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The 21st
Century at Work
Forces Shaping the Future Workforce
and Workplace in the United States
LYNN A. KAROLY, CONSTANTIJN W. A. PANIS

Prepared for the U.S. Department of Labor

The research described in this report was conducted by RAND Labor
and Population. The views expressed herein are those of the authors and
do not necessarily reflect the official position of the U.S. Department of
Labor.

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PREFACE

In labor as in other policy domains, government action plays out in a
context of powerful trends, some strongly affected by other government activities and some not. Understanding this context is a prerequisite to sound policy formation. To aid understanding of the
forces impinging on the workforce and workplace of the twenty-first
century, the U.S. Department of Labor (DOL) asked RAND to conduct a study of the future of work. Specifically, we seek to answer two
sets of questions about work in the twenty-first century:
•

What are the major factors that will shape the future of work in
the current century and how are those factors likely to evolve
over the next 10 to 15 years?

•

What are the implications of these future trends for key aspects
of the future workforce and workplace, including the size, composition, and skills of the workforce; the nature of work and
workplace arrangements; and worker compensation?

To address these questions, we take a closer look at three major factors that are expected to shape the world of work in the coming
decades: shifting demographic patterns, the pace of technological
change, and the path of economic globalization. In doing so, our
objective is not so much to predict the future but rather to understand key structural forces under way in the economy today, the factors associated with those trends, and whether we can expect such
trends to continue or to deviate from their present course. We also
aim to identify the implications of those trends and the challenges
they pose for decisionmakers in the public and private sectors.

iii

CONTENTS

Preface .........................................

iii

Figures .........................................

vii

Tables..........................................

Boxes ..........................................

Summary .......................................

xiii

Acknowledgments.................................

xli

Abbreviations ....................................

xliii

Chapter One
INTRODUCTION ..............................
The Challenges of Looking to the Future .............
A Guiding Framework ...........................

1
3
6

Chapter Two
SHIFTING DEMOGRAPHIC PARAMETERS SHAPING THE
FUTURE WORKFORCE ..........................
Slower Workforce Growth Ahead ...................
The Workforce Is Becoming Ever More Diverse ........
The Key Characteristic of the Future Workforce Is Skill ...
Addressing the Slowdown in Labor Force Growth.......
Changing Demographics Also Shift Demand for Goods
and Services...............................
Demographics and the Future of Work ..............

15
17
30
44
52
72
75

The 21st Century at Work

Chapter Three
THE INFORMATION AGE AND BEYOND: THE REACH OF
TECHNOLOGY ................................
The Advent of the Information Age .................
Applications of the “New Biology” ..................
Nanotechnology: Revolutionary Technology on
the Horizon ...............................
How Technology Is Affecting the Workforce
and Workplace ............................
Technology and the Future of Work .................
Chapter Four
A NEW ERA OF GLOBAL INTEGRATION .............
The Phenomenon of Economic Global Integration ......
Forces Behind Global Economic Integration ..........
How Economic Globalization Is Affecting the U.S.
Economy, the Workforce, and the Workplace ......
Economic Globalization and the Future of Work .......

79
81
92
96
99
124
127
130
151
159
179

Chapter Five
IMPLICATIONS FOR WORK IN THE TWENTY-FIRST
CENTURY....................................
New Paradigms for the Organization of Production .....
Shifts in Employment Relationships and Where Work Is
Performed ................................
Other Workplace Dimensions: Safety, Security, and
Privacy ..................................
The Changing Nature of Work and the Skill Requirements
of Jobs ...................................
Supplying the Workforce Needs of the Future .........
Changing the Rewards to Work ....................
Conclusions ..................................

200
209
217
221

Bibliography .....................................

223

183
186
191
198

FIGURES

S.1. Labor Force Participation Rate, by Sex, 1950–2002 ...
xvi
S.2. Real Private Fixed Investment in Information
Technology, 1987–2001 .......................
xxi
S.3. Real Median Hourly Wage by Education Level,
1973–2001................................. xxiv
S.4. U.S. Exports and Imports as a Share of GDP,
1960–2002................................. xxvii
1.1. Conceptual Framework .......................
7
1.2. Female Labor Force Participation Rate, 1900–2002 ...
11
1.3. Patents Granted, 1900–2001 ...................
12
1.4. Exports and Imports as a Share of GDP, 1929–2002 ...
13
2.1. Annual Growth Rates of the Labor Force, 1950–2000,
and Projected, 2000–2030 .....................
18
2.2. Determinants of the Size of the Workforce .........
20
2.3. Fertility Rate, 1920–2001 ......................
21
2.4. Labor Force Participation Rate, by Sex, 1950–2002 ...
23
2.5. Labor Force Participation Rate by Sex and Age,
1980–2010.................................
25
2.6. Immigration to the United States, 1950–2001 .......
28
2.7. Age Structure of the Population in 1960, 1980, 2000,
and 2020 ..................................
32
2.8. Racial and Ethnic Composition of the Population,
1980–2020.................................
39
2.9. Ethnicity and Race Questions on the 2000 Census ...
40
2.10. Fertility Rate by Race, 1981–2001 ................
41
2.11. Fertility Rate by Hispanic Ethnicity, 1989–2001 .....
42
2.12. Immigrants by Origin, 1991–2001 ...............
42
2.13. Labor Utilization in Selected Countries, 1998 .......
53

vii

viii

The 21st Century at Work

2.14. Labor Force Participation Among Men Age 55-Plus
and at Selected Single Years of Age, 1950–2002 ......
2.15. Labor Force Participation Rate by Sex and Marital
Status, 1970–2001 ...........................
2.16. Labor Force Participation Rate of Women with
Children by Marital Status and Age of Youngest
Child, 1970–2001 ............................
2.17. Labor Force Participation Among the Disabled,
by Sex, 1983–2002 ...........................
2.18. Basis for Obtaining Immigrant Visas, 1994–2001.....
2.19. Composition of Expenditures, by Age Group .......
3.1. Moore’s Law, Predicted and Actual, 1971–2005......
3.2. Quality-Adjusted Price Indices for Information
Technology, 1970–2001 .......................
3.3. Real Private Fixed Investment in Information
Technology, 1987–2001 .......................
3.4. Real Investment in Information Technology by
Industry, 1970–2001 .........................
3.5. Information Technology Patents as a Share of All
Patents, 1980–2001 ..........................
3.6. Labor Productivity, 1970–2002 ..................
3.7. Economywide Measures of Occupational Task Input,
1959–1998.................................
3.8. Real Median Hourly Wage by Education Level,
1973–2001.................................
4.1. Volume of World Merchandise Exports, 1950–2001...
4.2. Value of World Merchandise and Services Exports,
1950–2002.................................
4.3. U.S. Exports and Imports as a Share of GDP,
1960–2002.................................
4.4. Distribution of U.S. Exports and Imports by Sector,
1980 and 2002 ..............................
4.5. Distribution of U.S. Goods Exports and Imports by
Region, 1980 and 2002 ........................
4.6. U.S. Capital Flows as a Share of GDP, 1960–2002 ....
4.7. Transportation and Telecommunications Costs,
1950–1990.................................
4.8. U.S. Trade and GDP Per Capita, 1960–2002 ........
4.9. U.S. Trade and Employment-to-Population Ratio,
1960–2002.................................

55
60

61
68
70
73
82
83
86
87
101
104
110
113
132
133
134
135
138
144
152
163
171

TABLES

2.1. Percentage of the Population That Is Foreign-Born
and Foreign National, Selected Countries, 2000 .....
2.2. Indicators of Aging in Selected Countries .........
2.3. Percentage of College Graduates, by Sex and Birth ...
2.4. Female Workforce Participation and Total
Fertility Rate in 1999, European Union and
Other Countries ............................

27
33
46

BOXES

2.1. What Determines the Size of the
Future Workforce? ..........................
2.2. Counting Immigrants ........................
2.3. The Difference Between Race and Ethnicity ........
3.1. Explaining the Increase in Productivity ...........
3.2. The Contribution of Technological Change to
the Changing Wage Structure ..................
4.1. The Consequences of Globalization for
Other Countries ............................
4.2. Trade and Aggregate Employment ...............
4.3. Methods for Assessing the Contribution of Trade to
the Changing Wage Structure ..................

18
26
37
106
114
162
170
175

SUMMARY

In the next 10 to 15 years, work in the United States will be shaped by
demographic trends, technological advances, and economic globalization. Formulation of sound labor policy will require an understanding of how those trends will evolve and affect the size and composition of the labor force, the features of the workplace, and the
compensation structures provided by employers. It is our purpose
here to contribute to that understanding. In the following pages, we
summarize current trends in each of the three principal forces acting
on the world of work. In the final section, we draw out some implications that the combination of those forces will have for the future of
work. Our key findings are as follows:
•

The U.S. workforce will continue to increase in size, but at a
considerably slower rate, while the composition will shift toward
a more balanced distribution by age, sex, and race/ethnicity.
Slower workforce growth may make it more difficult for firms to
recruit workers during periods of strong economic growth,
although greater participation in the workforce by the elderly,
women with children, persons with disabilities, and other groups
with relatively low labor force participation could cause the
workforce to grow faster. Immigration policy offers another lever
for changing the growth and composition of the workforce. Many
of the trading partners of the United States are undergoing
slower workforce growth and population aging on a more dramatic scale, thus offering a new comparative advantage to the
United States.

xiii

xiv

The 21st Century at Work

•

The pace of technological change—whether through advances in
information technology (IT), biotechnology, or such emerging
fields as nanotechnology—will almost certainly accelerate in the
next 10 to 15 years. Synergies across technologies and disciplines
will generate advances in research and development (R&D), production processes, and the nature of products and services.
Further technological advances are expected to continue to
increase demand for a highly skilled workforce, to support higher
productivity growth, and to change the organization of business
and the nature of employment relationships.

•

The future reach of economic globalization will be even more
expansive than before, affecting industries and segments of the
workforce relatively insulated from trade-related competition in
the past. The new era of globalization—marked by growing trade
in intermediate and final goods and services, expanding capital
flows, more rapid transfer of knowledge and technologies, and
mobile populations—is partly the result of inexpensive, rapid
communications and information transmission enabled by the
IT revolution. Globalization will continue its record to date of
contributing economic benefits in the aggregate. Although market share and jobs will be lost in some economic sectors with
short-term and longer-term consequences for affected workers,
the job losses will be counterbalanced by employment gains in
other sectors.

•

Rapid technological change and increased international competition place the spotlight on the skills and preparation of the
workforce, particularly the ability to adapt to changing technologies and shifting product demand. Shifts in the nature of
business organizations and the growing importance of knowledge-based work also favor strong nonroutine cognitive skills,
such as abstract reasoning, problem-solving, communication,
and collaboration. Within this context, education and training
become a continuous process throughout the life course involving training and retraining that continues well past initial entry
into the labor market. Technology mediated learning offers the
potential to support lifelong learning both on the job and
through traditional public and private education and training
institutions.

Summary

•

A number of forces are facilitating the move toward more decentralized forms of business organization, including the transition
away from vertically integrated firms toward more specialized
firms that outsource noncore functions and more decentralized
forms of organization within firms. Some sectors may be comprised of “e-lancers,” businesses of one or a few workers linked
by electronic networks in a global marketplace for products and
services. More generally, we can expect a shift away from more
permanent, lifetime jobs toward less permanent, even nonstandard employment relationships (e.g., self-employment) and work
arrangements (e.g., distance work). These arrangements may be
particularly attractive to future workers who seek to balance
work and family obligations or such workers as the disabled and
older persons who would benefit from alternative arrangements.
These changes call attention to the importance of fringe benefits
that are portable across jobs, or even independent of jobs (in the
case of freelancers, for example).

SHIFTING DEMOGRAPHIC PATTERNS AND THE FUTURE
LABOR FORCE
In the next 10 to 15 years, important demographic shifts will continue to influence the size and composition of the workforce. The
size and composition of the population, as well as labor force participation rates, determine the number and makeup of people who
want to work. Demographic parameters also influence the consumption patterns of the population and thus the mix of goods and
services produced and of the labor required to produce them. These
factors continue to evolve, in some ways that perpetuate recent
trends, and in other ways that suggest changes from the recent past.

Slower Labor Force Growth Ahead
The labor force has been growing more slowly over the past 20 years
than it had previously been. During the 1990s, the workforce grew at
an annual rate of just 1.1 percent, in contrast to the 1970s when it
grew at an annual rate of 2.6 percent. This is partly because, in the
years following the end of the baby boom in 1964, the fertility rate
(the number of live births per capita) fell by about a quarter, and

xvi

The 21st Century at Work

these smaller cohorts reached working age during the 1980s. It is also
partly because of a trend toward earlier retirement by male workers.
That the labor force has been growing at all has been the result of
progressively higher labor force participation by women (see Figure
S.1) and a continuing large inflow of immigrants. Immigration tends
to increase the workforce disproportionately to their numbers,
because immigrants include many young adults of working age.
Most notably, workforce growth will slow even more dramatically
over the next several decades. Between 2000 and 2010, the annual
growth rate is projected to equal the rate in the 1990s of 1.1 percent.
In the decade that follows, the rate of growth is projected to slow to
just 0.4 percent, followed by an even lower 0.3 percent annual growth
rate between 2020 and 2030. The slowdown of the workforce growth
rate may make it more difficult for firms to recruit workers in the
future, especially in periods of more rapid economic growth.
RANDMG164-S.1

100
90

Percentage in labor force

80
70
60
50
40
Men
Women

30
20
10
0
1950

1960

1970

1980
1990
Year
SOURCE: BLS (2003a), series LNU01300001 and LNU01300002.
NOTE: Population is those age 16 and above.

2000

Figure S.1—Labor Force Participation Rate, by Sex, 1950–2002

Summary

xvii

Shifting Workforce Composition
The composition of the workforce will also continue to shift, largely
reflecting demographic changes that have been under way for some
time. Because the U.S. population as a whole has been growing older
as the baby boom generation ages, the workforce has also been aging
or, looking at it another way, has come into greater balance across
age groups. Older people bring strengths to the workforce different
from those younger people bring. However, to the extent that they
are not part of the labor force and are supported by such largely payas-you-go programs as Social Security and Medicare, an older population imposes greater support costs per working person. These
greater costs, which impinge on the quality of life for the labor force,
are still less than those faced by most other developed countries. By
2050, there will be three working-age adults per elderly person in the
United States compared to two in the United Kingdom, France, and
Germany, and 1.4 in Japan, Spain, and Italy.
The inflow of immigrants has been largely responsible for a continuing increase in the racial and ethnic diversity of the workforce. Hispanics and Asians are the fastest-growing racial and ethnic groups in
the population and workforce. In the case of Hispanics, a high birth
rate is partly responsible for that, but immigration is the main driver.
In addition, the steadily increasing female labor force participation
rates, combined with decreasing male rates, have brought the labor
force close to gender balance. The rise in female rates holds for married women and single women alike. It holds as well for women with
and without minor children, and, for the latter, it holds whether they
are married or not and no matter how old their children are. As a
result of population aging and the increased labor force participation
of women, another dimension of change is that more workers have
responsibilities outside of work. This may involve caring for children,
elderly parents, or both.

The Growing Importance of Worker Skill
While these attributes provide one way of characterizing the future
workforce, an even more important dimension as we look to the
future is the skill that potential workers bring to the workplace. The
rapid pace of technological change is expected to continue to propel

xviii

The 21st Century at Work

demand for highly skilled workers who can develop the new technologies and bring them to market and who can exploit the new
technologies in the production of goods and services. Moreover, the
transition to a knowledge-based economy continues to fuel demand
for well-educated workers. Maintaining a high-skilled workforce is
also a key component of U.S. comparative advantage in the world
economy. Shifts in organizational forms and the nature of employment relationships, brought about by new technologies and global
competition, also favor such high-level cognitive skills as abstract
reasoning, problem-solving, communication, and collaboration, attributes associated with so-called “knowledge work.”
On the whole, educational attainment (i.e., years of schooling completed) in the United States has been rising and will probably continue to do so. Achievement scores of U.S. students, however, have
been only about average when compared to those in other developed
nations, despite greater public and private expenditures on education in the United States. Likewise, adults in the U.S. rank near the
middle of other developed countries on tests of skill measures
important for workplace literacy. Notably, the United States also
tends to have a wider spread in the distribution of such skills, with
more very low-skilled and very high-skilled individuals based on
these assessments. Education reforms, such as those that address the
funding and institutional organization of schools, and the degree of
competition among schools promise to raise the productivity of education. In addition, technological developments, such as technologymediated instruction, have the potential to improve educational outcomes and support lifelong learning through on-the-job training or
training through other public and private institutions.

Options for Raising Workforce Growth in the Future
The slowdown in the growth of the workforce may have far-reaching
consequences for the U.S. economy. In general, further growth of
economic activity depends on a growing labor force or increases in
worker productivity. Thus, the growth rate of the future labor force
limits the growth rate of the economy for any given rate of productivity growth. Slower economic growth is a concern, given the rising
costs of such entitlement programs for the elderly as Medicare and
Social Security, which will be largely paid for by taxes on a workforce

Summary

xix

that is growing more slowly. To the extent that it is desirable to raise
the rate of labor force growth, in the short to medium term the two
primary options are to increase the labor force participation rate for
the current population or to increase the overall size of the population through immigration.
Given the right environment, more older workers may be motivated
to retire later and continue to contribute to the nation’s prosperity.
Indeed, the rates of labor force participation for men age 55 and
older, previously on the decline, have begin to level off and even
increase at older ages. A variety of factors, including changes in
incentives associated with pension plans and reforms to Social
Security, mean that the reversal in the trend toward earlier retirement will likely continue. The rise in female labor force participation
rates holds for women with and without minor children, regardless
of marital status and the age of their children. Clearly, women with
responsibilities at home are willing to work outside the home. Data
from the United States and from other countries suggest that labor
force participation by women with children could rise further if work
could be more easily balanced with family responsibilities, such as
through less-expensive child care, greater availability of public
preschool programs, or more-flexible scheduling. While the overall
effect on female labor force participation may be modest, the effect
would likely be larger for women with lower earnings prospects. It
may also be possible to raise labor force participation by groups
underrepresented in the workforce. For example, fewer than one in
three working-age individuals with disabilities are currently in the
workforce, leaving around 12 million persons with disabilities out of
the workforce. Finally, immigration offers opportunities for workforce growth. In particular, immigration policy may be applied to
target highly skilled aliens, thus raising the overall skill levels of the
U.S. workforce.

Demographics Will Shift the Demand for Goods and Services
So far, we have emphasized the effect of demographic trends on the
characteristics of labor supply. However, those trends will also alter
the mix of goods and services demanded and thus the characteristics
of labor demanded by firms. Older households tend to spend their
money differently from younger ones: an aging population is likely to

The 21st Century at Work

employ more health care workers and increase the demand for other
health care–related products and services. Furthermore, such
household activities as child care, cooking, cleaning, and gardening
that used to be performed by household members may be
“outsourced” to the paid workforce as women (in particular) take
paid work in greater numbers.

THE EXPANDING REACH OF TECHNOLOGY
By the end of the twentieth century, the U.S. economy was shifting
from one based on production to one based on information. New
technologies had spawned new products and industries and had
transformed the way firms in established industries were organized
and labor was employed. In the coming decades, technological
advances promise to further shape what is produced; how capital,
material, and labor inputs are combined to produce it; how work is
organized and where it is conducted; and even who is available to
work.

Rapid Advance in Information Technologies
To anticipate the future consequences of technology for the workforce and workplace, consider the remarkable pace of change in the
incorporation of information technologies into the U.S. economy.
Computing power and storage capacity, data transmission speed,
and network connectivity have increased dramatically while costs
have fallen rapidly. For example, between 1970 and 1999, as the
capacity of a fingernail-size silicon chip grew from a few thousand
transistors to 44 million, the cost of 1 megahertz of processing power
fell 45,000-fold from $7,600 to 17 cents. At the same time, greater
user-friendliness of new software has led to rapid adoption of computer systems: levels of business investment in computer hardware
during the mid- to late 1990s were several times those of previous
years (see Figure S.2).

Summary

xxi

RANDMG164-S.2

300

Billions of 1996 dollars

250

200

Software
Communications equipment
Computers and peripheral equipment

150

100

0
1987

1992

1997

2001

Year
SOURCE: BEA NIPA Tables, Table 5.9 (http://www.bea.gov/bea/dn/nipaweb/Select
Table.asp).

Figure S.2—Real Private Fixed Investment in Information Technology,
1987–2001

While the technological advances experienced in the last several
decades in IT have been remarkable, the pace of change will almost
certainly continue for the next decade or more. The practical implications of further technical advances will include greater processing
speed, higher storage capacity, and a wider array of applications. For
example, advances in microprocessors will support real-time speech
recognition and translation, and the fields of artificial intelligence
and robotics are likely to advance further. The use of more intelligent
robotics in manufacturing will support agile manufacturing—the
ability to quickly reconfigure machines for the production of prototypes and new production runs—with implications for manufacturing logistics and inventories.

xxii

The 21st Century at Work

Other Evolutionary and Revolutionary Technologies Are on
the Horizon
Technological progress, however, is not limited to communications
and information technologies. A wide array of such technological
advances as biotechnology and nanotechnology are expected to have
equally profound consequences for the U.S. economy in the next
several decades. In the health care sector, for example, recent
progress against a variety of diseases will be married to moleculargenetic advances spawned by the Human Genome Project to yield
“personalized medicine” in which drugs might be individually tailored to increase their effectiveness and reduce side effects. In the
near future, progress in biotechnology is expected to generate medical advances that will further extend life expectancy and improve the
quality of life for those with a chronic illness or disability, often in
ways that will enhance their productive capacity in the workplace.
Nanotechnology—the manipulation of matter at the atomic scale—
could afford even more-drastic revolutions in products, services, and
quality of life over the next half-century. In addition to applications
in electronics and IT, nanotechnology is expected to lead to breakthroughs in pharmaceuticals and other aspects of biotechnology,
energy technology, and aerospace and materials technology, among
others. As a cross-cutting technology, nanotechnology will facilitate
technological change that extends and enhances existing technologies—further computing power for semiconductors, for example—as
well as more revolutionary applications—computers no bigger than a
bacterium and new materials displaying paradoxical properties of
strength and flexibility and performance in heat and cold. The earliest applications in the next 10 to 15 years are likely to be in the first
category, while those in the second category may be further in the
future.
Many of the advances in biotechnology and nanotechnology raise
social, legal, and ethical implications, among other concerns, that
need to be addressed as the technologies evolve. If public acceptance
of the new technologies is slow to materialize, their adoption and
diffusion may not match the pace of discovery.

Summary

xxiii

New Technologies Demand a Highly Skilled Workforce
Job skill requirements have been shifting across all sectors as a result
of new technologies. Machines with microprocessors can now be
programmed to do the sort of routine activities that less-skilled
workers used to do. At the same time, business computer systems
generate demand for highly skilled labor in the form of technical staff
who operate and repair the equipment, develop and install the software, and build and monitor the networks. In addition, computer
systems often generate more data that may be profitably analyzed,
thereby increasing the demand for the analytical, problem-solving,
and communication skills of workers, managers, and other professionals. Increasingly, the term “knowledge workers” is applied to
workers who go beyond just providing information to now being
responsible for generating and conveying knowledge needed for
decisionmaking.
While the recent technological advances may favor either skilled or
unskilled workers, depending on the application, the overwhelming
evidence is that on balance, recent technological advances favor
more-skilled workers and the same can be expected for future
advances. Not surprisingly, those demand differentials have been
driving up the salary premium paid to workers with higher education
levels (see Figure S.3). For example, between 1973 and 2001, the wage
premium for a college degree compared with a high school diploma
increased 30 percentage points, from 46 percent to 76 percent.
Researchers consistently find that technological progress that
increased the demand for more-skilled workers explains a sizable
portion of the rise in the wage differential by education level since
the 1980s, although other factors played a role as well.

The Organization of Firms and the Workplace Respond to
Technological Change
The new information technologies adopted in recent decades have
had implications for other aspects of the production process, from
the capital equipment used in the goods-producing sectors to the
ways firms across all sectors are organized and conduct their
business. Such changes have taken place in “old economy” goods-

xxiv

The 21st Century at Work

RANDMG164-S.3

Real median hourly wage (2001 dollars)

0
1973

Advanced degree
College degree
Some college
High school graduate
Less than high school graduate
1983

1993

2001

Year
SOURCE: Mishel, Bernstein, and Boushey (2003), Table 2.17.

Figure S.3—Real Median Hourly Wage by Education Level, 1973–2001

producing sectors, such as the steel and machine tool industries, as
well as services-producing sectors, such as retailing, trucking, and
banking.
The vertically integrated corporation was the dominant organizational model for much of the twentieth century. This model provided
the means to control and coordinate the various stages of production, especially in an era when markets were underdeveloped and
supply networks were more uncertain. While this model has by no
means disappeared and revenues and production volumes may be as
large as before, some sectors of the economy are moving toward
more specialized, vertically disintegrated firms. With vertical disintegration, firms divide up the production pipeline and specialize
broadly in products and services that define core competencies while
outsourcing noncore activities. Such activities might include steps on
the production chain, such as industrial design or the manufacturing
of intermediate goods, or support activities, such as computing ser-

Summary

xxv

vices or human resources. This trend is facilitated by the power of
information technologies and their associated networks to coordinate and control across organizations and within organizations in a
more decentralized manner.
Technology also shapes firms’ decisions about how to organize production within the firm and how to structure the compensation system to motivate workers at various levels of the organization. With
increased investment in IT, companies have been moving toward
more participatory, “high-performance” work systems. Such practices invest greater authority and problem-solving responsibilities in
front-line employees rather than managers. Jobs become more flexible and broadly defined, employees work in collaborative teams
requiring a high degree of information-sharing and communication,
and outcomes focus on timeliness, quality, and customer service. A
related development is the increased reliance on performance-based
pay to improve employee motivation. Production-based pay, profitsharing, and stock-option plans allow employees to share directly in
the profitability of their employers.
Technology also facilitates telecommuting and other forms of distance work. As of 2001, nearly 20 million workers, or 15 percent of the
workforce, usually did some work at home (at least one day a week)
as part of their primary job. Using a broader definition of off-site
work, about four out of five workers either work off-site themselves
or work with others who work at a distance.

Technology Supports the Process of Lifelong Learning
As technology operates to increase the demand for more skilled
labor, workers often need to undergo retraining in order to take
advantage of how new technologies are utilized in the workplace or
to operate within new organizational structures. At the same time,
technology has great potential to support the education and training
of the workforce prior to labor market entry and as a part of lifelong
learning. Technology-mediated learning—the use of computers and
other information technologies as an integral part of the learning
process—is gaining ground through such applications as computerbased instruction, Internet-based instruction, and other methods for
customized learning. Information technologies potentially allow
access to instructional materials any time, any place.

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The 21st Century at Work

New technologies in the next 10 to 20 years offer tremendous potential to revolutionize the way education and training is delivered in
order to improve efficiency and effectiveness in learning. For example, one application that goes beyond traditional distance learning is
the use of electronic performance support systems, typically wearable computer devices that provide real-time access to information
needed on the job to perform increasingly complex, dynamic tasks.
Just as individualized medicine is envisioned as an outgrowth of
biotechnology, individualized learning programs that are optimized
for a given person’s knowledge base and learning style are expected
for the future. Such learning programs will become increasingly
sophisticated over time with advances in hardware and software,
including artificial intelligence, voice recognition and natural language comprehension. They will also benefit from improvements in
intelligent tutoring systems that allow self-paced, interactive, selfimproving learning.

Productivity Benefits from New Technologies
After a long period in which it seemed that the information revolution was having no impact on worker productivity, an acceleration of
the annual rate of productivity increase began in 1995 and has not
been slowed by the post-2000 economic downturn. The productivity
gains were not limited to a few industries but applied to a range,
including durable-goods manufacturing and such services as wholesale and retail trade and finance. Analyses by economists indicate
that the rise in economywide productivity can be attributed to
growing productivity within the IT sector itself, as well as increased
productivity in other sectors of the economy. Given that these new
technologies have yet to reach saturation in the economy, most analysts expect the boost to productivity from the IT revolution to continue for the near term.

GLOBAL ECONOMIC INTEGRATION
With the growth of economic globalization in recent decades—
whether measured by flows of goods and services, direct investment
and other capital flows, the transfer of knowledge or technology, or
the movement of people—the economies of the world are tied
together even more so than in the past. In the decades ahead, the era

Summary

xxvii

of economic globalization will affect the size of the markets we produce for, the mix of products we consume, and the nature of the
competition in the global marketplace. It also has implications for
the labor market that U.S. workers compete in and the sources of
domestic and international labor available to U.S. firms.

The Dimensions of Economic Globalization
Recent decades have been marked by dramatic increases in trade.
Total trade activity (exports plus imports) has increased from about
one-tenth of U.S. gross domestic product (GDP) in 1960 to about a
quarter at the turn of the century (see Figure S.4). Meanwhile, the
sectoral distribution of trade has changed. Trade in services has
grown from 18 to 30 percent of the total over the last 20 years.
Another important new aspect of trade patterns, called “vertical

RANDMG164-S.4

Percentage of GDP

Exports + imports
Exports

Services
imports

Goods imports

Services
exports

5
Goods exports

0
1960

1970

1980

1990

2000

Year
SOURCES: BEA U.S. International Transactions Accounts Data, Table 1 (http://
www.bea.gov/bea/international/bp_web), and BEA NIPA Tables, Table 1.1
(http://www.bea.gov/bea/dn/nipaweb/SelectTable.asp).

Figure S.4—U.S. Exports and Imports as a Share of GDP, 1960–2002

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The 21st Century at Work

trade,” is that finished products may be composed of inputs
produced and assembled in stages in different countries.
Multinational firms no longer limit production to a single country
but carve up the production process into stages implemented in
multiple countries through subsidiaries or contractors. This allows
more labor-intensive stages of the production process to be located
in lower-wage settings, as opposed to stages that are more capital-,
knowledge-, or technology-intensive, which are located in higherwage settings. This pattern of specialization extends on a global scale
the vertical disintegration of the firm discussed above in the context
of technological change.
Not only manufacturing jobs have been outsourced overseas but also
higher-skilled white-collar jobs in the services sector, such as IT and
business-processing services. Advances in communication technologies and falling prices associated with voice and data transmission facilitate the shift of IT-enabled services from the United States
to overseas locations in such countries as China, Costa Rica, Hungary, India, Ireland, and the Philippines. Since the work products in
many information-based and knowledge-based industries can be
readily transmitted over high-speed computer networks, the physical
location of the workforce is increasingly less relevant. Data to estimate the extent of international outsourcing in the services sector
are not readily available, but some estimates suggest that the movement is relatively modest to date but growing. In the future, companies may choose to blend onshore and offshore models to offer
greater flexibility as well as the capacity to work around the clock.
As trade flows have increased and production has become more
internationalized, the United States has altered the mix of trading
partners toward countries with lower wages. While Canada remains
the largest trading partner with the United States in terms of goods
exported and imported, Mexico assumed the second-place ranking
as of 1999, displacing Japan from that position. Trade with China has
also grown dramatically, from less than 1 percent of U.S. goods
imports in 1980 to 11 percent in 2002, exceeding goods imports from
Japan for the first time. Even so, more than half of U.S. goods trade
takes place with other industrialized countries where wages are more
comparable.

Summary

xxix

Globalization has extended to capital flows and labor skills. U.S.
acquisition of foreign assets increased sixfold between 1980 and
2000, and foreign acquisition of U.S. assets grew even more. Capital
flows increasingly take the form of direct investment in companies
overseas as a means to control production and expand into new
markets. Worldwide migration has doubled in the last quarter-century, resulting in greater circulation of workers, not only the lessskilled but also the highly skilled. At the same time, IT advances have
enabled highly skilled workers on different continents to collaborate
without physically relocating. The internationalization of labor is
also tied to the greater ease with which new knowledge and technologies are transferred across international boundaries.

Forces Propelling Globalization Will Continue
What is driving the current wave of economic globalization? First,
over the past 50 years, communication and information transmission
costs have declined precipitously, along with transportation costs.
For instance, a call from New York to London that would have cost $1
in 1950 cost just 6 cents as of 1990, and the call is essentially free
today using the Internet (although the quality might not be as good).
Through voice, video, and electronic communications, firms can
work with subsidiaries or suppliers in other countries and ensure the
quality and timeliness of product delivery necessary to meet their
own production processes. The revolution in information technologies also provides a mechanism for rapid transmission across electronic networks of inputs and outputs in the IT-enabled services sector, as well as the means for supervising work products and monitoring quality. Second, since the end of World War II, a series of trade
agreements have reduced barriers to trade, while the move to flexible
exchange rates in the early 1970s, combined with other financial reforms and new financial instruments, increased capital mobility.
On balance, we believe the trend toward a globally integrated economy is likely to continue, driven by further IT advances and reductions in trade and capital market barriers. However, there may be
efforts to link further trade and capital market liberalization with
particular countries or regions to concerns over labor standards, the
environment, human rights, the existence of democratic institutions,
or the protection of property rights. There are also signs that other

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countries, especially low-income nations, are more reluctant to seek
further liberalization without the major industrialized countries
relaxing some of their remaining barriers (e.g., subsidies for agricultural products, patent protections on pharmaceuticals). If so, this
may limit the pace of expansion of trade between the United States
and developing countries.

Economic Globalization Generates Aggregate Benefits to
the Economy
The consensus among economists is that globalization has had and
can be expected to continue to have, at the aggregate level, a favorable effect on income, prices, consumer choice, competition, and
innovation in the United States. In terms of long-run growth, at the
same time that trade’s share of the U.S. economy more than doubled
in the last four decades of the twentieth century, real GDP per
capita—a measure of U.S. standard of living—did so also.
From the perspective of U.S. consumers, trade typically expands the
range of choices available and results in the reduction of prices for
some goods when foreign suppliers can produce them at less cost.
For U.S. firms, a more open world economy expands the size of the
market they can sell to, elevating sales and possibly reducing costs
and raising productivity through economies of scale. At the same
time, the increased openness of U.S. markets, both through export
competition and import competition, pressures U.S. firms to remain
competitive in the global marketplace. Such forces spur innovation
and adoption of technologies and production processes that can
reduce cost. Trade also provides access to foreign technology and
ideas (e.g., business organization practices), which further allow
productivity gains for U.S. firms.

Globalization Also Has Distributional Consequences
While greater integration in world trade and capital markets can
enhance welfare at the national level and over the long term, there
can be short-term and longer-term consequences for particular segments of the U.S. economy and workforce as labor, capital, and other
inputs are reallocated to their most efficient uses. Some industries

Summary

xxxi

facing greater import competition will lose jobs. At the same time,
trade generates new jobs for U.S. workers in domestic exporting
industries. As of 1999, for example, an estimated 11.6 million jobs in
the United States were supported directly or indirectly by goods and
services exports, representing about 9 percent of employment. With
continued growth in exports relative to GDP, that share is likely to
expand. In two industries—computers and electronic products and
primary metals—more than one-third of jobs were tied to exports as
of 1997. On balance, research suggests that the effect of trade on
overall employment levels is, at most, small, with job losses caused
by import competition counterbalanced by job gains that stem from
expanding exports.
Economywide, most workers displaced due to a plant move or closing, elimination of a position or other factors that lead to involuntary
job loss find new jobs although they may experience spells of unemployment and face permanent wage losses. For example, the typical,
or median, worker displaced in the late 1990s experienced a little
more than five weeks of unemployment before finding a new job.
Earlier in the 1990s, when the labor market was weaker, the typical
unemployment spell was about three weeks longer. Studies of the
longer-term consequences of job displacement suggest permanent
earnings losses in the range of 5 to 15 percent. More-educated workers tend to be reemployed more rapidly than their less-educated
counterparts and their relative earnings losses tend to be smaller,
presumably because their skills transfer more easily from one job to
the next. This suggests that, while painful, future job loss associated
with higher-skilled services-sector employment might not be as
costly in terms of unemployment and permanent wage loss as were
earlier waves of blue-collar trade-related job displacement.
Globalization has also been linked to the relative decline in earnings
among less-skilled workers over the last few decades. Research suggests that, while trade made a modest contribution to the trend,
other factors, such as technology and immigration, were more
important. It must also be kept in mind that many less-skilled workers are employed in nontradable services and thus will not be directly
affected by globalization. In the future, if trade in services that
involve more highly skilled jobs continues to grow, trade will affect a

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The 21st Century at Work

larger share of the workforce, so the effect on the wage structure
could become larger over time.

