with that of
married mothers. .
.
.
.
Although we might therefore expect that the employrr.ent response of the low~income population
would be less than that of the general population, we should also expect that the demand for paid
care among working women would be more sensitive to the price of care for low-income
working women. since,the costS represent a larger fraction of their monthly income. On balan-cc
then. it is not dear whether the total effect of the price of care on the demand for care (including
both the employment effect and the demand effect among working women) would be larger or
smaller for low income wOmcn compared with the general population. Without any further
evider.ce to guide us, it is simply important to note that this li.'7litation of the evidence should
dic:.ate caution in making precise predictions of the effects of subsidies.
POLICIES THAT ADDRESS THE QUALITY OF ClllLD CARE
is reason to believe that. the results are very sensitive to the choice of instruments (see e,g, the
large difference in estim.tes obtained by Hotz and IUlburn (1992) and Hotz and IUlbum (1994)
who use the same data but different instruments and estimating procedu.-es). In general, the
results will be affecteci by whe:her the instrur::ter.ts a:e truly exogenous, "" well as how correlated
they are wi':h the origInal va.."'iable. The variation in the predicted price of care is used to estimate
the employment) care, and quaHty responsiveness to the price of care.
18
�We have reviewed the evidence that the current quality of care may be too low. that high quality
child care can have important, positive effects on cpjldren. and that substandard care can place
children as risk for harm, Here, we consider wby the current levels may be too low, and bence
how policy can be designed to improve quality. We focus in this section on attributes of care that
may be re;ated to child development; the. next section considers issues of chlld health and safety.
Parental demand for quality child care
Evidence suggests that parents do not demand the structural attributes of quality that policy
might address. For one thing. the level of trainer education, staff<hild ratios, and group size have
linle effect on provider fees,'" In addition, there is evidence that center fees are not responsive to
quality as defined by child experience measures." The fact that the staff-child ratio and the' group
size do not affect the cost of care is particularly surprising, given that these attributes mcst a.:rect
the marginal cost of providing care. A cort'.mon interpretation' of these findings is that l.iey
suggest that parents are not willing to pay for these attributes of quality care. 66
Thus, even though parents say that they care about quality," they appear not to be willing to pay
for 'quality', at least as researchers have been able to meesme :t.. There are several possible
explanations for this finding, although we have little evidence that allows us to choose among
them. First, if there are external benefits associated v:ith high quality child care, parents may in
fact not demand as high a level of quality as is optimal for their child and society. Some evidence
of this is the fact that when parents say they care about the 'quality' of child care. they may in
fact be placing the cost and convenience of the care at a higher premium than warm bteractio:1s
with care givers and other aspects of the child care program that developmentaHsts believe
promote positive outco~es.68 A second possible explanation is that parepts do care about child
Care quaHty that is important for child outcomes ar..c development, bl.:t that the attributes that
they care ab()ut -- and are willing to pay for -- are not the structural attributes that are easily
_ measu:ed and that government policy can target. In ou1er \yords, parents may choose their child
care and pay based on the wannth of the child care provider, the organization of the facility, the
structure of the daily routine! or other attributes that these studies do not measure. Third, parents
may care about structural attributes of quality, but lack information about these features. And
finaHy, parents may"care about these struCtu.ral attributes ofquality) but not be able to afford
"Hagy (forthcoming); Blau and Hagy (forthcoming); Walker (1992); Waite et a!' (1991).
"Co,t, Quality &; Outcomes Study ream (1995).
"Interpretation in Wait~ et al (1991), Blau (1991) and Helbum .. d Howes (1996).
o
"See e,g. Cost, Quality &; Child Outcomes Study Team (1995) or Klsker and Maynard
(1991 ).
"See for example Klsker and Maynard (1991) and Hofferth (1991),
19
�them.
Possible governmental policy responses include information provision, regulation, and subsidies
to reduce the price of care. Again, the app:opriate polley response depends on the reason that
parents do not purchase high quality ca.-e.
Effect of subsidies on the quality of care purchased
If the low parental demand for quality child care is due'to an affordability issue, or to the
existence of external. benefi:S, then policies that reduce the price of cl'.ild care might induce
parents to purchase h:gher quality care. Empirical evidence is scant, but it suggests that when
prices are reduced, parents do not respond by purchasing higher quality care, as measured by
structural attributes.69 As a result, subsidies alone appear unlikely to increase th,e demand for .
strucrural attribuies of child care. Of course, subsidies may allow parents to purchase care with
.
.
aspects ofquality that are difficult to measure -- panicularly the child experience measures that
, developmentalists emphasize. However, no evidence is available on this point .
If child care subsidies do not appear !O induce parents to purchase }!jgher quality care, perhaps
subsides targeted to high quality care rrjght have an effect For example, a subsidy might be
available only for care that met a certain child~staff ratio or group size. Empirical evidence on the
effect of targeted subsidies is limited. One study finds that the implicit price of staff~child ratio
does not affect the demand for higher s:aff~chiid ratios.'Itl
We do kr.ow, however, 1.'at subsidies i1at ~ower the price of child C3.""e induce mot:ters to work,
and induce working mothers to purchase more paid care relative to unpaid care. Thus subsidizing
'child'care is likely to result in more non-maternal care, and more paid relative to unpaid care. A
comprehensive surVey of the literature concludes that there is no evidence that non~materna1
child care has adve:se effects on children.Tt Furthermore, given the current policy 'of
encouraging mothe:s to enter·or remain in the workforce, such women have little choice but to
place their children in non-rnatemal care. There is little evidence about t.i.e relative merits for the
child of paid verSUS unpaid care.
"Blan and Hagy (Fol'illcoming). A problem with drawing conclusions based on this paper
is that the data are cross-sectional a.'1d if places 'With lower prices of c:uld care draw in C'lore low
income families who cannot afford high quality care, the result would not really iHustrate the
effect of price reduction, on the quality of care purchased by a given family tha, is already
purchasing care, For this. we would need longItudinal data.
"'Hagy (forthcoming).
"Hayes et al. (1990).
20
�Effect of regulations on the quality of care'
If the low quality of care purchased is • result of infonnation imperfections or Ihe external
benefits associated ""ith child care) a possible approach is for the government to regulate the
quality of child care. Regulation, if enforceable and binding, is likely to increase the quality of"
regulated care.72 However, regulations are also likely to drive some providers out of the licensed
market and raise prices among remaining providers. thus lowering the availability and
affordability of regulated care.71 , Since ·complia.'1ce Wlt.~ regulatjons can be costly ~~ particularly
regulations that impose minimum group size or child staff ratios a..'ld hence raise the marginal
cost of providing chUd care ~~ providers will have to raise their prices or suffer profit losses. .
However, W(~ have seen that parents arc unwilling to pay for these atL>i.butes, and that t.~ey are
v.illing to substitute among modes of care 'in response to relative price changes. Hence providers
will be limited as to how much they can raise the:r prices. But since mast child care providers
have very low profit margins?,' those that cannot raise their prices may be driven out of business.
or at least into the unlicensed sector.'
Children whose providers shut down because of regulations, or whose parents switch to another
mode of care because the regulated care has become too expenshrel do not enjoy improvements
in their care quality. However, for children who remain in regulated care, a q'Jaiity improvement
may be enjoyed, Empirical evidence on the relation between quality regulation and costs is scant
and inconclt:Sive. Studies have looked at the effects of criminal record chec~s, thitd staff
regulations, provider educatlon regulations, and group si~ regulations on the cost of care, The
results differ both across a.'1rl within s:udies as to whether a given regulation increases, decreases,
or has no significant effect on the cost of care' $. And there is essentiaHy no evidente of the effect
of regulations on the use of regulated'care. Both issues deserve further srudy. "
We must acknowledge a tradeoffberv.teen the gains from regulat:on in terms of quality
"For example, Cost, Quality & Child Outcomes Study Team (l995) finds that states with
more demanding licensing standards have fewer poor.quaHty licensed centers, and that centers
that comply wilh additioual standaxds beyond those required for licensing provide higher quality
services, Here, quality is measured in termS of'child care experience~ Also Howes et aL (1995)
flnd that regulations in Florida ~n staff-child ratios and provider education improve both child
experience measures of quality and child development.
"Chipty and Witte (1997) find that minimum standards regulations increase Ihe
probability that ptoviders exit certain markets (e.g. care for certain age groups).
"Cost, Quality &; Child Outcomes Study Team (1995).
"Ribar (1995), Chipty (! 995), Hotz and Kilburn (1994), Although such regulations may
translate into higher costs to parents. they do not appear to improve the wages ofchild care
workers (Slau 1993, Blao 1992).
21
�.
". '.
··,i :.
"
.'
improvements in the regulated sector and the likelihood ofincreased child care costs and
substitution out of regulated care, which CQuld adversely affect the quality of care some children
receive. Different regulati~ns are likely to have different effects on costs. It is probable that some
regulations would have net benefits, but each shouid be evaluated separately,
Information provision aDd networks
..
Mother possible remedy to irJormation probiems are i.'1fonnation an~ refenal services to help
parents make better decisions. The gover:nn"~ent could either serve as the provider of information
. or encourage private sector agencies to coUect a.'ld disseminate the information. Howeyer, the
high tunlov~r rates of providers and the lack of effort by many family day care'providers to fwd
clients could make it difficult to provide and maintain comprehensive and accurate lists of
providers in each neighborhood.'6 It is unclear whether u.n;egula~ed providers wiH be
forthcoming in respo:l.Se to requests to register with an irlfonnation agency. If providers are
responsive and comprehensive lists are mair..tained, this would be a uSeful service to the extent
that the infonnation agency is more infonned than potential consumers about the quality of care
offered at each provider; given the concern about whether collectable indicators are indicative of
quality, this deserves further consideration. Furthermore, if there is a dearth of demand for
quality care. the benefits from providing infonnation are somewhat decreased. However, if~s
infonnation stimulates demand for better quality care, it may help alleviate the current quality
problems,
Effects of policies a.imed at influendog child care providers
The qualifications and beha~ior of child care providers a..-tfect both structural and child experience
measures of child care quality. Therefore another imPOrtant policy lever that the government
could potentially use to improve the quality ofchild care is policy that affects child ca..--e
providers. Child care providers' education and behavior are aspects of child care quaiity. In
addition, the continuity of child cate received is thought to be an important aspect of the quality
ofcare,11
'
Child care providers are mostly women. They tend to have low levels of education and high
turnover rates?! Their wages are very low compared to other wome:l and there is some evidence
that they re-;:eive lower wages than similar fe.'1l.a1e workers in other sectors,"/? One reason for the
low levels of education may be that child1c;are providers appear not to receive a 'return' to
"Walker (1991).
"Phillips (1995).
"Slau 1992; Walker 1992.
"Blau 1993; Cost, Quality & Outcomes Team Study 1995.
22
�ecu,cation in the ferm of higher wages, so· (n addition, their low wages may be at l~t partly
responsible for the high levels of turnover, wl>.ich in tum disrupts the conlinuity ofcare,
Possible interventioc.s include subsidizing or regulating child care providers' wages, subsidizing
or providing child care training. or setting minimum standards for child provider education.
Given the low profit margtns of centers!:, regulations that raise wages are likely to force Some
centers to shut down or to raise their costs, In addition, L.1.e low wages of child care providers
may be best met through more general pOlicies aimed at raising w3ges at the bottom of the wage
distribution.
Given that crtild care providers appear not to receive a wage premium from investments in
education~ policies that set higher mi:rimal education requirements will likely result a decrease
_in the number of (iegal) child care providers. at least in the short r.m.ll Government provision or
subsidizing oft.-aining for chile. care workers may be a more promising route. Fina.*1cial
constraints can make it difficult for workers to invest in r.eeded skills and the goverrurient
therefo:e currently subsidizeS training for some adult workers. The high turnover among child
care providet's~ however, can reduce the retUrn to the goverrunent on its invest.ment in provider
education.
.
in
AllDRESSING CONCER.'fS ABOUT CHILD HEALTH AND SAFETY
In addition to-the impact of high quality child care on child development, we have also seen that
children s health and safety are Clh."'tt!ltly endan'gered in some care facilities. This is an ~ of
grave concern, with potentially high costs to the children and 10 seciety. The health and safety
'problems may result from an information problem Of limited abBity of parents to monitor
'quality. Another possibility is that parents are aware of the health and safety proble::ns but cannot
afford better care, If the issue is an information one, provision ofiriformation or regulations that
impose minimum standards combined with monitoring to e'nsure that these standards are met are
jJotential solutions. Such regulations again have the potential to drive up the cost ofcare, but they
can plausibly be expected to have less of an effect on cOSt t.1um minimum staff/cr.j]d ratios or
group size, wrich directly increase the margir.ai cost of providing care. However, if ensuring
basic health and safety does increase the cost of care, and hence parents may not be able to afford
care t.lut meets these standards, subsidies for care that meets the sta.'1dards could also be useful.
j
"'Walker 1992; BI.u 1992,
"Cost, Qu.lity & Outcomes Team study 1995.
!~Of course,
the longer run effects wiH depend on how responsive the supply of skilled
_
child care labor is. since the decrease in supply "iii drive up wages for skilled child care
workers. There is as yet no research On this question.
23
�There:s currer.tly no available evider.ce of the effect of minhr.:.lIll health and safety regulations
on the cos: of care, or oft.i.e effect of subsidies -or. the safety of care purchased:'
.THE NEED FOR MORE RESEARCH
Employment and
car~
responses to the price of child care
There is a little evidence on the employment responses .0: :OW in~ome ?ar~"lts, There is a critical
need for such evidence since direct federal scbsidies are targeted to this group. Furthermore.
there is a need for studies of employment responses of low income families in the new
environmen~ created by welfare ref<;>:m. Ra."1dom assignme:nt studies are a promisi.'1g approa~h,
Because subsidies are limited, and waiting lists tend to ceve1op.3J random assigr.ment to eligible
parents would enhance our ab,ility to study the effects of subsidies on parental choices. Anct.1.er
ll."l!esolved question is to what extent working momers respond to subsidies by substituting paid
, for unpaid care; an investigation of this issl..<e would require longitudinal data. Finally. there is
little evidence on the effect of the cost of care on the demand fer quality. EVldence on this effect
is important in understanding whether child care subsidies will induce pare:tts to purchase higher
quality care.
.
The link between child care quality and child outcomes
Although there is ampJe evidence that high quality paid child care can benefit children, there is a
need for more infonnation on the relationship between specific attribctes of care ~. or groups of
atL.-ibutes -- and child outcomes. We lack information on the magnitude of the effect of changes
in measured inputs on child o~tcomeSt On the ways in which improving one attribute of care may
have implications for the effects of other attributes, and on where to draw the L1reshold for
acceptable and unacceptable levels o:r different attributes of care, 'It is important that research on
such topics properly controls for family inputs and uses representa~ive samples,S4
Tne existing studies have looked at variations in quality among pa:d care facilities. Yet we know
that one of the effects of child care subsidies :s to induce an increase in paid relative to unpaid
care. We have no information on tr.e develQpmental effects of paid versus unpaid care, 'or even
on their relative quality. Finally, there is a need for more research on the effects of chiid ca...~ on
low income :hildren as compared with the general population of children.~!i
USee e.g. Berger and Black (1992) for evidence of wait:ng lists with one subsidy
program.
"Hayes et al (1990)
" Plullips and Bridgman (1995).
24
�Effects of regulation
Very little work has been done on the effect of regulation ~w and, more impor.antly, of different
types of regulat:on - on the child care marke:. We lack infor:nation on how regulation of
different s!rucrurai attributes ofcare affects the supply of regulated care; for instance, do
providers leave, or enter, the regulated child care market in response to regulation? We also lack
information on the effect of regulations on the prices charged by child care providers. And
fmally. we lack information on how regulations affect parents' use of regulated care.
, Information on unregulated child care
Infonnation about the unregulated child care sector is, not surprisingly, much iess available than
information about 'regulated providers. But it is i:nportant to get a better sense of this sedor, As
noted previously. CCDBG subsides can go to unregulated providers, which in some states could
be a family cay care home \l,'ith up to 12 children,a6 We lack information on the quality oftrus
care, and on how responsive lts supply is to changes in demand. Strice more stringent regulations
may result in regulatec providerS mov:ng to the unregulated sector, infonnation on this sector is
critical for a complete analysis of the effect of regulations.
SUMMARY
Ma:ernal employment has been rising ave:- the last few decades a."ld vvith it, the use of non~
maternal child care, particularly paid chiid care: There is no reason to expect a change in this
trend~ and as welfare reform moves mothers in~o employment, the demand for child care services
is likely to grow. Child care costs place a large financial bc.rden on those ",;t..'1out access to
subsidized care and many low income working families receive little or no government subsidies
for child care expenditures. There is also reason'to be concerned about the quality of care.
in
We discussed three possibIe motivations Ior intenrention the cr-Jld care market: external
benefits, ini~rmation i."l1perfections, and r,edistribution. 'What can we say of the relative merits ,of
dtfferent policy tools in meeting these different goals?
Care that does not provide for basic health and safety of children can have large costs to these
children. their parents, and society. Potential policy responses include providing parents with
information about the safety features ofdifferent care options, and enforcing stronger minimum
standards in licensed care settings. If mL'llmum standards. drive up the cost of c~e. subsidies to "
low income working parents for care that meets the standards might a!so be needed.
In addition, there is substantial evidence that high qual~ty child care can have a positive. impact
on child development. B!lt we lack information on the precise nature and the magnitude of the
"Child Care and Development Block Grant Act Section 658E.
25
�link between child care attributes and chiid outcomes; this makes it difficult to design policy to
promote the use of child care wit.~ external benefits. Subsidies, even those tied to particular
aspects ofcare, do not appear IL'<ely to increase'the purchase of'high quality care', at least as we
can measure it. Subsidies for paid cr-ild care are: likely to induce working parents to use relatively
mOfe paid care. The relative quality of paid and unpaid care, however. is not well understood.
Regulations can serve to increase quaiity I but the likely increases in costs will induce
substitution away from regulated care, However. we lack information on the magnitudes of the
various effects of regu~ations, Subsidizing provider training may also inerease quality, and is .
llilrikely to iricrease costs; however the high rate of turnover among child care providers raises_
concerns about the return on subsidizing invest."nents in provider education.
There is also evidence that parents lack the information necessa."Y to make appropriate selections
of cl'dld care for their children. The government could serve a us~ful role in directly providing
thiS information. or in encouraging private sector agencies to do so. Any increases in our
knowledge about the links between care and outcomes would enhance the government and the
private sectOt'S ability to provide useful information. There is also SOme evidence that
regulations that establish minimum quality levels help overcome the information gap, although
potentiaUy they have t.,.e downside of increasing the cost of care.
.
Finally, from a redistributive perspectivel we have 'seen that chad care tosts impose a substantial
burden on working ·families. particularly On lowwlr.come working families. Policies that make
child care mf)re affordable for working parents Cat1 help alleviate this blli-den. Policies targeted to
the low income population 'complemer.t other efforts to encourage wark, since mnthers' work
decisions are responsive to the price of care, Such policies a!.so seem likely to increase the use of
paid care among working mothers, .but not the amount of non~matema: care among worklng
mothers.
26
�-._.,---"-----
Appendix I. The effect of child care
price.!i':I~~;~;~~~;~IJioyl1l;~t(;il effects statistically sjgrlificanrlmless~mOlcate(JJ ~
A. 5'tudies lhat lISe an estimation ofchild·care. costs
. __ .
Study
[year)
Group studied
Data source
-
Meal ute 0 f Illbor
Me~$1lre of cost of
supp y
I!stimation procedure
child csre
1990 NCCS and 1!}90
pes
- -===_ ---,I
4
.
.
Blnu and
__ .
Married and
single mothers
with children
under 7 not in
school
MatTied molher~
with ;'I.t least one
child·under 14
1980 EOPP
Robbin~
(19.')
"
I
Wave 5 of 19&4 SIPP
.
Ribar
(1992)
"
MullinomiOlllogit
?robil
--
Married mothers
wiih children
under {;
-
Simultaneous maximum
Ilkelihood probit of
labor force participation
and tobit of demand for
paid and unpaid child
care services
GAO
(1995)
Mothers in
sample
diuo
Probit
ehild care costs) Significance cannot
be de!ennined from available
infhnnalion•
I ·0,20 (cakulated al means)
_ _ _ _ _ _ _ _ _ _ _ _~
1.0.74 (caleulated at means)
.
ditto
employment over a runge of examined
------t
Selectivity'(:om:cted predicted
hourly costs from
employed who
---tl,-pun:h,,'Ctlre
-
·(US (average price elasticity of
Average child-care
expendItures among
families in lhe
cummunity who
purchased l:arc
---+
Empl oyed or not
---
Urban Insti!ute's 1990 National
Ch.ild Care Survey Elnd LowIncome Sub-study
from available infonnation.
---t-----
Moll ,er does not
nOI
__ . .
~0.20 (calculated by <:<>mputing Ihe
elaslicity ((lr each individual and then
averaging over the sample.)
Significance c.;Innot be determined
Uses dalll 011 fees to
estimafe hourly fees
won verSus four
coml imJtions of
.
Married mothers
with. children
under 13
__ .
Wave 5 of ! 984 SIPP
Wh, Iler mother is
emp. oyed
---
---_.
"
--_.
"
---r~.
motl' er working
with purcbased care
01' D( • other
relall yes working or
--Connelly
(1992)
Multinomiallogil.
Estimated elasticity of employment
with respect to child care <:MI~
~.
Blau and
Hagy
(forth
coming)
I
--
--_.
27
ditlo
ditto
-0.5 for poor mothers, -0 J4 for ncar
poor malheIs, and -0.19 for non·poor
. mothers. (Calculated al means)
�-t·
~
Ribar
Married women
Maximum likelihood.
with children
1984 SIPP.
(1995)
Estimates a structural
under 15
~
~---
~
dino
diuo
*0.09 (under 15). -0,09 (under 6)
Elastir:itles are means of effeclS
<
evaluated at each obscrvatirn
frledal arhours nfwark
,.
SlgnifiC'lmce 'cannot be de!enninet!
from available information.
Kimmel
(1995)
19811md 1988 SIpP data
Single mothers
in poverty
-----
Cleveland
tt al
ditto
Probit
ditto
....
~
1988 Canadian National Child
Care Survey
Families with
Probit
young c~i1d!en
Engaged in paid
employment or not
------
-
dif10
·0.346. Also estimated elasticity
separately (or white single mothers in
poverty (~1.362) and b!ack single
mother'S in poverty (-.345; not
statistically significant)
·0.388 (evaluated at means)
(1996)
------
1\ verett et
------
Married mothers
with at least one
1986 NLS-Y
,I. (1997)
child under age 6
------
Dual·error model
Annual hours of
dicto
·0,78 (evalualed al means ofdala)
work
----
------
B. Studies Jhallise an excgenOlls SOlm;;e afllarialion ill (he cost of child care
------
~
Iy (year)
Datu
Group srudied
Source
-~~
.
CO"I~
-----
~---~
Source of variation in child care
,
~er and
'k (1992)
Telephone survey
Low-income
si.ngle mOlhers
Those tecdving day care subsidy
in twO Kentucky programs versus
Ihose on subsidy waiting list.
:afsson and
ford{l992)
Swedish data sel
ptus telephone
Families in
different
Swedish
communilies
Cxogenou$ variation due. 10 local
goveOllllenl serting SUblii~y ntes
for public child care.
Measure ('lflabor
I"
Measure of cost of child care
.
Whether mother
employed or not
Dummy for receipt of subsidy
(amI of subsidy varies with '
income)
Whether mother
works 'substantially>
(more than 30 hours)
Locally-set price {per month)
of public child care
------
survey
.
~~
.
--~
Estimate of employment
I .rre«
.
Attribute an increasc in
employment of 12% to
program
------
EStimated mean elasticity of
employment wilh respect to
child care cosl ~L88
�'-------,-~.-
Jowitz: et at
l2)
NLS·Y
FirsHtme
mothers
Vtlriation among states alld over
time in state and federal Income
tax credits for child care
29
Whether mother is
employed when child
is J months old, and
whether molher Is
employed when child·
is 24 month!;
Subsidy available through
state and federnl income lax
credits; to avoid endogenei!)"
issues, assumes woman works
full-time at b<:r predicted wage
.--
Greater tax credits increased
early relurn to wOrk (wlin 3
mos) bUI had little effect on
efl1ployment of women wilh
older children
-~--~-------~
�Appendix 2: Effect Ilf chUd care luice on use of market care, given maternal emplnyment l
I" Measures of price of care and mo~e' ofcare.'
S;'~y rM.I~odS
~~
1986 NLS72. Black and
white mothers with
preschool age children
Probit
Hou: arid
Kilburn
\992
Parental versus non-parental care.
Selectivity-com:cled predicted hourly price of non-parental cure
1986 NLSn. Black and
Parental versus non~parental care,
Selectivity-corrected predicted hourly price ofnon+parenta! care (using
different instruments lrom 1992 paper).
I
ICI~veland
el 01
(1996)
white mothers of pre~school
ago cbHdrea Maximum
likelihood sWitching
regres...ion model.
----
1988 Canadian National
Chlld eme survey, Families
with )'Dung children" Probit
Whetbe; family purchases market care or non-market care at zero cosL
Selectivity-corrected PFcdicted hourly price of care from employed who
purchase care.
----
1984 SIPf', Married women
with children under 15.
Maximum likelihood.
1~95
-J,7. Sigl)ifi :ant
~~
~
Ribar
-0.17 to ~O.2 o depending on
speciHcatiOl Significant.
-----
~~
Hottand
Kilburn
1994
Price elastic ,ty of market care
utilization c inditional on
emptovmem
~
~
~
,
I
~
----
-1.056. Singl'e (;oeflicient'us.ed in
computing e aslicity is significant.
----
--
Direct report ofwhelher family pays for care.
SeJeellvity~corrected predicted hourly prJce of care from employed who
purchase care.
Elasticity fo paid carr: utilizatlQn is
-0.608 or -0 42 depending on
specificatiOl' When loOK at moms
wilh).dds tin er .6, elaslicily drops to
-0.235 or -0. 224 depending on
specificatior Can't determine
significance,
Market venus non-miflJkct care; care coded as market if provided by a
nnn-relative or in a group facililY or day care center, or if fl.mily reports
any direct expenditure Oil child eilre.
The weekly cost of market care reported by families is used to construct
the site~average weekly child care costs; these are divided by 30 to
estimate hourly price ofc:arc_
-1.17. Can'l detcnnine significance
-----
~-
~
Blau and
Robins
(1988)
----
~-
193{} EOPP. Married
mothers under 45 with
children under 14.
Multinomiallogit.
----
30
�-
Blau an I
Hagy
(farthea n
ing)
~
Ribar
(1991)
t 990 NCCS and peess.
Women with children under
1, not in school.
Whether family pays for care or not.
Estimates hourly fees using regression results.
-.IS. Can 't delem~ine significance
Paid versus unpaid care,.
Seleclivily-corre<:ted predicted hourly costs from employed who
purchase >care.
~.21O.
Multinomial logiL
--
1984 SiPP. Married females
with children 0-6. Tobit
-
Underlying. coefficients
significant.
i
1, Elasticities for Bfau and Robins (988), RJb.ar (1992) and Blau and Hagy (forthcoming) are all taken from Blau (under review) who recali::ulates lhe elasticities
, using variable means from the data in Blau and Hagy (forthcoming).
2.A,1I elasticilie:& calculated at sample means except for Ribar (19~5) who calculates mean of elasticities for each individual.
31
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Way,'
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Supply, and Child Care.' Review ofEconomics and Statistics. February,
.
Beli, David, Dennis Gleibek, Alice Mercer, Robi Phifer, Robert Guinter, A. Cohen, Euguene .
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,
Berger, Marl< C. and Dan A. Black. 1992. 'Child Care Subsidies, Quality ofCare, and the Labor
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II, nO.2
.
Blau, David. 1992. 'The Child Care Labor Market.' Journal ofHuman Resources, Winter.
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BIau. David, (Under review, December 1996) 'Child Care policy. y:nployrnent of low-income
. mothers, ana child Welfare.'
Btall, David M. and Phillip K. Robins. 1988. 'Child Care Costs and Family Labor Supply.'·
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August.
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. ,
Bureau of Labor Statistics (1996). Marital and Family Supplement to March Current Population
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Casper, Lyn.,. M. and Martin O'CnnnellI997. 'State Estimates of Organized Child Care
Facilities', Paper presented at the annual. meeting of the Population Association of America. U.S:
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Cur.er.t Population Reports, P-70, no.52. Washington, DC.
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Children's Foundation (1997). 'The 1997 FCC Licensing Study!
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Chlpty, Tasneem (1995). 'Economic EEocts of Quality Regulations in the Day-Care Industry.'
American Economic Review, Papers and Proceedings. May.
Clevelane, Gordon, Morley Gunderson and Douglas Hyatt. 1996. 'Child care COStS and the
employment decision of women: Canadian evidence: Canadian Journal of Economics,
February.
.
Cohn, E., and T, Geske, 1990. The Economics QfEduc.atjQo. 3d eeL E!msford h7; Pergamon
Press, .
Connelly, RacheL 1992. "The Effect of Child Care CostS on Married Women's Labor Force
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Cost: Quality &. Child Outcomes Study Team. 1995. 'Cost. Quality, and Child Outcomes in
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.
Council of Economic Advisers (1997). 'The First Three Years; Investments that Pay.'
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GAOfHEHS-95-20. .
Gomby. Deanna, Mary Lamer, Carol Stevenson. Eugene Lewit and Richard Behrman (1995).
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Future of Children; Long-term outcomes early childhood programs. Center for L'Ie Future of
Children.
of
33
�Gustafsson Siv, and Frank Sudford. 1992. 'Child Car: Subsid;es and Labor Supply in Sweder..'
JoZ!rnal ofHl.4man Resources, Winter"
Hagy, Alison.. (fo".heoDing) 'T.~e Deoand for child care quality: an hedonic price t'leory
approach.' Journal ofHuman Resources,
Hayes,Cheryl, lohnPalmer and Martha Zaslow (cds). 1990. '\Vno Cares for America's
Children? Chlld Care Policy :or the 1990,.' Kational Academy Press: Washlngton DC.
He1burn, Suzanne and Carollee and Howes (1996). 'Chl1d care cost and quality.' In 'The FutUre
Children: fmancing child care; Center for the Future of Children.
of
Hernandez, D. 1995. 'Changing Demographics: Past and Future Demands for Early Childhood
'Programs'. In IThc Future of Cl-.Jldren: long-term outcomes ofearly childhood programs) > Center
. .
for the Future of C!,jldren.
Hofferth, Sandra. 199i. National Child Care Survey, 1990. Washington DC: The Urban
lnstitute.
Hofferth, Sandra. (1996). 'Child Care in the United States Today.' In 'The Future of Children:
financing child care,' Center for the Future of Children..
Hofferth Sarldra (1995). 'Caring for Children atthe Poverty Line. Children and Youth Services
Review 17 (112).
Hotz, V. Joseph and M. Rebecca Kilburn (1992), 'Estimating the Dema.1d for Child Care and
Child Care Costs: Should We Ignore Families V.1th Non-Working Mot",rsT unpublished
manuscript. University of Chicago, Februa..ry.
Hotz, V. Joseph and M. Rebecca Kilburn (1994). 'Regulating C;tildCare: The effect of State
Regulations on Child Care Demand and Its Cost.' unpubli~hed manuscript.
Howes, Corollee, Ellen Smith and Ellen Galinsky. 1995. 'The Florida Child Care Quality
Improvement Study; Interim Report.' FamilIes and Work Institute.
Kimmel! Jean. 1995. 'The Effectiveness of Child Care Subsidies in Encouraging t.i.e Welfare-to
Work Transition ofLow-Income Single Mothers.' American Economic Review. Papers and
Proceedings, May.
Kimmel. Jean. 1994, IChlld Care Costs as a barrier to employme:lt for single and married
mothers.' W.E. Upjohn Institute, draft.
Kimmel, Jean. 1992. 'Crjld Care and the Employment Behavior afSingle and Married Mothers.'
34
�WE. UpJo'hn Institute for Employment Research, working paper 92~I 4.
j(jsker, Ellen and Rebecca Mayrwd (1991) 'Quality, Cost, and Parental Choice in Child Care'
In Blau, David (e~) The Economics o(Child Care,
'
'
Leibowitz, Arleen, Jacob Klennan, and Lind. Waite, 1992, 'Employment of New Mothers and
Child Care Choice.' Journal ofHuman Resources, '?¥inter:
Michalopoulos, ,Charles, Philip K, Robins, .. d Irwin OariinkeL 1992, 'A structural Model of ' '
,
, Labor Supply and Child Care Demand,' Journal of Human Resources, Winter.
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,
child care in 1990, joint f",dings from the national child care S\llVey, 1990 and the profile of
child care settings,' Washington DC,
Phillips Deborah (1995), 'Child Care for Low Income Families: Summary ofTwo Workshops:
National Research CounciL
Phillips Deborah and Arme Bridgman (eds,) 1995, 'New Findings on Children, Families, and
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Medical Care, and Long-Tenn Care in America.
Rij>ar, David, 1995.' A structural moeel of childcare and the labor supply of married women:
Journa{ a/Labor Economics, vol 13, no.3
,'"
Ribar, David Co 1992, 'Child Care and tlle Labor Supply of Married Women: Reduced Form
Evidence.' Journal a/Human Resources, Winter.
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Government Prin~g Office.
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Elizabeth FarqUhar,
U.S. Department of Education, 1995. National Cente: for Education Statistics! National
Household Education Survey.
35
�Waite, Linda, Arleen Leibowitz a.~d Christina Witsberger. 1991. 'Wbat parents pay for: child
care characteristics, quality, and costs.' Journal a/Social Issues, Vol 47, No 2.
'.
"
Walker, James. 1991. 'Public PoHcy and the Supply of Child Care Services.' In The EconQrni£.<
QfChiid Core, edited by David Blau. New York: R1;Sseil Sage Foundation.
Walker, James. 1992. 'New Evidence an the Supply of Child Care.' Journal oj Human
Resources, Winrer,
36
�,
EXPLAINING TRENDS IN THE GENDER WAGE GAP
June 1998
A Report by
The Council Economic Advisers
of
�EXECUTIVE S~L>\RY
•
•
Although the gap between women and men's wages has narrowed substantially since the
signing of the Equal Pay Act in 1963, there still exists. significant wage gap that cannot
be explained by differences between male and female workers in labor nwket experience
and in the characteristics ofjobs they hold.
After hovering at about 60 percent since the mid~1950s. the ratio of women's to men's
. median pay began to rise in the late 1970s and reached about 70 percent by 1990. The
gender pay ratio is currently on the rise again, SU1jlassing 75 percent in 1997.
•
The gender gap has narrowed faster among younger women and among married women
with children. The data that permit disaggregation by demographic groups show the
overall gender pay ratio rising from 57 percent in 1969 to 68 percent in 1996 (the last year
for which these data are available). In contrast, among women under 40, the gender pay
ratio rose from 58 percent in 1969 to 74 percent in 1996. Among married women with
children, the gender pay ratio (relative to all. male workers) rose from 53 percent in 1969
to 68 percent in 1996. Relative to all male workers, wage gains have been faster for non
Hispanic black and non-Hlspanic white women than for Hispanic warne!!.
•
The most recent detailed longitudinal study found that in the late 1980. about one-third of
the gender pay gap was explained by differences in the skills and experience that women
bring to the labor rrutrket and about 28 percent was due to dilfurences in industry,
occupation, and union status among men and women. Accounting for these differences
raised the female/male pay ratio in the late 19805 from about 12 percent to aboutSH.
percent, leaving around 12 percent as an "unexplained" difference.
'
•
Over the last twenty years, increases in women's accumulated labor market experience
and their movement into higher~paying occupations have played a major role in increasuig
women's wages relative to men's. Changes in family status, in industry structure and in
uniouization also worked to narrow the gender pay gap, while increasing economic
benefit. from skills and increasing wage ineqnallty would have, by themselves, widened
the pay gap. In addition, the decrease in the pay gap that remains "unexplained" after
controlling for measured differences between men and women has been a large contributor
to the narrowing ofthe pay gap.
.
•
6
The evidence is that labor market discrimination .against women persists. although it is
difficult to determine precisely how much ofthe difference in female/male pay is due to
discrimination and how much is due to differences in choices or preferences between
women and men. One indirect and rough meaSure of the extent of discrimination
remaining in the labor market is the «unexplained" difference in pay. Some studies have
tried to measure discrimination directly by looking at pay differences among men and
women in very similar jobs or by comparing pay to specific measures of prodUctivity.
These mudies consistently find eVidence ofongoing discrimination in the labor market and
support the conclusion that women still face differemial treatment on the job.
..
"
.
,'.'
�L INTRODUCTION
Thirty five years ago, President Kennedysigned the Equal Pay Act into law, making it illegal to
pay men and women employed in the same esublishmertt different wages fur "substantially equal" .
work'. At that time, the ratio of women's to men's average pay was about 58 percent' Although
the gap in ave..ge pay between men and women has deoreased since then. the "geeder gap" in
pay persists. Decreases in labor market discrimination towards women may be partly responsible.
for these improvements. but continued discrimination may also contribute to the remaining
earnings gap. .
The long-standing differences in the average pay of men-and women in the labor market are the
result of man)' farces, including differences in:he characteristics (such as average labor market
experience) that men and women bring to their jobs, differences in the characteristics of the jobs
in which men and worn'en work, and differential and discriminatory treatment ofwomen by
_ employers and c~workers.
All ofthese factors interact in complex ways.' Hence it is difficult to determine precisely how
much' of the diJference in female/male pay is due to discrimination and how much is due to
differential choices and preferences by female workers. For example. if women have less
experience than men., they may choose occupations 'where extensive experience is less necessary.
Ifwomen consistently choose different occupations than men. stereotypes about women's abilities
. may. be reinforced and discriminatory behavior by employers may be perpetuated. If employers
make it diffictilt for women to enter certain occupations, women's iZlcentives to invest in training
for those occupations may be reduced.
Women and men diJfer, both in terms of the jobs in which they work and in their responsibilities
for children (which affect work at home and in the market), Nevertheless, over time, women's
skills have become more similar to men's. The occupations and industries in which men' and
women work have also become more similar. But. as of the late 1980s, the date ofthe most
recent detailed study, there were still large differences between men and women in personal and
job characteristics that influenced their relative wages, And even when aU of these differences
were taken into' accQun1,. -a significant gender wage gap remained. As we discuss below, this
suggests that there is continuing discrimination against women in the tabor market.
,
' . '
.
'Schultz v. Wheaton Glass: Co., 421 F,2d 259 (3rd Cir. 1970).
'Based 00 calculations from the March 1964 Current Population Survey (Bureau of the
Census). Data. ~e for weekly wages of full-time, year-round workers aged 25~64.
I
�"
II. TRENDS lli TIlE GENDER WAGE GAP
Trends in the overall gap
Hgur'! 1. MedIan Weekly Earnings of Females Relative to Male$ After hovering around
lOOt
'"
I'1If.IitM_Mn.
l~_"'1
;
70
~
;;;;:
---"
"
!
1!1aS
o
o
I
I
>
'S$1
I
D
I
!
HI77
~
t973
__
~
501969
"
"
"
~
a~ L
V
~
191$$
19$3
_ _ """
1997
60 percent since the mid~
1950s', the ratio ofwomen's to men's pay
,
began to rise in the late 1910s, surpassing 10
percent by 1990 (see bottom line offigure I), "
After a pause in the mid-1m;;, the gender pay
ratio has begun to rise again, reaching more
thali 75 percent in 1991 (see top line ofFigure
1).' Although the size ofthe gender pay gap
vanes across countries, many industrial
economies have seen a narrov.ring ofthe gap
over the last two decades.$
""""'ro- .....c
Trends in the gender gap by demographic characteristics
Figure 2. Rillio of FemalelMllle AYen.tge Weeldy WIl9o$
L0
0.8
'I
1
t
,
0.,6 :..
In order to compare trends in the gender pay
ratio across different-demographic groups, a
data series is needed that permits such
disaggregation. Figure 2 shows the aggregate
gender pay ratio in this data series, based on a
~O+
'The data shown in the top line of.the figure are ...nos of median weekly wages for full·
.time workers aged 25'.to 54,,Published quarterly by the Bureau ofLabor Statistics since 1979. The
bottom line shows the ...nos·of median weekly wages of full-time, year-round workers aged 25 to
54, calculated from the Marcb Current Population surVey data files. Unfortunately, the former
senes is not availabJe befure 1979, and the latter series is not currently available after 1996,
'w.ldfogel, Jane.
Children."
1998. "Understanding the 'Family Gap' in Pay for Women with
Jvurna/ of Economic Perspectives 12(1}:137.56.
2
�. slightly diiIerent group of workers.' Although the level of the gender pay gap in Figure 2 is
slightly diiIerent from that in Figure 1, the overall trends are similar.
,~:3, RetiQ of~l\!IiMtie ....-e~WouI¢y~!:It ~ BI'Id Bl"tIio;lty Figure
u
0.8
.
'
3 shows pay ratios for women workers
..
by raee and ethniClty, re1alive to all male
workers, Relative to all male ~orkers, wage
gains have be<n filster for non-Hispanic black
and non~Hispanic white women than for
Hispanic women,
Women of all ages and education levels
experienced ga1'1S in pay relative to their male
counterparts. The gender gap varies little
across education groups' but is substantially
smaller for younger women (see figure 4). This
was not always the case. In 1969, the gender
gap waS similar for those under and over age 40. But the gap narrowed much faster far younger
women. The farger gap among older women
~r• ..., Ratkl lit F."..I<:I/Mal. Av.rag" V'ft,,1dy 'o'hll.$ by A<jj"e
may be a generational effect, indicating that the
current younger cohort of women has made
choices more similar to those of men a."ldior is
0.'
not facing as much discrimi."lation as the cohort
M
before them, Alternately, the gap, for o~der
women could reflect growing differences in '
accumuiated work experience as women age or
a "glass ceiling" effect by which women aehieve
.smaller pay gains over time. Indeed~ the
bipartisan Federal Glass Ceiling Commission
0.0
found that "in the private sector, equally
qualified and similarly situated citizens are liaing
.
denied equal access to advancement into seruor
level tnlIllllgement on the basis ofgender, race, or ethnicity."'
.
. ,[
~:l
,
"Data jll figures 2 through 5 are based on tabulations from various years of the March
. Current Population Survey (Bureau of the CensusJ. The data refer \0 full-time, year-round
workers aged 25 to 64.
'Blau, Francine. 199&. "Trends in the Well-Being of American Women, 1970-1995."
Jauma/ ofEcanomic Literature 36: 112-<55.
.
'Il.S. Department ofLabor Glass Ceiling Commission. 1995. "o"od for Business:
Making Full U,;e ~fthe Nation's Human Capital," March. Washir,gton DC.
.
3
�F"~5.FbtiQoIF~~w..Nty~b1Fam~~
1,O;-~""
6:in9"'--'- _ _ _
Traditionally, women with children have had
[ower wages than childless women. However,
gains in average pay have been greatest for
married women with clilldren (see figure 5). It
is worth noting that this is also the group of
women among whom labor force participation
has increased the most since 1970. Although
their pay relative to men has climbed, single
mothers cOntinue to have the lowest average '
rate of pay.
Sin;two...,....... MwlIIood_
GeodeI' gaps ,in fringe benefits
The male-female difference in wages is also
visible in fringe benefits, which currently make up about 30 percent oftotal compensation. As
with wages, some ofthis gap is related to differences betYleen men and women in human capital
and job characteristics, and some remains unexplained. Among younger workers, the gender gap
in total compensation appears to be smaller than the gap in wages.' Much ofthe female-male gap
in: pension coverage can be accounted for by differences in their labor market histories and is
much smaller among younger workers. In addition, among those who have pensions, the gender
gap in benefit lev~ is largely exPlained by gender differences in income,1 0 Therefore, lower
wages, and htnce lower lifetime earnings, result in lower pension benefits upon retirement For
Some wome~ the lack of coverage or IDwe~ benefit levels may not be a problem, since they
receive benefits through a spouse. For other women. lack of adequate health or pension benefits
from their job is a serious problem. More research is needed to understand the impact ofiower
fringe benefit coverage on female employees.
""JO;iIb
IIll'Ici;Q.
m
'H1<icIs
wI;l4f
EXPLAINING TIrE TRE1'lDS IN TIrE GENDER GAP
In this sectiOl'!7 we examine changes in the relative characteristics of female versus male workers
and in the jobs in which they work, and relate these changes to the decline in the gender gap. The
next section considers the role, ofdisci:imination.
The gendeT SllP has declined both because gender differences in measured characteristics bave
narrowed, and because the "unexplained" difference in pay (v.:hich may be discrimination, as
dismssed below) has also fallen. Among the measured characteristics, -the two most important
factors contributing to a narrowing ofthe gender wage gap between 1970 and 1995 have been
improvements in .women's relative labor m3fket experience and improvements in their relative .'
r..;.,gblin.
'Solberg, Eric and Teresa
1995. "The Gender Pay Gap, Fringe Benefits, ar.d
Occupational Crowding." Industrial and Lahar RelatiansReview, 48{4): 692-708.
L<$ver, Wdfiam and David Macpherson. 1994. "Gender Differences in Pensions," Journal
ofHYman Resources, 29(2):555.587.
4
�ocoupational ,rtalus. Changes in unionism also benefitted women relative to men, but have played
a smaller role. Although subSUUltial, shifts in employment across industries have had relatively
little effect on the gender pay gap .. Increases in the returns to skill and increasing wage differences
across occupations and industries - particuWly in the 19805 - dampened women's relative "'age
gains, since women were disproportionately represented among the less-skilled and in lower
paying occupations.
'.
The Role of Human Capital
Human capital, which includes education and labor 'market experience, is often viewed as the most
important detenninant of wages. An additional year ofschooling is estimated to increase wages by
5 to 15 percent." An edditional25 years ofwork experience mcreases wages by an estimated 80
percent. tZ
'
Differences in labor market experience between men and women are far greater than differences in.
their educational attainment. But in the 1980s. the difference between men and women workers
in average labor market ,experience began fill. The increase in women's relative experience by
itself would have reduced the pay gap by about 35 percentage points over the 1980,. Still, as of
the late 1980s~ when such data were last analyzed. remaining differences in work experience
between men and women were fuund to explain about one-third of the pay gap that existed at that
to
time,u
"
Th. Rol. of Family Statn, and Children .
The reltitionship hetwe.en farnily starns and pay is different fof' men and women. While married
men, most of whom have children, typically earn more in the labor market than unmarried men,
for women the relationship is reversed. Children are associated with lower wages fur women but
not for men, in pan because children tend to reduce women~ s work experience and time with their
emp'oyer.
,
The pay premium for married men appears to have shrunk during the 1970. and 1980s. H
However•. trel1ds,~ earnings differences between mothers and women without children are less
, "Council ofEconomic Advisers. 1996. "PromOting Economic Growth: BackgroWld
Briefing Paper." July,
"Freeman, Richard and Lawrence K.atz. 1994. "Rising Wage Inequality: The United
States vs. Other Advanced Countries." In Richard Freeman, ed. Working Under Different Ruies.
New York: Russell Sage Foundation, .
"Blan, Francine and Lawrence Kahn. 1991. "Swimming Upstream: Trends in the Gender
Wage Differen:tial in
1980•. " Journal ofL:1bor Economics 15(1, Part I): 1-42.
the
"Blackburn, McKinley and Sanders Korenman. 1994. "The Declining Marital Status
Earnings 'Differential,.. Journal ofPopulation Economics ~:247-70.
5
'.
�clear, Out of all women. gains in average pay over the last three decades have been greatest for
married women with children (see Figure 5), But there is evidence that for younger women, the
~ge gains for mothers were much less than for non-mothers over the 1980$, U
of
The Role Occupation
Men and women tend to work in different occupations, And wages dilfer substantially according
to the gender composition ofthe occupation. In particular, men and women who work in .
predominantly female occupations earn less than comparable workers in other occupations,"
Figure 6 indicates how metl's and women's occupational starns have changed over time, Women
have increasingly moved into traditionally male occupations, Between 1983 and 1997, the
proportion ofemployed women who worked in
~g\lfe 6, OcoJpational Oi$trlbutian ~ Employmert
managerial and professional occupations
increased from 23 ,to 32 percent, while the
proportion of men in these occupations rose
only from '26 to 29 percent. l1 But women are
still much more likely to work in service and
. clerical jobs than men., while men remain more
likely to be in blue collar (craft, oper.tor, a."d
labor) jobs,
'
Occupational segregation by gender began to
o
2U
~,
~
de{:line noticeably in the 19705. Such changes
_ _ .............-I_• ..,.r;:::::_,
mayaI due to integration,offormerly male tal
be
'
'th or
lem e occupations or to,mcreases,tn e to
'employment sbare of occupations that have traditiooalJy been more integrated, Movement of
women into traditionally male occupations was the predominate cause ofthe decrease in
occupational segregation in the 1970. and 1980s, In the 1980s, growth of overall employment in
more integrated occupations was somewhat more important than it had been in the 1970s," The
decline in occupational segregation alone in the 1980. would have'reduced the geoder gap by
about three percentage points," Although occupational desegregation has commued in the 1990••
the rate ofdesegregation through the mid-1990s appears to have been somewhat slower than the
_ _ O<l.>W _ _ _
~_~
C';
,
,
"wa1dfoge~ op, cit,
"Blau, op, cil"
11 Data begin in 1983 due to a major change in the occupational classification system
'
implemented in that year,
"BIau, op, ,cil,
"Blau <ind Kahn, op, cit,
6
�rate during the 1970,
and 1980s."
The RDle of Unions
Union membership is estimated to boost wages of union members relative to non-union- members
by 10 to 20 percent?! Men have traditionally been more likely to be wUon members than women.,
which helped increase the gender pay gap. The decline over the last 25 years in the fraction of the
workforce that is Unionized has raised wOr:len's relative pay as fewer men receive union wages,
In addition, the share of unionized workers who are female has increased as unions have declinad
less (or even grown) in certain public sector and service-related occupations that have a greater'
, share offemale workers. 21 These female union members have benefitted from higher union wages.
Bu~ overall, the decline of unions has had a relatively small role in the declining gender pay gap;
by itself, it would have cau~d the gender pay gap to decline by about one percentage point over
the 19805.
The Role of Industry
Differences in wages across industries are substantial and persistent. For example, wages for
similar workers are 37 percent higher than average in the petroleum industry but about 17 percent
lower than average in retail trade.2J· Recent shifts in employment across indusiries (notably, the
decline in the relative employment share of blue-collar jobs, where women are under-represented)
have benefitted women relative to men.~· However, the industry shl.r.s had relatively little effect on
the gender gap in the 1980,."
.
The Role of Changes in the Wage: Structure
Trends in the above factors have boosted women's wages relative to men's. Roweve:" two major
trends have worked to widen the gendeI:' gap: increases in the pa.y premium associated with higher
-ZOWootton, Barbara. 1997. "Gender differences in occupational employment." Bureau oj
Labor Statistics, Monthly Lahor Review, Apri~ pp.15~24.
'
21 Freeman. Richard and James Medoff. 1981. "The Inapact of Collective Bargaining:
illusion or Reality?" in Wj. Industrial Relations 1950-198Q: A Critical Assessment, IRRA.
"Blau 'Old Kahn, op. cit. See ,also Even, William and Da;id Maepherson. 1993. "Tne '
Decline ofPrivate Sector Unionism and the Gender Wage Gap," Journal a/Human Resources
.
28(2}:279~96.
"Krueger, AIati and Lawrence Summers, 1988. "Efficiency Wages and the Inter-Industry
Wage Structure." EcollOnwtrica 56(2): 259-93.
"'O'Neill. June and Solomon Polachek, 1993. "Why the Gender Gap in Wages Narrowed
.
in the 1980,." Journal afLahor Economics 11(1)' 205~22&.
"BIau lIl1d Kahn, op cit..
7
�«skills" (i"e,~ higher levels of education and labor market experience) a.1d increased pay differences
across industries and occupations, :u. This has served to widen the gender gap because female
wcrkers continue to have less labor market experience. on average, than male workers, and are,
on average, in lower~paying occupations. The rising wage inequality aIld increasing econorn.lc
returns to skills slowed. women's progress during the'19805 and alone would have increased the
gender pay gap by about four to six percentage points.'" .
The Role orrolicy
A number of policies in the 1960s targeted gender discrimination in the labor market. The Equal
Pay Act of 1963 proscribes gender-based pay discrimination among emptoyees.;vitltin the sarne
establishment who do "substantially equal" work." Title VII ofthe 1964 Civil Rights Act (and
subsequent amendments) proscribes employment discri."Ilination on the basis of sex in a broader
set of categories, including hiring, prornocio~ and other conditions of employment. Executive
Order 11246 (issued in 1965 and amended in 1967 to include sex).requires that non-exernpt
federal contrat;:tors and subcontractors take affinn~tive action in employment. .
. Few studies have examined the effects of these poucies on the gender pay gap. One difficulty in
making such an assessment is that these policy changes took place at a time'ofenormous changes
in gender roles and expectations. Isolating the effects of a single policy change from these·
broader social and economic changes is difficult. One study estimated the effects ofaffirmative
.action on hiring by comparing hiring in firms that are Federal contractors to those that are not
(and therefore are not subject to affirmative action provisions). Employment of women increased
somewhat faster in contractor fums. J9 AlthO:lgh no sach studies of the effect of policies on the
gender pay ratio exist, it is dear that a rOle for these policy changes cannot be ruled out in both
the increase in t.'le gender pay ratio and the other changes that have served to increase the gender
pay ratio..
26Blau, op. cit.
"Blau and Kahn, op. cit.
,
. "Schultz v. Whealon Glass Co. op cit. The Equal Pay Act, 29 U.S.C. § 206(d) (1), makes
it illegal to pay men and women employed in the same establish.."llent diffe:ent \\'ages for "equal
work on jobs the perfOmta!1ce of which requires equal skill. effort, and responsibility and which
are performed under sinillat working conditions, n
"i-eonard, Jonathan. 1984.·"The Impact of Affirmative Action on Employment," Journal
afLabor Economics, October, 2, 439-463.
