Building Wealth - 99.06 (Part Four)

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(The online version of this article appears in four parts. Click here to go to parts one, two, and three.)

Rule 8

The biggest unknown for the individual in a knowledge-based economy is how to have a career in a system where there are no careers.

DUCATION has always been a high-risk investment for the individual. More than 20 percent of all college graduates will end up making less than the average high school graduate. They invested and it did not pay off. But recently it has become even riskier. How does one plan the investments necessary to have a career in the face of corporate downsizings at profitable firms?

For my generation of high school graduates the concept of a career had meaning. During the 1950s in Montana, where I went to high school, many high school graduates started as laborers in the copper mines. Starting wages were good, and one could count on annual raises of two or three percent. There was a skill ladder. Laborers moved up to operating underground trains or other kinds of heavy equipment, learning the necessary skills by working as assistants to the operators. Someone who demonstrated intelligence and judgment could be given responsibility for setting off underground explosions. Each promotion meant higher hourly wages. When a worker reached his mid-thirties, he could expect to take the last step on the earnings ladder and become a contract miner, who was paid for each foot of tunnel dug rather than by the hour. He was no longer a wage slave. On this career ladder high school graduates could match college graduates in earnings.

balancing act But that's all gone now. Those mines were shut down. The thousands of people who worked there were laid off.

What used to be true only in declining industries -- that skills suddenly become valueless -- is now true everywhere. Downsizing is a way of life even in good times. In a global economy, if skills are cheaper somewhere else in the world, companies will move there to lower production costs. They aren't tied to any particular set of workers. When new knowledge makes old skills obsolete, firms want to employ workers who already have that knowledge. They don't want to pay for retraining. In the second half of this decade profitable American companies have laid off more than half a million workers each year despite the economic boom. The old career ladders are gone. The old lifetime employees are gone.

Explicitly or implicitly, today's high school graduate is given a message: "You are unlikely to have a lifetime career in any one company. You are going to have to learn to take responsibility for and manage your own career. Regular annual wage increases are a thing of the past. Paternalism is gone." If they are honest, employers themselves deliver the message. But how does anyone follow this advice?

From Atlantic Unbound:

Politics & Prose: "What Work Costs Us," (February 10, 1999)
Jack Beatty on Richard Sennett's The Corrosion of Character, a book that examines the demoralizing effects of the new "flexible" economy.

If career ladders don't exist within any one company, maybe they exist across different companies. This would mean that a good initial performance at Company A would lead to training opportunities, a better job, and higher wages at Company B. But the world doesn't work that way for most employees. Companies don't tell other companies who their good employees are -- even if they have no promotion opportunities to offer those employees. They don't want to lose them. And even if they did tell other companies, they wouldn't be believed. They would be suspected of trying to get rid of their bad workers. Similarly, they don't tell other companies about their bad employees. They don't want to open themselves up to lawsuits. If asked, and they seldom are, companies are willing to tell other companies just one thing about a worker seeking a new job: Yes, that person did work for us.

In this context a good performance at Company A doesn't matter, because it does not lead to opportunities for training and promotion at Company B. When workers move from one company to another, they simply start over at another entry-level job; there is no progress up a career ladder. The rational strategy is to keep moving until one finds a company that still has internal career ladders. But as such companies become fewer, the number of high school graduates with real career opportunities ahead of them declines to the vanishing point.

A cross-company career ladder runs into other problems. After age forty-five cross-company career moves are difficult, and after age fifty-five they are impossible. (Those tracking downsized workers find that after age fifty-five they seldom find good jobs with good companies.) Age-discrimination laws can protect older employees against being unfairly dismissed from their old firms, but they cannot get them a good job at a new company. Employers have the right to hire the best workers available. In a fast-changing world older employees too often bring obsolete experience and out-of-date skills. There are always a lot of young potential employees who look more promising.