THE IMPLICATIONS FOR THE FUTURE OF WORK
The three forces we have examined do not move independently of
one another but can be expected to have important interactive
effects. Given these interactions, we seek to anticipate the implications of these interrelated and interacting forces for the future of
work. These issues are relevant from the perspective of current and
future workers who wish to anticipate future trends and how they
might respond in terms of investments in their human capital and
other decisions throughout their working lives. Other issues pertain
to choices that employers make about how to organize their workplaces, invest in their employees, and structure employee compensation. Policymakers at the federal, state, and local levels also make
decisions that shape the laws and regulations governing the workplace and other policies that may provide incentives or disincentives
for behavior on the part of workers or employers. Other interested
parties include public- and private-sector education and training institutions that help shape the quality of the future workforce.

The Organization of Production
Technological advances and globalization are changing the way production is structured, pushing firms toward vertical disintegration
and specialization, decentralized decisionmaking, and attaching a
premium to acquiring and sustaining knowledge as a means of
achieving competitive advantage. Such specialization allows firms,
which may remain as large as ever, to exploit their comparative
advantage in the provision of particular goods and services, while
outsourcing those functions peripheral to the core business. With
more decentralized decisionmaking, striking the right balance
between empowerment and control will be an important management element in the future workplace.
In some sectors, these trends could result in the disintegration of
firms to the individual level in the form of numerous IT-enabled,
networked, self-employed individuals or “e-lancers.” In this new
business model, individuals may compete in a global market for

Summary

xxxiii

project opportunities and may work on multiple projects at any
given time. Project teams continually dissolve as old projects are
completed and form as new projects begin. Issues associated with a
more decentralized e-lance model of production include access to
the full range of tangible and intangible benefits that come with traditional employment relationships: economic security through
employment continuity and subsidized employee welfare benefits,
professional development through training and other opportunities,
social connections to workplace colleagues, and a sense of professional identity. In the future, some or all of these functions may be
provided by worker associations, organizations independent of particular employment relationships. Existing organizations (e.g., professional or community groups) may take on these functions or new
organizations may be established defined by occupational groups or
geographic areas to take on this role.
The evolution of organizational forms in the next 10 to 15 years is not
expected to rapidly converge on any one particular model. Instead,
organizations are expected to adapt in the future in response to the
nature of innovation, markets, networks, and information costs.
Thus, we can expect large corporations to continue to exist, albeit
with greater specialization of function than in the past, at the same
time that the prevalence of decentralized networks of small organizations grows. Within these new paradigms of specialized firms, decentralized decisionmaking, and knowledge-based organizations,
employers in the coming decades will require a workforce with welldeveloped analytical skills and communication and collaboration
skills.

The Nature of Employer-Employee Relationships and
Work Location
The conventional model of employment is that of full-time jobs of
indefinite duration at a facility owned or rented by the employer. The
forces driving the reorganization of production are expected to
decrease the fraction of workers in such traditional arrangements
and increase the fraction in such nonstandard arrangements as selfemployment, contract work, and temporary help. Already, about one
in every four U.S. workers is in some nontraditional employment
relationship. These alternative work arrangements may become

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The 21st Century at Work

more prevalent in the face of rapid technological change and competitive market pressures. A further increase could result from
increases in labor force participation among subgroups of the population, such as the disabled or older workers who have a preference
for more flexible work arrangements. To the extent that the ranks of
workers in nonstandard work arrangements grow in the future, one
issue will be access to traditional workplace benefits. It may be
worthwhile to implement policies promoting health and pension
coverage among workers in nonstandard arrangements, whether
through the tax code or access through business or professional
associations. The latter may be modeled on the worker associations
as discussed above.
As advances in IT continue to weaken the bonds between work and
workplace, a greater proportion of the labor force will be working at
home or in other locations removed from their employer’s headquarters (or client’s office). Part-time or full-time telecommuting can
allow employers to accommodate the needs of workers who care for
children at home or a sick family member. Older workers and the
disabled may also benefit from nontraditional workplace arrangements. This geographical separation, where it crosses state boundaries, will increasingly raise questions about which jurisdiction’s
work-related policies apply.
Changes in business organization, management structures, and
employment relationships have other implications for the relationship between employers and their employees in more-traditional
employment relationships. On the one hand, shifts in organizational
form and the use of nonstandard work arrangements weaken the
bonds between employers and their employees. On the other hand,
many employers increasingly recognize the human capital and
knowledge base of their employees as a critical asset. Within this
context, the use of high-performance workplace practices that give
greater decisionmaking authority to front-line employees is blurring
the traditional distinction between “labor” and “management.”
Changing employer-employee relationships will also alter the opportunities and challenges faced by labor unions.

Summary

xxxv

Workplace Safety, Security, and Privacy
While workplace safety and security concerns focused in the past on
high-risk industries in the goods-producing sector, these issues now
resonate with virtually all employers and the entire workforce. In the
coming decades, the aging of the workforce may raise new safety
concerns in traditional or emerging industries. For example, workers
age 65 and older have been shown to experience higher rates of permanent disabilities and workplace fatalities compared with their
younger counterparts in the same industries and occupations.
Emerging technologies may present new health and safety concerns
(e.g., those associated with nanotechnology or biotechnology). At the
same time, technological advances may provide new solutions for
improving worker safety. Workplace security, in the face of terrorist
or other security threats to workers in the United States or overseas,
raises issues regarding the balance between public-sector investments in workplace security and private-sector security investments.
Privacy concerns will become more prominent as a result of various
technological advances that facilitate employee monitoring and
access to sensitive information.

The Nature of Work and Job Skill Requirements
Future technological developments will increase the demand for
highly skilled workers who can develop and market the new technologies, while other workers will be involved in production processes or in the production of goods and services based on these
technological advances. A growing emphasis on knowledge workers
and knowledge-based organizations can further define a source of
competitive advantage for U.S. workers and employers. The shift in
organizational forms and the nature of employment relationships
also favor strong cognitive and entrepreneurial skills. Workers who
increasingly interact in a global marketplace and participate in global
work teams will require the skills needed to collaborate and interact
in diverse cultural and linguistic settings. At the same time, demographic and other factors will drive demand for traditionally lowerskilled jobs in retail trade, health services, and other personal services. None of these jobs typically require postsecondary education,
although training often is an important component of job preparation. In addition, more of these jobs in the future are likely to incor-

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The 21st Century at Work

porate new technologies but typically with intuitive interfaces accessible to individuals who are not technologically sophisticated.
A variety of forces appear to be shifting the workforce away from
more permanent or lifetime jobs toward less permanent, even nonstandard employment relationships. Thus, the labor market will
require a workforce adaptable throughout the life course to changing
technology and product demand. As less-competitive sectors of the
economy lose jobs, workers who can retrain will be better able to
adjust and find productive reemployment. The prospects of continued or even accelerating job displacement as a result of technological change and trade also invite consideration of current and future
policies to help workers adjust to these shocks.
In this context, consideration must be given to how the U.S. education and training system can evolve to better meet the needs of the
twenty-first-century workforce. Workforce education and training in
the future will involve continuous learning throughout the working
life, involving training and retraining that continues well past initial
entry into the labor market. Challenges for the private and public
sectors include improving educational outcomes at the primary and
secondary levels of education, developing opportunities for careerlong learning through formal and informal training opportunities,
and meeting the growing need for scientists and engineers who can
advance new technologies in the laboratory, develop the applications, and bring them to market.
Technology-mediated learning, which offers the advantage of individualized learning programs that can be accessed “any time any
place,” may help meet training challenges and support life-long
learning. In addition, as e-learning materials become more common
in routine work processes (e.g., the use of wearable devices with procedural information to supplement prior training and reduce errors),
continuous training and lifelong learning can become a reality.

The Size and Composition of the Workforce
Current demographic forecasts estimate no change in the growth
rate of the labor force over the coming decade and even a likely
slowdown after that. Such projections depend critically on assumptions regarding underlying population growth rates (immigration

Summary

xxxvii

being one important factor) and rates of labor force participation
among demographic subgroups. Labor force growth rates can exceed
current projections to the extent that labor force participation can
rise for groups not fully employed.
Thus, an important issue is whether tapping underutilized labor
force capacity can contribute substantially to a larger workforce.
Some older workers are lengthening their careers, and more might
do so if employers show more flexibility in job responsibilities, hours
worked, and pay (and if government permits such flexibility). There
is room for progress in this regard: 63 percent of workers age 59 or
over say that their employer would not let them move to a less
demanding job with less pay if they wanted to. Greater attention to
work-family balance issues may increase the labor force participation of women, particularly women with children. Technological
advances may aid the labor force participation of people with disabilities by alleviating the disabilities themselves or their impact on
ability to work. Other demographic groups that may be targets for
greater inclusion are low-income women with children, former military personnel, and immigrants.
From the perspective of employers, strategies to make work more
attractive than remaining out of the labor force are not cost-free. In
tight labor markets, employers may offer higher wages. They may
also offer more attractive work conditions (such as flexible scheduling or telecommuting) or more generous fringe benefits (such as
time off for family emergencies, on-site child care, or assistance with
elder care). In their negotiations about compensation, prospective
workers and firms may trade off among cash wages, working conditions, and benefits. The key challenge will be to identify the compensation mix that attracts the most new workers for any given total cost
increase. Government policies may constrain employers’ abilities to
increase participation among some groups. For example, government policies currently limit employers’ ability to adjust benefits for
older workers to account for changes in preferences for health insurance, pension benefits, and other employee benefits as workers age.

Compensation in the Form of Wages and Benefits
Future trends in technology, globalization, and demographics are
also likely to affect the level and distribution of wages, just as they

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The 21st Century at Work

have in the past several decades. Continued technological progress
has the potential to lead to further productivity gains that would
support growth in real wages (or total compensation to the extent
that compensation patterns shift from wages to benefits). At the
same time, mechanisms driving greater wage disparities in the recent
past, namely technological change and globalization among others,
can be expected to exert the same pressures in the near term. In the
absence of a strong increase in the supply of skilled workers in
response to the higher returns to education, wage dispersion—particularly as measured by the gap between more- and less-educated
workers—will likely remain at current levels or continue to widen.
Meanwhile, a variety of factors may weaken the tie between
employment and access to fringe benefits. Greater turnover within
traditional employment relationships and shifts to nonstandard
employment relationships also spotlight the importance of fringe
benefits that are portable across jobs or even independent of jobs (in
the case of freelancers, for example). Employers that do offer benefits
may move toward more personalized structures, tailored to meet the
circumstances of each employee. Younger and older workers, for
example, might be allowed to select those benefits that fit their circumstances with corresponding adjustments in cash wages to retain
current compensation levels. Information technologies and outsourcing may support this trend by reducing the costs associated
with managing a more complex system of employee benefits.
We have identified a number of ways in which the workforce and
workplace are likely to differ in the early decades of the twenty-first
century compared with the experience of the twentieth century. At
the same time, many of the institutional features of the U.S. labor
market—such as the laws and regulations that govern employment,
hours, wages, fringe benefits, occupational health and safety, and so
on—evolved in the context of an earlier era. In some cases, these
policies need to be reexamined in light of the evolution of the labor
market in the coming decades. Are there distortions or unintended
consequences associated with current policies that preclude desirable market adjustments? Are policies put in place to address market
failures in the past less relevant, given parameters that exist today
and their likely future evolution? Are there new market failures that
policy can address? Are there distributional consequences that could
make a case for government intervention? These questions merit a

Summary

xxxix

more detailed examiniation in the context of the future of the workforce, workplace, and compensation in the twenty-first century.

ACKNOWLEDGMENTS

We wish to acknowledge the U.S. Department of Labor, including
Christopher T. Spear, Assistant Secretary for Policy, for its funding
under contract number J-9-9-2-0033. In addition, during the course
of preparing the book, we had valuable discussions and received a
wealth of insightful comments from many other DOL staff.
We benefited from comments on the study provided by a group of
academic experts consisting of Amar Bhide (Columbia University),
Gary Burtless (The Brookings Institution), Eric Hanushek (Stanford
University), Marvin Kosters (American Enterprise Institute), Olivia
Mitchell (University of Pennsylvania), June O’Neill (City University of
New York), Robert Smith (Cornell University), and Finis Welch
(Texas A&M University).
We are indebted to Jeannette Rogowski for the extensive management support she gave the project in her role as Director of the
RAND Center for Employer-Sponsored Health and Pension Benefits
which housed this project. We are also grateful for discussions and
feedback provided by our RAND colleagues Philip Antón, Beth Asch,
Phil Devin, Carole Roan Gresenz, James Hosek, Michael Hurd, Arie
Kapteyn, M. Rebecca Kilburn, M. Susan Marquis, Robert Reville, and
Cathleen Stasz. David Loughran and Jacob Klerman at RAND provided constructive and comprehensive technical reviews of the book.
Giacomo Bergamo and Maria Dahlin served as research assistants to
the project, contributing extensive support in assembling the data
and literature that we draw on. James Chiesa provided superb editorial assistance with the entire book and especially with the summary.
We also thank Dan Sheehan for editing the manuscript, Stephen

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The 21st Century at Work

Bloodsworth for the cover design and graphics, Denise Constantine
for coordinating the document production, and Diana Malouf and
Mechelle Wilkins for project administrative support.

ABBREVIATIONS

ADL

Advanced Distributed Learning (Initiative)

AFDC

Aid to Families with Dependent Children

ASTD

American Society for Training and
Development

BCIS

Bureau of Citizenship and Immigration
Services

BEA

Bureau of Economic Analysis

BLS

Bureau of Labor Statistics

CEA

Council of Economic Advisors

CBO

Congressional Budget Office

CPS

Current Population Survey

defined benefit

defined contribution

DHHS

Department of Health and Human Services

DHS

Department of Homeland Security

(Social Security) Disability Insurance

DOC

Department of Commerce

DoD

Department of Defense

DOL

Department of Labor

EBSA

Employee Benefits Security Administration

EITC

Earned Income Tax Credit

FDI

foreign direct investment

xliii

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The 21st Century at Work

GATT

General Agreement on Tariffs and Trade

GDP

gross domestic product

Hospital Insurance (Medicare Part A)

HTML

hypertext markup language

IALS

International Adult Literacy Survey

IMF

International Monetary Fund

INS

Immigration and Naturalization Service
(now the Bureau of Citizenship and
Immigration Services)

IRS

Internal Revenue Service

information technology

ITAA

Information Technology Association of
America

ITAC

International Telework Association and
Council

ITU

International Telecommunications Union

MEMS

microelectromechanical systems

MSTs

microstructure technologies

NAFTA

North American Free Trade Agreement

NAS

National Academy of Sciences

NCHS

National Center for Health Statistics

NHIS

National Health Interview Survey

NIC

National Intelligence Council

NIH

National Institutes of Health

NIPA

National Income and Product Accounts

NNI

National Nanotechnology Initiative

NSF

National Science Foundation

NTIA

National Telecommunications and
Information Administration

OASDI

(Social Security) Old-Age, Survivors and
Disability Insurance

Abbreviations

OECD

Organisation for Economic Co-operation and
Development

OMB

Office of Management and Budget

personal computer

PDA

personal digital assistant

PISA

Programme for International Student
Achievement

PRWORA

Personal Responsibility and Work Opportunity
Reconciliation Act

R&D

research and development

SAG

Screen Actors Guild

SARS

Severe Acute Respiratory System

SMI

Supplemental Medical Insurance
(Medicare Part B)

SSA

Social Security Administration

TAA

Trade Adjustment Assistance

TANF

Temporary Assistance for Needy Families

TCU

transportation, communications, and utilities

TFR

Total Fertility Rate

TPA

trade promotion authority

TRIPS

Trade-Related Aspects of Intellectual Property
Rights (agreement)

UNCTAD

United Nations Commission on Trade
and Development

UNDP

United Nations Development Programme

UPS

United Parcel Service

USDA

U.S. Department of Agriculture

WDM

wavelength division multiplexing

WTO

World Trade Organization

xlv

Chapter One

INTRODUCTION

In the next 10 to 15 years, work in the United States will be shaped by
a number of forces, including demographic trends, advances in
technology, and the process of economic globalization. In many
respects, these key factors have already played a role in shaping the
world of work in today’s economy. They have influenced the size and
composition of the labor force, the features of the workplace, and the
compensation structures provided by employers. How these factors
continue to evolve will further influence the workforce and the
workplace, often in ways that can be predicted. In some cases, however, conditions will change in ways that are, as yet, more uncertain.
The evolution of these trends and their eventual consequences will
clearly depend, to a great extent, on the decisions made by workers,
employers, educators, and policymakers. To make informed decisions, these individuals need to understand their evolving context,
and that is what we hope to bring about in the study that has resulted
in this book. In particular, we attempt to answer two sets of questions about work in the twenty-first century:
•

What are the major factors that will shape the future of work in
the current century and how are those factors likely to evolve
over the next 10 to 15 years?

•

What are the implications of these future trends for key aspects
of the future workforce and the future workplace, including the
size, composition, and skills of the workforce; the nature of work
and workplace arrangements; and worker compensation?

The 21st Century at Work

To address these questions, this book focuses on three major factors
expected to shape the world of work in the coming decades: shifting
demographic patterns, the pace of technological change, and the
path of economic globalization.
When we have finished, we hope that current and prospective workers will benefit from an understanding of how the future world of
work is likely to evolve and how they might respond in terms of
investments they make in their education and training and other
labor market choices. Employers can use the information in their
decisionmaking regarding their business approach, investments in
their employees, the nature of the employer-employee relationship,
and the structure of compensation, including fringe benefits. The
perspective we provide will inform policymaking at the federal, state,
and local level with regard to laws and regulations that govern the
workplace, the workforce, and compensation. Other interested parties include decisionmakers at public and private education and
training institutions that contribute to the skills and knowledge
development of current and future workers.
We seek to provide an assessment based on relevant data and
research. Our focus is on a medium-term horizon—10 to 15 years—
and a broad-brush perspective on the trends that are likely to shape
the future. We are less concerned about the inevitable ups and
downs of the business cycle as that future unfolds. Even aside from
such fluctuations, the future is difficult to predict. Some developments can be foreseen with more confidence than others. In demographics, for example, the composition of the future population,
outside of immigration patterns, is well defined for our time horizon
because future cohorts of adults are today’s children and youth.
However, more uncertainty will be associated with the path of other
forces.
In the remainder of this chapter we set the stage for our analysis of
the forces shaping the future world of work in the United States. We
begin by identifying some of the challenges associated with anticipating the future direction and implications of such complex systems
as the U.S. labor market. We then outline a conceptual framework
that guides our analysis, particularly our focus on the three key
forces: demographics, technology, and globalization.

Introduction

THE CHALLENGES OF LOOKING TO THE FUTURE
Efforts to anticipate the course of future events range from simple
extrapolation of existing trends to wishful thinking. One of the earliest systematic efforts to anticipate the future that lay ahead was the
Commission on the Year 2000 established in the late 1960s under the
auspices of the American Academy of Arts and Sciences. The seminal
volume published by the Commission in 1967, Toward the Year 2000:
Work in Progress, has been viewed as the forerunner of what would
become the field of futurism (Bell and Graubard, 1967). Rather than
setting out to predict the future, the contributors to the Commission
aimed to identify the structural changes under way and the issues
they raised and challenges they posed for society (Bell and Graubard,
1997). Actual predictions were viewed as less relevant, given the
complexity of the interrelated systems of interest and the potential
for behavioral responses to forces that might not be anticipated.
History is also often marked by important unforeseen turning
points—the assassination of Archduke Franz Ferdinand in 1914, for
example—that in turn set in motion other events that could not have
been predicted. Thus, Toward the Year 2000 did not feature findings
but conjectures on possible future courses.
Among the conjectures, many were prescient. Although the commission did not focus explicitly on the world of work, their deliberations anticipated the continued emergence of a postindustrial society and the associated changes in the structure of industry and occupations. They also anticipated the communications revolution and
the associated growth of a national information infrastructure. The
changing age distribution of the population was highlighted, as well
as the growing importance of education. The rise of biology, including genetic engineering, within the sciences was also anticipated.
Looking back with 30 years of hindsight, the original editors of the
commission report note with regret their most serious omission: the
failure to anticipate the changing role of women in the economy and
society (Bell and Graubard, 1997). Another omission was the lack of
focus on the role of minorities and the persistence of economic disparities across groups. The editors note the latter oversight may have
been due to optimism that minorities would be integrated into society in much the same way as past waves of immigrants. Finally, the

The 21st Century at Work

growing interconnectedness of economies and societies around the
world was underappreciated.
Two other studies speak more directly to the subject matter of this
book. In 1987, the Hudson Institute published Workforce 2000, a
study commissioned by then Secretary of Labor William E. Brock to
provide “basic intelligence on the job market” in order to evaluate
then existing policies and for undertaking new initiatives (Johnston
and Packer, 1987). Based on analysis of trends and forecasts using an
econometric model, the study reached four central conclusions:
•

Economic growth would be strong, propelled by exports, a strong
world economy, and rising productivity.

•

Manufacturing’s share of employment would continue to
decline, with most new job creation in the services sector.

•

The workforce would become steadily older, more female, and
include more minorities.

•

New jobs in the services sector would require a more highly
skilled workforce.

By and large, these predictions held up, along with some of the other
findings of the study. Perhaps the greatest oversight was the lack of
attention to the information technology (IT) revolution, although in
1987, personal computers (PCs) were just starting to penetrate the
workplace.
A decade later, the Hudson Institute published a follow-up volume to
the original study titled Workforce 2020 (Judy and D’Amico, 1997).
Like the first study, this follow-up analysis continues to emphasize
the aging of the workforce, along with the increased share of the
future workforce that will be made up of females and minorities. The
study projects that automation, as a result of accelerating technological change, will continue to displace unskilled and lower-skilled
workers, although technology is expected to create more jobs than it
destroys. The greater integration of the U.S. economy with the rest of
the world is highlighted as well, with implications that include a high
reliance of the manufacturing sector on exports and a shrinking, but
higher-skilled, employment base in manufacturing. The combination
of globalization and technological change is expected to increase

Introduction

volatility in product and services markets, as well as their associated
labor markets, implying, for example, more frequent job changes.
While it is too soon to grade these forecasts with respect to eventual
outcomes, many of the same themes emerge from our analysis based
on more recent data.
Like the Commission on the Year 2000, we seek in this book to identify the underlying structural forces likely to shape the future world of
work. The next section provides our underlying conceptual framework that links the roles of demographics, technology, and globalization to the key labor market outcomes of interest:
•

Who will be working and what skills they will they bring to the
labor market.

•

The types of jobs the future workforce will fill and the type of
work arrangements future workers will make.

•

How much workers will earn and how their compensation will be
structured in terms of wages and such employment benefits as
health insurance, pensions, and other benefits.

In general, our objective is neither to provide future estimates of the
number of workers in a given industry or occupation nor to pinpoint
the expected growth rate in real wages or the future level of wage
dispersion. Rather, we seek to understand key structural trends
under way in the economy today, the factors associated with those
trends, and whether we can expect such trends to continue or to
deviate from their present course. We also aim to identify the implications of the trends and the challenges they pose for decisionmakers in the public and private sectors. In some cases, our
inferences will be more speculative because future outcomes are not
predetermined. They depend not only on the future evolution of key
forces but also on how behavior might change in response to those
forces. Unanticipated events and the uncertain timing of business
cycle upturns and downturns further complicate efforts to forecast
even broad trends with certainty.
In some cases, we will draw on existing forecasts of future economic
outcomes to illustrate the likely trend in the outcome, given the best
available forecasts. However, all such forecasts are inherently limited

The 21st Century at Work

in that they do not typically anticipate the ways in which economic
actors—consumers, workers, firms—may respond to shifts in economic forces and other social, political, or cultural phenomena. For
example, future projections of the wage premiums offered to highly
skilled workers assume that technological change will continue its
rapid pace and that workers’ educational attainment will increase
only modestly, as it has in the recent past. Instead, it is possible that
young people will anticipate the increasingly large rewards to skills
and respond by seeking more education. This would change the relative supply of highly skilled workers and reduce future wage disparities.
As another example, forecasts of the future labor force may assume
that older workers will retire at the same rate at each age as they do
today. Instead, it is possible that older workers may choose to extend
their careers in the future in response to other external forces, such
as improving health and longevity or changes in such social insurance programs as Social Security. Nevertheless, it can be useful to
present relatively naive forecasts, so that policymakers, employers,
and future workers can prepare and benefit from upcoming opportunities. At the same time, we exercise caution in placing too much
weight on mechanical forecasts, especially when we can identify
important changes under way that would induce behavioral responses.

A GUIDING FRAMEWORK
In undertaking our analysis of the forces that are likely to shape the
future of work in the United States, we are guided by the conceptual
framework illustrated in Figure 1.1. Our ultimate interest is in understanding the outcomes of the labor market (bulleted above and
shown in the box at the bottom of the figure).
To address these labor market outcomes, we first require an understanding of the forces that will shape them—the subject of our first
question on p. 1. In seeking to answer this question, we adopt an
economic perspective that views the labor market outcomes in the
bottom half of the figure as determined by labor supply and demand.

Introduction

RANDMG164-1.1

Demographics

Globalization
Technology

Labor
supply

Labor
demand

Employment
• Workforce size, composition, and skills
• Nature of work and workplace
arrangements
Compensation
• Wages
• Employment benefits

Figure 1.1—Conceptual Framework

By labor supply, we mean those willing and available to work, how
much they can work, and what skills they bring to the labor market.
By labor demand, we mean the number of jobs employers seek to fill,
and the associated skill requirements, to produce the goods and services demanded. In such a market, following the neoclassical economic tradition, compensation is assumed to adjust to balance supply and demand. This will occur separately for each type of labor—
both more- and less-skilled workers—to adjust both the demand for
each type of labor and the relative demand for different types of
labor. Finally, compensation should be viewed broadly. Firms compensate workers in the form of cash wages, noncash benefits (e.g.,
pensions, health insurance), and working conditions (e.g., flex time,

The 21st Century at Work

attractive work sites). Workers and firms may negotiate a varying mix
of wages, benefits, and working conditions in the compensation
package. For example, working parents may prefer greater scheduling flexibility in exchange for lower cash wages. While this is a simplistic view of how labor markets actually operate, given various
deviations from the assumptions that underlie the neoclassical
model, it nevertheless provides a useful framework.
The key then is understanding which factors are likely to shift underlying supply and demand in the U.S. labor market in the coming
years. We view three key forces as important drivers of future outcomes in the U.S. labor market through their effect on the supply and
demand for labor (shown in the ellipses at the top of the figure):
demographics, technology, and globalization.
The demographic force encompasses the manner in which births,
deaths, and net migration determine the size and composition of the
U.S. population. The total supply of labor is obtained by multiplying
the population by the labor force participation rate, the percentage
of the population working or actively looking for work. Labor force
participation is determined by, among other factors, people’s health,
family structure, and nonlabor income (Blundell and Macurdy,
1999). The labor supply can be broken down demographically by
considering the population and labor force participation rate specific
to people of the same sex, age, race and ethnicity, marital status and
family composition, country of birth, and education. In addition to
affecting the available supply of workers, demographic factors also
influence the demand side of the labor market. The mix of jobs
employers seek to fill by industry and occupation is derived from the
underlying demand for goods and services, either for consumption
by U.S. residents or, through export, by populations in other countries. To the extent that consumption needs vary with different characteristics of the U.S. population or populations abroad, demographic factors can influence the types of jobs required. For example,
older individuals consume more health care goods and services than
younger individuals do. Thus, if the population composition becomes older, that will increase the demand for physicians, nurses,
home health care workers, pharmaceuticals, medical devices, and
so on.

Introduction

The force of technology captures the ongoing, and by all evidence
accelerating, process of technological innovation across a wide range
of applications that can influence the world of work. Like the demographic force, technology affects both the demand and supply side of
the labor market. New technologies may generate new products that
give rise to new industries and occupations. The invention of the PC,
for instance, generated an entire new industry dedicated to its production and the associated occupations required to create software
and install, service, and repair the machines. New technologies may
also change the process of producing goods and services in new and
in established industries and thus alter the nature of work and
worker productivity. Again, the incorporation of the PC and microprocessors more generally into machine tools and office processes
has fundamentally altered a wide array of manufacturing processes
and services-sector occupations, shaping how and where work is
performed. The supply side of the labor market can also be affected
by technological change. For instance, medical advances may
improve the physical and mental functioning of individuals with disabilities or individuals as they age, thereby affecting who is available
for work. Technology may also alter the process of workforce preparation in secondary and postsecondary education, as well as the
ability of older workers to retrain, thereby altering the mix of skills in
the workforce.
Finally, the force of globalization represents the economic integration of the U.S. economy with those of the rest of the world in terms
of trade, capital flows, labor mobility, and knowledge transfers. As
the U.S. economy becomes more integrated with others, the markets
for goods and services and even the market for labor become global
rather than domestic. Thus, the demand for labor is driven not only
by domestic demand but by world demand for U.S. goods and services. Just as U.S. firms compete in a global marketplace, U.S. workers increasingly compete with workers in other countries as employers make decisions, on the basis of labor and other cost differentials,
whether to locate production facilities in the United States or overseas.
As Figure 1.1 is drawn, the three ellipses representing the forces of
demographics, technology, and globalization overlap to indicate that
in many ways, these factors are not acting independently but are
interacting with one another. As we detail in our analysis, for exam-

The 21st Century at Work

ple, the process of economic integration across the world’s
economies is driven by technological innovations that are reducing
the cost and raising the speed of communications and transmission
of data and information. In turn, the competitive pressures brought
about by a more open economy stimulate further technological
innovation and more rapid adoption of new technologies. In many
respects, these interactive effects across the forces we focus on make
them even more powerful than if they were operating independently.
Our focus on demographics, technology, and globalization as major
drivers of future labor market trends is consistent with the important
role that these forces have played in shaping the world of work in the
twentieth century as well. For example, one of the salient changes in
the demographic composition of the labor force in the last century
was the substantial rise in the rate of labor force participation among
women. Figure 1.2 illustrates this trend from 1900 to 2002. At the turn
of the last century, only about one in five U.S. women worked for pay
in the labor market. By 2002, that fraction had tripled to three in five
women. The rate of increase was markedly faster from about 1960 to
the late 1980s, when the rate advanced almost 2 percent per year,
more than three times the rate of increase for the early part of the
century or of the 1990s. The transformation in women’s paid work is
even more dramatic among married women. For example, just 6 in
100 married women worked in paid employment as of 1900 in contrast to 61 in 100 a century later (Goldin, 1990; U.S. Bureau of Census,
2002c). In the Chapter Two, we consider not only the role of women
in the labor market but a number of other aspects of population
growth and change that will influence the labor market over the next
several decades. We show that the U.S. workforce will continue to
increase in size, but at a considerably slower rate, while the composition will shift toward a more balanced distribution by age, sex, and
race/ethnicity. Slower workforce growth may make it more difficult
for firms to recruit workers during periods of strong economic
growth, although greater participation in the workforce by the
elderly, women with children, persons with disabilities, and other
groups with relatively low labor force participation could cause the
workforce to grow faster.
The twentieth century was also marked by a revolution in technology
that has transformed the economy from the industrial age to the

Introduction

RANDMG164-1.2

Percentage in labor force

60
50
40
30
20
10
0
1900

1920

1940

1960

1980

2000

Year
SOURCE: 1900–1954: U.S. Bureau of Census (1975), Series D29-41; 1955–2002: CEA
(2003), Table B-39.
NOTE: Participation rates for 1900–1940 are for women age 14 and above. Participation rates for 1947 onward are for women age 16 and above.

Figure 1.2—Female Labor Force Participation Rate, 1900–2002

information age. As an illustration of the remarkable pace of change
in the past century, Figure 1.3 charts the rapid rise in the number of
U.S. patents granted since the middle of the last century. While the
number of patents granted has oscillated somewhat, there has been a
rapid pace of growth in patent awards since the late 1940s and what
appears to be an acceleration of the upward trend since the mid1990s. These patents capture everything from advances in telecommunications to the introduction and evolution of computing hardware and software to the revolution in biotechnology. These past and
future trends in technological change are the subject of Chapter
Three. There, we describe how trends in IT, biotechnology, and
nanotechnology have led experts to conclude that the pace of technological change will almost certainly accelerate in the next 10 to 15
years. Synergies across technologies and disciplines will generate

The 21st Century at Work

RANDMG164-1.3

200,000
180,000

Number of patents granted

160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
1900

1920

1940

1960

1980

2000

Year
SOURCE: U.S. Patent and Trademark Office (2002b).

Figure 1.3—Patents Granted, 1900–2001

advances in research and development (R&D), production processes,
and the nature of products and services, with wide-ranging implications for the workforce and workplace.
Another marked change in the past half-century was the increased
integration of the U.S. economy with the rest of the world. Although
the U.S. economy experienced considerable trade and capital flows
in the early part of the twentieth century, protectionist pressures and
other factors substantially dampened the importance of those flows
within the U.S. economy in the interwar period. However, the U.S.
emerged from World War II on a path toward greater openness. Figure 1.4 illustrates this trend with respect to trade in goods and services. As a share of gross domestic product (GDP, a measure of economic activity), exports and imports combined have climbed from
about 10 percent of GDP in the late 1940s to 26 percent at the peak in
2000. Expanded trade has come through growth in both exports and
imports, although since 1976 the U.S. trade account has been in
deficit as exports have been smaller than imports. While the bulk of

Introduction

U.S. trading activities is in goods, trade in services, especially exports,
has been growing in importance over time. We address the extent
and nature of globalization and its implications for the labor market
in Chapter Four. The central lesson we infer is that globalization will
continue its record to date of contributing economic benefits in the
aggregate. Although market share and jobs will be lost in some economic sectors with short-term and longer-term consequences for
affected workers, the job losses will be balanced by employment
gains in other sectors. The future reach of global competition will be
even more expansive than before, affecting industries and segments
of the workforce relatively insulated from trade-related competition
in the past.
These patterns provide a preview of the forces that have shaped the
world of work in recent decades and ones that we think will play an
RANDMG164-1.4

Percentage of GDP

Services
imports

Exports + imports

Goods
imports

Services
exports
Exports

5
Goods exports

0
1930

1940

1950

1960

1970

1980

1990

2000

Year
SOURCE: BEA NIPA Tables, Tables 1.1 and 4.1 (http://www.bea.gov/bea/dn/nipa
web/SelectTable.asp).

Figure 1.4—Exports and Imports as a Share of GDP, 1929–2002

The 21st Century at Work

important role in the labor market in the next several decades as
well. It is our intent that our assessment of these forces provide a
framework for considering their implications for important dimensions of the workforce and the workplace. Thus, in the concluding
chapter we discuss the implications for important dimensions of the
workforce, workplace, and compensation that arise from the major
forces shaping the world of work. Among those are the following:
•

Employees will work in more decentralized, specialized firms.

•

Employer-employee relationships will become less standardized
and more individualized.

•

Greater emphasis will be placed on retraining and lifelong
learning as the U.S. workforce tries to stay competitive in the
global marketplace and respond to technological changes.

•

Slower labor force growth will encourage employers to accommodate women, the elderly, and persons with disabilities to
increase their participation in the labor force.

•

Future productivity growth will support rising wages and may
affect the wage distribution. The tie between employment and
access to fringe benefits will be weakened.

Chapter Two

SHIFTING DEMOGRAPHIC PARAMETERS SHAPING
THE FUTURE WORKFORCE

In the next 10 to 15 years, important demographic shifts will continue to influence the size and composition of the workforce. The
size and composition of the population, as well as labor force participation rates, determine the number and makeup of people who
want to work. Demographic parameters also influence the consumption patterns of the population and thus the mix of goods and
services produced and the labor required to produce them. These
factors continue to evolve, in some ways that perpetuate recent
trends, and in other ways that suggest changes from the recent past.
In this chapter, we elaborate on the relationships among population
size and composition, labor force participation, and labor demand
and supply. We begin with the basics: slower workforce growth and
shifting labor force composition. These developments have been
under way for some time and will continue in the next couple of
decades. The labor force has been growing more slowly because of
smaller birth cohorts following the baby boom that ended in 1964
and a trend toward earlier retirement on the part of male workers.
While workforce growth has been slowing for some time now, the
upcoming slowdown is far more dramatic than at any time during
the twentieth century. That the labor force has been growing at all
has been the result of progressively higher labor force participation
by women and the continued large inflows of immigrants. As the
female labor force participation rate approaches that of men, the
growth of female labor force participation is slowing, thus further
slowing the expansion of the overall workforce.

