| BUSINESSWEEK ONLINE : SEPTEMBER 27, 1999 ISSUE | ||||||||
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| ECONOMICS
The Prosperity Gap The economy is booming, profits are soaring--so why isn't everyone riding high? By most statistical measures, the past few years have felt like a return to the good old days of the 1960s. The unemployment rate has fallen to just over 4%, inflation is nearly nonexistent, and productivity growth has accelerated. There is, however, one big difference between today's boom and the experiences of the 1960s. Back then, it really was true that the rising economic tide lifted everyone. No matter where you worked--be it a factory, school, bank, hospital, or hotel--you saw your wages rise in the 1960s. But today, there are vast disparities in wage growth between different parts of the economy. If you work in a ''New Economy'' industry such as software, financial services, media, or consulting, you have probably seen your earnings skyrocket in recent years. But if you work in an ''Old Economy'' industry, it is more likely than not that your wages, after adjusting for inflation, have not gone up much. The bottom line is simple: If you stay at a job in an Old Economy industry, you are destined to become relatively poorer and poorer in a richer and richer society. That's true despite reports of labor shortages in many industries. Grocery stores and hospitals may have big ''Help Wanted'' signs in their windows and on their front desks, but intense price competition means that real wages in grocery stores and hospitals are actually falling. And while it may be hard to find a carpenter to put a new deck on your house, construction workers are contending with a tremendous influx of nonunionized and immigrant labor. In addition, nonresidential construction is far lower, as a share of gross domestic product, than in the 1980s. As a result, the average weekly wage across all of construction, adjusted for inflation, is up less than 3% over the past five years. Similar trends exist throughout the entire economy. By BUSINESS WEEK's calculations, average real wages in the New Economy industries have risen by 11% since 1994, while real wages in the rest of the economy are up by only 3%. Compared with 1988, real wages are down by 4.5% in Old Economy industries (chart, page 92). These figures are for production and nonsupervisory workers, but a similar disparity affects every level of the labor force, from managers to sales reps to new college grads. Moreover, these figures do not include stock options, which are a far more important source of income in the New Economy industries. SOARING PROFITS. This difference goes a long way toward explaining why many Americans are uneasy about their place in today's prosperity. Now, as never before, it matters very much what part of the economy you work in. How can you tell whether you are part of the New Economy or the Old Economy? The key is whether the main product or service of your industry is information. If so, then the exponential gains in the speed of information processing insure falling costs and enormous opportunities for growth. That, in turn, makes it far easier to pay higher wages. For example, financial services are in the New Economy because they are primarily an information business--no physical products or personal services change hands. As a result, banks and Wall Street firms have reaped the full benefit of the information revolution, in the form of lower costs, new products, and soaring profits--and not incidentally, rising wages. By contrast, Old Economy industries produce tangible goods or personal services, which are less affected by information technology. Putting computers into the factory may cut costs and hold down inventory, but the cars or steel produced don't change very much. To be sure, the division between the Old and New Economy is not cast in stone. Take higher education. As long as most teaching is still done the old-fashioned way, with individual professors lecturing to classrooms, there is little scope for computers to boost productivity. But as universities move to a different model--tele-education, Internet-assisted learning, and the like--advances in information technology translate into lower costs and potentially lower tuitions and broader markets. DEEP FISSURES. Nevertheless, the group of New Economy industries is gradually pulling away from the broader economy, opening up deep fissures that did not exist before. With much faster job growth, much higher productivity gains, and much bigger profit increases (chart), the New Economy industries can afford to pay bigger wage gains than their Old Economy counterparts. It's not simply the less skilled who are suffering. Wages have also lagged behind dramatically in education and health care, industries that are the two biggest employers of college-educated workers. (Education and health account for one-sixth of all bachelor's-level college degrees and a full third of all master's-level degrees.) For example, average elementary and secondary school teacher salaries rose at a rate of only 2.3% from 1995 to 1998. ''Our contracts don't even grow by the rate of inflation,'' says Lauri Gause, 40, an Ann Arbor (Mich.) elementary school teacher. Her last three pay increases were for 1%, 2%, and 3%. What's more, teachers are finding that they have to get more education just to stay in place. John D. Berry, 34, a San Francisco teacher, went for additional graduate training in order to improve his chances of getting a full-time position. ''The requirements to be a teacher get higher,'' says Berry, who already has a master's degree from prestigious Columbia University Teachers College. In the health-care industry, real wages have stagnated as health-care reform squeezes profits and prices. For nurses, the shortages that drove up salaries in the 1980s and early 1990s have largely disappeared. ''A lot of nurses got into it and thought it would be a very high-paying profession,'' says Carolyn McClerking, 31, a nurse at the University of Michigan Medical Center in Ann Arbor. As a result, she went back to school for her master's degree in nursing in order to become a better-paid nurse-practitioner. Still, even that is not a sure thing, since a glut of new nurse-practitioners and physician assistants have hit the job market in the past few years. ''Right now, the salaries have pretty much peaked,'' says