The lack of career opportunities is dramatically visible in earnings data. The gains in real annual earnings of high school graduates aged twenty to forty are much smaller than they used to be. There are lots of jobs, and unemployment is low, but opportunities to acquire skills and the higher wages that go with them don't exist. As a result, earnings profiles are flatter. The lack of on-the-job opportunities to acquire new skills is another reason that the wage gap between high school graduates and college graduates has gotten much bigger in recent years.

From the archives:

"The Declining Middle," by Bob Kuttner (July, 1983)
With most jobs being created at the top and the bottom of the ladder, America may have difficulty remaining a middle-class society.

"The Return of Inequality," by Thomas Byrne Edsall (June, 1988)
The great bulk of Americans are losing economic and political power, while the affluent are gaining both. This is not a recipe for social comity.

Real wages have also been falling for most of the male labor force. Graduating from American high schools, these men don't initially have the same level of skills as their counterparts in the rest of the industrialized world, nor do they get the post-secondary skills training (apprenticeships, for example) that most of the rest of the world gives its non-college-bound labor force. At the same time, wage gains for those in the top 20 percent of the work force have never been larger. The widening disparity in earnings and wealth doesn't create problems for the economy (it simply produces more luxury goods and fewer middle-class goods), but it probably does create long-run political problems in a democracy. How does one preach political equality in an economy of ever-growing inequality?

The issue is not jobs. It is high wages and careers. If wages fall to be commensurate with skills, jobs are always available. That is what the American experience proves. Jobs have never been more plentiful than they are in the 1990s, yet wages have been falling for more than half of the work force. In contrast with jobs, careers are in very short supply in America.

With career ladders in place, the ambitious worker of the 1950s or the 1960s could figure out what skills were needed for advancement. He or she knew what to take in night school. But without career ladders, how does anyone rationally plan an educational investment? What skills will pay off? No one wants to waste investment funds on skills that will go unused.

Historically, on-the-job training has been central to skills acquisition for much of the population. But with downsizing, the days of extensive on-the-job training have ended. What replaces it? In economics textbooks workers start to pay employers for the training they used to get free, when they were expected to be lifetime employees, by working for wages below what they could get from an employer who was not providing training. This has not happened. Judging what skills to buy from one's employer is no simpler than judging what skills to buy from an outside institution.

Also missing from a downsizing environment is a sense of economic security. If workers are asked what factors are most important in a job, economic security always comes out ahead of maximum wages. This is not the answer that is supposed to be given by Homo economicus. He or she is supposed to be interested in lifetime income maximization, and not to be worried about the risks and uncertainties of economic life. But real live human beings like the feeling of a solid economic floor under them. Homo economicus does not worry about starving between jobs.

Paradoxically, just when one would think that firms would be building closer relationships with their key knowledge workers, in order to keep them committed to the firm, they are smashing the implicit social contract with these workers. Knowledge workers, like other workers, are now fired when not needed or when their skills become obsolete. They, too, see a reduction in their real wages when cheaper alternatives are found elsewhere in the world. Firms invest less in on-the-job training for knowledge workers even when they want them to stay around, because they know that in the future fewer of them will stay around. If workers are laid off when not needed, the smart ones know that they should leave whenever an even marginally better job opportunity presents itself.

As job uncertainty rises, the numbers of those with a strong interest in the success of their current employers dwindle. Surveys show that although attachment to their occupations has remained constant for American workers over the past two decades, the number of those with a strong attachment to their employers has gone down by a fifth. The system is evolving toward less commitment and less investment in skills just as it should be moving in the opposite direction.

The basic problem in the United States is that every employer wants a free ride in the training system. "You train, I'll hire" is the American way. Whenever unemployment is low, employers who themselves do no training bitterly complain about the shortage of trained workers. They see nothing strange about their complaints. As for the employees, without career ladders they cannot intelligently acquire the right skills on their own. Since they will be switching employers frequently, they don't know what skills they will need or how long those skills will be relevant to their earning opportunities. As a result -- rationally -- they don't invest in skills.