The 21st Century at Work

The U.S. population as a whole has been growing older as the baby
boom generation ages. Older people bring strengths to the workforce
different from those of young people. However, the increase of nonworking elderly can be costly for society because of their reliance on
social insurance programs. These costs in the United States, however, are less than those faced by other developed countries. A continuing large inflow of immigrants has shifted the composition of the
workforce. Hispanics and Asians are the fastest growing racial and
ethnic groups in the population. In the case of Hispanics, a high birth
rate is partly responsible for that, but immigration is the main driver.
The steadily increasing female labor force participation rates, combined with decreasing male rates, have brought the labor force close
to gender balance. The rise in female rates holds for married women
and single women alike. It holds as well for women with and without
minor children, and, for the latter, it holds whether they are married
or not and no matter how old their children are. As a result of population aging and the increased labor force participation of women,
another dimension of change is that more workers have responsibilities outside of work. This may involve caring for children, elderly
parents, or both.
An important theme of this chapter is the growing weight of education and skills in defining the future workforce. We outline the educational attainment, achievements, and skill levels in the United
States, both compared to years past and to other countries. On the
whole, the educational attainment (i.e., years of schooling completed) of the U.S. population has been rising and will probably continue to rise. Achievement scores, however, have been only about
average compared to those in other developed nations despite
greater public and private expenditures on education. In addition to
education reforms, such as those that address the funding and institutional organization of schools and the degree of competition
among schools, technological developments, such as technologymediated instruction, might raise the productivity of education.
The slowdown of the workforce growth may make it more difficult
for firms to recruit workers in the future. We therefore explore the
potential for faster workforce growth. First, given the right environment, more older workers might choose to retire later and continue
to contribute to the nation’s prosperity. Second, data from the
United States and from other countries suggest that labor force par-

Shifting Demographic Parameters Shaping the Future Workforce

ticipation by women with children could rise further if work could be
more easily balanced with family responsibilities. Third, there is the
potential to raise labor force participation by such underrepresented
groups as the disabled. Finally, immigration offers opportunities for
workforce growth or changes in the skill composition of the workforce.
Most of this chapter is directed to the effect of demographic trends
on the characteristics of labor supply. Those trends will also alter the
mix of goods and services demanded and thus the characteristics of
labor demanded by firms. Older households tend to spend their
money differently than younger ones do, and household tasks formerly performed by household members may be “outsourced” to the
paid workforce as women (in particular) take paid work in greater
numbers. We take up such issues briefly toward the end of the chapter.

SLOWER WORKFORCE GROWTH AHEAD
The workforce grew from 83 million individuals in 1970 to 107 million
in 1980, 126 million in 1990, and 141 million in 2000. These figures
correspond to annual growth rates of 2.6 percent in the 1970s, 1.6
percent during the 1980s, and 1.1 percent in the 1990s (see Figure
2.1). The rate of increase has thus abated. Between 2000 and 2010,
the Bureau of Labor Statistics (BLS) projects a continuing annual
growth rate of 1.1 percent to 158 million individuals in 2010
(Fullerton and Toossi, 2001). After 2010, the workforce growth will
slow further. Between 2010 and 2020, the annual growth rate is projected to be just 0.4 percent, followed by an even lower 0.3 percent
annual growth rate between 2020 and 2030 (Toossi, 2002). (See Box
2.1 for a discussion of what factors determine the size of the labor
force and methods for projecting the size of the future labor force.)
Why has the rate of growth decreased and why will it slow even
more? The high labor force growth rates of the 1970s and 1980s were
the results of strongly increased workforce participation among
women combined with fairly robust population growth. The rapid
increase in female labor force participation strongly dominated a
gradual decrease in male participation. However, as female and male
participation rates converge, the rate of female participation growth

The 21st Century at Work

RANDMG164-2.1

3
2.6
Annual growth rate (percentage)

2.5

2
1.7

1.6

1.5
1.1

1.1

0.4

0.5

0.3

0
1950s

1960s

1970s

1980s

1990s

2000s

2010s

2020s

SOURCE: Toossi (2002), Table 2.

Figure 2.1—Annual Growth Rates of the Labor Force, 1950–2000,
and Projected, 2000–2030

Box 2.1
What Determines the Size of the Future Workforce?
A study about the twenty-first century workforce and workplace inherently
relies on many projections. How do we, or rather, how does the BLS, project the number of people in the future workforce?
First a definition: the workforce includes both people who are employed
and people who are unemployed. It is also known as the labor force. Unemployed people are people without a job who are actively seeking one.
Thus, the term “unemployed” does not count a student, disabled person,
homemaker, or retiree who does not have a job and is not looking for one.
Similarly, someone who would like a job but has given up on finding one is
not unemployed and thus not in the workforce.
The size of the future workforce depends on the size of the future population and the future labor force participation rate—that is, the fraction of the

Shifting Demographic Parameters Shaping the Future Workforce

Box 2.1—continued
population that is employed or unemployed. The size of the future population, in turn, depends on the current population, fertility, mortality, and
immigration (see Figure 2.2). Labor force participation rates vary greatly by
age, sex, and race/ethnicity. The BLS therefore generates separate population projections for 136 age, sex, and race or Hispanic origin groups. It
does this every two years with a 10-year horizon. It also projects labor force
participation rates for each of the 136 subpopulations. It first calculates the
rate of change over the past eight years and applies this to the most recent
labor force participation rate to get an estimate for the next eight. It then
reviews each projected rate and manually adjusts implausible ones, namely
when they appear inconsistent with the results of crosssectional and cohort analyses. This second step aims to ensure consistency in the projections across the various demographic groups. Finally, the
size of the anticipated labor force is calculated by multiplying the labor
force participation rates by the population projections (BLS 1997; Fullerton
and Toossi, 2001).
Workforce measures do not take number of hours on the job into account.
Someone who works full-time is counted the same as someone who works
20 or 30 hours a week. This can sometimes be misleading—for example,
when labor force participation rates are compared across subpopulations or
countries with different fractions of part-time workers.
Naturally, there is uncertainty in projecting the various elements contributing to the labor force estimate. If the horizon is only 10 to 20 years, uncertainty about fertility is not very important, because future children will be
mostly too young to work. Barring a major shock such as a particularly
lethal disease or a war on U.S. soil, the effects of mortality are accurately
predictable. Legal and illegal immigration are more uncertain, but those uncertainties are on the order of hundreds of thousands per year against a
population pool in the most immigration-affected age classes in the tens of
millions. The main source of uncertainty is future labor force participation.
This will depend on job opportunities, wage levels, ability to balance work
and family, retirement incentives, health, nonlabor income, and many more
factors.

The 21st Century at Work

RANDMG164-2.2

Fertility

Mortality

Immigration

Population

Labor force
participation

Labor force

Figure 2.2—Determinants of the Size of the Workforce

is slowing. BLS expects women to continue slowly increasing their
age-specific workforce participation until 2015. But because the aging
female workforce is gradually moving into age groups that traditionally have low participation rates, overall female labor force
participation is expected to reach its highest level a few years earlier,
in 2010. Men are also aging, resulting in a continuing slow decline in
their overall participation rate. Since 1990, the total contribution of
increased labor force participation rates to workforce growth has
been very small; after 2010, the aging of the workforce is expected to
reduce the overall labor force participation rate (Toossi, 2002).
Workforce growth since 1990 has largely been fueled by immigration.
We now take a closer look at underlying childbearing trends, decreasing labor force participation rates among men, increasing labor force
participation among women, and the large inflow of immigrants
since the late 1970s.

Shifting Demographic Parameters Shaping the Future Workforce

Baby Boom, Baby Bust
The most notable development in fertility after World War II has
been the baby boom of 1946–1964 (see Figure 2.3).1 It was preceded
by a baby dearth in the 1930s, so that the baby boom cohort is much
larger than earlier birth cohorts. Fertility rates declined substantially
after 1964 and have remained low through the present time (14.5
births per 1,000 residents in 2001).
RANDMG164-2.3

30
1946

Births per 1,000 residents

25
1964
20

0
1920

1930

1940

1950

1960

1970

1980

1990

2000

Year
SOURCES: NCHS (2001), Table 1-1; NCHS (2002a), Table 1.

Figure 2.3—Fertility Rate, 1920–2001

______________
1 Because we are interested in explaining the growth of the population and its sub-

groups, we define fertility as the number of live births per x residents, conventionally,
per 1,000. Fertility rate in this sense is affected by population age-gender structure, as
well as by Total Fertility Rate (TFR), or the number of live births per woman of reproductive age over the course of her life. The TFR was 2.1 children per woman in 2001,
precisely at the level to maintain a stable population in the long run.

The 21st Century at Work

In 2003, the oldest baby boomers will celebrate their 57th birthday.
Over the next decade or two, many of them will be retiring. Since this
cohort is so much larger than older cohorts, the number of people
leaving the labor force will increase sharply.
At the young end of the workforce, the number of entrants will
increase, but not in tandem with the large cohort that is retiring. The
difference is not quite so dramatic as Figure 2.3 might suggest. The
fertility rate since 1970 has been well below the rate in the baby
boom years, but because the overall population has grown, the total
number of babies born is not hugely lower than during the baby
boom years. At the peak of the baby boom, in 1957, there were 4.3
million live births (or 25 per 1,000 residents) in the United States. The
number declined to a low of 3.1 million in 1973, but has risen to
around 4 million recently (National Center for Health Statistics
(NCHS), 2002a). The number of young workforce entrants has been
increasing correspondingly in recent years and may be expected to
continue to slowly increase in the next couple of decades.

Men Start Working Later, Retire Earlier
The most striking workforce participation trends of the second half
of the twentieth century are the declining labor force participation
rates of men (especially older men) and increasing rates of women
(see Figure 2.4 and the discussion regarding women below). In 1948,
fully 90 percent of men age 55–64 were in the labor force. This rate
declined to 87, 72, and 67 percent in 1960, 1980, and 2000, respectively (BLS, 2003a).
The effect of the trend toward earlier retirement is amplified by the
population’s aging. If the age structure of the workforce were stationary, earlier retirement would reduce the overall labor force participation rate. However, the population is also aging, thus gradually
moving workers to age groups with traditionally low participation.
The effect is clearly reflected in male labor force participation statistics. The overall male participation rate declined from 86 percent in
1950 to 74 percent in 2002 (BLS, 2003a). However, as we discuss in
detail below, there are reasons to believe male labor force participation behavior at older ages will be different in the future.

Shifting Demographic Parameters Shaping the Future Workforce

RANDMG164-2.4

100
90

Percentage in labor force

80
70
60
50
40
Men
Women

30
20
10
0
1950

1960

1970

1980

1990

2000

Year
SOURCE: BLS (2003a), series LNU01300001 and LNU01300002.
NOTE: Population is those age 16 and above.

Figure 2.4—Labor Force Participation Rate, by Sex, 1950–2002

Male labor force participation has also decreased at younger ages.
Between 1980 and 2000, labor force participation rates among men
age 25–54 dropped by two to three percentage points. BLS projects
further small declines (Toossi, 2002). Larger changes occurred at
younger ages. Between 1980 and 2000, labor force participation
among men age 16–24 fell by six percentage points to 69 percent in
2000, and it is expected to drop some more. Much of this reduced
workforce participation is mirrored in sharply increased school
enrollment rates. Between 1980 and 2000, school enrollment
increased from 46 to 61 percent among 18–19-year-olds, from 31 to
44 percent among 20–21-year-olds, and from 16 to 25 percent among
22–24-year-olds (U.S. Bureau of the Census, 1981, 2001c). We elaborate on education issues below.

The 21st Century at Work

Women Greatly Increased Their Workforce Participation
While labor force participation among men, particularly older men,
has gradually declined since 1950, among women it has increased at
an extraordinarily rapid pace (see Figure 2.4). In 1950, 86 percent of
men and 34 percent of women age 16 and older were in the labor
force. By 2002, these rates had converged to 74 and 60 percent,
respectively (BLS, 2003a). BLS expects the male and female labor
force participation rates to continue to converge to 73 and 62 percent, respectively, in 2010 (Fullerton and Toossi, 2001; Toossi, 2002).
The generally converging labor force participation among men and
women implies that the fraction of workers that are women is
increasing. It was 47 percent in 2000 and is expected to be 48 percent
in 2010.
While male and female participation rates are converging in the
population as a whole, the story is different in some subgroups. For
example, at roughly the same age-specific participation rates, Hispanic men have higher overall labor force participation rates than
non-Hispanic men because of their young age structure (61 percent
of Hispanics are between age 20 and 44, compared to 46 percent of
non-Hispanic whites [Fullerton and Toossi, 2001]). This does not
hold for Hispanic women. Age-specific participation rates of Hispanic women are 12–14 percentage points lower than among nonHispanic white women. However, because of the younger age structure among Hispanics, the overall labor force participation rate
among Hispanic women age 16 and older is only 4 percentage points
lower than among non-Hispanic white women (Fullerton, 1999).
Overall in 1998, male and female labor force participation among
Hispanics was 80 and 56 percent, respectively. The increasing
prevalence of Hispanics in the population therefore counteracts the
observed overall convergence of male and female workforce participation rates.
Figure 2.5 demonstrates that increased participation among women
took place at all ages between 20 and 64 years. The figure also indicates that the changing age structure of the population has important implications for overall workforce participation. Among both
men and women, labor force participation drops off strongly after
age 55. While male labor force participation rates are projected to

Shifting Demographic Parameters Shaping the Future Workforce

RANDMG164-2.5

100
Men
90
2010

1980

2010

Percentage in labor force

80
70
Women 1980

Males in 1980
Males in 1990
Males in 2000
Males in 2010
Females in 1980
Females in 1990
Females in 2000
Females in 2010

50
40
30
20
10
16–19

20–24

25–34

35–44
Age

45–54

55–64

65+

SOURCE: Fullerton and Toossi (2001), Table 3.

Figure 2.5—Labor Force Participation Rate by Sex and Age, 1980–2010

change very little between 2000 and 2010, the aging of the workforce
implies an overall reduction of male labor force participation. Among
women, the continuing small increases in labor force participation
between 2000 and 2010 and population aging counteract each other.
BLS expects overall female labor force participation to continue to
rise until 2010 and decline thereafter (Toossi, 2002).

Immigrants Fuel Workforce Growth
Immigration has dramatically influenced U.S. population and workforce trends in recent decades. Relative to population size, immigration was largest in the early part of the twentieth century. However,
the absolute number of immigrants in the last two decades of the
twentieth century exceeds that during the first two (INS, 2002,
2003a). To a small extent, immigration is offset by emigration. Since
1960, there has been approximately one emigrant for every four
immigrants. (See Box 2.2 for a discussion of how immigrants are

The 21st Century at Work

counted and comparisons between the United States and other
countries in the relative size of their foreign-born populations.)

Box 2.2
Counting Immigrants
How does the United States differ from other developed countries in its
absorption of immigrants? First, we must define what we mean by
“immigrant.”
Following the Bureau of Citizenship and Immigration Services (BCIS, formerly the Immigration and Naturalization Service, INS), we use the term
“immigrants” to refer to foreign individuals (aliens) who become permanent
residents of the United States. Their immigrant visa is commonly called a
“Green Card” and their expressed intent is to live permanently in the United
States. In addition to immigrants, the population contains nonimmigrants
(aliens with a temporary visa) and illegal immigrants (aliens without a visa).
Some countries, including the United States, maintain statistics on the
number of residents born abroad. Other countries keep track of the number
of foreign nationals, which is not the same. Immigrants may later adopt citizenship of their host country, in which case they are no longer foreign
nationals but still foreign born. The difference can be substantial, depending on naturalization policies. For example, the 1999 population of France
consisted of 10.0 percent foreign-born, but only 5.6 percent of the entire
population were not French citizens.
Table 2.1 indicates that large international differences exist in immigrant
populations. Some countries have few immigrants because they are traditionally sending countries (Mexico, Spain, Italy, and Ireland). But low immigrant populations may also be the result of restrictive immigration policy.
For example, Sweden apparently admitted many more immigrants than its
neighboring countries (Denmark, Finland, and Norway), which are similar
by many measures. The fraction foreign-born in the United States, at 10.4
percent in 2000 (up to 11.5 percent by 2002), is roughly in the middle of the
international range.

Shifting Demographic Parameters Shaping the Future Workforce

Table 2.1
Percentage of the Population That Is Foreign-Born and
Foreign National, Selected Countries, 2000
Foreign-Born
Australia
Austria
Canada (1996)
Denmark
Finland
France (1999)
Germany
Hungary
Italy
Luxembourg
Ireland
Mexico
Netherlands
New Zealand
Norway
Spain
Sweden
Switzerland
United Kingdom
United States

23.6
10.4
17.4
5.8
2.6
10.0

Foreign National
9.3
4.8
1.8
5.6
8.9

2.9
2.4
37.3
3.3
0.5
10.1
19.5
6.8
11.3

4.2
4.1
2.2
5.4
19.3
4.0

10.4

SOURCE: OECD (2003c).

In 2002, the civilian noninstitutionalized population in the United
States included 32.5 million foreign-born, representing 11.5 percent
of the U.S. population (U.S. Bureau of the Census, 2003b). These
individuals may be (permanent, legal) immigrants, temporary foreign residents, or illegal immigrants. Figure 2.6 shows the number of
permanent, legal immigrants entering the country each year between
1950 and 2001, including individuals who already resided in the
United States and converted from nonimmigrant to immigrant status
(INS, 2003a). The annual inflow increased slowly to about 640,000 in
1988, jumped to over 1 million in the next year, reached a peak of 1.8
million in 1991, and settled in around 900,000 per year in the late
1990s. The jump in 2001, when the INS issued 1.1 million immigrant
visas, is largely the result of an effort to reduce administrative backlog (INS, 2003a).

The 21st Century at Work

RANDMG164-2.6

2,000,000
1,800,000
1,600,000

Immigrants

1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
1950

1960

1970

1980

1990

2000

Year
SOURCE: INS (2003a), Table 1.

Figure 2.6—Immigration to the United States, 1950–2001

Many aliens legally reside in the United States on a temporary basis.
These include students, professionals, their family members, and
others. Most temporary foreign professionals hold an H-1B or L-1
visa. H-1B visas are for well-educated or skilled so-called Specialty
Occupation Workers; L-1 visas are for intracompany transferees—
i.e., for aliens transferring from a foreign to a U.S. location of their
employer. H-1B petitions are approved for up to three years with a
possible extension of up to another three years; L-1 petitions are for a
maximum of seven years. In fiscal year 2002, BCIS approved 198,000
H-1B petitions, down from 331,000 in the previous year (DHS, forthcoming). The number of L-1 visas issued was 58,000, slightly below
that in the previous year (U.S. Department of State, forthcoming).2 A
______________
2 BCIS considers and approves petitions, thereby granting the right to work; the U.S.

Department of State issues visas, thereby granting the right to enter the United States.
Someone who converts from student (F-1) status to H-1B status without leaving the
United States does therefore not need a visa, unless they leave and reenter. (In fiscal
year 2002, 198,000 H-1B petitions were approved and 118,000 H-1B visas were issued.)

Shifting Demographic Parameters Shaping the Future Workforce

rough estimate, assuming an average stay of two years per H-1B
approval and four years per L-1 visa issuance, is that the stock of H1B and L-1 beneficiaries is about 800,000. Their labor force participation is, by the terms of their visa, 100 percent. Approximately 7
million illegal immigrants were thought to reside in the United States
in 2000. A little more than half of them originated from Mexico. The
population of illegal immigrants is estimated to grow at about
350,000 per year (INS, 2003b).
Migration flows can substantially alter the growth rate and the composition of the future workforce. Assuming no growth in the number
of temporary (H-1B or L-1) workers, the number of people—other
than business travelers and tourists—legally entering the United
States each year is around 900,000. There is about one emigrant for
every four immigrants and the illegal immigrant population
increases by roughly 350,000 annually, so net migration is around 1.0
million. In 2001, the natural increase of the U.S. population—the
difference between 4.0 million births and 2.4 million deaths—was
about 1.6 million (NCHS, 2002c). Net migration thus boosted the U.S.
population growth by about 60 percent. The effect on workforce
growth is even larger, because immigrants are more likely to be of
working age than the general population (71 percent of immigrants
were age 20–64 in 2001 compared to 59 percent of the population).
Declining male labor force participation and slow population growth
reduce labor force growth to a trickle. This has prompted some to
become concerned about a future labor shortage (e.g., Lofgren, Nyce,
and Schieber, 2003).3 For economic activity to continue to grow, U.S.
workers would need to become more productive or overall labor
For counting temporary alien workers, the number of H-1B and L-1 approvals is thus
most relevant. BCIS does not publish L-1 approval statistics, but because L-1 beneficiaries are transferring from abroad, the number of approvals is close to the number of
visas. (BCIS does publish admission statistics, but those double count individuals who
entered the country twice in one year.)
3 Some argue that the term “labor shortage” is a misnomer, because if labor supply is

not sufficient to meet labor demand at current wage levels, the price of labor (i.e., total
compensation) will increase. This will make work more attractive relative to leisure,
thus inducing greater labor force participation to the point where firms can hire all the
workers they desire. Strictly speaking, the concern is thus not about a labor shortage
but about upward pressure on wages and benefit costs, which could erode corporate
profits, reduce corporate investments, reduce productivity growth, or make U.S. goods
and services less competitive on the world market.

The 21st Century at Work

force participation or immigration would need to increase. To the
extent that the predictions of slower growth ahead are accurate and
tight labor markets materialize, a central issue for the next couple of
decades will thus be whether and how to increase the size of the
labor force, perhaps through immigration or increasing labor force
participation rates. We return to this issue later in the chapter.

THE WORKFORCE IS BECOMING EVER MORE DIVERSE
The Hudson Institute’s Workforce 2000 predicted that in the late
twentieth century the workforce of the United States would become
older, more female, and more “disadvantaged”—a term it used to
capture black and Hispanic workers (Johnston and Packer, 1987). As
we discuss in this section, as many of the underlying demographic
forces remain the same, the workforce will continue to evolve along
these same lines in terms of age, gender composition, and the racial
and ethnic makeup. In addition, we will signal another dimension of
diversity: more diverse in responsibilities outside work. The remainder of this section documents the forces leading to greater workforce
diversity over the upcoming couple of decades.

The Workforce Is Becoming More Balanced in Age
As has been noted extensively elsewhere, the population of the
United States is getting older. The median age is projected to
increase from 35.5 years in 2000 to 40.7 years in 2050 (UN, 2001).
During the same period, the number of elderly (age 65-plus) per 100
working-age adults (age 15–64) will nearly double from 18.6 to 34.9.
In other words, the population of workers will support a relatively
larger elderly population in the future, a population that participates
in social insurance programs largely paid for by current workers.
Most notably, under current law, expenses on Social Security and
Medicare are projected to climb from 7.0 percent of GDP in 2002 to
13.1 percent in 2050 (Board of Trustees of the Federal Old-Age and
Survivors Insurance and Disability Insurance (OASDI) Trust Funds,
2003; Boards of Trustees of the Hospital Insurance (HI) and Supplementary Medical Insurance (SMI) Trust Funds, 2003). The cost of
these social insurance programs will thus fall on a relatively smaller
base of workers. The population is aging mainly because of past fer-

Shifting Demographic Parameters Shaping the Future Workforce

tility and mortality trends, which generate lower growth rates among
the young and higher growth rates among the old. The result is a
departure from the standard pyramid-shaped age-gender diagram of
a growing population, in which relatively many young people outnumber smaller and smaller population sizes at older ages. The
population diagram has instead become more pillar-shaped, with
roughly equal population sizes at all ages except the old.
The top panel of Figure 2.7, for example, shows the pyramid-shaped
distribution of 1960, with relatively many young children. These
children are the baby boom generation, born between 1946 and
1964. Moving down the panels of Figure 2.7, the large baby boom cohort climbs the pyramid and shows up in the age 56–76 categories by
2020. Successive cohorts were generally smaller in size, so that the
base of the population pyramid has not grown as rapidly as higher
levels have. As a result, by 2020 the distribution of the population
between birth and age 65 will be approximately rectangular or pillarshaped rather than pyramid-shaped. The size of the population will
be in the narrow 20–23 million range for every five-year age group
from birth to age 64. Thus, none of these groups will differ by more
than 6 percent from the average size. After age 65, mortality becomes
increasingly strong and generates a pyramid-shaped pattern.4
Since the population “pyramid” will soon be pillar-shaped up to age
64, we speak of the population’s “becoming increasingly balanced in
age” in addition to just “aging.” In the workforce, the trend toward
greater age balance is even stronger than in the population, at least
until 2010 because of projected increased labor force participation
among mature and older workers (see below for details). In 2000, the
median age of the population was 4.9 years higher than that of the
workforce. By 2010, this difference is projected to shrink to 4.1 years
(Fullerton and Toossi, 2001).
______________
4 In keeping with tradition, we have depicted the age distribution of the population

separately for men and women in two-sided horizontal histograms. However, the differences between men and women do not change markedly over time. At birth, there
are slightly more boys than girls. The sex ratio reverses at higher ages because women
generally outlive men. In 2000, the sex ratio went from 105 boys per 100 girls at birth to
100 at about age 35 and only 50 at age 80 or above.

The 21st Century at Work

RANDMG164-2.7

85+
80–84
75–79
70–74
65–69
60–64
55–59
50–54
45–49
40–44
35–39
30–34
25–29
20–24
15–19
10–14
5–9
0–4
0
0

Age–men

1980

Age–men

2000

Age–men

2020

Number (in millions)

Age–women

Age–men

1960

Age–women

85+
80–84
75–79
70–74
65–69
60–64
55–59
50–54
45–49
40–44
35–39
30–34
25–29
20–24
15–19
10–14
5–9
0–4
0
0

Number (in millions)

SOURCE: U.S. Bureau of the Census (2002a).

Figure 2.7—Age Structure of the Population in 1960, 1980, 2000, and 2020

Shifting Demographic Parameters Shaping the Future Workforce

Among Developed Countries, the United States Remains
Relatively Young
At present, the U.S. population is somewhat younger than the populations of other developed nations. The outlook, however, shows
much greater differences. All major countries will age, but the United
States at a much slower pace than most other nations. Table 2.2 lists
two indicators of population aging in the United States and other
countries in 2000, 2025, and 2050. As mentioned above, the median
age of the population and the old-age dependency ratio are both
increasing in the United States. Most of this population aging process will have been realized by 2025.
Our neighbors to the north and south will also become older. The
median age in Canada is already above that in the United States, and
the gap will become wider. The number of elderly per working-age
adult is currently about on par with the United States but will grow
much faster. The Mexican population is currently much younger
Table 2.2
Indicators of Aging in Selected Countries (2000, 2025, and 2050)
Median Age (Years)

United States
Canada
Mexico
Europe
France
Germany
Italy
Spain
United Kingdom
Russia
Japan
China
India

Old-Age Dependency Ratio

2000

2025

2050

2000

2025

2050

35.5
36.9
23.3
37.7
37.6
40.1
40.2
37.7
37.7
36.8
41.2
30.0
23.7

39.3
42.9
32.5
45.4
43.3
48.5
50.7
49.2
44.5
43.8
50.0
39.0
31.3

40.7
44.0
39.5
49.5
45.2
50.9
54.1
55.2
47.4
50.0
53.1
43.8
38.0

18.6
18.5
7.6
21.7
24.5
24.1
26.7
24.8
24.1
18.0
25.2
10.0
8.1

29.3
32.6
13.8
33.2
36.2
39.0
40.6
36.1
34.8
27.6
49.0
19.4
12.1

34.9
40.9
30.0
51.4
46.7
54.7
68.1
73.8
47.3
47.1
71.3
37.2
22.6

SOURCE: United Nations (2001).
NOTES: Old-age dependency ratio is defined as the number of elderly (age 65plus) per 100 working-age adults (15–64 years). Europe includes all European
countries, from Norway to Greece and Iceland to Russia.

The 21st Century at Work

than the U.S. population. The median age is fully 12 years lower and
the old-age dependency ratio less than half. Until 2025, the gap will
narrow, but the Mexican population will remain much younger than
the U.S. population. After 2025, however, Mexico is projected to age
at a much faster rate than the United States. By 2050, its age structure
will be similar to ours.
The populations of most European countries are already older than
the United States, and the difference is projected to grow substantially. The median ages in Germany and the United Kingdom, for
example, are projected to rise by more than 10 years between 2000
and 2050, compared with an increase of five years in the United
States. The median age of the Italian population will have risen by
nearly 10 years by 2025 and 14 years by 2050; Spain will age even
faster. In Europe as a whole, the median age is projected to rise by 12
years between 2000 and 2050. Similar patterns are reflected in the
old-age dependency ratios. The large western European countries
currently have ratios of about 25 elderly per 100 working-age
adults—i.e., there are about four working-age adults per elderly person. By 2050, there will be as few as two working-age adults per
elderly person in Germany, France, and the United Kingdom, and
only 1.4 in Italy and Spain.
Japan’s population is currently among the oldest in the world. Its
median age, at 41 years, is slightly above the median ages of Germany and Italy. It is projected to rise by 12 years between 2000 and
2050. Similar to the oldest European countries, its number of working-age adults per elderly is projected to fall from four in 2000 to 1.4
in 2050.
The populations of such fast-developing countries as India and
China are much younger than the U.S. population. China’s median
age is 30 and India’s only 24, with correspondingly low old-age
dependency ratios. However, both countries will age rapidly. By
2025, China’s median age will be the same as that of the United
States, and even higher by 2050. India will also age rapidly, but
remain comparatively young.
As the age gap between the United States and other developed
nations grows, so will the differences between their workforces.
While older workers tend to have more experience, younger workers

Shifting Demographic Parameters Shaping the Future Workforce

are generally more productive and more likely to acquire new skills
through their own investments or investments by their employers
(Lofgren, Nyce, and Schieber, 2003). The productivity of the U.S.
workforce is thus likely to evolve more favorably than in other developed nations. The same holds with respect to India and China,
whose populations are aging much faster than the U.S. population.
These demographic patterns may have implications for the relative
competitiveness of the United States vis-à-vis other nations, particularly other developed countries where population aging is even more
dramatic. Absent major changes in immigration levels in Japan and
other European countries or unanticipated increases in birth rates,
the U.S. population will remain relatively younger. A major issue
facing all developed countries is the costs associated with old-age
social insurance programs. Most developed nations largely fund their
retirement benefit and health care programs on a pay-as-you-go
basis—that is, current workers pay for the benefits of current retirees.
Current tax and benefit structures cannot be sustained in light of the
increasing size of the elderly population supported per worker. For
all practical purposes, benefits must become less generous or tax
contributions higher. Almost all developed nations are therefore currently reforming their retirement benefit and old-age health care
programs, typically opting for a combination of reduced benefits and
higher taxes.
Who will bear the burden of those higher taxes? Basic economic theory states that workers are compensated according to their marginal
productivity, so that in the long run the higher burden will be borne
entirely by workers and reduce their standard of living. In the short
to medium term, it is possible that employers will shoulder some of
the costs. As a result, the cost of production may go up which could
reduce competitiveness in world markets.
The impending societal costs associated with an aging population
are expected to weigh heavily on the United States. As mentioned
above, under current law, expenses on Medicare and Social Security
are projected to almost double as a fraction of GDP. However, other
developed nations are facing even greater burdens. In part, this
stems from the slower pace of aging in the United States. In addition,
while Social Security and several government pension programs are
largely funded on a pay-as-you-go basis, these programs account for

The 21st Century at Work

only a portion of retirement benefits in the United States. Employerprovided pensions, which account for roughly the same share of
retirement income as Social Security, are mostly prefunded. Few
European countries have sizable funded pensions. (The Netherlands
is a clear exception, as is the United Kingdom, to a lesser extent.
Sweden recently carved out a funded portion of its retirement benefit
program.)5 Nevertheless, as the number of retirees increases relative
to the number of workers in the United States, there will be rising fiscal pressure to pay for the elderly’s entitlements and the government
services that they use.

The Workforce Is Becoming More Diverse in Race and
Ethnicity
Another major U.S. population development is the increasing
diversity of its racial and ethnic composition. (See Box 2.3 for a discussion of racial and ethnic categories.) Figure 2.8 shows the population’s composition for 1980 through 2020 (U.S. Bureau of the Census 2001a, 2001b, 2002b). Hispanics may be of any race; the other
categories exclude Hispanics.6 The most notable feature is the
declining share of whites in contrast to the growth of all minority
populations, particularly Hispanics and Asians and Pacific Islanders.
The Hispanic population has grown the most, almost doubling its
share from 6.4 percent in 1980 to a projected 12 percent in 2002.
Hispanics are projected to keep increasing their share of the population, albeit at a slower pace, to 17 percent in 2020. Asians and Pacific
Islanders increased from 1.6 percent in 1980 to 4.1 percent in 2002.
They, too, are projected to continue increasing their share of the
population, to 5.7 percent in 2020. The black population share
increased slightly and is projected to continue to do so only slightly,
from 12 percent in 1980 to 13 percent in 2020. Native Americans
remain the smallest segment, with a projected growth from 0.6 percent in 1980 to 0.8 percent in 2020.
______________
5 A system of personal retirement accounts, much like Sweden’s, is under considera-

tion in the United States, but this will affect U.S. government cash flow negatively
because of immediately lower tax revenues and much-delayed lower benefit payments.
6 Unless explicitly stated otherwise, this study uses the racial identifiers “white,”

“black,” etc., for non-Hispanic white, non-Hispanic black, etc.

Shifting Demographic Parameters Shaping the Future Workforce

Box 2.3
The Difference Between Race and Ethnicity
What is the distinction between race and ethnicity in the context of the
demographic data we rely on for this study? The Oxford English Dictionary
defines the two terms as follows: Race is “A group of persons … connected
by common descent or origin” or alternatively, “One of the great divisions of
mankind, having certain physical peculiarities in common.” Ethnic is
“pertaining to or having common racial, cultural, religious, or linguistic
characteristics.” In other words, race categories tend to be associated with
biology and ethnic categories with culture. However, the two concepts are
not clearly distinct from each other. For example, 26 different racial terms
have been used to identify populations in the 1900–1990 U.S. censuses. In
the early twentieth century, Italian, Irish, and Jewish were listed as racial
categories and seen as inherently and irredeemably distinct from the majority white population. Today, these are considered ethnicities. Genetically,
no matter how racial groups are defined, two people from the same racial
group are about as different from each other as two people from any two
different racial groups (American Anthropological Association, 1997).
The U.S. government uses a distinction, which we follow here, based on
the Office of Management and Budget (OMB) Directive 15 of 1977. OMB
Directive 15 specified that all federal agencies use a four-race classification
system (white, black, American Indian and Alaska Native, and Asian and
Pacific Islander) and an ethnicity classification system that permits classification of all individuals as either Hispanic or non-Hispanic. Finer categories
are allowed, provided that they can be unambiguously assigned to one of
the primary categories. Thus, Hispanics can be of any race. For example,
someone who is descended from slaves brought from Africa to Cuba is
Hispanic and black; someone of Mayan descent who immigrated from
southern Mexico is Hispanic and American Indian. Often, race and ethnicity
are blended into five mutually exclusive categories: Hispanic, non-Hispanic
white, non-Hispanic black, non-Hispanic American Indian and Alaska
Native, and non-Hispanic Asian and Pacific Islander. While simpler, this
classification does not permit analyses of racial differences within Hispanics or of ethnic differences within races.