Ray E. Smith, who runs a health-care recruiting firm in Savannah, Ga. ''I don't anticipate it getting any better.'' What's happening is that a new class of left-behind workers is being created, encompassing a large portion of the workforce. They have jobs, sometimes with high salaries, but while their New Economy counterparts' earnings soar, the left-behinds are struggling to post small real gains in income. That's why, despite the overall prosperity, many households keep taking on more debt. To be sure, there have been important spillover effects from the New Economy boom to the rest of the economy. For one, the low unemployment rate has benefited millions of poor workers who were not able to find jobs before. For another, until fairly recently, real wages in trucking have been falling, since it has been exceptionally easy to get a license to drive a truck and the industry is completely deregulated. But the surge of online retailing has turned skilled truckers into an essential part of the Internet economy. ''Driver wages at major carriers are clearly outstripping the rest of the economy,'' says Victor Klemp of SignPost Inc., which tracks drivers' wages. Moreover, most people who have invested in the stock market have done well, no matter what industry they work in. GREAT LEAP. In addition, a growing number of workers are making the jump from Old Economy industries to the better opportunities and faster wage growth of the information sector (page 102). Berry, for example, is starting to look at job listings with Internet companies. ''I'd love to be on the technological side as an educational specialist,'' he says. But for the foreseeable future, most Americans will be locked into Old Economy jobs without much hope of big income gains. Indeed, based on current trends, the wage gap between New Economy and Old Economy workers seems likely to widen for years to come. The result will be a deepening fissure in the workforce along industry lines, which will likely be eventually reflected in politics as well. In many ways, the closest parallel to today's situation comes from the late 19th and early 20th centuries. The Old Economy back then was agriculture, which in the 1870s accounted for roughly 35% of the economy. At that time, the cutting edge of the New Economy was the newfangled and relatively small industrial sector--manufacturers, railroads, and utilities--accounting for only 10% of output. Spurred by the advent of such innovations as automobiles, telephones, and electrification, the industrial sector quickly caught up and far surpassed the farming sector in jobs, output, and productivity. With the industrial sector booming, once prosperous farmers kept losing economic ground relative to factory workers, railroad employees, and other members of the industrial workforce. Real wages in manufacturing rose much faster than wages for farm workers. What's more, farmers, burdened by falling farm prices, took on heavy debts in order to survive. When the economy slowed, they would lose their farms. The result: massive bankruptcies across much of the Farm Belt, an increasing number of sharecroppers and tenant farmers, and the increasing impoverishment of rural communities. Moreover, the period saw the creation of third-party political movements, such as the Progressive Party of the 1890s, to fight for policies to benefit the farm sector, including an easier monetary policy, higher tariffs, and increased government regulation of railroads. The plight of the Old Economy workers in today's economy may not be quite so dramatic. Yet the forces driving the widening wage gap are not disappearing. First, labor demand is far stronger in the information sector of the economy, boosting wages there. New Economy companies are expanding their employment at a 4.1% annual rate, compared with less than 2% in the rest of the economy (chart, page 92), despite the spillover effects. Indeed, the number of manufacturing jobs has shrunk by nearly 400,000 over the past year. As a result, most unions are settling for wage gains of 3% or less--a bit better than inflation, but far behind what New Economy industries are paying. Even in the booming auto industry, with record-setting sales, jobs are being outsourced to lower-paid transplants and to suppliers. ''Unions are not going after wages,'' says David L. Littmann, chief economist at Comerica Bank in Detroit. ''American labor is on the defensive.'' Second, productivity is growing much faster in the New Economy industries--and all else being equal, faster productivity growth translates into faster wage growth. In manufacturing, for example, makers of computers, semiconductors, and communications equipment are boosting their output per worker at over 30% annually (chart, page 92). Meanwhile, productivity in non-high-tech manufacturing is only rising at a 2.5% annual rate. Reflecting these differences, hourly wages in semiconductor and computer manufacturing are rising substantially faster than the pay of other factory workers. Although productivity is harder to measure in the service sector, a similar link between productivity growth and wage increases seems to hold there as well. Industries whose primary output is information are the best positioned to take advantage of the explosive productivity gains from information technology. Not surprisingly, these are also industries in which wages are soaring. Journalists have seen their wages rise as the result of demand from Internet-based media companies. According to the Bureau of Labor Statistics, the median wage for editors and reporters has risen by 18% over the past four years, one of the largest gains in the economy. By contrast, information technology has a much less immediate impact on the productivity of businesses that provide personal services, such as retail, hotels, beauty, health care, or education. Consider grocery stores. Despite the use of computers to manage inventory and purchasing, the fundamental business of grocery stores--stocking shelves and checking out customers--has not changed much. According to BLS figures, output per hour in food stores actually went down by 5% from 1994 to 1997, the last year available. Combined with intense competition from Wal-Mart Stores Inc. and others, that's a major reason why pay in food stores has risen by only 1.8% over the past year. And unable to boost productivity much, grocery chains have been