8
�IV. DISCRIMJNATION
What is gender discrimination in the labor force? •
Gender discri:nination may take a va:iet}' of forms, from practices' that reduce the cha.1.ces that a
woman is hired to differences in pay for men and women who work side by side doing the same
tasks equally well, There are a variety of theories about how and why women face discrimination
in the labor market. An employer may dislike female employees or underestimate their abilities; <
customers may dislike female employees or.underestimate their abilities; or male co~workers may
resist working with·women. These attitudes may not be directed toward all workers but may only
focus on women in higher status occupations. For instance, IT'.ale employees may not object to
having women work for them but may object when women are their superiors. In addition,
employers may engage in what is called "statistical discrimination," meaning that they assume an
individual woman has the average characteristics of all women. For examp.ie. because women on
average have higher turnover rates than men. an employer may assuree that a given female job
candidate is ~ore likely to leave the finn than a similar male candidate. Statistical discrimination.
like other fonTIS of discrimination, is illegal. An employer is required to base hiring or pay
decisions on specific information about an individual. not on presumptions based on gender.
The unexplained portion of the gender gap
Although the gender gap has narrowed since the late 1970,. at 25 percent it i, still substantial (see
figure 1). And as late as the 1980,. the date of the most recent detailed longitudinal stUdy,'
gender pay differential of about 12 percent'remain,ed unexplai.'led even after adjustmentS for
gender differences in education, labor market experience, broad occupational and industrial
distributions, and umon status. According to this study. the gender pay gap ratio in 1988 was 72
percent. Women's lower full-rime experience explained roughly one-third of the pay gap, and
. gender differences in industry, occupation, and union status explained about 28 percent of the pay
<gap. Thi, left about a 12 percentage point pay gap unexplained. This unexplained differential,
after adjustmeqts. declined by half over the 1980" from about 22 poo:entage points to about 12
. percentage points< This decline alone would have reduced the gender gap by about 10 percentage
.
,.
, pomts.
~.
The unexplained portion ofthe pay gap is often interpreted as the result ofdiscrimination. In thi,
view, once differences between men and women in the relevant determinants of wages are taken
into a<;count, any remaining difference in pay must be ~ue to discrimination. But this explanation
may 'be too simplistic. To the extent that discrimination affectS women,'s educational, job, and
family choices. the "un~lainedn differential will understate the true effect ofdiscrimination.
And l to the extent that an analyst cannot adequately measure all the determinants of wages using
available data, there may be significant unmeasured labor market skills that differ between men
and women. For instance, ifwomen's labor market exp~rience is less likely to be continuous (for
example, due to childbearing), then just controlling for years ofwark may not fully control fur the
differential effects of experience on male and. female wages. In trus case, the ··unexplained"
9
�.'
i
differential will overstate the true effect ofdiscrimination, because it includes the effect ofrelevant
unmeasured' ~OtS that influence the relative productivity ofmale and female employees.
The decline in the "unexplained" portion of the pay gap over the 1980, could either be due to.
relatiye improvement in women's uruneasured labor market skills or a decline in discri.m.ination.
Both explanations are plauSIble. Women's unmeasured skills may have improved rel.tive to
men's over the 1980$, (For instance, women have entered elite priVate universities - many of
which were closed to women before the mid-1970s - at an increasing rate in recent decades,
perhaps increasing the quality of their schooling.) But reductions in discrimination may also have
played a role in reducing the."unl?XPlained" difference between men's and women's wages, For
example. as women increased their commitment to the labor force and improved their job skills,
statistical discrimination against them may have diminished. In addition, reduced discrimination
could also have contnbuted to the decline in the explained portion of the pay gap if earlier anti
discrimination efforts encouraged women to invest more in labor market skills and to move into
traditionally nulle occupations.
.
Studies of gender pay discrimination
Gender pay discrimination Under the Equal Pay Act is said to occur when male and female
workers employed in the same establishment receive different pay for "substantially equal" work."
A small but growing area of researeh attempts to coHect direct evidence on·gender pay
.
discrimination in the 13.bor market in two Ways. While none of these studies alone is definitiveJ
taken together they present' compelling evidence ofthe continued existence ofgender
discrimination in the labor market.
First, a handl\Ji ofstudies have examined whether female workers earn less t.ian comparable male
workers within the same establishments and llilITOwiy defined oecupatio~al categories. Although
evidence is mixed, some studies find substantial pay differences. bet\1leen men and women working
in the same narrowly defined occupations and establishments. One recent and thorough'study of
this kind takes advantage of a unique data set that matches workers in the 1990 Census to
information on the establlshments in which they work, using the U.S. Census Bureau Standard
Statistical Establishment List. Unlike previous studies of this type, the data mernile worker, from
all sectors of the economy. The study decomposes the gender gap into a part that is the result of
the concentration ofwomen in particular occupations, industries, establishments, and "jobs" (an
occupation within an establishment) and a portion due to differences in pay between men and
women working in industries, occupations, establishments, and jobs with a similar percentage of
female workers. The authors find that a substantial portion - at least one-quaner - of the pay
. gap is the result ofdifferences in pay betWee., men and women worlcingin similar job, and
esta.btishments. n
llSchultz v. Wheaton GlassCo., op cit.
';Bayard, Kimberly, Judith HeUerstein, David Neumark, and Kenneth Traske. 1998.
"New Evidence on Sex Segregation and Sex Differences in Wages from Matched Employee
10
'
�Second, an even smaller set of studies attempts to measure productivity offemaie and male
workers diroctly to determine whether gender pay differences can be directly linked to
, productivity differences. This approach is rarely implemented because it requires information on
wages and " r"liable (and non-gender-biased) measure of productivity such as physical output per
hour or sales" But a recent study of this sort found that pay differences between comparable
women and men are too large to be explained by productivity differences: Using a large linked
employer-employee data set. it concluded that "at the mar-gill'l women were 85 to 96 percent as .
productive as men but were paid only 66 to 68 percent as 'much as" met;Ln
Finally, studies of discrimination in hiring offer additional, albeit indirect, evidence related to the
gender pay gap. For example, the introduction of"screens" to conceal the identity of candidates
from juries in auditions for symphony Qrchestras markedly increased female musicians' chanyes of
success in such competitions and raised their odds of being hired" ~ An audit study - in which
male and female candidates submitted essentially identical resumes for restaurant jobs - found
that female applicants were less likely than their matched male counterparts to be interviewed or
hired as wait-staffin higb-pljce restaurants (this was not true inlow-price restaurants)!'" There is
some informal evidence that earning, tend to be higher in IUgh-price restaura.~ts; therefore this
difference in hiring could contnoute to gender ciliferences in pay.
V. CO":'lCLUSION
Tnere is both good news and bad news with regard to gender pay differences. The bad news is
that there remains a significant differential between women's and men's pay. On average. women
earn about 75 percent of what men earn. Even after controlling for differences in skills and job
characteristics. women still eam less than men. While there are a variety ofinterpretations of this
remaining «W1explained" differential. one plausible interpretation is that gender wage
discrimination continues to be present in the labor market. This i.'"rt'erpretation is buttressed by
, other more direct studies of pay discrimination, which also 'show continuing gender differences in
pay that are not explained by productivity or job differences"
Employer Data." Paper prepared for the U.S" Bureau ofthe Census' International Symposium on
Linked Employer-Employee Data, Washington DC, April"
"Hellerstein, judith, David Neumark, and Kenneth Traske" 1996, "Wages, Productivity
and Worker Characteristics" n National Bureau ofEconomic Research Working Paper 5626" June"
" Croldin, Claudi;:md Cecilia Rouse: 1997" "circhest-'"atiIlg lr:Jpartiality: The Impact of
;B1ind' Auditions on Female 1vfusicians." National Bureau ofEcon-omie Research Working Paper
No" 5903" January,
''Neumark, David, Roy Bank and Kyle Van Nort" 1996" Sex Discrimination in Restaurant
Hiring: An Audit Study" Quarterly Jaurnal ofEconomics, August.
11
�. The good news is that these differences have decreased .in recent .
d,ecades. This is true not only
for the "raw" gap in .verage femalelmale pay, which has decreased from about 40 percent to
about 2S percent over the past two decades, but it 1S also true for the "unexplained" difference in
female/male p~~y once factors that affect pay are controlled for. This suggests both that women's
s~s and job choices are becoming more ~ar to those of men. and that discrimination may be
lessening as well.
.
12
�
Dublin Core
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Title
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Clinton Administration History Project
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Cinton Administration History Project
Council of Economic Advisers
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1993-2001
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An account of the resource
<p>The Clinton Administration History Project describes in detail the accomplishments of President Clinton's Administration for the period 1993-2001. The records consist of the histories of 32 agencies or departments within the Executive Branch. In general, each organization associated with the Project submitted a narrative history along with supporting documents. These narrative accounts are primarily overviews of the various missions, special projects, and accomplishments of the agencies. The supplementary records include substantive memos, press releases, briefing papers, and publications illustrated with photos and charts.</p>
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Text
To "SAVE" ONE DOLLAR•••
'1<
OCTOBER, 1995
My father once told me, "It's no great thing to save
a dollar no matte!; what the cost." Don't be penny-
wise and pound-simple."
,
When it ·comes. to puplic invest.-ncnt in children's health and education, saving a dollar
today may actually cost more than a dollar tomorrow, Much of today's public expenditure on
children is acturuly an investment in their future productivity and health.
Listed below are the conclusions of evaluations of some government expenditure programs
that target children. These studies have 'considered the economic returns to such expenditures,
either in the form of increased productivity for the entire economy or in the fonn of reduced
future expenditure on remediation programs. Therefore. these studies do not take into account
the substantial increase in welfare that accrues to the beneficiaries of these programs simply as
a result of tue provision of the service o~ transfer,
CI!lLDHOOD IMMUNIZATION
•
Cut').in immunization programs will increase future health care costs.
;..
Every $1 cut in polio irruminization costs $10 in later medical ~osts. ,Every $1 cut
in measles, mumps, 'rubella immunization programs costs $14 in later' medical
costs,'
irnm~zation increase the future incidence of these avoidable
diseases 'and the future cost of treating diseases.
Cuts in childhood
IHouse Select Cornmluec on Children, Youth, and Families, Opportunities for Success: Cost Effective-Programs:
, for Children lJoeaie; 1990. 101 Congo 2 SeilS, (GPO 1990),
�SPECIAL SUPPLEMENTAL FOOD PROGRAM fOR
WOMEN, INFANTS, AND CHILDREN (WlC) PRENATAL, AND
. MEDICAID PRE.'1ATAL CARE
•
Cuts in WIC and Medicaid
pre~taJ
care will increase medical
expenditur~
Every $1 cut in the prena:al care portion of the WIe program costs between $Li7
and $3.90 in increased medical expenses in the first 60 days fOllowing childbirth.
The USDA made this finding in a five·state study of 105,000 Medicaid births.'
Every $1 cut in the prenatal care portion of the WIC program COSts $3 in short·
run medical expenditure according to a study in Massachusetts.)
Every $1 cut in the prenatal care pomon of the WIC program costs between $0.49
and $0.83 in additional Medicaid expenditure within the flrst 30 days after
childbirth according to a study in M..issouri,4
Every $1 cut in the Medicaid comprebensive prenatal care program may cost as
much as $2 dollars spent in an infant's first year of life.'
Prenatal care decreases the probability of low hirthweight infants and the
incidence of neonatal death according to several studies,'
~,s. Department of Agriculture. Food and Nutrition Se:rvke..Office of Analysis and Evaluation. The Savings
Co~.ts for Newborns and Their ~others from ?renauI Participation in the WlC Program, Vol. 1.
(WashingtOn. D.C.: Mathematic.. Policy Research. Inc., .1990).
in Medicaid
~ KQtelchuck. ~.• "WlC Participation and Pregnancy Outcomes: Massachusetts Statewide Evaluation
?roject." A.mr.rican loom31 of Public Health. Vol. 74,- October. 1984. aT. Kennedy. etOm.• "€ostlbcnefit and
costleffec~¥eness of Vt1C," Unpublished paper, 1 9 8 3 . '
-.
·W,F, Schramm, "\VIC Prenatal Participath:m and Its Relationship. to Newborn-Medicaid
CoMlBenefit Allalysis," Americrm. Journal of Publlc Healjt. Vo!' 15.• No.8, August, .1985.
~. Kore;,brot. "ComprehensIve Prenatal Care as a Medical Benefit: Expected'
Francisco, CA: University of California, 1984.
COSts
CostS
in Missouri: A.
'
and Savings," San
911- Murray, "'TIlt: Differential Effect of Prenatal Care on the Incidence of Low Bitt:, Weight Among Blac~
and Whites in a Prepaid Health Care Plan," The New England Journal of Medicine, Vol. 319. No. 21, November.
1988. Institute of Medicine, Pre...enting Low Birthweight. Washington, D.C: National Academy Press, 1985. C.W.
, Copeland. "Gaining Ground:. The lmpxt of Medicaid on Infant MQrWity;' American Politics Quarterl ..., Vol, 15.
No.2. April. 1987.
2
�HEAD START AND OTHER EARLY CHILDHOOD EDUCATION
•
C~t'i in
Head Start will lower academic performance and increase medical costs .
Head Start increases test scores and results in fewer failed grades for white and'
Hispanic children, and it has been demonstrated to improve the health of African
American children as measured by the height of participants and by the age at
which measles vaccination is received,7 .
Participants in Head Start. are less likely to
assigned to special education classes. a
.'
•
re~at
a grade and less likely to be
Measles vaccinations ,are given to a higher fraction of Head Start enrollees to all
other children, both those enrolled and those not enrolled in other preschool
programs.9 The cost of missing ~ese vaccinations is discussed above in this
document., A much'higher share of Head St;art children receive medical screening.
dental cbeckups, and other preventive medicine than do comparable child!en who
do not participate. 10
C!lt'i in other early childhood education programs can mean enormous future costs
to society.
'
The Perry Preschool Experiment in the early 1960's in Ypsilanti, Michigan, is an
. example of a high..quali,ty preschool program with ancillary services made
available to a low-income youth. II A cost-benefit analysis of the' program found
that a $1 expenditure on the Perry Preschool progr":ffi' saved $4.75 in future
expenditure on special education, public assistance, and crime. 12 The high school
7Janet CUlne and Duncan Thomas, "Does Head Stan Make a Difference?" NBER Working Paper No. 4406, July,
1993.
IOepartml:nt of Health and Human Services. The Impact of Head Start on Children, Families. and Communities:
Head Stan Synthesis Project, Final Report. 1985 .
•
9Janet Currie and Duncan Thomas, ·'Does Head Start Make a Difference?" NBER Working Paper. No. 4406.
July, 1993.
lOOeparttIlent of Health and Human Services, The Impact of Head Stan on Children, Families. and Communities:
Head Start Synthesis Project. Final Report. 1985, p. V~9.
l1C.T. Ramey and F.A. Campbell. "Poverty. early education. and academic competence." in Aletha C. Huston.
Children in Povem, (Cambridge: Cambridge University Press, 1?91). p. 210.
11Sawhill. Isabel V. "Young Childre'n and Families" in Henry J. Aaron and Charles L. Schultze. editors. Setting
.
Domestic Priorities, 1992, p. 168.
3
�graduation rate of Perry Preschool enrollees was 67 percent compared to 49
percent for the children in the control group. J)
,
L'ICOME SUPPORT •• AFDC AND FOOD STAMPS
ANIl TAX POLICY •• EITC
•
Cutting the income of low·income people, will reduce future output .
Every $1 cutJrom means~tested transfer programs like AFDC and Food Stamps
may cost between $0,92 and $1.51 in lost output due to reduced educational
attainment alone." We expect this frnding to apply to every additional $1 of
taxes that low-income working people will pay if the BITC is cut.
Each additional child who spends Qne more year in poverty due to these cuts will
cost the economy between $2.466 and $6.759 in reduced output - through the
effect of childhood poverty on reduced educational attainment alone. U When. we
account for the total costs of childhood poverty. we ftnd that cutting means-tested
transfer programs or increasing taxes on low-income working families will cost
the economy $12,105 in reduced f'lJtput for each additional child who spends one
more year in,poverty.16
•
'
Cutting income support for .low-income families wiil reduce the educational
achievement of children in those families.l"I
Evidence from the Income Maintenance Experiments defInitively demonstrates that
educational attainment is higher in low·income families that receive income
\
tJCharles F. ~ski. ''''"'hat do controlled experimcnts reveal about outcom~ when treatmcnts vary?" University
of Wiscoirliin~Madison, 199..:3, pp. 6--7.
lfAmy C. Butler. ''The Effect of Welf3.re Guarantees on Children's Educational Attainment."· Social Science,
Research Vol 19, pp. 175-203. 1990: OU!dtet'l'S Defense Fu'nd, Was;ing America's Future, 1994, p. 109,
~SChlldren's
I)efense Fund. Wasting America's Future, 1994. p. 104.
l~Children's Defense
fund. Wasting America's Furure, 1994. p. 104.
nCharles O. Manu, 'Th.e educational and labor-supply responses of young adultS in e.'4perimental families." in
H.W, Wau and A. Rees (editors), ~ew Jersey Iocome MaiTI-.~nance Experiment. Vol n. (New York: Academic
Press, 19"11), p. 175.
4
�support There is strong evidence that childhood poverty reduces educational
attainment after controlling for observable family characteristics. 18
Reducing the amount of education a persone will be able to receive will mean big
losses to the economy when the return to education is so high, The return to
education is estimated at between a 5 and 13 percent increase in earnings per each
additional year of education. 19 Cuts in income support that cause a person to
forego education during childhood can add up to big productivity losses for the
<
economy.
•
Cutting income transfers to children and their famUies will reduce our social
perf'unnance relative to other developed countries.
Compared to other developed countries, the United States already has the highest
rate of post t"" and transfer child poverty, Furthermore, the United StaleS tax and
transfer system already ha;s less impact on child poverty than.all but one oiher
developed country.'"
\
."
,
,
lICha.ltes D, Mnnat. ''''The educational and labor·slJpply responses of young adlJttS in experimental famlh~," in
H.W. Watt and A. Rees (editors), The New Jersey lncor.lc Maintenance EXperiment, Vol II, (New Y(Jfk: Academic
Press, 1977), p. 175.
1VOrley Ashenfelter and Alan B. Krueger, "E."timates of the Return to Schooling from a New Sample of Twins."
American EC!lnomic Review, December, 1994. }osnua ru;grist and Alan Krueger, "'Ooes Compulsory School
Attendance Affect Schooling and Earnings?" Ouarterl,£ Journal of Economics. Vol. 61, No. 4, Novem~r, 1991 .
. Thomas J. Kane and Cecilia Rouse, "Labor Market Returns to Two~ and Fow-Year Colleges: Is a credit a credit
and do dcgreez matter?" Working Paper #311, Industrial R!!lations Section. Princeton University, December, £993.
~e Rainwater and Timothy _Sm~ngs, OQing Poorly: The real income of American children in n
e:omparoti"e perspective, Luxembourg Income Study, Aug\lst, 1995.
5
�TEEN EDUCATION, DROPOUT PREVENTION; Al'lD YOUTH EMPLOYMENT
•
Cutting programs that help young people finish high school may cost as much as
$7,000 p"r dropout per year in lost output alone.
In 1993, men aged 25 to 34 with high school diplomas earned $25.632 per year
on average. Men in this age range 'with less than high-school education earned
only $18,719 per year. A host of economic fmdings on the returns to education
make dear the value of encouraging completion of high schoolY
A study of the economic penomlance of high-SChOOl dropouts and the eo~t of
high-school completion in the early 1970, shows that every $1 cut from programs
that assist high-school completions may cost the economy, as much as $6 in lost
o~tpUt."
•
Cutting programs that help young people fmish high scbool may have eveo greater
costs when the additional social burdens posed by dropouts are taken into aCCOUDL
. Perhaps the mast extreme fonn of dropping through the cracks in the 'educational
system is incarceration in the criminal justice system. Men aged 18 to 34 without
a blgh school diploma had a one-inwfour chance of being in prison, on probation,
or on parole at any time in 1992: The equiValent probability for men aged 18 to
34 with a high-school diploma or higher education is only 4 percent. The
expected lifetime -cost of prison. parole. and welfare is 569,000 for high-school
dropouts. $32,000 ror high-scbool graduates. and 515,000 for COllege graduates."
The Quantum Opporrunities Program (QUOP). which provides iniensive_academic
assistance and counseling and a small stipend to child AFDC recipients, achieved
a 63 percent high-school graduation rate among program participants co~pared
to only 4:7 percent for members of a control group. A remark~ble 42 percent of
QUOP participants enrolled in higher education, ccmpared to only_16 percent of
the control group, OnJy 24 percent of QUO? participants became,
parents during
.
.
"'
110rley Ashen"felter and Alan B. Krueger, "Estimates of the Return ;0 Schooling' from a New Sampl~ of Twins,"
American E,;onomic Review, December, 1994. Joshua Angrist and' Alan Krueger. "Does Compulsory School
Attendance A.f'fect Schooling and Earnings?" QuarterlY lwrnal of Economics. ,vol. 61, No" 4, November. 199L
Thomas 1.' Kane and Cecilia Rouse, "Labor Mark-et Returns to Two- and Four-Year Colleges: Is a credit a Cl'lldit
and do degrees matter?" Worldng Paper #311, Industrial Relations Section. 'princeton University, Decere.ber, 1993.
UHM. Levin, "Cost-benefit and cost-effectiveness' analYS1S" in Aletha C. Huston, Children in Poverty.
(Cambridge: Cambridge University Press, 1991). p, 248.
~con'?!n:c
Report of t.'1.e President. U,S, Govemmeru Printing Office, February, 1995, pp.
6
187~188.
�the four~year program compared to 38 percent of the control group.24
QUOP program is cost-effective.
The
Cutting the: Summer Youth Employment Program will take mlDlITlUm wage
summer jobs and remedlal education from hundreds of thousands of disadvantaged
. young people. aged 14 to 21, who would not otherwise have these opportunities.
Studies show that the program does not rusplace private market employment hut,
rather. employs youth who would otherwise be unemployed. 2S
Programs like the <2enter for Employment and Training (CEn·in San Jose.
California. generate returns much greater than their short~run costs. CET increases
youth participant earnings by $6,000· per year in the third and fourth years
following the program when compared to a control group. The COSt per youth
averages a one~time expe~diture of $4,209: The CET program even increases the
earnings of minority. feJ!18le single-parents - an especially difficult-fe-serve
population - by $1,500 per year."
The Job Corps increases the earnings of participants by $1,300 per year, a 15
percent premium. comp~~ to a demographically similar comparison' group. The·
cost for the residential program is high. $15,000 per participant, but the population
served is highly. disadvantaged: 80 percent are high scbool dropouts and three
quarters never worked before entering the Joo Corps,
G~duates of the Job Corps are employed 3 weeks more per year Md receive 2
weeks fewer of welfare benefits and 1 :week less of unemployment insurance than
the comparison group in the four years following the program. Job Corps
. graduates are also more likely, to receive high school"diplomas (25 percent against
5 percent of the comparison group) and have a lower incidence of felony crime
commission,n Every SI cut from the Job Corps means $1.45 in lost productivity
14Andrev.' Hahn, .sl.J!., Evaluation of the Quantulp Opoonl,mitics f>rogrjll!l: Did ~ ..~lIDlm WQrk? {WaltJ:am,
MA: Brandeis University,lune. 1994}.
":l<m Cr:illC and David Ellwood, The Summer Youth Employment Program:
Substitute. Harvard University, ,March, 1984.
Private Job SUPBlcmcnt or
ltiCenter far Employment and Training, 25th Annjw:~ary Annual Rewn, 199"3. U,S, Department of Labot,
What's Working, January, 1995.
l1Charles MalIar, ~t aI.,
n.ird Follow·Up rep9rt of the Evaluation of the Efonornic Impact of the lob Corps
Program. Ml'.thema:.ica Policy Research, 1982. _
7
�and future remedial and legai expenditure. The-program evaluation found that the
lifetime benefits of 'the prog:am are 45 percent greater than' program costs?~
. The Jobstart program costs $5,900 per participant for a 7 month program and
generates an a.verage earnings gain of $400 per year -- an 8 percent increase over
the comparison group. If this earnjngs gain persists. then the return on the
investment easily covers the, cost of the program.19
LEAD POISONING
..
Cutting the programs that reduce the incidence of childhood lead poisoning can
mean large increases in future medical expenditures and compensatory education~
Cost-benefit analysis on l~d poisoning reduction programs found nearly $750
million (1994 doUars) in sav~gs On averted medical care and compensatory
education between 1986 and. 1988.'"
Lifetime earnings are decreased by ::; 1,147 for each additional nticrogram per
. '
deciliter of lead in a child's bloodstream."
An EPA analysis of lead in drinking water fouod that tightening the drinking
water standard from 50 micrograms per liter to 20 micrograms per liter would cost
. about $230 million Per year and would generate benefits in reduced medica).
expenditure and increased cogriltive ability of between $109 million to $296
million per year. n
\.
.sL!i",
~tcharles MaHar,
Third F9.!1f!.':Y.:-.iJ.p...rePOrt
Pro~ram, 'Mathematka Policy Research. 1982.
of the Evaluation of the Economic Impact of tbe Job Cprps
Z9George Cave. et aL. ~IA.gI;.... f~nal Report on a Progrnm for High School DroPOuts. (New York City:
MDRC. October. 1993).
*'House ~;e:lect Committee on Children, Yout.'>t. and FalJ'Jlies. Opoortunities for Success: Cost Effective
for Chlldren Uodate, 1990. 101 Cong.2 lies;;. (GPO 1990).
~ms
llChiJdrer,'s Defense Fund. Wasting America's future, p, I is.
)~House Select Commi:tee or. Children. Youth, and Fa.:nJies. Opportl:.ntties for Suc::ess;
Programs fOf Children Update, 1990. 101 Cong. 2 sess. (GPO 1990).
8
Cost Effective
�HOUSING ASSISTANCE
.
..
.
Cutting housing voucher programs will limit the effectiveness of a proven means to
move families towards better housing and economically beneficial o,utcomes for
youth.,
In the Gautreaux. housing voucber program Initiated in Chicago in 1980. 60
families. of whom 90 percent were single-parent AFDC recipients. were given
housing vouchers for middle-cJass suburban neighborhoods. The outcomes for this
group were compared to' those for 40 families 'given vouchers for urban
neighborhoods. When the children in these families reached age lS:
.
the dropout rate for the suburban youth was 5 pereent, compared to 20 percent
. for the urban youth; .
. more than ,half of the suburban youth were ePIoUed in coUege, compare,d to
20 pe",ent of the urban youth;
three-<juarters of the suburban youth were employed, compared to 40 pen:ent
of the urban youth; and
21 percent of the suburban youth were earning more than $6.50 per hour.
compared to 6 percent of the urban youth.:D
Cutting housing voucher programs will deny access to better school quality.
increased job availability. and improved physical safety, which were the keys to
, Sllccess according to evaluation of the Gautreaux case.
..
Cutting ~'1Ibsidized permanent housing will mean that homeless families must use
. expensive emergency housing.
In Washington. D,C,. a program that provides both housing subsidies and social
services costs $765 per family per month" while emergency housing for homeless
'
••
,
.
families costs $3,000 per moq.th. 304
'.
~osenbaum. James. "Black Piorn:ers - Do their moves to the suburbs increase
mothers and children?" Hg.,!sing Poticy Debate, June. 1993.
:)4Chlldren's Defense Func,
6
Vision for America's Future, p, 34.
9
economic opportunity for
�CONCLUSION
This survey examines some studies of federal expenditure programs that invest ,in the
future of Atoerican children. The focus is on the economic return to spending on these programs
measured in furure output ,and future remedial expenditure. While this document does not
address the undoubtedly substantial reduction in immediate misery that these programs bestow
upon their beneficiaries. such benefits
the repercUSSions ~f their loss should be considered
before any cut is made,
and
Furthennore we have examined only some of the public ex.penditure programs for children
based on the aVailability of reliable cost-benefit analysis_ Other public. expenditure programs at
the federal, state. and local levels almost cenainly generate economic returns but have not yei
received proper evaluation.
,
to
�·U.S. TRADE POLICY WITH JAPAN:
ASSESSING THE RECORD
:An Update
The Council of Economic Advisers
U.S. Treasury Department
April 10, 1996
President Clinton has made opening the Japanese market a key priority.
One
month after taking office, Pres.ident Ointon set forth a simple but powerful mission
statement to guide trade policy: . uWe'm~st compete, not retreat" At the same time~ he made
clear that his trade policy would not be business as usual. "We will continue to welcome foreign
'products and services into OUI' markets but insist that our products and services be able. to enter
theirs On equal terms.." Since that time. President Clinton has been unwavering in his
commitment to sec~ tough but fair trade agreements - and to make sure that those agreements
'l!eenforce<i
President Clinton has made the' economic relationship with :Japana model fOr his
.disdncdve approach, to trade policy; Accordingly, one of his fIrSt trade initiatives was to
establish a "framework for a new trade relationship with Japan." In the 33 months since the
Framework Agreerr.ent was signed, the Administration has concluded more trade agreements with
Japan than any previous administration. ' And in keeping with the President's commitment to
America's companies. workers and farmers. the Administration has followed through on
implementing. reviewing. and enforcing these agreements. The President's consistent application
of the principles'he laid out in his frrst months in office is now producing convincing results.
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�U.S. e;r:pons to Japan in targeted sectors are growing rapidly.
The Clinton Administration has negotiated 20 trade agreements with Japan. including
Uruguay Round, Framework, and other bilateral agreements. The agreements cover priority areas
from general market access and deregulation, to intellectual property rights protection for U.S.
goods and services, to important services sectors such as insurance and construction. to specific
sectors such as automobiles and apples. The trade agreements are "win~win", yielding
g~s
lower prices and higher quality for Japanese pu.rt:hasers and consumers and increasing market
access for U.S. companies, workers and farmerS. Free and fair !tade has long been recognized
as the basis for increasing living s:andards for all trading pan.,ers.
The Administration'S St:r1i.tegy is :resu!ts-oriented.
The agreements indude objective
criteria for measuring progress and timelines for review of the agreements. The Adrninistnltian
has placed a high priority on enforcing the agreements, which is helping to ensure they deliver
real benefits for American companies~ workers. and fanners.
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U.s. Export. to J.pan In Sectors Cov.Nt<i by Tra;a Agreements In
GroWCng.I n Ellen Ful« P.e. Than Th~ In Other $eetou
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greater than growth in other U.S.
exports to Japan -- which bas also
been strong. Indeed, growth in all
U.S. exports to Japan of '34
percent has been over twice as
great as growth in U.S. exports to
the European Union. TooU U.S.
exports to Japan reached a record
$64 billion in 1995.
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results. In the goods sectors
covered by our Uruguay Round,
FramclVOrk, and other bilateral
agreements, US: exports to
Japan have grown over 85"
percent since this Administration
took ollice. Growth in expons to
Japan in these sectors is 3 times
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The Administration'3
strategy is showing positive
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The July 1993 Frnmework Agreement is the cornerStone of the Adminis!tation's !tade
policy with Japan. The Framework focuses on all three aspects of the economic relationship with
, Japan--macroeconomic, structuml and sectoral-and it establishes guidelines for review of the
agreements to ensure that the desired results are achieved. This strategy is now paying off: in.
the goods sectors covered by the Framework Agreement alone, U.S. exports to Japan nave
risen 120 percent since the Agreement was signed _. four times as fast as other U.s. exports
to Japan.
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�U.S. businesses and workers are achieving successes in sectors covered by
Clinton Administration trade agr.eements.
Autos and Auto Parts: Since the auto and au", pans agreement was signed in August 1995.
U.S. auto and auto pans exports to Japan have risen over '35 percent. totalling $3.8 billion in
1995-· already exceeding exports to the European Union. In 1995: the Big Three and Japanese
transplant producers exported over 140.000 U.S.·made vehicles to Japan, up nearly 40 percent
from 1994.
Recognizing that U.S. auto makers could expand their sales if given adequate opportUnity to
dlsplay their products in Japan. the Administration targeted access to dealerships as an important
part of the August 1995 auto and auto pans agreement Since the agreement was signed, the Big
Three U.S. automakers have added 30 high·quality, high· volume dealer outlets in Japan, but more
progress is required.
Deregulatory actions in Japan are beginning to lead to
mare sales for -competitive U.S. suppliers
in the auto parts afrenn;;rrket,. U.S, pruts suppliers will now have the opporturrity to sell their
prodUCtS through,Japan's major auto pans retailers .and service stations, Such access will
'dramatically increase U,S. auto parts sales to Japan: For example, as result of opportunities
created by the agreement. Tenneco Automotive, which has'made efforts to,break: ~t:o,thls market
for years. expects to expand its sates of, shocks and st:'Uts in Japan from the existing level of
70,000 unitS per year to 105,000 in 1996.
Telecommunications Equipment: Since two' agreements on telecommunications procurement
were signed on November 1, 1994, U.S. exports oftelecommunicarions equipment to Japan ha~e
increased nearly 50 pexefit. to $1.7 billion in 1995. This is almost twice as fast as the growth
of U,S, exportS of telecommunications equipment to the European ,Union. albeit starting from a ,
lower base.
Cellular Telephones: After years of stalled negotiations. L~e ClintOn Administration concluded
. an agreement in March 1994 with Japan to open the cellular telephone market in the TOkya
Nagoya area. the largest popUlation center in Japan. Since the agreement was signed and the
Japanese Government instinned deregulation' measures. subscribers to the Nprth American
designed system have grown from 22,000 to 600.000. Motorola. which tried unsuccessfully for
years to break into this market. provides the bulk of the equipment to build and maintain this
system. with sales values ~n the hundreds of millions of dollars per 'year. Greater competition
in the region has also benefit:ed Japanese consumers -- they nOw not only have greater choice
- but also enjoy lower prices for cellular pnone services. Initiation and monthly service fees are
now one~third the previous rates.
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�Medic.1 Technology: 1.0e Clinton Administration concluded a Framework Agreement with
Japan covering public sector procurement of medical techr.ology (such as MRI machines and CT
scanners) on November I, 1994. A review of the agreement in July 1995 determined L~at the
Japanese Government has made good progress toward implementing the transparent and open
procurement procedures called for in the agreemenL Since the agreement was signed, U.S.
exports of medical technology to Japan have increased over 35 percent, !onearly $2 billion in
1995.
Rice: The Clinton Administration targeted rice in the Uruguay Round negotiations. Although
American medium-grain rice has been highly ,,"ed on qualitY by the Japanese Food Agency,
imported rice was: virtually banned in Japan for decades. With the successful conclusion of the
Uruguay Round, Japan finally opened its market to imported rice and American rice has been
well~received by Japanese consumers.
In 1993, a major failure of the rice crap in Japan led to the first taste of American rice for many
Japanese consumers. Since that time. U.S. fanners have ·sold $287 million of rice exports to
Japan, more than the previous 25. years combine<i And although Japan's rice crop subsequently
recovered, U.S. exports of rice to Japan in 1995 totalled $31 million.
Apples: The: Clinton Administration targeted apples as one of its first bilateral trade initiatives
with Japan,and an agreement was concluded on September 13, 1993. Since that time, the
Administra.oon has continued to work with Japanese officials to increase the number of U,S.
apple growers and apple varieties certified to supply the Japanese market. These sustained efforts
are beginninl! to payoff: where U.S. apple exports to Japan were once banned, apple expo,",..!
approached S7 million in 1995. Merutwhile, imparts of apples have brought lower prices to
~apanese consumers, which will help increase overall apple sales in Japan.
Capper: The Clinton Administration targeted copper in the Uruguay Round negotiation,. Since
the Uruguay Round Agreement was signed, U.S. exporu of copper to Japan have increased by
over 80 percent, to $350 million in 1995. The United States sell' 1.5 times as much copper to
Japan as to the European Union, and U.S. exports of copper to Japan are growing faster than
. those to the European Union.
Chemicals: The Clinton Administration targeted chemicals in the Uruguay Round negotiations.
Since the Uruguay Round Agreement was signed, U.S. exports of chemicals to Japan have grown
nearly 25 percent, reaching $2.8 billion in 1995. .
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Flat Glass: Until the flat glass agreement was signed in January 1995, Japan's $4.5 billion
markel for flat glass had been dominated by an oligopoly of 3 Japanese producers. U.S. exports
of flat glass to Japan doubled in 199510 nearly 5 million square meters.
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�Japan's market is also opening up more broadly.
Realizing that progress in individual sectors would depend in part on addressing overall
imbruances. the Administration targeted macroeconomic and structural adjustment Japan as
important aspects of the Framework agreement On these fronts as well, the results have been
positiye. Japants impOrtS have bee'n growing rapidly. This strong lmp'on 'growth is especially
encouraging g)venlow overall growth in Japan and "'Ie recent depreciation of the yen against L;e
"dollar. Indeed. recent evidence suggests Japan may be experiencing a structural shift towards .
greater aceepmnee of importS.
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By the last quarter of 1995, the Japanese current acceunt sUl]llus had fallen below 2
percent as a share of the economy: Moreover: Consensus Econbmfcs forecasts continued
reduction in Japan's current account sUl]llus from SIlO billion in 1995 to $88 billion in 1996 and
$69 billion in 1997.
Japan'. CUrrent Accounl StJrplu* Has Fallrtn 11:$ (I;
Percent of GDP to itt: Lowest Level Since 1991
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�And the bilateral trade deficit witIJ Japan has begun to decline.
Despite slow growth in Japan during 1995. U.S. merchandise exports to Japan grew five
times f""ter than our impol'1S from Japan. Ovemll. U.S. merchandise export, to Japan grew 20
percent in 1995 alone.· As a result, the t;nde deficit with Japan declined by nearly 10 percent ,_
the first decline in five years. Trade in autos accounted for half of the improvement in the trade
deficit: U.S. auto exports to Japan increased by nearly 40 percent while imports lelHor the first .
time in a decade. '
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The improvement in the
trade deficit in pan reflects
economic ~covery in Japan,
While we welCome the
fmprovement in the bilaternl
deficit. it is imponant to note that
the bilateral deficit is not a
scorecard far trade policy. The
goal of our trnde policy is to
improve the economic well~being
of Americans by expanding trnde.
"rho B!latoral Oeflcit Hu Fallon by 10 ~,"nt
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The recent success of our Japan trade policy parallels improvement in overall
U,S, competitiveness..
Japan in particular i~ attributable to a
variety of factors. in addition to the numerous market openi.'lg agreements concluded during this
AdminislIation. The President's overall economic plan. with its emphasis on deficit reduction
and investment, has led to strong sustained growth with Jow inflation. This has encouraged
Out strong export performance in general and
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strong growth in U.S.i;>vcstment and employment, and helped to strengthened U.S. business
conftdence and the fundamental competitiveness·of U.S. industries and workers. The economic
results have been impressive by any measure: during the last three years, the American economy
has produced 8.5 million new jobs; the federal budget deficit has been
CUI
nearly in half; home
ownership is at a I5-year high; the combined rate of inflation and unemployment is the lowest
in 27 years; and an all-time high of almost 2 million new busin,esses have been Created. U.S.
experts have surged. rising 31 percent since thebeginning afthe Adrninistrntion. and the World
Economic Forum has ranked the United States number one on competitiveness for twO years in
a row t up from number 5 in 1992.
FOI'trlNe ir./armarion, please conJacr Michele Jelin at 202·395·5084.
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lob Creation .and Employment Qpportunities:
The United States Labor Market, 1993·1996
A Report by the
. Council of Economic Advisers ...
with the U.S. Department of Labor, Office of the Chief Economist
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April 23, 1996
�EXECUTJVE SUMMARY,
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. Since January 1993. employmeQI bas rmWD
rapidly.~ cxpandin~
by 8.5 million net
new jobs. Based on comparable data. employment growth has been stronger in the
United States than in any of oui G,7 parniers.
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Two-thirds (fiR ~o;tn() of the net erowtb in full~time emplQyment berweCD '
&bruary'1994 and Fehruary 1926 occurred in industry/occupation ~ps payine
. a.boYeonedian wages. Over half of the net growth occurred in the lOp 30 percent
of job categories. Although many of these new jobs werejn the service sector, .
they did not conform to stereotypes.
Thc evidence suggestS that the vast majority of !he net neW jobs are fuU~rime .
Both the household and establishment surveys indicate that job growth has been
. concenlrnled in full-time positions..
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The share of workers bolding multiple jobs bas remained rouehly constant since
the late 1980.1. The household survey suggests that the proportion of employed
'
persons working multiple jobs has remained at about 6 percent,
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!he ""crall number of ""QIkers diSllja,1:{! ""as 1llll2h1y the same propoaion of lhe
Workforce in 1991 ~tas in 1981 ~2. although' the recession durlne; the early 1980s
us..more severe than the one duriol: the early 1990s., However. it is difflCult to
delennine precisely how to account for the husiness cycJe in' assessing
displacement rates. The official data on Cisplac'ement after 1993 are not yet
availnble, but an alrernativejQb Joss measure bas fallen sjnce then.
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The characteristics of displaced workers have changed somewhat. DiSllla!:ement rateS for
older. white:eollar and better educated workers have risen. ahbouKb the)! remain low
Itlari.ve to those for )!QJ,m~er. blm:;;CQUar. and less educated workers.
the
• , . Despite some receot positive si~s.lQD~-trnn cba1Jen~s remain, Between
" '1970, and the early 1990s, real wages stagnated and income inequality widened,'
But in'I994, for the first time in5 years, real median family income rose and the
poverty rate fell. We must continue to build 00 these gains to improve living.
standands and reduce income inequality. And although many more jobs are being
created th'¥1 destroyed, a dynamic economy inevitably imposes costs on some
workers: l'orexample, data from 1981 to 1993 indicate thaijcb losers were more
likely to be pennanently dismissed (rather than temporarily laid-oft), that older
workc:rs were subject to greater risk of job disp1acement. and that the average rea)
wage loss due to displacement was significant and ~rsistent In order to obtain
the full bCnefits of. dynamic economy, we must red'uce these adjustment costs,
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�INTRODllCIIQl\l .
Employment growth in the United States has been robust since January 1993. with
nonfann payroll employment expanding by 8.5 ~llion. Based on cornparnble data. U.S.
employment growth has Iieen stronger than in any of OUT G·7 partners. Thi: first purpose of this
,rudy is to sift through the evidence to deveiop a more detailed pictllre of where the job grOwth is
occurring and the nature of the jobs being created.
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Tho news is encouraging; employment has grown disproponionatoly in the
industry/occupation job categories paying'above-median wages: Even in the traditionally" lower- '
paying service industry. a majority of the net employment growth has been in managerial and .
professional sPecialty positions. which typically pay above-median wages. Contrary to " '. .,
conventi~n8.I wisdom. the :tew jobs are not disproportionately part-time. low-skill positions.
The second purpose Of the study is to examine job displacement Although the economy
is generating millions of net new jobs. it is clear that the speed of ttal1sformation in tlJe U.S. labor
market has left many American workers anxious about their economic future •. A dynamic and
growing labor market can impose costs'as well as offer opportunities. and policies to help
workers deal with job transit;ions are critical to reducing these adjustment costs,
JOB CREATIQl\l
According to the Bureau of Labor Statistics establishment survey, nonfarm employment
· grew by 8.5 million (7.8 pen:ent) between January 1993 and March 1996. PrivlUe-sector p.yuolls .
(up 8.1 percent) grew even faster, while federal p.ymlls (excluding the postal service) actually
· declined by 11.4 percent, and state and local government payrolls combined grew by only 5.0
percent (see Figure I). The public sector's share of employment is therOfore falling.
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The unemployment rate has fallen from over 7 percent in January 1993 to 5.6 percent in
March 19%. and has been below 6 """",nt for 19 consecutive months. Given current
demographic trends, the Bureau of Liibof Statistics projects the labor fo",e to continue growing
·bY approximately L1 percent annually between 1994 and 2005. Therefore. to keep.
unemploymeflt low. the economy needs to average a net increaSe abOut 120.000 new jobs per
month. Employment is now expanding at a pace consiStent with steady, 'susuiinable growth and
low unemployment'
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Figure 1
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. Private Seclor ano.Govemmen! Employment Growth.
January 1993 " March 1996
State & Local
Federal
5.0
Private Sector
Govemment
Note: Fadiltal .m,a:oylMllt Ududia Iht p;lstaI MMoa.
Based on aata. Imm tNt EkiI'l!!Wilt labor Statisli¢S, &1;~lllMWr,
lnter~ational Comparisons. The United States has experienced faster employmemt .
growth than My of iii. other G·7 coumOOs. Only Canada has experienced any significant
·employment growth. while !lie other G·7 memben; have experienced negligible job gains or
· outright declines.. The U.S. labor market perfOlTllanCC is particularly impressive given that it has
.occurred during a period in which the federal budgeideficit was reduced from 4.9 percent of
· GDP ioFY 1992 to an estimated 1.9 percent FY·1996.
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TIlE QUALITY OF JOBS
According to data from the Current Population SUrvey, 38 percent of the net employment'
growth between February 1994 and February 1996 occurred in "service" industries,' This section
therefore first examines job quality in the service. sector. It the. presents a more detailed anaiysis
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of all sectors of the economy.
A nwjor redesign of the survey in January 1994lnakes long-term comparisons difficult.
Moreover, because the household survey data are often not seasonally adjusted, we try to compar.
the sarne month in different years. . The sample penod we study is therefore February 1994 to
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February 199<;;
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�Higher-paid Jobs in the Service Sector. The jjservice sector" is quite diverse. It
includes many low-wage positions, but also many high-wage positions in fmancial seIVices,
hospjtals. and computer and accounting services. For this reason, it is important to detennine
whether employment growth within services bas occurred primarily in the high-skill managerial .
and professional specialty occupations or in low-paying occupations. The CUrrent Population
Survey provides evidence on employmen1 growth by occupation.
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The data show that recent net job 'growth in services has been predominately in'
managerial or pro/ess/oMI specialty pOS/tiollS (Figure 2). These are relatively high-paid'
ocCupations.
F,lgure 2
Thus. the conventional wisdom suggesting that the growth ill service sector employment is
dispropor!ionatelyconcentrated in low-wage job categories is wrong.
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Growtb of Higber-paid Jobs by Industry and Occupation. An 'even more demiled
picture of the nature of the new jobs.created emerges from an examinatipn of industry/occupation
categories. Using data from the February 1994 and February 1996 Cun;ent Population Surveys,
we sorted full-nine wOIkers into 45 deUliled occupations in 22 major indusnies. A quarter of the
"sample reponed earnings in addition to the indusnies and occupations in which they wo!ked. '
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�Although D1my of the possible 990 induslr)'/occupations cells were small, only 6 percent of the
populadon-weignred sample was found in cells with 10 or fewer sample members reporting .
earnings data for both surveys; In order to avoid the high sampling variability associated with
insufficient numbers of observations, we eliminated these small cells from our analysis. There
were 287 job categories in each year,after .the cells with, sample.members} ~
eliminating ' 10 or fewer .
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The first step in our analysis was to rank the 287 occup.tionJinduslr)' cells by the median
weekly earnings of full-time workerS, Approximately half of all full·time employment in February
1994 was found in cells with median weeldy earnings above $480 (in February 199,6 dollars)" The
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employment growth in these "high-wage" job categories can then be complired to overall
employment growth, Our key m<losure onal> qlUlliry'is the percewage oftotal employment
. growth tMt occurred within. the occupation and industry categories that paid above-median'
wages in Februa/)! 1994, The results were striking_
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Two-thirds (68 pe~cen') ofthe net growth in full-time empioynu!nJ between FebrlUllJ! .
. 1994 and FebrlUllJ! 1996 wasfoulld in job categories paying above-median wages,'
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Another way to summarize the results from Our industry/occupation analysis is shown in
Figure 3.. Ho.re we ranked the 287 industry/occupation categories by their median weekly'
earnings for full-time workers, and sorted them into, I 0 ordered grQUpings -- each with 10 percent
of employment in February 1994 -- by their earnings ranking. If all 10 groups had grown
. Proportioruuely to their share of employment in February 1994, each would have accounted for
10 percent of the net new employment. But rather than accounting for their proportion~ share of
taral employ::nent growth (30 percent);the top three decile, accounted for much more (over 50
percent).'
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Over half (52 percent} ofenip/oynient growth wasfound in rhe top 30 percew afjob
categories, '
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, The average remiUning industry/occupation cells included 331 sample memberS and
contained earnings data for 70 sample members" _
a As._ result of sampling variability. in ihe m:mthly surveys, the precise figure may be affected
by the months chosen for co~n, We have also performed the same exercise using hourly wages
for full-time and pan-time workers combined. The results are similar.
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�Figure 3
Shares of Net Employment Growth'
February 1994· February 1996
Higher P?ying job categories
68 percent'of growth
Lower paying job categories
32 percent of growth
. MOrt' Detailed Data on Occupations. The Bureau of Labor SllItistics also publishes an
annual series on wages and employment growth for an extremely detailed set of occupational'
categories, based on pOOling. year', population survey responses. The survey included 488
categories with data for both 1994 and 1995 (the 1996 annual estimates will not be available until
next year). The results from this data set give additional support io the results reported above..
Some of the categories. with the largest employment gains included "sales supervisors, and '..
PJYprietors.t< "electricians," '~managern marKeting and advertising," and "electrical and'
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, electronic engineers,'" And consistent with the above calculations, the detailed occupations in the
. top naif of the wage distribution accounted for 70 percent of the net employment growth, wniie'
the top 10 percent af the distribution produced a. third of net employment growth.
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Employment in "hmnb';ger-j1ipping jobs'" actually fell between 1994 atuJ 1995,
, In sum, the data indicare the following aboUt the nature of recent job gTowlb:
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Two-thirds of full-time job growth between February 1994 and February 1996
occurred in occupati~)tl/industry categories paying above-me4ian wages.
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Over half of full-time job growth between February 1994 and Febfuary 1996 was
in occupation!industry categories paying even higber wages (top 30 peruem),
The New Jobs are Mostly Full-Time. Data from both the Current Population SUrvey,
and Ibe BLS establishment survey indicate that most of the net new jobs are full-time, The
Curren, Population Survey includes data on part-time employment. Figure 4 ponraysthe
proportion of employed persons reporting that they' worked part-time for "economic" as well as
for "non..e,conomic" reasons. Despite a shift in both series corresponding to a redesign of the ,
survey in January 1994. the proportion of employed persons reporting to be employed pan-time
has actually declined slightly, The declines have been even larger for those working part-time for
"economic" reasons, often referTed to as the "involUntarily underemployed" .
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, The establishment data illrurectiy support the conclusions from the household survey. If
the net new jobs were disproportionately part-time. we would expect average hours worked peT
job to falL' But the employment data show that average hours worked for all jobs (mduding the
new job,) reJmtined roughly constant: the number of nonfarm paymll positions and the total ' .
number of h"Ufs worked both grew at about the same rate over the past three years (See table)..
This suggest> that the new jobs have not been disproportion.tely pan-time.
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Do/(!. collected from both bouseholds and companies indicale tliat f1WSt oftlte net job
creation over the past thr.ee yearsJUlS beenfull~time..
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• These "'" defined as workers in the
counter, fountain 3nd related occupations; and kitchen
workers, fooci prep~rlon. and misceUafl:eous food preparation ocCupatio~s. The re~ult holds both
for full-time and for all workers (full-time and part-time combined).
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, This assume, that average hours worked on existing jobs did not change, U"fortunately,
existing smtisrlcs do not allow us to verify whether this assumption holds.
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Figure 4
Part·Time Workers
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Non-Economic Reasons
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CPS redesign
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Economic ReaSons
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Jan.1990 Jan.1991 Jan.1992 Jan.l993 Jru)-1994 Jan.1995Jan.1996
Employment and Hours Worked at Nonfarm Establishments
January
March
Percent
1993
1996
Change
Employment (millions)
109,5,
Jl8.0
7.8
Hours worked (annual basis, billions)
202.2
217.8
7.7
Based On data from the Bureau of I,.abor Statistics.
. Little, Change in Multiple"j~b Holding. Some Americans decide to hold more than one
job, in order to Save for a house or to meet uneXpected expenses. Nonetheless, mUltiple job
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holding woUld raise concern. about the qUality of jobs if an increasing number of Americans have
to work two or three jobs to make ends meet. A frustrated wOrker is said to have reacted to the
news that 8.5 million new jobs have been created by replying, "Yeah, and'l have three of them."
But the datil simply do not indicate any significant movemeni in multiple job holding.. The..
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percentage of employed persons working multiple jobs bas remained in !he neighborllood of 6
percent since the late 19808.
Impact on Wages and Income Inequality. Between the 1970s and the early 1990s;
average reaI wage growth slowed and income inequality widen~. In recent years, however, there
are some encouraging signs that the tide may be tumjng on these labor market challenges. In
',1994 -" the most recent year for which 'data' are available - real median family income rose and'
the poverty rate fell for the fIrst time in 5 years. improVing job qUalitf can enhance these recent
gains. although !he effects may onlyhecome ID1Il1ifest after an extended period of time. As
discusSed above, most of the recent net increase in employment has occurred in occupations and
industries that typically pay above~rnedi~ wages. But the additions to the workforce have had '
only a marginal effect on aggregate wage data, since net employment growth represents only.
relatively small percentage of total employment for the U.S, workforce. Nevertheless, the news
about the qnality of net job growth is encouraging. and bode, well for !he future. Although there
i~ still much left to be done. recent p-ends show that the labor market is oft the right track. .
THE CHALLENGES CREATEL! BY A DYNAMIC LABOR MARKET
A dynantic, healthy labor market creates enough jobs to accommodate a growing labor
force. But at the same time, jobs in a dynamic economy continually shifl away fronfcertain areas
and toward other areaS with greater growth opportunities. (For example, the decline in federal .
payrolls has been more than offset by increase. in private-sector employment) Meanwhile,
, research conducted by Robert Valletta and published by !he Federal Reserve BimI!: of San
Franciseo concluded that. after controlling for the business eycle. the share of unemployment
atnibutable to permanent dismissals (mthel" than temporaty layoffs) bas increased -- particularly
from 1980 to 1993. A bigher proportion or'job losers thus do not expect to he recalled by their
fanner employers. As a result of !hese labor market ehange" many workers feelles, secure about
their job prospects.
While. !he anxiety relt by many worlrers is real and important. it is also Important to take
an objective look at-the evidence, Not all so~es demonstrate increased econottnc anxiety, For
example. the Michigan and Coriference Board surveys of consumer sentiment recently have been
ah9ve their hi~torical averages. Respondents to those surveys apparently dO nOt view
employment prospects as poor. Nevertheless, considerable evidence suggests that many
Americans are concerned, some very oopcerned1 about job displaceffienL .In order to know how
best to resporld to these concerns, we need a more precise assessment of the nature of the
, displacement problem. Has job displacement in fact increased? Is it affecting different categories
of individuals today than it did ten years ago? ,This section of th,e report eJUUnines these
questions. "
.