The 21st Century at Work

Box 2.3—continued
The 1990 census asked respondents to identify themselves with one and
only one racial category and one ethnicity. However, the U.S. population
had become increasingly diverse since 1977 and opposition against the
mutually exclusive racial categorization was building. More and more people were born with ancestors of different races. About half a million people
ignored the instruction and selected more than one race (Wallman,
Evinger, and Schecter, 2000). Large numbers of immigrants (especially
from Latin American and Arab countries) complained that none of the four
main racial categories applied to them, and many people (especially people
of Hispanic origin) chose “other race” on the 1990 census form. Among
those, many reported ancestries (on the ancestry question) indicating multiple racial backgrounds (Lee, 2001). OMB Directive 15 was therefore
amended in 1997. There are now five basic race categories: American
Indian or Alaska Native, Asian, black or African American, native Hawaiian
or other Pacific Islander, and white. An important change is that federal
survey respondents may now identify themselves with multiple racial categories. The two ethnic categories are now labeled “Hispanic or Latino” and
“not Hispanic or Latino.” Unlike mixed-race people, individuals with mixed
ethnicity must select one and only one ethnic category.
Figure 2.9 reproduces the questions on ethnicity and race, as asked in the
2000 census. The questionnaire distinguishes several subdivisions of the
primary ethnicity and race categories laid out in OMB’s 1997 Directive 15.
Nationwide, 2.4 percent of the respondents identified with more than one
racial category. Among children under age 18, 4.0 percent were multiracial
(Lee, 2001).

The growing diversity of the labor force in terms of the race and ethnic composition stems mainly from trends in fertility, immigration,
and labor force participation. In short, minorities have more children, immigrants largely add to the minority population, and minority Hispanics participate more in the workforce because of their relatively young age.

Shifting Demographic Parameters Shaping the Future Workforce

RANDMG164-2.8

100

Native
American

Black
80
Percentage of population

Asian/
Pacific
Islander

Hispanic

60
White
40

0
1980

1990

2000

2010

2020

Year
SOURCE: U.S. Bureau of the Census (2001a, 2001b, 2002b).
NOTE: Hispanics are excluded from the other categories. Hispanics can be of any
race.

Figure 2.8—Racial and Ethnic Composition of the Population, 1980–2020

Fertility series by race show that whites have had lower fertility than
other racial groups (see Figure 2.10). The differences, however, have
not been sufficient to have a very large influence on the evolution of
racial and ethnic diversity. More important are differences by Hispanic origin (available since 1989). Figure 2.11 breaks Hispanics out
of the racial groups. It shows that birth rates among Hispanics have
been substantially and consistently higher than among non-Hispanics. In 2001, the number of births per 1,000 Hispanic residents was 85
percent higher than the corresponding figure among non-Hispanic
whites (26 versus 14). Part of the reason for Hispanics’ higher birth
rate is their younger age structure, in which more women are in their
prime child-bearing years. The dominant reason, though, is their
much higher age-specific birth rates.7 However, large differences
______________
7 A commonly used summary measure of age-specific birth rates is the TFR, equal to

the sum of age-specific birth rates. It measures the rate of childbearing absent the

The 21st Century at Work

RANDMG164-2.9

7. Is Person 1 Spanish/Hispanic/Latino? Mark X the “No”
box if not Spanish/Hispanic/Latino
No, not Spanish/Hispanic/Latino
Yes, Puerto Rican
Yes, Mexican, Mexican Am., Chicano Yes, Cuban
Yes, other Spanish/Hispanic/Latino—Print group

8. What is Person 1’s race? Mark X one or more races to
indicate what this person considers himself/herself to be.
White
Black, African Am., or Negro
American Indian or Alaska Native—Print name of enrolled or principal tribe.

Asian Indian
Japanese
Chinese
Korean
Filipino
Vietnamese
Other Asian—Print race.

Native Hawaiian
Guamanian or Chamorro
Samoan
Other Pacific Islander—Print race.

Some other race—Print race.

Figure 2.9—Ethnicity and Race Questions on the 2000 Census

arise within the Hispanic population. Hispanics of Mexican descent
account for much of the high birth rate. Their birth rate was 27.1 per
1,000 residents in 2000, much higher than among Puerto Ricans
(20.2) and Cubans (10.4).
Immigration has strongly added to workforce diversity in recent
decades because only a small fraction of immigrants are non-

influences of population age-gender structure. The TFR is the average number of lifetime births women may be expected to have if they bore children at the rates that
women of all ages did in the year or other period for which the TFR is taken. The TFR
among Hispanics was 2.9 versus 1.8 children per woman among non-Hispanics in
1999.

Shifting Demographic Parameters Shaping the Future Workforce

RANDMG164-2.10

Births per 1,000 residents

0
1981

Black
Native American
Asian, Pacific Islander
White

1986

1991

1996

2001

Year
SOURCE: National Center for Health Statistics (2002a), Table 1.
NOTE: Hispanics can be of any race.

Figure 2.10—Fertility Rate by Race, 1981–2001

Hispanic white. Over the 1990s, only one in six legal immigrants
came from Europe or Canada (see Figure 2.12). One in three came
from Asia and almost one-half from Mexico, Central America, or
South America. Among (temporary) H-1B workers, almost half are
from India, 8 percent from China, and another 8 percent from
Europe or Canada. As of 1996, about three in four illegal immigrants
originated from Mexico, Central America, or South America (INS,
2002).
Along with minority status, nativity status—whether born in the
United States or abroad—is often considered an important workforce characteristic. As calculated above, net migration adds about
1.0 million people per year to the U.S. population. The number of
births is around 4 million per year, so that immigrants account for
around 20 percent of new U.S. residents. The stock percentage of the

The 21st Century at Work

RANDMG164-2.11

Births per 1,000 residents

10
Hispanic
Non-Hispanic Black
Non-Hispanic White

0
1989

1991

1993

1995

1997

1999

Year

SOURCE: National Center for Health Statistics (2002a), Table 6.

Figure 2.11—Fertility Rate by Hispanic Ethnicity, 1989–2001
RANDMG164-2.12

Other
1%

Europe, Canada
16%

Mexico,
Central and South
America
47%

Asia
32%

Africa
4%

SOURCE: INS (2003a), Table 3.

Figure 2.12—Immigrants by Origin, 1991–2001

2001

Shifting Demographic Parameters Shaping the Future Workforce

population that is foreign-born is 11.5 percent (U.S. Bureau of the
Census 2003b). The foreign-born population is therefore increasing,
with implications for the distribution of educational attainment and
skills of the future workforce as we discuss below.
Finally, labor force participation among Hispanics is higher than
among non-Hispanics, thus further contributing to ethnic diversity
of the workforce. The main reason for Hispanics’ greater participation in the workforce is their relatively young age structure. The Hispanic population is kept relatively young by its high fertility and by
the large inflow of Hispanic immigrants. While the U.S. population as
a whole is becoming more balanced in age (see Figure 2.7), the Hispanic population retains a younger age distribution. Hispanics have
about the same age-specific workforce participation rates as the
overall population, but 61 percent of Hispanics are between age 20
and 44, compared to 46 percent of non-Hispanic whites (Fullerton
and Toossi, 2001).

Future Workers Will Have More Responsibilities
Outside Work
While increased diversity of the workforce by sex, age, and race/
ethnicity has been widely signaled before, one more dimension of
worker diversity deserves attention. Women with children at home
have increased their labor force participation faster over the past 30
years than those without. While women with children are still less
likely to work than similarly aged women without children, participation by women age 25–54 with children at home increased from 49
percent in 1975 to 74 percent in 2002, while that by their childless
counterparts increased from 67 percent to 80 percent.8 A working
mother who is unmarried clearly has substantial responsibilities
outside work; a working mother with a partner or spouse presumably
shares some or all of the household responsibilities, particularly
when the partner or spouse is also employed. Thus, increased workforce participation by mothers implies that more workers have substantial responsibilities outside work.
______________
8 Based on authors’ calculations from unpublished BLS tabulations of the March 1975

and 2002 Current Population Surveys.

The 21st Century at Work

Family responsibilities frequently pertain to the workers’ children,
but they may also relate to the workers’ parents. Increasing life
expectancy and delayed childbearing imply that increasingly many
workers find themselves in between both needy children and needy
parents. Family members between needy children and needy parents
are sometimes referred to as the sandwich generation (Raphael and
Schlesinger, 1994). Based on the 1994 National Long-Term Care Survey, Spillman and Pezzin (2000) found that approximately 3.5 million
individuals, primarily women, were dually responsible for an aging
parent and a dependent child. Familial or other responsibilities outside work have implications for workplace arrangements and preferences regarding employee benefits. Sandwiched workers, in particular, are likely to attach a high value to scheduling flexibility, working
from home, leave days for family emergencies, and employer-provided child care, among other aspects of their employment situation.9 With these preferences, they may be willing to trade off various
forms of working conditions or employment benefits for lower
wages. Other workers may also prefer these types of flexible benefits
and the associated trade-off with cash wages.

THE KEY CHARACTERISTIC OF THE FUTURE WORKFORCE
IS SKILL
The workforce has become older, with greater numbers of women
and more diversity in race and ethnicity, and all signs point to a continuation of that trend over the next couple of decades. Non-Hispanic whites will continue to form a majority, but the other racial
and ethnic groups will constitute sizable minorities, represented in
all sectors and at all levels of the economy. Women already make up
almost one-half of the workforce. Many mature workers will remain
in the workforce, given the aging population. While these attributes
provide one way of characterizing the future workforce, an even
more important dimension as we look to the future is the skill that
potential workers bring to the workplace. As we discuss further in
Chapter Three, the rapid pace of technological change is expected to
continue to propel demand for highly skilled workers who can
______________
9 See Neal et al. (2001) for a discussion of ways in which employers can support

employees with child and elder care needs.

Shifting Demographic Parameters Shaping the Future Workforce

develop the new technologies and bring them to market and who can
exploit the new technologies in the production of goods and services.
Chapter Four emphasizes the importance of high-skilled work to the
U.S. comparative advantage in the world economy. As we discuss
further in Chapter Five, shifts in organizational forms and the nature
of employment relationships, brought about by new technologies
and global competition, also favor such high-level cognitive skills as
abstract reasoning, problem-solving, communication, and collaboration, attributes associated with “knowledge work” (Earl and Scott,
1999; Zack, 2003).
Skill acquisition is, of course, tightly linked to education as well as
training, both on-the-job training and training that occurs outside
the workplace. In the remainder of this section, we focus on the
makeup of the future U.S. workforce in terms of educational attainment but also more broadly in terms of measurable skills. We consider how the United States ranks compared with other countries in
terms of skills measures, and the prospects for technology to
improve skill acquisition in the future.

Educational Attainment Will Continue to Rise
Educational attainment among the U.S. population increased rapidly
throughout the twentieth century. About 80 percent of people born
around 1950 graduated from high school, up from 40 percent among
those born around 1900 (Day and Bauman, 2000). Similarly, the
share of college graduates rose from 10 to 25 percent. These large
cohort differences implied that there was a steep age gradient in
educational attainment. By the end of the twentieth century, however, that age gradient had flattened considerably. The difference in
educational attainment between cohorts entering and retiring from
the labor force is becoming smaller.
Has educational attainment really stagnated? Day and Bauman
(2000) took a very close look at the issue. Earlier findings of a stagnation were typically based on cross-sectional data and the assumption
that educational attainment stops after a certain age. For example,
according to the 1998 Current Population Survey (CPS), the fraction
of white men that completed college was stagnant at 30 percent for
the 1953–1957, 1958–1962, 1963–1967, and 1968–1972 birth cohorts
(see Table 2.3). However, this understates college graduation rates

The 21st Century at Work

for the younger cohorts because they have had fewer years to complete their degree. When measured during the same age range for
every cohort (i.e., ages 26 to 30), college graduation rates rose from
26.3 percent among white men born in 1953–1957 (determined in
1983) to 30.4 percent among white men born in 1968–1972
(determined in 1998). College graduation rates among young white
women, as of ages 26 to 30, now surpass those among their male
counterparts. White female college graduation rates rose very
strongly, from 22.7 percent in 1983 among women born in 1953–1957
to 34.2 percent in 1998 among women born in 1968–1973, again
when measured as of ages 26 to 30 for each cohort. Here, even crosssectional data show an upward trend, but they again understate
actual attainment growth. It is therefore important to measure successive cohorts’ educational attainment at the same age—i.e., one
must use multiple years of data. Day and Bauman (2000) concluded
that educational attainment has not stagnated but continued to
increase.
Day and Bauman (2000) also investigated the effects of immigration.
A sizable fraction of the immigrant population is very well educated,
but most come to the United States with relatively little formal
schooling. This has made educational progress among Hispanics, in
particular, look low. The fraction of Hispanics that completed high
school increased only 15 percentage points over the last 20 years,
Table 2.3
Percentage of College Graduates, by Sex and Birth
Cohort, in 1998 and at Age 26–30
White Men
Birth cohort
1953–1957
1958–1962
1963–1967
1968–1972

White Women

In 1998

At Age
26–30

In 1998

At Age
26–30

30.4
29.5
30.4
30.4

26.3
25.7
27.2
30.4

28.8
28.3
32.6
34.2

22.7
24.5
27.1
34.2

SOURCE: Day and Bauman (2000), Table 1.
NOTE: White includes both Hispanic and non-Hispanic white.

Shifting Demographic Parameters Shaping the Future Workforce

compared with a gain of 30 percentage points among blacks. However, many more less-educated Hispanic immigrants are here today
than were here 20 years ago. A cohort analysis excluding immigrants
showed that educational progress among Hispanics has been nearly
identical to that among blacks (Bean and Tienda, 1987). Smith (2003)
applied an analogous analysis to the schooling and wages of three
generations of Hispanic immigrants. He concluded that the apparent
slow progress among Hispanics stemmed from immigration. Indeed,
schooling and wages of the children and grandchildren of immigrants grew faster than that of native non-Hispanic whites, so that
their economic statuses converged (also see Smith, 2001).
Based on characteristics of the youngest cohorts, Day and Bauman
(2000) projected that educational attainment would continue to
increase among the very youngest birth cohorts. Overall, over the
next 25 years, they project the probability that a 25-year-old will have
completed high school to rise four to seven percentage points above
the current 84 percent. The probability of having completed college
at that age will rise four to five percentage points above the current
24 percent. The largest gains will be booked by women, particularly
non-Hispanic white and Asian women. Non-Hispanic white men are
also projected to reach higher levels of educational attainment.
Minority men should robustly increase high school graduation rates,
but gains in college graduation rates are subject to more uncertainty.
However, educational attainment (or years of schooling) does not
necessarily equate with the skills that workers need. It is clear that
quality differences exist among schools, and the skills taught in
school may differ from those needed in the workplace. As we discuss
further in the next chapters, workers will increasingly be exposed to
new technologies, new management practices, and development
and production distributed over multiple countries and carried out
by people from multiple cultures. Such new work circumstances call
for skills not traditionally taught in school: communications, working
in teams, problem-solving, and so on. These skills are already essential for the higher echelons of the workplace and will become
increasingly important for workers at all levels. Unfortunately, as
with on-the-job training, there is a paucity of data on such “soft
skills.”

The 21st Century at Work

Comparing Across Nations, Our Average Is in the Middle
How do the educational attainment, achievement, and skill levels of
the U.S. population or workforce compare to those in other countries? There have been several large-scale international studies to
consistently measure achievement. The National Center for Education Statistics (2003), for example, found that educational attainment
(as measured by upper secondary and university completion) in the
United States was the highest among all G-8 nations (Canada,
France, Germany, Italy, Japan, the Russian Federation, the United
Kingdom, and the United States). However, attainment is not
achievement. Based on internationally comparable standardized test
scores administered to students in primary or secondary schools, the
United States typically falls somewhere near the middle of the G-8
countries (National Center for Education Statistics, 2003). Perhaps
the most extensive international achievement comparison is the
Programme for International Student Assessment (PISA) of the
Organisation for Economic Co-operation and Development (OECD).
It covers 43 countries and tests 15-year-olds on reading, mathematical, and scientific literacy. The results are consistent with those
above: U.S. students score approximately in the middle of other
developed countries (OECD, 2003b).
The explanation for the achievement gap between U.S. students and
those of other developed countries remains unresolved. One possibility is that schools in the other G-8 nations are of higher quality
than those in the United States. Yet, U.S. public and private expenses
on schooling are far greater than among other G-8 countries. In 1998,
schooling expenditures amounted to 2.3 percent of GDP. By contrast,
Canada spent 1.9 percent, whereas the other six countries spent
between 0.8 and 1.1 percent (OECD 2001, Table B2.1b). Other possible explanations center around differences in pedagogical methods,
academic emphasis, the organization of schools, and other institutional differences between the U.S. schooling system and those of
other countries.
Beyond the achievement test comparisons for school-age children,
other internationally comparative data provide insights into differences in skill measures across adults. The 1994–1998 International
Adult Literacy Survey (IALS), also coordinated by the OECD, tested
adults aged 16 to 65 in three areas that mimic broad requirements of

Shifting Demographic Parameters Shaping the Future Workforce

white-collar jobs: prose literacy (the ability to process narrative text),
document literacy (the ability to process forms, charts, tables,
schedules, and maps), and quantitative literacy (the ability to perform practical arithmetic operations). Similar to their student counterparts, U.S. adults ranked near the middle of the 21 participating
countries on all three assessments (OECD, 2003a). (Sweden scored
highest, on average, on all three tests.)
Notably, the United States had the largest spread (i.e., the difference
between scores at the 95th and 5th percentiles) of all countries on
two of the three tests, and was close to the largest spread on the
third. In other words, many very low-skilled and very high-skilled
individuals work in the United States. The relatively large fraction of
very low-skill individuals may be stem, in part, from immigration. As
noted above, about one-half of legal and three in four illegal immigrants are Hispanics (INS, 2002). The average educational attainment
of foreign-born Hispanics is almost four years lower than that of
white men (Smith, 2001). On the other end of the spectrum, the high
quality of many colleges and universities in the United States may be
responsible for the relatively large fraction very high-skilled individuals. By most evaluations, U.S. colleges and universities rank among
the best in the world (Hanushek, 2002).
Since the IALS was administered to working-age adults, it offers the
opportunity to correlate test scores to labor market outcomes. The
OECD (2003a) study found that greater literacy skills, including
mathematical literacy, are correlated in the expected direction with
most labor market outcomes: labor force participation, unemployment, and earnings. These relationships held up even after controlling for educational attainment.
The international comparisons suggest that the educational delivery
by U.S. schools is, at best, about average among developed nations.
This is consistent with Hanushek and Kimko (2000), who found that
the quality of U.S. schools could not take credit for causing the high
growth rate of U.S. GDP over the twentieth century. Instead, the
openness and fluidity of U.S. markets and the low level of intrusion
by the government in economic operation—through relatively little
regulation, low taxes, and few government-owned industries—
stimulated more innovation and investment in the United States
than in most other developed countries. Presumably, though, growth

The 21st Century at Work

could have been even more impressive had U.S. schools been of
higher quality.

Technology-Mediated Learning Offers the Potential for
Improved Educational Outcomes
The U.S. performance on internationally comparative tests suggests
there is room for improvement in educational outcomes. Indeed,
considerable focus has been placed on various approaches to educational reform in the United States, including greater competition
among schools (through charter schools, vouchers, and other reforms to school organization); setting educational standards; testing
and other accountability reforms; reductions in class size and other
changes in school resources; and such movements as home schooling (Grissmer et al., 2000; Gill et al., 2001).
In addition to these various reforms under way across the country,
technology-mediated learning has been the source of one of the
most exciting new developments. This term captures many types of
learning, ranging from traditional classroom settings equipped with
PCs or other technology tools to distance learning through videoconferencing or interactive software, possibly at remote locations, in the
comfort of one’s home, or at an hour of the day that best suits the
student. Technology-mediated learning is also sometimes labeled elearning: instructional content or learning experiences delivered or
enabled by electronic technology. In the educational sector, distance
learning has gained the most ground at the postsecondary level. In
the 2000–2001 academic year, 56 percent of U.S. colleges offered distance education courses (U.S. Department of Education, 2003).
Spending on e-learning by the federal government is expected to
grow 34 percent a year, from $200 million in 2000 to $850 million in
2005 (Emery, 2001). As we discuss further in Chapter Three,
technology-mediated learning has an even wider array of applications for learning opportunities throughout the life course, not only
as part of kindergarten through twelfth-grade education or postsecondary education but also as part of a process of lifelong learning,
in or out of the workplace.

Shifting Demographic Parameters Shaping the Future Workforce

Distance learning is an example of a production process that has become much more efficient through the application of IT. It can reduce costs by eliminating the need to bring in a live instructor or for
geographically dispersed pupils to travel to a central location. The
marginal cost of enrolling students is very low. Perhaps more important, technology mediated learning offers opportunities for faster
and more effective learning. Distance learning, along with other
forms of technology-mediated learning, is individually based rather
than institutionally based (Commission on Technology and Adult
Learning, 2001). Its delivery of content may be in the form of multimedia presentations or other effective methods. Technology-mediated learning may be complemented by other advances in the cognitive sciences with regard to how individuals learn and how best to
tailor educational opportunities—whether using traditional pedagogical methods or technology-mediated methods—for optimal
delivery given an individual’s learning style (U.S. DOC, 2002).
One key issue in the diffusion of these advances in educational
approaches is the extent to which these methods are available to
children and adults of all backgrounds. At the same time, experts in
the area have noted that realizing the benefits from technologymediated learning requires more than just making computers available to all school-age children or placing computers in every library.
It is important to pay attention not only to hardware and software
but also to the support resources, infrastructure, and social context
within which the individuals who will use the technology operate.
Warschauer (2003) illustrates the issue in the case of an effort to
make advanced placement courses available in underserved high
schools in the Los Angeles area. The initial effort, an online course,
allowed small, dispersed populations across several schools to participate, but the online instructional format lacked structure and
sufficient teacher-student and peer-to-peer interaction given the
learning styles of the students involved. A more successful revamped
program brought students from several schools to a central location
for an online course taught by an expert instructor but also included
a local teacher to provide additional assistance in the classroom with
the computer-based curriculum. Ultimately, researchers now argue
that the issue is not so much unequal access to the technology but
rather inequities in the way the technology is used.

The 21st Century at Work

ADDRESSING THE SLOWDOWN IN LABOR FORCE GROWTH
We began this chapter with the forecast that workforce growth will
slow to a trickle in just a few years. This poses some challenging policy issues. In general, further growth of economic activity depends
on a growing labor force or increases in worker productivity. Thus,
the growth rate of the future labor force limits the growth rate of the
economy for any given rate of productivity growth. While we discuss
expectations for future productivity growth in the next chapter, here
we focus on the size of the labor force.
Should we be concerned with aggregate output growth or should we
be satisfied with greater output per worker (productivity)? Several
arguments can be made in favor of a focus on aggregate growth.
First, our standard of living is closely linked to GDP per capita, not
per worker. As the population ages, overall labor force participation
declines and GDP per capita shrinks for any given level of productivity. Second, expenses on such entitlement programs as Medicare and
Social Security will rise sharply relative to GDP; a larger aggregate
wage bill would reduce the tax rate that would be required to pay for
those expenses. Third, the U.S. economy is currently the largest in
the world, which in itself may bring advantages. For example, much
of international trade is conducted in U.S. dollars, which generates
seigniorage income for the United States. There may thus be benefits
to maintaining a dominant role in the international marketplace.
To the extent that it is desirable to raise the rate of labor force
growth, in the short term the two primary options are to increase the
overall size of the population through immigration or to increase the
labor force participation rate for the current population.10 In the case
of immigration, future immigrant flows and their composition are, to
a large degree, under the control of policymakers. While it may be
considered desirable to increase labor force participation from current levels, such increases may involve trade-offs. The current participation rates result from market forces and reflect a balance between
desire for income on the one hand and health, family responsibilities, and other factors on the other. Thus, further increases may
involve trade-offs between greater work effort and reductions in
______________
10Over a longer horizon, higher birth rates would also be a source of increased labor

force growth.

Shifting Demographic Parameters Shaping the Future Workforce

other uses of time. In some cases, greater work effort may follow
from increasing the returns to work in the form of wage compensation or the structure of benefits. In other cases, some groups may
desire to work more, but various barriers or disincentives preclude
them from doing so now.
One perspective on the potential for increasing labor force participation rates comes from comparative data that show how the United
States measures up against other developed countries in terms of
labor utilization. By “labor utilization,” we mean the extent to which
potential labor is utilized—i.e., a combination of workforce participation, (lack of) unemployment, and annual hours worked per
worker. Figure 2.13 displays labor utilization in selected countries,
relative to the United States. The figures are standardized for age
composition of the population, that is, a country with the same agespecific labor force participation, unemployment, and annual hours
as the United States has a utilization of 100, even if its age structure is
different.
RANDMG164-2.13

Korea
Japan
Iceland
United States
Canada
Denmark
Greece
Ireland
United Kingdom
Finland
Sweden
Germany
European Union
Spain
Netherlands
France
Belgium
Italy

107
104
102
100
94
89
88
86
85
84
81
79
77
75
74
67
65
65
0

20
30
40
50
60
70
80
90
Labor utilization rate (United States = 100)

100 110

SOURCE: Scarpetta et al. (2000).

Figure 2.13—Labor Utilization in Selected Countries, 1998

The 21st Century at Work

Most European countries have labor utilizations well below that of
the United States. The European Union as a whole uses only 77 percent of what the United States uses; France and Italy use as little as
65–67 percent. These low utilization rates reflect Europeans’ earlier
retirement, higher unemployment, higher enrollment in disability
programs, shorter work weeks, and longer vacations. Some countries, such as Korea and Japan, have utilization rates above that of the
United States, although only modestly so. The high utilization rate in
Korea is driven by Koreans’ long working hours. In 2001, Koreans
worked an average of 2,447 hours per year, 34 percent above the U.S.
and Japanese averages of 1,821 hours (DOL, 2003). Based on Figure
2.13’s utilization rates, the scope for additional work effort among
the U.S. population seems limited. However, several large subpopulations have a labor force participation that is relatively low or an unemployment rate that is relatively high. Given the right labor market
structures, some members of these subpopulations may choose to
work more.
In the remainder of this section, we investigate this issue in the context of labor force participation among older men, among women
with children, and among the disabled. In addition, we explore
immigration as a potential source for workforce growth.

Will Men Continue to Retire at Increasingly Younger Ages?
While we previously documented the trend toward earlier retirement
among men, there are reasons to believe this trend will not continue.
Figure 2.14 shows that workforce participation among men age 55
and older declined steadily during the second half of the twentieth
century, but reversed its slide after 1995. A more detailed examination of this pattern for single-year ages, also shown in Figure 2.14,
reveals that no recent reversal of the retirement rate occurred among
59-year-olds, although there appears to be a leveling off of labor
force participation among men at this age. The youngest age at
which a reversal clearly has taken place is 62, and it has occurred at
older ages as well, up through 71. (To avoid cluttering the graph, we
only show every third year of age, but participation rates among 55–
61 year olds were essentially flat over the 1990s.)
The reversals shown in the figure will probably continue, for several
reasons:

Shifting Demographic Parameters Shaping the Future Workforce

RANDMG164-2.14

100
90
80

Percentage in labor force

70
60
50
40
30
20
10
0
1950

Age 59
Age 62
Age 55+
Age 65
Age 68
Age 71

1960

1970

1980

1990

2000

Year
SOURCE: Age 55-plus series based on BLS (2003a), series LNU01324231; single
years of age series based on unpublished tabulations of the 1965–2002 CPS, provided by the BLS.

Figure 2.14—Labor Force Participation Among Men Age 55-Plus and at
Selected Single Years of Age, 1950–2002

•

There is a trend away from defined benefit (DB) pension plans to
defined contribution (DC) plans.11 The fraction of workers covered primarily by a DB pension plan went from 38 percent in
1978 to 21 percent in 1998, whereas the fraction of workers with a
DC plan as their primary pension went from 7 to 27 percent
(DOL, 2002). In DB plans, workers typically face strong incentives
to retire at the plan’s early retirement age. During the 1990s, for
about 30 percent of workers in the public and private sectors
aged 51–69 with a DB plan, the early retirement age was 55 years,

______________
11DB pension plans promise a lifelong guaranteed monthly benefit, typically based on

years of service and the employee’s earnings. In DC plans, such as 401(k) plans,
employers and/or employees contribute to an account that the employee may draw
down in retirement.

The 21st Century at Work

and for almost 90 percent it was age 62 or younger.12 DC plans do
not have such incentives.
•

The normal retirement age for Social Security is currently being
raised from 65 to 67. For workers who turn age 62 in 2003, the
normal retirement age is 65 years and eight months. A higher
normal retirement age implies a reduction of lifetime benefits.
Changes in Social Security law between 1968 and 1979 increased
benefits by more than 50 percent in real terms, which has been
linked to younger retirement ages during the 1970s and 1980s
(e.g., Hurd and Boskin, 1984). Lower lifetime benefits may thus
induce delayed retirement.

•

The Senior Citizens’ Freedom to Work Act of 2000 eliminated the
earnings test for Social Security recipients age 65 or older. The
earnings test reduced monthly benefits in case of wage earnings
in excess of a threshold. Even though the beneficiary would later
be compensated with higher monthly benefits, such that the
average effect of the earnings test on lifetime benefits was close
to zero, the earnings test was perceived by older individuals as a
disincentive to work.

•

Social Security rules are currently changing to make delayed
retirement more attractive. Workers who reached age 62 in 1986
could receive a 3 percent increase in monthly benefits for every
year that they delayed claiming after the normal retirement age.
This delayed retirement credit is being raised to a target of 8 percent per year. At 8 percent, the credit is approximately actuarially
neutral—that is, over a lifetime, the higher monthly benefits
approximately offset losses caused by fewer years of benefits.
Workers who turn 62 years of age in 2003 are eligible for a 7.5
percent benefit increase for every year they postpone claiming
after the normal retirement age.

•

Our persistently low national saving rate may also have consequences for elderly labor force participation. High rates of return
on stock holdings compensated for the low saving rates of the
past two decades (Bureau of Economic Analysis [BEA], 2003), so
that recent retirees entered retirement with sizable assets. For

______________
12Based on data from the 1992–2000 Health and Retirement Study for respondents

aged 51–61 in 1992 (Panis et al., 2002).

Shifting Demographic Parameters Shaping the Future Workforce

example, in the late 1990s the median and mean net worths of
households just after retirement were $125,000 and $255,000,
respectively (in constant 2000 dollars; Kapteyn and Panis, 2002).
However, the much lower rates of return since 2000 may result in
lower wealth holdings and thus less nonlabor income among the
elderly, which in turn may induce them to delay retirement or to
reenter the labor force after retirement.
In all, these changes are expected to reverse or at least slow the trend
to earlier retirement. The BLS projects an increase in labor force participation among men age 65–74 from 14.8 percent in 2000 to 17.3
percent in 2010. This trend is already reflected in the projected
growth rate of the labor force. However, that projection also assumed
that the slow decline in labor force participation among men age 55–
64 will continue, from 67.3 percent in 2000 to 67.0 percent in 2010
(Fullerton and Toossi, 2001). In light of the arguments above, we may
actually experience a small increase.
Aside from the factors listed above, other trends may also affect the
ability of men to continue working at greater rates than in the recent
past. One consideration is whether men will be physically healthy
enough to continue working past traditional retirement ages. One
may point at the higher retirement ages of only a few decades ago
and argue that, clearly, men are able to continue working longer than
they do today. Moreover, male life expectancy at birth has been
rising vigorously, from 46 years in 1900 to 66 years in 1950 and 74
years in 2000 (NCHS, 1998 and 2002b). Not only life expectancy, but
also healthy life expectancy has been increasing (Manton, Corder,
and Stallard, 1997). This implies that many workers are indeed physically able to work longer than before. Put differently, the 70-year-old
of today looks a lot like the 65-year-old of a few decades ago.
Another factor that may influence labor force participation at older
ages is the interaction between technological change and retirement
from the labor force. As new technologies become available, older
workers stand to benefit less from investing in new technologydriven skills as they have a shorter remaining work career over which
to recoup their investment. To the extent that their skill levels are of
an older vintage (e.g., their formal training occurred farther in the
past), their skills may be less relevant in the face of new technologies
and they may be more likely to be in jobs that would be eliminated.

The 21st Century at Work

On the other hand, if older workers or workers farther from the
retirement decision do invest in new skills through on-the-job training or other mechanisms, it may extend the time they spend in the
labor force.13
Several recent studies shed light on this issue. Bartel and Sicherman
(1993) find that, in industries with unexpected increases in the pace
of technological change during the 1970s and 1980s, older workers
retired sooner because of the faster depreciation of their human
capital. On the other hand, in industries with high permanent rates
of technological change, workers retired later, especially in industries
where a positive relationship exits between technological change and
on-the-job training.14 Using data for a more recent cohort of older
workers, Friedberg (2001) finds that older workers who use computers on the job are 25 to 30 percent more likely to continue working
over a four-year horizon. Overall, these studies suggest that interactions occur among technological change, training, and the labor
force behavior of older workers.
Longer careers may also result from labor demand factors. Employers with difficulties recruiting workers are likely to make their wage
offers, work conditions, or benefit schedules more attractive. Hurd
and McGarry (1999) found that workplace flexibility and the employer’s accommodation of older workers increased an older worker’s
anticipated work-life. The ability to make lateral career moves—here,
a change of position in the company that is not a promotion and perhaps even involves less responsibility—may also contribute to
delayed retirement. In Japan, for example, it is not uncommon for
workers to retire from their company and subsequently be rehired,
on renegotiated terms (Rebick, 1993). Phased retirement may also
prove attractive to older employees. In 2000, 57 percent of respondents to the Health and Retirement Study who were close to retirement indicated that they would prefer to gradually reduce hours on
the job, at the same hourly wage (Panis et al., 2002). Lofgren, Nyce,
and Schieber (2003) reported that 16 percent of large employers
______________
13This follows from the positive correlation between training and the slope of the wage

profile. So more training leads to a steeper wage profile and a greater incentive to
remain in the labor force and realize the eventual return (Bartel and Sicherman, 1993).
14Other research indicates that industries with higher rates of technological change
make a larger training investment in their workers (Lillard and Tan, 1986; Bartel, 1989).

Shifting Demographic Parameters Shaping the Future Workforce

offered some form of phased retirement in 1999, up from 8 percent in
1997.

Labor Force Participation Among Women with Children
As discussed above, female labor force participation has been
increasing steadily over the past four decades. The largest increase
occurred among married women and, very recently, among nevermarried mothers. Figure 2.15 shows labor force participation rates
for never-married, married, and other (separated, divorced, and widowed) men and women from 1970 to 2001 (U.S. Bureau of the Census
2002c). One contributor to the overall downward trend in labor force
participation among men (see Figure 2.4) is the drop in participation
among married men, a decline from 86 percent in 1970 to 77 percent
in 2001. Participation among unmarried men actually rose slightly
over the past three decades.
Women uniformly increased their labor force participation over the
same period. In particular, participation among married women
increased from 41 percent in 1970 to 61 percent in 2001, an increase
of 20 percentage points. Never married women, whose participation
was already the highest among all women, added 11 percentage
points, whereas separated, divorced, and widowed women added 10
percentage points. Moreover, not only has the labor force participation rate increased among women, the average hours worked among
women has increased slightly as well. By 1999, among mothers
whose youngest child was under three years of age, the average work
week was 30.9 hours. It was 33.4 hours among those whose youngest
child was 3 to 5 years old, 35.6 hours for those whose youngest child
was 6 to 17, and 38.0 hours among those without children under 18.
All these work weeks figures have steadily lengthened since 1969
(BLS, 1999).
Figure 2.16 shows labor force participation rates among women with
children at home by marital status and age of the youngest child
(U.S. Bureau of the Census, 2002c). Among mothers, the married category is the largest (18 million married mothers at work versus 7 million unmarried) and therefore the most important for labor force
composition. The labor force participation of married mothers
increased strongly in the 1970s and 1980s and remains high. Until

The 21st Century at Work

RANDMG164-2.15

100
90

Percentage in labor force

80
70
60
50
40

Married male
Never-married male
Other male
Never-married female
Married female
Other female

30
20
10
0
1970

1980

1985

1990

1995

2000

Year
SOURCE: U.S. Bureau of the Census (2002c), Table 568.
NOTE: Other = separated, divorced, or widowed. Population is those age 16 and
above.

