Microsoft Word Heckman final 2007-03-22c jsb doc

 

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recommendations. 

 

Human Capital and Economic Performance 

Education and skill are central to the performance of a modern economy. The emergence 

of new technologies has raised the demand for highly skilled workers who are qualified to use 

them. A wage premium for skilled labor emerged in many countries in the early 80s, and wage 

inequality grew as the economic return to education (the economic benefit of attending school) 

rose, especially in countries like the U.S. where the supply response to the increasing wage 

premium was weak.

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 Not only did the wages of the skilled rise, but those with the least ability 

and education earn less today than comparable workers would have earned thirty years ago. 

 

Workforce Trends 

Table 1, taken from Ellwood, highlights the problems facing the American labor market 

in the next two decades. The first column of the table presents the distribution of the American 

workforce among age and race-ethnicity categories in 1980. The second column shows the 

growth in the categories from 1980 to 2000 and the third column shows the labor force as of 

2000. The fourth column shows the projected growth in the labor force in the next twenty years 

by category. With the possible exception of the numbers for immigrants, these are reliable 

projections because there is little emigration and the groups being projected are already alive. 

The immigration projections come from a carefully executed U.S. Census study. The labor force 

is aging and young replacements for old workers are increasingly in short supply compared to the 

1980s.

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  The aging of the American workforce raises serious problems for the future of American 

productivity growth. 

The workforce of prime-age workers, fueled by the entry of Baby Boomers, propelled 

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U.S. economic growth in 1980–2000. However, we cannot count on this source of growth in the 

next twenty years. Indeed, the largest components of growth in the workforce will come from 

older workers as the Baby Boom cohort ages. Hence, a major source of vitality in the U.S. 

workforce will be lost. Future workforce growth will come from older workers and from 

demographic groups in which, for a variety of reasons, dysfunctional and disadvantaged families 

are more prevalent (See the middle rows of the table 1 and the discussion below). 

On top of these trends in the number of workers by age, there is stagnation in educational 

attendance rates. Figure 2 shows the distribution of educational attainment among 30-year-olds 

by year. College-going rates have stalled out for cohorts of Americans born after 1950. This is 

not a consequence of immigration of unskilled workers. It is a phenomenon found among native-

born Americans. Currently, 17% of all new high school credentials issued are GEDs.

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  Heckman 

and LaFontaine (2006) document that the high school dropout rate has increased over time if one 

counts GEDs as dropouts, as one should, because GEDs earn the same wages as dropouts, and 

graduate from college at the same rate as dropouts. 

The growth in the quality of the workforce, which was a mainstay of economic growth 

until recently, has diminished. Assuming that these trends continue, the U.S. economy will add 

many fewer educated persons to the workforce in the next two decades than it did in the past two 

decades (see table 2). Jorgenson, Ho, and Stiroh estimate that the average annual rate of growth 

of college labor supply was 4.5% in 1977, but fell to 1.75% in 1990–2000. These trends are 

predicted to continue, or possibly worsen. 

The slowdown in labor force quality growth has already hurt American productivity 

growth. Delong, Katz, and Goldin estimate that increases in educational attainment boosted the 

effective quality of the workforce by 0.5% a year over 1915–2000, and thus contributed an 

average of 0.35 percentage points per year to economic growth over that period.

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  The slower 

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growth in educational attainment of the workforce substantially reduced productivity growth in 

recent years compared to its performance in the period 1915–1980. Based on current trends, these 

authors project that the annual rate of productivity growth attributable to education—0.35 from 

1980 through 2000—will decline by half or more (to between 0.17 and 0.06 percent) in the next 

two decades. This will reduce the productivity growth of labor by a substantial 0.18–0.29 

percentage points per year and will be a drag on real wage growth and fiscal revenues. 

 

Literacy and Numeracy 

The skills of the U.S. labor force are poor. The U.S. has a thick lower tail of essentially 

illiterate and innumerate persons, who are a drag on productivity and a source of social and 

economic problems. We use data from the International Adult Literacy Survey (IALS) to 

examine literacy and numeracy of working age adults (age 16-65).

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  Document literacy is defined 

as the ability to locate and use information from timetables, graphs, charts and forms. Figure 3 

presents data on document literacy. Tests for prose literacy and quantitative literacy produce the 

same pattern.

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Level 1 performance is essentially functional illiteracy or innumeracy.  It represents the 

inability to determine the correct amount of medicine from information on a bottle of pills. 

People who perform at Level 1 can make limited use of texts that are simple and uncomplicated. 

They are only able to locate information in text or data as long as there is no distracting 

information around the correct answer. On the quantitative scale, they can only carry out 

relatively straightforward operations such as simple addition. Roughly 20% of U.S. workers fall 

into this category on each test, a much higher fraction than in some of the leading European 

countries. This is a major drag on U.S. competitiveness

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 and a source of social problems. 

 

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