8
�Evidence from Ibe Displaced Worker Survey. The BLS conducts a SUlYey of displaced
workers every two years, with the most recent published data from February 1994, The .able'
below summarizes the displacement rates (defined as the number,of workers displaced per 100
,employed) for the 1981·82 and 1991-92 periods. .
The overall number of workers displaced was ro~ghly the same proPortion of the
workforce in 1991-2 as in 1981-2, although the recession in the early 1980. was more severe than
the one.in the early 1990s.. However, it is difficult to determine precisely how to account for the
business cycle in assessing displacement rates, A .comparison of aggregate displacement rates also
conceals a fuildamental change in the incidence ofjob displacemenL The table shows that oldCr.
white-<:ollar worlrers were considerably more at risk of displacement in 1991-92 than during the
previous f'CC<:ssion. And further analysis shows that job displacement rates rose for more
educated workers, These changes in the incidence of job displacement may be a re'ason for the
reports of heightened anxiety regording job loss. Although biue-collar and less educated workers .
remain more likely to be displaced than others, displac.m.nt rates bave clearly risen among thOse
workers who bed previously been largely immune from the threat ofjob dislocarlon.
•
Displacement rates for older and more educated workers, wlw hed largely been
UJlQ.ccuslOrru;d to facing such risk, rose between 1981-2 WulI991-2.
Changing incidence or displacement
Displacement Rates"
19&1-2
1991-2
Total
3,9
3,8
Occupatioos
White-collar
2,6
3.6
Blue-collar
7.3
5.2
25-34years of age
5.0
3.8
35-44 years of age
3.8
3.9
45-54 year. of age
3.0
3.8
55+
3,6
4,2
~.
• Expressed as '4 percent of workers with three or more years of
tenure on their current job.·
,
. &sed on data from the Bmeau of Labor Statistics.
9
�,
'
Indicators of Recent Job Displacement As noted above, the Displaced Worker Sw:vey,
is conducted only onee every two years, and the most
published data are from the 1994
survey. which covers the 199 I,93 period. Unfortunately. the official displacement data for the
period nfter 1993,.... not yet available.' (The resullS of the 1996 Displaced Worker Sw:vey.
conducted in Februar:Y. should be available later this Sumn:ler.)·Until the official displacement d:ita
are a~ailable. other measures can be used to get an indication of how the labor market has been
changing sinoe 1993.
'
'
recent
One m'dicator comes from unemployIDent data on job losers. Figure 5 'shows thejob loss
r.ue, defined as the'muo of recently unemployed job losers" those who are unemployed due to
job los.. (as opposed to job leavers or labor market entrants), unemployed less than 5 weeks, and.
not on temporary layoff - to total employment in the Current Population Survey. This job loss
"rate roug~ly approximates the net "flow" into unemployment due to job loss. since it considers' .
only those who have lost their jobs recenrly. As shown in Figure 5. the job loss rate'has continued
10 fail since 1992.
Figure 5
New Job 1.osers
,,12,-'--------------------,
.Unemployed new job losers
..
~
_ excluding temporary layoffs
I
1
,;,2
~
"
'" O.S
-
'0
'~
8:.
0.6
. • Based on previous experienCe, the displacement rat~ for 1993 is likely U, tie lower in th~ 1996
survey data than in the 1994 survey data.
10
�•
Official dola on job aisplacemenl are IWlyel available beyond 1993, BUI based on
unemploymem dalafor job losers, the job loss rate luis declined since lhen.
The Costs ofJob Displacement. The Displaced Worker Survey provides information on
the impact of job loss on workers. Theresulls are sobering, According t" analysis from the
,Bureau of Labor Statistics, roughly. quarter of those displaced during 1991 and 1992 had either .
StopPe<! searching for work or had not yet found woric by the rime they were '\lIVeyed in February
1994. And while experiences varied widely, research conducted by Henry Farber of Princeton
University suggests that the average real wage loss for workers displaced froni a full-time job and
re-employed int" a full-time job was totighly 10 percent in the early 1980, as well as in the early
1990s. A study by Ann Huff Stevens of Rutgers University and the National Bureau of Economic
Research also indicates that the wage loss due to displacement is persistent. Six or more.yean;:
after displncement, a displaced worker's earnings remain roughly 10 percent below what they'
could have otherwise ~pected to earn. :
In a market economy facing competitive pressures both natiooaJly and internationally, it is
inevitable that
job displacement will take place. Technology is constantly changing: New
companies start up and some old ones contr'act or close down. Since change can.be costly for .
.wor~~. it is vital that policies are in place to help workers deal with that change. POrtability of
penSions and health benefits. effective re-employment services, adequale unemployment
insurance, and education and training policies can all help reduce the adjustinent costs between
jo~s. Moreover. it is imporuuit that displacement not take place nee.nessly. A stable
,
.
macroeconomic environment with full employment will help minimizA: the need for layoffs and will
.maximize the cbances for speedy reemployment of those who do lose their jobs.
some
•
Job loss is costly. When/aced with job loss, American -WOrkers must be equipped with lhe
.
toois 10 find new jobs quickly,
CONCLUSIQN
The labor market is in the midst of • robust expansion in which 8.5 million jobs have been
created since January 1993. Now that we have emerged from the last recession and are
expanding in a steady, .ustabtable fashion, employment is growing most rapidly in those job
categories offering the best-paid employment opportunities. Our analysis indicates that over two
thirds of recent employment grcwth has been in industryfoccupation job categories with above
median wages; that the vast majority of new jobs belng created
full-time; and tliat the
proponion of workers holding multiple jobs has rem.med roughly constant since the late 1980•.
But a dynamic labor market inevitably destroys some jobs while creating Others, and the costs of
.job loss are both significant and persistent. In order to obtain the full benefits of a dynamic
economy. we must reduce these adjustment costs.
are
11
�r
•
•
.,
Promoting Economic Growth:
Background Briefing Paper
.Council of Economic Advisers
July 31, 1996
�EXECUTIVE SUMMARY
•
Over the past three and ~ Imlf years, the economy has creaied 10 million new jobs and the
unemployrrem rare has fallen from above 7 percent to 5.3 percent According to Olmn's law, .
the decline in the unemplo)'ltJ!1lt rate con:esponds an increase "in outPut per person of more
.than $1,000.
.
.
to
•
B.ut reducing the unemplo)"l'rent rate was juSt the flfst step - albeir a crucial one - in raising
our living 'tlU1dards. 'The key to sustaining higher growth in wages and living standards is
"raisiilg the economy's underlying per capita growth rate; With appropriate polici'?S. it is an
achievable goal.
.
•
Economists have' identified mree sources of growth: investments in physical capital,
investments in people. and improvements in" efficiency. These three pillars are the basis for
the Ointoo Administration's growth agenda.
•
•
•
•
Invest}", jn physical capital. Budget deficits crowd out private investment (or~ if
frnanced from abroad, imply that the returns to our investment are shared with
foreigner creditors). 'The Federal budget deficit haS fallen from $290 billion in FY
1992 to an estimated $117 billion in FY 1996. As expected, mvesttnent has soaied:
real equipment mve'lInent is up 37 percent since the beginning.of 1993,
':lI'wSlin~
in people, Better trained. better educated, and more experienced workers
are generally more productive. 'They are also generally more adept at implementing
produCrlvity-enhllneing .technological change, Econonlles" with better-educated'
workforces tend to grow faster (all else being equal) than those with less-educated
workforces. 'The net stock of Federally-financed investtnentS in human .capital has
lisen 12 percent in real terms since FY 1993.
Improyjn~ eflicienc;ir. Between 1960 ~d 1973, efficiency improvements added over
1.5 percentage point per year to the growth flIte of output per hour. Since then,
Cfficiency has oontributed little to our a!ulUal growth. But this trend can be reversed.
Investm:nts in R&D, irore open markets abroad, expanded competition at home, and
improved government operations should. if continued over time. raise the effICiency
""ith Vlhicb we use our capital and, labor.
.
.
'The Clinton Administration -- by focusing on these three pillars -. has laid the foundation for
higher growth and improved living standards in the future. But continued 'mvesttneni is
needed. Growth would be endangered by a rerum to large budget deficitS, by sharply reduced .
inveslments in human capital. or by protectionist policies.
.
1
�INTRODUcrION
Today, the American economy is as healthy as it has been in three decades, performing better
than any of t,e other industrialized economies along many dimensions,' Unemployment has .
fallen
.
.
fromover71'ereelltat the end of 1992 to 5,3 poreent now (see Figure I), Ten million new, jobs have
.
.
been created since JanUary 1993. and rriJre than two-thirds of the new jobs are in indusuy-occupadon •
categories paying above-median wages.':
Figure 1: Unemployment rate
.r--------------------------------,
These are not juSt Slatisties, EmpJoJ'lI"llt makes a huge difference in the lives of the millions·
ofAlmricans who would be without'a job if the unemployment,mI. were still ahove 7 percent And
l.nv:'u.s. economy ifi gmwill& faster (2.(} ~t in 1995) tIw; ~rest of \he OEeD (l.8 percent)., with more private not);
, residential i.tIwstrr.ent growth (9,1 JlC'l-.:enc \/Q1us 3.7 pcteen!), lower i.nIl.a.Ikm (25 percent versus 5.1 pcroent for inflation u
measured by Ibe GDP dcllator)"snd lower unemployment (5.6pe:reeot verws 8.6 pt:I't$'lt). See OrpnlzatiOtl fur EcooomiC eo.
opcmtion and Devclopmenl, DECD EconcmicOur/,ooA: 59 (Paris: OECD.lune 1996).AMex Tables 1. 6. 14., and 21. Theotbef
OECD economies are: hpRn. Germany,:France. IlIlJy. Unittrl Kingdom. Canada., AU$tnWa. Austria. Belgium, Czech 5tepublic,
Denmark. FInland, Oreece. Iceland, Ireland. Luxembourg. Meltioo. Ne!hetlaOOs, New ZealMd. Norway, Porulgal. Spain, Sweden,
Swi!Zerland. and Turkey.
, 2~er two-thiIds (68 ~ofilie~gm~1h innill.time~1oyment \)e{w¢C.fl February 1994'andFebrual)' 1996
occurred ill industry-oocupation groups paying l'I.1x;we·meditm wagl!$, See Counw "fEconomic. Advisen and D~cnt of L.abor.
"Job Creation II1ld Employment OJ:Ipon:un.lti.es: The United SUIIes Uilior Motkel, 1993-1996,"'April23, 1996,
.
2
�according to Okun's Law, a well-known empirical regularity in economics. every percentage poim'
.
.
reduction in the unemployment rate corresponds to an increase in output of two percentage points.3
.
.
"
The reduction in the unemploymenl mle since the end of 1992 therefore corresponds to an increase
,
.
in outpUI of about 4 percenl -- roughly $30() billion in total, or over $1 ,000 for'every American.
Getting ~ back to v.'Ol'k was just the first step -- albeit a crucial one - in raising U.S.
living standards. The continuing challenge is to increase the underlying productivity growth rate of
the economy. which is the key to higher wages and living standards. This paper addresses that
chalIenge--
where we stand today and wher~'we need to go from here. It describes a frarneworkof
fundam:ntal economic principles for faster growth, and how they clU) be translated illto practice. It
also identifies potential threats to higher growth in the future.
.
.
,.
~ eponymoU:$ Arthur Okun' WIU Cha.irman of President lol'u'tron', CounclJ of ~ Advisc:n.: fw more tooal1
dis.cussionsofO~"
law, fee RobenOordan, "lnfLalion. Aexlblt &changeRalcs, and the Nntw'DlRareofUn~~ in
Martin Baily, td.. WOlters. Jobs, andlnjlmiM (\IIfashlngWi:t: Brookings Institution. 1982), pp. 89·158; Steven Bruun, "Esl.imaticn of
C'uncn1-Q1W1t:t Gross Na1iorw.1 Product by Pooling Prelim.i.twy I...ahor-Marw Da!a." Jounu:d ofBlUwn &. ~ Statistic:.
July 1990, pp.19J·304;and Hugh Courtney. "'Okun'$ t.aw and the Businc.u Cyclc,"in Hugh CoUl1ney, T~l1(vtridge Cilh't4Nl
O~'.t lA.w: A Re-aaminmialt ofFUlid.tJmeflioJ M(JCMec~ Rdallcul$hI'p$ 1:11 tk Ullile4 Sf4U.t (Ph.D. dWerta1:ion, Department
of Eamomics. Mwsaclu.lseusInstimte ofTecltnoiogy, 1991), Chap1.t'l4.
'
3
�THE THREE PILLARS OF ECONOMIC GROWTH
Economists have identified three major sources of sus.tained growth: investments in capital,
. investments in people, and improvements in the efficiency of the economy. These three pillars
interact.
Increased investrr.ent in 'capital, for example facilitates the intrOduction of more prOductive
l
technologies ~ the econqmy, while investments in people may enhance the pace of innovation,~
Despite the possible interactions, separating the three pillars provides a useful basis for thinking about
ways to enhance economic growth.
The relative importance of each factor has shifted ov~r time. The growth contribution from
capital inve:;tment, for example, ren during. the 1980, '; • period of large budget deficits.'
Meanwhile, investments in People have contributed relatively more to productivity growth.' Until
,
"
1990, roost of
'
the increased role of investments in ~Ie was the result of additional experience
,
rather than additional years of fconal .education: as the baby-boom genemtion acquired more
experience, the labor force bccarrJOrelarlvely tmre productive.' Finally, the contribution of efficiency
appears to have been substantially lower since 1973 than before,'
"The e1~OUS growth~:re high1igh~ such inte'l"W.:'tions betwt'Ien technological a.dva.noe lind physical aoo human
, capital invest:meru. S« KcnnethArrow. "The Economic Implications of Learning by Doing," Rtview of c;cotWmiJ; Studitls. Juoo
1962, pp. 155·17:'; Paul Roma. "Endonegow: Technological Change." Journal q{Pc1ilicd £tOMmy. October 1990. pan pp.•
S71~SlO2; aM Gene
and EIhanan Hclpman./flM'i'ali.oP. GIld Growth in the Global EcOllcmy (cRmtnmge: MIT Press,
Gmlaman
t.t~.
n.
.
.
. Slnvestment in ""4piJai ~ullled tei 0.5 percentage pcin~ per year in productivity growth between 198 i .and 1990, down,
from 0.9 perce~e point per yeat between 1960 1Uld 1981.
..
lilnctc.a;.es inworkm'
eduCJltiooand~l'lllsedproductivity growth byQ3percentagcpointperycar between 1981
and 1,990. up troll' 0.1 ~ge.point per ymrbctween 19wand 1981.
.
1
.
.
"
, "
,
Between 1960 and 1981. u Ihe baby-boom geoo.mtion~!1I.t:rt:d the labor force. the aventge Worker', ~ level
acruaUy .sublnlcted 0.2 percentage pomt pet year from growt.'l. But experience rl.1i:uui groloV{h by 0.1 pe.mwiage point pet year
~ 19B1 n.OO 1990. EduCAtion~ted between 0.2 and 0.3 perC\mtagepoiru pet y~ in both periods. Since 1990. tbe
ooolri1mtioll of rom;at)on has increased to 0.4 petC(;ntage point per y e a r . ' .
@ThecontributionofR&DhasremiuMdOlllStantatMOll!o.zpercentagepointp.!l'lyear. But the ~!Jtkm of o~cr
efflciency faclDn - the ~ growth ruidtlftl ~"has fallen from L7 pc1centage point per year between' 1960 and 1m, to
'
upproximarely ZCfl! since then. As !he appendix ootes; some of the apparent decline in the growth residual.
be tI $1atistiGa1 artifact:
productivity growth may be increasingly underestimil1cd
result of increasingly severe mea:surem~ t:.mm.
may
lIS.
4
.
�Investments in capital
Economies with higlier investment rates tend to grow faster (all else being equal) than those
with lo~er Investment rates.' And budget deficit reduction •• by reducing the public sector's demand
for capital ·-leads·to higher private investment The mechanism is'simple: Government deficits
,
'
,
reduce na?onal saving m:td put upward pressure on interest rates,10 mIDcing private investment less
attractive. ll Conversely: cutting the government deficit Talses national saving and lo~ers interest
rates, stimulating
inve~tment
and boosting growth. Because of its impact on investment. deficit
reduction is.a fundamental component of the Clinton Administration's growth agenda.
DtfU:lJ reduction since 1992. The deficit has fallen bytrore than half since 1992·· from $290
billion in FY 1992 to an estimated $117 billion in FY 1996 (see Figure 2). The results are even
more, '
dramatic relative to the size of the economy: the deficit has fallen from 4.9 percent of GDP in FY
'See Gregory ~w. DavldRoiner, and David Well. "A ContnllUlion 10 !he Empirics (;fEconomlcGroWlh." QiWffuly
JmlrM/ al U{JJwmict. May 1m pp. 407431; Rm 1..ev1."'Ie and David Rene1t. "A Smiilivity Analyil.l ofCroorEcollOmy GrowtI\
~ .. .o'\tn.uicwr &xmmnic Review. September 1992, pp. 942-963; and Roben Batro aoo >Cuvler Sala-i-Mattin,. Economic
(howtA(Ncw yatk: MeOmw.Jiill. 1995).
l°Them is oonsidmbie uooeruUnl)' over the prtcis.e figures.. btll empirical ~ genmilly ruUtlll$ !hal ttie:y $1 billlon
~ in the budget deficit roduoes yrivau:. investment by about $500 million, ~ borrowing from »brood by about $300 ,
million. and raisc:1 priVate saVing by about $200 rnillion. Every $1 billion increa.se: in the budget ik:ficit !htre!m:c ~ nalinnaJ
saving by roughly $800 million (Sl billion less: in public saving. 1200 million more in prh'aLe &aving), Reduced naLional Savina-a.
un.alIer "upplyof loanable (11mb !.. then puts UVNard prtM1lft on intc1est iales. In theory, increased priValtl saving could fuUy offset
n:duood public wo'iflg (iAn, b wger budget delkit). 110 thaI NJtiDnal $living would be unaffecU!d. But the IWUmptiuns ~ fcK
web *fxx>.fticwdian equiwlcncr:" to obWn ~often viewed as unrealistic. and in pr11Ctkt private S8Ving does not $CCm to rcspoOO
strongly tOebllnges in me budp deficit - let alone strongly enough 10 fully offset 5uch chnrt&u. In the 1980s, fOTexnmple. the
pmooaI AVing rate actually lelf liespUt a subSlllnlial increaI;ein the budget ~t. For oomewhm more futmal empirical
investigations)mo!he effectsmbudget deficits 00 private saving• .sec BIUT)' Boswottb.Soving aJlJ1 /ilw:l1mtmJ in 0 Globttl EclW.mty
(Washingu:m: BrotIkinp Institution, 1993), Chapltt 3; mllnterna.donal Monc.twj' Fund,SlagSlwiKIJqr liIL World EcOMmic .
Oui/ook (Washinttml; International Monetary Fund. SqlecRbeT 1995).. Cbbpw 1: FOr .. more general d~ion of the eff«lU of
. ~deficits, &tl! F«imd Reserve Bank: of.K1II'l$I'IS. City, Budge; Defo:i.u and DdJ:: !ShUS and Opliolu (FedenU Reserve Bank of
Kansas City Symposium
1995); andBcnjamin Friedman, Day of Rec1cofling: The Cmtl£JlU8lCU oJ Anwicatt ~ljomic
Paliq (New York: Vin. Bool:&. 1989).
smcs.
1~ ether effect oftrigivlrirucrest nues is an inflow of foreign capital _ 100 that budget'deficlts hom ('l(OWd out pri'li!J.e
investment and iru~ our ~ to the rest ()f the wOOd: lIS meruioncd in \he footooLe ~ empiri¢Id estirn.tt!.cs Alggm thai
every $1 billion irn:tcase in the budgadeficit i.ncTeases borrowing from abroad by about $300 rn.i!lion. See Jeffrey Sachs. "Global
Adj1,tSll'nMtl 10 " S~ U.S. Tmda Deficit,.. Br{)()kings Papers on &orwmic Activiry (Wastungu:m: Brookings Instinumn.
19&8:1). pp, 639.(.74. In the 198Os, large budget deficits oonln1lUted to a &ignificw1t incrt.Ast in boJrowing from abroad. As a result.
the Unittld S~ \vent from beirtllhe world', lwge.st CRditot It) b world·s.largcst debtor.
5
�1992 to an estimated 1.6 percent in FY 1996. The deficit is a smiller share of GDP than in any other
major economy.12. And the ~ederal government is now running a primary surplus: revenues exceed
.expenditures net of interest paid.
!ffis year, the Federal government will mak~ net interest payments .
of nx>re than' $240 billion -- payments wJ:llch are required because of
the massive debt accumulated
in prior years. Without these interest payments, the budget would be in surplus. 13
Figure 2: Federal budget deficit
roo
""
'"
""
'
'""
"
15
~
300
i'!
.,.
~
a;
With OBRAII3 and
FV 111117 Ad""rUUBllon budgal
'"
,
.'00
w...___
11H12
"c-_ _--',""'_--'....,..,U
...L_ _ _~_ _ _
11194
1\11;16
1~ .
2000
2002
Sowre: Office of Management and Budget OBRA93 is the Omnibus Reconci.l.iatlon Act of 1993, which embodied President Clinton's
deficit rcciucti(m plan.
.'
The impact on' inveslf!U!nl .and growth. As predicted, this historic deficit redu~tion ~as
spurred private investment Real investment in equipment, for example; is up 37 percent since the
beginning of 1993. It has risen from 6.5 percent of real GDP in the first .quarter of 1993 to 8.2
,
percent in the first quaner of 1996 '(see Figure 3)."
12In 1995. the genenJ. government deficil-GDP ratios for theoth~6 majorcconomies were: Japan. 3.9 percent; ~y,
3.5 percent; France, 5.0percent; llaly, 72 peroent: UnilOd Kingdom, 5.7 percent; and Canada. 42 pat:enL Organization for
Economic Co-operation o.nd Development, DEeD Economic Dwloo159 (paris: OECO, June 1996), Annex Table 30.
.13OCficeof Management and Budget, Mid·S~ssw/'l. R~vjew o!tk 1997 Bu.dg~l (Washington: GPO, July 1996), Tables
1~
and 22.
l4The quality of investment -,how d6ciently invesllnent is allocated to projects with high returns ___ may be as impor1Bnt as
the level of invesu"nent. The allocation of invesllnent can be strongly affecll.:d by tax preferences and the fmancial system. Since the
19805, tax preferences for specific invesllnents have been reduced and the fmancial system has slrengthened. A recent stUdy by
McKinsey & Company documenlOd the relatively high kVcl of capital productivity in many US. industries. See McKinsey Global
6
�..
Figuie 3: Equipment investment
'.0
,.,
A classic economic lW'",th model -- for which Robert Solow of M.l.T. was awarde<! the
NotJel prize ~. ~lusttates the linkages between deficit red\lcricn and irivestment U Figure 4 presents
the results from adopting a relatively conservative set of assumptions aod applying the model to a
budget deficit reduction equivalent to 3.5 perceni of GDP - roughly consistent with current deficit
reduction efforts." The figure highlights two points. First, the ultimate henefits are signifi~ant -- the
capital stock is roore than 15 percent·higher and real wages are 5 percent higher because of the deficit
.
. .
reduction. Second, the benefits do "nO:t materialize i.mmedia~ely. but instead emerge over several
decades. The precise outcome depends on the ass~tions, but the qualitative results in Figure·4 are
.
.~nsistent
.
with both economic theory and. experience.
wdtme. Capilal Produclivily (Washington: McKinsey &. Company, 19%)..
l~ Solow. "A Contribution to"the Theory ofEoonomk: Oro......m... Qll11t'reriy J()~ D/~mic;, Fchnwy 1956
w- 6$-94. For. basic introduction to the Solow
Umwniry Press, 1970).
.
model, sceRobert Solow. Gr(1Wlh ThEtJf}: M
E.xpwititm ~w Yorlc Orlotd .
'
,l6.n.e MetC1te ~ l!I Cobb-DouglM pl'l.)d;u;;Uon (I,:nction wilh. capital sharem ~-third: art initial investment lIte of
1.5 percent of GDP: an initial potential output gTQwtn ntle of 2.3 pcn;c.nI.; a depreciation m£e of9 pcreent; and thaI the stnu:tun\l
budget deficit i.s diminated in 2002. The model also assllmes. thai. 50 percent of !he budg!:! defICit reduclion lesutis in highQ Private
domestic mvtsUl'teJ:ll.. 'I'll!: assumptions Ble particlilarly oonservalivesm I..'e mteof inoovatkm m Solow mode! is ~I of
die
the investment rale. In cndogcoollS growth models, innovation is II. function of investment - and the iong-llln impact of. higher
naliona! saving TIlle is therefore magnified.'
.
1
�.
Figure 4: Long-run effects of deficit reduction
Thediscussion .rove highlights the role of private investment in raising growth. But public
,
inv~"nt is also essential for a wel1Mfunc~oning economy. Bener roads, for example, reduce'
. .congestion at!d transportation costs - allowing frrms to be more productive. While it is difficwt to
.
.
disentangle caUsality in the observed link ,between public investment and output, p~blic physical
capital-- as,well ~ improvements in the efficiency with wpich we use our c~nt stock of capital
undoub;edly raises output. 11 The net srock of Federally-financed nondefense physical eapital 'has '
risen 7 percent in real terms since FY 1993.'" Moreover. by lowering interest rates, Federal deficit
'"
. '
.
'
reduction has cut financing cost;s for State and local gov~eIlt investment - which ro~ i 3 percent
in real terms between 1992 and 1995.
,. Fm
'
li discuss~
of the ~ return to infrastruct.me, $CO Cllfford W~ aM Bany Bosworth, "Public
lnfrutructll1C," in ~t:m}'.Aaron and Cburlcs Shultu.Sttting D<:>m4Jiic PrlDriJiu: What CM O(JW:T/'InWIJ /)f)? (Wuhlngtl.'lll:
Brookings lnstitutian.. 1m). W; 267·293.
180 !focC' of Managemeru and Budge!., Budgd of IIIL United Slam FY 1997: Al1l1lytical POS/MCliwu· (Wu~
CkJ.vcmmcnt Printing OfflCC, 1996), Table&-5.
.
8
�."
.,
Investing in people
Bener traineil, OOtter educated. and more experienced workers are generally more productive
.
.
and more adept at implementing productivity-enhancing technological
better-educated workforces tend
to
c~ge.
Economies with
grow faster (all else being equai) than those with less-educated.
workforceS. w And investrrems in educatiOn have accounted for approximately one-ruth of the annUal
. .
growth in productivity over the past t~e decade~. Investing in hurt11in caPital is thus the second,
pillar of the Clinton Administrntion's growth agenda.
Educarion and rhe growih agenda.
Investments in human capital boost wages and
productivity. Each additional year of schooling is associated With increased earnings in subsequent.
years ofroughly 5 to 15 peteen, (see Table
i).'"
This re;um to slcln
has risen substantially over the
last two decades or so, and much of the increase can be explained by technological change. Increased
computer use acc?unts f?f up to half the increase in the return to education during the 1980$.21
The growth payoffs to education and training'go beyond the direct effect ofhigberwages and
.,
.
.' productivity'., Education and training
~an
also ease the ,adjustment
COsts
pervasive in
a.~c
=nomy: skilled workers who lose their jobs are more likely to find new jobs, are more likely to be
re-employed in full-time jobs: and suffer a smaller relative wage l~ss between jobs, than less-skilled
)9 Rober!
Bam find Xavier Sala-i-Manin, EcDlWl11.ic Growth (New Yotk: McOraw.-Hm. 1995), 018Pll:':r 12; ~ Gregory
David Romer, ~ David Wdl. "A Contribulionlo me Ernpiric;:$ ofSeonomic: Growth:' QIIQrUrJy J()Ww tif ECOAOlnl'CJ,
May 1991, pp. 401-437, ,.
Mani;iw,
to Muny ment s1Udies _ kh,x1mg !he ~jorlty of lhose llsterlln Tabk 1 ~ diff:ICUlt QiAI$#iliy problem$ Wid
concluded that education and tmining acwalIy raisc~vity. AI one exarnpte of en innovative Mnoo for addreuing the
'
C8lUltllityproblem, Or!cy Ashenfelre:r af!d A.l.an Kn!egu.uudk:d idetllica! twins - who.share identkai g~ and similnr family
baI.:qm~ - tl.nd {mind r.ha1 each)'CIIl of additional $¢h(lQlina raisOO.eaminlS of !be more~re6 twin by alxwt 13 ~ (ue •
the citation in fuolnol.Ll; 23 below). This and other ~~ effectively counter the atgumenI thal. jX'$itivt ~ is ~ only
bcml.se of omiUcd variables.such as inMIc akiU; dIIU inruueIy wlMtt.d w~ who in anycasc would hwte earned more tMn!heir
less: talentodQ)lieagues. maybe more likely 10 obtain additiunal educution lind lI"llining.
'
have
21 Alan Krueger, "How Compul.el$'Have Changed Ihe WageslructW-c:
'J,!fU1fiJi oj E!:lMomir:;. February 1993, pp. 33·:59.
9
E~idence from Miaodata. Iml~89." QUltI'fLriy
.
�workers.'" Reducing such costs is necessary 10 ensure the full benefitS of growth and the widespread
acceptance of economic change.
Table 1: Recent estimates of the real relurn to schooling
<
Estimated real return to an additional year of
education (percent per year)"
'
Author (y<,ar)"
, Angrist and Krueger (1991)
,
6·8
,
An grist and Krueger (1992)
<
6·7
Butcher and Case (1994)
Kane and Rouse (1993) :
6 - 9<
Card (1993)
<
9 - 19
7·13
<
Angrist and Newey (l99i)
4-8
Ashenfelter and Krue.or (1994)
8 - 17
Ashenfelter and Zimmerman (1993)
5·8
1996.
•
2l~:' JOShUa Angrist and AllIn K1'uegl:r."Doo Compu!so1y ~ Affect
and Esrnl.ngsr ~uly
JDlU'Nli of Ecmwmks. NoVembtt 1991, W. 979·10l4~ lruhua AngtUt and Alan Knteger. "Estimating the Pa)'tlffro Schooling UJing
the Vietnam-EfB. Ofafi Lotu:1y," NBER Working Pqcr .Qi1. May 1992; KtiJ:tin Butc:her and Anne Case. "The Effect of Sibling
Composition Ql1 WometI'S" EduCation and Esmings," QlIl1Tkrly JOIVNJ:i otEcl1Iwm.ics. AuguSlI994. pp, S31-63; Thomas Kane aild
CeclUa Roose. "lab« Market Returns '" Two.- tmd Four-Year eollegc.s; Is a Credit a Credit and Do Oegtees MIltUlf'r NBER
Working Paper 4l68.-1anuarY 1993; DAvid Card, "thing Gcogmphie VllriaJion in CoUege Proximity 10 EStirnat.e tilt Rerum to
,
Schooling." NB5R Working PajIer 4483, <Xtobet 1993: Joshua Angrut Md Whitney Newey. "Ove,<ldemUicauTests in~
Funclioos with Fixed EffectS.... )011"1111 0/SlUMS aM Econmnic $lilIi.rIicJ.ll,l]Y 1991. pp. 317<123; Orley Asherucller'and Alan
Krueger. "EIltimates of the Economic Return w Sc~ling from a New Sample ofTwins." Amuican ~ ~ew. t:lceetnbts
1m. 'pp. 1157-ll73; Orley AshMfelter and I)aviQ 2'.inunmnM. "'E.ttimll.lt:$ mthe Return to Sch001irlg from Sibling DfIIB: Falhen,
Sons, and Brother$.,.. NBER Wotl::ing Paper 4491. Oc\obc;r 1993, Tl'Ible ~ from David Card., ''Earnings., Schooling, and Ability
Revisited... ~ UniwniIylndustria! Relations; Sectioo Worong ~'331. MaY,lm.
Scttoolina
24 ~ simple ~ rhc internal raZe of tdUm ¢11 odncationls equal to 1M. p(:Jt:.:tnaae change in IWninp ~m an
AddItioM.I)'CWo! JCbooling (me 1lgu!es lisled in !he tabJe). Soc: Robert Willis., "Wage Detenninonts: A SurveY and ~of
Human Capittd £aimngs Functions."':in Orley /Wlcnfelt.c:r and Ri.chmd Layard. eds.. HlVIdbook 0./ lAbor EccMmic;J, Volume 1
(AmsICtda.m: NQrth.Holiand, 1986). pp. S29·534,
'
10
,
i
�The role of government. The govemment bas a special role to play in education and
training.l$ TO' provide just one examp)e. the future earnings accruing from an education cannot be
reposses'sed like a car or a house, So private lenders -- without any go~mment involvement "'~
would have difliculty in securing sufficient collateral for student loans, The government can address
this credit market failure by providing either loan guarantees or the loans themselves,
The Clinton Administration ~aS emphasized lifelong learning and employability security in
order to raise growth and reduce the adjustment costs associated with a vibrant econ0n:'Y' The net
stock of Federnlly-lin'!flCed human capital investments has increased 12 percent ($72 billion) in real
'terms since FY 1993,'" Panicularly imponan't components of the Administration's human capilli'
investment program include expanding pre-school programs (such ~s Head Stan); 'expanding access
to higher eduC.'ltion through the new direct lending program, the proposed tuition tax deduction, ,and ,
.
the proposed tuition tax credit for 13th and 14th grades; facilitating the introduction of new
, technologies into the classroom; and proposing a dramatic reform of the nation's job training
programs,
:lSFora mere deWltd discussion of ~tioo and rraining. see Counc.ill)( Economk: Adviscu and Dc:par1l"I1CI'Il 0( Labor,
"Educatins Amaica: An ~vestment (er Our Furure." Scprember 1995.
2G
'
.
Officc of MatIll£em~ e.nl;i Budg.et, 8~ttJ '" file Unitui SlaW IT 1997: ltMlytical PuspecfilPU (Wnshlngton:
Government Printing Office, 1996), Table &.8..
.
11
�"
"
., Improving efficiency
The final component of growth is raising the effld~cy with which we use and deploy our
human and physical capital. Efficiency is enhanced by research and development (,,:,hich improves
,our technology), by opening markets at
ho"" and abroad (which ensures that technOlogical advances
are translated into new goods and new production processes, and allows us [Q shift resources into
more productive areas). and through more efficient government. (which frees up resources for
potentially I1lOl:' productive p,es).
Resean:h and development
Research and develop""nt (R&D) spending leadi to technological advances, and on average
has phenomenal economic rerums (see ,Table 2)." Since the Payoff to society as a 'whole from R&D
,
substantially exceedi that to the individual firm, o'go=1 role is warranted. In the United Stites,
,
,
government sponsOrship of R&D has a long and venerable history - from the fmancing of Samue~
Morse's first telegraph line between Baltimore and Washington,.to the development of the Internet
The Administration's R&D effOrtS include support for C\vilian technology programs and dual- '
use technologies, the establishirent of a pannen;hip for a new generation vehicle, spurring the uSe of
technology in schnols, the resean:h and experimentation tAx credit, and increased funding for small
busineSs R&D. The net stpek ofFedernlly-fmanced nondefense resean:h ":'d development has risen
,
'
,
11 percent in real terms since FY 1993."This has advanced
,
"
'
the 'government's role in promoting
.
,
,
knowledge. But the translation of new knowledge into' concrete products, has remained .:. and sbuuld
,
'
.
continue 10 remain -- primarily the responsibility of the pri'vate sector,
27 For a mt.'Ite detlilltd ~ or R&D. Jet Council ofEoooomic Advisen. "Supporting Reswch and Deve1;"'mcnt to '
1995.
.
Promo!e Economic Growth: 'T'ht: Ftrlc.ral Gcventment',5 Role." October
2eOIb Or~Mb~ and BUdget. B~gd of the Unikd SlaW FY 1997: AnaJyJkaJ Pcrsptctivu (Washington:
Government Printing OfflCe, 1996). Tabk6.7.
'
12
�Table 2: Private and social real return to private R&D
,
Estimated private
Estimated social
real rate of return
real rate of
Nadiri (1993)
20 - 30
50
Mansfield (1977)
25
56
Terleckyj (1974)
29'
48 -78
7 - 25
50
Ooto 'and Suzuki (1989)
26
80
Bernstein and Nadiri (1988)
10,27
ll-1I1
29 - 43
64 - 147
15 - 28
20-110
Author (year)"
Sveikauskas(1981)
,
Scherer (1984)
Bernstein and Nadiri (1991)
,
,
return
Promoting competition at home
Opening marleets domestically encoUnlges fums
io adopt beSI practices -- to take advantage
of new production processes and new tecimologies - and prompts labor and capital to flow to their
- most efficient uses, raising overall productivity. The Clinton Admi~stration's efforts to promote
competition domestically include refonns
,
",thin the telecommunications and electricity induSlrles..
,
, Libemlizing these industries, while maintaining effective protection for consumers; should allow the,
economy to operate even more efficiently in the future, Each sector accounts for over $200 billion
in annual sales~ or cOllectively more than $800 per American.
19SoutCoC$: bhoq Nadiri, '1nnov1ltions and Tedmological Spillovers." NBER
w~ng Paper 4423,..:ugust 1m; P..d~
Mansfield. J, RItpt'IpOl1. A. Romeo. S. Wagna, and G. Beardsley. "Social and Privak ~ ofRetum from lndllSt:riallnoovatioru."
QfU1I'krlyJhuma/ hI Ecorwmks.pp, 221.240,1977: N. Tl'ldeckyj, "Effects of R&D on the f'rodactiyityOmwthofIndw;trics; Aft
E.x.p~ Study,· NmionaJ Pl.nnninlAssociatioo. W~!On, DC. 1974; 1.. Svclklwsk&s. ~gy lnpul.saod Muttifl'lCU:Ji
Productivity Growth.· Review <If &~ andStalislia, pp. 275-232. 1981; A. QlIO end 1(. SuUlki. "R&D Capital. Rate of '
Return on R&D Investmernand Spilkrn:r of R&D in Japanese ManUfac:turina Industries. ~ R~" of Ecrmomi.cs and Statisticr. pp.
5SS.$64, 1989; Jeffrey Berns!cin AtJd M. Ishaq Nadiri. "Imerindusuy Spilloven. Rates of Return, and Prodaction in High.Tcc.h
lAdustri.c$.... American Eccmomic laW-: P/Jpm oruf Proceedings. pp. 429434, 1988; Frederick Schem, ·UM, I..iI:Ikb:i Pm.entand
R&D Data to MCll$UrelnteritlddryTcclulo1ogy Fiows/ in Z. GriliclJes {ed.).RUJ. Pt1Jt1llJ, Wt.d Pr~vity (Chicago: Univ: of
Otieago Pms, 1984). pp, 417-464; Jeffrey Ikmstein and lshaq Nadiri. ~Product Demand, Cost of Production, Spillovers. Md the
Social Rfuc "fRetum to R&D, ~ NBER Working PBper 3625, 1991. Table adapted froin: Zvi Griliche~ ''The.se.an:h far R&D
spillovf:ts... Sr:andirunianl(JUTNJ1 of Ei:bAomics, 1992 suppkmen!. pp. 2947; and Nadirl (1993).
13
�i,
The landmark telecommunications bill signed earlier this year is expected to stimulate
competition and promote access to the infonnation superhighway. But the bill avoids adopting.
simplistic approach to deregulation, which could have led to increased monopolization by flIl11s with
. dominant market power
.
'Wi~
certain regions, or to
owners~ip
concentration that would have
.
inhibited the dissemination of 11 div.ersity ofviewpo~nts, The new bill is intended to help foster'the
growth of entirely new competitive industries -- lowering costs of more traditional serVices.
and
. providing an expanded range of services.
Similarly, new rules from the Federal Energy Regulatory Commission have opened access to
the nation'5 electricity transmissions
. '
.
lineS.
..
In the past, the supply of electricity within • given
geographic area was largely monopolized - indUCing a distorted market for electricity'and moving
reSources away from their most productive uses. The Federal Energy Regulatory Commission issued
new niles earlier this year that promote competition in these' markets, and should l~ to a _
transformation of the electricity industry.' But onCe again, d,eregulation was nOt undertaken 'in a
myopic, dogmatic way, Ensuring open access to the electricity transmission grid, for example, wa,s
.
,
• crucial regulatory challenge. The reforms in bOth the telecommunications and electricity industry
should mise the efficien!,), with which labor and capital are deployed across the economy.
ExpaDdjD~
markets abroad
Opening markets .broad has similar effects to opening them domestically. Trade stimulates
the flow of illfonnation, and boostS growth by allowing ccpnortties to concemnlle on what 'th,y do
.
relatively weU ~~ it crelftes an opportUnity and incentive for labor and capital to shi'ft into ~latively
more productive areas. Trade also expands the relev,ant size of" the market. acrommooating
economies of scale. A recent economic analysis, which controlled for other national characteristics,
found that more open econortties grew by an average of 2.5 percentage points more per year than
closed ";"nomies. '" A srudy of manufacturing industries iIi Gennany, Japan. and the United States
lOJcfi.fey Sachs andArmw Warne:r, ~ ~orm'and the Proc.es.s:
EccMmicAdivily (Wl$hington: Bl'tX!k:inp lnstitution.l99S:1), pp.l.l1l:!. . '
14
or Global ID\.egration." Brookings Paptll'l (:In
.
�concluded that trade restrictions hurt.productivity.31 And an, analysis of over 70 economies found that
a l<?-percenmge-point increase in tariffs on capital goods and.intennediate products was associated
with a 0.2 percentage point decline in annual real growth per capita. 32
The Ointon Administration's trade stnitegy recognizes the growth benefits of continuing to
open markets' abroad. Recent market-opening effons have contrib1:lted to an impressive t:ise in·
expons over the past three and a halfyeiu.
(see Figure 5). And rene~ting the benefits of comparative
ad\.'antage,jobs supponed by goods expons pay roughly 15 percent more than the national average. n .
Figure 5:' Expons of gOOds and services
12.0
11.5
0...
o
'"
'6
....
11.0
j
, 10.5
10.0 LL----~----~~----,.".----"w
19Q2
19Q3
1Q!1.4
1Qg5
19Q16
Source: Department of Commerce.
3l McKinsc:y Globailnstitute.Mtull(rk:tUTiJlg Productivity (Washington: McKinsey & Com~y. October 1993).
32Ro bc:rt Sarro and Xavier Snla·j·Martin, &onomicGrowth (New York: McGrew. Hill. 1995):
33Department of Commerce, "U.s. Jobs Supponed by Goods ~ Services Exports," May 1995; and 1. David Richardson
and Karen Rindal. Why Exports Maller: More! (Washington: Institute for lntemnlional Economics and the Manufacturing Institute,
Febrtllll")' 1996).
15
�IWl.!lllYin.e the efficiency of the public sector
Improving how efficiently the government does its job is another mechanism for J1l.ising
, productivit), •• and one for which the government beru; speeiiII responsibility. By freeing up
resoUICeS for potentially Imre productive uses in other sectors and by reducing the cost of regulation,
goverrunent reform can raise economy-wide productivity.
The Vice President's reinventing
government initiative has been doing just .that. Thousands of pages of Federal regulations are being
eliminated, and thous~ds more: are being streamlined or improved in other ways; hundreds of ,
obsolete Federal programs have been eliminated; and red tape has been .
reduced dramatically. The
..
FedernI workforce has been cut by 230,000 (see Figure 6), and as a percentage of total emploYment
is now smaller than at any time since the early 1930,.
Figure 6: Federal employment
""" ,-----...,----'------,,------,
'
....
16
�THREATS TO GROWTH
The Clinton Administration's concerted growth agenda addresses all three sources of
sustained growth: capital, people, and efficiency. But each of these pillars can be undermined by
inappropriate policies.
•
Drivine up the budeet deficit. Allowing the budget deficit to rise significantly -- through an
~xcessive tax
cut not offset by spending reductions -- would curtail private investtnent and
thus endanger growth., The long-run cost is apparent from the burden we continue to bear
from the large budget deficits of the 1980s.~ Although there is considerable uncertainty
concernrng the precise numbers, economists estimate that every $1 billion increase in the'
budget deficit translates into roughly $500 million of reduced private investment, $300 million
in increased borrowing from abroad, and $200 million in additional private saving.
Gross Federal debt held by the public rose$1.8 trillion (in 1992 chained dollars) between
1980 and .I 992. The buildup in debt therefore reduced the private capital stock by an
estimated $90) billion. At an average return on capital ~net of depredation) of approximately'
. 7 percent, this in tum implies that GDP ~ the output of goods and services in our economy
~ approxima~ely $65 billion lower per year for the" next decade or so due to this b~ildup of
Federal debt." The lost output correSpOnds to roughly $250 per American. And because the
budge, deficits also increased borrowing from abroad, GNP - GDPpius net factor payments
froIl"!- other na~ons -- is about $}OO billion lower pe~ year. 36
34
100 calculations that follow apply ruies of thumb which are only rough approxin1l1lio~ to IhC long-run impact of ~ficits.
TIle precise effects depend on many fllCton, including how the deficit is increased or reduced, the lime frame over which such
changes are implemented, and market reactions:
'
35 An c:vcn larger estim.ale of the
burden is contained in Laurence Ball and Gregory Manldw, '~Do Budge!
DcficiIS 007" in Federal Reserve Bank of Kansas City, BJJ.dgct Deficits tJIId Debt: lsswu tJIId Options (Fodc:m.I Reserve Bank of "
Kansas City Symposium Series, 1995). pp. 95-119. Ball and Manldw estimate lhal annual output in the United StaleS is 3 to 6
percent lower - Of roughly $200 to S500 billion _ because of past fiscal imbalances.
'
"
debt
3'EstimaleS suggest that for evr:ry $1 billion" increase in the budge! deficit. private investment and the current account
decline by a combined $800 million. U the borrowing from abroad required to finance the current account carries a 7 percent interest
rate, the $1.8 trillion ~uildup in Federal debt reduces GNP by .07".g"1.8 trillion'" $102 billion per year ($64 billion from reduced
17
�An excessive tax cut not offset
~
expenditure reductions is an .obvious mechanism for
pnxh,clng a larger budget deficit. Under plausible assumptions concerning the wage elasticity
of labor supply and the int"",,'t elasticity of saving, any increased private saving generated
from a broad tax cut would be significantly smaller than the resulting inerease in the budget
deficit - so tbat national saving would fall, not lise," By reducing national saving, such a tax
' .
.
'
.
. cut would lherefore put upward pressw;e on interest rates and dampen p~vate investment,
endangering higher growth.
Other threats to growth include:
•
.
Failing to invest in buman capital. Without continued public investments in education and
,
'
.training. the productivity of 'America's workers would be ad,,:"erseJy affected and job
transitions would be
unnece~sarily
burdensome. Deep, cuts in educatiOll and training
prognuns with proven returns would have detrimentallong·run effects on output per person.
•
.slw:!>lycuttin~ R&D eXJl!lIlditures. As shown in Table 2, the returns to R&D are generally
iinpressive. Forgoing those returns by dramatically cutting investments in R&D would be a
clear lhreat to hJgber growth.
•
.NQr ,,[mooting corrg:titiye dOmestic m~rkeIs. ~t forces speed the transmission of new
~eas and. ne:w .products, and roove resources tOo relatively productive areas. Failing to
prom",e competition at home would reduce growth. But the .other extreme may be just as
, private mYe«tment and S3R billion frotr:i incrasedfAcwr payments to foreigllers). 'l'he cost 10 running equivalent deflcits now may be
much hip bolh because of rnm-liriearities in the effects of government debt, and because fmancial marktt behaVior
have
evolved xince the 19BOs.. Any given incrn.ese in the budget deficit now may therefore induce IllMger increase in bood yield:! _ wish.
more potent advw..e effectOtl in\'~- than during Ihe 1 9 8 0 5 . '
",
may
. Jiln order to raise nalionaJ saving, tax curs must taU;e priva1e;aving by enough tootfset the loss in public saving (Btl
increttse in the budget deficit), In geneml.,. privateslwing does notIe3pOfld IiiIDngly to change$ in taxes. Soe discussions in A, l..;w
Bovenbetg, ''TII'I P(llicy and NatiooaI Saving: A Sl11'Vey," in IntemaIionalM{.)(KltatyFtmd.1MUnikdSfl11eI&Ontmfy;Pf!rjOJ.ltll.Ul.te
and ltsues (Washington: lnlemational ~ FuOd: 1m).. pp. 52-76; end Erie Engen, William Gale. and John Scholz. "Effect.!; (If
• Ta;o;·&$ed Saving Incel1tivcs on Saving aii.d Weahh: A CritieaJ. Review of the l..itenuure." unpublished dmft. May 1996, Ah:.o s.eoe
1Irtkle!; in James Rock. ed.. lHM twllAe Twin Dqldts /kbate (Moun:ain View.Catif~ Bristlecone Books, 1991).
'
.
."
,
18
�dangerous; ineffective oversight of newly deregulated markets -- as well as financial markets
•. could reduce fiving'standards.
•
AdOJ)tine: pmtec~Qnist policies. Trade boosts growth by allowing us to shift rcS<?urces into
secrOIS,in wbK:h we are ,relatively productive"
and by exposing us to new ideas from abroad.
Closing markets to international.trade would mean that we would ,lose these growth
erMncing benefits,
19
�PUITING GROWTH INTO PERSPECTIVE
The Qin,on Administration's growth stralegy -- with each piece making its own contribution
- could arld significantly 10 our gniwth rate. Over the long run, such increased growth is the key to
higher wages and living standanls. Growth also provides the resources 1o:
.'
Tackle problems s~ch as de~oiating iimer cities and home!essness;
•
Address the major demogmphic issue facing the country -- the impeniling re'iremen', of the
baby 000m= -- without placing'an undue burden on the working age population; and
•
Ensure the long-run international strength and standing of the United States.
Our
international power depends only in part on Ouf, military prowess~' that military strength must
,
be supported by a sound and vibrant economy.
Even relatively small changes in OUf annual growth rate can produce huge changes in our
.
,
'
$IIlndard ofliving over time. For e,",mple, increasing the rate of productivity growth by 50 percent
'over a generation would raise real 'national income by 16 percent (or over $2 trillion) in 2026. But
, it takes time to reap the benefits ofinvestmenL Investrrents in children, for example, are not manifest
in higher productivity until the clilldren enter the la~ force -- which can be as much as two decades
after the initial investment.
We ~st also rerrembet that economic growth is not an end in itself. Rather, it is the means
to an end -- enhanced living ~ and enriched lives for all Americans. Many dimensions to these
ultimate oQjectives "",:not adequatelycaplo/ed in our eCononiic,measures: for example, the .ense of
secUrity that an aged person feel:! knowing that medichl expenses will be covered by Medicare should
sickness Slrike, or the benefits we derive from knov,ing that the air "'''' breathe and the waler we drink
are clean, and will not have adverse effects'on our,health.
20
�CONCLUSION
Over the past three and a hili years, the. unemployment rate has fallen from over 7 percent
to 5.3 p<?I'Cent, and over 10 rnilljon net new jobs have been create~ -- dramatically improving the lives
of millions of Americans. The continuing,challenge is to raise the underlying growth rate of the'
economy.
In some areas, growth has continued to be spectacular. Manufacturing p~uctivity
.
.
'
growth has remained high -- 3.6 percent per year over the past three years -- restoring the competitive
position of many U.S. finns. For example,' America is once again the world's leading producer of.
automobiles and semiconductors. But mOTe remains to be done.
The Clinton Administration's growth agenda addresses all three pillars of growth: historic
deficit reduction to raise investment in physical capital; education and training programs to boost
investments in people; investments in technology, and market-opening polic~es at home and abroad.
and IIDre effit.i.ent gov~n~ operations to raise efficiency. Such policies have laid the foundation
f~r ~gher growth in the future. ~ If we continue to implement, sound econ,ornie policies. we.can raise
our growth ra~e -- with .substantial improvements in our future standaro of living.
J8The i::linton Administralion's growth agenda is a Iong-~ stra1egy that is laying the foundation'cor higher growth in the
future, It is not possible to provide a precise empirical estimlllc for how much faster growth might be. This is p8rtly because
inlCraClions among the various components of growth present daunting forecasting problems (e.g., how much technological change is
embodied in new equipment?), and partly because the erratic nature of the historical record (see Figure 2) does not provide much
insight into the long-teml potential for economic growth. Economic theory and econometric practice provide impressive insight into
which policies are likely to have posiJi~ growth effects - and which ones negative effects - but are not advanced enough to permit
precise qunntitalh'e estimales of such effects. 'The difficulties are exacerllated by the ~ent issues discussed in the appendix.
21
�APPENDIX: TWO ISSUES IN GROWTH
This appendix ~amines two tOpical issues in economic growth ~~. the role of laOOr 'force
growth and'the impact of ~.asurement error.
GToWth in the. Jabor force
Overall economic growth depends on growth in the I,bor force and growth in output per ,
,
WQr\<er.
,
TIie key to higher living StlUldJmis is raising output per person, which iswhy our discussion
'
sources ofprOOuctivity growth. In assessing Q!l!:!lI1l growth rates, it is necesW')'
,
has foCused 00 the
, to, separate the effects of productivity growth and labor force growth. Srudies that do oot take
account of population growth in analyzing economic, growth are likely to preseot a misleading picrure
.
'
'
of the impact on liVing stlUldards.
Gro';"th in the labor fOrce depends on growth io the working-age population and growth in
. "
,
,
,
the labor force participation rate. The fIrst cOmponenl-~ growth i~ the working~age population
lo~g-run demographics,' which ..;, largely driven by no~-economic forces.
Population growth may'not be strongly lUfect~ by .oonomic forces, but it d!les strongly affect them.
is determined by
The entrance of the baby boomers into the labor force in the 1960. :ind 1970" for example, gave a
push to overall growth. And part of the slowdown in overall economic growth in the past quarter
century -- approximately three-quarters of a percentage point -: is due to a decrease iothe growth,
.
.
,
rate of the worl<ing·age population, which rell from 1,8 pen:ent per year between 1960 and 1973 to
LI percent per year between 1981 and 1995 (see FigUre 7).
22
' ,
�Figure 7; Growth of working-age population
,
,
SoUTOe: Department of LAbor.
.
.
The second component of labor fon:<: growth is the labor force participation rate. the percent
of the working-age population that decides to work. Labor rorce participation has risen over the past
two decades (see F.gure 8). The overall upward trend in participation is the net result of two forces:
. • sharp upward movement in labor force participation for females. and a decline in labor force
.
.
participation for males - particularly older men."