Figure 2.15—Labor Force Participation Rate by Sex and Marital Status,
1970–2001

recently, it was higher than that of unmarried mothers and had
increased faster. The participation among unmarried mothers rose
gradually and uniformly from 1980 to 1995, and faster after 1995.
Never-married mothers with children under age six, in particular,
surged from 53 percent in 1995 to 67 percent in 1998, and never
married mothers with children age 6–17 from 67 percent in 1995 to
81 percent in 1998. Participation increased somewhat more after
1998 but appears to have leveled off by 2001.
Why did participation among married mothers increase steadily
since 1970, and why did it so suddenly accelerate in the late 1990s
among single mothers? Leibowitz and Klerman (1995) focus on
explanations for the increase among married mothers between 1971
and 1990. They noted that participation in the first three years after a
birth is significantly related to maternal education, maternal age,

Shifting Demographic Parameters Shaping the Future Workforce

RANDMG164-2.16

100
90

Percentage in labor force

80
70
60
50
40

Other, children 6–17 only
Married, children 6–17 only
Never-married, children 6–17 only
Other, children 0–5
Married, children 0–5
Never-married, children 0–5

30
20
10
0
1970

1980

1985

1990

1995

2000

Year
SOURCE: U.S. Bureau of the Census (2002c), Table 570.
NOTE: Other = separated, divorced, or widowed. Population is those age 16 and
above.

Figure 2.16—Labor Force Participation Rate of Women with Children by
Marital Status and Age of Youngest Child, 1970–2001

family size, and paternal age. During the 1970s and 1980s, the mix of
women who were bearing children changed such that more of them
returned to work within three years. Another important development
was that women’s wage prospects improved—in part because of
increased investment in human capital—so that work became relatively more attractive to them. At the same time, men’s wage
prospects deteriorated, making women’s work relatively more
attractive to couples with a choice as to which partner worked.
Changing demographic characteristics and wage prospects could
explain almost one-half of the increased workforce participation.
The recent increase in labor force participation by unmarried women
with children is generally attributed to the Earned Income Tax Credit
(EITC) and welfare reform (Meyer and Rosenbaum, 2000; Grogger,
Karoly, and Klerman, 2002). EITC credits increased twentyfold from

The 21st Century at Work

$1.6 billion in 1984 to $32 billion in 1998 (U.S. House of Representatives, 2000). Single mothers received about two-thirds of these EITC
dollars (Meyer and Rosenbaum, 2000). In 2003, a single woman with
two children who earns less than $13,730 is eligible for a 40 percent
credit on dollars earned, up to a maximum of $4,204. Because tax
credits may exceed the tax owed, and a mother of two with those
earnings is not subject to any federal income tax, she will receive a
check from the IRS for the credit amount. The credit becomes
smaller with higher earnings and in 2003 is fully phased out at
$33,692.
Welfare reform also introduced stronger incentives to work among
single mothers. Until 1996, women with dependent children could
receive welfare benefits under Aid to Families with Dependent Children (AFDC), a joint state-federal program. The Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996
replaced AFDC with Temporary Assistance for Needy Families
(TANF). Among others, TANF’s objectives were to promote job
preparation and work. TANF mandated a 60-month lifetime limit for
adult receipt of federally funded benefits. Many states took advantage of options in the law to implement shorter lifetime limits or
intermittent limits, such as a maximum of 24 months of assistance in
any 60-month period. Grogger (2003) found that time limits have had
important effects on welfare use and work. Blank, Card, and Robins
(2000) found that unmarried mothers not only participated more in
the labor force but that their number of weeks worked per year also
increased. Both increases started in 1994, before PRWORA but plausibly as a result of earlier state reforms.15
While the recent increases in labor force participation among mothers have been impressive, we should point out that not all are working. Unemployment among never-married women has always been
high. For example, unemployment among never-married mothers
with children under age 6 was mostly above 20 percent between 1980
and 1995 (U.S. Bureau of the Census, 2002c). Among other unmar______________
15 While most AFDC program parameters were set at the federal level, states could

petition the U.S. Department of Health and Human Services (DHHS) to implement
experimental, pilot, or demonstration projects they believed would result in a more
effective welfare program. By 1996, DHHS had approved waivers for more than 40
states, many of them for statewide reforms (DHHS, 2000).

Shifting Demographic Parameters Shaping the Future Workforce

ried mothers, unemployment was lower but still mostly well above
the national average and much higher than among married mothers.
Unemployment among mothers dropped in the late 1990s but
increased again after 2000, consistent with unemployment among
other workers.

Workforce Participation: The Role of Child Care
How much further can workforce participation among women, particularly mothers, increase? Here again, it is instructive to compare
the United States to other countries. Table 2.4 lists labor force participation rates among women age 20–64 in selected countries. Participation in the United States, at 72 percent, is above that of all countries except the Nordic countries. In those countries, the rates range
from 71 percent in Finland to 75 to 76 percent in Denmark, Norway,
and Sweden and 83 percent in Iceland.16 Given certain conditions, it
thus appears that female labor force participation in the United
States could rise further.17
Table 2.4 also shows total fertility rates, i.e., the average lifetime
number of births per woman. Raising children and working outside
the home are competing activities, and one might intuitively expect a
negative correlation between female workforce participation and
fertility. Interestingly, fertility in the European Union (listed as the
first 15 table entries) tends to be higher in member countries with
higher female labor force participation. The correlation coefficient is
0.54 and statistically significant at the 5 percent level. (The significantly positive correlation does not hold up outside Europe.) The
Nordic countries thus reap a dual economic benefit: High fertility
rates help offset the population’s aging and the attendant social
welfare costs. High workforce participation means more fully utilized
labor capacity.
______________
16The Nordic countries have policies that permit long parental leaves after childbirth

(e.g., 12–15 months in Sweden). While on leave, the parent is counted as in the labor
force. Nordic participation is thus slightly inflated relative to countries with policies
mandating shorter parental leave.
17The regulations and income taxes on which the Nordic countries largely rely to sub-

sidize child care and create other labor market conditions suitable to work by women
may introduce distortions in other areas.

The 21st Century at Work

Table 2.4
Female Workforce Participation (age 20–64) and
Total Fertility Rate in 1999, European Union
and Other Countries

Country
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
United Kingdom
United States
Canada
Mexico
Japan
Norway
Iceland

Female Workforce
Participation

Total Fertility
Rate

62.2
57.8
75.8
71.3
60.8
62.8
49.0
54.9
46.0
64.6
64.5
66.8
48.9
74.6
67.5
71.7
69.6
42.1
63.8
76.3
83.1

1.32
1.61
1.73
1.74
1.77
1.36
1.30
1.88
1.19
1.73
1.65
1.49
1.20
1.50
1.68
2.08
1.60
2.62
1.41
1.80
1.99

SOURCES: All female workforce participation from U.S.
Bureau of the Census (2002c), Table 1335. Total fertility rate
(TFR) in European Union from Council of Europe (2000); TFR
in the United States, Canada, Mexico, and Japan from U.S.
Bureau of the Census (2002c), Table 1312; TFR for Norway
and Iceland from Central Intelligence Agency (2003).
NOTE: All rates apply to 1999 except 2001 TFR in the United
States, Canada, Mexico, and Japan and estimated 2002 TFR in
Norway and Iceland.

What factors generate a positive correlation between female work
and fertility in the European Union? The answer is not yet known,
but a common hypothesis is that it may be attributable to child care
arrangements. In 1992, the European Union explicitly recommended
that its “Member States gradually develop and/or encourage measures to enable women and men to reconcile family obligations

Shifting Demographic Parameters Shaping the Future Workforce

arising from the care of children and their own employment . . . ”18
The recommendation listed nonfamilial public or private child care
as the first such measure. Availability of affordable, high-quality child
care indeed appears to increase female labor force participation. In
1986, Finland introduced a child home care allowance that enables
parents to stay home for up to three years after the birth of a child,
essentially reversing a trend toward more nonfamilial child care. In
combination with an economic crisis that hit Finland, the new policy
strongly affected Finnish women’s labor force participation. Participation among mothers with children under age 12 fell from 76 percent in 1985 to 53 percent in 1991 (Salmi, 2000; Mahon, 2002). The
lesson: Effectively increasing the price of nonfamilial child care
drives down female labor force participation. Daly (2000) found that
the more choice in child care arrangements a country’s policies
offered, the higher workforce participation among mothers with
children from birth to age 10 was.
The same relationship has been found in the United States. Changing the market price of child care in one direction drives women’s
labor force participation in the other, and more so for the leastskilled women than for the most-skilled (Anderson and Levine, 2000;
Blau, 2001). For example, Blau’s (2001) estimate indicates that a 10
percent reduction in child care costs would lead to a 2 percent
increase in the labor force participation rate among mothers with
young children, an estimate that is within the range of those provided by other studies (see the reviews by Blau, 2001, and Anderson
and Levine, 2000). Anderson and Levine’s (2000) analysis indicates
that the sensitivity of labor force participation to child care costs is
larger for less-educated women compared with their more-educated
counterparts. Their estimates imply, for example, that a 10 percent
reduction in the price of child care would increase labor force participation by 4 percent for women with less than a high school education compared with a 3 percent increase for those with more than a
high school education.
Another recent study indicates that child care costs can affect not
only the propensity to work but also the intensity of work effort as
measured by weeks worked per year or hours worked per week. Gel______________
18Quoted from the Council of the European Union (1992).

The 21st Century at Work

bach (2002) finds that enrollment in public kindergarten—which
provides essentially free child care during school hours—leads unmarried mothers whose youngest child is age 5 to increase their labor
force participation by 4 percentage points, their annual weeks
worked by 3.6 weeks, and their hours worked per week by 2.2 to 2.7
hours per week. Similar but somewhat smaller effects are found for
married mothers. Gelbach’s result suggests that the movement by
some states toward providing universal pre-kindergarten programs
for children as young as age 3 and 4 may serve to boost labor force
participation of women with young children in the United States,
although the size of the effect on the overall participation rate may
be modest.

Workforce Participation Among the Disabled
Not surprisingly, labor force participation among people with a disability is lower than among those without. In 2002, workforce participation among the disabled and nondisabled age 16–64 was 28.6 and
81.5 percent, respectively (U.S. Bureau of the Census, 2003a). Obviously, the main reason for their inactivity in the workplace is their
physiological impairment. In addition, there may be institutional
disincentives to work (such as rules of the Social Security Disability
Insurance [DI] program) and practical impediments in the workplace. Is there scope for increased workforce participation among the
disabled in the twenty-first century?
First we need to define what we mean by a disability. There is no universally applicable definition of disability. For example, to be eligible
for DI, an applicant must be unable “to engage in any substantial
gainful activity by reason of any medically determinable physical or
mental impairment that can be expected to result in death or that
has lasted or can be expected to last for a continuous period of not
less than 12 months.” This definition includes both a medical and an
economic element. A surgeon who cannot perform surgeries because
of Parkinson’s disease but is still able to earn a living as a teacher is
thus not disabled for DI purposes. Most other definitions place less
emphasis on economic considerations. A common definition of disability is based on individuals’ own responses to the question “Do
you have a health problem or disability which prevents you from
working or which limits the kind or amount of work you can do?” By

Shifting Demographic Parameters Shaping the Future Workforce

that definition, the surgeon with Parkinson’s disease would be considered disabled. Other commonly used definitions rest on selfreported difficulties with activities of daily living, such as walking
across the room, dressing, using the toilet, etc.
Depending on the definition, the measured prevalence of disability
can vary widely. The participation figures above are based on a definition developed by the U.S. Bureau of the Census that combines
seven factors asked in the CPS, including a self-reported work limitation, receipt of federal disability benefits, job separation because of
poor health, etc. By that definition, 10 percent of individuals age 16–
64 were disabled in 2002, amounting to 18 million individuals. The
prevalence of disability increases with age: among individuals age
16–24 and 55–64, the rates were 3.6 and 22 percent, respectively.
Almost regardless of the definition, workforce participation among
the disabled is lower than among the healthy.
Figure 2.17 shows workforce participation among disabled men and
women between 1983 and 2002. The data are based on two sources
with different definitions of disability. For 1983–1994, the rates are
based on the National Health Interview Surveys (NHIS) (Trupin et al.,
1997). For 1995–2002, the rates are based on the CPS (U.S. Bureau of
the Census, 2003a). The NHIS-based definition is less restrictive than
the CPS-based definition, resulting in correspondingly higher labor
force participation rates among the disabled. The series are internally consistent but may not be compared to one another.19 Between
1983 and 1994, workforce participation among disabled men and
women decreased and increased, respectively, just as it did among
the population at large. Disabled men age 16–64 slightly decreased
their workforce participation, whereas disabled women increased
their participation fairly rapidly (Trupin et al., 1997). Overall,
workforce participation among the disabled slightly increased
______________
19The two series are internally consistent in the sense that the NHIS and CPS ques-

tions remained the same from 1983 to 1994 and from 1995 to 2002, respectively. However, the respondents’ interpretation of the questions may have changed, corresponding to, for example, the definition that the Social Security Administration applied for
its DI program. From 1996, DI benefits are no longer available to individuals whose
disability was based on drug addiction or alcohol abuse. Such individuals may have
been more likely to classify themselves as disabled before 1996 than after 1996.

The 21st Century at Work

RANDMG164-2.17

100
90

Percentage in labor force

80
70
Men based on NHIS
60
50
Men based on CPS

40
Women based on NHIS
30

Women based on CPS

20
10
0
1983

1988

1993

1998

2001

Year
SOURCES: Trupin et al. (1997), Table 2; U.S. Bureau of the Census (2003a), Table 2.
NOTE: Population is those age 16 to 64. 1983–1994 based on NHIS data, 1995–2002
based on CPS data. The series are internally consistent but cannot be compared to
one another.

Figure 2.17—Labor Force Participation Among the Disabled,
by Sex, 1983–2002

between 1983 and 1994. From 1995 to 2002, workforce participation
decreased among both disabled men and women. Using the stricter
definition, in 2002 workforce participation was 31 percent among
disabled men and 26 percent among their female counterparts (U.S.
Bureau of the Census, 2003a).
While workforce participation among the disabled has been slightly
declining recently, several technological and institutional developments are under way that may reverse this pattern. First, medical
technology is undergoing rapid change, so that some disabilities may
be cured, prevented, or rendered more manageable in the future.
Second, progress in IT may help the disabled perform tasks that they
currently cannot. The new ability may be enabled by technology itself, such as speech recognition that replaces the need to type man-

Shifting Demographic Parameters Shaping the Future Workforce

ually. It may also be enabled through organizational change, such as
remote work from home. Burkhauser et al. (1999) showed that
employer accommodation of individuals with disabilities significantly delays application for DI. (See Chapter Three for these and
other technological developments.) Third, the Social Security
Administration (SSA) is aiming to induce more DI recipients to
return to work, using among others such tactics as removing disincentives to work. In particular, its Ticket to Work program allows DI
recipients to return to work with maintained Medicare health insurance coverage for more than eight years and with the option to
reenroll in DI without delay should the work effort fail (Ticket to
Work and Work Incentives Improvement Act of 1999). The SSA is also
required by law to experiment with a reduction of DI benefits by $1
for each $2 that a beneficiary earns over a certain amount, as
opposed to the current entire elimination above the substantial
gainful activity threshold.
Countering these developments, however, is the prospect that the
prevalence of disability may be on the rise. Other things being equal,
population aging and rising prevalence of disability with age imply
that a greater fraction of working-age adults will be disabled in the
future than today. Moreover, Lakdawalla et al. (2003) found that the
incidence and prevalence of diabetes, asthma, and obesity, three
major precursors to disability, are rising in the United States among
persons under the age of 60. In other words, age-specific disability
rates may also increase. However, this finding and its implication
that the recent trend toward less disability among the elderly will
reverse is still controversial (Manton, 2003).

Immigration Policy as a Lever to Influence Further
Workforce Growth
As we noted earlier, immigration currently accounts for much of the
growth of the U.S. population and the workforce. The size and composition of immigrant flows are largely a function of federal policy,
thus implicitly or explicitly immigration policy has been used in the
past to influence the size and composition of the population and the
workforce. In particular, immigrant visas are issued for several reasons (see Figure 2.18). For 1994–2001, 13 percent of immigrants
obtained a visa on the basis of employment. This includes so-called

The 21st Century at Work

priority workers (in professions with a shortage in the United States),
professionals with advanced degrees or with exceptional ability, and
skilled workers. It also includes spouses and children of workers;
only 6 percent of immigrants obtained a visa on the basis of own
employment.20 By far the most common category (66 percent) of
immigrants were family members of other immigrants or U.S. citizens, including former immigrants who have become citizens.
Refugees and asylum seekers constituted 12 percent of the new
immigrant population, and 9 percent were admitted for various
other reasons.
Immigrants and temporary foreign workers are heterogeneous in
terms of their country of origin, English-language proficiency, and
education levels. The level of education, on average, is highest for
those admitted for economic reasons. For example, H-1B visas
require that the beneficiaries possess at least a bachelor’s degree (or

RANDMG164-2.18

Other
9%
Refugees,
asylum-seekers
12%

Employment
13%
Family
66%

SOURCE: Authors’ calculations based on INS (2003a), Table 4.

Figure 2.18—Basis for Obtaining Immigrant Visas, 1994–2001

______________
20Based on personal communication with Michael Hoefer, Director, Office of Immi-

gration Statistics, Bureau of Citizenship and Immigration Services.

Shifting Demographic Parameters Shaping the Future Workforce

equivalent degree) and that the jobs they fill require a bachelor’s
degree. In 2001, indeed 98 percent of H-1B visa holders held a bachelor’s degree and 42 percent had a master’s degree or higher. Most (58
percent) were in computer-related professions. While employmentbased immigrants and H-1B visa holders are well-educated, immigrants in other categories tend to have more limited educational
attainment or English language proficiency (Schoeni, McCarthy, and
Vernez, 1996). Their admission is currently largely a matter of social
policy, based on family reunification or political hardship. While not
admitted on the basis of employment, many of these immigrants
work for pay, or they may support participation in the labor force by
other family members (e.g., grandparents who provide unpaid child
care in support of employment of the parents).
The extent to which immigration and temporary work visas offer
alternatives for future workforce participation growth in general, or
for targeted growth among higher skilled workers, is a matter of federal immigration policy. During the economic expansion of the 1990s
and under pressure from employers with a need for skilled IT personnel, Congress raised the legal maximum number of H-1B visas
that could be issued. As a result, the number of newly issued H-1B
visas more than tripled from 52,000 in fiscal year 1995 to 162,000 in
2001 (U.S. Department of State, forthcoming). 21 Intracompany transfers followed the trend with roughly one L-1 for every two H-1B visas
issued. The number of new H-1B visas declined to 118,000 in fiscal
year 2002. However, while Congress permitted adjustment of the
flow of temporary work visas to economic conditions, employmentbased permanent immigration followed a different path. The number of employment-based immigrants fluctuated from 123,000 in fiscal year 1994, to just 57,000 in 1999, to 179,000 in 2001 (INS, 2003a).
Beyond the use of temporary work visas to alleviate shortages of
skilled workers, immigration more generally is not always perceived
to bring net benefits to the U.S. economy. Compared with the native
born, immigrant households are relatively heavy users of some government services, such as schools and income-conditioned transfer
programs but relatively light users of other government services such
______________
21Statistics on H-1B approvals have only been available since 1999. The number of

admissions also more than tripled between 1995 and 2001.

The 21st Century at Work

as Social Security and Medicare. For example, all 1995 government
benefits amounted to $22,021 for native and $25,943 for immigrant
households (Smith, 1998). In short, immigration touches many
aspects of society and its policies have many implications beyond
economic ones.

CHANGING DEMOGRAPHICS ALSO SHIFT DEMAND FOR
GOODS AND SERVICES
Most of this chapter has focused on the implications of demographics for labor supply—i.e., for the size and the composition of the
workforce. This section addresses an indirect effect of demographics
on the future workforce, namely the effects that shifting population
patterns have on the goods and services consumed in the United
States. A changing mix of goods and services will induce different
employment opportunities with some sectors hiring new workers
and others shedding staff. In other words, as we emphasized in our
conceptual framework in Chapter One, population shifts affect not
only labor supply but also labor demand.
The two main demographic shifts of the past that will continue into
the foreseeable future are the aging of the population and the
increased participation of women in the workforce. The elderly consume a different basket of goods and services than do the young, and
dual-earner couples are likely to purchase goods and services that
single-earner couples may produce at home.

Young and Old Spend Their Money Differently
The Consumer Expenditure Survey affords a glimpse into the
spending patterns of various age groups. Figure 2.19 shows the fractions of total consumption spent on various categories, by age group
for 2001. There are some clear differences between young and old.
Starting at the bottom of the figure, expenses on health care increase
with age. Households headed by an individual age 55–64 spend 6.5
percent of their total outlays on medical care, compared with 11.2
percent at age 65–74 and 14.7 percent at age 75 or older (BLS, 2003b).
This understates the true health-care expenditure difference between an older and a younger society because it includes neither

Shifting Demographic Parameters Shaping the Future Workforce

Cumulative percentage of expenditures

100

RANDMG164-2.19

80
Insurance
Transportation
Entertainment
Apparel
Other
Housing
Food
Gifts
Health

0
<25

25–34 35–44 45–54 55–64 65–74
Age group

75+

SOURCE: BLS (2003b), Table A.
NOTE: Insurance includes worker pension contributions.

Figure 2.19—Composition of Expenditures, by Age Group

social expenditures on the virtually universal health insurance of the
elderly through Medicare, nor means-tested benefits through Medicaid. The elderly spend considerably less on insurance (including
pension contributions) than the young and somewhat less on transportation and entertainment. Only minor differences appear in the
share of food, housing, apparel, and miscellaneous goods and services.
As the number of elderly in the United States increases, demand for
health care goods and services can thus be expected to expand. For
the workforce and workplace, the implication will be that the pharmaceutical and medical technology industries will demand more
workers that are highly skilled in their areas. Already, the aging—and
more obese—U.S. population is driving strong demand for high-tech
implantable devices to treat heart disease, orthopedic complaints,
and other conditions (Wharton School, 2003). Nanotechnology is
particularly promising for more precise and less invasive surgical

The 21st Century at Work

procedures than those practiced today. Meanwhile, genomics hold
the promise for a quantum leap in the treatment of various diseases,
mental disorders, and such behavioral disorders as substance abuse.
The main question is one of timing: how long will it take before
nanotechnology and gene therapy will move from the research into
the production stage? While this is difficult to predict, the aging of
the population is likely to provide strong incentives for continuing
innovations in medical technology.
Demand for such health-related services as long-term care will also
change the mix of prospective workers. For example, BLS projects a
30 percent increase in the number of nursing, psychiatric, and home
health aides in the first decade of the twenty-first century, to 2.7 million workers in 2010 (Hecker, 2001; Moncarz and Reaser, 2002).
Demand for registered nurses is expected to rise by 26 percent over
this period, to 2.8 million by 2010. Over the longer term, the baby
bust that followed the baby boom may fuel even stronger growth.
Married individuals and individuals with children are far less likely to
enter a nursing home than childless widows and widowers
(Lakdawalla et al., 2003). The future elderly will have fewer children,
on average, than the current elderly, who are the parents of the baby
boom generation. In other words, not only the number of elderly will
increase, but the rate of institutionalization will also likely increase.

Working Households May Outsource Many Home
Production Activities
Female labor force participation has risen considerably, especially
among married women and women with children. These were the
traditional homemakers, with primary responsibility for the household and children. As they enter the labor force, their homemaker
responsibilities must be transferred to others or be accomplished
outside work hours. To some extent, these responsibilities, particularly for child care, are shifted to such other family members as parents and parents-in-law—the grandparents of children whose
mother enters the labor force. This type of assistance may become
less available in the future, as grandparents themselves may still be
working. Demand for paid child care is likely to increase as well,
although the movement in many states toward universal preschool
programs may lessen this demand to some extent.

Shifting Demographic Parameters Shaping the Future Workforce

Beyond child care, households “outsource” many formerly homeproduced activities, substituting such market purchased goods and
services as prepared meals, cleaning services, gardening, home
improvement services, and so on. Among the occupations projected
to have the largest job growth between 2000 and 2010 are food
preparation and serving workers (including fast food—673,000 new
jobs), waiters and waitresses (364,000 new jobs), and landscaping
and groundskeeping workers (260,000 new jobs) (Hecker, 2001).
These occupations typically require little formal education. Further,
since these services are not internationally tradable, the jobs that
they create are not subject to competition from less expensive unskilled labor abroad.

DEMOGRAPHICS AND THE FUTURE OF WORK
The future shifts in the U.S. population and labor force participation
rates have important implications for the size and composition of the
U.S. workforce. Most notably, the growth rate of the future labor
force is expected to be slower in coming decades compared with the
past. At the same time, the composition is shifting toward a more
balanced age distribution, a higher proportion of women and
minorities, and a workforce with more responsibilities outside work
for younger and older dependents. In anticipation of our discussion
of the importance of technology and globalization in the chapters
ahead, we also focused on the importance of skill as a key attribute of
the future labor force. While the United States produces a highly
educated workforce judged by years of schooling, that preparation
does not necessarily translate into higher skills for the workforce,
especially compared with other developed countries.
These shifting demographic patterns have a number of implications
for the future of the workforce, workplace, and compensation. We
explored in more depth in this chapter the potential for increases in
labor force participation and immigration to raise the growth rate of
the future labor force. Other implications of the demographic trends
are often interrelated with those that follow from expected advances
in technology and further globalization. We take up those forces
independently in the following two chapters and, in the last, the
implications of all three together for the future workforce and workplace. We here preview those implications as they relate to worker

The 21st Century at Work

numbers, skills, and other aspects of the workplace and compensation:
•

Who is in the labor force. While this chapter has focused on the
size and composition of the future workforce, future outcomes
may deviate from current projections to the extent that decisions
regarding labor force participation change from the recent past,
or immigration patterns shift due to future policy. Technology,
for example, may interact with workers’ decisions about when
and how long to work, or biomedical breakthroughs may affect
the health and individual functioning in ways that alter labor
force behavior. The disabled, in particular, may benefit from
breakthroughs in technology. Changes in workplace arrangements or employer-provided benefits may also influence work
decisions.

•

Skill requirements for the workforce. Future technological
advances and greater economic integration of the U.S. economy
with other world economies are expected to increase the
demand for a more highly skilled workforce. Shifts in the nature
of business organizations and the growing importance of knowledge-based work also favor strong nonroutine cognitive skills,
such as abstract reasoning, problem-solving, communication,
and collaboration. Some evidence indicates that young people
are responding to the economy’s demand for higher skill levels
by attending college in greater numbers, and employment-based
visas could continue taking up some of the demand for high
skills. Technological change and globalization are also expected
to lead to less stable employment relationships, highlighting the
importance of lifelong learning to facilitate transitions from less
competitive sectors of the economy to more competitive sectors.

•

Nonstandard work arrangements. Technology and other factors
are expected to lead to and support future increases in the fraction of workers in nonstandard work arrangements that offer
more flexible forms of employment, whether through part-time
work or self-employment or through such distance work as
telecommuting. These arrangements may be particularly attractive to future workers who seek to balance work and family obligations or such workers as the disabled and older persons who
would benefit from alternative arrangements. Nonstandard work

Shifting Demographic Parameters Shaping the Future Workforce

arrangements are likely to place additional weight on workers’
personal responsibilities for keeping up with technological
developments, arranging for health insurance, providing for
retirement, etc.
•

The composition of compensation. The changing composition of
the future workforce has implications for workers’ preferences
over the types and nature of employer-provided benefits, and
their willingness to trade-off wages, benefits, and working conditions. Older workers, for example, may prefer a different package
of benefits compared to what younger workers would prefer,
while those with family responsibilities may place more weight
on those that address the balance between work and family life.
Technology may allow a shift toward more personalized benefit
structures, although workers in nonstandard work arrangements
may need access to benefits through sources that are not based
on employment.

Chapter Three

THE INFORMATION AGE AND BEYOND:
THE REACH OF TECHNOLOGY

By the end of the twentieth century, the U.S. economy was shifting
from one based on production to one based on information. New
technologies had spawned new products and industries and had
transformed the way firms in established industries were organized
and labor was employed. In the coming decades, technological
advances promise to further shape what is produced; how capital,
material, and labor inputs are combined to produce it; how work is
organized and where it is conducted; and even who is available to
work.
To anticipate the future consequences of technology for the workforce and workplace, we begin this chapter by highlighting the
remarkable pace of change in the incorporation of information technologies into the U.S. economy. Computing power and capacity,
data transmission speed, and network connectivity have increased
dramatically, while hardware costs have fallen rapidly. At the same
time, increased user-friendliness of new software has led to rapid
adoption of computer systems, with levels of business investment in
computer hardware during the mid- to late 1990s reaching several
times the level of previous years. Physical limitations may eventually
slow the rate of technological progress after the current decade, but
meanwhile, we can expect further increases in computing and data
transmission speeds.
Technological progress has not been limited to the information
technology (IT) and communications realm of computers, videoconferencing, and cellular phones, however. A wide array of techno-

The 21st Century at Work

logical advances, such as biotechnology and nanotechnology, are
expected to have equally profound consequences for the U.S. economy in the next several decades. In the health care sector, for example, recent progress against a variety of diseases will be married to
molecular-genetic advances spawned by the Human Genome Project
to yield “personalized medicine,” in which drugs might be individually tailored. Nanotechnology—the manipulation of matter at the
atomic scale—could spur even more drastic revolutions in products,
services, and quality of life over the next half-century. Possible applications include molecular electronics, photovoltaics, materials able
to withstand extreme stresses, and manufacturing technologies.
In the second half of the chapter, we identify how the technological
advances in the late twentieth century have influenced the workforce
and workplace. The demand for IT professionals has grown explosively, but IT has also influenced the size and specialization of the
workforce in other sectors. Job skill requirements have been shifting
across all sectors, as the ability to program routine activities has
reduced the demand for less-skilled workers while increasing the
demand for those with problem-solving and communication skills.
Not surprisingly, the demand differentials have been driving up the
salary premium paid to workers with higher education levels. IT has
made it easier for firms to vertically disintegrate and outsource noncore activities to realize savings. IT also promotes measurement and
communication within firms and thus facilitates the evolving management emphasis on continuous quality improvement. In addition,
technology facilitates telecommuting and the flexibility that it brings
to workers’ lives and workplace organization. Finally, technology has
great potential to support the education and training of the workforce prior to labor market entry and as a part of lifelong learning.
This is all finally beginning to affect the bottom line. After a long
period in which it seemed that the information revolution was having
no impact on worker productivity, an acceleration of the annual rate
of productivity increase began in 1995 and has not been slowed by
the post-2000 economic downturn. All this experience provides the
basis for developing an understanding of how technology is likely to
shape the world of work in the next 10 to 15 years, a subject we
briefly anticipate at the end of this chapter before expanding on it in
the final chapter.

The Information Age and Beyond

THE ADVENT OF THE INFORMATION AGE
Among recent technological advances with a major impact on the
way work is organized and conducted, IT arguably ranks at the top of
the list. IT, broadly defined, includes technologies associated with
communications (e.g., telephones, fax machines), computer hardware and related peripherals, and computer software. While such
communications technology as the telegraph and then telephone
played a role in the earlier industrial revolution, computer hardware
and software mark the transition to an information-based economy.
That transition has occurred in a relatively brief period. Stocks of
computer equipment and peripherals in the nonresidential sector
first appear in data produced by the Bureau of Economic Analysis in
1963. By 1980, these stocks had yet to reach 1 percent of the level
attained by 2001, and as of 1990, the stock of computer equipment
and peripherals was less than 10 percent of the level it would reach
within a decade. Even the language associated with the information
age has been rapidly absorbed into the popular lexicon. While the
typical new word takes 10 to 20 years to move from small group
usage to official recognition in English language dictionaries, words
like “dot-commer” have made the cut in just five years (Tynan, 2003).
In only a few decades, computers and other information technologies have altered product markets and transformed much of the
workplace. That transformation will be a recurring theme in the second half of this chapter.

A Rapid Pace of Technological Advance
The greatest advances in computing technology have been manifested in processing speed, storage capacity, data transmission
speed, the quality of user interfaces, and the reach of computer networks (Nordhaus, 2002b). The earliest electronic automatic computer was built in 1946, mainframes came on line in the late 1960s,
and the microprocessor was invented in 1971. In 1965, Gordon
Moore, the cofounder of Intel, predicted that transistor density on
integrated circuits would double every 18 months. As seen in Figure
3.1, Moore’s prediction has largely been borne out. The straight line
(on a log scale) captures Moore’s predicted rate of advancement, and
the diamond symbols plot the actual pace of development. In just

The 21st Century at Work

RANDMG164-3.1

Transistor count per microprocessor (log scale)

1,000,000,000
Mobile Intel Pentium III

100,000,000

Intel Pentium

10,000,000

Intel 486 DX
1,000,000

Intel Pentium II

100,000
10,000
Moore’s Law
1,000
100
10
1
1971

1981

1991

2001

Year
SOURCE: NSF (2002), Table 8.1.
NOTES: Line represents trend that defines Moore’s Law. The data points are actual
(1971–2001) and projected (2003–2005) data.

Figure 3.1—Moore’s Law, Predicted and Actual, 1971–2005

three decades, transistor density on a fingernail-size wafer of silicon
has increased from a few thousand to 44 million. At the same time
that this exponential progression has occurred, the cost of 1 megahertz of processing power has fallen from $7,601 in 1970 to 17 cents
as of 1999—i.e., by at least half every two years for three decades.1
Computing storage capacity has advanced at a similarly astounding
pace, while cost per unit of storage has likewise plummeted. In 1970,
the cost of one megabit of storage was $5,257, a figure that reached
17 cents as of 1999. Given these advances in processing speed and
storage capacity at a lower real cost, the price of computers and
peripheral equipment, adjusting for quality, has fallen dramatically
______________
1 These and other data are cited in Woodall (2000).

The Information Age and Beyond

as illustrated in Figure 3.2. 2 The price decline reached an annual rate
of 21 percent between 1995 and 2001, even faster than the annual
average decline of 13 percent over the previous 15 years.
Another area of rapid progress has been the speed of transmitting
electronic information. Between 1990 and 2000, the capacity of a
single fiber-optic cable grew by a factor of 1,000, from 1 billion to 1
RANDMG164-3.2

8,000

150

6,000
5,000

100

4,000
3,000

2,000

1996 dollars (1996 = 100)

7,000

200
Software (right scale)
Communications equipment (right scale)
Computers and peripheral equipment (left scale)

1,000
0
1970

0
1980

1990

2000

Year
SOURCE: BEA NIPA Tables, Table 7.8 (http://www.bea.gov/bea/dn/nipaweb/
SelectTable.asp).

Figure 3.2—Quality-Adjusted Price Indices for Information Technology,
1970–2001

______________
2 The price index for computer hardware and peripherals is based on the use of

“hedonic” price measurement, a statistical technique that captures changes in the
price of such computer attributes as processing speed, memory, storage capacity, and
so on. For a discussion of this approach in the context of computer price indexes, see
CBO (2002). Other factors that explain falling computer prices include decreases in
quality-adjusted prices of other components aside from semiconductors and storage
devices and cost-saving technological advances in the computer-manufacturing process, such as building-to-order and contracting out (CBO, 2002).

The 21st Century at Work

trillion bits per second (NSF, 2002). As with the other dimensions of
advancement, costs have fallen rapidly as well from $150,000 in 1970
to send 1 trillion bits of information to 12 cents as of 1999. Wireless
communications have also taken root during this period, first with
mobile phones and more recently with wireless Internet access
through portable computers or mobile phones or other handheld
devices.
Improvements in computer software accompanied the hardware
advances. User-friendly interfaces have greatly expanded the capacity of individuals to harness the growing computing power and have
thereby allowed computer use to infiltrate most sectors of the economy and all manner of workplace tasks. Of course, standardized
software is ubiquitously used for administrative tasks and document
processing. At the same time, specialized software has been developed for a wide array of complex functions in the business world,
such as financial tasks, supply chain and inventory management,
and human resource management.
Another major component of the growth of information technology
has been the capacity for networking within and across firms, and
between consumers and the producers of goods and services. The
World Wide Web, introduced in 1989, is the ultimate example of this
networking capability, with tremendous implications for the nature
and costs of transactions. Connectivity began with remote terminals
connected to a mainframe server, followed by the ability to connect
individual personal computers to one another or central servers
through local area networks. The reach of connectivity was extended
as standardized file formats and such computer languages as hypertext markup language (HTML) allowed users with different systems
to communicate across networks. In the business world, such networks are now employed to improve communication and data storage within firms, to facilitate interactions between businesses
located around the world, and to provide information and transact
sales between consumers and firms.
One feature of such networks is that their value to any given user
depends on the number of other users. This relationship is expressed
in Metcalfe’s Law, which states that the value of a network grows in
proportion to the square of the number of users: In other words, the
network’s value grows faster than the growth in the number of

The Information Age and Beyond

users.3 This law can also explain the rapid adoption of a technology
that exhibits network effects once a critical mass is reached. In the
case of the Internet, the number of users has exploded in just a few
short years. The number of Internet domain hosts has grown from
just under 6 million in 1995 to almost 110 million by 2001 (NSF,
2002). As of September 2001, 143 million people in the United States,
or 54 percent of the population, reported using the Internet, with 2
million new users added every month (NTIA, 2002). Worldwide, just
over half a billion people use the Internet as of 2001, nearly double
the number of users in 1999 (ITU, 2001).
While computing capacity and telecommunications have been the
primary beneficiaries of more powerful, cheaper semiconductors,
advanced microelectronic components have found use elsewhere.
Microprocessors and other semiconductors have been incorporated
into a vast array of such products as machine tools, aircraft and military equipment, automobiles and other durable goods (e.g., home
appliances), consumer electronics, and children’s toys, games, and
learning materials. Estimates suggest that semiconductor shipments
for noncomputer products accounted for 50 to 70 percent of worldwide semiconductor sales in the late 1990s (CBO, 2002).