holding down wage increases and getting rid of high-paid, experienced workers. How does that jibe with cries of labor shortages coming from retailers, hotels, and other people-intensive businesses across much of the economy? It should be no surprise that with pay steadily falling behind the rest of the economy, these businesses are having a tough time finding workers. Grocery clerks and construction workers are scarce precisely because their pay has deteriorated and workers in these industries have changed jobs. The ''Help Wanted'' signs are a mark of desperation, not prosperity. At the same time, profit growth has been much faster in the New Economy industries. In the second quarter of 1999, profits in the New Economy industries rose by 58%, according to BUSINESS WEEK's most recent Corporate Scoreboard. Old Economy industries showed a profit gain of only 9%. And this is no fluke. In 1994, the New Economy industries accounted for 36% of large-company profits, according to the BUSINESS WEEK Scoreboard. In the first half of 1999, that rose to 48%. As a result, companies outside the New Economy sector simply do not have the profit growth to support big wage increases, even if they wanted to do so. That helps explain why economywide wage increases have been so moderate, despite the low unemployment rate. The latest data show wage increases actually decelerating across much of the economy, outside of the New Economy industries. But today, even managers and professionals are finding that they run the risk of being left behind if they are working in lagging industries. Those in industries such as consulting, computers, and telecommunications saw their real salaries rise by 12% or more over the past five years. In more traditional industries, the gains for managers and professionals were as little as half that. The reason? Rising productivity and high profits enable the New Economy industries to pay more. ''The industries at the top are not that cost-sensitive,'' says Ken Abosch, a principal at Hewitt Associates LLC, a Lincolnshire (Ill.) consulting firm. For example, at the age of 38, Scott K. Wilder, vice-president for product development at Internet toy retailer KBkids.com, is already looking ahead to retirement. Having prospered financially from a succession of high-tech jobs, Wilder says: ''I plan to get there within the next 10 years.'' The same disparity shows up for sales representatives, an essential part of most businesses. The Willy Lomans of today can expect to see their incomes rise far faster if they work at a New Economy employer rather than a more traditional company. For example, sales reps selling telecom equipment saw their average income, including commissions, rise by 30% from 1995 to 1999, according to data from Hewitt. By contrast, their peers at traditional manufacturing companies enjoyed only a 3% increase in income over the same period. The new college grad, making a choice about which direction to go, faces an even starker dichotomy. Overall, employers are anteing up big for new graduates, but New Economy companies are on a level by themselves. Consulting firms are offering business administration majors a 25% premium over other employers, according to data from the National Association of Colleges & Employers. Management consulting firms are growing faster than computer software firms, and even nonsupervisory workers at the consulting firms are seeing pay rise at an amazing 7% clip. What will happen when the current expansion comes to an end, as it inevitably will? History suggests that when the next downturn hits, workers in the old-line industries will be quite vulnerable to losing their meager wage gains and perhaps even their jobs. Facing intense competition, low profit margins, and the prospect of slow growth, Old Economy companies will have to ruthlessly slash costs. What's more, many of these same workers, because their wage gains have been relatively meager, have been drawing down savings and financing their purchases out of rising home and stock prices. Just ask Erica S. Wexler, 36. She recently started her own child-care business after five years of teaching at a Dallas day-care center. In that time, she had one raise. ''We're living on credit, basically,'' she says. Adds Stephanie Blue, a certified nurse's assistant in Jupiter, Fla.: ''You hear in the papers and on the news about this booming economy, and we're not sharing in it.'' Blue makes $14,000 in a good year, typical for CNAs. When growth slows, the prosperity gap will translate into enormous political tensions between workers in Old Economy industries and those in the New Economy. For New Economy industries, free trade and relatively unregulated markets are critical parts of economic policy. But most voters are still employed in industries with relatively slow wage and job growth. For these workers, security and benefits are the important issues, and there may be a rise in protectionist sentiment, similar to that expressed by conservative Presidential candidate Pat Buchanan. ''Come the next recession, neo-Buchanan thinking becomes popular,'' says Frank S. Levy, an economist at Massachusetts Institute of Technology. What's more, the next downturn could create fertile ground for new political parties. Both Democrats and Republicans have become increasingly dependent on New Economy industries for campaign funds. That's not surprising, since that's where most of the new wealth is being created. But it does mean that there could be an opening for a new party that addresses the concerns of Old Economy workers. To be sure, both Democrats and Republicans have proposed measures to try and narrow the prosperity gap. President Clinton's recent tour of poor areas in the U.S. was designed to highlight his strategy for closing the gap, including trying to encourage more New Economy jobs in these areas. But just as movements in continents produce earthquakes and volcanoes, so will the growing prosperity gap create social upheavals for years to come. No matter what the politicians do, the Information Revolution will continue to accelerate some parts of the economy faster than others. We will be riding this tiger for years to come. By Michael J. Mandel in New York, with bureau reports To read a letter to the editor about this story, click here. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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