. More recently. the female participation rate has stabilized - at least partially reflecting .I.p~.
in the decErung trend ofchildren per wo",":, aged 20 to 54. The earlier.inere!!Se in female labo!- force .
participation may have been partially ca~ by previous declines in this ratio. which tended to reduce
the non-marl;:et responsibilities of mothers..40 TJ.le decline in the male participation rate also a~ears
to have slowed, reflecriog some stabilization in the previously declining participation rate for older
male workers (see Figure 9).
)' For a moredetailed ~ of ~ labor fom pat1icipadon trends. sccDepartmcntOC La.bor. R(pon 0/1 the
Govc.mment Printing Off'1Ce. 1994).
A,muican WOI'Afcrce (WAShlngwn:
4~t is IIlso Possible that !he causalityruru in both directions: i.tw increasing female labor rorce participation _ and me"
market responsi'bililies cnl3ill!d by !hat inaease - had reduced !he number ofchildten pet woman aged 20 10.>\.
23
�Figure 8: Labor force participation rate. 16 years and over
.,
M_'
/
T....
-
"
,
..,
,
--
.
,.-..
.
.
"
'
,
1
"
-
. -
11M8
1~
1956
1il63
11)64
Ui73
Hna
lljl83
1~
1QQ3
Soum:: Dq:utmcrnofl.aixl'andCouncil of Eoonomit: Advises, Pre·I994 panic:ipNion raI.t:$ IiU'C cormcu:d for the effecu of tbercvUed
CUlfent Popula;ion Survey questio'Maire. '
,
Figure 9: Labor force participation rate. 55-64 years old
'"
.
M_
,
T""
"
•
..
,/ ,
-------
....
,...,
-,
" ,...
""
'
-
,
"'"
Sotttte.: Depettment of l..ab::.- and Council of Economic A~, Pte.l994 Pzrucip81ian I1llc$ are ront.:elcd for !he effects of the revised
Cll1TCnt PopnJ.ar:ion SU1"Ve)'
qUeliti<:mMire"
.
24
- .'
�As the economy shifts increasingly to service sectors. it may be more difficult to measure
improve""nts in quality and efficiency·· so that ?leasured productivity statistics may be increasingly
mislead{ng. 041 Anecdotes of "missing" productivity abound. For "example, the introduction of"
microsurgical techniques has reduced the time and risk involved in a cataract operation relative to a
decade ago. And repair of • torn knee ligament with arthroscopic surgery involves a shorter stay in
the hospital, less chance of coliateral damage during surgery, and a faster recovery time.. Similarly,
.
telecommunications companies have introduced many .new services, including high.speed data
.
"
"
transfer and mobile cellular telephone service.
To so~ extent, these productivity improvemmts are not reflected in the official productivitY
data. As one example, Bureau of Labor Statistics' estimates suggest that productivity growth in the
. OOnking sector has averaged 2 percent per year in recent years. But these estimates are not used in
.
the construction of aggregate measures of output and productivity. .
Rather, growth of real ou!;>ut·
.
in banking and other financial services is assorned equal to the increase in hours worked in the
industry, so that growth in laborpfoduciivity is roughly",:", by assumption."
These. examples
ren.c. underlying problems in productivity measurement associao:ct with the
changing character of the economy. The output of the economy increasingly is shifting away from
standardized commodities with easily defmable ch;tracteristics that change little over time, toward
goods and services for which issues of quality and even defmition are of primary Unp<mancc.
41 See. for e.mrnple. me ~ in A1&t Oreenspan's SIa1emelll: before the Subcomminee: on Domcslie and 1n~
Mooewy Poii¢y. Commiuee ~ Banking and Financial s~ u.s. H~ofR~C3MlBtives. February 20. 1996,
<12 Commineo to Study !.he ImpAct ofWormation Technology mfthe Perl"otmanee ofScrvicc Activities, National ~
Council. ltrf()1f7j;(JJimf Techrwfcgy in tk Servia SW01": A Twt:nry·FlW Century Levu (Washington: Nationll! Academy Press.
19'J4);And Cound.1 ofEoooomic Advl.sers, &OIWmicRtptJrtcjtM PftxidttnJ 199J (Washington: GPO, 1995), Chapter 3,
2S
�•
Although the magnitudes involved are not known with any precision. it is likely that the economy's
productivity growth nne is understated in recent years because of these measurement problems.
26
�The NAIRO as a policy Target: Refinements, Problems and'
Challengas
By
steven'Braun and Ronald Chen 1
September 1996
Abstract
The NArRU hypothesis has been criticized because it seems to
require a NAlRU that changes over time--especially in Europe.
Without, a plausible expl~nation ~or the evolution of the NAIRU,
the hypothesis is neither satisfying nor as relevant to policy as
it could be~ Several explanations ,for the variation of the NAIRU
are exrurnined: demographics, slowing productivity, supply shocks,
"hysteresis, and the duration of unemployment compensation. We
·conclude that most of the variation in the NAIRU can be explained
by these factors.
In the United states, the'most important
factors in the evolution of the NAIRU are the changing .share of
teenagers in the labor force and the accOI:uno'dation to the post
1973 productivity slowdown.
A recent challenge to the natural rate concept 'is the
imprecision of its estimates. It ·seems to US 1 however, that this
imprecision is of only limited relevance to the execution of
policy.
In addition, we examine several recent issues: 1) that the
~hillj,ps curve may be nonlinear, 2} that reducing inflation may
become more difficult as the rate of inflation approaches zero
("the goal-line effect"), and 3) that the NAIRU may not be
independent of the -inflation rate.
II
A Report by the Council of Economic Advisers to the OECD
for presentation to Working Party #1 on October lOth and 11th,
1996. Submitted September 1996.
Wi:h substantial assistance from Jason Furman.
�... ,,' "-
.. ~
-~.-.--
.....
INTRODUCTION
The Phillips curve has a venerable tradition'in empirical
macroeconomics. Standing at a central place in stabilization
policy, it ha,s recently become a focal point af criticism as well
as an object for refinement. This paper evaluates some of these
criticisms and refinements.
The Phillips curve. in historical perspective
The wage and price equations of the earliest macroeconomic
models were similar to those in current usaqe (as in the Klein
Goldberger model (l955)). These equations were of the form: .
%w= ~o +
P, U +
P,{L) %p
(1)
where,
%w = wage inflation,
%p = price inflation,
U = unemployment rate, and "
~,(L)%p ~ distributed lag in price inflation.
However I these equations failed to impose the unit constraint on
the coefficient of lagged prices (al}--which were used 85 a
proxy for price expectations. Equations o~ this sort were first
called "The Phillips Curve .by Samuelson and Solow (l960) after
Phillips' (1956) work (which, however, omitted inflation
expectations). After the criticisms of Friedman (1968) and
Phelps (1968) that unemployment rates below the natural rate
'could only be attained at the cost of rising inflation, this
equation was refined by constraining ~2 to unity. 'With-this
refinement, this equation--called the expectations-augmented
Phillips curve--can be solved tor a rate of unemployment
consistent with stable. inflation. This unemployment rate, called
~'the natural rate, tI or misnamed the "NAIRU, n has ,become a pillar,
of all major macroeconomic models, and an_anchor for monetary
policy.2
ll
Although the new classical side of the economics profession
views the inflation-unemployment relationship as spurious and
undercidentified, it has been widely accepted by the majority of
working forecasters and recently has found renewed support.
(See'
~
The acronym, NAIRU, for non-accelerating-inflation,~ate
of unemployment is a mathematical misnomer because it implies too
many-derivatives.' A better term would be NIIRU for'non
increasing-inflation .t.ate of',unemployment •.
�2
King and Watson (1994), who argue that the Lucas-Sargeant
critique may not be empirically relevant.)
Problems, Refinements, and Challenges
One drawback with the Phillips curve is that it does not
work nearly as well for Europe as·it does for the United States
and,Canada. This relationship, however, can be resuscitated in
Europe by using a time-varying NAIRU. Even in the United States,
the NAIRU has varied. But without a plausible explanation for
its evolution, the NAIRU is neither theoretically satisfying nor
policy-relevant. We argue that several factors explain the
variation of the.NAIRU: demographics, slowing productivitYI
supply shocks, "hysteresis," and unemployment insurance.
Jlmong the refinements are the possibility' that the Phillips
curve may be nonlinear and'that reducing inflation may become
more difficult as the rate of inflation approaches zero ("the
goal-line effect"). A related objection is that the NAIRU may
not be independent o'f the inflation rate.
A~ong the challenges to the natural rate concept is the
imprecision of its estimates .. We will examine how relevant
imprecision is for policy.
'
The basic model
The basic "price-price!' version of the Phillips curve
relates the increase in inflation to the gap between the actual
unemployment rate and the NAIRU.
%p - %P.,
~
BI U-U')
(2)
Does the NAlRU vary?
The NAIRU has varied during post-war u~s. history--as shown
in Figure 1. 'The series was constructed according to a simple
and transparent procedure--similar to one used by Elmeskov
(1993), Assuming a value of 0.5 for B (measured from figure 3 as
will be described below), the time-varying NAIRU then was
constructed as a moving average of the U* that solves equation
(2) precisely. 3
The resulting NAIRU series shows several
prominent features: a dip in 1970, a sharp rise in 1973, a steep
decline from 1979 to 1982 1 and then a qradual decline through the
19805.
3
The moving average was constructed according to the
Hod=ick-Prescott filter (with A~1600) ,
�3
We will argue that these features are the result of several
explainable factors: the Nixon-era wage and price controls; the.
post~1973 slowdown in productivity growth, which was not quickly
accoDmodated by the bargaining process: the rise in the share of
teenagers in.the labor force from 1965 to 1977, and the
subsequent decline in this share.
We are using this NAIRU series for illustration rather than
for precision because it has a number of econometric problems.
For example, it is not clear why e should by fixed while U·
varies: the e assumed for the first step usually will differ from
a ~ estimated with the new NAIRD; the series·is not consistent in
the statistical sense. Some of these problems can be solved with
Kalman-Filter techniques.
.
others have published their own estimates of a time-varying
N~IRU: Elmeskov {1993), who used a procedure similar to the one
aBove; and Robert Gordon (1996l, who constructs his-estimate from
a Kalman-filter procedure--after making an assumption for the
variance of the process affecting the NAIRU. In work currently
underway, Krane and Roberts also use the Kalman-filter framework,"
'but estimate the variance of the NAIRU process directly.
.
.
The current accelerationist Phillips curve
We will examine two oasie equations for estimating the
NAIRU~
The first is a price-price specification (an equation,
similar to.(2), that explains price inflation with lagged price
inflation). The second" is a wage-price "specification (where
increases in hourly compensation are explained, in part, by
lagged price .inflation, as in '(1)).
"Oemographics
In both equations, "the measure of slack has been adjusted
for demographics because each demographic segment has its own
natural rate and the shares of these "segments change over time.
For ey.ample, an unemployed teenager does not put as much downward
pressure on the wage structure as an unemployed prime-age adult
and becau~e the proportion of "teenagers in the population has
cha"nged dramatically over the past-war period. Versions of this
adjusted unemployment rate have been used since Perry (1980). In
our version (UDEM93), the unemployment rates for five labor-force
groups are'averaged using their '1993 labor-force shares as
�'"
,.'
..
".'"
.. "" .....
-'
..
"
...... .
4
Another way to control for demographic variation is to
use the unemployment rate for prime-age males~5
weights~4
The ·difference·between the actual and fixed-weighted
versions is shown in the upper panel of figure 2~
As can be
seen, demographics raised the NAIRU by about 0.8 percent in the
mid-1970s relative to levels in the mid-1960s, a result of the
increase in the number of teenagers; this effect vanished by the
mid-19S0s. At the moment; there are few teenagers in the 'labor
force and the demographic effect on the NAIRU is near'its
historical low .
. The empirical validity of the basi·c price-price Phillips
curve (2)is evident from the scatter diagram showing the
acceleration of the core CPI versus the demographically-adjusted
unemple.yment rate (figure 3) .. ' The slope of· the simple
regression, -0.5 , indicates a "sacrifice ratiolf of two: two
percentage points of excess" unemployment for everyone percentage
point of disinflation. (This estimate of ~ is the one used to
construct the implicit ~IRU in figure 1, as discussed above.)
We can tes~ whether this demographic adjustment is plausible
and appropriate by including two unemployment terms in the
regression:
1) UDEM93 (the demographically adjusted unemployment rate)
2) U - UDEM93 (the ordinary unemployment rate less the
d,emographically-adjusted version)
If the use of. demographic adjustment aaded nothing, these two
terms would have the same coefficient and both would be
significant. As can be seen in table 1, the coefficient on. the
.demographic adjustment is -.32, closer to zero than the
coefficient on the demographically adjusted unemployment rate
.52. FUrthermore, the t-statistic on (U-UDEM93) is
-;4 suggesting that it does not differ significantly from zero.
~
The five labor-force groups are teenagers (16-19), younq
men {2Q-24), young women {20-24}, 'men (2'5 and over), and women
(25 and over.
, The prime-age male unemployment rate explains changes in
inflation at least as well as the demographically-weighted
unemployment rate~ However, fixed-weighted unemployment is more
closely related to total unemployment than prime-age male
unemployment is.
�............. ·
~
,
."""'-.
......--~
...
,'.,,~,.-
.•.....
5
Although these results do not consti'tute an ironclad case
that using a demographic adjustment is the best way to proceed,
it does suggest that it is a plausible theory.
The price-price equation for the core CPI
The basic price-price specification explains the consumer
price index excluding food and energy (the so-called "core CPr")
with a demographically-adjusted unemployment rate. Prices of
food and energy are excluded because they are so volatile and
their volatility has more to do·with politics and weather than
with the fundamentals of deman~ pressure.
'The basic price-price equation was specified and estimated
in non-linear 'form so that'the NAIRU would appear as an estimated
parameter--along with its standard error (shown in parentheses) •
p = -.31 (UDEM93-5.8)
(.06)
+ l.OLP"
1.2)
-.9FRZ + 3.2BLG + .04LW~RPE"
1.2)
(.6)
(3)
-'
90
R = •• :
FRZ
and
for
and
D.W.
= 2.0;
S.L = 0,7; Estimated1961:Q1 to 1993:Q4.
is a dummy variable .for the 11 quarters·of the Nixon-era wage
price controls, BLGE is·a dummy for the bulge in inflation
the 3 quarters after the termination of the controls. RPE
RPF'are the price of energy and food relative to the core
Cpr.
;,. can be seen, the demographically-adjusted NAIRU is
estimated at 5.S percent, a figure that--by construction--is
constant over time. The NAIRU for the ordinary unemployment rate
is calculated 'by adding back the demographic adjustment, Which
does vary over time-~and is shown in the lower panel of figure 3.
As cap. + be 'seen, this NAIRU series replicates part. of one
major feature of the implicit NAIRU derived above: its rise in
the 197.05 and its subsequent decline., However, it does not rise
nearly as high in the mid-1970s as the implicit NAIRU.
�6
~~other feature of the implicit NAIRU seems to be missing
from the NAIRU derived from the price-price equation: the dip in
the early 19705. Using the coefficients of equation (3),we
estimate that about O~3 percentage point of this dip was caused
by the Nixon~era wage and price controls. This effect was.
omitted from the price-price NAIRU shown in figure 3, but it
remains in the implicit NAIRU.
Using the demographics of 1996, this estimate translates
into a 5.9 percent estimate for the NAIRU of the ordinary
unemployment rate. The standard error of this estimate is
·±O.2 percentage point. The coefficient of the unemployment rate
is estimated to be a bit smaller than the simPle regression shown
in figure 3 and shows that an.additional percentage point of
unemployment will reduce the core inflation rate by one third of
a percentage point.
A variation of this equation addresses the argument that the
NAIRU has fallen recently. The version abov~ was estimated
through 1993:Q4, the variation shown below includes a dummy for
the change in the NAIRU after.1994:Ql (094).
%p = ·-.31[UDEM93-(S.B
(.06)
. (.2)
- .06 D94)] + LOL,%p., -.9FRZ + 3.2BLG
(0.9)
(.2)
(.6)
(4 )
-,
R = .90;
D.W.' 2.0;
S.E . • 0.7; Estimated 1961:Ql to 1996:Q2.
The coefficient onD94 indicates that the demographica11y
adjusted NAIRU fell 0.06 percentage point in the 94-96 period--a
change that" is clearly not signif~cant (the t-statistic'~s -.OS}.
'alternative method of testing the same hypothesiS is by
the out-af-sample forecast errors from equation (4)
shown in table 2. These errors are small and of alternating
(An
exa~ining
sign. i
Wage-price markup
'
syst~
(two
equa~ions)
Thinking about the wage and price sector as a 2-equation
system shows how changes,!n productivity growth affect the NAIRU,
For example! it took a long time for workers to lower their real~
�7
wage aspirations in the wake of the post-1973 productivity·
slowdoWl1. During this transition period, the unemployment rate
associated with stable inflation remained elevated.
(The
earliest reference fo the effect of productivity on thc'NAIRU is
Tobin (1971). See also Braun' (1964).) .
The growth of the productivity trend is difficult to measure
in real time. Among other problems, productivity varies
substantially with the position of the business eyelet and the
data are subject to sUbstantial revision. As a result l
expectations of future productivity growth are likely to be a
backward-looking average. suppose that workers' real-wage
aspirations are a weighted average of two productivity concepts:
I} a backward-looking avera,ge of the last 10 years of
productivity growth (u lO ) ' and 2) the \'true" growth rate of trend
productivity (no).
'
The increase in nominal wages that emerges from the '..
bargaining process will be the sum
this real-wage aspiration,
expected price inflation, and a response to the excess of
of
unemployment over the long-term NAIRU (NAIRUL ) .
(5)
Prices, are modeled as a markup on unit labor costs with' the'
markup related to some measu=e of slack.
P:m(W/n,slack)
(6)
Among the various specifications compatible with this idea" we
have chosen "the one that simplifies the derivation of the NAIRU,6'
Taking the first difference of (6).t we regress price inflation on
1) increases in trend unit labor costs (the wage increase, w,
less the increase in trend productivitYI ft"}1 2) the deviation
of actual productivity growth from its current trend, and 3) the
change in the unemployment rate. (If the level of .slack affects
the price ,level in (6), then the change in slack affects the rate
of increase in prices.)
, An error-correction specification would be more '
theoretically pleasing, but this addition is tangential to our
main poi.nt;
�· "-'
(7)
The rate of unemployment· that is consistent with the steady state
where actual inflation matches expected inflation may be derived
by substituting (7) into (5) and remembering that n=n* and bU=O
itl
steady state.
(6)
Thus, the NAIRU will be higher than the long-term NAIRU (NAIRUL )
when r~!al-wage aspirations are higher than the true rate of trend
productivity growth. We use the term "wage aspiration bias" for
the right-hand term in (el. Eventually, however, these real wage
aspirations will gravitate toward the true trend rate, and the
NAIRU will converge to~ard the long-run natural rate.
�,
9
The ~age equation (5) and the markup equation (7) were estimated
along these lines, and the estimates are shown in (9) and (~OJ
below", 7
%w= .74%n 10 +."26 Yin'" -.52 (UDBM93-5.6) -.lBFRZ + .6?BLG
(.4)
(.1)
(.1)
(;3)
(.3)
(1.3)
(9)
-, • . 60;
R
D.W ... 1.B;
p;;: .01
( .1)
-,
R
= .81;
+
1.OL Wj
i
D.W.· 1.7;
S.B . • 1.?;Estimated'1961:Ql to 1993:04,
. . . LOn+ -.29 (n-n') +1.16U -.87[;.U.,
(.07)
(,5)
. (.4)
(10)
S.B . • 1.3;Estimated 1961:Q1 to 1993:Q4.
The NAIRU from, this 2-equation 'system'is plotted by the
dashed line i~ the lower par.el of figure 3. It varies over time
as a result of variation in the demographic adjustment (upper
panel) and wage aspiration.bias (middle panel). This theory
suggests that the effect on the NAIRU from the post-1973
productivity slowdown is large--adding l~ percentage pOints to
the llAIRU in the mid-1970s. The similarity between the NAIRU
derived in this way and the implicit NAIRU is dramatic. I t
suggests that the theory of the wage-price Phillips curve
explains most of the variation in the American NATRli during the
post-war period.
What is the NAIRU at the present time? Demographics.factors
are no different in 1996 than they were in our 1993 ~ase year/
7
The dependent variable, is the percent change in hourly
compensation as measured by the Employment Cost lndex. Before
1980 1 when the. Eel did not existJ the series has been spliced
backward with hourly compensation derived from the National
Income and Product Accounts. In the wage and markup equations,
prices are measured by the implicit deflator for nonfarm
business.
�10
and labor productivity growth has been steady at a 1.1 percent
.annual rate of growth since 1973. As a result, the point
estimate for the NAIRU from the wage-price system is estimated at
5.6 percent for 1996--the same as the long-run NAIRU estimate.
The 95 percent confidence interval for this estimate 'runs from
5.0 to 6,2 percent.
Again! we address the issue of whether the NAIRU has changed
over the past three years by inserting a dtll:tmy variable for the
recent period (94:Q1 to 96:Q2), as in (11) ·below,
%lI'" .74rrw 1'.26
\.ll
-,
R
U.
-.52 [UDEM93-{5. 6 -.SD94)1 -.19FRZ" .71BLG+ 1.oEw/tP~I(l1)
1.1)
1.11
1.31 \1.11.
;:: .63; 'D.W. :; 1.8;
l.ll
11.21
S.E. = l.7;Estimated 1961:Q1 to.1996:Q2.
, The coeff~cient on the dummy variable indicates that the
NAIRU during the past 2':> years shifted down 0.5 percentage point
to 5.1 percent. However, the t-statistic on the dummy variable
(-0.4) indicates that .this shift is not statistically
significant.
Comparing the coefficients on the dummy variables from the
price-price equation (4)--which were tiny--with ·those from the
wage-price equation (ll)--which were noticeable--is enlightening.
It indicates that the surprise in the past 2~ years has been in
lagging wages rather than in'lagging prices.
I
Another way of arriving at the same conclusion is by
examining the out-af-sample forecasts from the wage and price
system (table 2i. The wage errors (column 2), tend to be·
negatlve--especially since 1993:Q4--indicating that wages have
been below their predicted growth rates. The price errors
(column -1 i are" smaller on average than the wa.ge errorS t
in'dicating that low wages are the surprising development.
The
markup is running slightly higher than would have been predicted.
Hysteresis
Another reason to believe that the NAIRU mi.ght vary over
time ;,S the possibility tha:: the NAIRU is dependent en past
levels of une~ployment--an effect that is often called
"hysteresis.
Several mechanisms might generate this ef~ect:
Firstt are the alleged insider-outsider bargaining arrangements
whereby the ct!rrently et:lployed, "the insiders,n bargain without
regard to creating jobs for the unemployed "the outsiders"
iLinbeck and Snower 1989). Second is the idea that
II
l
1
�11
employability decays with the duration of unemployment--either
because of stigma effects, 'deterioration of skills, or loss of
motivation in job search (see Blanchard and Summers, 1986;
Layard t Nickell and Jackman, 1991).
,
"
Some evidence for hysteresis, in the European experience
appears in the 19605, according 'to Blanchard and Katz (1996),
however, the evidence remains inconclusive. Hysteresis could
occur through any of the mechanisms noted above, but the insider
outsider model lacks direct empirical support.
Hysteresis (continued): Does employability decay with the
duration of unemployment?
Several stUdies show evidence that workers are scarred by
long spells of unemployment. For instance, Lynch (1989) finds
strong evidence among.young workers that the chances' of re
employment decline as the length of unemployment increases. Van
den Berg and van Ours (1996) find similar evidence for white
males~
-One problem with these studies--as noted by the authors
themselves--is that th'ey'have not completely excluded the
possibility that those experiencing long periods of joblessness
have been left out because of inferior skills (an effect·called
unobserved heterogeneity) .
'
Evidence suggests that length of displacement affects re
employment wages, possibly indicating a deterioration of job
skills with increased durations of unemployment. Addison and
Portugal (1989) find that a 10 percent increase in unemployment
duration is associated with roughly a 1 percent decrease in the
re-employrnent ~age.
Hysteresis: The European Experience
The European experience of the 19805 provides ample evidence
that the NAIRU varies over ti~e, and presents a direct challenge
to the original theory behind the NAIRU. Large cyclical
increases in unemployment, when allowed to fester at extended
durations, appear to have led to a rise in the long-run
unemployment rate. In 'Europe, where once the NAIRU'was thought
to lie between 2 and 3 percent I unemployment rates of 10 percent
and higher have been 'associated with a'stable rate of inflation
in recent years. But why? An explanation for the 'evolution of
the European NAIRUs is necessary for a useful theory.
�,
"
'."".,.......
12
the
A recent paper by Ball (1996) suggests an explanation for
experience. Ball (1996) notes that,
~uropean
•
Countries with the largest and most protracted dis inflations
ha~ the largest increases in the NAIRU.
•
The' rise in the NAIRU i. explained even better by tne
interaction of disinflation with the length of unemployment
benefits (figure 4)..
'
These results are consistent with a hysteresis-type theory:
workers who lose their jobs become accustomed to an unemployed
lifestyle! stop searching for work, and become detached from the
labor force. 'This effect is likely to be strongest where
unemployment benefits are long lived, making-it" easier to be
satisfied with unemployment. In these countries, the costs of
disinflation may be higher than previously thought. Protracted
periods of unemployment a~fect both the short-run uneroplo~.ent
rate and the natural rate.
Nonlinearities: Shape of Phillips curve
The traditional view was that the Phillips curve was convex
to the origin--as it was drawn Phillips' 1958 paper. 8
This
reflected the view that the costs of a disinflation were
substantially higher than the benefits from a similarly-sized
inflation. In other words, contractions decreased output by
creating more slack in the economy, while expansions just pushed
up prices because they inevitably ran into capacity constraints~
In this sort of environment, even a risk-neutral policy-maker
would be averse to experimenting with the unemployment rate. In
contrast, if the Phillips curve is linear, then experimentation
has little or no expected cost. The cost of a deflation in terms
of temporarily increased unemployment is exactly equal to the
benefit of the lower unemployment in the first place.
The shape of the Phillips curve 'evolved in the 1980s, with
the traditional U-shaped curve of Phillips (195B) giving way to
linear specifications (Gordon 1982, Braun (1984)) . . The scatter
diagram {figure 1, which is compressed to exclude the effects of
the Nixon-era wage and price controls) fits a linear
specification rather well.
,
However/ the wage equation in the Klein-Goldberger
(195;;) was linear.
~odel
�13
·To test·more precisely whether the slope of the Phillips
curve differs between the 'Cwo sides of the NAIRU, we used non~
linear methods to estimate:
%p = n
VI
(
~,
•
a-a • ).+ .-1 (U-U)- IU- U'I)
(12)
2
the second term is negative {and equal to
The NAIRU (U·) is a
parameter to be estimated. The fitted values from this equation,
in figure 5, show that the Phillips CUrve has a kink .
.Unemployment rates below the NAIRU add .17 percentage point to
inflation while excess unemployment above the NAIRU lowers
inflation by .56 percentage point. The t-statistic on the
nonlinear term is 2.6.
In this
specificatio~,
2 (U-U·' l) when U<U', and zero otherwise).
The consequences of this particular nonlinearity, if in fact
it holds--and if it is large enough--could be important because
it,suggests that even risk-averse policy-makers might want to .
engage in moderate experiments with the unemployment rate. If,
hypothetically, they then discovered that the unemployment rate
had fallen, say, 0.5 percent below the NAIRU for a siX-month
period, then it would take less of a rise in unemployment,
possibly 0.4 percent above the NAIRU for six months, to wring the
conse~lent inflation out of the system.
If the hysteresis effect
proves important! then ~hese conclusions would be reinforced.
H9wever, the kinked Phillips curve that we have estimated,
which is shown'in figure 5, does not depart much from lipearity.
As a rl;:sult, the force of this argument may be limited. Wi? also
observe in the figure that the NAIRU consistent with the kinked
Phillips curve'is higher than the one from the linear version.
Goal-line effect
Another refinement to the standard Phillips curve (which we call
,the "goal-line" effect) is the·possibility that reducing
inflation might be more difficult as the rate of inflation
approaches zero. (The analogy is to American football where it
becomes harder to gain yardage as one approaches ~he goal line.)
To conduct a simple test of the goal-line effect, we estimate our
basic price-price Phillips curve including an interaction term
for the level of price inflation and the unemployment rate.
%p:::: (31 + ~'lUDEM93 + f,3) i UDEM93*,%p) +
y
%P~l + •••
(13)
�14
The presence of a' \'goal-line" effect would imply that the
coefficient on the interaction term H~J) is negative. 9' 'l'he sign
of our coefficient estimate is just the opposite,' casting some
doubt' on whether the '~90al-linefl effect exists~,
O'oes inflation "grease the 'whoels /r of the labor market?
With the rate of inflation remaining stable and low for some
time now, economists recently have rekindled the debate over
whether the target rate of inflation should be zero. In
particular/. a number of economists have suggested that some
amount of inflation is beneficial because it serves to ~grease
the wheels of the labor market. Their arqu..'l1ent stems- from the
idea that while workers generally will accept real wage
reductions, they resist reductions in their nominal wage. In a
world with-zero inflation, therefore, employers , responding to a
negative demand shift will be unable to adjust real wages
appropriately--resulting in lower levels of employment.
lf
Is the distribution of changes in workers' nominal wages
truncated at zero? Several economists recently have estimated
substantial downward rigidity in the economy. Overall, however,
the evidence remains inconclusive. Card and Hyslop (1996)
estimate that 6-10 percent of workers experienced rigid nominal
wa,ges {that is, they had unchanged nominal wages when they ~hould
have received wage cuts) during the late 19705 when inflation was
running around 10 percent, and over 15 percent of workers during
the mid-1980s when the inflation rate was around 5 percent. Kahn
(1994; also finds evidence for substantial wage rigidities;
however, the rigidities appear to be specif~c to. wage earners,
and nQt to salary earners. Elbow, Stockton, and Washer (1995)
estimate much smaller levels of wage rigidity and conclude that
moving from 4 percent inflation to complete price stability would
result in an additional ~ to 1-3/4 percent of workers constrained
·by wage rigidities.
Simulating the effect of complete price stability on the
overall economy, Akerlof" Dickens/' and Perry (l996) conclude that
the cost of maintaining zero inflation would be very large. In
their market-level analysis, Card and Hyslop conclude that
nominal wage rigidities have a small effect on the aggregate
economy, with only ll',odest efficiency gair.s from higher inflation .
. Elbow; stockton, and Washer estimate the welfare loss from zero
inflQtior. to be small--about five-hUndredths of a percent of ·GDP.
9 Reme:r.ber "'2 is negative indicating that higher unemployment
decreases inflation; the \\qoal-line effect would make this
effe,;t even more negative at high rates of inflation and less
negative at low rates.
il
�-
om
---
..
15
Akerlof, Dickens, and Perry make much of the problems with
the data used by· the others Ifrom the Current Population Survey
or the Panel Survey of Income Dynamics)., Specifically, many
individuals have faulty memories of what they were paid last year
which may result in an overstatement of the inferred number of
nominal wage cuts. While admitting these problems, it seems to
us that Kahn, Elbow et al., and Card and Hyslop do the best with
available data. The best data would be from firms as they keep
better records of wages than individuals do.. To our knowledge, a
database with wages reported by firms {with many reporting firms)
does not exist.
~l1at
is the variance of the NAIRU estimate? Does i~ matter?
A rec~nt paper by Staiger, Stock l and Watson (1996) argues
that theNAIRU is imprecisely estimated: a typical 95% confidence
interval for the NAIRU is roughly 3.6 percentage point wide. 10
Does this imprecision render the NAIRU useless for stabilization
policy'?
First, the selection of a 95% confidence interval implies
that the policy-maker demands an extraordinary level of preCision
before making a decision. In contrast, a 68% confidence interval
would be 1 percentage point. (The standard errors for the NAIRU
shown in equations (3,4,9, and 11) are one-standard deviation
ranges derived under less rigorous statistical assumptio"ns.) In
any case, most decisions are made under a considerable range of
uncertainty because there is no alternative~
Second, to clarify our thinking, consider a situation where
there is a clear answer to the question about whether uncertainty
matters: the case of a quadratiC welfare function. Having done,
this, we can relax this assumption# According to the "certainty
equivalence H theory of Herbert Simon (1956), the variance of the
NAIRU is irrelevant to the linear decision r,ule.
Suppose "that decision-maker wishes to minimize the welfare
cost in a social welfare function that is quadratic
i~
the inflation rate and the unemployment rate.
W=E{C,I%p-%p')' +c,(U- UTI')
10
(14)
Derived from figure 2 in the February 1996 version of
the paper,
�where (%p_%pT) and {U-UT} are the expected deviations of
inflation and unemployment from their targeted rates, and c 1 and
C 2 are relative weights.
Suppose that the inflation dynamics are
governed by the accelerationist Phillips curv,e,
%p =
~ (U - 11)
+ %P-l
(15)
where N is the "true" NAIRU. Let N be an unbiased estimate of
the NAIRU and let € be the error associated with thi~ 'estim~tet
N=&+€
(16)
Furthermore l suppose that the policy instrument {Ii influences
the unemployment rate accordi~g to
fJ=o:I+<
(17)
where ~ is iid and mean zero. Then minimizing (14) with respect
to I and subject to (15), (16), and (17) produces the following
decision rule:
(18)
where (YII Vii and YJ are functions of 'the coefficients in the
equations 114)-117D. This equation (18) displays the certainty
equival'ence result: the policy instrument decision is not
affected by the uncertainty Of the NAIRU estimate (0.).
For uncertainty to matter, 03e has to argue against the
relevance of the quadratic-cost formulation ,of the welfare
function. In fact, this is not· hard to do. It does not seem
appropriate to penalize unemployment below the target rate (as
the second ter-m of (14). (In contrast, the symmetric.penalty on
inflation deviations seems plausible.)
in
Any model of maximizing expected (discounted) intertemporal
u'tility will make use of the information of the Phillips curve-
even if the parameters are estimated imprecisely. Economic
decision making always occurs in an environment of uncertainty.
How uncertainty affects decision ~aking is a complicated matter;
in general, we cannot simply replace a variable ydth its
certainty equivalent. A fuller formulation would entail a more
�pr,ecisely defined welfar.e function\) in addition to incorporating
a variety of issues including costs of adjustment 12 , the effect
of lower levels of unemployment on the NAIRU itself, the learning
about the NAIRU that will evolve over time, and how that learning
may be affected by policy.
Other considerations in setting policy
Policy-makers' are likely to learn somethin';r ·about the
location of the NAIRU as more data are accumulated.. This ~ill be
especially true if the NAIRU varies over time. This
consideration is an interesting embellishment on the discussion
of .uncertainty presented above--which assumed that the
uncertainty was fixed. This consideration--taken on "its oWn-
argues for a policy of probing for the NAIRU.
A statistical theorem shows that the variance of a forecast
will be smallest around the sample mean. If the mean of the
historical sample of une~ployment rates is higher than the
estima~ed NAIRU, then the variance of the NAIRU estimate could be
reduced by getting new observations around or below the estimated
NAIRU. This argument, potentially important for some countries,
has only limited relevance for the U.S. where the average
uMr.lployment rate has been close to the NAIRU.
Hysteresis suggests that policY,actions may influence the
NAIRU. Instead of macroeconomic policy-makers being faced with a
NAIRU given to them by the supp.ly side cif the economy, it says
that the natural rate also depends on the evolution of de~and.
The Europeans continue to suffer from the consequences of
hysteresis which can last extremely long. Some hysteresis might
also be present in the U.S. If prolonged periods of excess.
unet.lployment lead to the decay 0= job skills, then a prolonged
period of high employment might lead to an accumulation of job
skills. In particular, ·the benefits. of the current period of low
"The most proble~atic aspect of the formulation of the
welfare function has to do with the costs of inflation. In
particular, a complete model should explain the costly
consequences of inflation rather than just assume that inflation
is inherentl~l bad. In the ca'se of one of these consequences-
output growth--most empirical studies suggest that for low levels
of inflation (with a critical level well above that experienced
by the United States in the last fifteen years) there is little
if any discernible relation betv.'een inflation and growth.
12Costs of adjustment would imply that policy-makers should
adjust incrementally towards the NAIRU rather than try to achieve
it instantaneously.
�18
may last a very long time~ If this effect is
significant, it suggests that in deciding policies today, one
wants to take into account ,the effects they might have on the
constraints facing future policy-makers. This involves solving a
somewhat complicated dynamic programming problem.
unemployme~t
Conclusion
Our major conclusion is that the Phillips curve works--at
least for ·the United States--and that the concept of the NAIRU is
a sound foundation for economic policy--albeit one that we think
can be improved around the edges., The unemployment 'rate shows a
highly significant correlation with the change in inflation.
The apparent variation in the American NAIRU is attributable
primarily to changing demographics and the accommodation of wage
aspirations to the post-1973 productivity slowdown. Together,
,. these forces decreased the NAIRU by about 1% percentage·points
between 1990 and today.
The imposition '·of wage and price
contro~s
and changes in the relative prices of food and energy
also played a minor role.
We estimate a central tendency for the NAIRU in the United
States at 5.6 to 5.7 percent, although much uncertainty
surrounds this
estimate~
'O'Jr price-price estimates of the NAIRU
are in this range even for the recent data. But the wage-price
system hints that the NAIRU may have fallen more recently to a
poin~ estinate of 5.1 percent.
Hysteresis is a serious challenge to the standard NAIRU
theory, though it can be incorporated into both econometric and
policy analyses. Some evidence suggests that job skills
deterIorate with prolonged periods of joblessness· so that the
NAIRU depends on recent employment history. Hysteresis is
particularly important in those economies that have undergone
major disinflation and have unemployment insurance programs that
supports long periods of joblessness.
'
.'l'here once it was thought that the Phillips curve was convex
to the origin, it is now cor.unonly believed to be closer to
linear . . In fact, some evidence suggests that it may be c,oncave.
The issue is important because it means that a period of
overheating can be offset with an equal (or perhaps shorter)
period of slack. This result provides more flexibility to fiscal
and monetary policy.
Whether the wage-bargaining system beco~es excessively r~g~a
at zero i~flation remains an active debate. The four papers
surveyed above agree that wages become more rigid at low
�19
inflation rates, but only one paper (Akerlo~ et a1) associates
these rigidities with large costs. The perfect data to answer
these questions have not been assembled, and the jury may be out
until then.
Although more uncertainty sur~ounds the NAIRU estimate than
is commonly appreciated, the NAIRU is still a useful concept for
macro-economic policy:r,aking.
�20
Table 1
Does Demographic Adjustment Affect Wages?
Estimation period: 1961:Ql
-
1993:Q4
nlO
0.71
(0.32 )
, 0.83 '
(0.45)
n•
0.29
(0.32)
0.17
(0.45)
UDEM93
-0.53
(0.11)
-0.52
(0.11)
U-UDEM93
--
LP lags
1.0
, (-0.3 2)
0.85
5
(constrained)
'
1.0
(constrained)
FRZ
-0.28
(0.26)
-0.27
(0.26)
,BLG
tO~)
0.97
1. 00
(0.96)
Constant
3.02
(0.64)
3.04
(0.63)'
R'
0.59
' 1. 83
1. 74
0.59
1.83
1. 75
D.W.
Standard Error
See notes (next page)
,
�-.
21
Notes to Table 1:
The dependent variable 1s quarterly change (at an annual rate)
in compensation in the nonfarm business sector. From 1980:Q1
to 1995:Q2 tbis concept is measured by tbe ECI, Before 1980
the series is derived from the National Income Accounts and
published by the BLS.
Variable Definitions: n10 is 5-year centered moving average of
lO-year annual growth rate of nonfarm productivity. n is trend"
growth rate of nonfarm productivity, 1960-1973 (2.9 percent)
and 197371996 (1.1 percent). UDEM93 is unemployment rate
adjusted to 1993 demographic weights. U is actual unemployment
rate. .p is the quarterly change {at an annual rate) in the
nonfarm business price index. FRZ is a dummy variable for
wage-price control~ (1971:Q3-1974:Q1); BUG is a dummy variable
for bulge after end of controls (1974:Q2-1974:Q4).
9
Restrictions: The coefficients of nle and n+ are constrained to
sum to one~ T~e coefficient of BLG is constrained.to equal
(-11/3) times the coefficient of FRZ. The sum of the
coefficients ·on the 8 lags of price inflation is constrained
to one .
•
�22
Table 2
Out-of-sample Errors from Wage & Price Equations
(actual - fitted; 1994:Q1 to 1996:2)
P:r;;i,e-grice ea·
Wage-price (2-eq, system)
Prices
Jll
1994:Q1
: Q;~
: Q3
:Q4
1995:Ql
:02
:Q3
Wages
Prices
Markup
121
(3 )
:31-!2l
.0
.2
.2
-.6
.5
.9
.0
1.0
.0
-1. 3
1.1
-.5
.2
1.1
,-.5
•8
.7
-.1
.1
-.3
.0
-.3
-.8
-.9
.5
-.2
-.6
-1.2
.1
-.3
-.1
.0
-1.2
.3
-1. 0
avg (94: 1-96:2)" .0
avg(94:4-96:2) .. 0
-.2
-.1
-.5
-.4
.1
.1
:04
1996:Ql
:02
.2
•6
-.2
-.2
.4
�Figure 1.
Non-increasing Inflation Rate of Unemployment
12
Moving average
of actual
unemployment rate -....
10
...... 8
.
.
t::
CD
Implicit NAIRU
(.)
'
!\
CD
n..
6
2
\
L
.. , " , .. ":'''' ..
"
1
'.
4
...
".
...
I
I
I
I
II
1960,01 19(1<!:Ol t964:01 1966:01 1966::!H 1970:01 1912:01 1&74:01 1976:01 1918:01 ti'ISO:Ol 1962:01 1984:01 19M:01 1i'16a'/}1 1990:01 lm:Ql t91l4:01 1996:01
Note: See text for derivation.
�Figure 2
Change in Inflation vs. the Unemployment Rate
8
,
,~~~-~----------------
6
•
c:
0
-til
4
.~
......
c:
c: 2
ru
0)
c:
ill 0
,
•
•
~.
.£:.
0
·2
I
·4
2
.. . •
•••
• •
•
I
.~.
•
•
4 6 8
Unemployment rate (demographically adjusted)
Note: Inflation is measured as the Q4·to~Q4 percent change in experimental core CPI. Annual
unemployment rate is adj~sted to 1993 demograpliic weights.
I
10
�Figure 3
Demographic AdjuSlr:1Snt
.
Wage AsplraHon Bias (Productivity Surprise)
',-----------------------------,
..li
I.
----j--'r--c-----;;-----1
i - '
t..
~
Non-increasing Inf!a;ion Rate of Unemploymen:
.
"
... W
,/",
{/
"
�..,
Figure 4.
Disinflation and Benefit Duration
10
I'---~-----------------------------------------------------'
_ Ireland
• Spain
8
g
'"
6
~
6
co
Q)
~
_New Zealand
:::>
CC
<1:
4
• Italy
z
•
c
Q)'
Ol
c
.
Netherlands
Norway --Germany
2
<1l
.C
o
o
-2 l...
-10
Switzerland .
.Austria
_
Canada· Australia
:_Sweden
-Japan
- France
_ Denmark
• United Kingdom
-Finland
-Belgium
Portugal - .- United States
___
n n
l
0
Source: Bali (1996).
I
10
I'
I
!
20.
30
40
50
(Decrease in inflation) X (Benefit duration)
60
70
�."
Figure 5..
.
.
Nonlinearities in the Phillips' Curve
:2
~
,~~~~~~-------------------------
•
'"
c
•
'[
1 .~.
(1)
C1)
••
'"
~
~
0
I
c
15
.1
<lJ
••
'~
"
"
a.
o
,-.-~
.
~
<lJ
.
• \e!. ••M ..
•
o
g
•
••
• • •
0"-' •
...
- • ...... -".- · ·.- · -...
c
W
.9
•
• •• ••
• • ••.,•
, • ••• •
.
•
.2
_.----..
•
-
• •
. .'.
•
.............
........
• • ••
'" . .....
.......
•
"i..
' '
'
.
.
~.
ID
@
:;l
'0
<{
·3
-~--
2
•
_ _ _...L.--_ _ _ _----'_ _ _.,..,-_-L_ _ _ _ _L - - I
4 6 8
Unemployment rate (demographically adjusted)
Note: Adjusted'price acceleration is change in experimental core CPI innation compressed from regression
including lagged inflation. Nixon wage-price freeze dummies. and ielative food and energy prices (see teXl).
Unemployment rate is a~justed to 1993 demographic weights.
10
�23
BIBLIOGRAPHY
Addison, John and Pedro Portugal (1989), "Job Displacement,
Relative Wage Changes. and Duration of Unemployment! II Journal
of Labor' EcoDomics, 'vol. 7 no. 3.
Akerlof I
and George Perry, (1996)
George, William Dickens,
- Macroeconomics of Low Inflation," Brookings
At:tiyity 1.
Pap~rs:
I
"The
Qn EQonQmit;.
Ball, Laurence (1996), ·Pisinflation and the NAIRU,' National
Bureau of Economic Research Working Paper 5520, March.
Ball Laurence (1994)
I
"What Determines the Sacrifice Ratio?" in:
N. Gregory Mankiw,-ed+( Monetary
Poli~,
Univer~ity
of Chicaqo
Press.
Blanchard, O.J. and L. Katz (1996), "The Natural Rate of
Unemployment,"
draft presented at the National
Bureau of
Economic Research Summer Institute, June.
Blanchard, Oliviert and Lawrence
the
European
Annual, 15-78.
H~
Unemployment
Summers (1986), IIHysteresis and
Problem," ~N~BuE~R~~M~a~c~r~Q~e~c~Q~n~Qum~iuc~s~
Blanchard, Olivier, and Juan.F. Jimeno (1995)
t
II
Unemployment: Spain Versus Portugal," Amex:iQan
S t r U0 t u r a 1
EQoDomic
Review 85 (May), 2l2-2l8.
Braun, steven N. (1984), 'Productivity and the NrIRU (and Other
Phillipsl Curve Issues),~ Working Paper #34, Federal Reserve
Board l Economic Activity section. ,
Card, David and Dean Hyslop {1996), "Does Inflation "'Grease the'
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Research Working Paper 5538, April.
It
Jorgen (1993), "High and ,persistent Unemployment:
Assessment of the Problem and Its Causes, n OECO Economics
El:meskov,
Department Working paper #132.
FriedD.lan, Milton (1968), "The Role of Monetary Policy
I
tI
American
Economic Reyiew 58 (March),1 1-17.
Gordon, Robert (1982), 'lInflation Flexible Exchange Rates and the
Natural Rate of Unemployment U in Martin Baily, ed;, Works,
Jobs. and Inflation, Brookings Institution.
�"
,
24
Gordon, Robert (1996), "A Time-varying NAIRU and ,its Implications
',for Economic Policy," rnanuscript l Northwestern'Univaristy*
Kahn! Shulamit (1996),' "'Evidence of Nominal Wage Stickiness
Microdata,"
~anaqement,
King,
manuscript,
March.
Robert G.
Boston
And Mark' W. ,Watson
University
(1994)
t
school
from
of
"'The Postwar. U.S.
Phillips CUrve! A Revisionist Econometric History,H. Carnegie
Rochester Conference on public Policy, 41, December: 157-219.
Klein, Lawrence R. and A. S. -Goldberger (1955), An Econometric:
Model of the united States.
1929-1924,
North-Holrand
Publishing Company, Amsterdam.
Krugman, paul (1994) I "Past and prospective Causes o'f High
UnemploYl:!ent, II in Federal Reserve 'Bank o'f Kansas
city t
Reducing Unemployment: ,c;p,rrent Issues and policy options.
Richard, Stephen Nickell and Richard Jack~an (1.991) I
Unemployment! 'Macroeconomic Performance and the Labor-Market,
O}:ford University Press t New York.
Layard J
Lindbeck j A. and D. J. Snower (1989), Xhe InSjder-Qutsider Theor~,
of Employment and Unemployment, Cambridge, Mass.: MIT Press.
Lynch, Lisa (1989), "The Youth Labor Market in ""the Eighties:
Determinants of Re-Employrnent probabilities for Young Men and
. Women, II The Reyiew of Economics' and Statistics, February.
Modigliani, Franco, and Lucas Papademos (1975), '''Targets for
Monetary Policy in the Coming Year, It 'BrQokings Papers QD
Economio Acti"ity, (l), pp. 141-63:
·okun,
Arthur M.' (19tH); Etices· and Quantities;
A Macroeconomic
Brookings Institution, Washington, D.C.
Anal~fThe
Perry I George (1980-91) "Inflation in Theory and Practice,',"
arookirigs Papers OD Economic Actiyity, pp. 207-241.
Phelps,' Edmund s~ (1968) t WMoney-WagG Dynanics and Labor-Market
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Part 2, 678-711.
Phillips, A.OW. (1958) I liThe Relation between Unemployment and the
,Rate of Change of Money Wage Rates in the united Kingdom.
1861-1957,11 ECOnQmica l November: pp. 263-99.
Samuelson, Paul A. and Robert Solow (1960), ~Analytical Aspects of
Anti-Inflation Policy," American Economic Reyjew, May: 177
194,
�2S
Simon, Herbert (1956), ~Dynamic Programming Under·Uncertainty with
a Quadratic criterion Function,*.Econometrica 24: 74-81.
Tobin, James (1971) I "The Wag'e-price Mechanism: Overview of the
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Van Den Berg, 'Gerard J. and Jan van OUrs (1.996),
"Unemployment
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vol. 14, no. 1.
�-.
',.
"
"
.
The FirstThree Years: Investments that Pay
A Report by the
" Council ofEconomk Advisers
April 17, 1997
"
�Executive Summary
Experiences durlng the first three years of childhood can dramaticallyaifect the rest af
life, •A growing body af research verifies that invesWents in young children nurture a child's,
physical and emational development and that these investments can have big payaffs far
faniilies, gavernment and society, Parents bear the ultimate responsibility far raising their
children, but the government can assist families who need help making important investments.
ImprOving Children's Health
Physical health is essential to a child's grawth and development and many programs have
played an important, role in improVing children's health:
'
,
•
Expansions in Medicaid eligibility ha~e reduced the incidence onow birthweight babies,
decreased infant mortality, and increased the shaIe of children wha have at least one
physician visit per year. ,
•\
'WI C participation reduces low birthweight incidence a..-id decreases Medicaid costs
during the first 60 days af a ,baby's life.
•
A home-based s'moking cessation program saved $~ for evefy $1 spent.
•
. EvelY $1 spent on diphtheria 'va«inations is estimated to save nearly $30. Other
vaccinations itre als(fextremely cost--effective.
'
Improving the Emotional Well-Being ofChildren
, Emotional well-being in early childhood lays the fOUndatian for children to realize their
full potential and develop their talents and capabilities. '
,
•
•
•
' During a recent 1S month periodt 17 percent of workers took time off.work for a reason
'eo~ered by ttie Family and Medi<:!l Leave Act, which was enacted in 1993. The law
'provides these benefits without imposing large costs on employers.
Federal support fur child care includes the Child and Dependent Care Tax Credit, the
Child Care and Development Fund, and the Exclusion for Employer-Provided
'
Dependent Care, since 1980, child care support has almost d~ubled;U;d has almost
triJ:led f9r low income families.
and
Head Stan' provides preschool education
access to needed social services to over
, 750,000 low-income.children and has favorable effects on cogrtitive development,
nutritional intake, and health statlls. The 1994 expansions to Head Start established
Early Head Start, targeted to pregnant women and low-income families with children
'
under age 3. Early Head Start currently serves over 12,000 infants and toddlers.
�Introduction
E:<periences during the first three years ofohildhood can .dramatically affect the rest of
life. Early childhood presents opportunities to improve a child's health and emotional weU
being. Health can he supported by appropriate nutrition and care for pregnant and nursing· .
mothers, and for their infants. Often very ,mall iI!vestments .:. like illJlllunization against
diseases or borne-based smoking cessation programs - yield large benefits.·A stimularu;g and
positive environment can promot~ emotional deve!opment and prepare the young for the· ,
cbalJenges posed by school and later life.
.
Parents hear the ultimate responsibility for ralsing t1ieir small children - including such
important activities as bolding, feeding, and talking to them - but the government can assist .
.these efforts when parents need belp making the investments that produce hwnan, social, and
econoralc dividends. Through legislation like the Family ""d Medical Leave Act (FMLA), the
government can help provide the opportunity for pirents to spend time with their newborn .
. babies. Siniilarly, the govermilent provides information to pregnant women on the dangers
smoking poses to the development ofchlldreh.· More broadly, the government supports basic
research in the pbysical and social sciences (see Box I), as well as evaluations of specific
programs, and the development of new interventions. These efforts turn government resources
into knov;ledge that can b. used by parents, educators, and doctorS to help children flouiish.
Pregnant mothers in poverty and chlldren growing up in poor familieS may lack the
reso~es needed for appropriate nutrition, medical care. ahd child ~e. I Programs like. the
Special Supplemental Nutrition·Program for Women, Infan!3,and Children (WIC) provide food,
nutrition education, and access'to health services for low~income,women.during and after
. pregnancy and 10 their young children. Medicaid· now· ensures that health insurance is available
to pregnant women and young children who live in households with incomes up to 133 percent
of the Federal poverty line. As discussed-below, these programs make an enormous difference in .
the future of children and ultimately may save money because investments made during the first
three years of life playa particularly important role in promoting subsequent physical health and
em·otional. fiOcial. and eo~rive development. '
"
.
\
"j
Children" in !Qw-Income households are at greater risk of virtually every adverse outcome. Poor children
aTe more likely io have low birthweight,. experience stunled growth, suffer ill health, have learning problems and
low educational ~chievement. and to exhibit extreme behavioral problems (Children's Defense fund, Wasting .
America's FUlure. Boston: Beacon Press Books. 1994). Family income 5e::ms to be a significant contributor toO th~
well-being of :::hiJdrcn primarily because ofthe resources it makes available: medical cart, nutrition, parental advice
on child development, quality "child care and preschool, neighbomood safety ind housing quality, One recent study
." finds that income during the fltSt five years of life has larger impacts on outcomes than that during any other time ar
childhood (Greg Duncan. et a,t, "Does Poverty Affect the Life Chances of Children?'" American Socic}o'gical
Review, fortheoming).
.
.