Accelerating Investment and Diffusion
With exponential growth in capacity, expanding applications, and
falling costs, U.S. businesses accelerated the pace of investment in
information technologies, especially during the 1990s. Figure 3.3
illustrates the particularly dramatic increase in real investment in
computers and related equipment during the latter half of the 1990s:
Between 1995 and 1999, the average annual increase in investment
spending on computer hardware exceeded 40 percent per year. Some
of this was probably motivated by a desire to replace older computer
equipment in the face of the Y2K transition (Gordon, 2002).4
______________
3 Network effects are also a characteristic of software and other technologies. For a dis-

cussion of the economics of networks, see Economides and Encaoua (1996).
4 The Y2K transition refers to the inability of some computer software, largely written

before the mid-1990s, to handle the transition from years “19XX” to “20XX.”

The 21st Century at Work

RANDMG164-3.3

300

Billions of 1996 dollars

250

200

Software
Communications equipment
Computers and peripheral equipment

150

100

0
1987

1992

1997

2001

Year
SOURCE: BEA NIPA Tables, Table 5.9 (http://www.bea.gov/bea/dn/nipaweb/Select
Table.asp).

Figure 3.3—Real Private Fixed Investment in Information Technology,
1987–2001

Investments in software and communications equipment increased
at a somewhat slower pace over the same period.
Figure 3.3 also documents a downturn after 2000 in investment
spending across the IT components, particularly for computers and
peripheral equipment and for communications equipment. This
pattern reflects a slowdown in investment spending in a weaker
economy as firms have attempted to cut costs and extend the life of
existing equipment. It may also reflect the lower need to upgrade
equipment in the immediate aftermath of the pre-Y2K recapitalization.
While the revolution in IT has affected just about every corner of the
U.S. economy, important differences can be found in the amount of
investment in IT across major sectors. As Figure 3.4 demonstrates,

The Information Age and Beyond

the transportation, communications, and utilities (TCU) sector made
the largest investment in IT up through the early 1990s, largely
because of the obvious link between communications equipment
and the telecommunications industry and related businesses. However, by the mid-1990s, the financial services sector had exceeded the
annual level of IT investment by TCU, as the pace of investment in
that sector increased rapidly in the latter half of the 1990s. It is
notable that the sharpest decline between 2000 and 2001 in IT
investment occurred for TCU, with a 19 percent decline for the
communications component alone. IT clearly plays a considerably

RANDMG164-3.4

180,000
160,000

Millions of fixed 1996 dollars

140,000
120,000

Manufacturing
Agriculture and construction
Mining
Transportation, communication, and utilities
Wholesale and retail trade
Financial services
Services

100,000
80,000
60,000
40,000
20,000
0
1970

1980

1990

2000

Year
SOURCE: BEA Fixed Assets Tables—Nonresidential Detailed Estimates of Real Cost
Investment (http://www.bea.gov/bea/dn/faseb/Details).
NOTE: Information technology defined as mainframe computers, personal computers, direct access storage devices, computer printers, computer terminals, computer tape drives, computer storage devices, integrated systems, prepackaged software, custom software, own-account software, and communication equipment.

Figure 3.4—Real Investment in Information Technology by Industry,
1970–2001

The 21st Century at Work

smaller role in agriculture, construction, and mining, as would be
expected given the nature of the processes and products of these
sectors.
These trends in IT investment reflect, among other things, the rapid
rise in the use of microcomputers in the workplace since the advent
of the personal computer (PC) in the 1970s. As of 2001, 53.5 percent
of the U.S. workforce—72.3 million workers—reported that they use
a PC on the job (Hipple and Kosanovich, 2003). This is more than
double the rate (25 percent) estimated for 1984 (Freeman, 2002).
While use of the Internet and/or e-mail at work is somewhat lower
than the rate of computer use alone, the rate of increase over time
has been more dramatic, a 54 percent annual rate of growth (NTIA,
2002).
In ways that are to be expected, computer use in the United States
varies with education level: There is a fivefold difference in rates
between those with less than a high school education and those with
a college degree (16.2 percent versus 81.9 percent) (Hipple and
Kosanovich, 2003). The fraction using a computer at work varies little
between ages 25 and 55, but utilization rates decline thereafter
(Friedberg, 2001; NTIA, 2002). Utilization rates also vary with occupation: Nearly 80 percent of managerial and professional workers use
a PC on the job, and use is only slightly lower for administrative support personnel and technicians. Yet, even in farming, forestry, and
fisheries, one in five workers reports using a computer on the job
(Hipple and Kosanovich, 2003). Computing hardware and software
used in the agriculture sector, labeled “precision farming,” allow
small- and large-scale farming operations to improve yields and
profits through precise geographically based information on inputs,
outputs, and weather patterns, combined with data on market fluctuations.
While our focus is on technological advancements and their effects
on the U.S. economy, it is important to note that the IT revolution is
taking place worldwide. Indeed, the IT revolution is fundamentally
intertwined with economic globalization, a subject we turn to in
more detail in the next chapter. Whether the metric is research and
development (R&D) associated with IT, production and trade in IT-

The Information Age and Beyond

related products, or network connectivity, the reach of technology
extends across the globe.5 The diffusion of new technologies is uneven, however. For example, more than three out of four Internet
users live in high-income countries, representing just 14 percent of
the world’s population. Disparities in access to technology within
countries are also striking. India, for instance, has a high concentration of both scientists and engineers—many in the technology hub of
Bangalore—in a county where the average education level is just over
five years of schooling. Of 46 high-technology hubs identified in
2000, 13 were in the United States; 16 in Europe; 9 in Asia; 2 each in
South America, Africa, and Australia; and 1 each in Canada and Israel
(Hillner, 2000).

Technological Advances on the Horizon
While the technological advances in IT experienced in the past several decades have been remarkable, the pace of change will almost
certainly continue for the next decade or longer. In terms of integrated circuits, current estimates suggest that Moore’s Law will continue to hold for another 8 to 15 years or so before the foreseeable
limits of physics set in. Even that pace of change will be challenging,
however. Design, materials, and production constraints affect future
improvements in various types of semiconductors, including microprocessors, memory circuits, and other integrated circuits used in
computers (CBO, 2002). For example, as leading-edge integrated circuits evolve to having transistors that number in the billions (current
counts are in the hundreds of millions), fabrication processes must
incorporate higher levels of control and precision, and power consumption rises, which in turn generates more heat.
Despite these challenges, there continue to be major breakthroughs
in transistor design that promise to keep pace with Moore’s Law at
least through 2010. For example, in 2001, Intel announced a breakthrough in transistor design that will lead to the “TeraHertz transistor”—equal to 1,000 gigahertz—as early as 2005 (Iwata, 2001; Intel,
2001). The new chip is projected to have upward of 1 billion transistors—almost 25 times the number of transistors on the Pentium 4—
______________
5 These figures and others in this paragraph are found in United Nations Development

Programme (UNDP, 2001).

The 21st Century at Work

and 10 times the speed of the Pentium 4, with no additional power
consumption. IBM has since announced an even smaller working
transistor with equally dramatic implications for the speed of future
computer chips (IBM, 2002c). While major hurdles still lie ahead in
translating these designs into mass production, the designs demonstrate that Moore’s Law should hold for the near term. Other
advances continue to push the frontiers of memory access and data
storage at the same time. For example, in 2002, IBM announced a
new technology that would provide data storage density 20 times
higher than the most dense storage device available today: “enough
to store 25 million printed textbook pages on a surface the size of a
postage stamp” (IBM, 2002a).
The practical implications of further miniaturization and other
technical advances will include greater processing speed, higher
storage capacity, and a wider array of applications. For example,
advances in microprocessors will support a range of applications,
such as real-time speech recognition and translation and real-time
facial recognition. We can also expect greater use of wireless communications technology and increased capacity for data transmission speeds for sending larger and larger amounts of data (e.g., video
streams) (Anderson et al., 2000). The fields of artificial intelligence
and robotics are likely to advance further, with more sophisticated
intelligent mobile robots linked together through wireless networks
(Butler, 2003). The use of more intelligent robotics in manufacturing
will support agile manufacturing—the ability to quickly reconfigure
machines for the production of prototypes and new production
runs—with implications for manufacturing logistics and inventories
(Anderson et al., 2000).
Other new technologies exploit the continued miniaturization of
computer chips and communications devices. For example, noncomputing capabilities are being added to chips, notably microstructure technologies (MSTs) that will allow chips to function as sensors
or actuators (NSF, 2002). A subset of these MSTs includes microelectromechanical systems (MEMS), which contain moving parts. MEMS
and other MSTs could be used as chemical and environmental sensors, or “motes,” which could communicate to wired and wireless
networks. In the future, wireless sensors may be used in commercial
or residential security applications, in agriculture to monitor climate
and control irrigation efficiency, and for assessing the structural

The Information Age and Beyond

integrity of buildings and bridges (Roush, 2003). At an even smaller
scale, these self-organizing sensors could reach the size of a few dust
mites, capable of distribution on road surfaces, in building materials,
and in fabrics. As another application, new high-technology radio
identification tags the size of a pinhead are in development. Such
devices, emitting a unique signal, could be attached to virtually every
manufactured product to track it through factories, warehouses,
transportation vehicles, retail outlets, and homes (Schmidt, 2001).
When combined with a new Electronic Product Code and a Product
Markup Language, such devices will be able to transmit signals to an
Internet-based database to retrieve production information, instructions, and so on.
As computer networks grow and the volume of information to be
transmitted expands (e.g., two-way video streaming), bandwidth for
electronic transmission will need to advance in order to meet the
need for communications capacity. New generations of fiber-optic
technology (known as wavelength division multiplexing, or WDM)
are expected to do just that (Hecht, 1999; Anderson et al., 2000).
Already in use today, fiber-optic cables that once carried one wavelength of light can now carry multiple wavelengths each with a separate signal, thereby dramatically expanding the capacity of the existing network of fiber-optic cables. In just a decade, the capacity of
fiber-optic cables has increased 1,000-fold. As the demand for
bandwidth grows, this new technology is expected to further expand
capacity. With expected growth in demand for more bandwidth and
with expected price declines for the technology, WDM is projected to
be affordable for individual consumers in their homes by about 2010.
As the information revolution proceeds, the economies of the United
States and Canada are expected to continue to be on the vanguard of
new technological developments and their applications in markets
for products and services (Hundley et al., 2003). Leading positions
will also be held by select countries in Europe and Asia. Countries
expected to be on the leading edge of the technology revolution are
those that have well-developed physical and regulatory/legal infrastructures, highly educated workforces (especially IT professionals),
efficient capital markets, and economies and societies that are open,
flexible, and adaptive to change. The preference for many European
societies for more economic and social equity is seen as potentially
inconsistent with the risk-taking and concomitant rewards associ-

The 21st Century at Work

ated with dynamic technological change. In Asia, the course of the IT
revolution depends, in part, on the extent to which such countries as
China, India, Malaysia, the Philippines, and Thailand become IT
users as well as producers. The prospects for other countries in Asia,
Africa, Latin America, and the Middle East that currently lag in the IT
sphere are mixed. Economic growth and supportive policies may
promote more-rapid adoption of IT, which in turn could support
further growth and investment in a “virtuous circle” (IMF, 2001).
Adoption of IT may even allow some low-income countries to
“leapfrog” older technologies by replacing, for example, mechanical
phone systems with advanced digital ones, bypassing analog technology. At the same time, many low-income countries lack the ITpromoting features listed above, which limits their potential for rapid
IT adoption.

APPLICATIONS OF THE “NEW BIOLOGY”
The latter part of the twentieth century was marked by technological
advances beyond the rubric of information technology. In the past
several decades, the biomedical sciences made tremendous progress
in the diagnosis and treatment of disease, from such life-threatening
illnesses as cancer, heart disease, and diabetes to such degenerative
diseases as Alzheimer’s and Parkinson’s to such mental health disorders as depression and schizophrenia. Researchers confronted the
emergence of infectious diseases, such as AIDS, with gradual
progress in the understanding of the virus leading to methods for
prevention, diagnosis, and treatment. Across a wide range of diseases, new drug and treatment therapies evolved from basic research
on the human body and its organs. The trend toward longer life
spans, discussed in Chapter Two, may be expected to continue, in
part, because of these investments in the biomedical sciences.
More broadly, tremendous progress has come in the area of biotechnology, defined as “techniques that use organisms or their cellular,
subcellular, or molecular components to make products or modify
plants, animals, and micro-organisms to carry desired traits” (Paugh
and Lafrance, 1997). Perhaps the most visible scientific effort in
recent years was the mapping of the human genome, published in
draft form in 2001, which serves as an incomparable resource for
understanding how the body works and the causes of disease (NIH,

The Information Age and Beyond

2001). This milestone builds on previous efforts to genetically map
other organisms and to identify the genetic basis for various human
diseases, mental disorders, and behavioral health disorders (e.g.,
addiction). The field of genomics has been used to understand
genetic differences in disease progression and how individuals
respond to treatments. The human genome project relies heavily on
the increased power and reduced cost of computing and data storage, as well as on improvements in scientific instrumentation. The
same may be said of other biomedical advances, such as advanced
imaging techniques and molecular diagnostic techniques. As a result,
scientific research in the biomedical field now involves teams of
researchers not only from biology and chemistry but also from such
disciplines as imaging, computer sciences, mathematics, and informatics (NIH, 2001).
In the near future, progress in biotechnology will almost certainly
generate medical advances that will further extend life expectancy
and enhance the work capacity of those with work-limiting disabilities (National Intelligence Council [NIC], 2000; Antón, Silberglitt, and
Schneider, 2001). As our understanding of the genetic variation in
human populations advances, the field of medicine, especially
pharmacology, is expected to evolve toward “personalized medicine”
in place of “one size fits all” (Wortman, 2001). Based on slight genetic
variation from person to person, drugs would be tailored to match
the genetic makeup of individuals or groups of individuals to
increase their effectiveness and reduce side effects. For example, a
test is now being used to determine which of several chemotherapy
doses is optimal for children with a particular form of leukemia.
According to industry experts, this shift in the pharmaceutical
industry will fundamentally alter the health care system toward
“disease management packages” to treat diseases and even to design
targeted interventions to prevent such ailments as cancer, heart disease, and dementia before they start. Scientists debate about
whether there are biological limits to our ability to continuously
extend the life span (e.g., Olshansky, Carnes, and Désesquelles, 2001;
Oeppen and Vaupel, 2002). While that debate is not yet settled, it is
clear that those limits, if any, will not be reached in the next few
decades.
In addition to extending life, biomedical advances will also improve
its quality for those with a chronic illness or disability, often in ways

The 21st Century at Work

that will enhance their productive capacity in the workplace. For
example, in the 1980s, cochlear implants, which convert sound into
electrical impulses, were developed to improve the hearing of those
with hearing impairments. Today, scientists are experimenting with
artificial retinas that employ minuscule silicon chips to convert light
into electrical signals transmitted to the brain (Stone, 2003). With
further development, such devices could eventually provide artificial
eyesight routinely for those who would otherwise be vision impaired.
Likewise, there is hope that biomedical research and advances in
organic and artificial replacement parts will improve the functioning
of those who suffer heart attacks, liver disease, strokes, or paralysis,
eventually replacing complex organs through tissue engineering
(Garr, 2001). Early research in this area is developing techniques for
joint replacement therapies based on injecting engineered tissue
formed from polymers, cells, and growth stimulators (Goho, 2003).
Some of these advances rely on the biomedical sciences alone, while
others also exploit developments in computer sciences with respect
to microchips and miniaturization.
The reach of the “new biology” has extended beyond the medical
and pharmaceutical industries to touch even the primary sector:
agriculture. Among the more controversial areas of progress has
been the use of biotechnology to genetically modify crops and animals. The field of genetic engineering or bioengineering has
extended what humans have done for centuries in breeding plants
and animals for size, taste, and resistance to disease. To move
beyond the limits of traditional breeding methods, new techniques
for genetic cutting and splicing were developed in the late 1970s and
early 1980s, followed by more-sophisticated methods later in the
1980s and in the 1990s (NAS, 1998). These technologies allowed scientists to introduce new genetic material, often from other species,
into plant and animal DNA to enhance resistance to disease or confer other desirable traits. For example, one of the first genetic modifications was made to cotton plants by introducing the genes from
the bacterium Bacillus thuringiensis (Bt) that created a protein toxic
to insects. With this new genetic material, the modified cotton plant,
commercially available in 1996, could generate enough of the
required toxic proteins to make it resistant to insects (NAS, 1998).
Other crops have been genetically modified to resist pests, diseases,
and herbicides and, in the case of fruits and vegetables, to extend

The Information Age and Beyond

shelf life. These crops include cantaloupe, corn, papayas, potatoes,
soybeans, squash, tobacco, and tomatoes (NAS, 2000).
The genetic modification of food crops and animals has tremendous
potential for altering agricultural markets and world food supplies
(especially in poorer countries), as well as broader consequences for
other biologically based products (NIC, 2000). The agricultural sector
is slated to become even more “high tech” as new crops are bioengineered to resist pests, disease, and herbicides. As the field advances,
scientists are expected to produce crops more tolerant to salt or
drought conditions and with properties—such as concentrations of
micronutrients—desirable for human health (NAS, 1998, 2000).
Other areas of likely advancement include bioengineering plants to
produce new compounds, such as industrial oils, plastics, enzymes,
drugs, and vaccines. Similar advances apply to animals as well, with
application to the production of medicines and organs and tissues
suitable for human transplantation (NAS, 2002). Bioengineering
applications thus have the potential to both raise agricultural productivity and increase the demand for new agricultural products that
generate uses beyond those available today.
The revolution in biotechnology, however, will be accompanied by
significant concerns regarding ethical, moral, religious, privacy, and
environmental issues (Antón, Silberglitt, and Schneider, 2001).
Manipulation of the human genome, including the possibility of
human cloning, has already raised significant concerns, and these
issues are expected to remain highly visible as further scientific
progress is made. Individual genetic profiling raises the specter of
employers or insurance companies having access to information
about an individual’s genetic predisposition to diseases. Challenges
in bioengineered agriculture include avoiding the evolution of pests
or diseases resistant to the defenses of the new crops, minimizing the
consequences of introducing genetically altered species into the
ecosystem, and limiting the effects on food safety from genetically
modified organisms. Restrictions on genetically modified crops in
European countries already place limits on the markets for these
products. Such controversies are likely to intensify and may ultimately modify the course of diffusion and adoption of the results of
the “new biology.”

The 21st Century at Work

NANOTECHNOLOGY:
REVOLUTIONARY TECHNOLOGY ON THE HORIZON
In looking to the future, the one area of technological innovation that
has the potential to equal or exceed the influence of the twentiethcentury advances in computing and information technologies is the
emerging field of nanotechnology (NNI, 2003). Nanotechnology, the
ability to measure, manipulate, and organize matter at the atomic
scale, bridges the fields of biology, chemistry, physics, engineering,
and computer science.6 In addition to applications in information
technology, nanotechnology is expected to lead to breakthroughs in
pharmaceuticals and other aspects of biotechnology, energy technology, and aerospace and materials technology, among others. As a
cross-cutting technology, nanotechnology will facilitate technological change that extends and enhances existing technologies—further
computer power for semiconductors, for example—as well as more
revolutionary applications—computers no bigger than a bacterium
and new materials displaying paradoxical properties of strength and
flexibility and performance in heat and cold. The earliest applications in the next 10 to 15 years are likely to be in the first category,
while those in the second category may be further in the future.
In recent years, nanotechnology has moved from the realm of science fiction into the reality of laboratories at major technology companies and research universities, with early commercial applications
in several product areas. R&D expenditures by the federal government in nanotechnology initiatives have climbed from $422 million
in fiscal year 2001 to a proposed $847 million in fiscal year 2004
(Bond, 2003). The NSF has established six new nanotechnology centers, and the Department of Energy has established another five.
Investments by large corporations and smaller startups financed by
venture capital further add to the soaring investment in this area. In
the United States, total investment in 2002 has been estimated at $1
billion, a level comparable to that of the semiconductor industry
(NNI, 2003). Moreover, this investment is taking place worldwide,
with advanced countries including Canada, Japan, and members of
the European Union joined by rapidly developing China, Korea, Tai______________
6 For a brief summary of the field, see “Nanotech Executive Summary,” 2001.

The Information Age and Beyond

wan, and Singapore in the race to build their future economies
around these technologies.
Looking ahead—in some cases decades into the future—nanotechnology promises both evolutionary and revolutionary changes.
Consider the following areas of application (NSF, 2001; NNI, 2001,
2003):
•

Electronics and information technology. To extend Moore’s Law
beyond current projections, nanotechnology offers the promise
of molecular electronics in the not-too-distant future. The next
generation of chips to exploit further miniaturization based on
silicon devices is likely to use organic molecules to create integrated circuits (Rotman, 2001). Such semiconductor chips would
create the capacity of today’s supercomputers on a single chip or
a memory chip with a million times the density of what is possible now. Molecular electronics of this type are already being
fashioned at a rudimentary level in industrial and academic labs,
and efforts are under way to bring the technology to market
(IBM, 2002b). Further into the future, quantum computing based
on using single electrons as switches offers the potential for even
further scale reductions. Bioelectronics is another area in which
the forecast is for revolutionary consequences, with proteins as
building blocks for electronic circuitry. Visionaries in this field
see “pervasive computing” or “electronics everywhere” at a scale
almost impossible to imagine today.

•

Medicine and health care. Applications in the fields of genetics,
medical devices, and pharmaceuticals may revolutionize the
diagnosis and treatment of disease and disability. Advances may
include new methods for using magnetic, nuclear, and optical
imaging techniques at the molecular level to enhance the detection of disease, such as potential cancerous tumors or areas of
plaque buildup in the heart and neck arteries that can lead to
heart attacks (Huang, 2003). The treatment of cancer is evolving
toward “targeted therapeutics,” whereby antibodies or other
agents can find and destroy specific cancer cells. Other “smart
drugs” will be able to target specific diseases—for example, drugs
that release antibiotics only in the presence of infection. Human
physical capabilities may be extended, with, for example, human
organs restored or enhanced with nanoengineered tissue.

The 21st Century at Work

•

Energy and the environment. Promising new energy solutions
that will replace fossil fuels, such as highly efficient solar power
and fuel cells, are likely to come from nanotechnology. Applications are expected to extend to energy generation and utilization,
including new energy sources and approaches to energy efficiency and environmental protection. For example, within a
decade or so, new advances in lighting made possible by nanotechnology could reduce worldwide energy consumption by 10
percent, with a corresponding reduction in carbon emissions.
Nanoengineered photovoltaic material could produce inexpensive nano solar cells that are spread like paint or plastic wrap and
applied to building materials or other surfaces (Scigliano, 2003).

•

Aerospace and transportation. Airplanes, spacecraft, and other
aeronautical applications require extraordinary materials that
exhibit unique properties in order to perform in extreme environments. New materials made possible by nanotechnology will
lead to lighter, faster, and safer vehicles. Roads, bridges, runways,
pipelines, and rail systems are likely to benefit from moredurable and -reliable materials and construction methods.

•

Biotechnology and agriculture. Extensions of current biotechnology with the new tools of nanotechnology are likely to further
improve agricultural yields and allow for more-economical water
filtration and desalination. Molecular biological building blocks,
such as proteins and nucleic acids, may be manipulated to produce new chemicals and pharmaceutical products, as well as
combined with synthetic materials to merge biological functions
with other desirable material properties.

•

Materials and manufacturing. New materials made possible by
nanotechnology architectures, beyond what is possible with
chemistry alone, may offer improved performance and reliability
with applications to a tremendous array of products. Manufacturing methods developed through nanoscience and nanoengineering are expected to evolve to the nanometer scale, with the
ability to precisely control nanoscale building blocks that are
then assembled into larger structures. As a recent example, scientists announced the creation of a new designer material, selfassembled in three dimensions from two different types of particles in increments of less than 1 nanometer. The custom

The Information Age and Beyond

properties of the new material reflect those of the original components (IBM, 2003; Redl et al., 2003).
In the same way that 50 years ago it was not possible to imagine the
full array of applications that would follow from the replacement of
vacuum tubes by silicon, the far-reaching applications of nanotechnology in these and other fields are not completely knowable. NSF
projections suggest that investments in the field of nanotechnology
will reach more than $1 trillion annually by 2015 in the United States
alone, with implications in the twenty-first century as significant as
the combined effect of antibiotics, the integrated circuit, and synthetic polymers in the twentieth century (NSF, 2001). Thus, as we
discuss below, we can expect these new technologies to continue to
affect the products we produce and how they are made; the health
and productivity of the workforce; the skill requirements for the
workforce needed to make the scientific discoveries, bring them to
commercial application, and produce the resulting goods and services; and the way the economy is organized to take advantage of the
new technologies.
Yet while the potential for nanotechnology is vast, pioneers in the
field are cautious about promising too much too soon (NNI, 2003). As
with all technologies, considerable lags can occur between basic scientific discoveries and full-scale commercial applications. However,
for the 10- to 15-year horizon, nanotechnology is almost certain to
generate evolutionary technological change that enhances the
capability of existing products and lowers costs. At the same time,
like the revolution in biotechnology, many of the advances in nanotechnology also raise social, legal, and ethical implications, as well as
national security concerns, that need to be addressed as the technologies evolve (NSF, 2001). If public acceptance of the new technologies is slow to materialize, their adoption and diffusion may not
match the pace of discovery.

HOW TECHNOLOGY IS AFFECTING THE WORKFORCE
AND WORKPLACE
The technological advances in the latter part of the twentieth century
have had a wide-ranging influence on the economy and the labor
market. Industries have emerged and expanded in both the goods

100

The 21st Century at Work

and services sectors to provide the products and services associated
with developing and implementing the new technology. For example, consistent with the process of investment and diffusion in the IT
sector discussed above, the IT sector was especially dynamic during
the 1990s. Between 1991 and 2001, the IT sector generated a 16-fold
increase in the production of computers, semiconductors, and
communications equipment. 7 Over the same period, employment in
the services industries of the IT sector (measured by the number of
such professional-level IT workers as computer programmers, computer systems analysts and managers, hardware and software engineers, and so on) more than doubled, from 1.2 million to 2.5 million,
a growth rate five times faster than the rate of overall occupational
growth (U.S. Department of Commerce [DOC], 2003). Technological
advances have had a significant effect on overall U.S. economic performance as well as on the labor market. The IT sector alone,
accounting for just 8 percent of GDP in 2000, is estimated to have
contributed about one-third of all output growth between 1995 and
1999 (U.S. DOC, 2000).
These advances have been made possible by considerable investment in R&D. In information technology, for example, this includes
R&D into the basic architecture of semiconductors, microprocessors,
memory chips, and storage devices as well as the application to
computer hardware and peripherals. The rapid pace of progress is
manifested in the number of patents granted for IT applications. In
absolute terms, annual patents for IT applications (e.g., communications, data processing, electrical computers) increased from about
1,400 per year in 1980 to over 18,000 per year in 2001. As shown in
Figure 3.5, the share of all patents awarded for IT applications grew
rapidly over the same period, from just more than 2 percent to about
10 percent, with a more rapid increase during the 1990s than in the
previous decade.8 The rate of growth in patents in the biomedical
field (e.g., biotechnology, pharmaceuticals, medical electronics, and
medical equipment) shows a similar profile (Hicks et al., 2001).
______________
7 This number is derived from industrial production data generated by the Federal

Reserve, Table 2, available at http://www.federalreserve.gov/releases/G17/table1_2.
htm.
8 A leveling off of the upward trend occurred after 1999, which may have stemmed

from the business cycle downturn or other factors.

The Information Age and Beyond 101

RANDMG164-3.5

Percentage of all patents

All information
technology patents
Other IT

8
Computers
6
Data
processing

0
1980

Communications

1985

1990
Year

1995

2000

SOURCE: U.S. Patent and Trademark Office (2002a).
NOTE: Patent classes aggregated as follows: communications—classes 370, 375,
379, and 455; data processing—classes 700–707, 716, and 717; computers—classes
708–713; and other IT—classes 714 and 725.

Figure 3.5—Information Technology Patents as a Share of All Patents,
1980–2001

Aside from the direct effect of technology in terms of the industries
that arise to produce and service the new technologies, new technologies are integrated into existing industries with consequences
that are often subtle. Consider a case study of how progress in IT in
the form of image processing of checks affected the structure of jobs
in two departments of a large bank (Autor, Levy, and Murnane,
2000). In the deposit processing department, a subset of the tasks in
the paper-based system typically performed by staff with a high
school education were now performed by various computerized
scanners and processing equipment. Of the tasks that could not be
substituted for, jobs were reorganized to be more specialized, with a
steeper pay gradient that increased with the degree of skill require-

102

The 21st Century at Work

ments. In the case of image keyers, since they now work with
scanned check images, it is no longer necessary for them to be physically collocated with other check-processing staff. This permits the
relocation of these jobs.
In the exceptions-processing department (dealing with checks that
require individual attention, such as stop-payment or a check written
on a closed account), in anticipation of the new technology and after
its introduction, the structure of jobs was reorganized in a way that
required greater problem-solving abilities. The result was a 28 percent reduction in the department’s labor force, almost exclusively
among those with a high school education only. With additional inhouse training, the workers who remained in the exceptionsprocessing department could upgrade their skills, while recruiting
focused on hiring more-skilled staff, particularly those with a college
education who could better function in a department with ongoing
process improvement.
This example illustrates several aspects of the way technology is
influencing the nature of work:
•

As a result of automation and the investment in new technology,
the same tasks could be accomplished with a smaller workforce,
which raises worker productivity.

•

Some jobs are becoming more specialized and requiring greater
analytic and problem-solving skills to perform tasks that cannot
easily be automated. Often these skill requirements are manifested in increased demand for workers with higher education
levels.

•

Pay is tied to underlying skill capacities with a greater reward for
those with the highest skills relative to lower-skill counterparts.

•

With greater specialization and work products that can be digitized and distributed over electronic networks, it becomes possible to redistribute workers across geographically dispersed work
sites rather than requiring workers to be collocated.

•

The incorporation of new technologies requires the reorganization of work to account for the new responsibilities and level of
decisionmaking required of workers in various occupations.

The Information Age and Beyond 103

•

Adapting to technological change often requires retraining workers so that they are able to work with the new technology and
within new organizational structures.

Shifting from the microcosm provided by this example to the macrocosm of the U.S. economy, in the remainder of this section, we consider how technology more broadly—or, in some cases, IT specifically—has affected each of these dimensions of work: productivity,
skill content of jobs, wage structure, geographic distribution of work,
reorganization of the workplace, and delivery of workplace education
and training.

The Missing Productivity Boost Has Been Found
Just as the technologies of the industrial revolution led to productivity gains measured by output per worker, it was anticipated by
economists that the adoption of various information technologies
throughout the economy would lead to a surge in productivity. Yet,
the advent of the information age resulted in an immediate boost in
neither economic output nor productivity despite high expectations
that it would. As illustrated in Figure 3.6, from 1973 to 1995, labor
productivity in the nonfarm business sector increased at an annual
rate of about 1.4 percent. There was no dramatic upward shift as new
information technologies took hold. As late as 1987, Nobel laureate
Robert Solow remarked, “You can see the computer age everywhere
but in the productivity statistics” (Solow, 1987).
As Figure 3.6 shows, however, the missing productivity growth—
labeled “Solow’s paradox”—has finally materialized.9 Since 1995, the
rate of productivity growth more than doubled to 2.9 percent per
year, a return to the near 3 percent annual growth rate experienced
from 1948 to 1973. The productivity gains were not limited to a few
industries but applied to a range, including durable goods manufacturing and such services as wholesale and retail trade and finance
______________
9 Interestingly, the surge in productivity growth in the United States has not been

experienced in other advanced economies that have made significant investments in
IT (Australia is one exception). Studies indicate that, in many cases, other factors offset
the productivity-enhancing effect of IT investments (IMF, 2001).

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RANDMG164-3.6

130

Labor productivity (1992 = 100)

120

Annual growth rate of 2.9 percent
per year (1995–2002)

110

100

Productivity

60
1970

Annual growth rate of 1.4 percent
per year (1973–1995)

1980

1990

2000

Year
SOURCE: BLS Major Sector Productivity and Costs Index Tables (http://data.bls.
gov/labjava/outside.jsp?survey=pr).
NOTE: Labor productivity is measured as output per hour in the nonfarm business
sector.

Figure 3.6—Labor Productivity, 1970–2002

(Baily, 2002). During the peak of the 1990s business cycle, these
trends and others formed the basis for characterizing the “New
Economy.” According to that paradigm, technological advances,
business process innovation, and sound government fiscal and
monetary policy were viewed as contributing to an economy with
low unemployment, low inflation, rising incomes, and steady gains
in productivity.
The acceleration in the rate of productivity growth since 1995 does
not appear to be solely a cyclical phenomenon. In fact, as indicated
in the latest data plotted in Figure 3.6, the growth in productivity has
remained at about 3 percent per year despite the economic slowdown that began in 2001 and a decline in investment spending
starting in 2000 (shown earlier in Figure 3.4 for IT but mirrored in the

The Information Age and Beyond 105

data for all nonresidential investment). Analyses by economists indicate that the rise in economywide productivity can be attributed to
growing productivity within the IT sector itself, as well as increased
productivity in other sectors of the economy (see Box 3.1).
Thus, it appears that the increase in productivity growth has been
largely the result of firms’ employing labor and capital more efficiently in producing goods and services, potentially as a result of the
increased investment in IT over the period. Recall from Figures 3.2
and 3.3 that the late 1990s were characterized by fast declines in
quality-adjusted prices for computer hardware and rising rates of
investment in computers and peripherals. Moreover, the productivity improvements were not limited to the “New Economy” sectors
but appear to have been experienced across many goods- and services-producing sectors of the economy (Nordhaus, 2002a; Triplett
and Bosworth, 2002). Indeed, Baily and Lawrence (2001) report that
productivity growth was fastest in the later half of the 1990s in industries that made the heaviest investment in IT, although the direction
of causality is not certain (Baily, 2002).10 Analysis of service sector
productivity gains also suggests that greater use of intermediate
inputs, presumably in the form of contracting out for the purchase of
material and services inputs, contributed significantly to productivity
growth in some industries, such as business services, insurance
agents and brokers, and transportation services (Triplett and
Bosworth, 2002).
As discussed earlier in this chapter, all indications are that the pace
of technological change experienced in the past several decades will
continue virtually unabated for the next 5 to 10 years or more. It is
even possible that new technological breakthroughs will quicken the
pace of change. Although the exact path of future developments is
difficult to predict, IT innovations are almost certain to add further
capability while continuing to reduce cost. Along with advances in
computer hardware and software, the Internet is viewed as a growing
resource for business-to-business and business-to-consumer transactions (Lucking-Reiley and Spulber, 2001; Bakos, 2001).
______________
10Baily (2002) summarizes various case studies of industry trends demonstrating that

productivity improvements arise from other sources as well (e.g., organizational
improvements) and that some sectors that invested heavily in IT did not experience
rapid productivity gains (e.g., banking).