When it is clear that something must be done but rational individuals and companies won't do it, society has to reorganize itself to make what is individually irrational into something that is individually rational. There is a simple solution. For example, France levies a training tax of 1.5 percent of payroll. The purpose is not to collect taxes but to make it rational for every employer to train. Employers can deduct their expenditures for training from that 1.5 percent tax. Thus if they spend 1.5 percent of their sales on training their work force, they pay no tax. Since the money will be taken away from them if they don't train, training becomes a free good as far as the firm is concerned. No one tells employers what skills to teach their workers, but they are effectively being told that they must teach some skills. Such a system aids everyone. It makes employers invest as if there were career ladders even when these have been abolished. If all employers have to invest, no one gets a free ride.

Major Unresolved Problems

HE biggest problem of the third industrial revolution is as easy to enunciate as it is difficult to solve. Technology is creating a global economy that is rapidly supplanting our old national economies. National governments cannot control this new economy, yet no one, least of all Americans, wants to create the forms of global government that might be able to control it. As a result we are going to be living in a fundamentally unmanaged economic system. The difficulties of containing the 1997 Asian economic meltdown are just the first of many such difficulties we can expect.

From the archives:

"Living in Candlestick Park," by John Lewis Gaddis (April, 1999)
In the twenty-first century geopolitics might well take its metaphors from geology, as the state system of international relations gets shaken to its foundations.

National governments, which used to worry about managing and maintaining their economic systems, are slowly being pushed out of business. Changes in global finance overwhelm all but the largest governments. Governments have lost much of their influence over the movement of information and capital. They cannot control who crosses their borders either physically or culturally. They still have their armies, but they are afraid to use them when wars are also fought on television.

Conversely, the power -- or perhaps we should say the freedom from government supervision -- of global businesses is growing with companies' ability to move to the most advantageous locations and to play countries off against one another in bidding for attractive investment projects.

As national governments shrink and global corporations expand, a second major problem emerges. Almost everywhere we look we see rising economic inequalities among countries, among firms, among individuals. Returns to capital are up; returns to labor are down. Returns to skills are up; returns to unskilled labor are down. Firms will be global players or they will be niche players. The mid-sized national firm is a species in danger of extinction. Traditionally, national governments have acted to keep such inequalities under control. But having lost their ability to manage the system, they have also lost their ability to restrain economic inequalities. For at least a while we are simply going to live in a world with greater inequalities on a broad scale.

HE third industrial revolution is making obsolete old institutions and old modes of operation, requiring the individual, the firm, and the nation to change.

For individuals here are three words of advice: skills, skills, skills. The economic prospects of those without skills are bleak. What we now see -- falling real wages for those without skills -- is going to continue. In education the needs of the bottom two thirds of the labor force are particularly acute. In an age when brawn earns little and brains much, this part of the labor force simply has to be much better educated. Something is fundamentally wrong when the bottom quarter of South Korean eighth-grade students score, on average, higher than their American counterparts.

Entrepreneurial opportunities were few in the 1950s and 1960s. Today they are many. But for every success we read about in the paper, every new billionaire made, dozens of entrepreneurs will go broke unnoticed and unmourned. The downside risks are real.

Cannibalization is the challenge for old business firms. Can they aggressively seize the opportunities opened up by the third industrial revolution, even when that means deliberately destroying existing profitable activities? History is clear: few can, and those that don't are likely to die. For new firms the economic opportunities have never been better. The world is full of openings for businesses to grow in environments without established competitors.

Nations that are heavy investors in education, infrastructure, and R&D are going to tend to win. We need a national capital investment budget to remind ourselves of how we are spending our resources. The negative savings rates that we now have are not the route to success.

For those with skills and a fondness for risks, however, who are willing to cannibalize their old activities and are living in high-investment societies, the times have never been more favorable.

The online version of this article appears in four parts. Click here to go to parts one, two, and three.

Lester C. Thurow is a professor of management and economics at the Massachusetts Institute of Technology. This article will appear in somewhat different form in his book Building Wealth: New Rules for Individuals, Companies, and Nations in a Knowledge-Based Economy which is to be published by Harper Business in June 1999.

Illustrations by Alison Seiffer.