-1
�Box 1.' The Human Capital, Initiative
An important building block of the Administration's efforts to support the well-being of,
young'children is the Human Capital Initiative, an ambitious research program examining the
effects of families, schools, communities, andthe workplace on the formation ofhuman'
capital. The Initiative Wl!S launched by leading professional associations in the behavioral
sciences in the early 1990s and was endorsed by the Clinton Adniini_tion and Congress in·
1994, with funding provided through the National Science Foundation. The goal of the
. Initiative is to apply a growing multi-disciplinary knowledge base to the challenges
.
confronting families and children so as to create an environment where all American children
can grow 'up to become healthy I educated, and productive citizens.
.
..
. '
R.s.arcil fmanced by the Human Capital Initiative can ;;,corm policy and pio';'ote
services for young children, A psychologist at the University of Pittsburgh, for example, is
exploring the role of social relationships at home in px:omoting early academic 'su~ess among
at·risk children; two economists at ,the University ofCalifornia are examining the efficacy of
: early intervention P.rograms in achieving long~ter:m educational and social benefits; a
'i University of Michigan anthropologist is investigating the principles used by young children
to organize knowledge and the determinants of young children's social stereotypes; a "
Universityoflowa psychologist is studying conscience development in the fir.;t four years of
life; and a University ofCalifornia psychologist is'examining the mathematical competencies
t?at childre~ bring to their earliest preschool experiences.
Why arc the First Three Years So Important?
ilf recent years, researchers have made large ~trides towards Understanding'the process of
early development Scientists have discovered physiological mechanis~s that help to explain the
\
importance of the first three years. Recent evidence suggests thet the flurry of brain-building
activity that begins in the womb and continues at a rapid clip through a child's early years is
, affected more by experience (as opposed to 'genetics) then Was previously thought This
'experience, in tum, depends on the health and emotional well-being of the child and also on the
mother's health before giving birth,
" '
"
\Vhen children are depriv,ed of a stimulating enviromnent early in life. their brains may
not develop 10 their full poten~al: More specifically, scientists have identified a ~'window" of
. time when the brain is more malleable and children,are best able to learn. Ofcourse, this
'Window does not ope~ and cl~se abruptly, a.."1d improvements are still possi1?le after that time
period has passed. Nonetheless, understarlding how and when the brain develops helps target
resources to children at the most effective times.
.
-1
�Early Investments Have Big Payoffs
A growing body of research, from psychologists, sociologists, physicians, educatoIS, and '
economists has examined the effect of investments - goods or services that bove initial costs yet
produce savings both in human consequences and money in the future - on children. ,Such
, interventions contribute to the stock of "human capital" - which includes ideas, knowledge,
'education, training. and problem-solving skills that make people productive contributo", to the
'nation's well-being. The literature finds that investments in young children can bove big payoffs
for facilllies, govemmen~ and society.l These invt:stJnents can re,duce the need for more costly
m~es later in life and lead to increased productivity,'
.
.
Families Face Many Challenges
Many challenges confront families in making these important investments. '
•
Both parents are often employed. In 1995, butli parents were employed in mo';' than
,70 percent of married couples with children, increase from roughly 6() percent in
an
1980.'
•
Many famU{es are singl...pa~enl households. In 1995, more than 20 percent effamilies
'were single-parent households, compared to 13 percent in 1965.'
'
1 A 'diverse set of techniques has been develop~d for ev3Iuating·the gains from ,lnte~entionS targeted to
children•. Ideally, experimental designs arc us¢d, wht:re!>y individuals willing to participate in the intervention are
, randomly assigned to the "treatment" group, which participate in the program, and the "control"· group, Which does
not The two groups are then eare'funy monitored to see If individuals receiving the treatment have superior
()utt::0mes. Random assignment can be done by !hI: toss of a coin ,or using computerized r.indoml~n procedures.
A key advantage of random assignment is !hat the t:reatm.ent and control groups w.e likl:ly to have similar .
characteristics, increasing the C{lofiaeoee. th.at any observed difference in outcomes is due to the intervention. 10 the
absente of sucb an experimental deSign. participants typically choose to enroll in the program while noriparticipanrs
cho~e not to, oft~n multing in difficult-to--observc: difff!renees between parti~ipmts and nonparticipants.
.
Since randomized experiments
'often expensive and have small sample sUes. social scientists have
developed' a variety of altetnative evaluation methods, Most imPortantly, statistical techniques ate U$ed to account
for observable differences between participants and nonparticipants in characteristics sucb as income, educatiDf1; .
and family $ta~s. Rcsearthers an:: also increasingly attempting to obtain information from natural exp<:riments,
where participation in the intervention is largely unrelated t(l individual characteristicS or preferenceS:
are
An
;>
excellent survey oribe effc~t$ of inv~tments in children. including tho~e made aft~ the fU""St wee
years, is provided. by Robert Haveman and Barbara Wolfe, "'The' Determinants ofChitdren '5 Attainrnen't: A Review
of Methods: and Findings." Jo~al ojE.t:oncmic Liler(Jture 33. no. 4. December 1995: 1829~7g,
..
'
, .• Tab!!!atlons from the Annual Demograpbie Surv~y of the Current Population Survey (March),
Burt:au ofth<: Census. various years.
~pattment .of Commerce,
S
Ibid.
-3
u.s.
�•
Children frequently lack health insu'!'nce. In 1995, 10 million children (14 percent 01:
all children) had no health insurance; including over 3 million under age 6.' Surprisingly,
nearly nine out often uninsured children have at least one parent '!Iho works.'
•
ViolenCe is prevalent. M~y yo.ri,g chlldren are exposed to violence. The numo.r of.
children dying as the result of gunfire nearly doubled between 1983 and 1993.'
•
Many families with children live in poverty. About 16 percent of families "ith children
under the age of IS were in poverty in 1995, and around 25 percent of children under the
age, of 6' were in poor' famjlie~.~
.
.
To help families meet these challenges, the Federal government provideS a variety of
services to families With young children. This paper discusses a long, but not exhaustive, list of
these programs. 10 ·
.
. ' •
Improving Children's Health
.Phy"ieal heaJth is essential to. child's growth and development and is influenced by the
intera!=1ion ofa complex set of factors including nutrition. access to medica) caret and the
environment. Some of the most important investments in health occur before ~irth and during
the first three years of life. Matemal nutrition, lifestyle, and medical care during' pregnancy have
a serious impact on the health and development of infants and childie.n: Poor habits or deficient
health care during pregnancy can inhibit a child's gro"''th, development, and well-being. Many
.of these effects last a life~~,
so~e may ev~n result in·death~ tl For examplc.:smqk1ng
during pregnancy has boon linked to 19 percent oflow birthweight births, and heavy drinking is
associated with a 'variety of birth defects and health disord=."·
.'
and
• Ibid.
1Children;; Defense Fund, The State ofAmerica's Children Yearbook, J997. Washington D.C.: Children's
Defense Fund. 1997. ,
. *Ibid.
, Tabulations from the Annual Demographic; Survey o(the Current Population Survey (March), U,S.'
Department of Commerce, Bureau of the Census. various years.
IG For instance. we do not discuss safety/injury prevention programs (such as those promoting (he llse of
car safety seats) or sc~ing programs testing for newbo.rn metabolic disorders.
• II
Th: Future ofChU~en Staff, "Analysis," The Future ofCbildren 2, nl), 2. Winter 1992: 7~24.
11 J, laeinmafl and l.H. Madans. ':The Effects ~f Maternal Smokiitg. Physical Stature, and Educational
Arutinmem on th"e InCidence: of Low Birth Weight," American Journal o/Epidemiology 121, no, 6, June 1985:
843..55; E.M. Ouellene, et at, "Adverse Effects on Offspring of Matemal Alcohol Abuse During Pregnancy," New
Engumd JOIJ'",!,i o/Medicine 29i, no. la, 1977: 52S~30,
�In 1995,1 percent of babies born in the United States were considered low birthw~ighL"
Low birthweight babies often require extensive medical attention early in tife and mai
subsequently suffer from a vilriety of physical, emotiolllll" and intellectual problems,
•
Health care costs in the fust yea:: of tife for low birthweight babies are, on, average, '
S15,OOO higher than those fomormal weight babies, arid elevated medical expenditures
continue throughout early childhood."
•
Low birthweight eb.ildren bave higher incidence ofcerebral palsy, deafness, blindness,
epilepsy, chronic lung disease, learning disabilities, aI\d attention deficit disorder. U
•
"Children who were low birthweight babies are more likely to repeat a grnde in school and
about'50 percent more likely to be enrolled in special education,"
are
,
Prenatal care plays a key role in the devetopment ofhealtliy children and includes three
basic components: early and-contiimous risk assessment, health promoti?n, and ne~ed medical
aridlor psychological jnterventi~. The proportion of women receiving prenatal care in the flrst
trimester rose substantially doting the 1970s,leveled'offin the 1980., and then'increased again
doting the early 1990s (from 76 percent in 1990 to 81 percent in 1995)." Poor women and
minorities are significandy less likely to receive early and comprehensive prenatal care.
•'
Adequate prenatal care is associated with lengthened duration of gestatiot:l and reductions
in low birthweight births, with some evidence of ~ater effectiveness for high~risk
women. II
.
.
11 ~aiT)' M. ROsenberg, et al. ~'Bl.rt.,s and Death$: United States. 1995," Monthly Vifal $Jafistics Reporr 45,
no', 3 (S)2;'Octo-ber4, 1996: 1-40.
\
14 Eugene M. LeWin.. et at. "'The Direct Cost of Low Birth 'Weight," The. Future ()fChildre~ Vol, 5, no. 1, '
Spring 1995: 3 5 · ) 6 , '
,,
U
16
S:Nigel Paneth. "'Tiu: Problem ~fLow Birth Rate," The Futur~ o/Chlldren 5, no, 1, SpringJ995: 19·34,
Ibid.
n H3l'T)' M. Rosenberg, et aL, "Births and Deaths: United State's. 1995"; Natl~al Center for Health
Statlstics, Health, Un/led ~ate.s, /995. Hyattsville. MD: Public Health Service, 1996. ,
u Institute ofMedic~ne. Pre:veming Low BtJ.thweight. Washington D.C.: National Ae~~emy Press, 1985:
\32-49,
-5
�•
. •
Prenatal care is a particularly cost-effective method of reducing neonatal mortality, when
. .compared to alternative interventi9~ such as the ~e of neonatal intenSive care. 19' •
Although we do not know the precise benefits of the various elements of prenatal care,
some experts have. concluded that particular service. are likely to improve health .
outcomes: cessation of smo~g! nutrition. and medical treatl?ent of specific conditions.20 .
EnsuIing that a baby is oom bealthy is only the:first step. Access to medicai' care, good
instrumentiiI to. young child's physical health and·
nutrition, and a healthy environment
groWth. Conversely, inadequate nutrition during these crucial years increases the likelihood that
a child wiU develop a wide range of physical, mental, and eniot;orizl problems. Low vaccination
rates may make yo~g children prone to,'prevc;ntable diseases such as mwleS or mumps, and
exposure to lead may impair the development of a child's nervous system, All of these issues are
of particclar·impcr'.ance during the first years of life.
.
.
.
are
lwedical Care
the
Since 1965,
Medicaid program has provided health insurnncefor poor families: In
1995, nearly 30 percent of children under 6 were covered by Medicaid." Eligibility used to'be
closely tied to' participation in the Aid to Families With Dependent Children (AFDC) program
but was extended to other groups beginning in the middle 19805. Pregna.~t women and children.
up to the age of6, living in households with incomes up to 133 percent of the Federal poverty
.
line are now eligible for. Medicaid. .
.
Pregnant women receive special services under Medicaid including u enl1anced" prenatal
,care in many sU!-tes.22 Children are eligible for a v.ide vari.ety of services including inpatient ,and
outpatient hospital services, physician care, x·ray services and many others. In additio~, under
the Early and Periodic Screening, Diagnosis. and Treatment (EPSDT) program, States provide
screening. diagnosis, and treatment services to Medicaid eHgib1e children (and' pay for ~eatment
of conditions identified during EPSDT screenS)..Since \ 993, States receive vaccines tree of
w
- t'TJ. Joyce, et aI., ...A Cost-Benefit Analysis of Strategies to Reduce infant Mortality.... Medic;;' Care 26-,
no. 4, April 1985: 348.-60. Although not a full benefitooCiID analysis. this research fmd4 that the costs of providing
prenatal ca:e art:: mQre than offset by rWucrlons in rust-year hospital and medical expenses resulting from averting
low blrthweights:.
. -
'
lO·lnstitute of Medicine, PreVenting Low Birlh'weighf; Greg R. Alexander, a.."d Carol C. Korenbrot. "The
Role ofP~en:ttal Care in Preventing tow Birth Weight." The Future ofr;hildren 5, no. 1, Spring 1995: 103<2.0.
of
11 Tabulations fro.-n the Annual Demographic Survey
the Current Population Survey (March), U.S, '
'
.
Departtnent of Commerce, Bureau of the Census, 1996.
D ChriMcpher Trenholin,"'The Impact ofPrena!al Medicaid Programs on the Health ofNewboms."
unpublished, University of North Carolina at Chapel Hill, November 1996.
. -6
�charge from the Federal government for Medicaid-eligihle and some other categories of
children."
•
Recent national studies conclude that the expansions in, Medicaid eligibility occurring ','
during tbd.te 1980. and early 1990s contributed to reduced incidence oflow birthweigbt
babies. decreased infantmortaiity. and increased the sbare ofchildren who have at least
one physician visit per year, as is reCommended by pediatric guidelines,~"
.
,
Nurrition
, Poor ~utrition during 'the. early years can have profound and lasting effects on a child's
he8.!tb. Pregnant women with po,or nutrition are more likely to have low birthweight babies. and .
children v.ith poor outrition often lack concentration and energy, experience dizzin.esslr
heedaches, ear infections'. and frequent colds." Iron deficiency can impOde the development of
pmblem~solving skills; n;totOr coordination,. ~oncentration., and long~term cognitive '
development.26. Stunted gro~'an indicator of poor nutrition, is associated with lower scores on
tests ofacademic ~bmty, even after controlling for socioeconomic characteristics, l'
The Federal gove~ent has two major progranis that help to ensure good nutrition for
low-income pregnant women and young children: the Food Stamp Program and the Special
Supplemental NutritioDProgram for Women;Inf.nt•• and Children (WIq. WIC targets
:u The Federal gove.'1'UTlent funds a variety ofprograms fuat promote the health of children and their
famHies..Th~ ,Title V Feder.l~State Partnersbip Block ,Grant provides t\rnding for programs that build state and
community health care systems and provide health care to. chilCx'en and their families. The Maternal and ebBd
He-alth Block Grant (MCHB). and all other progriuns undcr.Title V. employ a three part strategy ofhe-alth
,promotion, prevention, ared protection. MCHB serves more than 17 million women and child:n:n. Other federal
, support indudes runds provided 10 community and migrant health centers under the Community and Migrant.
Healtb Centrr Program. ~ora review of these programs See Ian T. Hm. "The Role of Medic:aid and Other
Government Programs in Providing Medical Care for Children ~d Pregnant Women." The. Futyre a/Children 2.
no. 2. Winter 1992: 134-53:' .
. ,
l~ .Janet Currie and Jonath'an
"Savin& Babies: The Efficacy and CoSt of Recent Ch:mg'es the
Medica;d Eligibilir, of Pregnant Women," J()Umal a/Political EcDflamy 104. no. 6, Dc~ber 1996: 1263~96;
Janet Ccrrie and lonathan Gruber. "Health Insurance Eligibility, Utlll.zatlon ofMedital Care and Child Health;"
Quarterly Journal of&anemics 1J1, no. 2; ~ay 1990: 431-66. ~ru'dies of Medicrud expansions in Tennessee and
Massachusetts failed to uncover improvements in prenatal Cart, birtbwelght, or neonatal mortality {l.S. Haas, et at,
"The Effect of Providing Health Coverage to Poor Uninsured Pregnant Women "in MassachU$(:ru" Journal oftlte
American Medical Jissociation 269. no. 1, January 1993: 87~91 and J.M, Piper. et aL~ "Effects of Medicaid
Eligibility Expansion (in Prenatal Care and Pregnancy Outcome in Tennessee:," Journal ofthe American Medical
Association 264,
17;Navember 1990: 2219~23):
Gruber.
in
no,
'~Children's"Defense
U
Ibid.
TI
fund, Wasting Arr.erica's Future.
Ibid.
-7
�: "
pregnant women, infants, and young children at nutritional risk by providing supplemental foods,
nutrition education, and access to health services. An average of 7.2 million women, infants, and
"
children participated in WIC monthly during FY .1996, lIIld the prognam had a budget of $3"1
billion."" "
"
"
..
Particip'ation in WIC is associated with lower probabilities of receiving inadequate
prenatal care; a 1 to 3 percentage point reduction in the incidence oflow birthweigh~ and
a 2 to 4 percentage point decrease in p~te'lll births.'"
.. ,
Participation in'VIle reduces the ~cidence of iron-<ieficiency ~emia among iofants.30
..
WlC participants are more likely than nonparticipants to comply with nutritional
guidelines in months 5 and 6 of the baby's life." "
"An impo=t study lias higblig.1:lted ",me additional henefits ofWIC (see Box 2).
Cessation. ofSmoking
In 1993, an estimated "16 percent of pregnant women in the United States smoked." The
harmful effects ofsmoking on fetal and child development are well-dowrnented" . Programs
designed to convince women to quit smoking during pregnancy may be an except,ionally
effective means of helping ehild.!'cn. '
21 Tabulations prcwided by the Office of Management and Budget Another Federal program that provides
food to children and adultll is the Child and Adult Food Care Prngram. ,This progmn genernlly operat~ in child'
d~y, <:are cent~. family day care homes.. and som-: .day can:: centcrs fCJt rum::tinnaUy impaired adults, The progrim
piovided meals to more than 1 miUion children and 45,000 adults in June of 1996 and has a budget orSl.7 billlon
,for FY 1997.
'
. ~ Annc Gordon and Lyle Nclson. ~Cb~ristic:> and Outcomes pC 'W1C Participa1l.ts and Nonparticipar:ts:
, Analysis CJfthe 19&1:l National Maternal and Infant Healili Survey," unpUblished. Mathematica'Inc.• Maren' 1995.
JIJ
Barbara Devaney, ct al~, "Prograins that Mitigat-: the Effects ofPov~rty On Oti!dt~n." 1M FutUre. 0/',
'
Children 1. no. 2. SwnmerlF'all 1997, forthcoming.
, . U Anne Gordon and Lyle Ne~n. "Characteristics and; Outcomes of \\-'Ie Pirticipanls and NCJnpartlcipa..l u:
Analysis of me 1988 National Matemaland Infant Health Survey." However. not ali nutritional outcomes are
favorable, In particular. Me participants are less likely to breast~feed their babies. This may occur partly because
infant formula is provided to WlC participants, The reduction in brea!;:~feedjng rates may be TCvmibie, however,
with some evideru~e that WIe pa.'1idpants wno are given advice to breast-feed do so more frequently than income
eligible non-participants (1. Brad Schwam et aI., "The WiC Breast-Feeding Report: The Relationship of VliC
Progr.un Pattidpation to the Initiation and Duration ofBreast-Feeding." unpUblished. Research Triangle Institute;
September 1992).
'
jl
National Center fQ'f Health Statistics. Healln.. UmledSlarer. 1995.
�Box 2. The Effects of Prenatal WIC Participation.
WIC is an important government ptograln that provides health ~e and social service
referrals to low-income pre~t'women and to chilmen aged 5 and under. Participants also
typically rc:ceive vouchers to purchase specific types, ofnutritious food"(milk, cheese~ eggs,
iIifant fomLUla, cereals, and fruit or vegetable juices) valued at an average of around $30 per
'month.
' .
.
To study the effect of this prenatal program on birtli outcomes and Medicaid costs,
Mathematica Policy. Research, lnc. undertook a study for the United States Department of' .
Agriculture in five States: Florida, Minnesota, NortbCarolina,' South Carolina; ana Texas.
Mothers included in the study participated in Medicaid and gave birth in 1987 or 1988. To
analyze the effect ofVlIC, birth outcomes and Medicaid costs.afWIe partiCipants were'
~mpared to those ~f income--eligible nonparticipants. Statistical techniques were used to
control for observable differences between the WIC participants and nonparticipants. .
(Ho.wever, the ~o groups ~ay differ in ways which were not ~bserved by the researchers.)
WIC participants :were one-third to o~e-ha1fless likely than nonparticipants to have
inadequate prenatal care.' Participation in the program was also associated with an
increase in birthweight (averaginE between 25 to 68 graII).sy, a lower incidence of pre-term
births, an~ a longer ges~tiona1 age." M.edicaid costs were also lower for WIC particip~ts.
Every d!Jllar spent on the prenatal WIC program was aSsociated with savings in Medicaid
costs during the first 60 days ofa baby's lifeof$l.77 to $3.13 for newborns and mothers ..
re~eived
.
•
•
\
' A pregnant woman who ,sm,o~es iess than a pack a 'day is 53 percent more likely to have a
low birthweight baby than a nonsmoker; a woman smokirig more than a pack a day is '
marc than twice as likely to do SO.34 ,
'A baby, born to a smoking mother is more likely to experience longer-tenn problems
, including ~gher risks of neurological abnonn~iti~s and poorer ~erbal skil,ls.15 " '
S~oking cessation programs for pregnant women are gene~ly inexpensive and are
likely to be cost effective. The cost-savings are most often associated with reductions in the .
incidence of low birthweight.
'
.
II Barbara Devaney and Allen Schinn, "Infant Mortality Among Medicaid Newborns in Five States: The
Effects of Prenatal WIC Participation."'unpublished. Mathematica Inc.• May 1993.'
.
"
'
}<I Select Committee on Children. Youth. and Family, Opportunities/or Success: Cost-Effective Programs
for Children. Update. 1990~ IOlst Cong., 2nd sess.• Washington D.C,: U.S. Government Printing Office. 1990. This
review summarizes a variety of studies evaluating programs targ~ted towards children.
, lJ
Ibid.
·9
�•
A study of. home-based smoking ,",ssation program costing Sl I. 75 per patient found
savings 0[S3 for every $1 spent"
.'.
.'
.' .
•
Relative general information on the adverse effects of smoking, materials focusing on
smoking dUring pregnaucy are more .effective and have a lower cost 'per quit for pregnant
to
"
women..
.
.
Childhood immunizatiollJl
Figure 1. Full Immunization of 2~Yea~..olds
ao,---~------~-------------.
75
70
",.
~ 65
•
'<C
55
50'• ,
1m .
,
1m
,
I'
~
,f!M! .
SOI.ll'ee: Cent~~ fOf OiseaM ~ttcr: and P~'fflmlen; Itu:ludes
I/aedrles and dosages teOI)mmern1e4 in 1991 fer hili !tnltWrnutl~.
•
Childhood immunizations
play an important role ni'preventing'
diseases such as polio, measles,'
rubeU., diphtheria, and mumps. For
example, the widespread use of .
vaccines has reduced the incidence
of some diseases in the United Stales
by more than 95 percent.:" In
addition to securing the health of
those inununized, vaccines'may
represent a particularly appropriate'
'area for gove~ent involv.ernent,.
since they indirectly protect those
Who are not vaccinated (by lowering
disease risk for all individuals).
The Centers for Disease,Control and Prevention estima~e t.~t every $1 spent on
4iphtheria vaccinations saves nearly $30 in future direct and indirect savings - which
includes savings frOm work loss, death. and.disability; ~veIj' $1 spent on measles)'
. mumps, and rubella :vaccinations saves over $20, J9
)6'Jeffrey Mayer, et at.. "Health Promotion- in Maternity Care," in A Pqur4 of Prev,enfion: The Case for '
Universal Maternity Care in :~e U.S., edited by Jonatnan B, Kotch, ct al... Washington, D,C,': American Public
Heaith Association, 1992. cited in Select Committee on Chlldren, Youth, and Family.-Opporrunilies for Succ;eu:
Cosl~EJfec:iYt' Programsfor.Children. Update, ~990. "
'
aL.
)1 R.A. WindSor, ct
"A Cost·Effective Analysis: of Self· Help Smoking Ccssatiqn Methods for Prein~nt:
Women," Public Health Reports 103. no. l, January/February 198&; 83-S8•
. n. Centers: for D~ase Control and Prevention, U.s. Department of Health and Human Services, "CDC
Immunization Info:marion," unpublished, MlU'cl! 1995. '
.
W Tabulations provided by Martin Landry, National lmmunization Program, Centers for Disease-Control
and Prevention, U.S, D,cpanment of Health and Hu."n3li Services.
• }I).
�•
Every $1 sp~nt on polio vaccinations is estimated to save $6..$0
In 1993, President Clinton signed the Comprebensive Childhood Immunization Initiative
that created the Vaccines for Children (VFC) program to help uninsured, Medicaid-eligible"
children get vaccinated. The goal ofthis'initia~vc is to f\illyvaccinatC 90 percent of all two
year-olds by the year 2000. VFC provides all recommended vaccines free of charge to clinics
and doctors whC? provide services to Uninsured and Medicaid-covered children. In respons~ to
this initiative, the per"cent of all two·year-olds who .were fully immunized increased from 55
" percent in 1992 to 75 percent in 1994-1995 (see FiguIe" I). This increase in"immunization rates is
corrCl,!-ted with the ~5 percent drop in the incidence of preventable diseases in chlldren under 5
from 1993 to 1996. 41•
"
"
Home Visiting'
~ervices.are often particularly effective wb~n provided to families'iri their own homes.
The goals of borne visiting programs vary considerably. Some programs link families with
social seryices while others assess' the sat-ety of the home, encourage healthy habits, answer
questions about pregnancy, childbirth, and child-rearing, or help parents set goals and make
plans:" Home visits are often made during pregnancy" and through the first I to 2 years after birth.
The more successful programs typically continue after the .child is born and .employ a
comprehensive approach that addresses ~any of the ab?ve goals.<42
.'
More than 4,500 home visiting programs in the United States provide health, social, or
educational services to families, sometimes in 'conjunction with organized child care programs.
A variety of Federal government Departments (such as Education, Justice, and Health and
Human Services) fund borne visiting programs for famjIies with young children. The 'Head Start
program (discussed below) administers one of the'.largest home·based prograrils, mostly to
chil<ken in rural areas.who would have difficultY participating in center·based care. In 1990, 24
States-used Medicaid funds to provide prenatal or postnatal care through ho~e visiting,
programs...J
"
"
\
Studies have linked many horne visiting'programs'to a variety of favorable child
outcomes. The analyses differ widely in th'eir assessments of these programs, in part-due to _
immense heterogeneity in the' intensity. 'scope, and focus the interventions. An understanding
o~the specific differences ~ong programs can help guide pO,liey.
of
~o
Ibid.
~\
Children's Defense Ftu;td, The State ofAmerica's Children Yearbook, 1997..
42 U.S. General Accounting Office, Home Visiting, (HRD·90·S3). Washington, D.C.: U.S. General
Accounting Office, July 199~.
C)
Ibid.
-11- "
�•
Home visiting programs aimed at persuading pregnant adolescents to stop smoking are
foood to decrease the risk of low birthweight babies." Studies of programs in '
Philadelphia and Baltimore suggest that the savings in medical eXpendit:u.res associated
.
with low birthweights may 'more than offset the cost of the programs."
•
A South Carolma study where "resource moth""" (nonprofessional women with
parenting experience "Id knowledge oftheir. community) visited pregnant teens in rural
areas showed improvements"in p~enatal care alld redu~Qns in cases of low birthwcight"<4(,
•
•
, A study of home visiting programs for moth"" ofpremature, low birthweight babies
scores at age 3,47.
..
"
.
showed that the intervention improved IQ .
,
.
The Prenatal and Early Intervention Program (pEIP) resulted in fewer emergency rOom
visits for children, and decreased ieports of child abuse. In addition, it had favorable
effects f~r mo~ers. such increases in schooling and reductions in future childbearing, ~,
as
•
A home visiting program in Elmira, New York lead to substantial reductions in
govcminent expenditures on 'Iow~inco:me fa..'"Ilines~ during the first four years oftheir
children's life (see Box 3)."
• 44 David Olds and Harriet Kit:l.ma."l. "Review or Research on Home Visiting for Pregn:m.t Women and
Patents "fYollng Children," The. Future a/Children 3, no. 3. Winter 1993; 53~92,
'
>
'
,
'
•
(' Jeffrey Maye., ct aL, "Health ?romoliQn in Maternity Care," cited in Select Comminee on Children: '
,Youth, and Family, OpptJrfllnlties/arSuccus: Casl~Effective Programs!", Children. Update. 1990.
,
,
•• '
<16 Henry C. Heins, "Social Support in Improving P~rinatal Outcome~'The R~l?urce Mothers Program,"
Obstetrics f?nd Gyru:coJogy, 70" nO. 2, August 1987: 263-66.
.
¥/ The Infant Heallh and Df!veloprm:nt Program, "Enhancing the Outcomes of Low Birth Weight.
Premat'Ure Iurants,": JQurnr;iJ a/the Anierican Medical Association 263. no, 22, lune (990.
'
'.
.
' .
,
.
04' J.effrcy Mayer. et at. "Health Promotion in Maternity Care," cited in Select Committee,on .Children,
Youth. and Faro,Hy, f!pponunitie.s lor Success: C()sl-EjJec.~Ne Progr'anu for Children, Update. 1990.
\
~, David L. Oids, e1 a1.. "Effect ofPrtna~1 and Infancy Ntme Home Visitation on Government Spending,"
Medical Care 3 J, no. 2. February 1993: 155-74. Prelimiuary analysis uf a IS~year follow-up of the Elmira
. intervention indicates additional benefit$ for low-income participants. induding reductions in childbearing,
substance abuse. and crime for the mothers. lower rates of child abuse, and decreased overall arrcst rates.·for the
cbltdren {David Olds, et'aL, ;·Long~.Tenn Efftcts ufHome Visjtation on Matetna' Life Course, Cbild Abuse ~d
NegJect, and Chlldren's A.rrest.$: A IS-Year Fonow~Up of a Randomizcd Trlal/' unpubllsbed, University of
Colorado, 1997). A recent replication of the intervention to primarily African~American women io'Memphis,
Ten.'l.essee, indicates that home visiting leads to'fewer complications in pregnancy and fewer h,ea!th problems for the
childrcn during the fU'St two yean; Qfthe child's life (Harriet Kitzman, et aL "Randomized Trial of Prenatal and
Infancy Home Visitation by Nurses on the Outcnmes:of Pregnanc),. Dysfunctional Care giving. Childhood Injuries.
and Repemed Childbearing Among Low-Income Women with N:o Previous Live Births," unpublished, Unjversity of
Cotorad~ Health Sciences Center, t997).
(
-12
�BOI 3. The Elmira, NY, Home Visitation Program
..,,'.
,:"
'.' .'
In the late 19705 and early 1980s, a randomized experiment was conducted in Elmira, ,
New York to examine the effect of home visiting on health and social outcomes. The study
included 400 teenage, unmarried, or poor women who were pregna:lt for the first time. The
women were randomly assigned to one of four groups providing some combination of health
screenings, free transportation to health providers. and home visits during'pregnancy and (in
some cases) through the child's second birthday. In the most intensive intervention, nurses
made home visits once evetY two weeks during pregnancy and once a week immediately after .
deliverY. decreasing iq frequency ~o once every six.W:eks the end of two years: '
:
at
"Home visitation was found to de~ smoking. improve diets and',for some groups;
reduce the frequency of lpw birthweightor pre-terrt;l deliveries. Participants were also more
likely to make use of the WIe nutritional supplementation program and to ,attend childbirth
education classes. The home visi~ increased the involvement of family members and fnends '
in the pregnancy, birth, and early care of the child,:
Program costs were compared \\~th changes in government expenditures duringJhe
first four years of the chil~'s life. For low-income families (but not £o,r their higher income
counterparts) the meaSured benefits of frequent home visitation outweighed the costs -- costs
averaged'around $600(} (1996 dollars). while the Savings were over $6,300, The sa>'ngs
resulted from lower AFDC~ Food Stamp, Medicaid, and Child Protective SerVice expendirures;
an'd increased maternal employment Almost one~thlrd of the savings (among low~income'
families) w'as due to the reductions in the number,of subsequent pregnallcies. This study miy
Underestimate the gains from the program, since neither nerunenetar)' benefits nor savings
after age 4 are taken into accotint.$U
Abatement ofLead
Lead inges-Jon is particularly hazardous for young children because they absorb lead
more readily than adults, and thei~ developing nervous systems are more.susceptihie to its .
effeets.1l High levels of lead in the blood can cause coma, convUlsions. and death. Even at
, lower levels, it is associated with r,?duced intelligence, ieaming disabilities. impaired'hearing,
1()
David L Olds, et at, "Effect of Prenatal and Infancy Hom!!: Vis.itation on Govent\Tler.t Spending,"
n ,Cenrers for Disease Contro\ and Preve:nton, U,S. Department (If Health and Human Services, Morbidity
a,..d Morll:11ity Weekly Report 46, no. 7. February 21. 1997.
'
-13·
�behavioral problems, and slowed gro....'th. n Many of the harmful effects are irreversible and .
result in subs1antial financial and human co~.. '
Restrictions on lead in gasoline, fond (';loning, and .other uses have reouced blood lead
levels by over 80 percent during the last 20 years!' Today, the risk of lead poisoning is highest
for low·income houSeholds, inner city residents, and persons living in older homes. Cuneot
efforts focus on redueing exposure to lead·based paint and lead-contaminated dust:
•
•
The Department of Housing and Urban D~velopn1ent rece~tlx estimated that the cost of
lead abatement in some federally-o ....ncd housing units would be around $450 million and
that benefits would be between $500 million and $1.5 billion.'" .
.
A new law requires that information about lead·based paint hazards .be provided to home
buye,rs and renters, and that purcbasers ofresidences built before 1978 ru1ve a IO-day
period to test their dwellings for lead paint."
Improving the Emotional Well-Being of Cbildren
Emotional wel1-being in early childhood lays the foundation for children to realize their
full potential and develop their. talents and capabilities. Emotionally bealthy children enter
school with the skills to communicate with their peers and teachers and the confidence t6 make
friends; they have high self-esteem, knowledge of socially acceptable behavior, and 'motivation
to learn. Vlhen children are prepared to.enter school, their early educational experience can be
fruitful, enjoyable, and productive.
.
.
Parenling During The First Months ofLife
To ensure emotional health, children need daily nurturing and guidance from'trustwor!hy
and cating adults. In the first years of life, children need love and ca. . from adults wbo listen·
.
and respond to their needs. Infants are dependent upon' adults for touching, rocking, feooing, and
•
]) H\L. 'Needleman. et at "Bone Lead Levels and Delinquent Behavior," Journal ofthe American Medical
Association 21S. no. S. February 7. 1996: 363w9••
'1 Office ~n.t:ad Hazard Control, U,S.'~partm¢nt of Housing and Urban Development, Moving Towards
a Lead~Safo America.' A Reporllo.fhe Cangrcss of/he United States,' Washington D.C.: U.S. Department of
Housing and Urba."l.De... elopmen~ February 1997., .
).I u.s, Department of Housing and Urban Development,. "Regulatory Impact Analysis of the Proposed
Rule on Lead~Based Paint." unpublished, June .1996.
H U.S. Department of Housing and Urban Development and U.S. Envi:ontntntal Protection Ag.ency,
""ReqUirements for Disclosure of Known Lead-Based Paint and/or Lead-Based Paint Hanrds in Housing: Final
. Rule." unpublished, Marcll19%.
-14
�and
wanning, as well as stimulation through ",.ding
talking." SubsumtiaI interactive parental
contact during the earliest months helps babies form secure and loving attachments with.adults,
develop confidence 'and competence, and establish the basic trust necessary for psychological
development throughout life." For this reason, as.well as to allow ample time lor mothers to
recover from childbirth and parents to adapt to the changes sUrrounding the birth,
experts
believe that severa! months of parenialleave play an'important role in promoting healthy infant
development. j I '
,
many
.
.
Even when employed, most new parents typically take some time off work to care for
their babies." However, this often creaies tellSions between the demands of the workplace and
those of the home. To support families in their efforts to strike. workable balance berween 'these
competing demands, President Clintoo signed into law in 1993 the Family aDd Medical Leave
Act (FMLA). The. FMLA grants 12 weeks. of unpaid job-protected leave to new parents with
qualifying employment rustones working for covered employers."' This legislation provides
employed parents With the time to nurture.their newborns and to develop their parentiDg skills.
.
..
•
During the 18-montli period ending in the swiuner 0[1995, approximately 17 percent of
. workers to'ok time offwork: for a re~on cove~d by the le~islation.61
• 9ver 90 percent of covered e~biishments reported that the F:MLA had either nO
,
noticeable effect or a P9sitive impact o'n their business performance. Larger percentages
indicated positive rather than neg~tive effects on employee productivity~ turnover, and
career advancement.(\2
,. Carnegie Task Force on Meeting the Needs of Young Children, Starting Paims: Meeting the NeeIb of
.Our Youngest C~iJdren. New York: Cam~gie Corporation ofNew York, 1994.
11
Ibid.
,
» E,P, Zigler and M, Frank (eds.). The Parental Leave qua: Taward A Nat/oMl Policy. New Haven:
Yale Unive:Gtty
1 •
~
19$!,
. ).' Jacob 'A. K!~'nnan and Arl~n Leibowitz, "The Work-Employment Decision Among New Mothers,"
Journal a/Human Resources 29,' no. 2, Spring 1994: 277«303, show that ~3 percent of emyloyed women with one~
· m,onth--oJd infanu and 41 percent of employed women with tw(}-illonth~olds. were on leave from their jobs; rather
thl1l'\ working, during the 1986·1988 period.
I>Q For further detai!s on t.~ FMLA, see Christopher J. Ruhm, "Policy Watch: The Family and Medical
Leave Act." JOIUMiojEconomic Perspectives. Spring 1,997. forthcoming.
'I' Commj~ion on Family and Medical Leave, A Workable Balance: Report to Congress on Family and
'Medical !-eave Policies. WashingtOn, D.C.: U.S. Department of Labor 1996.
"
" David cantor, et aI., "The Impact of the Family and Me'dicat Leave Act: A Survey of Er'nployers,"
unpublished, Westat Inc., October 1995.
-15
�,Quality Child Care for Infants andTodd/ers
,
The emotional, social, and cognitive development of infants and toddIe~ is promoted by
" their having close and stable relationships with a small number ofadults in safe and intimate
settirig., Traditionally, such relationships have been provided by' parents, particularly mothers,
who stayed at home with their childrOn, However, as women increasingly work outside the
home and more children grow rip io> single parent housebolds, full·time parental care is becoming
tess typical,
,
Accompanying this trend is the increased use of professional child~.1n 1993, about
30 percent ofchildren under 5 in families With employed mothers were eared for in centers;
compared with only n percent'in 1977 (see Figure 2). However, childien in poor families with
'emp!oY,ed mothers were one,..third less likely to receive care in centers as were ~bildren in non
,
,
poor families, Another option for care
Figure 2. Child Care Arrangements for Children Under 5·
'outside the home is family day care
in Families Wit~ Empr~yed ~ot!iers, 1~93
care by Donrelatives in another home _
Mo_
• which accounted for an additional 17
.2%
percent of the carc"receivc::d by
, children under 5 with working
1.$.1;%
mothers." Among child care
arrangements, a bewilderirig array of
. options exist with res~t to .
. e:1V~orunent. cost, hours spent per·
week and per day, and se",ices
provided, 'Parents also often face
, considerable uncertainty regarding the
quality ofchild care provided, : ,
Day CareJNun;ery
29.S·'"
Moreover. as is to be expeeted. the
~: u.s. OepartmMlt of CWnmerce, BuI'eiIu of !hit Ctn$u$,
qUality o~the care 'received ~atters
.,,""
greatly."
,
,
~.
Children who receive care in quality centers terid to be less distracted and more
tftsk·oriented. considerate. happy,.~d socially competent in elementary school, .They are
U Tabulations from the Survey of Income and Progra.,n Participation. U.S, Department ofC.ommerce.
Bureau of Census:
'" Q~ality care: is best measured by the' warmth and interaction benv"ee~ the provider and the ehild. but
'assessing' these dimensions is necessarily a subjective, timeli. and expensive exen:tse. As a result. r~earchers and
regulators. tend to foeus on more easily observable specific structural measures, such as child~teacher ratios, group
sizes, and staff training. Th~ available evidence suggests tr.at changes in thest: struCtural factors have the potential
to improve the quality of child care, If the)' an: accompanied by broader chang'!s in the way child care is delivered,
although theft ~ :s-mal1er benefits· if they occur to isoiation (e.g. David M, Blau, "The Production of Quality in
Child Care Centers," Journal 01Human Resources 32. no. 2, Spring 1997: 354--87.)
·16·
�more self-oonfident, proficient in langUage, advanced in cognitive developmen~ and
make better academic progress. Conversely, children in poor quality prognms risk the
'development of poor school skills and heightened aggressio,,:"
•
" The Syracuse Univemity Family Development Reseatth Program provided extensive
child care, home visits, and health and nutrition resources to 108 low-income families
'v.ith children aged 0 to 5. Participation was associated with decreased nwnber, severity,
'
'
.
and chronicity ofjuvenile justice proble"",."
•
Project cA.R.E, an intensive combination of center~ and home~based intervention 'and
beaJlh care, serves children beginning at birth. Participation is associated with significant
increas~ in measured int~mgence.61
The eare received by many children is inadequate. For example, the child development
environment in more than one-third of classrooms surveyed in the National Child Care Stafflllg
study was rated less than "l1liniffially adequate", aiJd only 12 percent of the classrooms received a
sCore which met or exceeded the standard associated ~th "good" practices.<l1 'Evidence from
several studies suggests that economically disadvantaged and psycbologicallystressed families
are mOre likely'to enroll their children in child eare arrangements that are of relatively low
quality." Cost is often a substantial bartier to obtaining quality child care." The Federal'
, iJ John M. Love, et aI., "Are They tn Any Real Danger? What Researeh Does - And Doesn't - Tell Us
· About Child Care Quality and Chilere'n's Well-Being," unpublished. Mathematica Inc.• May i9%; Suzanne W.
Helbum a.'1d Carotlee Howes, "Child Care Cost and Quality," The Future o/Chi/dren.6 • no. 2, SummerlFaU 1996:
62-82; NICHD Early Child Care Rcscan::b Network. "Mother<hild Interaction
Cognitive Outcomes Associated
· Willi Early Child Care: Results of the NICHD Study," unpublished materials for 'the Poster Symposium of the .
Biennial Meeting afthe S~iety foiResearcb in Child Development, WMhn:gton D.C., Aprill997.
and
, .... Hirokazu Yoshibwa, "Long-Tenn' Effects of Early Childhood Programs on Sodal Outcomes and
Delinquency," The FUfure a/Children 5, no.3, Winter 1995,
-
,
'
., Doo~a Bryant and Kelly Maxwell, "Th~ Effectiveness of Early Intervention for Disadvantaged
Children," in The. Effecfiveness of Early /nJerw:JJtion. edited by Michael Guralniek. Baltimore MD: Paul H. Brookes
'
Publishing Co-., 1991: 234it
... Marey Whitebook. el aL, Whq C:ues? Child Cant Teo<;hers and lhe QualitY o/Care in America; A Final
Report: Nalional Child Care Slajfing SlUdJ;. Oakland, CA: Child ~e Employee Project. 1989.
.
: till John M, Love. et 'at. "Are They In Any Real Danger? \J;'haI; Research Does - And Doesn't - Teli Us
About Child Cat! Quality and Children's Well~8eing."
Average weekly child care costs were 514 in 1993 for families with employed mothers that purchased
· care, (Lyrnle M, Ca5ycr, "\Vhat Does It Cost To Mind Our Preschoolers?" CI1n'enll'oputcfion Reports, no:P70~
52, Washington, D,C.: U.S. Department of Commerce, September 1995.)
,'»
-17·
"
�. government plays an impofWlt role in alleviating this financial burdeD. Since 1980, Federal
.
support bas doubled aod bas almost tripled for low-income families.~'
·
.
One ofth.largest Federal child care assistance prograIils is the Child and Dependent
Care Tax Credit In IT 1997, this program will provide an estiIDated $2.7 billion nfta:<
relief to tax-payers who are working or are seeking work and have a qualifYing dep;ndent
Wlder the age of 13. Tax-payers can receive • credit of up to $2,400 per year for one
qualifying dependent and $4,800 for two or more qualifying dependents."
•
Under the newly establisbed Child Care and Development Fund, ihoFederal
government bas made. $2.9 billion available to States fOl: FY 1997, an-increase in child
care funding ofover $550 million over the preVious fiscal year, n This program,
'authorized by the Personal Responsibility and Work Opportnalty Reconciliation Act of
1996, will assisrIow·income families and those transitioning on and ofl'welfare in .
obtaining child care so that they can work or receive training or education, The program
combines four previous Federal child care subsidy programs and alIa",.. States to design
comprehensive, integrated service d~tivery systems to meet the needs of low-income
working families. At least 4 percent of theSe funds must be spent on quality
improvements in child c~e:
•
A major purpose of the Social Services "Block Giant is preventing neg1~t. abuse, or
. exploitation of children and adults. Some of the funding for the grant goes to child care
. services in _almost all S t a t e s } " ·
•
Since 1981. emp~oyees have generally been allowed to receive an Exclusion For
Employe~_~Pr~vided Dependent Care from their gross income on their taX retu."1l. The
tao, relief to tax-payers from this provision is estimated $830 ·million·in'FY 1997,"
"1
Jl D.S.' Phillips. cd., CJ;ild Care/er Low-Income Families: Sum";ary ~fTW!! Workshops. WaShingto!'!. '
D.C.: National Academy Press. 1995,
12 House Committee on'Way, and Means, The 1996 Green Book, l04t.i. Cong.-, 2nd sess. Wash'in~on D.C,:
U.S. Government Prin[ing Office, 1996; Office of Management and Budget, Analytical Peripecfrves, Budger oflhe
United Slates Government, riscal Year J998.
,
7J Administration f<lr Children and Families. Department ofHeafth and Bumw Services, "Child Care and
Development Fund," unpublished, December 1996,
.
.
't~ House Commi~ on Wa~ and MeaM, The 1996 Green Beck..
,
n HouSe Committee on Ways'and Means, The 1996 Green Book:, Office of Management and Budget.,
Analytical Per,fpectives, Budget O/tM United Stales G!fVernment, Fiscal Year J998,
.
-)8
"
�Early Education ,
Early eduCation programS hejp'many 3 to 5 year ohls develop motivation, inquisitiveness,
positive social'behavior, and self-confidence,' Preschool enrollment has risen substantially over
time (see Figuri, 3). The programs vat;' dramatically on many dimensions - hours pet day and
days pet weei<,' type of curriculum., services included, and ccst. Some programs inCorporate
, ,health care by encouraging immunizations, hearing and vision screenings, and home visits.
Some ofthe literntUre finds that compensat~ry preschool progriuns initially increase IQ
scores but that the effcct fades over
. Figure 3. Preschool Enrollment of 3-4 Year-Qlds
time." COIlseguently, it is frequently
4() r - - - - - , - - - - - , , - - - - - - - ,
. asserted that preschool has no
'
penn;inent effect on cognitive skill.
35
However, research ex.amining other
outcomes, suCh as educational
artainment, behavior, .nd health
status finds continued benefits to
preschool. These long-term benefits
are believed to result from children
entering elementazy school with more
20
experiences aild advantages: .School
learning'is viewed by many as a
15'=-:=-:::--::::-:::::---:-:::-::::---:::;-::::-::::--:::: "cumulative process" where early
1m
UUI'I
1$71
1m lQ!t
111e1 1_
111'11
,.,
19\0
'
advantages improve' later
Source: u.s. Oepartmef\t of Commert:e. Bvrnu of 1M ~I'ISU$..
perfannance.l1
j~
.
.
. A comprehensive review'finds that compensatory preschool education improves long
, tenn' school performance~ as measured by grade retention t special·education enrollment.
and b.igh school graduation."
.
•
Early education programs, in combination with family support programs, have been
fO)lDd to reduce antisocial behavior and delmquency."
.
•
.w..
1~ For a :review of the literature see
Stephen Barnett, "&m:fits: of Compensatory PreSchool Education,"
JOlJI'na/ of Human Resources 27. no2, Sp~g I~92~ 219·312. .
•
T7
[bid.
, 11 Ibid. The author notes that somc ofthese studies may not have 5uffir:iel;1t control 'p.oups since they were
self-selected Or drawn from ditre.~t populations.
,., Hirokazu Yoshikawa. "Long-Term Effects orEar!y Childhood Programs on Social Outcomes and
Dclinquency," The Future ofChildren :5, no. 3, Winter 1995: :5 1~75.
-19
�, '
•
,
,
Preschool participants are qJore likely to receive immunizations. iii
The Perry Prescbool Study, wbich randomly assigned 3- and 4-year-old children iIito the
preschool program, bas provided noteworthy evidence offavorable outcomes over a Variety of
dimensions (see Box 4).
.
".
' . '. ' .
. Bo.4. The HighlScope Perry P ....chool Project
. In the 1960s, concern for the intellectual developmeni of young chlldien living iIi
poverty spurred research on the ability ofeetly eduCation programs to break the !ink between
poor school performance and fam1ly poverty. The High/Scope Perry Preschool Project, which
began in 1%2, was.designed to test the bypothesis that good preschool would help young .
children move from the home iIito the classroom. and thus raise these children's educational
ability and aitainment. Children living in a predominantly black neighborhOod of Ypsilanti,
Michigan were randomly assigned to either the treatment group, which attended preschool, or
the control g"oup, which did not A tota! of 128 African-American children entered the
.
project, and 123 completed the preschool years.
The 58 children iIi the treatment group received a daily:i. Y, hour classroom session. in
addition, the children and their mother.; received a weekly 1 Y, hour visit iIi the home from the
child1 s "teacher. Over three-quarteis of these children attended the classroom session ror two
academic Years, with the rest attending one year. The pm~ cost roughly S8,OOO per child
per year (iIi 1996 dollam). For comparison, Head Start costs around $4,500 per child annually,
. "
, .
.
The .123 children completing the program were interviewed annually from age 3 ta II,
and at ages 14, IS, 19, and 27: Benefits associated with the intervention include:.higher IQ
, levels at age 7~ better school achievement at ~e 14. greater educational'attainment and general"
: literacy at age 19, higher monthly earnings and home awnmhip at age 27; leiwer levels of
i social service receipt from age 17 to 27, and reductions in arrests by age 21." Every dollar
· spent on Perry Pre,chaoHs estimated to have returned roughly $9 in benefits due to reduced
. .
· costs ofspecial education, public assistance, and crime later in life.'"
10
Janet Currie and Duncan Thomas, "Does Head Start Make a Difference'?" AmericaI'! Economic Review
8$, no, 3. June 1995: 341-64.
U llnne:u:e $chwcinha.''t.. et.al.~ Significant Benefos. Ypsilanti; MI: HlghlScope Press, 1993. However, the
results of the- Perry Preschool sred)' may not be generalizable to other preschool programs that may provide higher
or low~ levels of serviCes or moncWj' investment.
11
Lawrence Schwcinhan. et ~l.. Significant &mejiu.•
..
-2(]'
�,
As with child care for infants and toddlers, financiai constraintS make i;difficult for many
families to send their children to preschooL In. 1990, only 24 percent of children from families in
the bottom fifth of the income distribution attended preschool versus 52 percent ofchildren in the
top fifth of families." Through the Head Stattprogram., the Federal gove':lllllent plays a key
role in assuring th.i.t low-income cliildren between the ages of 3 and 5 can receive preschool
education end access 10 social semces.
.
.
Since Head Start's fonnation. the prograrobas served over 16 million children and their
families; over 750,000 children were enrolled in FY 1996." Most programs are'cenler-based but
may vary in terins ofthe number of days peiweek and hours per day. However, Head Start·
currently has slots for only about 40 percenl of eligible chiidion. The restricted availability
"'presents a lost opportunity to invest in our children and, as a reSult, the President has
proclaimed the goal of serving one million child)"enby 2002•.
•
. A surv~y Qf72 studies of Head 'Start co~cluded' that the program bad substantial, .
favorable effects on children's cognitive development at the.end cfthe prograin year."
•
. A randomized study in four counties revealed t!mt Head Start raised access to health care,
increased the receipt basic health services, ircproved diets, and led to better health
.taitts." The Head Start participants also had more fully developed ";d Coordinated
motor skills. .
.
•.
of
Parent-child communication has been found to be positively affected by Head start in
some studies. r1
tl Office ofthe Assistant Secretary for Planntng and Evaluation, U.S. Depll..'tmcn't of Heatth and Humar
Services, Trends in lhe Well~8ei!lg ojCJ1I1dren and Youth: 1996. Washington D.C: U.s. DePartment ofHealti and
Human Servi<.:es, t 996.
... Head Start Bureau, U:S. Depattrru:nt of Hea!th and Human Services, "Head Start Statistical Fact Sheet,"
unpublished, February 1997,
'
Il
Barbam Oev~ey, et aI., "Programs That Mitigate'ale: Effects'ofPovcrt}' on Children."
i6 Abl Associ~tes' Inc. "The Effects of Head Start Health Services: Report of the Head 'Start Healtb
Evaluation,': unpubli.5hed. Ca."t'Ibridge;MA. 19S4.
.
17 ll. M~Key. H. Ga:lson Condelli. et at, The I~p«J ofHead SIarf en Children, Families, and
CommuniJies.' Final Report a/the Head Start EvaluaIiolI,. Synthesis and UtiJi;;(]1ian Projecl. Washington~ D.C::
CSR. mc.June 198~, " .
-21
�.•
. Research comparing siblings participating in Head Start to those who did ~ot found that
program participation inCreased test scores significantly for some children and afso
reduced the probability of being retained in grade. II
The 1994 expansions Il> Head Start ostahlished Early He~d Start, which is targeted to
low-income pregnant women and children under age 3. Early Head Start employs a "two
generation" approach that is designed to serve parents and children simultaneously by providing
. intensive health and nutrition servi= during the ·prenatal period and the first three years of the
child's life.
. . .
.
•
Early Head Start &rants have ~ awarded 1.<l 142loca!ities aeross ihe nation, and the
program now serves around 26,000 infants and toddlers." Randomized experiments are
'l:?eing-cond~ctc:d allow accurate ev3l~tion ofthe success of the pro~.
to
Conclusion
. Scientists and educators have identifi~ the first three years of life as a time when
children bave "fertile minds". Efforts to help children during these years are especially fruitful.