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Box 3.1
Explaining the Increase in Productivity
Economists have carried out several studies in an effort to identify the
sources contributing to the rise in productivity since 1995. An analysis by
the Council of Economic Advisors (CEA) indicates that, through the first
three quarters of 2002, all of the increase in the annual rate of labor productivity growth since 1995 was structural rather than cyclical (CEA, 2003).
The acceleration of structural productivity growth since 1995 is attributed to
• capital deepening in the IT sector (about 23 percent of the increase),
• an increase in total factor productivity in the computer sector (about 8
percent), and
• an increase in total factor productivity (TFP) in all other sectors of the
economy (62 percent).
TFP is the residual source of productivity gain after accounting for
increases in capital or labor inputs. For example, a gain in TFP would follow
if a firm boosts output by redesigning its production processes while still
using the same level of inputs of capital, labor, and other materials.
Other growth accounting studies reach similar conclusions, although the
percentage shares attributable to these three components vary (see CBO,
2002; Baily, 2002; Triplett and Bosworth, 2002; and Oliner and Sichel,
2002, and the studies cited therein). Among the various studies on this
topic, the CEA analysis provides one of the larger estimates of the share of
productivity growth since 1995 attributable to TFP in other sectors. In contrast, Gordon (2000) estimates that, excluding durable goods manufacturing, all the productivity gains are attributable to the computer industry
alone, in the form of both capital accumulation and growth in TFP in the
sector.
Economists searched for explanations not only for the original slowdown in
productivity growth after 1973 but also for the failure of productivity growth
to return to pre-1973 levels following more widespread use of IT. Although
the paradox has yet to be fully resolved, a range of explanations has been
considered. For example, computer prices or output may have been mismeasured in service-producing sectors; the capital investment in computers
may not have been sufficiently large to have an effect; and the effect of
computers might have had to await firms’ adopting new practices to exploit

The Information Age and Beyond 107

Box 3.1—continued
the hardware and software advances (Triplett, 1999). The rebound in productivity growth that has now occurred suggests that expectations that
computers would have an earlier effect were overly optimistic, given that
computing equipment at the time represented a relatively small fraction of
the overall capital stock (Oliner and Sichel, 2000). Furthermore, many of
the benefits in such areas as new business processes and new organizational structures go unmeasured in the national accounts (Brynjolfsson and
Hitt, 2000).

Given that these new technologies have yet to reach saturation in the
economy, most analysts expect the boost to productivity from the IT
revolution to continue for the near term. Typical forecasts and
“educated guesses” are in the range of 2.0 to 2.8 percent per year for
the near term, close to the more recent experience.11 Litan and Rivlin
(2001) forecast that the Internet alone has the potential to add 0.2 to
0.4 percent per year to productivity in the next several years. There is,
of course, uncertainty around this consensus estimate, including the
possible longer-term consequences of the September 11 attacks and
the increased resources devoted to security measures that are not
reflected in output data.
Some economists are more pessimistic about the longer-term sustainability of the recent surge in productivity. Gordon (2002) for one
argues that the 1990s were characterized by a set of events—the
invention of the Internet, the Y2K transition bug that compressed the
replacement cycle, the dot-com and telecom bubbles—that are unlikely to be repeated in the future. He also contends that, because of
diminishing returns to more numerous and more powerful computers given a fixed endowment of human time, a limit exists to the
demand for new computers with added capacity, even if prices continue to fall. Comparing them with the great inventions of the nineteenth and twentieth centuries, such as electricity, the internal com______________
11See, for example, Baily, 2002; Jorgenson, Ho, and Stiroh, 2002; and Oliner and Sichel,

2002, and the studies cited therein. The Bureau of Labor Statistics (BLS) forecast for
2000–2010 in Su (2001) is at the top of the range.

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bustion engine, telecommunications, and urban sanitation infrastructure, Gordon concludes that the Internet and other IT advances
will fail to measure up over the longer run (Gordon, 2000).

Technology Is Shifting the Skill Requirements of Jobs
In theory, technology could be either a relative complement or substitute for skilled labor.12 Much of the process of industrialization in
the late nineteenth and early twentieth centuries replaced highly
skilled artisans with capital equipment operated by less-skilled
workers (Goldin and Katz, 1998). Consider the example of automobile manufacturing, which was initially carried out in large shops
with highly skilled craftsmen who hand-fitted the various components. Eventually, technological improvements led to assembly line
production using standardized and interchangeable parts assembled
by less-skilled workers. Later still, robotized assembly lines required
fewer less-skilled assembly line operators and instead employed
more-skilled machine operators. Thus, as this example illustrates,
the initial technological advances substituted for skilled labor, while
later technology displaced unskilled labor.13 The more recent experience has led to the common perception that technology and skills
are relative complements, at least for the technological advances of
much of the twentieth century and beyond (Bresnahan, Brynjolfsson,
and Hitt, 2000; Acemoglu, 2002; Autor, Levy, and Murnane, 2002).
For a more recent example, consider the case of computer systems.
Computers automate routine tasks and those that can be well
defined (e.g., clerical tasks and related bureaucratic activity), thereby
substituting microprocessors and software for human labor that is
not highly skilled. In some cases, the substitution may replace all
tasks previously performed by a given worker (consider, for example,
automated teller machines replacing bank tellers, telephone operators replaced by automated switching machines). In many others,
______________
12When new technologies increase (decrease) the demand for more-skilled labor rela-

tive to less-skilled labor, technology and skill are relative complements (substitutes)
(Goldin and Katz, 1998).
13In a more systematic analysis across industries in the manufacturing sector from
1909 to 1940, Goldin and Katz (1998) trace the origin of contemporary capital-skilled
labor complementarity to the transition from factories to continuous-process and
batch methods that increased the relative demand for skilled workers.

The Information Age and Beyond 109

computer automation substitutes for a subset of tasks. At the same
time, business computer systems generate demand for highly skilled
labor in the form of technical staff who operate and repair the
equipment, develop and install the software, and build and monitor
the networks. Outside the increased need for highly skilled IT staff,
computer systems often generate more data that may be profitably
analyzed, thereby increasing the demand for the analytical and
problem-solving skills of workers, managers, and other professionals.
At the same time, technology may also change the skill requirement
of mid- to low-level occupations (Burtless, 2000). Consider, for
example, the use of scanning technology by sales or inventory clerks,
which may reduce some of the skill requirements for those jobs, such
as key punching. At the same time, the scanning technology generates new data for inventory control, reordering, and accounting,
which increases the value added of the tasks performed by such
lower-skilled workers.
While the recent technological advances may favor either skilled or
unskilled workers, depending on the application, the overwhelming
evidence is that on balance, recent technological advances favor
more-skilled workers, a phenomenon known as “skill-biased technical change.” Figure 3.7 illustrates the economywide trend over the
past four decades in the average skill content of jobs based on data
analyzed by Autor, Levy, and Murnane (2002). The skill content of a
job is defined by five skill categories based on whether the job
involves routine or nonroutine tasks, and cognitive or manual skills.
Each skill category is indexed to zero (no change) in 1959.
Figure 3.7 shows that, in the past four decades, there has been a
steady rise in the share of jobs requiring nonroutine cognitive analytic (problem-solving) and interactive (communication) skills,
especially during the 1980s and 1990s. At the same time, the share of
jobs requiring routine cognitive and manual skills, after rising during
the 1960s, fell steadily in the next three decades consistent with the
timing of the rise of the computer era. The share of nonroutine manual skills represented in the occupational mix fell steadily over the
entire period. In analyzing the drivers of these economywide trends
by industry, occupation, and education groups, Autor, Levy, and
Murnane (2002) find that computerization is associated with the

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RANDMG164-3.7

0.6

Level relative to 1959 (1959 = 0)

0.4

0.2

–0.2

Nonroutine cognitive/analytic
Nonroutine cognitive/interactive

–0.4

Routine cognitive
Routine manual
Nonroutine manual

–0.6
1959

1969

1979

1989

1998

Year
SOURCE: Autor, Levy, and Murnane (2002), Table 3.

Figure 3.7—Economywide Measures of Occupational Task Input,
1959–1998

reduced relative demand for routine manual and cognitive tasks and
the increased relative demand for nonroutine problem-solving and
complex communications tasks. This should not be surprising
because routine tasks, both cognitive and manual, are those most
amenable to computerization. The clear, repetitive nature of these
tasks can be defined by rules codified in computer software and
performed by computers or other machines. Nonroutine skills, such
as those requiring flexibility, creativity, problem solving, and complex communications—whether cognitive or manual—are not as
readily translated into programmable rules.
In a related study of changes in the relative quantities and wages of
workers by education level, Autor, Katz, and Krueger (1998) conclude
that relative demand for skilled labor (college equivalents) grew more
rapidly in the United States between 1970 and 1995 compared with

The Information Age and Beyond 111

the 1940 to 1970 period. In the 1980s, demand accelerated only in
manufacturing, with the greatest degree of skill upgrading taking
place in industries with intensive computer investment.
Firm-level analyses provide a complementary source of information
on the relationship between technology and the demand for labor.
For example, in the manufacturing sector, Berman, Bound, and Grilliches (1994) documented large increases during the 1980s within
detailed industries in the use of higher-skill nonproduction workers
at a time when wages for skilled workers were rising. They also found
a positive correlation between the rising demand for skill and
investment in computers and R&D across both manufacturing and
nonmanufacturing industries. More recently, in a sample of approximately 400 large U.S. firms, Bresnahan, Brynjolfsson, and Hitt (2000,
2002) found that firms with larger investments in IT and IT intensity
increased their demand for human capital and workforce skills.
Taken together, the evidence points to the growing importance of
cognitive skills in the workplace, whether in the manufacturing sector, where production line employees now program and repair
complex machine tools, or in the services-producing sector, where
workers increasingly are responsible for managing, interpreting,
validating, transforming, communicating, and acting on information
generated by new technologies. More and more, the term “knowledge workers” is applied to workers who go beyond just providing
information to now being responsible for generating and conveying
knowledge needed for decisionmaking (Reich, 2001). With the ease of
online stock trading, for example, brokers are no longer needed to
carry out transactions. Instead, they must now be a source of knowledge about the future course of markets and the investment needs of
their clients. Knowledge work requires the capacity for abstraction to
make sense of patterns and symbols, the ability to view problems in
the context of complex systems, an aptitude for experimentation to
understand how systems behave, and the capacity to work collaboratively with others to solve difficult problems (Thornburg, 2002).
This type of transformation in the skill requirements of the workplace has already affected a wide range of occupations and industries, and many more are likely to be influenced with further technological advances.

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Technology Is Changing the Wage Structure
To the extent that technology is changing the demand for labor of
various skill levels, economic theory would lead us to expect that the
demand shifts have implications for the wage structure as well.
Indeed, much of the recent empirical literature has tried to explain
the very substantial increase in the skill premium that accompanied
the period of growth in IT. The skill premium, as typically measured,
captures the wage differential between low- and high-skilled workers
defined by education level. For example, Figure 3.8 plots the trend in
the median real average hourly wage by education level since 1973.14
Over the entire period, high school dropouts and those with only a
high school diploma experienced real wage declines of 18.5 and 4.1
percent, respectively. At the same time, those with a college or
advanced degree benefited from a 15.9 and 19.5 percent real wage
gain, respectively. (Those with some college were about even, with
real wage growth of just 1.4 percent.) The premium for a college
degree compared with a high school diploma increased 30 percentage points, from 46 percent to 76 percent. Compared with a high
school dropout, the college premium increased even more sharply
(from 67 percent to 138 percent). The widening wage gap is even
more pronounced when 1979 is used as the base because a slight
narrowing of the wage gap occurred during the latter part of the
1970s. More generally, over this period, wage dispersion grew
because of the increase in wage differentials by education level as
well as increased wage dispersion within education groups (Murphy
and Welch, 1992; Gottschalk, 1997; Katz and Autor, 2000).15

______________
14These data are based on the CPS and include all wage and salary workers. BLS has

maintained a similar series since 1979, also based on the CPS, for median weekly
wages of full-time wage and salary workers by education level. The data for full-time
workers from 1979 to 2001 show a pattern over time in the education premium similar
to that reported in Figure 3.8 based on median hourly wages for all workers.
15The real wage trends plotted in Figure 3.8 are adjusted for inflation using the Consumer Price Index (CPI-U-X1). There is evidence that the CPI overstates the true rate
of inflation, although the extent of the overstatement is subject to debate (see the articles in the December 1993 issue of the Monthly Labor Review, and Moulton, 1996).
Correcting for the overstatement would increase the rate of growth of real wages for
each education group, but it would not affect the trend in the wage differential
between education groups.

The Information Age and Beyond 113

RANDMG164-3.8

Real median hourly wage (2001 dollars)

0
1973

Advanced degree
College degree
Some college
High school graduate
Less than high school graduate
1983

1993

2001

Year
SOURCE: Mishel, Bernstein, and Boushey (2003), Table 2.17.

Figure 3.8—Real Median Hourly Wage by Education Level, 1973–2001

This increase in the college-education wage premium during the
1980s and 1990s came at the same time that the supply of collegeeducated workers continued to increase, suggesting that demand
must have been increasing even faster. In seeking an explanation for
these trends, researchers have considered a range of supply,
demand, and institutional factors. Among the demand-side factors,
skill-biased technical change has consistently been identified as one
of the drivers behind the growing wage gap by skill level, although
studies vary in the magnitude of the effect attached to this explanation. Evidence in favor of this hypothesis comes in several forms, but
researchers consistently found that technological progress that
increases the demand for more-skilled workers explains a sizable
portion of the rise in the wage differential by education level since
the 1980s (see Box 3.2).16
______________
16For recent reviews of this literature, see Johnson (1997) and Acemoglu (2002).

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Box 3.2
The Contribution of Technological Change to the Changing
Wage Structure
An extensive literature has developed to explain the growing wage inequality in the United States in the past several decades.17 In reviewing the
cumulative evidence from this literature, Acemoglu (2002) concludes that
“an acceleration in [skill-biased technical change] during the past few
decades appears to be the main cause of the increase in [wage] inequality”
(p. 9).
One set of early studies considered the growing education wage gap in the
context of a standard labor supply and demand model, which posits that
changes in relative wages by skill group must stem from changes in relative
supplies or technological change. Applying this approach, studies by
Bound and Johnson (1992), Katz and Murphy (1992), and Murphy and
Welch (1992) concluded that skill-biased technical change was the only
factor capable of explaining the large increase in the college-education
wage premium during the 1980s, after accounting for the role played by
changing relative supplies. Thus, in these studies, evidence in favor of a
technology explanation is indirect: a residual unexplained factor attributed
to technical change (Card and DiNardo, 2002a, 2002b).
Other studies look for more direct evidence on the relationship between
various measures of technology and the wage structure. In an early study,
Mincer (1991) modeled the time-series changes in the male college-tohigh-school wage differential and the experience premium for high school
and college workers. His regression analysis, showing a positive effect of
R&D expenditures per worker and capital equipment expenditures per
worker on the education premium, supports his hypothesis of technologyskill and capital-skill complementarities. In a more recent study at the
industry level, Allen (2001) finds a positive relationship between various

______________
17Studies of wage or earnings inequality generally examine annual measures. Because

individual earnings may rise or fall over time, researchers have also examined patterns
of wage mobility and the distribution of longer-run measures of earnings (see
Gottschalk, 1997, for a review). These studies generally find that, while there is mobility in the earnings distribution and less inequality can be found in longer-run earnings
measures, earnings mobility has not increased over time. Thus, taking mobility into
account does not change the trend toward greater inequality in earnings.

The Information Age and Beyond 115

Box 3.2—continued
measures of technical change (e.g., R&D intensity, the capital-labor ratio)
and the schooling wage gap within industries between 1979 and 1989.
These results are consistent with the related evidence from industry- and
firm-level studies cited above that show the sectors experiencing more
rapid technological change increased their demand for more educated
workers (see, for example, Berman, Bound, and Grilliches, 1994; Autor,
Katz, and Krueger, 1998; Bresnahan, Brynjolfsson, and Hitt, 2000, 2002).
A more controversial source of evidence comes from Krueger (1993), who
documents that workers who use computers on the job enjoy a 15 percent
wage premium compared with those who do not use computers. Given the
positive correlation between education levels and computer usage, he calculates that growing computer use can explain one-third to one-half of the
rise in the college wage premium between 1984 and 1989. That is, a higher
demand for workers capable of performing computer-intensive tasks is
driving up the returns to a college education. Updated estimates by Autor,
Katz, and Krueger (1997) through 1993 support a similar conclusion. However, as DiNardo and Pischke (1997) argue, these estimates are biased by
selection of those who use computers on the job. If computer users are
more skilled in ways not measured by the analyst, the higher returns to
computer use will simply reflect a return to unobserved ability rather than to
the ability to use the technology.

While most studies conclude that technological change played a role
in widening wage differentials by education level, it is not clear that
skill-biased technological change provides a consistent explanation
for the various dimensions of the changing wage structure in the past
several decades (e.g., the rise in wage inequality within education
groups and the slowdown in the rise in wage inequality in the 1990s)
(Card and DiNardo, 2002a, 2002b). Rather than a unicausal explanation, a confluence of factors likely played a role in affecting the wage
structure. In the next chapter, we return to this literature to consider
the effect of another demand-side factor—globalization—on the
wage structure. Other factors that can explain the rise in wage inequality include a slowdown in the increase of college-educated
workers, rising immigration, declining unionization rates, a falling
minimum wage, and economic deregulation (Katz and Murphy,

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The 21st Century at Work

1992; DiNardo, Fortin, and Lemieux, 1996; Freeman, 1996; Fortin and
Lemieux, 1997; Topel, 1997; Card and DiNardo, 2002a, 2002b).

Technology Is Altering How Firms Are Organized
In addition to the effects on the labor force and wage structure, the
new information technologies adopted in recent decades have had
implications for other aspects of the production process, from the
capital equipment used in the goods-producing sectors to the ways
firms across all sectors are organized and conduct their business.
Machine tools and other equipment have become increasingly
sophisticated through the incorporation of computer chips and software that allow greater automation, improved accuracy, and faster
retooling. Business processes have been revamped to exploit information-based software that allows better management of human
and physical resources, business-to-business relationships, and
business-to-customer relationships.
Such changes have taken place in “old economy” goods-producing
sectors, such as the steel and machine tool industries, as well as
services-producing sectors, such as retailing, trucking, and banking.
An example from the banking industry was provided above. From the
manufacturing and retailing sectors, the textile and garment industry
illustrates how new technologies are transforming long-standing
industries. In the textiles and apparel sector, as in much of retailing,
the use of bar code and related information technologies supports
“lean retailing”—the use of accurate and timely information, from
the supply chain to sales results, to efficiently manage inventories
and rapidly respond to changing demand (Abernathy et al., forthcoming). These technologies have been accompanied by an explosion of diversity in product lines that allows producers and retailers
to offer more variety to consumers and ensure that stocks of specific
items are available at individual retail outlets to meet demand. Order
fulfillment takes place in a matter of days based on frequent but
smaller orders compared with the infrequent bulk orders of the past.
Shipments are processed through distribution centers on their way
from suppliers to retail shops, rather than being warehoused.
While it is difficult to measure and quantify the ongoing changes in
business organization, a number of signs point to the changes under
way in terms of the organization of firms, business practices, com-

The Information Age and Beyond 117

pensation systems, and the nature of employer-employee relationships. In terms of the organization of the firm, the hierarchical, vertically integrated corporation was the dominant organizational model
for much of the twentieth century (Malone and Laubacher, 1998).
Vertically integrated firms could enjoy economies of scale and scope
and thereby produce goods more efficiently than less-integrated
firms. Vertical integration provided the means to control and coordinate the various stages of production performed by large and often
geographically dispersed groups, especially in an era when markets
were underdeveloped and supply networks were more uncertain.
While this model has by no means disappeared and revenues and
production volumes may be as large as before, some sectors of the
economy are moving toward more specialized, vertically disintegrated firms do. With vertical disintegration, firms increasingly specialize broadly in products and services that define their core competencies while outsourcing other functions ranging from industrial
design and manufacturing processes to back-office work, human
resources, and computer and other information services to janitorial
and cafeteria services (Appelbaum, 2003; Postrel, 2003). This trend is
facilitated by the power of information technologies and their associated networks to coordinate and control across organizations and
within organizations in a more decentralized manner.
As noted earlier, the increased use of intermediate inputs appears to
have contributed to productivity gains in some segments of the services sector and may explain part of the productivity gains in the
goods-producing sector as well. This type of outsourcing presumably
allows firms to contract out for those aspects of the production process that can be accomplished less expensively by another firm,
potentially because of greater efficiencies on the part of the contractor (Abraham and Taylor, 1996). Contractors may also be able to
perform work less expensively if they provide less-generous fringe
benefits packages than the contracting firm or face lower labor costs
if they are not unionized. Finally, firms are expected to have less loyalty to the employees of their subcontractors, thereby allowing them
to more readily adjust employment levels in the face of changing
business circumstances.
Technology may also shape firms’ decisions about how to organize
production within the firm—particularly the role of workers with
more-extensive skills and decisionmaking authority versus those

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with fewer skills and less autonomy—and how to structure the compensation system to motivate workers at various levels of the organization. Evidence has been found that firms have made adjustments
in employee decisionmaking and incentive structures toward more
participatory, “high-performance” work systems to reap the benefits
of more-sophisticated technology and improved business practices
(Appelbaum, 2003). For example, as of 1997, upward of three out of
four establishments report using quality circles, while nearly half
report practicing job rotation (Kruse and Blasi, 1998). Such practices
invest greater authority and problem-solving responsibilities in
frontline employees rather than managers. Jobs become more flexible and broadly defined, employees work in collaborative teams
requiring a high degree of information sharing and communication,
and outcomes focus on timeliness, quality, and customer service.
Companies that adopt such practices also invest more in training for
their workers (Lynch and Black, 1995). A related development is the
increased reliance on performance-based pay to improve employee
motivation. Production-based pay, profit-sharing, and stock-option
plans allow employees to share directly in the profitability of their
employers. As of 1997, roughly two in five establishments report
having profit sharing or stock options for their employees, not only
for executives but also for other personnel (Kruse and Blasi, 1998).
Many of these practices were initiated in the early 1980s—predating
the period of major investment in IT—largely in response to competition from Japanese firms that appeared to benefit from alternative management styles. A growing literature points to the beneficial
effects of these workplace practices and compensation systems in
terms of productivity and employee morale, particularly when participatory practices are combined with financial incentives, worker
training, and employment security (Ichniowski et al., 1996). However, only a small minority of firms—about 10 percent, according to
data in 1997—combine the workplace, compensation, and other
practices associated with “high-performance” workplaces (Kruse and
Blasi, 1998).
Case studies and firm-level data suggest a correlation between these
changes in business organization and the extent of investment in IT
(Bresnahan, Brynjolfsson, and Hitt, 2000, 2002). IT adoption is associated with better measurement and communication within the firm,
which will change the optimal organizational structure of the com-

The Information Age and Beyond 119

pany. Thus, IT investment and reorganization of the firm are posited
to be complementary innovations, along with changes in products
and services. Bresnahan, Brynjolfsson, and Hitt (2002) argue that
together these innovations provide a more complete explanation for
the skill-biased technical change discussed above because they go
beyond simple automation and substitution to include the complementary changes in workplace practices.18
There is also speculation that IT may be changing the nature of
employer-employee relationships, with firms in the “new economy”
relying more heavily on “alternative” or “contingent” workers in
place of traditional employees. As of 2001, just over 9 percent of the
workforce was classified in alternative work arrangements, the
largest group as independent contractors (6.4 percent), followed by
on-call workers (1.6 percent), temporary help agency workers (0.9
percent), and workers provided by contract firms (0.5 percent) (BLS,
2001). Contingent workers, those who do not expect their job to last
or who are in temporary jobs, represented 4.0 percent of total
employment as of 2001.
The share of employment in alternative work arrangements shows
little change since 1995, when BLS first began collecting nationally
representative data on such work arrangements. The fraction in contingent work has actually declined somewhat, from a high of 4.9 percent as of 1995. Other studies suggest little change since the mid1980s as well (Kruse and Blasi, 1998). Utilization of such work
arrangements is generally lower in industries classified as high tech
or in IT industries, with the exception of contract firm employment
(Neumark and Reed, 2002). At the same time, such alternative and
contingent employment relationships are more prevalent in “hightech” cities (those with a high concentration of high-tech employment) and in high-growth industries. One explanation for these
patterns is that reliance on alternative or contingent workers is a
temporary phenomenon as firms in high-growth sectors adjust their
workforces.
______________
18This view is consistent with the banking case study discussed above (Autor, Levy,

and Murnane, 2000).

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Technology Facilitates Work at a Distance
In the same way that technology can facilitate the vertical disintegration of firms and contracting out, within a given organization IT also
has implications for the physical location of the workplace (Autor,
2001). Some segments of the workforce, such as those in sales or
transportation, have always been mobile on the job and new technologies offer them less-expensive, more-reliable methods for staying in touch with their home office and their customers. For other
workers previously confined to an office, when equipped with a
phone, fax machine, PC, and Internet connection, they may be able
to perform many or all of their functions from an office in their residence or another site. In many cases, the activities of off-site workers, such as telephone call center employees or other workers who
perform much of their jobs using computers and other communications devices, can be electronically monitored.
Reliable data on current telecommuting patterns are hard to come by
and estimates of the telecommuting workforce today vary because
no common definition of “telecommuting” or “telework” exists. As of
2001, data collected by the BLS indicate that nearly 20 million workers, or 15 percent of the workforce, usually did some work at home
(at least one day a week) as part of their primary job (BLS, 2002a).
About half these teleworkers were wage and salary employees who
took work home on an unpaid basis, while another 17 percent had a
formal arrangement to work at home. The remainder, about onethird, were self-employed. As might be expected, most of those who
work at home are in positions of authority or those with more autonomy in their work. In fact, about four of five workers who worked
regularly at home were in managerial, professional, or sales positions. Such workers also have more education and higher incomes,
on average. Because of changes in questionnaire wording, gauging
changes over time in the prevalence of home-based work is difficult,
but some evidence suggests that it is on the rise (NSF, 1998; Kuenzi
and Reschovsky, 2001).
Using a broader definition of off-site work, about four out of five
workers either work off site themselves or work with others who work
at a distance (ITAC, 2003). Thus, technology allows greater communication and work activities interdependent with those located at a
distance. For example, IT allows even greater physical separation

The Information Age and Beyond 121

between workers performing such tasks as “back office” functions
(e.g., accounts processing), performance monitoring, and telephonebased operations (Autor, 2001). With greater task specialization and
work products that rely on digitized information that can be coordinated over electronic networks, staff performing different functions
may be physically separated to take advantage of local labor market
conditions or other factors that affect firm performance. As we discuss more in the next chapter, this physical separation may extend
from U.S.-based workers operating in different states to work performed by foreign workers overseas.

Technology Is Changing the Delivery of Workplace Education
and Training
As technology operates to increase the demand for more-skilled
labor, workers often need to undergo retraining to take advantage of
how new technologies are employed in the workplace or to operate
within new organizational structures. At the same time, technology
has great potential to support the education and training of the
workforce prior to labor market entry and as a part of lifelong learning. Technology-mediated learning—the use of computers and other
information technologies as an integral part of the learning
process—is gaining ground through such applications as computerbased instruction, Internet-based instruction, and other methods for
customized learning (American Society for Training and Development [ASTD], 1998). Information technologies potentially allow
access to instructional materials any time, any place, reducing the
costs associated with bringing instructors and students to a central
location as in traditional classroom settings. The technologies also
allow ready access to training and instructional manuals in workplace settings through personal computers or wireless devices. Most
important, the technologies support individualized learning programs.
A number of examples of technology mediated learning are used in
civilian and military workforce applications today. As of 2000, corporate distance learning was a $1.2 billion business and growing at a
rate of 80 percent per year (Moe and Blodget, 2000). In addition, the
U.S. Department of Defense (DoD) has embraced technologymediated learning methods. Distance learning offers the opportunity

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for instruction among the DoD’s far-flung personnel. One application, DANTES (Defense Activity for Nontraditional Education Support), provides distance-learning opportunities for off-duty DoD
employees around the world. Among other supports, DANTES allows
DoD personnel to participate in distance-learning courses to fulfill
undergraduate and graduate degree requirements and to receive
certification for civilian occupations that match their military specialty.
The next generation of technology-enabled learning is being developed through the U.S. Advanced Distributed Learning (ADL) Initiative, a public-private collaborative sponsored by DoD to go beyond
proprietary Web-based learning systems.1 9 The ADL Initiative’s
objective is to reduce barriers to and costs of e-learning by establishing specifications that allow the interoperability, accessibility, and
reusability of training components and curriculum on a worldwide
basis. This effort encompasses such features as wireless and personal
digital assistant (PDA)–based training, simulation-based training,
assessments of individual and team performance, and tracking of
online learning activities, all based on open architecture that is
usable across platforms. Already the resources developed have been
adopted in a variety of settings.
More generally, new technologies in the next 10 to 20 years offer
tremendous potential to revolutionize the way education and training are delivered in order to improve efficiency and effectiveness in
learning. Just as individualized medicine is envisioned as an outgrowth of biotechnology, individualized learning programs optimized for a given person’s knowledge base and learning style are
expected for the future.20 Such learning programs will become
increasingly sophisticated over time with advances in hardware and
software, including artificial intelligence, voice recognition, and natural language comprehension. They will also benefit from improvements in intelligent tutoring systems that allow self-paced, interactive learning based on “learning objects”—independent, reusable
______________
19Information about this joint effort involving academia, industry, and government

can be found at http://www.adlnet.org/index.cfm?fuseaction=abtadl.
20For a wide range of perspectives on future learning scenarios and technologies, see

U.S. DOC (2002).

The Information Age and Beyond 123

software modules stored in “learning libraries” that can be used in
combination with one another to create customized learning (ASTD,
1998).
For example, one application that goes beyond traditional distance
learning is the use of electronic performance support systems, typically wearable computer devices that provide real-time access to
information needed on the job to perform increasingly complex,
dynamic tasks. Examples include the development of systems by the
military and such private companies as General Motors to provide
mechanics with information needed to repair and maintain even the
most sophisticated equipment or machinery (ASTD, 1998; Hibbard,
1998). These devices allow hands-free voice-controlled access to all
types of job-related information displayed on nearby computer
screens or devices mounted on the user’s head, thereby embedding
training in workplace processes and supporting and reinforcing
traditional training. The software may be tailored to match the user’s
level of experience and the complexity of the problem and can allow
employees to work on a wider range of tasks given real-time access to
reference material. Such systems may also be used in factory or other
plant settings to provide managers with real-time access to operational data needed for decisionmaking. They may also be used to
collect information discovered while employees work, feedback that
can improve procedures and training and reference materials.
In other applications, workers may be trained using simulation technologies, best known now for their use in training pilots in civilian
and military contexts. As simulation technologies develop further,
their use in training of complex skills and for ongoing monitoring of
performance levels will grow (U.S. DOC, 2002). Such devices will not
be exclusive to high-tech occupations or industries. For example,
simulation technologies may be used with sales personnel to train
and evaluate performance in interacting with customers. Other
visions for the future role of technology in learning include virtual
laboratories linking individuals at multiple sites; tele-immersive
environments that visualize and simulate three-dimensional spaces;
and automatic translators that bridge language barriers between
participants in education and training programs.
Advances in the cognitive sciences that improve our understanding
of how individuals of all ages learn are expected to complement the

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The 21st Century at Work

capabilities of new learning technologies. These approaches may be
especially fruitful for individuals with learning disabilities and other
handicaps and should be complementary with biomedical advances
in treatment regimes to improve physical and mental functioning.

TECHNOLOGY AND THE FUTURE OF WORK
Viewed together, the converging and interdependent trends in
information technology, biotechnology, and nanotechnology, as well
as other areas of technological advance, have led technology experts
to conclude that the pace of technological change will almost certainly accelerate in the next 10 to 15 years (Antón, Silberglitt, and
Schneider, 2001). Synergies across technologies and disciplines will
generate advances with wide-ranging applications in terms of
research and development, production processes, and the nature of
products and services.
Just as the IT revolution in the past two decades has reshaped the
world of work, we can expect the accelerating pace of technological
change to have wide-ranging implications for the future of the workforce and the workplace. We have alluded to some of those changes
in this chapter, and we revisit these issues in a more extensive discussion in the concluding chapter. To preview that discussion, we
highlight here some of the most salient implications:
•

Who is working. Advances in diagnosis and treatment of disease
and disability may further extend the life span and improve
health and functioning as people age. This will have implications
for participation in the labor force and productivity at older ages.
The prospect of curing progressive or permanent disabilities
suggests a shift toward remediation for, rather than accommodation of, individuals with disabilities and improved prospects for
labor force activity. Greater economic productivity through the
life span may outweigh the likely increase in the cost of medical
care that will accompany new medical technologies. At the same
time, access to technology and training opportunities may affect
career trajectories at older ages.

•

Skill requirements for the workforce. The evolutionary and revolutionary technologies in the coming decades will sharply increase the demand for a skilled workforce to undertake the basic

The Information Age and Beyond 125

R&D, develop the applications and production processes, and
bring the resulting products to the commercial market. Technologies that change the way work is conducted—continued
advances in IT and other knowledge-based industries, and production processes associated with nanomanufacturing among
others—are also expected to shift demand toward a more skilled
workforce. The traditional education and training system may
need to respond to the changing workforce requirements, and
potential workforce shortages in key occupations may need to be
addressed. At the same time, technology can facilitate distance
or distributed learning in order to support ongoing worker
training and lifelong learning.
•

How work is organized. Information technologies facilitate the
move toward more decentralized forms of business organization,
both the vertical disintegration of firms evident by increased
specialization and the organization of work within firms. Further
technological advances that support agile manufacturing and
rapid change in response to market shifts may further extend
these trends. Some sectors may consist of “e-lancers,” businesses
of one or a few workers linked by electronic networks in a global
marketplace for products and services. Shifts in business organization in turn have implications for compensation structures,
including wages and employee benefits.

•

Where work is conducted. Our discussion of the various technological advances, particularly in IT, suggest that for many occupations in the future, where work is conducted will not be tied to
a given physical location to the same extent as the past. Particularly when work products can be exchanged and monitored electronically, it becomes less essential that workers be physically
collocated with coworkers engaged in related tasks. Flexibility
with respect to the physical location of where work is performed
may allow workers to better balance work and family obligations,
to save time commuting, and to generally be more productive. At
the same time, if workers are in jurisdictions different from their
employer’s—say a different state or even a different country—it
may raise issues for the applicability of regulations and benefit
programs (e.g., fringe benefits, social insurance) that vary across
geographic space.

126

•

The 21st Century at Work

Further integration of the world economy. The technology revolution is taking place on a global scale, albeit unevenly distributed across regions and countries. Nevertheless, the United
States must compete with other countries investing in these new
technologies and be poised to supply the workforce capable of
providing the associated goods and services. Information technologies and distributed work make possible global teams that
draw on the best skills available in a worldwide labor market.

In many cases, these implications, derived from the perspective of
the forces of technological change, will also be shaped by the demographic and globalization forces discussed in Chapters Two and
Four. These interactive effects are the focus of Chapter Five.