BecauSe of the long-l:isting effects, early investments can have big payoffs..They avert the need
for more costly interventions later in life, and so contribute to happier, healthier, and more
adults...·
..
productive children, adolescents,
and
Par~nts
play the largest role in meeting the needs of children. However, the government
can assist in a variety of important ways. FarniHes. communities. and the government are
making considerable investments in' young children. These investments are iQ1portant beUuse
'
.our YOWlge:it chUd,ren are., in a very real sense, the future of America.
1& Janet (:urrie and Duncan Thomas, "'Does Head Surt Make A Differl:m:e?'.' American EconomiC Revi~
Janet Cucie and Duncan Thomas, "Can Early Childhood Education Lead to Long. Tenn Gains in Cognition?"
. Policy Options, forthcoming.
'
,
"Head Stu1 Bureau, U,S. Department ofHeaith and Human Services, "'Improving Head Stlt't: A Success
Story," unpublished, November 1996; additional tabulations provided by the U.S. Departmt:nt of Health and
Human Services.
-22
�
Dublin Core
The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/.
Title
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Clinton Administration History Project
Creator
An entity primarily responsible for making the resource
Cinton Administration History Project
Council of Economic Advisers
Department of Commerce
Central Intelligence Agency
Department of the Interior
Department of Defense
Corporation for National Service
Council on Environmental Quality
Department of Justice
Domestic Policy Council
Department of Education
Department of Energy
Environmental Protection Agency
Federal Emergency Management Agency
General Services Administration
Small Business Administration
Social Security Administration
United States Agency for International Development
National Economic Council
Office of Management & Budget
Office of National Drug Control Policy
Office of Personnel Management
Office of Science & Technology Policy
Office of the Vice President
United States Trade Representative
Date
A point or period of time associated with an event in the lifecycle of the resource
1993-2001
Description
An account of the resource
<p>The Clinton Administration History Project describes in detail the accomplishments of President Clinton's Administration for the period 1993-2001. The records consist of the histories of 32 agencies or departments within the Executive Branch. In general, each organization associated with the Project submitted a narrative history along with supporting documents. These narrative accounts are primarily overviews of the various missions, special projects, and accomplishments of the agencies. The supplementary records include substantive memos, press releases, briefing papers, and publications illustrated with photos and charts.</p>
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Clinton Presidential Records: White House Staff and Office Files
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History of the Council of Economic Advisers
Clinton Administration History Project
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1993-2001
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A History of the Council of Economic
Advisers
During the Clinton Administration
1993-2001
\
Prepared for the Clinton Administration History Project
Washington, DC
2000
�Table of Contents
I.
Organizational and Personnel Changes
A,
Chair <lnu Members of the Council
B.
Staff Positions
C.
Mission
D.
Operating Methods
II.
Interagency Relations
III.
1993
IV.
1994
V.
1995
VI.
1996
VII.
1997
VIII. 1998
IX.
1999
X.
2000
XL
Legislative Relations
XII.
Extern,,! Relations
Appendix A
Appendix B
Appendix C
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,"
COUNCIL OF ECONOMIC ADVISERS
HISTORY PROJECT
1993 - 2000
1. Orgat:!iz<lUonal and I)ersunnel Changes'
A.
Chuir and Memhers of the Council
The first Ch::li;- of the Council of Economic Advisers under President Clinton was Lauf<!
D'Andrea Tyson, While chair:ng rhe COl~:lcil, Dr. Tyson Was on leave from the Univers.ity of
California at-Berkeley where she was Professor of Econumics and Business Auministration and
DirectOr of the Berkeley Roundtable on the International Economy,
The other (Wo members of President Clinton's first Council were Atan S, Blinder and
Joseph E. Stiglitz. Dr. Blinder was on leave from Prin'cclOn University where he was the Gordon
S, Rcntschkr Memorial Professor of Economics. Dr. Stiglitz was ot'! leave from Stanford
University where he was the Joan Kenny Professor of Eco:1omJcs.
In J UTlO i 994, Dr, Blinder was appointed as Vice Chair of the Board of Governors o/' the
Federal Reserve System 1hus cre:)ti:Jg:) vaca;!cy at the Council, Martin N. Buily was named to
replace him on June 30.199-5. DL Baily was on leave from the Ur.iversity ofMary~ ..md where he
wuS Professor of Economics,
On f:ebruury 21, t995, Laura D'Andrea Tyson was appointed uS Assistant to the
President and Director of the National Economic Council nnd in June [995, Joseph E. Stiglitz
who hac been i1 Member of the Council SI!1CC 1993 was named Chair of [he CEA thus creating a
vacancy for <I Member. In January 1996, AEdu H. NLmocll who had been Assistunt Secretary
for Econnmic Policy at the D::;partmer.t O~~ Trc;:su:'Y since 1993 W:.IS appointed to the Cou.neil to
replace Joseph Stiglitz;
In August 1996, Mattin Baily resigned tojoln the G!obal Institute at McKinsey and
Company, [nc The President appointed Jeffrey A. Franke! in Aprit 1997. He was on leave
from the University of C;tlifomiu m Berkdey where he was Professor of Economics,
In February 1997, Joseph E. Stiglitz re-signed to take a position at the World Bank as
Senior Vice President. Dcvclopmc;lt Economics & Chief Economist, On Fcbntary 18, i 997,
hlnet L Yci!en, who was a Member of the Board of GovcrnoI'S of the Federal Reserve was
appointed.
In August [997, Alicia H. Munnell resigned ~md took a position at Boston College as the
Peter F, Drucker Chair b Management & Science. Rebecca Blank who was appointed in October.
�·
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2
1998 Sllccctucd her. Dr. Blank was on leave from Northwestern University where she wus
Professor of Economics.
In March 1999, Jeffrey Franke! resigned to take a position at the John F. Kennedy
School of Government at Harvard University where he holds the Harpel Chair for Capital
Formation and Growth. Robert Z. Lawrence, who is on leave from the John F. Kennedy School
of Government at Harvard where he is the Albert L. Williams Professor of International Trude
and Investment at the Center for Business and Government, succeeded him.
In July 1999, Rebecca M. Blank resigned to take a position at the University of Michigan
where she is the Henry Carter Adams Professor of Policy and Dean of the School of Public
Policy. On November 17, 1999 the President nominated K.nhryn L. Shaw to succeed Rebecca
Blank. Dr. Shaw is on leave from Carnegie Mellon University, where she is Profcssurof
Economics in the Business School.
In August 1999, Janet L. Yellen resigned to return to the Haas School of Business at the
University of California at Berkeley. The President appointed Dr. Martin N. Baily on August 12,
1999 to succeed Dr. Yellen. Dr. Baily had served previously as a Member of the Council from
June 1995 to August 1996.
B.
Staff Positions
In 1993, the new position-of Chief of Staff of the Council was created. The first Chief of
Stuff wus Thomus P. O'Donnell, formerly of Patton, Boggs & Blow. He resigned in April 1995
to take a p05ition as Chief of Staff at the National Economic Council. M. Michele Jolin,
formerly of ScnUlor Barbara Boxer's office succeeded him. M. Michele Jolin resigned in April
1999 to uccepl a position as Vice President and Senior Project Manager of Innovative Learning
Initiatives ut Ashoka: Innovators for the Public. She was succeeded by Audrey Choi, formerly
Domestic Policy Advisor to the Vice President.
The Council created u Macroeconomic Forecasting Office headed by a Director, who
managed the work of several staff economists and research Assistants, directed and managed the
production of the almost daily memoranda to the President on the subject of major economic
data releases.
The Council established a position for a Chief Economist who served as editor of the
Weekly Economic Briefing (WEB) and directed several research <lssistants in the preparation of
the WEB.
Over the past eight years, CEA has taken on a more technological complex direction.·
Following the retirement of an administrative support employee in 1997, a research assistant was
added to the statistical office to provide more technical support.
S(.!nim staff at the Council during the year consisted of the Chief of Staff, the Senior
StatIstician, senior economIsts, staff economists and research assistants. Senior and staff
economists and resc:.lrch assistants Llsually corne from academic instilUtions, research institutions
�or Oiher government agencies. The majo:hy of the stdf changed every year. The support staff
is constant a:1d consists of a Scmo;" S:atistician, two Statisticians, a statistical Assistant, a
Re;;eurch ASSIS::.l:l:, an Ad:ninistrut;vc Officer, six Executive Assistants and one Program
As:si:stant.
A contr(l.';tor, Michael Treadway, provided editoriai assistance in the preparation of the
Economic Reports from 1994 through 2000.
The Cour.ci! exper:cr,ccd a tn.:umaric period in [995 when the Se:1ure Committee or.
Appropriall:ms H?proved $3.4 miUion for the CEA funding for FY'96 and the HO~I$e of
Representatives "terminated the funding during its appropriation process. With the help of former
Chairmc;), Lcadcmic and business economists and even sorr.e .::ourr.alists defending the Council
as <Hi unbi"11,cd source of sound ecor::OlU1C udvice, funding w:.ts restored LInd the Council
coruinued its work as usual,
"':'h:,: Cou:lcil was established by the Employment Act of 1946 to p:-ovide the Pres;dent
wi!h objective economic analysis and advice on the cevelopment and implementation of a wlde
range of uomestic and intcrnutional economic policy i::.sucs.
The c')l:ncil wus involved on every level or economic policy makir.g. All econoliuc
policy was coordir:ated tmough the NUl]O;);}1 Economic Council, which was estkblis~ed by the
Pr:.::ulent by EXCCi.lti ve Order on Janudry 25, 1993. The Chdjr of the CEA was i1 member of lhis
Coullcd.
The Council continued to prepare t~e Economic Report afthe President and The Annual
Repon of the Council oI Economic Advisers.
The COI,::tci [ i;1itia:ed a new project under this Administnltion, It was the Weekly
ECUflomic' BriefillR for the President, the Vice President and lr.e Pres]der.Cs other seni.);
t:t:or.omic and policy wJvisers. Oml briefings were conduc:ed by the Chair and attended by the
two rllCmbCi'$, The Council, in coopercltion with tr.e Office of the Vice President, prepured a
written briefing, which proviCed <lnaly;:;is of current economic developments, more extende,:
discussions of u wide rar.gc- of ec:onomic iss.ues and problems, and summanes of economic
deve!opmer.ts jil di fferent regions ,md sectors of the economy. The report was Glstr:buted Frid,IY
of each 'Week anci served as a basis for the ond briefings,
In addition!O the Economic Report of the Prcsldt!!lt, the Council WaS ca:Jed upon to
prepare numerous other reports analyzing vurious Issues <IS they affected the economy" They un;
IIsteu as Appendix A.
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D.
Operating .\'lethods
The Chuirm!!p. rep:1:sented the CO',Joell at Cabinet meetings and variOUs other high~Jcvc:
meetings inc!~di:1g those of (he t\atlonul Se{;Uril y Council focusing on economic issues, daily
While Hcusc senior s:atT meetings, budget team meetl:lgs with the President and !T.any other
formal unc mlor:nal meetings with t:'1C President, senior White House staff, and other senior
government officials, The Chairman is one of six members of the Principals Committee of the
newly established N:llior.al Economic Council and is a member of the Domeslic Policy CounciL
'll:e Chairman 1$ the CouncIl's chief public spokesperson.
The Chairman and the Members work as a team on most economic policy issues, They
participated in the deliberations of the National Economic Council ,
The Chief of Staff played a very vital and necessary role in lhc everyday opcrutlon of the
COlillcil. The Chlef of Slaff directed the scheduling, preparation, ar.d production of the
Ecuuomic Report of rhe Pre:;fden!' Regulur meetings, weeki y ampli ficalion and conference calls
provic:ed t!lC Chief of Staff with the Issues, policy initia!! ves and legislation lh~t wcre IInportant
in the Admir.islmttOn. The Chief of Stuff relayed thIS informRtion to the Chair:nan. Press
briefings, TV ir.terviews, :lnd speeches were regularly scheduled for lhe Chairman as a way of
presenting the Administration's message on domestic and inlcrmltlonal policies.
11.
'ntcntge-ncv He-lutions
During 1993, the Council worked with most all Cabinet Dep~rtmcnts in publishing the
Economic Report of the President. Their input, comments, suggestions and edIts are solicited
and implemented dUring the wt~ring and publishing ot'Ih'is Rep,xl.
The Chair and the M(;mbcrs regularly exch<.inged lnformtttion and met with the Chainnan
a;lJ Members of the Board of Governor:.: o( the Fcdcra: Res.erve System to discuss the econon~ic
oUilook and monetary poliCY,
The Council \vorked to improve the quality of government economic statistics. The
Council urged increased funding for economic and demographic statistics in intcrdgcncy
dis(':ussions and in deli?erations over Federal budget priorities,
The, Council worked with officials from the Department of the Treusury. the Office of
rV1:magement and Budget and other members of the President's economic Oleum on
macroeconomic policy issues. The Council, the Depattment of the Treasury, ll!1d the Office of
Mar:agemenl and Budget (OMS) - the "Troika" produced the economic fOreCl.lSl$ [h~!t UI'.derlie
the Admi:lbtration's budget projections, The Chairman and the Member::; met regularly with
Mcmber~ of the Feticcal R..:scrvc BOl.lnllO discuss the et:onornic uutlook umi mO:1etury policy,
The Cour:dJ worked with the Department of Transporlation to develop the
Administration'S Civil Aviation Initiative, At the request oJ'the President, Dr. Tyson also
�5
~e,VeC on the Nation;;.] Commisslon for' a Strong, Corr.pctitivc Airline bdustry. The Council also
(lss:s,.;;d in :hc development of the Administration's Domestic Natura: G ..iS and Oil lnttiarive,
issl!cd by the Department of Energy.
b 1997, the Council worked with the Department of Education, and the Office of
Man~gemeut and Budget to develop reforms. of the college financial aid system to make it fairer
and more efficient.
IlL
1993
The Council advised the Preside~i On all major macroeconomic issues in 1993, The
Council prepared for the President, the Vice P:-csident and the White House senior wlff a
-comprehcnsivc'sclles of memoranda on the statislicul releases that heip monitor U. S. economic
activity. It also prepared special analyses of economic policy issues and briefing papers on
significant economic events, SL:.ch as the 1993 floods in the Midwest (and the earthqu.!kc in
southern California early in 1994.
International economic issues were a high priority for the Council in 1993. All three
members: continued. the Council's act:ve mle in the Organization of Economic Cooperation and
Development (OECD). Dr. Tyson attended the OECD's Economic Policy Committee meeting in
P,uis in Muy and served as its Acting Chair in November. Dr. Blinder led the U. S delegation to
the OEeD to as.sess U. S. economic policy and Was a member of the U. S. delegation to OEeD
Working Party 3 on m>icroeconomtc policy coordination. Dr. Stiglitz headed the U.S. celegntion
to OEeD Working Party 1 meetings on microeconomic and slructufu,1 issues, Senior staff
members represented the Council at the semiannual short-term EconomIc Projections meetings at
the OBCl) in Paris and at the annual Asia-Pacific Economic Experts Meetings in Sydney. The
goal of !r.ese meetings was to support the coordination of macro-economic policies to promote
ecollOlr.ic growth, The Chair and the other Members helped fonnulate Administration policies
that brought to completion two major trade agreements, the North American Free Tr:lde
Agreemer.! ond the Uruguay Round of GATf, and pfO\'ided economic analyses of the
imp:ications of those agreement;; for the U. S, economy. The Council also participated in
tor:nu:Clting 0thcr Administration policies in the international arC:1<1, including such important
i:liti:uivc:l as the National Export Strategy, and the ongoing eV<lIUUlion of the economic
relationship oetwecn the United Swtes and the People's Rcpt.:blk of China.
Dr, Tyson ,md Dc Blinder were deeply involved in the negotiations of the United StulCS~
J;;p.m Fram.,;work for a New, &:onumi"C Partnership, w1th Dr, Blinder making two tript; to Japan
:1$ part of the nego!i'ltions, The Council also engaged in discussions with Japan's Economic
Planning Agency on the CUtTen! account imbnlances and other macroeconomic issues. The
Coune:! was involved thrOi,lghout the year in Adminisu-,:nion polkics for ;'H.1vancing economic
n.:funn in the fonner Soviet Union. Dr, Stiglitz traveled to Russia and Ukraine and eswblishcd
Lfl uffidnl relationship with :hc Russian Guvercmcm Working Center for Economic Reform.
The Council provided the President with rcgulur bticfings on intemation.i1 developments
and was particularly active ill the preparation..; for the Asia-Pacific Economic Cooperation
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6
(APEC) Mi:1isteFiaJ mcetmg and (he first-ever APEC lemlcrs' meeting hosted by the P;esiut!nt in
Scattle.
Dr. 'S!lglilz played an important role in the development of two Executive On:icrs - one
on reglJatory planning :md review and another on the' Nation's infrastn.:cturc.
Each order
directs executive branch llgen;:;ies to rely upor. cost-bene:!1 analysis when identifying appropril\tc
regullllory approaches and '.vhcn determining which in:rastrucl'..1!'C projec!s should be undertaken.
Or. Stiglitz also served as co-chair of a commi!tee of the Administration's Regulatory Working
Group studying cost-benefit analysIs methodology ,md he purticiputcd in u number of working
groups 00 financial markets and economic developmenc OJ', Tyson and Dr. Stiglitz worked
closely with the Vice President and other Administration officials in developing legislative
proposals for teJecommcni-cmions regulation. In addition, Dr. Tyson and the otber ylembcrs
were involved in analyzing various proposals for bank regulatory agency consolidation,
The Chair was a member of the Health Care Task Force headed by the First Lady and the
Council was involved with the health care reform elTort. especially in analyzing the economic
effects of reform opt~ons. The. Council also helped develop the tax, empowerment zone and
enterpr!st) communities' provision of the 1993 Omnibus Budget Reconciliation Act (OBRA),
Chll.irTyson was a member of the President's Community EnteJ1>rise Board. In addition, the
Council participated in the development of the Adminislralion's work force secudty and welfare
reform inili;'\tives and in the design of the Administration's defense reinvestmem initiative, Dr.
Tyson was appointed It member of the President'S Kational Science and Technology Council and
wm; appointed the Administration's rcprcscnl:.lti ve of the Competitiveness Policy CounciL Df,
Tyson and Dr. Stiglitz both ser\'ed on the Administration's Welfare Reform Task Force,
.
Dr. Stiglitz was particularly active in the Administration's environmental policymaking
efforts. He chaired the Subcommittee on Economics Research On Natur~!l Resources and
EnvironmeT!t, created 10 idemify key research areas in economics common to mnny
environmental quality and n~l1uml resouree management issues. He \VaS l.Ilso m::tivcly involved ill
developing the Administration's propos:.lls for Superfund !"{!iJuthonzatton. Clc.1n Water {\ct
reamhori:wlion. and the President's Clima.te Ch:.lnge Action Plan.
During 1994, the Council continued to prepare for the President, the Vice President, and
the Whitt: HOllse senior stuff:.l comprehensive series: of memoranda monitoring key economic
indicators and unalyzing current macroeconomic events. The Council also prepared special
analyses of economic policy issues and hriefing papers on extrJ.ordinllry economic events, such
as Califomia 'ii. Northridge earthquake disaster in January and the Mexican financial situation
later in the year. Council senior economists also prepared in-depth studies of potential output,
structural budget deficits. and <I regular monitor of inflationary trends,
The Counci: played a leading rok: in discussions of macroeconomic policy issues with
officials from the Depanrr.ent of the Treasury, the Office of M:lliagemcnt und Budgct, and oiher
mcmbers of the PresiJem's economic policy tcam, and was a key participant in the formulmion
�7
of the Administration's economic policies th:,o"Jgh V,{r:Ous Cabine: und subMCabinet working
groups, As par! of this effort, :he COl:nci! provided an :;t;onomic assessment of variolls policy
initiatives that were under discussion 1:1 the COilgress, including the proposed bu\nnced budget
~:orir.g of the budget and welfare reform. The Council
also c.lrcfully monilo:'cc the response of the iruerest sen5iti ve sectors of the economy to the
selie:;: of munetary tightening steps taken by [he FederaJ Reserve beginning in February,
amendment to the Constitution, dynamic
M
Internutio:lJI eccnomic issues occupied much of the efforts of the CQuncil ic 1994. DL
Tyson a:ld the o~her Members helped [annulate Administration policies that brought the
Uruguay Round negoTi:.HJl)nS of the General Agreement on Tariffs and Trude to com;;k:tion u:ld
subseq~len: Congressional approval. The Council also provided analyses of the implicutions of
tbe Urug'..wy Round agreements and the North Amelican Free Trade Agl'eemem for the U. S.
Economy.
The Council W~tS IntenselY involved:n the prepara:o:-y wor~ for lhc Administration's
major regiollul ini'riutives:.It [he Novembe-r Asia-Pacific Economic Cooperation (APEC) meeung
ltl Bogor. InuoneslU and the Decerr,ber St::Tlr:lit of the Americas in Miami, Dr. ryspn was
aetl vel y [nvol veo in th;.;: ncgo.iatior.s l:cnde;r :he U.S.-Japan Ftamework for a New Et.:onomic
P:Il·tner:;,hip and in the ongoing exa:nbatior. of U, S. relations with Chinn and its p!ace in ~he
world trading system,
The Cour,ei: ilctively pa!1:cipated .in the Organization for Econor:1ic Cowoperation <lnd
Development (OECD). The Councii ~ed the U. S. Delegation to the OBeD's semiannual
Economh: Policy Committee meetings.:.md the CEA Chair heads the Committee, Tt:e Co:mcil
was also part of the delegation to the OECD Minister:u) meetings, which are he}d once :.t yeur.
80th of thc:,e meetings arc heJd in Paris, France. The Coune!; aCl1vely participated in the
prcI'.tfuH0ns for the economlt.: summi{ of the Group of Seven (0-7) natioils io Naples
Dr. Tyson served on the Comr::lunj:y Em?owerment Board, the committee responsible for
implementation of the empowerment zone :.Ind cnterpr.sc communi:y provisions of the Omnibus
BUdget ReconciliatlOn Act of 1993.
Dr. Tysor. wus l.l :nerr.ber of ;;he Administration's Health Cure Task Force, with partlcuh:r
. rcsponsibihty for assessing the likely economic effects of vuriolls reform options.
Dc Stiglitz chaired the National Science and Technology (NSTC),Subcomm!ltee 0:1,
Social ~:1d Economic Sciences Research l,muer the NSTC Committee on Enviro:1ment l.lod
Nutural Resources, He was an m:tive participant in the Inlc1'governmt:::!'ltal P;tnel on Clin;<I[c
Change. He also partic.:ip(lted in un intcfi.lgcncy working group formed to assess :he condi~jon of
the o:! and gas industry.
Dr. Tyson and Dr. Stiglitz also played ro~cs in the Administration's ~ejnventmg
government efforts, particul<lr~ y with rcspe-cr to t~e Depa:r.ments of Energy, Transportation, and
[lollslng and Urban Development. Dr. Stiglitz conlicueu as co-chair of the SUb-group on beneflt
cost antilysjs of the Administration';) Regu!:Jtory Workwg Group and co~chaired the working
groL,p on reviewing regulaton of fir:;,md:ll sc:-viccs. Dr. Tyson une 01'. Stiglitz were uclivc in
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8
the Administration's efforts to formulate poli;:;y in telecommunications; in June, Dr. Stiglitz
supervised lhe preparation of a Council White Paper, titled "Economic Benefits o/the
Atimiltistrarion's Legisialive Proposals for Telecomrmmicmiom;, "
The Council engaged in
it
number of efforts aimed at improving the Nation's agriculturu!
and resource management policies. With the support of the Vice President '$ office, the Council
and the Office of Science and Technology Policy initiated an interagency working group on
biocncrgy. This work included the evalul.ttion of the prospccti ve economic viability of bioenergy
in future decades and strategies for research, devclopmen:, and demonstration. The Council,
primwily through Dc Tyson and Dr. Stiglitz. has been a key participant in Administration
deliberations on reauthorization of the farm bill.
In [995, the CQuncil spent a substrmtiul ~lmQunl of lime on budget and tax issues. The
Council participated i:! the prepurJlion of the President's bnlance<lbudget propos:.!!. The'
Council also participated extensively in meetings on a range of budget issues, including
Mcdicmc and Medicaid, discretionary spending ptiolities, the AdministrOlion'$ tax proposals ;'Jnd
the cltm;nalion of corporate subsidies and loopholes, In addition, the Council participated in
consultations with the Congressional Budget Office (CBO) on the ecuoomic assumptions that
were deyelopcd for the 7~year balanced budget phin.
The Council prepared, with tbe Department of Utbar, a report titled" Educating America:
All InveSTment for Our FWllre," which presented the overwhelming evidence on the benefici.d
imp:lc[ of education on m:r workers anG on our economy. The CouncIl also prepared a report
titled ··SlIpporriu,i{ Research and DevelopmeullO promote Economic Growth: TIle Federal
Government's Hole." which describes the Fedt:ral role in research and development (R&D) and
the llnportanec of R&D invesa:lents to economic growth,
The Coc.nciJ was ;.lctive in the Nutional Economic Coutl:;;il/NaJionaJ Security Council
international economic polley process, providing both technic;.:1 and analytical support and pulit:y
gllid<.tncc. The Cuuncil's roil; i;icluded policy development und planning for the Ow7 Economic
Summit in Halifax, the APEC leaders meeting in 05<1l\a, the Denvcr Ministeliul for the
Hemispheric Initiative and the L'.S.-EU Summit. The Councii ulso purticiputcd at tbe policy and
analyticallt:vel in preparation for tr<lde negotiations, including those with Japan on autos and
auto P~\rts, and with China on market access and intellectual property,
The Council focused on the impact of intcmational trade and financial developments on
overnll U. S. economic performance and on U. S. financial marketS. The Council has used its
e:"pertise on developments in other countries to identify lessons, succcsses as well as failures, to
be glc~mcd f!'Om policy initiatives undertaken elsewhere. The Weekly Economic Briefing
rcguhtrly included anicles on international events nnd issues.
The Council WLlS an active participant in the Administration's Re-inventing Government"
effort \'.'111<:)] has mudc government ~gencies more efficient ~tnJ rr.ure performa:Jce onented and
has xv:~cd and cllminatcd thousands of pages of regulations.
�9
The Coun:":l! \vas involved in efforts (0 !mp!cment comprehensive and procompetitive
reforrr: of Lelccommunic;}tlons policy. These efforts are reflected in the sweeping new
te!ecumr:wnicmions legislatiun passed by the Congress in early J 996. The Council ulso ph!yed
<.If: important role in ongoing efforts to reStructure INTELSAT, an intcrr.ational satelEte
cO:1sortium, to promote more competition In the market fo~ satelli:e communications services
while preserving universal access to such services.
The Co~mcll was active in 'v~lrious issue:) affecting natural resources and the environment.
The Coune:! uss;;:;ted tr.e Vice President in developing a program for reinventing environmental
regLlatlo;)" As pall of :ha;. effort the Cotlncil helped to develop optior:s for expanding the use of
m<lrkct~bustd policies for air pollutton controL The Counc:1 was involved iii addressing
adminislr:ltive and legislative ch~mgc$:o the Kalior.'s prog:-ams for managing hazardous wastes
and cleamng up contaminated sites. The Coun"cil ,llso participated in ongoing assessments of
policies for addressing cli:na[c chu:1ge. Thc Coundl was activcly involved in the preparatiQ!1 of'
the Adrnir.lstration·5 posi:ions on reacthonzmion of the Farm Bill' and Dr. Martin Baily chaired
<If: lOterager,cy g;oup responSible for developing options to fund land acquisition a:)d re$~oration
pro:c\:tS i:l the Everglade$.
Dr. Stiglitz and Dr. Mur.oeU played key t"9les in assessir.g tbe implicjtlons of welfare
reform policy, inclLlding the consequences of block grunts, They also participated in the
Administra;ion' s effo~s to aO[I(:ipatc tr.t: impact 0; wc.Jfare reform 00 child poverty rates" In
:ldJitlon, 0;", MunneL participated i:l working groups on urbun policy und initiatives for children.
The Council cor.ti:l:.lcd to take part :n c.::icL:ssltlns I.l.bout the President'S balanced budget
phm.
The Council, together with the Department of Labor, prepared a report titled Hioh
Creation and Employment Opportullitie,,'; The United States Labor Market, 1993-1996," which
:Ina! yzcd thi) American economy's robust employment growth, the nat"Jre of the jobs being
cre,llt:d, ~lnd the incidence of job displacement, This :-epart conckdcd that over (WO-ifllfds (68
percent) of the net job growth j;) full-time employment between February 1994 and February
1996 OCCUlTed in inCustfy/occ'Jp<.:.[iuj categones thut paid above·median wages, The Council
uls-o prepared ,; b:.t;;kgrot.;.nd repOlt dtled "PromoLng Economic Growth," which dIscussed the
challenge 0" ;ncre~l::iing the underlying produ(;[ivi!y growth rate of the U. S. economy. '
The Council was an active participant in the imer:1<lttonal economic policymaking
process through the National Economic Council and the I\';.ttional Security Cot,;ncil, providing
both !e..:ho:cal and aralytic suppOrt and polk:y gUidance. The CounCIl engaged in interagency
Jis;.:ussions (kati:lg wit.h sud: :opics as U, S. Trude remedy laws (antidumping, countervailing
dt!tH!S, safegua:"ds, and Section 301 actions) the U, S. bai:.lm.:e of payments; cross-border
ir vest:nent: mtcl"!lationu! aspects of telecommunications and in.formation technology; inlegwti:1g
Russia, China ur.d uther newly market-oriented economics i:1lO the \vorid economic order, aOG
�,
"
10
the agendas of multilateral und regiomll fora such as the World J:rade Organizmion, the Asia
P::;cific Eco:\omk Cooperation forum, and the North American Free Trade AgreeJr.cnt.
Dr. Sllglllz led u U. S. dcleg,Hion to the Inforrnution Society and DeveJopmcrH (ISAD)
Conference in SOlllh Africa. The ISAD Conference, which followed the 1995 G~7 Ministerial
Conference on the {nformation Society held in Brussels, was designed to extend acceptance of
the Glob,\! lnformmion Infrastructure principles, first articulated by the Vice Pes-idem in 1994 to
the developing world, Dr. Stigilitz also led a U. S. delegation to China, where he met with top
Chinese omci~lls to initiate u dialogue on economic issues between the COLincil and China's State
Planning Commission,
The Council "was involved in efforts W implement the 1996 telecommunications reform
bill. The Council worked with the Vice President, the NutionuJ Economic Council and the
Departments of Justice and Commerce to develop Administrat:on policies regarding
interconnection of telephone I.:ornpetitors. Dr. TlmOihy 1, Brenmm. the senior economists on
Regulation, Inuustnal Organizutior,: ar.d Antitrust. participated .in economIsts' forum at the
Feuerul Cmnmunicutions Commission to cxmr.:ne various aspects of ullowing local telephone
companim; lO provide !ong~disttince serVice, The Council also,promotcd pUl1icipation tn
spectrum au.;tions held by the Feder:;.l Commun;cat~cns Commission and played an important
role in ong<Jlng efforls to n:::st::lIctnre LKTELSAT rmd Inn:llrsllt (the intC!1111tional satellite
consortia),
The Coundl pnnicipaled in the,ongoing nssessment of global clinwte chunge policies,
The Council was also <lctt ve in d:scussions on the Superfund program and other issues reluting to
the man<lgemcn! of hazardous wastes, The Council helped assess the reaulhorization of the
Clea;) Water Act and the Snfe Drinktng Water Act and evaluated the drafts of the En,{ironmental
Prmection Age:lcy's Mecury und Utility repons required by the Clean Air Act Amendments of
1994, '
The Council played an tmportant role in agricultural policy reform, most notably the
Administration's continuing efforts to implement the 1996 Farm Aet. The Council also advised
00 the opcfation of agricultural trade programs, including the sugar program and v<')fious f ~nn
export subsidy programs,
VII
1'197
The Council continued to takc part in discussions about the President's
bal~nced
budget
plan. The Councit also ptlrticipaled In meetings on a runge of budget issues inc!t,lding Medici.lrC
dis(,:lctionury spending priotities, and the Adminis:ndon's tax proposals: The Council
purticipa:ed in discussions regarding proposu!s to 3trcngt:'ler. the Social Sccutity sY,stem, and in
an interagency ct'furt to t.lcyelcp a 'pa::kuge of proposed reforms to the pri vate pension system to
promotc higher rules of nation..!1 savings ~:1d grl;'mtcr retiremcnt security.
:1:fo(:11,
The Council participated Ii) the Working Group on Fir.unchl! Markets, and intcnlgcn~y
group that :110mlOrs developments rela~ed to linanda! markets and the banking sector,
"
�11
The Coune!! continued 10 be an active particIpant Iii the internmional economic
policymuking process through the NEe and the National Security CounciL The Council helped
assess the economic impact of intematlonal sanctio:1s against foreign nations, (!od the efficacy of
relaxing restrictions in the U,S .•Japan civil aviation market The Council took an active role on a
range of other international economic issues, including evaluating and explaining the case for
trade liberalization, the Administration's policy approach to Asia's financial turmoil. U. S. tlJde
remedy laws (.mtidumping, countervailing duties, safeguards, and Section 301 actions) and the
agendas: of multilateral and regioo:ll forums such as the World Trade Organizmion. the Asia
Pacific Economic Cooperation forum, and the proposed Free Trade Area of the Americus.
The Council played a significant role in preparing both the Administration's 1997 Study
on fhe Operation and EJfects oflile North American Free Trade Agreement and the t997 APEC
Economic Outlook.
The Council was actively involved in the PreSident's l~itialive on Race and coordinated
a document t'hut p~csemed impo'rtum indicalor:; of social and economIc well being by race and
cthnlcity for usc by:.l natio'!al audience i'!cluding ed:JCutors and policymukers.
b Muy, the COl.:m.:il issued a report titled Expiaining the Decline in WelJare Receipt,
1993lo 19Y6.
The COlincll was Involved if! While House conferences on early childhood development
and childcare. In conjunction with the early childhood development conference, the CounciJ
released tl v!hhc paper tilled The FirSi Three Years: investments Thlll Pay.
As'I follow-up to the \Vhitc House child care conference, the Council Issued a report
tilled Tf!(~ Economics of ChildCare.
[n (he lu'cas of rcgul(Ition and competition policy, (he Council helped develop important
Administration initiatives to improve the performance of markets, both domestically and
internationally. On the domestic fronllhe CounciJ took part in interagency efforts to increase
competition in electric power market in a manner consistent with important envIronmental and
soci.d Objectives. The Council contributed to the Administration's analysis of whether Hod how
much 10 reform product liability law, and to discussions of the Fedeml Communlcatiun.:)
Commission's methods for pricing telecommunications services, The Council ulso worked with
t:-tc Federal Tnlde Commission, the Department of Justice, and the Department of the Treasury to
consider ql:cstiuns raised by the proposed industry-wide tobacco settlement,
The COl:flcil took P:'U1 in the imefagen~y evaltwtion of Nutiomd Ambient Air QU'1lity
Standards fl)1' ozone and particulate m"t:er ur:der t:'1e Clean Air Act and the implementation plans
(or th'c revi:,cd $tundtlfds. The Councii WL\S ~lctively involved in the development und amdys.i~ of
the Adminis:rutiun's glob«1 climate change policy.
.
�,
"
12 '
VIlL
1998:
The Council participoted in the Working Group on Financial Murkets, an intemgency
group thut monitors developments related to financial markets and the bunking sector, The
group included representatives from the Treasury, the Feder~! Reserve, the National Economic
Council, and various regulatory agencies.
The Council took an active role in developing policies to respond to financial turmoil tr.
Asia, Russia. anc Latin America, induding, for example. theAsian Growth and Recovery
lmt::.itivc, d,,;signed to uccclcmte the restructuring of bank and corporate debt in some COll:!ines
<IITceted by the Asiun crisis. The Council also monitored closely, the effects 0;' the Asian cnsis
0:1 U. S, lradc. Ir. addition, the Council u(.;tively participl.ltcdll1 the development of proposals to
ref{)rm the international linancial architecture.
The Counci I was involved in a range of other intematio:1al economic Issues, including
evaiu<1ting lind explaining the case for trade llbcmllz;lclon, U. S. (fade remedy laws (antidumping,
countl.!fvaibng duties, safeguards, UI!d Section 301 actions), $"!n<.:tions policy, and the agendas of
multilulcral and regional forums such as the World Truue Organization und the Asia-Pacific"
Economic Cooperation forum, Dr. Yellen testified before the Senate Pinance Committee on the
canses and t:onscquences of tbe U. S. Trade deficit.
The Council continued its annna! meetings witb the Economic Planning Agency of Japan
und the State Development and Planning Commission of China, the Council's counterpurts jn
those countries and began to meet with Fnmce's new Council of Econom:c Analysis. In Mayof
1998, Dr. Yellen led a delegation of U. S. economic officiais, including representatives of the
Dcpnrtmem of Commerce :md Treasury aod the Bonrd of Governors of the Fedenl Reserve
Syswm, to China to continue discussions about Chioa's economy nod ecooomic rcf0rms. Dr.
YeUen t:lso participated in the President's trip to China i:1 June and in November, she traveled to
Japao, as pa!1 of the President's officIal visit, to discuss Japu!1' s ecor:omy and e..::onomic refonns.
The Council contmued ics "clive involvement in :he President's Initiative on Ra<.:c. It
coordinated the productio:1 and release of J. document presenting important inuicuton; of social
and ct.:Ol:orr:ic wei; being by r;!ce ane ethnicity :"01 L1:ie by a !1atlon~tl auuicnce including cduc..!lOrS
and jJolkyma;';'crs, The Council helped coordinate u mujorconfcrcncc on rLH..:lal [rcnds in the
Uni'\ed Stall;"';, ,.,;po!lsured by Ihe President's Initiative on Rncc and orgunizcd by the Nutional
Rc~;:carch Research Council.
.
In June 1998 the Council issued a report titled E"plaining Trends in the Gender Wage
Gap. The report concluded that nlthough the gap between women and men's wages has'
na:rowcd substantially since tbe Signing of the Equal Pay Act in 1963, a significant wage gap
remains. which cannot be explained by differences between matc and femulc workers in labor
market Cxp(:ricnce and in t.he characteristics of jobs they hold.
�13
In the ;tre~:; of regulation and competition policy, the Council helped develop ir.'lportant
Administration initiatives to improve the performance of mZlrket~, both domestically und
internationally. On the domestic front the Council provided background information for and
participaled in a fCview of merger effects and related polley issues, and participated in
interagency reviews of competition and pricing in variolls seCLOrs of the transportution murket.
The Chair testified before the Senate Judiciary Comminee on the economic impact of mergers in
the United States. The Council also panicipated in a working group on consumer privacy policy
:md in another group on natural disaster insurance. The COllndl wurked to consider questions
mu;cd by proposed tobacco legislation. Ii was also engaged in issues reluted to the privatizatlon
of the U. S. Enrichment Corporation.
The COU:lci! was active in discussions on natural resources und the environment,
i:lduding implem~r::a[io:l of the Clean Air Ac~, as it applies to automohi!e:" power plunts and
Olher pollmio{' SO",lrccs. It was involved in trye development and ;malysis uf the Admjnis:n.l~io:l'':;
gloi1nl dima:\! change policy.· After the f!egoti<;tLion or the Kyoto Prolol:ol, the CO<lnci:
responrJcd (!) rcql1c:-;ts from ~he Congress and the public to analyze the economic ill:pact of'the
climut..: change ~lg;cemenL The Council led the preparation and rclc"lsc of the Administration's
t:c0oomic ~lllalysb>. titled The Kyoto Protocol and the President's Policies !OAddress ClimtUe
Clwuge,' AdlllilliJlratioll Economic Analysis, which was releascd in July. Dr, Yellen testified on
six occasions before sever:.!l House and Senate committees regarding the Administration's
findings. The Council has been active in developing and pror!"lOting plans for the international
trading of emissions permits and other market mechanisms to :.Ichieve the targets ofihe Kyoto
Protocol most efficiently, To advance these plans, Members nnd stuff traveled to und consulted
with offici:.!ls from Argentina, China. France. and [he RepubU<.: of Korea.
The Council took an ac,ive role in developing policies to respond to financiallUnTIoil in
Latin Americ~1 and elsewhere, continuing the role it has taken following the 'series of emergi:1g
market t'ini.lJlc:ai crises that began in 1997. The Council :llso monitored closely the effects of the
Asian crisis or, V. S. trade and actively
international financial .:rchitecture.
pa~ticipated
in developing propos!t1s to reform the
The Council played an important ~oJe in evaluating and cX?!~linjng the CaSt: for trade
IibcraEz'll:on and U S participation in the multllatcra: trading system, Its :nvolvcmcnt,includcd
wrilinf.; a white paper on America's Interest in liIt 'rVorid Tradt: OrgaJli::.miofl. The Council was
..tls{) involved in ..I r:mgc of other Interr;utiona! eC0.10mlC issues, including U. S, trade remedy
laws (antiomnmping, countervailing ciu:les: si.:fcgcurds, and Section 30 t ,\etion::;) and sanctions
policy, DL L,t.\wrencc testified before the Trade Defjci~ Review Commission ofthc: Semite on tbe
causes ami consequences of the U. S. trade deficit
Council mcmbers regularly met wlth reprcsentatives of the Council's counterpart
agencies in foreign countries, as well as with foreign trade ministers, other government officials
And members of the private sector. The Council often represcnls the Uniled Stutes at
intenHltiunal meetings and forums, such as meetings of the Economic Committc'c of the Asia
Pacific,
�14
The Council continued to be u lending participant in the Organizmion for Economic
COOpcr:ltlon Hnd Deve!opment (OEeD), the principal forum for economic cooperation among
the high-income ir.d1.lstry countries. The CmlOcii heads the U. S. delegation to the semittnnual
meetings of Ihe OECD's EconomJc Policy Committee. Dr. Lawrence pur~icipated in the
OECD's Workiiig Party 3 on t1ia\;roc(,:onomic policy and coordinatiorL Char:es F. Stone, Chief
Economi;;;: a: the Council, participated in the OEeD's Working Party 1 meeting On stru:::uml
issues ur.u attended :he OEeD's workshop "Making Work Pay". Dr. Luw!'C:1ce also participated
in a meetmg of s~lburbunite offici.tls from ~he United States and Japan and was a mer.1ccr of the
Join! Economi:: Development Group mceting with (h¢ israeli government.
The Council was actively involved in reviewing and an.llyzing progress in the
tclecommullic.ttions industry and other growir.g sectors of the digital economy, The Council was
active in ongoing interagency discussions involving the digilUl economy and (ook a le~ding role
in facitil:ning work on the topic, Work included reviewing and improving datu collection
activities 10 better assess the growth of electronic commerce; participation in the new'OECD
Growth Project initiated at the May 2000 meeting of the OECD Councilut the :vtinisteriullevel;
and economic analysis of p9licy~related costs and burners to electronic commerce.
The CouncH also participated <Ictively in interagency discussions 0:1 regulation and
compcUion. policy. On the Domestic front, the Council waS :nvo!ved'in diSCU$slor.s abOl.:t
merger policy. rai: policy regun;!\ng ilHcrconneciions, and the performance of dgricaltural
markeLs. D~scussio:ls :egarding regulatory refmm in the broadcust indust:'y and in th;.; air traffic
Gonlro! system was u:so ongoing as was the monituring of issues related to the pri ~'il.tiziltion of
the U. S. Enrichment Corporation. The Council was <I}so actively Involved in several issccs
relnting ~o internarional regularior, and compc:ition, including the effects of gray market :mports,
and hilS undertaken interagency discllssions rcg'Hding lhe role of competition policy i:1 thc World
Trade Organiz~tion.
TIle Council was active during 1999 in a range of policy discussions on natural resources
und the environment, including implementation of the Clean Air Act as it applies 10 automobiles.
petroleum refineries, power plants, and other pollution sources. Council Members and s,taff
ptlnicipmed in severn! Adminisrration efrortil iO assess od supply issues, induding the effects of
oil in~ports on the U. S. economy and p!:..mning for pmenli<.ll Y2K oil supply disntptions. The
CO'Jodl hur also contributed to Administration initiatives on r.tltional forest m<l:lagef::lent
The Council conti:wes its involvement in the analysis of the
Admin:3t[;]t~or:s
global
climi.l;c Ch<.IOg:; po!:cy, and Dr. Yellen testified on two occasions before Senate Hr,J House·
corr.:nittccs 0:1 the economic implications of the Kyoto Protocol. At a high~lcvel DECD mcct:ng
on Climate change, Dr. Lawrence participated in t\ discussiorl on developing country
parricipatio:1 in the Kyoto Protocol. The Council WilS active in developing and promoting plans
for the intcmallona! tradlllg of emissions permits and other market mechanisms to achieve the
protocol's wrgcts as efficiently as possible, It also worked with a number of developing
countries to idemify opportunities for them to further -contribute to the global effort to address
climate change. To advance these plans, Members and staff consulted with officials from a
number of Ihese countries and organizations. including Argentina. Australi~l, Bali via, Can,lua,
�15
Chill:), Colombia, the European Union, Japan, Kazakhstan. Mexico, the OECD, and the Russian
Fedefa~jon.
In addition, the Council evaluated trends in U, S. carbon dioxide emissions and
panidpaicd :0 Administration efforts to promote energy erricicncy in the Federal Government.
x.
2000
The Council took part in discussions on a range of macroeconomic issLles, with particular
focus on Ihe markets for energy and capital. The Council engaged in di~cussiQns with other
agencies con..::crning pressures:o t:',;: ;narkel for oil and quantifying possible effects ;'or the U. S.
cconoiny" The Council cor:tinued ~o participate in the President's Working Group 00 FinJ.ncial
Marke:s, an ir.teragency group that monitored developments related to financial markets :::md the
banking sector. In 2000 this group emphasized continuing deregulation of c<lpital markets.
increasing international harmonization .across markets, and regulation" of new financial
instruments. The Council continued to study <lrunge of budgclund tax issues, including the
positive effects of continued fis{;ul discipline for the economy. The COllncil worked closely with
OMB, Treasury, the Federal Reserve, NEe, as well as other government agencies in provIding
'.\nalyscs to the Administration on these topics of concern .
. Over the past year, the Council releused seye~al research papers on microecQnomic policy
'SSlles.
In April 2000, the COllncil relCi.IScd n repol1 titled The: Uses of Censlts Daf(L' An
Al!u/yricCiI Neview. This. report examines the many ways that Census Bureau duta is used by the
Fl.:ucraJ government,
stute
and Joe'lt govemm¢rH, business users, community groups, individua:s,
and Hcademic researchers .
. In May 2000. the Council released a report titled Teens ami Their Parems ill fhe 2t'''
Cent/H)': An Emminatlon a/Trends in Teen Behavior and the Role ojParelllallllvolvemenl.
This report analyzes key (rends in teen behavior IHitl demonstrates that teens ure more likely to
maximize opportunities and avoid risks when parents are involved in their lives.
A{so III tv1ay 2000 the Council l'clcascd" report titled Opporwuifies ami Gender Pay.
Equity in Nt:,ll Economy OCdlpt.llionxjocasiftg OJ! v;omert itt
r1' ()cclt{JaliQlts.
The report finds
th.ll C>.l:'Cers in flve key rapidly growing IT-rc:alCc occupations provide excellent pay for both
men <lnd women., However, the report shows lhnl i:nPQrtan~ employment and pay gender gups
exist in !h~sc IT occupations, and concludes tbat policies that assist young women in lheir career
development, such as on-the-job truining a!)d mcntoring, could help close these gender gaps.
tn June 2000, the Council released u report titled Educational AUaillmem and Sltccess in
fhe New ECUlwmy: An Allalysis of Challenges for lmprovi,!g Hispanic Swdcnls" Achievement, [[
documents Ihe gaps in educational outcomes between Hispanics and non-Hispanic whites. The
study also provides evidence about the increasing importance of education 1n the economic
success of Hispanics in the new economy.
In S~;plember 2000, the Council released n rcpon titled Reaching (he Uninsured."
/l!tenwtiw: Approaches lD Expallding lIeallh Insurance Acce.ys. The rC;)Qrt evaluatcu lhe
�.
..
16
efficacy and effidency of tax deductions, tax credits il:1d government provided health care in
expanding health insJra:1ce coverage, The report found that dlre~t provision of health insurance
through public programs is the mas! efficient way of expanding health insurance to
families.
low~income
'..
The Council also released a repon titled 111e Economic Impact ofThird~Gencratiofl
Wireless Technology. This report documented the expected be'nefits on a new generation of
wireless technologies that provided high-speed mobile ;\cceSS to the Internet and other
communications networks, and explained why adcqumc spectrJm is needed (0 provide these
. serv:ces efficiently. The report was released in conjuncthm with u. P:eside:H;a) Memorandum
directing Federal agencies to work together with the print>.: scctor to Identify suitable spectrum
for these new services,
'
In December 2000. the Council release u report titled Pftltwllliropy in. Ihe American
Ecu/lomy. Till:; report was requested by the President as a follow-up to the 1999 Whirf! House
Conference on Philanthropy, It discusses trends in giving oycr the past several decades and
highlights the economic explanations behind the increase in donations, It finds that increases in
both tne income and weallh of Americans played significant roles in lhe record hig:"llevel of
philunthropy recorded in 1999, The report concludes with u disclission of opponunities to
increase giving further in coming years.
The Counei! also participated in Administration working gl'OUpS on several issues. The
Council provide-d analytical assistance to the N;:llionul Economic Council (NEe) for <l report on
the rnir.imum ,."age. The Council purticipated in the review of the Occupational Safety and
Health Administration" proposed workplace ergonomic l'Oles. The COllncil ulso worked with the
Department of He<l!th <l:1d Human Services and OMB in p{cpnring un economic Impact Hnj!ysis
of the potential nccd for setting ShtnC1.lrJs covering the electronic transmission of many
administrative tlnd financial trc:.ns-actiO:1S between i:)surcrs, providers and other health care
institutions. The Council's ccor:om!sts pjl1icipated in a series of l:1lCr-agency working gl'OUpS
focusing on the Adminis.tration's New Markers ir:it:tttivcs to creme upponunity in impoverished
I;ommunilies and thl,;. President's Interugency Task Force un Nonprofits and Govel'OmenL
Additiol1\l!l y, the Council participated in a workir,g group, organiZed by the Offi..:c of the Vice
President, to coordinate Fedcral Empowerment Zone and Enterprise Communities uctivlties. In
June 2QOO, the Community Etnpowermc;n Bourd held its annu<ll conference on Commanity
EmpO\vr..:rmenl, and Council member Kut~ry!) Shaw attended and spoke in a breakout session.
The Council also participated actively in intewgency discllssions on regulation,
pnvutizmion. und competition policy. Domestically the Council was involved in discussions
related ro mergers, telecommunications policy, ail' truffle control, airline reservarlon systems, and
the effects of government ownership on competition. The Council also contimlcd to particip-ate in
the Digit:d Working Group, to disclIss sueh issues as busincss~to~husine$s electronic commerce
and the role of venture capital in fostering innavution.
The Council contioued its annliul meetings with the Economic Planning Agency of Japan
:md the SWlc Dcvek.pmcnt and Pla:1ning Cummission '01' China, the COllrH.:il's countt:rp<tl'ts in
�17
those cQuntlies. The Council also met with Members of the State'Council Office for
Restructuring the Economic System (SCORES) Delegation to discuss how infonnation flowed in
a market economy. The Chairman of the Council continued to chair the Economic Policy
Commillcc meetings of the OEep and continued to be ~I pan of the U. S. Delegation to the
OECD's Ministerial meetings. Dr. Kathryn Shaw participated in the Working Puny 1 meetings
of the OECl) while Dr. Robert Lawrence participated in the Working Party 3 Meetings us well
as the Economic Development Review Committee (EDRC). The Chairman participated in a
brainstorming session hosted by the Pl;me Minister's office on the New Economy in,the United
Kingdom and continued his regular,Mhigh. level contacts with senior economic policy makers in
.
tile U.K. Dr. Baily being the highesHanking British-born member of the Administration and
the only Cab met Member who was a naturalized 'immigrant from Britain was a natural to
accompany the President on his trip to the United Kingdom and Ireland to advise the President
on cconomi.c issues and set up meetings with Irish and UK economic policymakers. This was
one of the Chairman's final acts in this Administration, the other being the publication of the
200 I Ecoliomic'Report of the Presidelll.
XI.
Legislative Relations
The Council maintained a working relationship with the Legislative Branch and the
Chair/Chairman testified before the various Senate and House Committees or Subcommittees
whenever they were requested to do so. The Council also responded to numerous requests for
documents 011 the Administration's analysis of thc cconomIC effects of global climate chunge.
The Council made every effort to respond as quickly ;,md clTiciently as possible. The Chairman,
Dr. Janet L. Yellen was asked and did testify thirteen (13) times before various House and Senate
Committees on this subject. Copies of the testimony are listed as Appendix B. It was viI1uaJly
~he same testimony before each committee.
XII.
Extcrnul Relutions
In 1993 the Council worked to improve the public's understanding of economic issues
and the quality of economic infonnation through regular briefings with the White House
financial and general press corps, periodic discussions with distinguished outside economists.
Ami meetings with leading business executives. The Chair and the other Members made
numerous pn.:sentations to outside organizations to explain the Admlnistration's econumic
str~ltegy and policIes.
In 1994, the Council established the President's Economic Policy Advisory Board,
comprised of distinguished academic and other private sector economists. Members of the
Board an: recognized scholars in the fields of international trade, macroeconomics,
microeconomics, labor markets, and financial markets. The Board met approximately every 6
months to advise the Council and other highMranking members of the Administration's economic
policy team on cun'ent policy issues, The Members of the Board were: Henry Aaron, The
BrOOkings Institution; Carl iss Baldwin, Harvard Business School; Rudiger Dornbusch,
Massachusetts Institute of Technology; Jeffrey Frankel, Institute for, International Economics;
�18
Paul Joskow, Massachusetts Institute of Technology; Charles Schultze, The Brookings
Institution and Robert M. Slow, Massachusetts hlstitute of Technology.
In 1999, the Council met with policy analysts of the AFL-CIO to share their
understanding of the state of 'the manufacturing sector and its importance to the economy. There
were also discussions on why manufacturing was impDrtant to the economy and policies to aid
the manufacturing sector.
Selected speeches by Chairs, Laura D'Andrea Tyson, Joseph E, Stiglitz, Janet L Yellen
and Martin N. Baily are listed in Appendix C.
Appendix A.
Appendix B
Appendix C
�Appendix A
• June 14, 1994 - Economic Benefits of the Administration's Lcgislati ve Proposals for
Telecommunications.
• October 1995 - Supporting Research and Development to Promote Economic Growth: The
Federal Government's Role.
• November 9,1995 - U. S. Trade Policy with Japan: Assessing the Record
• Septemher, 1995 - Educating America: An Investment for
OUf
Future
• October 1995 - To "Save" One Dollar. ..
• April 10, 1996 - U. S. Trade Policy with Japan: Assessing the 'Record
• April 23, 1996 - Job Creation and Employment Opportunities: The United States Labor
Markel, 1993 - 1996
• July 31, 1996 - Promoting Economic Growth: Background Briefing Paper
• September 1996 - The NAIRU as u Policy Target: Refinements, Problems and Challenges
• April Ii, 1997 - The First Three Years: Investments that Pay
• May 9,1997 - ExpiainingThe Decline in Welfare Receipt, 1993-1996.
• December 1997 - The Economics of Child Care
• Junc 1998 - Explaining Trends in the Gender Wagc Gap
• The Kyoto Protocol and the President's Policies to Address Climate Change: Administration
Economic Analysis
• September 1998 -- Changing Amelicu: Indicators of Social and Economic well being by
Race and Hispanic Oligin.
• December 1998 - Good News for Low Income Families: Expansion in the Earned Incom'e
Tax Credit and the Minimum Wage
• January 8, 1999 - Latest Jobs Report Indicates That the Current Expansion Has Achieved
Record Length
�• Februar:(8, 1999 - Progress Report: Growth and Corr:petition in U. S. Telecommunications
1993 - 19998
• May 1999 - Families and the Libor Market; 1969,1999: Analyzing the "Time Crunch"
• August], 1999 - The Effects: or-Welfare P?licy and the Economic Expansion on Welfare
CaseJoads: An Update .
• November 16, 1999 ··Amcnca's Interest in the World Trude Org.mization: Afl Economic
, Assessment
• December 3, 1999 -20 Million Jobs: January 1993-November 1999
• April 1,2000 - The Uses of Censlls DJta: An Ar:alytical Review
• :\flay 11,2000 - Opportunities und Gende!' Pay EqL;ity in New Economy Ol:cup,ltions
• May 20()O - Tcens <lnd Their Pnrcnts in [he 21$1 Century: An Examination of Trends in Teen
Behavior and the Ro:c or Parental Involvement.
• June 15,2000 - Educational Attainment and Success in the New Economy; An AntIlysis o:n
Challenges for Improvi:1g His-panic Studems' Achievement
• September 200U -
R~achjng
The Uilinsurcd: Alternative Approaches to Expunding Health
Insurance. Access
• October 2000 - The Economic Impact of Third-Generation Wireless Technology
• November 25. 2000 - Philanthropy in the American Economy
�..
Appendix B
Laura D'Andrca!ryson tcstitlcd before the following committees:
• Fcbrua,} 22, 1993
Ecor.om.c Plan.
-~Tesofjed
before (he Joint EconoflllC Committee re the Presidect's
• March 16, 1993 ~-Testified before the-House Science: Space & Technology Committee,
Sul~ummiltee on Technology, Environment & A'vidtion re Trude Policy and Technology
Policy.
'
• May :::0, :993 -~Tcstif!ed before the Senate Labor & Human Resources Committee re Health
Care Costs and the Economy.
,
,
• Jent 21, 1993 ~~Tcstified before the Joint Economic Committee re Technology Policy and
Economic Competitiveness.
• Oc:ober 21, 19-93 ~. Te:.llified before the House Committee
Subcommittee
Of) Labor-Mun~gement
,
on Educ,;nion & Labor,
Relations.
• October 26, 1993 - Teslified before the Senate Committee on Banking, HOllsing, and Urban
Affairs re Fair Trade in Financial Services Act.
• February 10, 1994 odt:ouk.
Tcst'.f!e~
before the Senate Committee on the Budget re the ecor.orr:ic
• Fehnwry 7, 1995 -Testified before the Committee O~ the Budger, Cnited States Se;wte
Ch .. ir Janet L. Yellen testified hefore the following committees:
• July 15, 1997 ~ Testified before :hc House Corr:merce Subcommittee on
n..: ccc:nomics of global chmate change.
En~rgy
and PO\ver
• Jur.c J I, 1998 - Testified before Senate Fhmnce Comr:linee on Trude.
• June l6, 1998 - Testf!cd before the Senate Commlttee on the Judiciary on Merge;:;.
�•
•
Appendix C
Selected Speeches given hy 'C)lair Laura 0' Andrea Tyson are listed below:
• February 14, 1994 - Speech before the Center for National Policy on the release of the
Economic Report for 1994.
• May 30, 1996 - Women's Economic Summit
Selected Speeches given hy Chairman Joseph E. Stiglitz before various organizutions
• September 23, 1995 - Speech to USA-ROC Economic Council Plenary Session, Anchorage,
Alaska
.
• O<.:tobcr 8, 1995 - Speech Lo institute of International Finance rc G-7
• Fehruary 15, 1996 - Speech to Brookings Institution on Tax Reform
• February 26, 1996 - Speech to Yeshiva University
• April 26, 1996 - World Bank Speech
• May 13. 1996 - Speech at ISAD Conference, South Africa
Selected speeches given hy .Janet L.Yelien
• April 10, 1997 - National Policy Association
• April 18, 1997 - French-American Chamber of Commerce of Washington, D. C.
• r.,.·lay 19, 1997 - Center for National Policy "Squaretable" Washington, D. C.
• May 20, 1997 - Eli Segal Breakfast - Making Welfare \Mork
• Septt:mber 1 [, 1997 - Smith-Bamc), Washington Conference
• Decembcr 2, !997 - USA-ROC Economic Council Plenary Session
• January 14, 1998 --Racial und Ethnic Economic Inequality: How much Progress?
• February 10, 1998 - Center for National Policy
�.
•
••
- 2
Selected speeches given by i\Iartin N. Baily
•
September 2. 1999 - American Association for the Advuocemcnt of Science
•
February 10.2000 - Center for National Policy
•
June 28. 2000 - Speech on New Economy in Munich, Gcnnany
�EXECUTIVE OFFICE OF THE PRESIDENT
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON, O.G. 20500
.Economic Benefits' oUhe
.
,
.
.
Administration's Legislative Proposals
for Telecommurjications
June 14, 1994
"
•
�'Economic Benefits of the Administration's
Leqislat1ve Proposals for Teleco~unications
June 14. 1994
summary
The Administration's legislative proP9sals have the
potential to add in cumulative value more than '$100 billion
(in 1994 dollars) to Gross Do::nestic Product (GOP) OVer the
nE~xt decade.
Naw legisiation can add to GDP by creating a 'reguiatory
enviro~ent in which the' following trends will accelerate:
Productivity will increase thr9ugbout the economy as
new ways of working, new ways of doing business, and
'va] uab~e new services are developed.
Jobs and other resources will 'shift into the
telecommunications and information sector as regulatory
barriers are re~oved.' Tha' productivity of a new j9b in
this sector exceeds the economy-wide average. '
Increased private sector investment in 'an advanced
, te1:ecommun1,cations ·'i;nfrastruc1;.ure will create a short
term increase in aggregate demand, accelerating ~~e
rate at which the:econom.y approaches full emploYment.
.'.
The new regulatory environment will accomplish this by:
,
'
reducing uncertainty about the course of regulation
promoting, competition throughout the telecom::nunications
and information industries, .and ,
,
providing a mechanis~ for removing existing regulatory
restrictions as the development of competition makes
them unnecessary.
With the Administrationfs'leqislative proposals, the
tEdecommunications and information sector of the economy
c(mld nearly double its share of GOP by 2003_
If this occurs, emplo~ent iri the sector coUld rise
from 3.6 million workers today to more than 5 million
workers in 2003~ Most of these jobs would be shifted
from other economic sectors in a full-emp~oyment,'
economy~
�To tbe extent enactment of the Administration's legislative
proposals stimulates an acceleration' of private investment,
and if the economy remains below full employmen~,through
1996,
economy as a whole could add,a total 6f 500,000
new employment opportunities ~uring the years ~994 to.',1996.
.
the
To improve the nation's emerging National Information
Infrastructure (lUI) with technologies .that enhance existing
telephone and cable television services, the'private sector
may make capital investments over the n~ decade valued
substantially in excess of $75 billion (in 1.994 dollars) .
These investments will occur earlier with the
.
Administration's legislative proposals than without .
•
2
�Economic Benefits of the Administration's
Leqis1ative proposa1s for ~e~ecommunications'
.June 14 t
.l994
In September 1993 the Administration announced a National
Information Infrastructure. Initiative (NIl) to Ithelp unleash an
information revolution that will change forever the way people
live, work,' and interact with each other." To <;ccomplish this'
end, Vice President Al Gore has. proposed legislative and
administrative reform of telecommunications pOlicy. The
Administration's proposals are based on the following five
principles:
'
t
encouraging private investment in the NIX,
pr~moting
~
and
pro~ecting
competition I
providing open. access to the NIl for consumers and
service providers,
preserving and advancing universal service to avoid
creating a society of informatio'n "havas l1 ' and "have
.
.
nots, It and
ensuring flexibility so that the newly-adopted
regulatory framework can keep" pace with the rapid
technological and market changes that pervade the'
telecommunications and information industries.
" This ·docu.:nent illustrates the great economic 'benefits to the
nation that could be ac:Q,·ieved t~OU9h new legislation to
accomplish these. e'nds. ,.'
'
I.
The'Potential for Economic Growth
The telecommunications industry plays a:' crucial role in our
. economy.
Like the railroad'and highway infrastructures built in
earlier ,generations" our ,telecommunications infrastructure brings
peopce together and helps firms reach their ·customers and
suppliers 'quickly and cheaply •. 'As a result, oUr lives are
e.."lriched and our firms and workers are mote .pr'oductlve.
.
Even without new legislation, ·the vast' opportunities created
by advance.s in communications and information: technology will
likely t;t'ansform the economy and -the way we live and 'Work. 1
lThe analogy to the railroad and highway networks ~ay not be
helpful in understanding the effect of ~~e NII on industrial
structure. The transportation network encouraged the development
o~ large industrial firms by making it easier to obtain scale
',e6onomies. In contrast, an advanced communications network may
particularly'favcr small firms .serving narrOW market niches.
�:tnnovation in the telecommunications and information sector 'is
already occurring at a rapid rate. In the past decade, the
facsimile ma~hine bas shifted fro~ a curiosity to a commonplace,
and the cellular telephone does not lag far behind~ Television
'news is ni:JW transmitted· instantaneously from the field to the
studio by satellite. IntGrne~ use is movinq beyond government
and academic researchers to involve other government functions t
'private individuals and private sector firms as well. The nucber
and variety of cable television channels has been growing. More
and More" people work frow home or the road by computer and
,modem, away from their physical office. The power an'd
sophistication of personal computers in homes and offices, and
what can"be accomplished using them/'has grown hy leaps and
bounds.
It i.5 widely recognized. that equally important advances in
technology are on the horizon. Technical change will permit
private lndustry to make new, products and services available and
affordable. 2 We can be confident that a telecommunications and
infor=ation revolution is upon us, even th9ugh we do not yet know
. the details. Two way, interactive, broadband ,service will·,
someday be the norm, although we cannot t'!:9W know whether the'
emerqL,g broadband network will be ,formed from wires, fiber optic
lines, wireless technologies t or hybrids. o"f these alternatives.
And we can be confident that the,computing'power available to
ConsUlllel;'S of the' multimedia services :provided by the emerging
information infrastructure will" rise'"..· even thou<]h we cannot
predict whether that power will be lodged in a serv~ outside the
house or office, or in the home and office ~ough a personal
.'computer or a set top box 'connected to a t~levision~
"
,
'
"
The Administration~s legislative "proposals will accelerate
the rate at which the teleco~unications and information
revolution arriveS in three ways: by reducing uncertainty about
the course of~.reqUlationt by promoting compe~ition throughout the
telecommunications and information industri¢s, and'by.providing a
~echanism for removing eXistinq regulatory restrictions as the
development-' of competition makes. theI:I. unriecessary.. Private
industry will be encouraged'to ~nvest mor~ rap~~ly in the
nation's ·elQerging information infrastructure, ,and:'to' develop new
services ~Ore rapidly. , The legislative pro~osals also reduce th~
likelihc)od that regulati.on will distort th~" choice of technol~gy
or other investment'decisions. These effects on,private
investment, combined with the price reductions that will flow
froE ne,Y' entry and greater competition, will' acc,elerate the
.2separatelY from its legislative proposals fo~ regulatory
reform, the Administration is' funding a wide range of research
and deve·loplDent projects, many in collaboration with industry, to
i~prove the infornation infrastructure and develop improved
~pplications.
2
�development of new services, the creation of new jobs, and the
growth· of productivity for the rest of the econo~y.
The precise contours 'of the new telecommunications and
marketplace cannot be predicted because they depend
on innovations not yet developed and the' details of leqisl:i'tion
not yet e.nacted •. -BecaUSe of these uncertainties, it is
qualitatively more difficult to forecast the development of 'this
sector, and the consequences of regulatory reform leqislation fo~
economic growth, than to predict, for example, the consequences ~
for GDP ,of changes in the tax code, or the monetary base.
',
Accordingly, the estimates provided in this document are not
comparable to the economic forecasts routinely published by the,
.A~inistration.
~he estimates depict one plausible scenario for
the development of the telecommunications and info~tion sector
and the' effects of new leqislation on that'development. ,They , t
should be interpreted as illustrative of the character of ,the
likely 'economic cqnsequences'of the new legislation rather than
as a forecast of those. consequences.
~nformation
II.
Methodology and Results
·A.
Baseline Scenario
The CEA est~ates were mad~ against a baseline description
of the likely growth of revenueS in the telecommunications and "
information sector in the absence of the Administration's
:Legislative proposals •. The .baseline scenario was developed from
l:-ecent trends, and private sec:tor and government estimates.)
,
,
.
'
In making' these esti}nates( the telecommunications se~tor was
divided into th1:'ee majqr 'components: (1) tfconduit" (local and
long distance telephone; cable television; wireless servicesi'
emerging serv~ces that comoine data, voice and image
transmisSions; multimedia services such as pay per view and videc
on demand; and", communications equipment) t (2) Itcontent" ..~~
(broadcast television and radio, newspapers and. magazines', motior
pictures and home video, books and prerecoraed music) ,and (3)
ll,?omputers ll (computer hardware and software, and 'computing- and
I
....
•
"
3If sector prices fall more rapidlY than expected as a
result of competition and innovation, and if the lower prices do
no~ immediately lead to a sUbstantial increase in demand I sector
,revenues could be significantly le~'s than described in the
scenario in the near term~ Yet if sector prices are lower than
expected because of cost-savinq innovations, GOP growth would
likely be greater in the long run .
3
�,'
•
data proc~~ssing servi~es}.
In the baseline scenario, these,
sectors will experience significant growth ~n the next decade
(figure ~).
•
A similar'baseiine was created for investment in the
telecommunications services component (the "conduit U catego-ty)
(Figure 2). 'Some of this investment is needed to maintain the'
existing leve'l of service when equipment breaks or becomes
obsolete, or when population grows. The rest will make,available
the enhanced telecommunications services (e.g. switched broadband
services/'tela-medicine, and expanded electronic-commerce.) and
the new info~tion services '(e.g. real-time multimedia services
e.lectroni<:: dissemination of government information, and. "virtual [1
field trips for school children) that will be available on the
information superhighway of the future. The bulk of the
investments needed to do so will be put into place by 2003, in
the baseline scenario. j ,
"
Only a portion of the investment depicted. in Figure 2 will
be dedicated to the development of enhanced services. This,'
'portion can be estimated by subtracting the' current level of
accounting depreciation recorded by the providers-of
telecommunications se.rvice&--a measure of the real investment
level reqtlired to maintain existing services--from the projected
gross investment le.vels. Applying this ,:~ethodoloqy, _the present·
value of these ,incremental capit~l investments OVer the next '
decade is approximately $75 billion in ~994 dollars.' This is
~hese definitions exclude 'some activities that other
definitions of the teleccimmunicati'ons and intorlilation sector have
included. FOl: exa:mple# the "content" component excludes'
commercial ,'printing and greeting cards, and the IIcomputerslt
component excludes consumer electronics other ,than communic'ations
equipment.
..
,
.
5.rl.le estimates illustrated in Fi~e 2 do not account for
invest1!1ents made by firms in the "content" or Uqomputers il segme:1t
of the telecommunications and information sector, no~ investments
by firms elsewhere. in the economy that wilL obtain access .to neW-,
markets and new ways of providing their services from the
creatio~ of the NII~
These figures also do not account for human
capital investlllents in education and training; 'as workers learn
to use the NII to become more productive.
.
~his figure assumes that the trans~ission infrastructure
will be built as'a hybrid combination of fiber optic lines,
,coaxial cable, copper telephone wire, and wireless transmission.
If this portion of the new infras~ructure were instead to "be
~uift entirely of , fiber optics, replacing rather than upgrading
the~existing telecommunications network, the total cost could
ea&ily excee.d $100 billion, according to private sector
4
�,
,
,
"
"
"
Figure 1
Baseline and Legislative Scenario Revenues
Revenues (billions of dollars I "
- -'.
1,500
1,000 .
baseline
~
500~~
o
1993 '
.
.
,
,
1998
• conduit III content
CEA Estimates
2003
I2l! computer
�.
•
Figure 2
h
Telecommunicat4ons Services Sector Investment
.
.
Baseline Scenario
.
billions of dollars
60ri------~----~--------------------~----~--~
55
50 ,
45 '
..
40
35 '
,
,
30LiL'------------------~~
1993
CEA Estimates
"
.,
....
__________________
1998
~~
2003
�likely an underestimate of the total cos~ of providing advancect
services because it ignore.s,investments firIlls have already made
and it ignores those investments that the baseline sc~nario
contemplates would not be made until after 2003. 1
'
B.
Legislative Scenario
Tne effect of the legislative package can be understood as
allowing the telecommunications and information sector to. achieve
. certain revenue levels years earlier than under the baseline
scenario~.and this' is how it is modeled here.
The legislative
projecti1:lns, illustrated in Figure 1, assume that the "conduit H
and -"cont:'ent lt industries in the telecommunications and
information sector will achieve by 2003 revenue levels that they
would not reach until 2008 in the baseline, and that the
"computer" industries will achieve by 2006 revenue levels they
would not otherwise reach until 2008.,' Moreover, the projections
assume that reVenues do not begin to respond to new legislation
unt11,199S. This assumption, which may be conservative, reflects
the time that may 'be needed for firms to adjust capital spending
to the new regulatory fra!llework and fpr regulators to develop the
rules necessary to implement the' new leg~slati~n.
Similarly, the
legi~lative
package, is assumed to accelerate
estimates~
'This figure is an overes:timate, ,·however I to the extent some
investments will turn out to, have ,been sp~nt on tec~~ological
dead ends' or otherwise.:wasted~·
'The assumption that new legislation to remove regulatory
barriers and ancou'rage competition will accelerate revenue growth
in this manner ~s broadly consistent with ~~e predictions of a
recently-conduct;ed. "Delphi survey~'1 The.·respondents agrE!ed. f for
ex~ple, ~hat by.~998-2000 interactive mul~imedia services and
products wil~ have widespread consumer acceptance i~ the home*
The survey found that this transformation will occur five to '
twenty years sooner than most other projections for the growth of
the i~formation superhighway~ The respondents also agreed that
business and requlatory barriers, not technology;' are th~ most
critical problems for the deployment cif the necessary
technologies. These results appear consi~t~nt with the modeling
st:ratj~gy adopted here:
they suggest that· ne~'- legislation to
remove regulatory barriers and encourage competition will
accelerate sectoral growth and investment t relative to forecasts
based on current trends. Dwight L. Allen, Jr4f H. William
Ebeling T 3r,/ and Lawrence W~ Scotti "Perspectives on the
'" Convergence of Communications, Information, and Entertainment:
.., Speeding Toward the Interactive Multimedia Age," Deloitte &
Touc~e, ~9941 pp. 13-~4.
5
�the rate of private sector investment in the narrowly-defined
telecommunications industry. The estimates assume that 40
perce.nt of the infrastructure invest~ent made between 2001 and
2003 in the baseline case will instead be. put into place' between
1994 and 2000 with new legislation. The 40 percent figure
recognizHs the difficulty of accelerating investment that ,'.
replaces depreciated capital stock and investment that cannot be
put into place until other investments have been made.
Und'er
these assumptions, private investment will become $9 billion
greater each year than the baseline projects (except half that
amount in 1994).'
.
c.
Consequences for GDP Growth
,
'By accelerating private investment in the .inforgation'
_
infrastructure and acceleratinq the availability and development
of new services,· GOP will increase. ~he three transmission
mechanisms involved are discussed in turn. ,
1.
Multiplier Effect Of'
. ,.
of
r~creased I~vestment
Every dollar
increased dOmestic'inves~ent before the
'year the economy is proj ectad to reach_ fult employment is assumed
to increase GDP by $1.60 d.uring the year it occurs.· This
multiplier is co.nsistent with the pred:ictions of most large-scale
macroeconomic models for periods in'~hich the economy is below
full employment. In recognition of
leading position of u.s.
manufacturers in producing the ,sophisticated capital equipment
,required to build an advanced talecoIl'DIlunications infrastructure,
the'<analysis tr~ats all,such investment sp:endinq as domestic.
the
2~
Shifting Inputs' into a High Value-Added'Sector
A new jop in the telecommunications and information sector
will prtJduce greater output per labor input ,than the' average new
job in 1:he economy * Thus, when the economy 'shifts inputs, ,
espeoially workers, into this high value-added sector; national
wealth increases even at full-employment. This cannot happen
today because r.egulation restricts entry and ~therwise creates
distortions limiting sector output. Much.of that' regulation was
necessary in the ·past in order to prevent the even' worse
distortions resulting from the exercise of 'market power by a
natural m.onopolist~ ·sut as developments in'technoloqy shrink the
s90pe of potential monopoly power in telecommunications, and as
~e projections assume that new legislati'on will not begin
~o aff~ct
private investment decisions before mid-1994. This
assumption is conservative to the extent investment has already
begun to accelerate in anticipation of the legislative enactment.
6
�regulatory reforms encourage the development of competition,IO
. the economy, can shift resources into this core productive sector
and so increase social wealth. It
'
The GOP projections assume, based on the results of a ~ecent
academic study, II that labor inputs will initially produce
approximately 10 percent more·output if shifted from the average
sector 'into IIconduit,,,ll approximately 3 percent more output if
shifted into "computers," arid no additional o~tput if shifted
into "'content. 'If These estimates are conservatiVa to the extent
workers shifting to the new jobs would come disproportiqnately
from sec.tors of the economy with beloW' average value added~ The
projectio~ also assume that non-labor inputs would become more
productive if shifted into the telecommunications and information
sector to 'the same degree as workers.
I
The benefit ~erived from the additional shift of economic
activity into the telecommunications 'and information sector
(relative to the baseline case) that will result fro~ the
Administration's legislation is assumed to beqin in 199a~ As
regulatory distortions are removed ,and resources shift into this
sector, however, the sector's productivity advantage wilL,
decline. This decline is assumed to occUr at a rate that would
'end the productivity advantage of the. telecommunications and
information sector by 2008 • .
I~he Administration's legislativ~-proposals will encourage
the development of competition,' by, for example, allowing cable
fi~s to offer telephone serVice' and vice versa, .unhundl~ng local
telephone services, creating ,a level playing field for all
service providers (including 'wireless provider~), guaranteeing
all providers open access to the network on nondiscriminatory
terms, an~ ending rate regulation of firms ,lacking'market powerv
. .
..
- tlMore technically, the marginal productivity of labor and
inputs in this sector is higher. tha'n 'the economy-W'ide
average because regulation intended to protect against monopoly
abuses cannot perfectly substitute for compe~ition~ Legislation
that encourages greater, coupetition and ,the xemoval of
unnecessary regulation will allow inputs to shift" into this
sector, increasing social wealth~
oth~r
Incr-easing Worker.
Productivity with Trade and Ind.ustrial Policy
working-, paper'l
University of california, .March 11, 1992.
12Williarn T. Dickens I -"Good Jobs;-
f It
l~This figure is for the conduit component excluding
telecommunications equipment; the initial productivity gain for
~ shifting resource.s into telecOllUllunicatio"ns equipment is taken to
• be only 8.4%.
7
�:I.
Greater Economy-wide Productivity
The n~aw information infrastructure wi1.l boost the economy's
productivity." Productivity -gains arise for <it least two
reasons: geographically distant firms will be able to'behave in
more ways as though they were neighbors I and changes in the
innovation process arising from new ways of working. will increase
the likelihood of future innovations. .If the investments that '
will develop the Ntl are accelerated, so services come on line
more quickly than in the baseline case, these productivity'qains
will commence uore 'quickly than under the baseline scenario~'
The GDP estimates below assume that a productivity boost
from the. new infrastructure begins in 1998 under the
Administration's legislation~ The in~rementa~ productivity gain
is assumed to be 0.03 percent per year, commencing in 199B. This
figure is consistent with other estimates of the productivity
qa~ns from infrastructure inv~stmentsl and,excludes productivity
qa~ns already captured by. virtue of the shift of workers to high
"value-added industries .
.. The productivity rat~ is assumed to revert to the baseline
trend between 2000 and 2008. This treatment of the productivity
increase is conservative because it i~ores the possibility that
the productivity r~te increase: will instead persist~
4..
GOP
Projections'
Taking into. account all three tra~smission mechanisms, the'
new legislation is projected to,-create a s:tream. of annual GDP
inc:reases over the- next.. 'aecade with. a present value of lUore than
$100 billion.. More than $30 ~il1ion of the increases will come
from 'the multiplier effect of increased 'investment. 'Economy-wide
productivi~y increases account for more.than half. of the
remainder.
'
p.
Consequences for Employment
increase in GDP that takes place when the ~conomy is
operating below full employment will create n~w jobs. (In
contrast, nO,new jobs are available at full employment even if
An
14productivity gains of this sort are plausible. For
example, one study found a large social gain to computerization
in the finance services industry not captured by the
manufacturers of computers. The ~ownstream benefits of technical
progress in mainframe computers between ".19.58 and 1972 were
estimated as at least 1.5 to 2 times the level'of expenditures in
~his sector..
Timothy F. Bresnahan 1tMeasuring the Spillovers
lrom Technical Advance; Mainframe Comput~rs in Financial
"'Serv~c':!st" American Eeon. Revie.... , vol~ 76, 1986, pp. 742-55.
l
a
�GOP rises.) Based on the predictions of large-scate
macroeconomic models, one billion dollars of new GDP created by
putting tmused resources to work is assumed to creat~ 17,000 to
20,000 new jobs. As a result t the economy as a whole could 'add a
total of 500 , 000 new employment opportunities during the y~ars
1994 to 1.996.
.
E.
Growth arid Employment within the Teleconununi'cations and.
Information Sector
The rapid growth projected for teleco~unications and
information sector revenues will lead the sector to grow as a
fraction of GDP. Figure 3 depicts the growth of Inflation
ad.justed revenues for this sector under the baseline and
legislative 5cenarios. u In 1993, telecollU:lunications and
information revenues equaled more than 9 percent of GDP. lIS With
the. Administratio'n's legislative proposals, the sector's GOP
share could nearly double between 1993 and 2003.
In 1993, 3.6 niillion workers were ~p,loyed. in the ,
. telecommunications and information sector.' Under the baseline
,scenario, assuming that recent trends in the growth of-sector
revenues per employee (average lahor produ~iyity) continue', th,e
sector will employ more than 4.5 million workers in 2003.
Acceleration of revenue growth (and acceleration of labor
productivity growth) in th.e legislati'v~: scenario will lead the
sector to employ up 'to 5.5 lr.illion ~rJ:c:ers in 2003.
F.
Foreign Trade in ~~e.Telecommunications and Information
sector
Ne_ither, the baseline nor the. 'legislative _scenario fully
captures the potential benefit's to the telecommunications and
infortlat:ion sector, or -the U.S. economy as a Who"le~. from the
_ _,_c'-._ - ' - - _
UAlthough much of the sector's rever,'ue 'increase comes from'
the developmeRt and diffusion of new innovations, some is likely
an artifact of the' way service functions ~re classified. For
example, during the 1950s, firm expenditures on preparing
payrolls were probably not classified as part~-of ~e
telecommunications and information sector. : >Yet to' the extent the
payroll function requires the use of computer- hardware and
software,_ and data processing services, it if? more likely to be
so classified today.
11Ss ector revenues as a fraction of GOP overstate the sector's
share of GOP to the extent revenues exceed value added. For much
of the sector, especially the services that are- included! the
difference 'is unlikely to be large. .If cotJ.:nercial publishing and
~onsumer el~ctronics are added, sector revenues in 2993 would be
closer to 10% of GDP than 9% .
.
�,
Figure 3 '
Telecommunications and Information Sector
Revenues 1950to 2003
Revenues (billions of 1994clollars)
1,600 -----:--------'~-.--....;------------,,...-_,
r-,
.legislative' . ,
1 ADO .-
•
scenano
1,200 .-
---.....
~
·
;.
.: .' t
BOO .
.......At
600
baseline
·
scenario
400 1-
a
•
••
•
.., , "~
....,
/
1,000 .
2001- __
·
•
·..
j..
.
--~-+--r---~~~--r
1950
CEA Estimates
1960
1970
,1980
. ,
1990
2000
"
�".
,development of a Global Information Infrastructure (GII)~ That
" development will promote U. s. export' growth, leading to increases
in telecommunications and information sector revenue,. domestic
GOP, an~, domestic employment~
Over the next'decade/'~any foreign governments will ch~nge
their regulatory approaches and promote additional infrastructure
inve~tments.
As other countries spend to improve their
information infrastructUre, privatize their existing
.telecommunications networks, and allow more competition, the
world market for telecommunications and information is likely to
experie.n'ce tremendous future. growth.
u.s. firms, often already
world leaders in these fields~ can expect to achieve further
5ucc,ess in the global market. As that success generates
additional scale economies in production and encourage.s
innovation, domestic producers will lower their costs~ This
dynamic promises to promote exports by enhancing the comparative
advantage of the U.S. in the global marketplace.
.
-.
'
•"
•
10
~.-
�SUPPORTING REsEARCH AND DEVELOPMEl'.'T
TO PROMOTE ECONOMIC GROWTH:·
THE FEDERAL GOVERNMEI'<'T'S ROLE'
October 1995
A Report Prepared by
The Council of Economic Advisers
,
.
• Federal research and development inves®t2t1S are obviotJ.s1y critical in the
Pursuit of man~ national
objectives, such as def~ he.al~. and die education ofsciCntists and engineers. However, this paper
focuses exclusively on economic rewms.
,
..
,
.
�EXECUTIVESUNUdARY
• lncrea.'Jing the productivity of the American wonaon:e is the key 10 higher living SUUldards
and stronger economic growth in the future. Investments in = h and development (R&D)
are the key to increasing productivity, accounting far half or more of the growth in output per
.
person, and 10 the creation of new products and processes.
• Investments in R&D have high rates of retum. The social rates of return, which may be close
10 50 !'Cl""n~ exaced the high private rates of returns, of 20 to 30 !'Cl""nt. by a considerable
amount because of the "spillovers" - benefits that accrue as other researchers make use of
new findings, often in applications far beyond what the original resc=her imagined. Because
. innovators milize only • fraction of the IOtai return 10 an innovation, there will be an
. ooderinvestment in R&D.
• There has beca aloug record ofsuccessful government support for R&D, fi:<>m its support of
Samuel Mon;C" odginal telegraph line from Washington 10 Baltimore in 1842 10 demonstrate
the feasibility of his new technology, til the support of agricullllrlll resean::h, beginning with
the 1862 Merrill Act establishing the laod-grant colleges, to the development in more recent
years the Internet. the Global Positioning Satellite (OPS) system, and support of the basic
research leading !(} the discovety or DNA. Ex.amples of successful Federal R&D investments
abound.
',f
• Federal R&D expenditures stimulate additional private R&D expenditures. AIl additional
dollar of Federal R&D Odds more than a dollar of R&D 10 the economy, as the private ..ctor
expands its R&D effon. Accordingly," cut in Federal R&D expendinm:s is likely 10 cause
.
the pri vate sector to cut back as well. .
<, '
.• The Congressional budget resolutioD would cut Federal R&D expenditures by about 30
percent by the year 2002. The Japanese government, by contrast, recently announccti plans to
double its R&D spending by the year 2000. While noo«fense R&D expenditures in the .
Uoited States, as a percentage of GDP, are already smaller than in Japan, a:; • result of the
American decreases and the Japane.. iIicreases. the Japanese government will actually spend
more, in total dollars, than the American government on oori-defense R&D by 1997.
• Current debates not only focus on the lml of support for R&D, but also on the composition.
Increased living SIandali!s and faster productivity depends on increased support far civilian
and dual-use research (that is, research that has both direct military and civilian applications),
not just support of 'Stllr warn" and other military research. Opponent3 of government support
for pre-<:ollll1leIcial rechnol.,g;",u developlIlCnt erroneously characterize govei:nment efforts as
"picking winaers,' interfering with what would otherwise be efficient market aIlcc.ations, and
or 10 draw. clear line between basic and generic' research (which all agree government
should support) and applied reseazeh. In reality, there is a continuum, with many applied
research projects yielding significant spilloveI1l, SQ that absent some government suppo~
there =y be marl<ed anderinvestmenL Government can aid the development of such
poooncially blgb.payoff pre~ R&D with large spillovers, but must involve the
private sector in such efforts. These government investments can yield high returns.
�INTRQDUCfION
Increasing the productivity of the American worl<fon:e is the key to higher living
. standards and stronger economic growth in the future. Evidence indicates IIw
investments in research and development (R&D) have large payoffs in terms of growth.
R&D yields new products, improving the quality of life, and new processes, enabling
American firms to reduce COSts of production and become more competitive. Indeed,
investments in R&D are estimated to account for half orm:ore of the increase in output per
person,' Mainmilling or increasing this country's R&D effort is esseotial if we are to
increase the rate of prodoctivity growth and improve American living stlUldards.'
The largest pan of R&D in the United Stares is funded by private indllStry. Small
entrepreneurs see an opporrunity, raise funds any way they can, and take llieir chances on .
an innovative id<:a. Large companies spend billions on R&D labs to develop a stream of
new prodncts and processes. Private oompanies !mow the markets they serve and the
workerS who must produce the prodUCts. Risking their own funds gives them a strong
incentive to avoid coStly failUn:s.
.
.
Since the founding of this country, the Fedora! government has had an impOrtant.
role in the prorootion of science and ti:chnology. Indeed, the Consamti.,n gave Congress
the right to grant patents to "promote the progress of science..•." But in today's
complex and compeutive world economy, promoting the progress of science goes beyond
simply rhe granting of patents. FlISt, su=sful R&D in private companies depends upon
. the flow of new ideas and InIined people stemming from basic =arch and pre
commel'cial R&D.' Federal support for these activities is vitaL· Second, the FedernI
government spOnsors much applied =arch to improve its own capabilities in such areas
as national security, health, and transportation. The government can then help transfer
.. tcchn"logies developati for its own use to the private sect<if.
This paper describes U.S. expenditures on R&D, how they have been changing
over tii"e. and how they compare wi!b other countries It then examines the rationale and
role for government involvement in R&D and documents the high returns to R&D '
investments. Fmally; it projects the results of the Congressional budget resolution on
R&D cxpendimres and contnlSts !bat projection with Japanese plans.
• Griliches. Zvi. ""'The Search forR&D Spillovers." ~dinavian JQW'Tlal of Economics. Vol. 94,
supplem",,, pp. 29 - 47. 1992
l Baily. M.N. and A Chaknlbarti. lnllrntlon and the ..fu;x1octivity Crisis. Btooking:s Institution_
Washing""" DC 1988..
.
'
..
, Pre-commercla1 R&D may be I~y dermed as R&D that is close to yielding a new product or prOCeSS.
but is still fur enough away from com~, to
a firm to take Oft subsmntial risk in pushing
it towards the market. and may be such that the soCi.aI returns to the inv~t will be much higher than
the private returns.
,
.
• .t Industry also. relies on the go~t to support (be wctinical in.ftastructure - fOt example, standards
for weights and me.asuteS. Re$eardl in ~ area is essential for advancing comm~ amUrnde.
reqwre
�u.s, INVESTMENTS IN R&D
The United States leads the world in alisolute ~g on R&D (sec Clan 1).'
This finding is not surprising. given that the U.S. economy is by far the largest in the
world.
Chart 1
m2 Total Expenditures on R&D
(billions of donars)
160
140
111)
100
30
60
.40
11)
0
. U.s.
An alrernative comparison is R&D expenditureS as a percentage of GDP, in order 10
account for differences in the size of eoonornies. Using this comparison, the United Sta.,.
is just "ehindJapan and slightly alu:adof(unified) Germany and France (see 0lart2).
.
Chart 2
1992 Total R&D Ex~nditiires
asa PercentageofGDP
3
2.5
2
1.5
1
OJ
0
U.S,
, Data for Charulllhrou;;h 5 and Table I. unl= otherwlsO'''''''-'<l, are from the National Sci<m<:e
_ion, Nl\IiOmIIPaItcrns "fMD l\e<olllt§; An SRS Special Report. NSF 95·)04. 1995,
Page 2
�But !hi, does not really tclllhe whole story. We must look not only at how IllllCh we
spend, but also at whll1 we spend it on. Aggregate R&:Q expenditureS. can be broken
down into defense and noo-defense R&D expenditures. The United States falls behind
Germany, even further behind Japan, and n:mains just ahead of France in I<:rmS of nOn
defense R&D expenditureS (see 0lMt 3).
Chart 3
1992 Non-Defense R&D Expenditures
as a Percentage of GDP
3
2.5
2
1.5
1
0.5
0
u.s.
As seen in Cbart 4, the United States consistently has lagged behind in this measure over
. the past two decades.
Ch.rt4
Non-Defense R&D Expenditures as a Percenfage ofGDP
3.0
2.8
2.6
2.'
;' ..... ",~ Japan
2.2
- --.... -- ... , /
-
2.0
1.8
1.6
1..
I
1.2
1.0
'"
§i
.
.Although total expenditures on non-defense R&D have remained relatively
constant as a share of GDP in the last 10 years (at a level well below those of Germany
Page 3
�and Japan), Federal eJ<]leIlditures OIlllOn-<lciense R&D in the United States actually bave
fallen as • percentage of GDp over the last three decades (see Olart 5).'
CbartS
Federal R&D Spending as a Percentage of GDP
I..
1.2
t
"
~~
\
\
0.8
0 ••
0.'
0.2
In the United States in 1994, the Federal government provided approximately 36
pore••t of all R&D funds and ;ndumy provided about 59 percen~ with the balance
coming from universities and colleges and otha non~profit organizations.1 indUStrY
primarily fundi product.""la/ed applied = h and develQPme.~ as these areas are most
" likely, to yield immediate psyoffs. Government funds most'basic research, since the results
of this type of."".,.,.;h are the most uncertain and applications may not be realized for
quite some time, as wen as more than one-third of ,all applied research. Table I details the
breakdown of support for different typeS of researeh.
• Defense and "".-<lefense eJqJ<ndi..res: 1961 - 1979: otru:e of Management and Budg<e llullm o(
the uru~ Swes Government Historical Tables: F"lSOlI Year 1996; 1979 - 1994: National Science
Foundation, 1995: GDP rtgUreS from Council ofEoonomic Advisers, Economic Reoort of We President.
1995.
"
.
.., National Science Fowulation. 1995.
�Table 1 .
Soun:es of Funds for R&D in l.994'
Basic
Researcb
All R&D
FOOeraI Government
,
,
,
$ billions
IndustJy
pen:em
sa
5.3
36
59
3
10
4
3.0
1726
2
100
5
100
2
62.2
102.1
Uni"",,"Des and Colleges •
,
Nm-ProfilS
TOTAL·
i
Applied . Development
Research
26
35
58
29
70
•
•
100
100
•
THE ROLE OF GOYERl':MENI lNYESTMENTS IN R&D.
.
.
Wby does the government need 10 invest in R&D? The private sector 00 its
own will oot commit the level of resoun;cs to R&D that is best fot society or
for me
individual £inns. A finn bases its iovestmenl cxpcnditurt:s, including those on R&D, 00
the expected rerum no investment to ,hat finn. Because firms realize only a portion of
the total n:turns to an investment in R&D, they will oot invest enough from a societal
standpoint. R&D is a unique input in the production process.' lIS results can spread
quicldy throughout the economy, wim applications far beyond those imagined by the
original researcher - the S<K:aIIed "spillover" effect. Spillovers mean that an individual
finn or innovator will realize only a fraction of the total returnS to an innovation; that is,
me inru",arion yields benefits to otllasJor which the original researcher is notfully
compensated.
=
on
"part
Examples aboWld. Lasers and transistor.; are now
ofeveryday. life. The
inventor.; of the laser probably had n~ idea mat it would eventually be used for removing
t NSF. 1995.
, The _
from idea., usable prodllCt '" _
can bo long. ll&D is """'J'rised, most gwera1ly, of
basic ~ applied """"",II, and ~t The divisioas _
these areas is DOl alway< cle<u:.
as they intaact in complex
with advances in one type of reseatclI inUucncing: the dlrection of
_
in
For """"'fltual _ _ gil, Tho NaliOfllll_ Foondarioo ~
Engineering Indicators. 1993) deCmes lhese ttnnS as foUows:
.
• Basic Research: The objective of baSic.- rCSC3Ith is to gaiD In()l'C complete knowledge or
~ o(the subje<t under srudy. wilhoot """'"" appl_ in mWd. In industry. basic
research is defined as re&earCh thal advances scicnlific- knowledge but does not have specific
immediate commercial objectives. although it may be in fields of present or potential commerciat,
illIen=.
• t\Wlied Researcll: Applied researcb is aimed at gaining knowledge or Wlderntanding to determine
the means by wbh;h. specifIC, recogni.wI need _ bo_ In indOSll')!. applied resean;h includes
invemgations Oriented 10 disc.overi.llg new scientific know~ thai. bas spec~ commercial
objectives with respect to products. proces!IeS. or sezvices.
"
.. J&yc:1cwment: Development is the systematic use of Ib( knowledge or understanding gained from
_ h dire<1l:d ",ward !he productioo of useful ~. devi=. syst<:rus. or melhods, including
the design and development o f _ a n d ~
.
au om....
waYs.
PageS
..,.
�catam<:!s or for playing Illusic in a colIlpa<:t disc player. Likewise, the American physicists
who invented the transistor at Bell lab, in 1948 could not bave imagined that their
invention would be used today in rndios, compu",,", spaCerught and guided missiles. and
countless other electronic devices. In bnth cases, even if the inventors' inmginations did
reach such heights, today they receive no additionalmoDenuy benefit for the large
.
advantages that society reaps from their insights.
.Sometimes the spillovers are far more subtle. The discovery of nylon showed that
it
possible to create anificial fibers with r<marlcable properties - and this knowledge
affected the·dit<:C!ion of reseruxh efforts applied by thousands of other researchers.
was
'The consequences of the existeru:e of imponant spillovm; is that private firms will
not invest enough in R&D from a national perspective. This point i. not merely
theoreti<:al: many studies have demonstrated that investments in R&D yield high retUTllS
, to investors arufeven bigberretums to society.. Onen::cem review of econometric studies
concluded that the avetage private l1l1e of return to an innovation seems to be between 20
and 30 percent, while the social rate of return is closer to 50 perce:nL".11 An earlier,
extensive. c,as.e..studyapproach found that the maiian private retum to the innovations
studied was 2S percent, while the median social rate cf
was 56 percent "While
estimates of the rates of return are just that - estimates - a wealth of studies over the past
two decades have confirmed these bigh private returns and even higher social returns.
Table 2 highlights the results of some of these studies."
=
to Nadiri, lshaq. "Inoovarions and TechnologiCal SpiilovO"S." NBER Workinl! Piner Series. Working
Paper No. 4423. August, 1993.
.
II Rates ofretum can be estimated by computing the benef'1lS (including discounted future benefits) and
the oosts of the innovation. .
" . Mansfield, Edwin, I. Rllpoport, A. Romeo, S. Wagna, andG. ~C)'. 'SocilllandPri_ RJI""I of·
~ from IndllSlrial InnovlUions." 0uarn;dy Iournal of Economj",. Vol 77,1'1'.221- 240. 1977.
13 Some of the sbldiescited in T.able2lookat indu:stty~level daIa whileochets use a ~stndy approach.
In oomc ins:tancet what is listed as a "social":rate Of return is a:;waD.y an indirect return to one industry .
. resulting from the m;carcb: of anolbcc industry. The point is clear: private rates of return to R&D arc
high. and the ret.tIm$ to society ate e'.'ell higher. The studies in the L!I.ble are I:lS follows em addition to'
thooc ulr1:ady du:d):
Ttri<dcy1 N. "Eff_ of R&D 00 the ProdoctivityGrowlh oflnd_ An &plO1l111.lry SlUdy."
Nalion>J Planning _
Washingron, DC. 1974.
~
Sveikausbs. L. 1'echnology Inputs and Multifactor Productivity Growth... Review of Economics
lIIld Scatistjj:s. Vol. 63, 1'1'. 275 • 282. 1981.
GoIO, A. and K. SU2ll1d. "R&D C3pita1, ~of ReIilI1I 00 R&D Invostmcnt and Spillo.... or R&D in
Japanese Manufacturing lndus!ries." Review of Economics and SwiSli<s. Vol 71.1'P. 555 ·564•.
<
•
1989.
'
.
'
•
.
Bemstoin, lclITey and M. lsh3q Nadiri. '-lnterindusUy Spillo"",'Ra!os of ReIilI1I. and Production in
•
High~iech Industries... American Economic Review: Papers and Proceedings. VoL 78. pp. 429 ~
434. 1988.
.
.
_ , Frederick. 'Using L.inked _
and R&D Data '" M_In~ Technology
F\o1o'." In ~IS. and l'l:llductiyj'Y, Z. Griliches (<<1.). University of Chicago Press. PP 417
464. 1984.
.
Bernstcin, lclITeyand M.lsbaqNaditi "1'ro<Wct~=ofProdoction,Spillovm,andthe
Social R:ueofRelilI1l '" R&D."h'B!iRWorldngPaper sm... Worldng PaperNo. 3625. 1991.
Page 6
�Table 2
Private and Social Rates or Return
Autlwr (year)
Nadiri (1993)
Mans6cld (1977)
Terleci:yj (1974)
Sveikaustas (1981)
~(1989)
aernstcin-Nadiri (1988)
Scherer(191lZ. 1984)
aernstcin-Nadiri (1991)
to
.
Private R&D"
Estimated Rates .fRetum
Private
Social
20-30
SO
25
29
7-25
26
10-21
29-43
15-23
56
48 -78
SO
80
.11-111
64-147
20-110
In addition, some firms - esperuny small ones that lack fUnds - may not invest
enough in R&D even from their own pernpective. To make R&D investmelllS. a fum may
. need to go to capital marl:ets for funding, and to provide these funds, financiers must bave
sufficient informalion I£) be able 10 assess the risks of the investments. Fmns may nor·
wani to provide ibis infurmation for fear of losing future private gains if somebody else
were I£) use that informati= Moreover, R&D cailnot be colliuecal.ized, in the way that an .
investment in a building or a maehine cao be. Thus. the fum must eirber pay bigber
interest rates for loans or uSe its own funds to pay for the research. In fact, evidence
suggest, that small firms' investments in R&D are limited bY their internal cash-flow. IS
The inadequacy of firms' incentives to invest in R&D creates an important role for
the Federal government. The goal of technology policy, however, is not I£) substitute the
government's judgment for that of private industry. Rather'; the point is I£) <>;meet a
genuine and significarit problem - underinvestment in bliSic research aDd in pre
commercial R&D resulting from the divergence between private and social returnS to
those activities. A complementa:ry goal is to design the technology investments that the
. government itself makes in public goods -- national security, public health, ~ucation, a
clean environment. an efficient transportation system - in ways that maximize the
potenti.l external benefits for the .Nation's commercial technology base. In both cases,
support for technologica! innovation ''''l1ances the Nation's economic and social welfare.
Expanding the R&D tax credit provides an additional incentive I£) the private
sector 0' ameliorate the underinvestment problem diseussed in this paper." Indeed.. the
tax credit can be effective in increasing private sector R&D expenditureS, and is an
imporumt component of. comprehensive technology policy.
"
Table adaptod from,Griliches (1992), and Nadiri(1993).
" IIimmelberg, ClwleslHld Bruce Peretsen. "R&D and lntemalF_ce. A Panel Study of Small
Finns in High-Tec~ Industries... Review ofEconomks and Star41ics'. Vol. 7(i,Issue 1. pp. 38 ~ 51.
1994.
,
16 The R&D laX crodit, officially known as the research and experimentation (R.&E) tax ~ allows
rums to deduct from their income taxes a portiOn of their R&D ex:pendi1ures beyond a certain base level.
Page 7
,
"'.:
�While the tax credit is important in promoting increased R&D expenditures, alone
it is not sufficient As a recent Congressional srudy noted. the tax credit does not alter the
composition of R&D cxpenditures. 17 It is not designed to encourage research in areas .
subject to particularly severe underinvestment problems, which include basic and prc
commercial =1L
.
What can the government do? The Federal government has a.long history of
involvement in science and technology. For example, in 1842 the government
appropriated $30,000 for Samuel Morse to build a telegraph line from Washington to
Baltimore to demonstrate the feasibility of his new technology. In 1862 the Federal
govenunent passed the Morrill Act, which gave states land with which to establish land
grant colleges to teach agriculture and the mechanical arts." Govenunent also has long'
history of involvement in direct /imding of agricultural research dating back to the
nineteenth century: many studies over the past ~ years have found rates ofreturn to
public investments in agriculrural research of over 35 percent 19
a
R&D provides the basis of America's competitive advantage in the many sectors in
which the United States leads the world. Our strength, reflected in the large number of
Nobel Prize winners in science - most of whom have received government support - is
based on our resean:h universities, the best in the world, all of which dCpend in large
Office of Technology Assessment, Congress of the United StlLeS. Ibe Effectiveness of Research and .
Experimentation Tax Credits." Septemlu 20, 1995.
.
II National Research Council Colleges of Agriculture at the Land Gmnt Universities: A ProfLIe.
National Academy Press. WashingtOn, DC. 1995.
,
USDA Economic Researcb Selvice. "The Value Md Roie oC Public Investment in AgriculruraI
Research." SIaffPaper Number 9510. May, 1995.
17
I'
Page 8
-. '.
:,."
�i
measure on government support. Students come from all over the world to learn from
.
.
U.S. scientists and engineers. '
Funding basic research. Most people recognize the need for g<JVerlllDCnt
funding of basic. or fundamental, resean:;h. Indeed, as sbown earlier in Table 1. the
Federal government funds close to 60 pen:ent of all basic research. Basic resean:;b is. by
oofinition. not directed at solving an immediate problem or at inventing a particular .
prodUCL While basic li:sean:b has immediate remm, in adding to our knowledge base and
in educating scientists and engineers. economic returns from investments in basic research
may be many years away. and may not have applicatioru; beating any similarity to what the
researcher originally thoughL Since so much of the returns 10 basic resean:;h are not
appropriated by the innovalOr (and indeed, in many cases, the output of basic research is
not patentablel, the gap between social and private rerums is particularly large, and
therefore the problem of undCrlnvestment is particulMly :severe. Firms are typically
reluctant to invest much in basic resean:h.
Basic research ultimately can yield extraOnJinar:Y rerums to society. For example.
twO physicists in 1946 discovered nuclear magnetic resonance as the result of basic
research. While they had no idea how this knowledge would eventually be used. others
soon rcallzed the potential applications of this knowledge. Todoy, most major hospitals
have magnetic resonance imaging (MRl) machines for use in noninvasive scanning of
patient" internal organs. The MRI is a direct outgrowth of catilier basic researcll. .
Universities and colleges comprise the largest single group of perf""""", of basic
research. accounting for approximately 45 percent of all basic resean:h in 1994.... This
research is funded primarily by the Federal gOVemm<:nL UnivetSitles and colleges create
"knowledge for knowledge's sake. help dJ:velop an educated populadJ:n,'and tntin the
scientific and engiJleering workforce. However. academic ti:search itself also plays a
'crucial role in industrial innovation. One recent study of 76 manufiu:turing firms revealed
that these firms could not have developed about 11 pen:ent of their new Products and 9
pen;ent of their new processes without research done at universities and colleges. This
stndy estimated the median social rate of return to research done at acatiemic institUtions
to be 28 percenL"'" .
H
:2(J
Universities and ool1eges aaually performed close to 55 pc:rccnt of an baSic research when one
includes wOlt -done at Feder.Illy funded Research and Development Cenc.er$ kared at umvemties and
coUeges.
.
<,
1l While the '''28 percent'" figure is clearly a rough estimate, it shows that the returns to academic
research are high, Moreova'. this estimate is likely to be too low for twO reasons. rtm,. the smdy ~
academic res.earch done only in tile IS years prior to the innovation - much academic research may not be
used in industriul innovations until tnOre than IS years after the initial discovery or publication. or may
continue to be used for matly years: thereafter. Second,. the swdy examined only seven industries. The
academic research llseful (or innovations in these industries likely was useful: in other mdu.stries. as well
Clearly, investing in academic research is an.area with highJ>ayoffs.
'" Mansfield.Edwill. "AoademicResean:handlndusttiallnnovlllkm." ~PoJi£¥. VoI.W. pp. t
• 12. 1991. .
Page~
�Another study notes that it is difficult to assign. panicularra<e of reIUm to basic
research, since its resullll may be used in many divetse ways. Instead. it suggestS that
basic research should be viewed as an inPut inlo applied _ h in many areas. Basic and
applied research interact in many ways. increasing !he productivity of both.'" In fact. one
study of mimufacturing!inns fooed a correlation between increased spending on basic '
resean:h and increased firm productivity, wbich may reflect incieascd effectiveness uf a
firm's applied R&D'when the firm also conducts basic research."
,
Pre-Commercial R&D: The Changing Government Role. The government's
role do<" not eod with funding basic research. One can view R&D as a continuum, with
basic research at one end, facing. huge underinveslment problem requiring substmtial
government involvemen~ and product COIllllletcialion at the, oIher end, where most
relUmS go directly to the firm. .Pxe-<:OO1Ille%cial R&D is SOtllewh= in between Iheae two
ext=nes. Some types of pre-c<l!IlIIlCl = h may be Cl!.1I<mely risky or have an
especially large gap between private and socW """""" Govc:nuncnt support ofsuch pre
conuneroiiU R&D involves identifying, with the aid of scientists, engin=, enm:preoeurs,
economists, and business people, technologies that could yield large societal benefits but
may not necessarily yield much private return to the innovator. It is this belief that drives
the AtintinistOJioo's lechnology policies. '
.
In fact, the United States implicitly began following a similar technology policy
, after the Secood World War. The Second World War brought geeat technological
advancements from government re~; all in !he name of !he war effort. Many of those
technological accornplishments hod npplicatinns in civilian life, as well. President Frnnklin
Roosevelt =gnizA:<! the potential of the R&D IIlItChine that hod been built up during the
war, and requested that Vannevar Bush, director of the wartime Office ofScientific
Research and Developmen~ devise plans on how to usc the wartime experience in
"
peacetime. In response '" Presiden' Roosevelt',s req~ Bush authored Science: The
Eodl~iS frontier in 1945, which became the guiding document for much of U.S. postwar
'
science policy.
The United States channeled publiC investment iqto basic Ii:search at .miversities
and government laboratories, then supported the initial applicalion of the results in .
products and production processes procUred by public agencies. New lechnologies first
developed for (and procured by) the Department ofDefen.se, the Department ofEn"'l!Y,
or the National Aeronantics and Space Administrnrlon, or supported by the National
Science Foundatino or the Natinnallnstirutes of Health, would then diffuse, or "spin off,"
,into commerci.al use.. In this manner, the Federnl' government supported the development
and diffusion of jet aircraft and engines, semicondueror microelectronics, computm and
compu,er-<:OlltroUed machine rools, 'phatlIlltCCUticals and biotechnology, advanced en"'l!Y
,
.
David, Paul, et aI. "'Analysing the Economic Payoffs From Basic Research:" Economic Innovatians
and New TechoQ\(lg)'. VoL 2, pp. 73~9(), 1992,
"
'.
2(
Mansfield. Edwin. "Basic Research and Productivity Increase in Man~." American
Economic Review. Vol. 70. No. 5. pp. 863-873. Decembct. ]930.
10
�and emironmental technologies. advanced 1lllUerials. and a host of other eommen:ially
successful technologies.
This system worked well as long as military ""IWrernents represented the leading
edge applications of new industrial rechnologies. In many areas. of basic research
supported outside the defense estahlishmen4 including biomedical research and the
. development of pharmaceuticals. biotechnology. and ri>edical diagnostic d.mces, the
system continues to work well
The cin::umstances that allowed the UnitOO States to i:cly primarily on a defense-led
model have changed. With the end of the Cold War. demand for new defense systems is
now less than it was. CommerciaJ product spin-<>ffs from military research have also
diminished from their beyday of the 1950s and 1960s, and American eompanies face
intense international competitioo from inereasingly capable foreign firms. On the other
hand. these changes aJso create exciting new opportonities: innovative defense
technologies are now !!lOre likely to emerge first in comm::rciaI products and production
techniques, and American companies are taking advantlge ofexpanded opportoniries in
foreign IDlIIkets. Accotttingly, the Aclministtation's tt:ehnology initiatives are shifting the
composi';o. ofFeder.d R&D finm military to civilian concerns, and the composition of
military R&D toward Ibe development of so-called dnal-use technologies - those with
applications to both military and commerciaJ products.
Designiog a suectSsfui prOgram of tecllDology support. The Administration's
effoos to proll1()te innovative technology conctio design featureS meant to limit the
possibility of government fallwe in the implementation of technology policy: inmost
. cases, flnns participating in the Administtati.on'. programs must cover at least·50 percent
of the costs of the projec;; projects are initiated by private firms. which compete for
.
limited funding; outside experts ill the relevant scientiflc. tcdhnological. and economic
fields evaluate competing proposals; and firms can compete for funds in a wide array of
technological fields, '" ensure that support for prt-<:ommercial R&D support does not get
"captun:d" by any particular technology or set of fiiins.
Eve. the best-designed technology program will have failures. Indeed. if it does
nO.4 then it certainJy is 100 ""utious. In the final analysis, the returns '" government
funded R&D depend upon the tmzrns to the successful projects outweighing the losses .
finm tht: unsuccessful ones. By incorporating the above design feal1lres, the
Administration" technology program pfovides the best cbance for achieving high returns
. that benefit American living standards.
Returns to gnvernment R&D investments: I; is impossible to provide a reliable
quantitative estimate of Ibe returns", publicly-supported R&D based upon historical data,
primarily beeause such a large percentage of Federnl R&D support has been defense
related, although as noted earlier the returns to other public investments have been
Page 11
I
�enormous." Traditional ways of calculating private f<1UrnS 10 R&D do not apply in
, situations where the government funds the R&D and then purehases the resulting outpUt
The real impact of government-supportCd R&D is not the remrns to !lie individuals
involved in the resean::h, but the relmnS 10 society. Measuring such relmnS is not a simple
task, since the results of public R&D weave their way through the economy in cOuntless
directions. R=imrs have noted that because of such spillovers, one must examine
Fedel;a( research on a case-by-<:aSe hasis." Some government progratns have been
spect>cular successes, yielding enonnous social returns." The ain;raft industty is. prime
exampie. The development of the U.S. aerospace industry was largely goVernment
funded. As late as 1986, close to 80 percent of all R&D in this industry was Federally
supported." Today this industry is a large employer and one of the largest exporters in ,
the nation.29
Other examples include:
• The atomic dock and Ibe Global Positioning Satellite (GPS) system. Super
precise atomic clocks were invented 10 help answer fundamental questions about the ,
IllUm'e of the universe. However, a practical npplication for the atomic clock also
emerged. The GPS is. system of 24 satelliteS that depends on eompull:T chips.
miniaturized radio receivers, and atomic clocks. GPS, initWIy developed by the U.S.
,Air Fon:e for military navigation, allows users to dulI:Tmloe their precise location and
altitude anywhere on earth. Now GPS is .iso used for many civilian npplications,
including coastal navigation, emergency rescue, and the ttacking of cotIllI1eIcial
vehicles. Over 160 manofacturers are developing GPS-hased systems for an emerging
multi-billion dollar industry.
'. Th" Hubble Space Telescope ,and cancer detection. ' The Hubble Space Telescope
WlI$ designed 10 gather
detailed information about the universe than is possible
from ground-hased telescopes. It may have _,ther use, as well. The image- '
more
" In 1987, for CxampI<:,'-70 I"'=" nf all F<demI _ _ deee.=<>riented. Products resulting
from def<'<lSe R&D gcnemIly are pun:based by !he _
and are .... wbjcct 10. marlret test See '
Hall. Bmnwyn.. ibe Privare and Social:Returns to Reseatch and Development What Have We
Learned.' June. 1995 fu<. discussion of 1he difficulty of measuring 1he return '" public R&D. One swdy
of manuf,QCturing fum.s Coood that inaeascd government funding for applied reseat(:h is correlated with '
increased productivity (Mansfield. Edwin. "Basic Research and Productivity Increase in Manu(~g."
Ame!i9\!J Ecooom;c Reykw. Vol. 70, No 5. December. 1980. PP 863-873). The umque r _ oflhls
'study is th:al because it was not actually focused on government fWlding. the ~ts were based 00 fU"trlS
not necessarily involved in defense contrncting.
,.. Bartebman,Eric. "Fedondly SpoosoredR&D and Productivity Growtl!." Fmance and EcOllillllieJ; ,
Discussion Srots. No 121, Federal Reserve Board. Washington, OC. April,199O.
Z1 Some programs that do not meet their sped.fied goal may officiaUy be: classified as failures, However.
even some ""failoo'" projects can yield enoonous positive spillovers.
l! M~. David and Nathan Rosenberg. Technology and the Pursuit QfEconomic Growth. Cambridge'
University Press. 1989.
" .
'" In 19'.l41he industry ompioyed
480.000 pe<lple. From 1990 '" 1994, exports av~ over 530
billion pc:r year.
abo.,
Page 12
�processing software NASA developed to recOnstruct and filter images can be applied
to a digitized mammogr3lll. and likely will be useful In identiJYing suspicious areas
Indicative of breast cancer. .
,
• The Interne! and the Information Superhighway, The Internet was originally a
government-sponsored computer netwodi: designed to connea researchers, Today, it
is an important component of what is commonly referred u> as "the infonruuion
superhighway," Nobody !mows exactly how the Internet will develop, but it is
in~ingly active. ywith
more ,and more business involvement
CONGRESSIONAL PROPOSALS CUT FEDERAL R&D EXPENDITURES
Today, we face the possibility of unprecede11led cuts in FedefaI R&D experullt1lt1:S:
The American Association for the Advancement of Science esrimiu.. a Jeal cut of abOut ,
30 pero:nt in Federnl support of non-defcnse R&D by the year 2002 if the Congressional
budget resolution were u> become • reality, Chart 6 detalls the eStimated results of the
Congressional plan.
. Chart 6
Projected Congressional Non-Defense R&D A1loeallons 199O. 2002
.
(binions of 1987 doillirs)"
21
25
23
21
19
11
IS
1m
1m
1994
the
By contrnsl,
Japanese government recently announced plans to double its R&D
apending by t1ie year 2000, Chart 7 highlights the .ffea of the Congressional plan and the
Japanese plan: by 1997 Japan will overtake !he United StateS in government support of
non-defense R&D - in total dollars, nO! juS! as a share of GDP,
'" 1990· 1995 areru:tual ~lJJJ'es: 19% - 2002 are estiuWtdresutts ofCongre.sIDnal proposats:'
ddlatonl994 - 2000 .... estiJnaIu fiVm OMB, Analytic3lPmm:liw: ,BwlW ofIh< Unit«! S,*,
Government. FY 1996. Assumed 3.5 percent inflation from 2(00 ~ 2002.
Page 13
...
.,.
',
�Chart 7
Estimated Japanese Governmental Expenditures OIl
Non-Defense R&D CompaM with Pr:ojeeted Congressiorud Allocations
.
(m billions of 1987 dolJat:;)
26
24
Z2
..
,See. updated chart' attaCh(H
2Il
16
14
12
10
Cutting Federal R&D wiD Muce private R&D expeuditures. Many stlIdies
demonstrate that Federal spending on R&D Slimn!o"", additional private spendiug on
R&D." This complementarity holds up in basic, as well as applied. re=b. 32 In other
words, an additional dollar of Federal R&D expendi= adds more than a dollar of R&D
in;:estmem to the econo:rny.
.
Unfortunately, complementarity also sUggests that if tile Federal government cuts
R&D expenditures, the private sector will cut R&D expenditures, as well Chart g shows
• clear cOm:lation between changes in Federal R&D expenditures and change, in private
R&D expenditures one year later.
~:!l Levy. David and Nestor Terlec:k:)j. '"Effects ofGovemmool R&D on Private R&D Investment and
PrOOue.hiIy: A M3croeoonomic Analysis.· The Bel! fuumal QfEconomiCll. VoL 14. No. 2. pp.551·
.
56!. ·Auwmn.1983.
n Robson. Martin. ""Fedelal Fooding and me Level of:Pri~ate Expenditure on Basic Research,"
Soutbcrn Economic Journa.!. Vol. 60, No 1. pp.63 - 71. July,' 1993.
.
Page 14
�Cbart 8
Percent Cbanges in Federal R&D Expenditures and
Private R&D Expenditures One Year Later"
11.-~~~~~~~--~--~--~~--~---,
10
•
6
/1', PrivAle R&D. one year lll.tcr
•
I
I
I
•
•
~
I'
"
/' \
,I'
F«knlR&D
'\ /
\
/1
\\
\,',~
\"
O~~~~~~~~~p'+~~~~~~~~~~
\_-'
/ \
/
J\J
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~L- ________________________________~
\
-2
...
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,
, This correlation means that if Fedeml R&D support is cut, the nation is likely to
lose future rewards not only from the Federally-supported R&D that will not be,
underutken, but also from the industrial R&D that will not be underutken as the private
sector scales back in response to Fedeml cuts.
CONCLUSION
Continued advances in R&D and tecbaology are crucW to ensuring and increasing
economic growth. Many studies have sbown that while returns to • fum from investing in
R&D are high, returns to society are even higber as new ideas are applied to areas far
beyond what the innov.'" initially imagined However, such spillovers imply that private
fin!>s will not invest in enough R&D from a national perspective, The Federal government
can .Il:p in to fill the gap between the private level.of R&D investment and the level and,
types of R&D investrnenf that ate best for the nation. Moreover, the nado~ benefits nOt
just from the resutlS of Federally-sponsored projecis, but also because Fedeml R&D
eXpenditures seem to srlmulall: additional private R&D expenditures.
The competitive position of the United StateS - and indeed future increases in
standards of living - depends on tecbaologinal advances. These in Illrn depend on our
entire scientific and technological infrastructure, which includes our educational
institutions - producing the scientislS and engineers that will provide the creative
advances of the furore - ow: resean;h universities, and our nation s laboratories. both
within the private and public seeton;, Ideas' flow from basic research, through pre
competitive developmen4 to concrete applications, producing new products and
deVeloping new, better, and lower-cost production processes. , Government has a vital role '
,
f
Hill. Christopber. ''Private Funds ilrC Unlikely to Repw?C Cuts in Pub~ .Funds for R&D in the U.S."
Mimoo. June 19. 1995. Data from NSF, "National Patrerns of R&D 1l<:.souI=: 1992," NSF92·330.
OcIObc<. 1992.,
31
Page 15
�in sustaining this infrastructure - from supporting scientists and engineers, to promoting
basic rese.an:h, to assisting in the development of new, high-risk technologies with
significant spillovers. We have evolved an effective sysU:m that has led America to its
current pre-eminent role. Olanges in our world n=llll.te that this system. and the role
of government. continue to evolve. Now is the time to renew our commitment to these
advances and to continuing the adaptation of our system to the changing world. These are
higb-return investments that will provide the basis of the America of the twenty-first
cenwry.
Page 16
�. Estimated Japanese Governmental Expendltures on
Non-Defense R&D Compared with Projected Congressional Allocations
·(ill billions of 1996 dollars)
35
- ··B
[ems,
25
• Japan
...
20
15
10
1990
1991
1992
1993
. 1994
1995
1996
1997
1998
1999
Updaced /Aarcb, 199610 lcflecl,cllanges since !.he Congressional B\ldgcl Resolution mc,;pected FY19% expenditures.
2000
�u.s. TRADE POLICY WITH JAPAN:
ASSESSING THE RECORD
A R.epon Prepared by
The Council of Economic Advisers
U.S. Treasury Depa11mellt
\
November 9. 1995
..
"
,
),
'.
.'
,
",."
,~
~
.
'"
�,"
Three years ago. President Clinton said. "We must compete not retreat." Since that time, he has
charted • new tnIde policy with Japan that is delivering results. This policy has three gruils:
•
To give American businesses. farmers, and woik:ax • chance to compete fairly in the
S«XJnd !argest1DllIket in the world by targeting expanded market access in those sectors
where U.s. competitive.... is SU'OngesL
o
To incmtse the growth of 1apanese imports and promote ndjustment of the massive
cmrent lICCOunt imbalance in Japan in order to Sln:ngthen global economic growth.
o
To
IllS""" American leadership in the glnbal economy.
Signif"'anI progress has beeo made on each of these gOals; WhiJc initial results "'" encouraging.
we are watching closely 10 make sure our tnIde agnoements are implemented and worl<.
\
'.
,
,
'.
'
.' ,'" .,"
"
",
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u.s. exports to Japan in targeted sectors are growing rapidly.
u.s. Exports to Japan In Sectors Covenad by Trade Agreements Are
Growing at an Even Fasler Pace Than TIlosa In Other Sectors
".
'00
.L~~~~~.~~~~~LU~.~~~~~Oq~~'~~UM~~~LWLU
__
__
efhfltlto~-.
o
The CinIOll Admini.tration has negotiated 20 InIdc agreements wilh Japan; 12 of th.",
are Pramework Agreements. These InIdc agreements are resu1ts-orien~ i.e., they
include objccIive criteria for measuring progress. Too of1eo in the past. our bilBll:rallnldc
agreements bave failed to deIlver real benefits for·Amcri£an mmpanies. workets, 'and
farm.....
o
In the goods """"" CX\VCil'l:d by our Uruguay Round, Pramcwod;, and other bilBll:rallnldc
agreements, U.s. exports to Japan bave grown nearly SO """""nt.me.; this Administtation
took offioe.
•0
o
<lrowIb in c:xpons to Japan in these """"" is nearly 2.5 tiJnes grc:aIt:r dum growth
in. other U.s. c:xpons to 1apan - which has also been suong. Indeed. growth in
all U.s. exports to Japan has been over twioe as great as growth in U.s. exports
to the Buropean Union. Total U.s. eJqlOl'IS to Japan IW:hcd $60 billion for the.
12 months ending in August 1995.
.
In the goods sectors oovm:d by our InIdc "8'=l0llll, U.S. c:xpons to Japan bav.
grown at an accolcrating pace; these eJqlOl'IS grew by one-seventh in 1993, one
quarW in 1994, and by nearly on~thinI in the tim 8 months of 1995 (00 a year
over-year hasis).
�,"
,"
o
o
o
In the goods sectors coverul by our Fmmeworli: Agreement alone, U.S. exports 10 Japan
have risen over 50 pen:ent since the Agreement was signed - more than twice as rast as
other U.S. exports 10 Japan.
Our strong cxpon performance in gcncnU and to Japan specifically is attributsble to •
varicIy of f8j)lIlrI. On the macroe<:onomic side, the President's ovetl!ll economic plan,
. with its empbasis on deficit teduction and investmen~ bas led to strong sustained growth
with low iDfIalion in the United Swcs. This bas ~ged strong growth in U.S.
. investmeDl, labor productivity, and employment, and halped to increase U.S. business
confidenoc and """ngtbca the fundamental competitiv..... of U.s. indu<tries and
woda:ni. Such owrall economic facton have helped a=1erate U.S. export growth to the
world, ri.sIng IiQm 4 percent in 1993, to 10 percent in 1994, and 16 pen:ent :so fiIr this
year. Our strong cxpon perfOllll8Il£C to Japan. cspeeiaIly in targeted sec:tors. aI:so teIleru
the nuinerous IIl8I'ia:t opening agreements concluded during this Administration under the
Frameworli: and the Uruguay Round.
Tho trade agreements arc "win-win·, yielding lower prices and higher quality for Japanese
'
purchasers and consum.... and increasing I!llIlket access for U.S. businesses.
\
:
..
. ',',
�,
~
.
.
u.s. busin..... are achie>ing s u _ illsecton covered by
CUnlOll Administration trade agreements.
o
Am years of stalled negotiations. the Clinton Administration concluded an agreement
in Mareh 1994 with Japan 10 open the cellular telephone market ill the Tokyo-Nagoya
...... the largest popolation center in Japan. Since the a,gn:cment was signed, and the
Japanese Government instilOteddercgulation IDW"",,- subscribers u> the Nonh American
designed system have grown from 22,000 10 500.000. MoIoroIa. wltieb tried
WlSucceosfully for years u> Imoak inID Ihilllllllkcl. ptDVideo the bulk of the equipment 10
, build and maintain Ihil system, With saIea vaIuca in the bundreds of millions of dollars
per year. <In>aftt IlOOIpctitioo in the region baa also benefitted Japanese oonsumenI - not
only is Ihcrc now gn:amrOOllSumor cboicc but also pricea for ceUuIar phone service. have
dropped.
o
Siooe the Qinton Administration concluded a Fnunewmt Agreement with Japan covering
public sector procurcmenl of medical """"'<>logy (sueb as MRI manes and CT
scanners) on November 1. 1994. to!lIIU.s. cxpo!U of medical instruments 10 Japan have
grown ~ SO percont. ..,.".,illl $1 biUiIIn for the 12 montha eruIi!Ig August 1995. This
.is over twice the mtc of growth of U.s. medical instruments cxpo!U u> the European
Union.
o
TIle ClinIOll Administration lIIIg.ted copper as • priority sector in the Uruguay Round
DCgotiations. Since the Umguay Round Agreement was slgncd 00 April IS. 1994. U.S.
""portS ofcopper 10 Japan have grown over ISO perocnt, reaching $0.4 bWion for the 12
\ mootha eruIi!Ig August 1995. This-is more than <> dotes as fast as the growth of other
U.S. 0Xp0rIS 10 Japan.
o
The CIinIOII AdminiJtratioo bUgcteddlemicals in the Umguay RoWu1 negntiatioua. Since
the Uruguay Round Agreement was sigaed. u.s. 0Xp0rIS of cbernicals 10 Japan have
growiI ~ 80 perocnt, reaching $2.9 biUiIIn for the 12 montha eruIi!Ig August 1995. This
is over tIm:c dotes as fast as the growth of other U.s.OXporIS to Japan and over <> times
as tlist as the growth of U.s. chemical 0Xp0rIS to the European Union.
o
The Clinton Administrationl1l!gcted apples as oDC of its first bi1ateml trade initiatives
with Japan and an agreement was concluded o. Seprember 13. 1993. Whore U.s. apple
0Xp0rIS 10 Japan were once hanned; apple 0Xp0rIS are now expected 10 mach $IS million
ill 1995. This is lOon: than. half the to!lII average iwnua! saIea of U.S. apples to the
European UniOn.
�o
1M Ointon Administration targeted rice in !he Uruguay Round negotiation,. Imported
. rice had been banned in Japan for over two decades. With !he s=ful oonclusion of
the Uruguay Round, Japan has finally opened its mamt 10 imported rice.
"
A major fail"", of !he rice crop in Japan in 1993 led 10 !he first ""Ie of American
rice for many Japanese con,umer>.
o
U.S. exports of rice 10 Japan rose 10 $243 million in 1994. Th.is is more than
twice !he total annual U.S. rice exports 10 Europe.
"
Amcriccn medium·gntia rice has been highly ...10<1 on quality by !he Japanese
Food APY and American rice has been wcll·""",iveci by Japanese consumers.
.,
,
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�·'.
Japan's market Is also opening up more broadly.
Japan'.
.Jap8n'elmpolla . . . _
nad<toFsn
01
llloUp
".
.
�The goal or our trade policy is 10 expand trade. Although the
U.s..Japaa bilateral trade deficit remains blgb, it is misleading
to focus on it as a scorecard.
'
The Bilateral Trade Deflclt Largely Reflects strong Growth
In the United States Relative to Ja
n
.r---------~~~~~~~~~~~~~~------~~
.
.
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laa:'1
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Periods or bigb employment growth $ucb .. in the past
tbn:c years are often accompanied by delCriorarloo in the
trade balance doe 10 strong demood for imports.
.'
�o
Moreover, U.S. exports to Japan have grown twice as fast
as importS in volume temls. How.eve:r, we are paying tnOl"e
for impons from Japan due to the appn:ciation of the yen
relative to the dollar.
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US. competitiveness
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and economic strength have surged ahead In the last two years.
For the second year in a row, a survey of international oorporate managm ",ted lIIe United States Number I on competitiveness
this year. up from Number 5 in 1992.
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J
�The resurgence In U.S, competitiveness has Jed to gains in key sectors.
.
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u.s. bnpor1a 01 ,ja_ Autos Are DeclIning Sharply
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.
EDUCATING AMERICA:
AN INVESTMENT FOR OUR FU1:URE
\
. A Report by the
Council of Economk Advisers and tbe
U.s. Department of Labor
September, 1995
�EDUCATING AMERICA: AN INVESTMENT FOR OUR FUTURE
EXECUTIVE SUMMARY
'"'
The educational level- that is, the number of years of completed formal education
~- of the U,S, workforce has risen, both over the long-term and over the past twenty years. Test
scores have been increasing ill the United States, especially for minoritie.<;, At the same time,
U.S, students compare unfavorably to those in many other nations on tests of math and science
achievement
More educated workers eam more, and the gap between earnings of high school
and college graduates has more than doubled over the past 15 years. In 1994, the median full
,time worker with at Jen,st a bachelor'S degree earned 74 percent more per week than the median
ful1~time worker with only a high school degree; this figure was only 36 percent in 1979.
,
'
of
'"
Since education raises the earnings and productivity of workers, it contributes to
overall economic growth, Evidence: from cross~country comparisons generally supports the
conclusion [hat education contributes to growth,
*
The weight of evidence indicates that Head Start and other compensatory preschool
education programs improve subsequent school achievement Evidence is not yet. available to
provide a full evaluation of "school to work" programs, but the initial evidence is f~'Vorabie.
\
Education and training payoff for workers who have already entered the labor
market. Worker training is generalJy an essential ingredient of hlgh-perfonn~ce workplaces.
,.,
Programs that make education cheaper or more available appear to increase the
amount of educational attainment.
>II
�-
EDUCATING AMERICA, AN 1l'<'VESTMENT FOR OUR fUTURE
~
"
Investments in education yield greater dividends today than ever before. The
" foHowing is a survey of the overwhelming evidence regarding the benefits of education to
American workers and to our nation's economy, and the importance of assuring affordable
access to higher education.
THE EDUCATIONAL LEVEL OF THE U.S. WORKFORCE HAS RISEN
IN RECENT YEARS.
l.
American workers now have more years of formal education than ever before.
Recent years have seen the continuation of three heartening trends.
First, more' students are finishing high schooL In 1973: 14.1 percent of l&. to
24-year-olds were high-school dropouts; by 1993, the rnto had fallen to 11.0
p<~rcent.
Part of this improvement:is due
to increases in the graduation rates cif
African American students, whose dropout rates have fallen much more sharply
than have dropout rates for w.hite studenLS. [See Chart AJ
Second, more high-school graduates are B:ttending college. Since 1980, the
percentage of high-school graduates who enrolled in college followif!.g
graduation haS increased from 30.5 percent to 41.6 percent, [See Chart BJ As
ne"':' workers have replaced qlder, less educated workers, the share o( the labor
force with a college degree has also increased, from 16 percent in 1973 to 29
percent in 1993. [See Chart C]
Third, total graduate. school enrollment has grown almost as rapidly as
undergraduate enrollment, in percentage terms, over the past two decades;
growth in graduate errrollmeht for fullAtime students has been much faster than
in undergraduate enrollment. .
The result of these three trends has been a more educated labor force: average years of
education per worker climbed from !I.B in 1973 to 13.0 in 199U.' [See Chart
DJ .
Test scores hare ~Iso risen, although they remain-unimpressive by international
standard:". Over the past decade, test Scores ~n mathematics, science. and '\IeTbal skills have
generally risen for children of almost all ages and racial and ethnic groups. These test-score
gains have been largest among A~ric!ID· American students, Despite the gains, there remains
room for further improvement: U.S, students continue to trail students from most other
industrializ.ed nations on international achievement tests in math and science. [See Chart E
andF]
I
u.s.
Department of Education, National Center for
Ed(lCatiOll
Statistics. Digut of EducaJion S~ics.
1994; and U.S. Department of Labor. Bureau of Labor Statistics, 'Labor Composition (11Ui U.S. Productivity
Growth. 1948·9D, De<:ember 1993,
�2
ll.
FORMAL EDUCATION CREATES SUBSTANTIAL ECONOMIC
BENEFITS, BOTH FOR THE INDrvIDUAL AND FOR SOCIET¥.
More educated workers earn more; and the gap has doubled over dIe past 15
years, In 1994, for example, the median fuU-time worker with at least a bachelor's degree
,earned 74 percent .more per week than the medil:ID {ui~-time worker with only a nigh school
degree; this gap was only 36'perccnt in 1979, The rewards to education and training are one
of the most well~stabHshed findings in economics. l Positive returns to education and the
recent increase in retums have been documented for a wide range of foreign nations. as well
as for tile United States.' [See Chart GJ
Establishments with higher levels of education have higher productivity." A
nationally-representative survey fouod that an establishment whose workforCe bas an ave:o.ge .
'education 10 percent (that is, slightly more than one year of schooling) above that of similar
establishments has productivity about 8.6 percent above similar establishments,
Labor demand in high~ski1l oceupations is increasing. Taken together. the two
trends noted above -- the greater numbers of college graduates, and the increasing earnings
gap between college.and high-school graduates -- juggest that deinand (or rugher-skilled
workers must have increased in recent decades. And indeed. occupational evidence supports
this view, From ]984 to 1994, whereas employment growth in occupations whose workers
have low.levels of education averaged only 7 pereent, employment growth in higb~ski11
occupations averaged an impressive 32 percent. The increases in employment in high-skill
occupations presumably would,have been even larger if there had not been an increase in the
wages of skilled workers relative to unskilled. [See Chart HJ
\ There is SOme debate about the callSe of the wrrelation between etdueation and
••rninis. One problem is tl,at people with high ability are disproportionately likely to
receive above~average education, but would also have been disproportionately likely to
receive high wages even if they had not received so much education. In addition, education
can payoff for an individual beca:.l5e ~ucation is a credential th?J. signals high ability. even
if little is learned at schoo1.
i
Willis, Robert, "Wage Determinants: A Survey And Reinterpretation of Human Capital Earnings
Functions," in Orley Ashenfelter and Richard Layard,.eds .• Ha.ndbcok
of Laber EcOMttlics.
Volume 1, Elsevier
Publishers. 1986,
l f'sacharopoulos, George. ~Returns to Bdocation: A Further International Update and Imp!ical.ion~:' Journal
oj Human RCSf)urcu. Volume 20, Fall, 1985; and Freeman, Richard B.• amfLawrencc Katz. "Rising W~
Inequality: The United States V$, Other Countries," in Freeman, Richard B., c<t, Working Under Difftrent Rulu
(New York: Russell Sage Foundation), 1994.
.
.. Lynch, Lisa, 'The Other Shoe: Char.\eteristics of Human Capitallnvestmc:nts and their Pnj'-(Jffs (0
Employers," working paper, National Center on the Educational Quality of the Workforce, University of
Pennsylvania, 1995.
�3
Nevertheless, much of the evidence indicates that the economic rewards to
education accrue because schooling actually makes students more productive as
employees, and not primarily because schooling screens out I?w-ability students.
of
One recent study showed that a year
college education increases earnings by
5 percent to 10 percent, even -controlling for family backgrounds or test scores
in high schooL This result holds not only for four-year institutions, but also
for community colleges. 5
Another study examined identical twins, who obviously share si.milar family
characteristics an~ identical genes, and found that each year of additional
schooling raises later earnings of the more-educated twin by about 13 percent. 6 ,
.A third study found that each additional year of schooling due to compulsory
schooling laws raises earnings by 8 percent (although statistical problems limit
the precision of this estimate).7
III.
EDUCATION CONTRIBUTES TO ECONOMIC GROWTH.
New evidence emphasizes that education is an important determinant of the speed
at which the economy as a whole grows. A large body of literature has shown that
countries with the highest initial levels of education in 1960 or 1965 typically grew the fastest
in subsequent decades. s One recent study, in trying to pinpoint just how education makes its
contribution, has shown that countries with better-educated labor forces are better able to take
advantage of technologies developed in other countries;9 this factor is likely to have
contributed to the growth successes of Japan and-the East Asian newly industrialized
countries. Sketchier evidence suggests that even within countries, states and regions with
Kane, Thomas J. and Cecilia Rouse, "Labor Market Returns to Two and Four-Year·Colle£e: [s A Credit
a Credit and Do Degrees Matter'?", American Economi~ Review, Vol. 85, No.3, pp. 600-14 (l~95).
.5.
6 Ashenfelter, arley, arid Alan B. Krueg~r, "Estimates of the Economic Returns to Schooling From a New
Sample of Twins," American Economjc Revjew, December 1994. Other studies of twins have found smaller, but
still positive, effects.
7 Angris~ Joshua and Alan Krueger, "Does Compulsory School Att~ndance Affect Schooling and
Earnings?," QlU1.rterly Journal of Economics, Vol. 61, No.4, November 1991.
8 See, for example: Barro, Robert J., "Economic Growth in a Cross Section of Countries," Quarterly
Journal of Economjcs, Volume 106, May 1991; and Mankiw, N. Gregory, David Romer, and David Weil, "A
Contribution to the Empirics of Economic· Growth," QlU1.rt~rIy Journal of Economics, Volume 107, Ma~ 1992.
9 Benhabib, Jess, and Mark M. Spiegel, "The Role of Human Capital in Economic Development: Evidence
from Aggregate Cross-Country Data:" Journal of Monetary Economics, Vol. 34, 1994.
�4
beuer-educated.labor forces grow more rapldly.H) A well-educated ';Vorkforce can also raise
the productivity of R&D (for example, because new innovations are implemented .more
quickly). encouraging the technological improvements that are the cruciafingredient in long~
term growth.
The cross~country evidence for an education growth effect can best be thought of
as augmenting the other evidence on the returns to' education. The central difficulty with
these cross-{;ounlry analyses is that countries that "got education right" also got many other.
things right. That is, countries with high levels of education tended to be those with high
investment rates, low inflation rates. a strong export orientation, and stable political
systems-all of which are believed to contribute to growth. As a result, disentangling ,these
factors to determine which of them has contributed most is no easy matter. Still, most growth
economtsts believe that in combination with other factors, education plays an important role.
Ed~.~.~.nonal improvements have contributed significantly to postwar economic
growth in the United States. If we' accept the proposition that more educated workers are
paid more because their education makes them more productive, then we' can estimate
education's growth effects directly by measuring incre~es in the educational attainment of the
workforce. Using this method, the Bureau of Labor Statistics estimates that between 1963
and 1992. improvements in education added 0.3 percentage points per year to the growth rate
of GDP-meaning that education accounted for about 20 percent of per~capita income growth
over that period. This estimate depends crucially on the assumption that the earnings effects
of education equal its effects on the ,economy's productivity. To the extent that returns to
, education are associated with credential screening and signalling, then 0.3 percentage points is
an overestimate; but if education ha.<; positive spillovers, then the actual contribution of
education may be even greater. Training and on-tne~job learning also contribute to economic
growth. although we have no estimates of the ,magnitude of these effects.
Educational improvements forJ9.~"~r..skmed workers can help ensure that they
benefit fully frOIIl economic growth~ Factors that contribute to growth. such as
technological advancement and increased tt:ade. sometimes benef~t higher-ski,lled.workers
disproportionately, The computer advances of recent years, for exampie. have probably
contribcted to economic growth while simultaneous'y shifting ·Iabor demand toward the high
, skilled workers who can best' use the new technologies. To keep lower-skilled workers from
being left behind by growth, it may therefore be ne~essary to increase their levels of
education and training.
10 .HptuA~3kin. Douglas, "Solow and the SUtes: Capital Accumulation. Productivity. and Economic
Growth," Nmionai Tax Journal, Vol. 46. No.4, 1993.
�5
IV. LEARNING THROUGHOUT THE LIFE CYCLE HAS HIGH PAYOFFS.
Head Start and other compensatory pre~5chool programs have substantial
economic payoffs. Pre-school programs,-soch as Head Start. can give a persistent ooost to
~cademic achievement. Compared with other stu4eots ;.vith similar characteristics. gf~duates
of Head Start-style programs are less likely to be held back in school, less likely to be
classified as special..education students, and more likeJy to graduate from high school. As a .
result. the program appears to yield net benefits oat only for participants but also for the
taxpayer." Critics of Head Start-style programs have noted that although the programs
substantially increase the IQ test scores of participant children relative to non-participants, this
test-score advantage disappears by the end of grade school. But studies that have looked
beyond tllis narrow measure of intelligence show that despite the erosion of lQ test-score
effects, ~lese programs do raise future academic achievement.
'
.
School-to-work programs can improve student outcomes: 'Recently, substantial
governmental efforts have been devoted to strengthening the link between high schools.
community coileges, and the workplace. Although these efforts are in many cases too recent
to have produced results that can be evaluated rigorously. preliminary results are encouraging.
For example. California's Partnership Academies, which combine high¥school education with
career-focU!;ed training and work experience, have apparently been quite successful in
reducing dropout rates among program participants. lz More definite results are available for
established progr~ targeted at hlgh~school dropouts, such as the highly successful Center
for Employment Training in San Jose.
Education and training for experienced workers have economic benefits as well.
One recent study concluded that each year of education provided through a Pennsylvania
'program for older displaced workers increased earnings by some 7 percent tJ And a recent
study of the lob Training partnerShip Act, a Federal program providing training for
economically disadvantaged clients. found that participation increased the earnings of adult
. .
.
•
II Bnrm:tt, W, Steven, "Be,.,efhs of Compensatory Preschool Education," Journal
27, No. 2., Spring 1992,
of Hwt'.(11:) Resources,
Vol.
I~ Hayward, Becky,
G. Tallmadge. EvaiWlrion of Dropcu( Prevention and Ret:n.rry Projects in
VocatwntJl Education, draft final report, Researt:n Triangle Institute, November 1993; and Stem, David, et at,
~Be1'leii1s nod Costs of Dropout Prevention in a Program Combining Academic and Vocational Education:
'
1bi:rd~Yeat Re$ults from Replications of the California Peninsula Academies," Educational E~aluatl'OIi and Policy
Annlysis, VoL' 11, No.4, 1989.
and
i
Jacobson, Louis. Roben LaLonde, and Daniel (j. Sullivan, "The Returns to Classroom Training for
.
Dislocated Workers,M unpublished m~usCript, September 1994.
II
�6
males by 10 percent and the earnings of' adult female participants by 15 percent. These
carrungs gains were one and a half times greater than th~ costs invested to produce lhem,I4
[Sec Cban IJ
.
has
Firm-provided vocational training
positive economic impacts for participants
and employers. For workers, a year of either on-the-job or formal training raises wages by
about as much as· a yea.r of college education. IS .There 'is also evidence that firm-provided
training Jeads to productivity gains. A survey of small manufacturing firms in Michigan that
received training gra.'1ts from the state government found that the additional training provided
by manufacturing firms significantly raised productivity. If. Another study of fonna! training
programs in manufacturing firms found that finns that introduced training programs in 1983
had productivity growth that was 19 percent faster, on average, than at other firmsY
Some evidence suggests that training is most effective when combined with other
innovative workplace practices. In practice, companies that train their workers weH tend
also to" have adopted other innovative practices-for example. pay systems that reward
productivity. as well as management structures that give fronuine employees the ability to
suggest and implement improvements in the product and workplace. Ii Several studies
suggest that taken together, these policies are particularly effective.
Evidence of the effectiveness of these human-resource practices comes from a variety of
industries. In manufacturing, a multiyear study of steel finishing lines showed that plants
using highly innovative human-resource management systems (i.e" thac had incentive-based
pay and employee involvement as well as training} had the highest prodllctlvity: these plants
were in operation 98 percent of scheduled time, com.pared with only 88 percent of the time at
companies with traditional work practices. t9 Another study concluded that high-invoiv~ment
steel minimills not only excel in quality and productivity but also enjoy lower employee
I. Bloom, Howard $., et aI., 11u: National JTPA Sru4y: Ovc-rvielV of impacts. Benefits, end Costs of Title
If-A, Abt Associates, Febru<l!)' 1994.
"
15 Lynch, Lisa, "private Sector Training and the Earriings of Young Workers." Am~ri~aJ1 economic Review,
Vut 82, No. 1., 1992.
16 Holul'. Harry et at, "Are Training Subsidies for Finns Effective! The Michigan Experience,~ lM.utrial
and Labor Rdaticns Review. November 1993,
,11 Bartel, A.'me. "Productivity Gains from ~ Implementation of Employee Training Programs," Industrial
Relations, {()1t};cQming.
IS U,S. Dcpart.'n~nt of Labor. High Petformance Work Practices and Firm Peiformance, 1993; and Levine.
David I., Rtinl!eming the Workplace: How B.uiness and Employees Can Both Win (Brookings, 1993).
19 Ichniowski, Casey, Kathryn Shaw. and Giovanna Prenntlsbi, 'The Effects of Human RI:.$Ollrce
Management Practices on Productivity," unpublished manuscnpt. March 1994.
�7
ti!Tnover,W Moreover, these results are not unique to the steel industry. A comparison of
productivity in several industrles in the U.S., Germany and Japan found that adopting best
practice production processes generally required extensive worker lraining. 21 . A worldwide
study of the automobile industry found that a
~oordinated
change to an involvement-oriented
human resource system can simultaneously improve product quality and.productivity.ll
Studies of the electrical components industry and.of companies with flexible manufacturing
systems have found similar resullS.u
.
AlthougJ: most of the detailed studies are in manufacturing, these policies also appear to yield
benefits in service industries, One study of 850 publicly held service companies discovered
that these work practices correlated with a significant reduction in employee turnover and
with 16 percent higner sales per employee (controlling for capital per worker and research
and development spendjng). higher annual cash flow, and increaSed market value of the
company.14
v.
FAMILY INCOME AND TUITION COSTS AFFECT EDUCATIONAL
OPPORTUNITIES.
Borrowing constraints mean that college costs may have a particularly large
effect on educational attainment. If capital markets functioned perfectly, any student for
whom the expected returns)o education were greater than the interest rate would be able to
borrow enough to cover tuition and living costs, Thus low- and high~jncome students with
similar abilities would be expected to enroll in college at similar 'rates. But in practice, future
earnings are far less effective as collateral than are physical aSsets such as houses. "As a
result, before federal guarantees. students could not generally borrow enough to cover the
costs, of education, Thus college costs matter more than they should: even when costs are
low enough to make education a good investment for a.low~income student, they may be too
high for him or her to stay in school. A variety of evidence· suggests that by easing the
borrowing constraint, government can substantially increase educational enrollm~nts,
,
<
20 Arthur, Jeffrey B., "Effects of'Human ReroUfCt SySlems on Manufacturing PeriQmlllnce and Turnover,K
Academy of Managemenl JOllmal., Vol. 37, No, ), 1994.
11 Baily, Manin ~eit, nod Hans Gersbach, "Efficiency in Manufacturing and the Need for Global
Cumpetition," Brookings Papers on EC(Jn(}mit; Activity: MicroccDlwmics, forthcoming.
. .
.
12 MacDuftie, John Paul,' ~Human Resource Bundles and Manufacturing Perl'ormance:' University of
Pennsylvania, Wharton School of Management, June 1993.
13 CUlcher..Qershenfeld, Joel. "TIle lmpac! on Economic Performance of Ii Transformation in Workplace
Reltu.ions:' industrial and lAbor Relations Review. Vol. 44, January 199i;.and laikumnr, Ra.mchandtan.
"Postindustrial Manufacturing," lJarvard Business Review, Vol. 64, November~December 1986.
Huselid, Mar";: A • ~The Impact of Human Resource Managemeru Practices oa Turnover. Productivity,
and Corporate Financial Performance," Academy of MOMgcmenl Journtll, forthcoming.
14
\
�8
Lower college tuition Jeads substantially more students to enroll in coHege. The·
net cost of conege education appears to have a substantial impact on the likelihood of coUege
enroHment for low-income students. For example, one recent study has found thIn students
from states wIth low public-university tuition levels are more likely Lo attend post-secondary
education than 'students from other states, even after conuolling for a wide variety of other
factors [hat could cause this difference,15 The effect is stronger for low-income students
than for high-income students, consistent Wilh the hypothesis that borrowing constraints 'do
indeed constrain educatio.nal attainment.
.
Go'rernment aid can also plav an important role in driving down the cost of
college, and thus inducing more students from low..income families to attend. For a
variety of reasons, students from low~income families may be particularly averse to taking on
the high level of indebtedness associated with borrowing for college. Consistent with this,
there is a substantial amount of evidence that for iow~income students, the avaHabiJHy of
grant aid strongly increases the likelihood of participation in further education.Zfi
The low levels of educational attainment of low~income students (caused~both by
borrowing constraints and by other risk factors) are costly in tenns of lost future
productivity. For poor children, rates of school completion and advancement to post
secondary nducation are much lower than for other children. For example. children who
experie~ce poverty between'the ages of 6 and 15 years. are two to three times more li~ely to
drop out of high school than are students who never ex.perience poverty, A recent study
commissioned by the Children's Defense Fund. which added up the COSts of low educational .
achievement for the 14.6 million poor children in 1992. es.timated that each year that these
children spe.nd in poverty costs the economy somewhere between $36 billion and $177 billion
in reduced future productivity and employment (Again. these ·estimates assume that the
. productivity. benefits of aiyear of education are as large (or poor students as they are (or the
average student)
•
15 Kane, Thomas, "College En\!)' By Blacks Since ~970: The Role of College Coses, Family Background,
and Returns to Education," Journal of PoliJicai Economy, October 1994, See alsO Mansk.i, Charles.. and David
Wise, CQUege Choice in America, Harvard University Press, 19S3.
26 McPherson, Mlcltael, and Morton Shapiro, Keeplng College Afford.acle: Government and Educational
Opportunity, Brookings tnstltution,.1991. p. 214: Hauptman, Arthur M., and Maureen McL3.ughlin, ~[5 the Goal
(If Access to Post-Secondary Education Being Met?," Washington. D.C., Atnuican Council on Educlniop, t988;
Jensen, Eric L, "Financial Aid and Educational Outcom<:s: A Review," College.and Universiry, Spring 1983;
Leslie. Larry, ar.d Paul Brinkman, T~e Economic Value of Higher Education, McMillan. 1988; Manski and Wise,
op. cit.
�9
VI.
CONCI.USION
A quality education is a key determinant of an individual's future economic well~
being and is a critical ingredient for this nation's future econo:mJc health and strength. The
evJdence on this score is overv.rhelming,
The economic returns to education for America's working men
and women have risen dramatically. In 1979, the median fulI~
time work~r with at least a bachelor's degree ,earned 36 percent
more per week than a worker with only a high school degree,
By 1994, that difference had'grown to 74 pe,rcent.
*
*
The evidence shows that compensatory preschool education
programs such as Head Start improve sUbsequent school
achievement. The' evidence is not yet available to provide a fun
evaluation of "school to work" programs. but the initial evidence'
is favorable.
*
\
Since education raises the earnings and productivity of workers•.
it conlribute~ to overalI economic growth.
Education-and training.pay off for workers who have already
entered the labor markel Worker tmini.ng is generally an .
essential ing"redient in the adoption of high perfonnance
workplaces,"
•
Programs that make education cheaper or more available appear
to increase the amount of education.
,
In the words of Benjamin Franklin: "An investment in knowledge pays the best
interest."
.
Given the strong evidence pointing to the positive impact that education has on the
lives of American workers and our economy; our nation must renew its commitment to these
investments. Abandoning our commiunent to education -- especially at a" time when the
future standard of living, for American workers and the strength of the American economy
depends on an educated workforce - is'shorrsigbted'and could have long-tenn dB:IJlaging
consequences to this nation's economic health and strength.
.
,
�CHARTA
High-schoo' dropout rates for persons aged 16 to 24 years
16%
14.1%
14%
12% .
11.0%
10%
8%
5%
4%
2% .
0%
1973
1993
�;:
CHARTB
College enrollment of 18- to. 24-year-old high-school graduates
45%
41.6%
42.6%
.
40%
36.1%
35%
32.8%
31.0%
30.S%
30%
27.6%
26.0%
25%
20%
15%
"
10%
5%
•
0%
All
White
Black
.1980 01993
Hispanic
�, t.
'c.:,
. <:, .
.'!'-..
~
"'~>
:;:.
.,
"'!
.
:',
.; .. '
-
,.
.,,;.
CHART C
Fraction of labor force with a college degree
30%
29%
25%
20"/0
1<;%
15%
10%
5%
�CHARTD
Average years of education per worker
13.5
13.0
13
12.5
12
11.8 .
11.5
"
11
10.5
+1-------'
1973
1990
�CHARTE
NAEP Mathematics Scores of 17-year olds
·1978, 1982, 1986, 1990, and 1992
320 .
311.9
310
300
e
0
290
u
'"
0..
~
2BO
"
'"
~
>
"
«
270
.260
250
240'
Total
White
Black
�"'"
\J ".:
'.:,,'
"~'.".
":.'"
"""
;
",'Co.
.';.
305
I
CHARTF
NAEP Reading Scores of 17-year aids'
1980,1984,1988, 19S0,1992,and 1994
.'
295 .
285 '
e
0
275
~
n.
'"
Ul
~ 265
255
245
274.4
�-'
CHARTG
Mean annual eamings for male full·time year·round workers,
Aged 25 to 341n 1979 and 1993
$45.000
$42,296
$40.000
$35.000
$31.613
$30.000
525,632
$25.524
"
'0
$25 00() .,.
":
g
520,000
.
~
Q
$18,719
~
$15.00~
•
$10,000
$5,000
•
$0
Higtl~school
dropout·
High-school graduate
.197901993
College graduato
�CHARTH
+35%
Employment growth by occupational skill level
1984-1994
32%
+30%
;;\ +25%
'"
~
..I
~
'"
":
"
~
+20%
0
"
'"
c
~
~
+15%
~
0
Q.
E
w +10%
7% .
.+5%
+O%LI----~---L--~__--~~JL---------r--------Low~sk.1II occupations
High·sk.lll occupations
NOTE:' High-skill occupations are defined as those In the top third of all employment by average educational attainment.
Low-sk.iII occupations are defined as those in the bottom third of all employment by average educational attainment.
�-.
CHART!
Increases In eamingsoutweigh costs of JTPA training
$1.800
$1.703
$1.500
Increase
$1.401
$1,400
Increase
$1.171
$1.200
$1.000
,$631
S800
$600
$400
$200
$0
JTPA for adult men
JTPA for adult women
NOTE: Earnings increase represents total additional earnIngs due to training over,30 months following training,
�
Dublin Core
The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/.
Title
A name given to the resource
Clinton Administration History Project
Creator
An entity primarily responsible for making the resource
Cinton Administration History Project
Council of Economic Advisers
Department of Commerce
Central Intelligence Agency
Department of the Interior
Department of Defense
Corporation for National Service
Council on Environmental Quality
Department of Justice
Domestic Policy Council
Department of Education
Department of Energy
Environmental Protection Agency
Federal Emergency Management Agency
General Services Administration
Small Business Administration
Social Security Administration
United States Agency for International Development
National Economic Council
Office of Management & Budget
Office of National Drug Control Policy
Office of Personnel Management
Office of Science & Technology Policy
Office of the Vice President
United States Trade Representative
Date
A point or period of time associated with an event in the lifecycle of the resource
1993-2001
Description
An account of the resource
<p>The Clinton Administration History Project describes in detail the accomplishments of President Clinton's Administration for the period 1993-2001. The records consist of the histories of 32 agencies or departments within the Executive Branch. In general, each organization associated with the Project submitted a narrative history along with supporting documents. These narrative accounts are primarily overviews of the various missions, special projects, and accomplishments of the agencies. The supplementary records include substantive memos, press releases, briefing papers, and publications illustrated with photos and charts.</p>
<p>Agencies:<br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Council+of+Economic+Advisers&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Council of Economic Advisers</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Central+Intelligence+Agency&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Central Intelligence Agency</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Commerce&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Commerce</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+the+Interior&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of the Interior</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Defense&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Defense</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Corporation+for+National+Service&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Corporation for National Service</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Council+on+Environmental+Quality&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Council on Environmental Quality</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Justice&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Justice</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Domestic+Policy+Council&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Domestic Policy Council</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Education&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Education</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Energy&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Energy</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Environmental+Protection+Agency&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Environmental Protection Agency</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Federal+Emergency+Management+Agency&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Federal Emergency Management Agency</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+General+Services+Administration&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the General Services Administration</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Health+and+Human+Services&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Health and Human Services</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Housing+and+Urban+Development&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Housing and Urban Development</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Labor&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Labor</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+National+Economic+Council&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the National Economic Council</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Office+of+Management+and+Budget&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Office of Management and Budget</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Office+of+National+Drug+Control+Policy&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Office of National Drug Control Policy</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Office+of+Personnel+Management&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Office of Personnel Management</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Office+of+Science+and+Technology+Policy&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Office of Science and Technology Policy</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Office+of+the+Vice+President&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Office of the Vice President</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Small+Business+Administration&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Small Business Administration</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Social+Security+Administration&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Social Security Administration</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+State&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of State</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Transportation&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Transportation</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+the+Treasury&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of the Treasury</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+United+States+Agency+for+International+Development&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the United States Agency for International Development</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+United+States+Department+of+Agriculture&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the United States Department of Agriculture</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+United+States+Trade+Representative&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the United States Trade Representative</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?search=&advanced%5B0%5D%5Belement_id%5D=39&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=History+of+the+Department+of+Veterans+Affairs&range=&collection=21&type=&user=&tags=&public=&featured=&exhibit=&submit_search=Search+for+items">History of the Department of Veterans Affairs</a></p>
Is Part Of
A related resource in which the described resource is physically or logically included.
<a href="http://clinton.presidentiallibraries.us/items/show/36051">Collection Finding Aid</a>
Provenance
A statement of any changes in ownership and custody of the resource since its creation that are significant for its authenticity, integrity, and interpretation. The statement may include a description of any changes successive custodians made to the resource.
Clinton Presidential Records: White House Staff and Office Files
Publisher
An entity responsible for making the resource available
Clinton Presidential Library & Museum
Format
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Adobe Acrobat Document
Extent
The size or duration of the resource.
1474 folders in 111 boxes
Text
A resource consisting primarily of words for reading. Examples include books, letters, dissertations, poems, newspapers, articles, archives of mailing lists. Note that facsimiles or images of texts are still of the genre Text.
Original Format
The type of object, such as painting, sculpture, paper, photo, and additional data
Paper
Dublin Core
The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/.
Title
A name given to the resource
[Council of Economic Advisors] [1]
Creator
An entity primarily responsible for making the resource
History of the Council of Economic Advisers
Clinton Administration History Project
Date
A point or period of time associated with an event in the lifecycle of the resource
1993-2001
Is Part Of
A related resource in which the described resource is physically or logically included.
Box 1
<a href="http://clintonlibrary.gov/assets/Documents/Finding-Aids/Systematic/Administration-History-finding-aid.pdf">Collection Finding Aid</a>
<a href="http://catalog.archives.gov/id/1224798">National Archives Catalog Description</a>
Provenance
A statement of any changes in ownership and custody of the resource since its creation that are significant for its authenticity, integrity, and interpretation. The statement may include a description of any changes successive custodians made to the resource.
Clinton Presidential Records: White House Staff and Office Files
Format
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Adobe Acrobat Document
Publisher
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Clinton Presidential Library & Museum
Medium
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Reproduction-Reference
Date Created
Date of creation of the resource.
6/24/2011
Source
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1224798-council-economic-advisors-1
1224798