Chapter Four

A NEW ERA OF GLOBAL INTEGRATION

It is now commonplace to hear the world today described as being
increasingly integrated, interconnected, or interdependent. Whether
the metric is the extent of cross-national trade in goods and services,
the mobility of investment capital across borders, the flow of human
migrants from one country to another, or the number of Internet
users across the globe, many see the economies and peoples of the
world tied together even more so than in the past. The outbreak of
Severe Acute Respiratory Syndrome (SARS) in late 2002 demonstrates
the extent to which even the germs that infect humans can jump
from continent to continent in a matter of hours. Some have argued
that we have entered a new era of global integration that has had and
will continue to have wide-ranging economic, political, social, and
cultural implications.
The phenomenon of globalization can be viewed from a number of
perspectives; there is no single agreed upon definition (World Bank,
2000). In this chapter, we are most interested in the economic
aspects of globalization as reflected in various cross-border transfers:
flows of goods and services, direct investment and other capital
flows, the transfer of knowledge or technology, and the movement of
people. From the perspective of the United States, the era of economic globalization affects the size of the markets we produce for,
the mix of products we consume, and the nature of the competition
in the global marketplace. It also has implications for the labor market that U.S. workers compete in and the sources of domestic and
international labor available to U.S. firms. In addition to the economic dimension of globalization, it also has political, social, and
cultural dimensions, such as the balance of power across nations and

127

128 The 21st Century at Work

the transmission of culture across national boundaries. While these
issues are important and may have implications for the future of
global integration, we devote less time to them because they are not
expected to be as directly influential in shaping the future U.S. world
of work.
We begin by highlighting the key characteristics of the era of economic integration that is under way. This era has been marked by
dramatic increases in trade. Total trade activity (exports plus
imports) has increased from about one-tenth of U.S. GDP in 1960 to
a quarter now. Meanwhile, the sectoral distribution of trade has
changed; trade in services has grown from 18 to 30 percent of the
total over the last 20 years. One important aspect of increasing trade
has been further disintegration of production, as some production
steps have been outsourced overseas. This includes not only manufacturing jobs but also higher-skilled jobs in the services sector, such
as IT and business processing services. Capital flows have also
become globalized in recent decades. U.S. acquisition of foreign
assets increased sixfold between 1980 and 2000, and foreign acquisition of U.S. assets grew even more. Globalization has extended to
labor and capital skills, as worldwide migration has doubled in the
last quarter-century, resulting in greater mobility of workers, not
only the less-skilled but also the highly skilled. At the same time, IT
advances have enabled highly skilled workers on different continents
to collaborate without physically relocating.
Next, we discuss the forces that underlie the current wave of economic globalization. We identify two principal sets of driving forces.
First, over the past 50 years, communication and information
transmission costs have declined precipitously. Second, multilateral
trade agreements have reduced import and export barriers, while the
move to flexible exchange rates in the early 1970s increased capital
mobility. Globalization has given rise to a backlash driven by concerns about job loss, environmental degradation, and other perceived social impacts. Nevertheless, on balance, we believe the trend
towards a globally integrated economy is likely to continue, driven by
further IT advances and reductions in barriers to trade.
We then consider the consequences of greater economic integration
with the rest of the world for the U.S. economy, workforce, and
workplace, drawing on research that measures the effects of global-

A New Era of Global Integration 129

ization in the recent period. The consensus among economists is
that globalization has had and will likely continue to have, at the
aggregate level, a favorable effect on income, prices, consumer
choice, competition, and innovation in the United States. The gains,
however, will not be evenly distributed. Some industries facing
greater competition will lose jobs. Most workers displaced by competition quickly find other jobs, but displacement effects can be
greater during business cycle downturns and permanent earnings
losses can be significant. More-educated workers tend to be reemployed more rapidly than their less-educated counterparts and their
relative earnings losses tend to be smaller, presumably because their
skills are more transferable from one job to the next. This suggests
that, while painful, future job loss associated with higher-skilled services sector employment may not be as costly in terms of unemployment and permanent wage loss compared with earlier waves of
blue-collar trade-related job displacement.
Globalization has also been linked to the relative decline in real earnings among less-skilled workers over the last few decades. Research
suggests that, while trade made a modest contribution to the trend,
other factors, such as technology and immigration, are more important, and it must be kept in mind that many less-skilled workers are
employed in nontradable services. A potential benefit from trade is a
reduction in wage and employment discrimination against women
and minorities caused by the more highly competitive markets associated with industries more open to trade. Some evidence suggests
that globalization may weaken implicit employer-employee understandings that insulate workers through the internal labor market
from market pressures once workers are hired.
We conclude by previewing some implications for the future that we
will discuss further in Chapter Five. Among those are the following:
that global competition will challenge not only the less-skilled workers but also the highly skilled; that a highly skilled workforce will be
essential for the United States to maintain its competitive position in
the world economy; that more workers may need to retrain and
switch sectors to sustain employment; and that further vertical disintegration of production will result in more telework, including business conducted intercontinentally.

130 The 21st Century at Work

THE PHENOMENON OF ECONOMIC GLOBAL INTEGRATION
In many respects, the phenomenon of an increasingly interconnected world was not entirely new to the second half of the twentieth
century. Consider these two quotes:
[T]he period was one of rapid globalization: capital and labor
flowed across national frontiers in unprecedented quantities, and
commodity trade boomed in response to sharply declining transport costs. (O’Rourke and Williamson, 2000, p. 5)
Named the Russian flu, this worldwide influenza epidemic . . .
begins in Central Asia in the summer . . . , spreads north into Russia,
east to China and west to Europe. It eventually strikes North America, parts of Africa and major Pacific Rim countries. (http://www.
msnbc.com/site_elements/blank.htm)

The first description applies to the international economy in the late
nineteenth century, while the second recounts the spread of the
worldwide “Russian flu” epidemic in 1889 to 1890 in which hundreds
of thousands died. In terms of economic activity, all the growth in
trade between World War II and the mid-1970s merely returned trade
as a share of the economy to the level the country experienced on the
eve of World War I (Krugman, 1995; Frankel, 2000). Indeed, the aberration in the twentieth century was the decline in trade activity
between the two world wars as protectionist pressures, world conflict, and political instability reduced the degree of openness of most
of the world’s economies (Williamson, 1998). 1
While trade’s share of the economy is not that different today from
what it was 100 years ago, other important differences can be found
between the earlier era of globalization and the one we are in today
(Krugman, 1995; Bordo, Eichengreen, and Irwin, 1999):
•

The flowering of trade at the end of the nineteenth century primarily involved more-developed countries in the Atlantic economy, whereas trade today increasingly takes place between
more-developed and less-developed economies.

______________
1 For an even longer historical view of globalization, see Taylor (2002).

A New Era of Global Integration 131

•

The current era of globalization is characterized by rapid mobility of all factors, especially information and capital flows which
travel at high speeds across digital networks.

•

A growing share of trade consists of services—many of them
related to such technological innovations as IT, discussed in
Chapter Three. The array of industries subject to international
competition has thus grown more diverse.

•

Goods-related trade is no longer limited to raw materials and
final goods but increasingly consists of intermediate goods which
are themselves inputs into the production of other intermediate
or final goods. Thus, the process of vertical disintegration and
growing specialization of the firm discussed in Chapter Three is
extended to the international level as the vertical disintegration
of trade.

In the remainder of this section, we discuss these differences in the
context of trade in goods and services, capital and foreign direct
investment, and labor and intellectual capital. We also briefly discuss
aspects of global health and security in the context of a more integrated world.

Growing Trade, Especially in Services and with More
Diverse Countries
From a global perspective, in the last 20 years, total world merchandise trade export volume has increased about 2.5 times, considerably
faster than the increase in total world production (see Figure 4.1).
This relative growth of merchandise trade primarily arises from a
rapid increase in the volume of trade in manufactures, by a factor of
almost 3.5 since 1980. In contrast, over the same period, world trade
in mining products and in agricultural products roughly kept pace
with world production. 2 Compared with merchandise trade, there
has been an even more rapid growth in trade in services since 1980,
______________
2 Compared with world production in their respective sectors, trade in agricultural and

mining productions have both increased faster than production since 1980, indicating
that share of production traded has increased within each sector.

132 The 21st Century at Work

RANDMG164-4.1

400
350

Volume (1980 = 100)

300
250

Exports—total
Exports—agricultural products
Exports—mining products
Exports—manufactures
Total production

200
150
100
50
0
1950

1960

1970

1980

1990

2000

Year
SOURCE: WTO (2002), Table II.1.

Figure 4.1—Volume of World Merchandise Exports, 1950–2001

according to available data (see Figure 4.2). While the value of merchandise exports increased by a factor of 3 since 1980, services
exports increased by a factor of more than four. The absolute dollar
level of trade in services is even now only about one-quarter the level
of merchandise trade, however ($1.5 trillion in 2001 for services versus $6.4 trillion for merchandise trade).
This pattern of growing export activity, with a relatively faster growth
of services trade is mirrored in the trade patterns for the United
States. Four decades ago, trade accounted for less than 10 percent of
the U.S. economy, compared to more than 20 percent by the advent
of the twenty-first century (see Figure 4.3). The sum of exports and
imports as a share of GDP—a measure of total trade activity—topped
out at 25.5 percent in the business cycle peak year of 2000.3 In every
______________
3 Other business cycle peak and trough years are also marked in the figure, based on

business cycle dating by the National Bureau of Economic Research (see http://
www.nber.org/cycles/).

A New Era of Global Integration 133

RANDMG164-4.2

450

Current dollars (1980 = 100)

400
350

Commercial services exports
Merchandise exports

300
250
200
150
100
50
0
1950

1960

1970

1980

1990

2000

Year
SOURCE: WTO Trade Statistics Historical Series Tables (http://www.wto.org/english/
res_e/statis_e/statis_e.htm).
NOTE: Commercial services data begins at 1980.

Figure 4.2—Value of World Merchandise and Services Exports, 1950–2002

year since 1976, the level of imports has exceeded exports, indicating
a deficit in U.S. trade in goods and services. The sequence of current
account deficits is financed by capital inflows (i.e., the acquisition of
U.S. assets by foreigners), so that economic ties between foreign
countries and the United States have increased substantially.
The growth of U.S. trade in services (e.g., travel and transportation,
telecommunications services, education, financial and business services, technical services, and royalties and license fees) is especially
evident for exports. Since 1980, services have gone from 18 percent of
all U.S. export activity to 30 percent (see panels A and B in Figure
4.4). At the same time, a 19-percentage-point decline occurred in the
share of exports consisting of foods, feeds, and beverages and industrial supplies and materials (including petroleum and other energy
products). Shifts in the other categories were more modest. Overall,

134 The 21st Century at Work

RANDMG164-4.3

Percentage of GDP

Exports + imports
Exports

Services
imports

Goods imports

Services
exports

5
Goods exports

0
1960

1970

1980

1990

2000

Year
SOURCES: BEA U.S. International Transactions Accounts Data, Table 1
(http://www.bea.gov/bea/international/bp_web); BEA NIPA Tables, Table 1.1
(http://www.bea.gov/bea/dn/nipaweb/SelectTable.asp); and NBER Business
Cycle Expansions and Contractions (http://www.nber.org/cycles/).
NOTE: Gray shading marks business cycle recessions (from peak to trough).

Figure 4.3—U.S. Exports and Imports as a Share of GDP, 1960–2002

by 2002, the share of services exports was the same as the share of
capital goods exports (exclusive of automotive products). Nevertheless, the services share of exports, at 30 percent, is not proportionate
to the overall share of services in the U.S. domestic economy, a share
that reached 67 percent in 2001. 4 This reflects, in part, the fact that
many services are location-specific and not readily tradable across
international boundaries.
The sectoral composition of trade shown in Figure 4.4 reveals
another important dimension of change: higher volumes of intrasec______________
4 Based on data from the Bureau of Economic Analysis, National Income Product

Accounts, for 2001 (see http://www.bea.doc.gov/bea/dn1.htm).

A New Era of Global Integration 135

RANDMG164-4.4

B. Exports by Sector, 2002
Total Value of Exports:
$971.9 billion

A. Exports by Sector, 1980
Total Value of Exports:
$271.8 billion

Services
18%
Exports, n.e.c.
2%

Industrial
supplies and
materials
27%

Consumer
goods (nonfood)
except automotive
7%
Automotive
vehicles, engines,
and parts
6%

Services
30%

Exports, n.e.c.
2%
Consumer
goods (nonfood)
except automotive
9%

Capital goods,
except automotive
27%

C. Imports by Sector, 1980
Total Value of Imports:
$291.2 billion
Services
14%
Imports, n.e.c.,
and U.S. goods
returned
2%

Foods, feeds
and beverages
6%

Consumer
goods (nonfood)
except automotive
12%
Automotive
vehicles, engines,
and parts
10%

Foods, feeds
and beverages
5%
Industrial
supplies and
materials
16%

Foods, feeds
and beverages
13%

Capital goods,
except automotive
11%

Capital goods,
except automotive
30%
Automotive
vehicles, engines,
and parts
8%

D. Imports by Sector, 2002
Total Value of Imports:
$1,407.4 billion

Services
17%
Imports, n.e.c.,
and U.S. goods
returned
Industrial
4%
supplies and
materials
45%
Consumer
goods (nonfood)
except automotive
22%

Foods, feeds
and beverages
4%
Industrial
supplies and
materials
19%

Automotive
vehicles, engines,
and parts
14%

Capital goods,
except automotive
20%

SOURCE: BEA U.S. International Transactions Accounts Data, Table 2 (http://
www.bea.gov/bea/international/bp_web).
NOTES: Data for 2002 are preliminary. n.e.c. stands for “not elsewhere classified.”

Figure 4.4—Distribution of U.S. Exports and Imports by Sector,
1980 and 2002

tor trade—i.e., flows of both exports and imports within the same
industry. For example, in 2002, automotive vehicles, engines and
parts constituted 8 percent of U.S. exports and 14 percent of imports
(see panels B and D in Figure 4.4). In some cases, these trade flows

136 The 21st Century at Work

represent exchanges of intermediate products or inputs into the production of more complex goods, which themselves are destined for
world markets. For example, the U.S. imports semiconductors that
are then assembled into computers, which are subsequently
exported.
This key feature of contemporary trade patterns—referred to as
“vertical trade,” “slicing up the value chain,” “disintegration of production,” or “multinationalization of production”—means that finished products may be composed of inputs produced and assembled
in stages in different countries (Krugman, 1995; Feenstra, 1998;
Hummels, Rapoport, and Yi, 1998; Bordo, Eichengreen, and Irwin,
1999; Hummels, Ishii, and Yi, 2001). Multinational firms no longer
limit production to a single country but carve up the production process into stages implemented in multiple countries through subsidiaries or contractors. This allows more labor-intensive stages of
the production process to be located in lower-wage settings, as
opposed to stages that are more capital-, knowledge-, or technologyintensive, which are located in higher-wage settings. This pattern of
specialization extends on a global scale the vertical disintegration of
the firm discussed in the prior chapter in the context of technological
change. U.S. firms outsource not only domestically but also internationally, thanks to IT innovations that allow greater coordination and
monitoring of production and to greater trade flows caused by
declining tariffs as well as falling communication and transportation
costs (discussed further below). Just as firms specialize in a particular
stage of the production process, countries are moving toward specializing in a particular stage of production as well (Hummels,
Rapoport, and Yi, 1998; IMF, 2002).
Feenstra (1998) illustrates this phenomenon in the case of Mattel, a
U.S.-based firm with a large U.S. presence in terms of design and
marketing functions. Yet, as of 1996, Mattel’s Barbie doll was assembled in Indonesia, Malaysia, and China out of raw material (hair and
plastic) from Taiwan and Japan, and molds and paint from the
United States. As another example, Grossman and Helpman (2002)
cite the case of a particular “American” car with just under twothirds of the production value originating from abroad. German
design contributes 7.5 percent, Japanese components and advanced
technology 17.5 percent, minor parts from Taiwan and Singapore 4
percent, Korean assembly 30 percent, British advertising and market-

A New Era of Global Integration 137

ing 2.5 percent, and data processing from Ireland and Barbados 1.5
percent. This leaves 37 percent of the production value attributable
to the United States.
Aside from such examples, systematic data on the extent of such vertical trade is not routinely produced. One set of estimates from 1990
indicates that 7 percent of total trade for U.S. goods-producing
industries was vertical—defined as the use of imported intermediate
parts in the production of goods that are later exported. The share
was highest in office and computing machinery (16.7 percent), followed by petroleum and coal products (15.5 percent), nonferrous
metals (12.2 percent) and aircraft (11.6 percent) (Hummels,
Rapoport, and Yi, 1998). Other large developed economies, such as
Germany and Japan, also have low shares overall, while such countries as the Netherlands, Ireland, and Korea have shares in the range
of 25 to 35 percent. This same study estimated that the growth of
vertical trade accounted for more than 25 percent of the increase in
the export share of output in several OECD countries up through
1990, although the United States was below the average.
As trade flows have increased and production has become more
internationalized, the United States has altered the mix of trading
partners toward countries with lower wages (see Figure 4.5, which is
limited to data on exports and imports of goods). Canada remains
the United States’ largest trading partner, with 20 percent of total
trade in goods in 2002, nearly the same as the share in 1980 when it
was 18 percent. While Japan held the second ranking position as of
1980 with 11 percent of trade activity, Mexico has assumed that
ranking as of 2002, growing from 6 percent in 1980 to 13 percent of
total U.S. goods trade activity.5 Total goods trade activity with Mexico
reached $233 billion in 2002, about 62 percent of the activity with
Canada in the same year, compared to 33 percent of the level of
Canadian activity as of 1980.
The growing importance of Mexico as a U.S. trading partner is
indicative of a shift in trade activity—notably goods imports—with a
______________
5 Mexico became the United States’ second largest trading partner as of 1999 (Chomo,

2002).

138 The 21st Century at Work

RANDMG164-4.5

A. Goods, Exports, and Imports
by Region, 1980
Total Value of Goods
Exports and Imports:
$474.0 billion

Asia, except
China and
Pacific Islands
17%

Africa
8%

Western Europe
25%

China
1%
Eastern
Europe
1%
Mexico
6%
Latin America
and other
Western
Hemisphere,
except Mexico
10%

Japan
11%

Canada
18%

Australia, New
Zealand, and
South Africa
3%

B. Goods, Exports, and Imports
by Region, 2002
Total Value of Goods
Exports and Imports:
$1,849.5 billion

Asia, except
China and
Pacific Islands
18%

Africa
2%

China
8%
Eastern
Europe 1%
Mexico
13%
Latin America
and other
Western
Hemisphere,
except Mexico
7%

Western Europe
21%

Japan
9%
Australia
1%
Canada
20%

SOURCE: BEA U.S. International Transactions Accounts Data, Table 2 (http://
www.bea.gov/bea/international/bp_web).
NOTES: In 2002, New Zealand is included in “Asia, except China, and Pacific
Islands” and South Africa is in “Africa.” Data for 2002 are preliminary.

Figure 4.5—Distribution of U.S. Goods Exports and Imports by Region,
1980 and 2002

number of newly industrializing countries, particularly in Asia. For
instance, one dramatic shift in the last several decades is the
increased share of goods imported from China. As of 1980, Chinese
goods imports amounted to less than four-tenths of 1 percent of total
U.S. goods imports. As of 2002, that share reached nearly 11 percent,
or $125 billion, a figure that exceeded the level of Japanese goods
imports for the first time. Goods imports from the four “Asian tigers,”
namely Hong Kong, the Republic of Korea, Singapore, and Taiwan,
totaled another $91 billion in 2002, or nearly 8 percent of U.S. goods
imports. This share has remained relatively unchanged since 1980 in
contrast to the rising share from China. Meanwhile, trade with
countries having very low incomes is still limited, largely because the
size of their economies relative to the United States is low: the 49

A New Era of Global Integration 139

countries designated by the United Nations as least developed are
responsible for less than 1 percent of total U.S. trade. 6 Instead, the
bulk of U.S. trade activity continues to take place with other industrialized countries, i.e., with Canada, Japan, Australia, New Zealand,
South Africa, and the countries in Western Europe. These countries
made up 53 percent of goods exports and imports in 2002, a small
decline from the 56 percent share in 1980. 7

The Convergence of Trade and Technology in IT-Enabled
Services—Outsourcing Overseas
While a century ago imports from low-income countries primarily
involved agricultural commodities, today the bulk of imports from
such countries as Mexico and those in east and south Asia involve
labor-intensive manufactured goods (Bordo, Eichengreen, and Irwin,
1999). Increasingly, however, trade in services is flowing to lowerincome countries as well, as U.S. companies outsource various service functions to foreign-owed subsidiaries (i.e., offshoring) or to
foreign contractors (i.e., outsourcing). Rising education and skill levels in lower-income countries, coupled with lower wages, allow U.S.
firms to save money while still meeting their need for quality.
Advances in communication technologies and falling prices associated with voice and data transmission further facilitate the shift of
IT-enabled services from the United States to overseas locations.
More generally, the movement of white-collar jobs overseas is linked
to the broader trends in IT discussed in the prior chapter. Since the
work products in many information-based and knowledge-based
industries can be readily transmitted over high-speed computer
networks, the physical location of the workforce is increasingly less
relevant.
______________
6 Based on data for 2002 from the U.S. Bureau of the Census Ft900 International Trade

in Goods and Services series (see http://www.census.gov/foreign-trade/www/press.
html#current), aggregated for the 49 countries currently classified by the United
Nations as least developed (see http://r0.unctad.org/en/pub/ldcprofiles2001.en.
htm).
7 These percentage shares differ from those evident in Figure 4.5 due to rounding and

the grouping of South Africa and New Zealand with other countries in their region as
of 2002 rather than with Australia as was the case in 1980.

140 The 21st Century at Work

During the early 1990s, a number of Silicon Valley technology companies began outsourcing software-coding jobs to companies in
India. Lower-skill data entry jobs were also transferred to countries
overseas. More recently, a broader range of IT jobs have been outsourced—as have business-process operations (e.g., back-office work
and call center operations), typically to countries with Englishspeaking, educated workers, such as India. For example, computer
programmers in India now routinely perform high-skilled software
development while Indian engineers design microchips, jobs previously limited to higher-paid workers in more advanced economies
(Engardio, Bernstein, and Kripalani, 2003). Various large U.S. corporations, including General Electric, American Express, and Conseco,
have established back-office facilities in such countries as China,
India, Jamaica, and Mexico with estimated cost savings of 30 to 40
percent (Wharton School, 2002a).
In terms of call center operations, Delta Air Lines is the first airline to
contract with companies based in India to handle some of its customer reservations made over the telephone. And, welfare recipients
in several dozen U.S. states who call for assistance with balances on
their electronic benefits cards or other matters reach operators based
in Bombay and elsewhere in India (Waldman, 2003).8 Because these
workers overseas are coached to lose their native accents, adopt U.S.
idioms, and even take on Americanized names, U.S. consumers who
call an 800 number are often unaware that they are speaking to
someone in another country (Carmichael, 2003).
The examples extend even beyond IT and business processing tasks
to other higher-skill jobs. For example, transmitting blueprints over
the Internet and teleconferencing allows one U.S.-based architectural firm to farm out the preparation of detailed architectural plans
to staff based in Shanghai, China (Goodman, 2003b). Staff in China
are paid a fraction of their U.S. counterparts, and the work effort
continues over a 24-hour cycle. Workers based in China, Costa Rica,
Hungary, India, Ireland, the Philippines, and other countries engage
in a range of white-collar jobs, such as evaluating health insurance
claims, preparing tax returns, analyzing financial data, and conduct______________
8 In at least one state, the shift of state-financed social services support functions over-

seas has resulted in controversy as we discuss further below.

A New Era of Global Integration 141

ing financial market research (Engardio, Bernstein, and Kripilani,
2003; Goodman, 2003b; Sharma, 2003; Waldman, 2003). Here again,
the cost savings can be considerable. Graphic artists who can contribute to movie special effects earn $5,000 per year in India, while
top business school graduates in India command $12,000 per year,
both tiny amounts compared to their U.S. counterparts (Sharma,
2003). Cost is not always the only consideration motivating the outsourcing of jobs overseas. Boston’s Massachusetts General Hospital
now has CT scans analyzed by Indian radiologists to relieve stress for
its own radiology staff, particularly during night shifts when the work
can be conducted in the daytime in India (Sharma, 2003).
Data to estimate the extent of these international outsourcing trends
in the services sector are not readily available, but some estimates
suggest that the movement is relatively modest to date but growing.
A recent survey conducted by the Information Technology Association of America (ITAA) in 2003 indicates that 6 percent of all U.S.
firms have moved IT jobs overseas (ITAA, 2003). Among firms specializing in IT products and services (e.g., computer hardware and
software, communications, and semiconductors), that fraction
jumps to 12 percent compared with 3 percent of non-IT firms. A
slightly larger fraction in each category plans to move IT jobs offshore in the next 12 months. The types of jobs being moved include
such higher-skilled jobs as programming or software engineering (67
percent), network design (37 percent), and web development (30
percent). The migration of IT jobs to other countries is more common among larger U.S. IT firms (more than 1,000 employees) presumably because they already have operations in multiple countries.
An estimated cumulative total of 473,000 computer-related jobs are
expected to migrate overseas by 2015 from a base of 27,000 as of 2000
(McCarthy, 2002). In total, a projected 3.3 million IT-sector jobs are
expected to have migrated overseas by 2015, compared with 400,000
to date (Greenhouse, 2003).9
In terms of back-office outsourcing, recent estimates indicate that
about 5 percent of large U.S. firms (revenues from $100 million to $4
billion) were currently outsourcing or had plans to outsource por______________
9 Another recent analysis suggests the flow could be even higher, a project 500,000 jobs

by then end of 2004 (Morello, 2003).

142 The 21st Century at Work

tions of the back-office operations overseas (Wharton School, 2002a).
In India alone, recent estimates forecast $21 billion in revenue by
2008 associated with call center and business processing operations
(Rai, 2002). Associated employment is projected to increase tenfold,
from approximately 100,000 to 1.1 million employees. India’s dominance in this field may soon be eclipsed by competition from China,
Ireland, and the Philippines among others. At the higher end of the
skill spectrum, a recent forecast projects 500,000 financial-services
jobs will be outsourced to India in the next five years (Sharma, 2003).
As companies gain experience with offshore operations and contracting and the associated needs for monitoring and quality assurance, the range of jobs that can be outsourced expands (Sharma,
2003). This has been the recent pattern with outsourcing servicesrelated functions overseas, as lower-skill data entry and computer
programming tasks have given way to jobs entailing accounting,
finance, research, and higher-level programming. One such example
is India’s move into medical services, where early experience with
transcribing dictation of U.S. doctors provided a foundation for
advancing to the analysis of CAT scans using three-dimensional
computer models (Sharma, 2003). In the future, companies may
choose to blend onshore and offshore models to offer greater flexibility as well as the capacity to work around the clock. To date, India
has been one country to gain from the growing experience of U.S.
firms with offshore functions, but other countries are likely to gain
market share over time as well. The education of the workforce, language skills, reliability of the economic infrastructure (e.g., electricity, telecommunications), security of sensitive information (personal
or proprietary), and political stability are important considerations in
decisions about when and where to outsource functions abroad.

The Internationalization of Capital Flows
The phenomenon of economic globalization also encompasses
increased mobility of capital across international borders, and trade
and financial integration often move together (IMF, 2002). Such capital flows may take two forms:
•

Direct investment (i.e., a firm in one country uses capital to
establish a plant in another country or to purchase a large equity

A New Era of Global Integration 143

stake in a company in another country, also known as foreign
direct investment [FDI])
•

Portfolio investment (i.e., purchases by residents or firms in one
country of bonds, small amounts of equity, or other financial
instruments in another country).10

On a worldwide basis, there has been a substantial increase in such
capital flows, particularly when measured on a gross basis (i.e.,
counting both inflows and outflows). Among high-income countries,
gross private capital flows as a share of GDP increased more than
threefold between 1990 and 2000, from 11 to 34 percent (World Bank,
2002b). Low- and middle-income countries also experienced an
increase, though a smaller one, over the same period (from 7 to 11
percent of GDP).
From the perspective of the United States, the last several decades
were marked by increased capital flows. During the 1990s, capital
inflows (foreign acquisition of assets in the United States) increased
to a peak of 10 percent of GDP in 2000 (see Figure 4.6). Capital outflows (U.S. residents’ acquisition of assets abroad) also increased
sharply over the same period, although capital outflows since 1983
have always been below inflows, indicating the consistent annual net
indebtedness of the United States to the rest of the world. In terms of
the stock of assets, the United States shifted from being a net creditor
since the late 1920s to a net debtor by the end of the 1980s. Preliminary data for 2002 show U.S. assets owned by foreigners exceeded
the value of foreign assets owned by U.S. residents by $2.4 trillion (at
current cost), or 23 percent of GDP. 11
These international capital flows play an important role in the internationalization of production and trade. The boundaries of the firm
are not limited to the geographic borders of its home country; direct
investment in companies overseas provides the means to control
production and expand into new markets. The level of activity on a
______________
10In addition to these two main categories of capital flows, there are also loans and

other residual transactions.
11Based on data collected by the Bureau of Economic Analysis at the U.S. Department

of Commerce available at: http://www.bea.doc.gov/bea/di1.htm.

144 The 21st Century at Work

RANDMG164-4.6

Percentage of GDP

U.S.-owned assets abroad
Foreign-owned assets in the U.S.

0
1960

1970

1980

1990

2000

Year
SOURCE: BEA U.S. International Transactions Accounts Data, Table 1 (http://
www.bea.gov/bea/international/bp_web)

Figure 4.6—U.S. Capital Flows as a Share of GDP, 1960–2002

worldwide basis is substantial. For example, as of 2000, approximately 65,000 multinational corporations (i.e., parent firms that
control assets abroad) were involved in international production
worldwide with about 850,000 affiliates (UN Commission on Trade
and Development [UNCTAD], 2002). Among the world leaders are
such U.S.-based companies as General Electric, ExxonMobil Corporation, and General Motors, which ranked in the world’s top 10
multinational corporations in 2000 by foreign assets. Together, U.S.based multinational parent corporations accounted for 56 percent of
U.S. goods exports and 35 percent of goods imports in 2000
(Mataloni, 2002). Even so, most activity for U.S.-based multinational
corporations remains within the United States: among U.S.-based
parent companies and their majority-owned foreign affiliates, 75
percent of their combined production, capital expenditures, and
employment were concentrated in the United States as of 2000, a
rate about the same as a decade earlier in 1989.

A New Era of Global Integration 145

With the growing internationalization of production, concerns have
been raised in the past about the operations of foreign-owned multinationals located in the United States. Available data indicate that
FDI in the United States on the part of foreign multinationals is an
important source of job creation: foreign affiliates in the United
States accounted for nearly 16 percent of employment and 18 percent of sales in the manufacturing sector as of 1999. They also contributed 15 percent of economywide R&D expenditures. The evidence also indicates that foreign-owned companies in the United
States pay wages comparable to U.S. firms in the same industries
(Landefeld and Kozlow, 2003). Foreign multinationals operating in
the United States also represent a source of technology transfer and
often invest in the human capital of their U.S. workers (Feldstein,
2000).
Based on recent experience, the trend suggests even greater internationalization of production in the years ahead, although such flows
are sensitive to the business cycle. Between 1991 and 1995, worldwide FDI inflows and outflows increased nearly 20 percent per year
and the rate of growth nearly doubled in the second half of the
decade. Most investment flows are expected to continue to concentrate among the more developed countries. For example, when U.S.
multinationals do invest abroad, their investment is concentrated in
countries with large, prosperous markets rather than in countries
with low wages: Three out of every four dollars invested by U.S.
multinationals is in other developed countries (Landefeld and Kozlow, 2003). Consistent with the growth in trade in services, a growing
share of U.S. FDI is in services such as banking, finance, insurance,
wholesale and retail trade, utilities, and other services (Bordo,
Eichengreen, and Irwin, 1999). At the same time, FDI flows are
beginning to shift toward lower-wage countries, both developing
countries and those in central and eastern Europe. For example,
developing countries increased their share of worldwide FDI inflows
from an average of 18 percent between 1986 and 1990 to 28 percent
as of 2001 (UNCTAD, 2002). However, the 49 least developed countries received only one-half of one percent of FDI inflows in 2001,
almost no change from the late 1980s.

146 The 21st Century at Work

The Globalization of Labor and Intellectual Capital
In the same way that goods, services, and capital move across borders in an increasingly integrated world economy, international
migration is another aspect of globalization. Data recently released
by the UN (2002) for 2000 reveal that 175 million people worldwide
live in a country other than where they were born. Although this is
less than 3 percent of the world’s population, the number of
migrants has more than doubled since 1975. The majority (60 percent) of these migrants live in the developed world (41 million in
North America, for example), so that about one in 10 persons living
in developed countries is a migrant. This contrasts with one in 70
persons in developing countries. In addition to migrants, another 16
million people worldwide are classified as refugees, most of whom
are in Asia (9 million) and Africa (4 million). Long lists of individuals
are also awaiting decisions on asylum applications (Hatton and
Williamson, 2002). Migrants from many low-income countries retain
close ties back home, providing substantial flows of remittances that
can exceed 10 percent of GDP (examples include El Salvador,
Jamaica, Nicaragua, and Yemen).
As discussed in Chapter Two, the annual inflow of migrants to the
United States has approximately tripled since 1970 (see Figure 2.6).
North America as a whole absorbed a net of 1.4 million migrants
annually between 1995 and 2000, followed by Europe with 800,000
net migrants per year. Efforts to limit the migrant inflow are not
entirely successful: illegal immigrant flows into the United States
equal about 300,000 per year while flows in western Europe reach
400,000 to 500,000 annually (Hatton and Williamson, 2002). In the
United States, immigrant flows represent potential labor market
entrants with both low and high skills. Indeed, as discussed in Chapter Two, where insufficient domestic supply of highly skilled labor in
specific occupations exists, U.S. companies can turn abroad. For
example, in 2001, more than 330,000 temporary work visas were
issued for specialty occupations, mostly computer-related jobs (INS,
2003a). In high-tech centers such as California’s Silicon Valley, immigrants make up substantial portions of the scientific and engineering
workforce (about one-third in the case of Silicon Valley as of 1990)
(Saxenian, 1999). Their contributions extend to entrepreneurship as
well: as of 1998, Chinese and Indian immigrant engineers led one in
four high-technology Silicon Valley firms. With greater numbers of

A New Era of Global Integration 147

foreign nationals in corporate leadership positions, many firms have
adopted a more global orientation in terms of their business strategy
(Feldstein, 2000).
The outflow of skilled individuals from low-income countries, a
repeat of the brain drain of the 1960s, is of increasing concern for
developing countries (Bhagwati, 2003). For example, graduates of
elite engineering schools and other universities in China, India,
Korea, and Taiwan come to the United States to receive Ph.D.s in science and engineering and many stay after completing their degree.
Current estimates suggest 70 percent of foreign-born U.S. Ph.D.
recipients do not return to their country of origin (Bhagwati, 2003).
While international labor migration captures one dimension of the
globalization of labor, communications and information technologies increasingly support another approach to global integration of
the workforce: the use of global work teams. Relevant for such primarily knowledge-intensive projects as new product development,
numerous examples of multinational firms drawing on top talent
from an international pool of labor can be cited. Among the examples provided by Marquardt and Horvath (2001) is IBM’s creation of a
five-site, five-country global work team in 1997 to develop a series of
small software components for use in a larger application. In the offshore sites—Beijing (China), Bangalore (India), Minsk (Belarus), and
Riga (Latvia)—and the U.S. coordinating site (originally Seattle, later
Raleigh), staff worked around the clock to reduce the time to develop
and test the new software components. The teams and their work
products were connected by the Internet, shared coordination software, and other collaborative technologies. Costs of the offshore site
activities were reduced by 10 percent compared with similar operations in the United States, and the time-to-market was reduced from
three months to less than one month. IBM also created a strong
presence in each of the emerging markets where the staff were based.
This example illustrates how global teams are used to reduce costs
and gain economies of scope, tap specialized skills around the world,
solve complex problems, increase operational speed, and gain
understanding of local markets.
Such global teams are not limited to those formed by multinational
corporations. The development of the Linux operating system, first
posted on the Internet in 1991 as a simple Unix-based operating sys-

148 The 21st Century at Work

tem developed by a computer-science student in Finland, provides
an example of self-generating global teams (Malone and Laubacher,
1998). The original Linux author encouraged other programmers to
access the software for free and make modifications. These
enhancements were in turn posted for other programmers to work
with. Within three years, an informal configuration of thousands of
individuals around the globe, without benefit of a formal management structure or oversight, had developed a highly-rated Unix
operating system.
While no systematic data suggest patterns and trends in the usage of
such global teams, a growing set of resources has been designed to
support them. 12 The phenomenon is another dimension of the FDI
and vertical trade trends discussed earlier that allow multinational
firms to draw on a global labor pool. More generally, these technologies facilitate a continuum of long-distance work relationships
within and between companies or even individuals, located half a
world away from one another. Future technological advances in the
IT field discussed in Chapter Three, including real-time translation
devices, would further support more cross-national collaboration.
The internationalization of labor is also tied to the greater ease with
which new knowledge and technologies are transferred across international boundaries. FDI is one such source of technology transfers
as multinational companies invest in plants, equipment, and people
in lower-wage settings (IMF, 2000). Investments in R&D on the part
of multinational firms can be considerable as well. Although data are
limited and great variability occurs across countries, estimates indicate that foreign affiliates account for close to two-thirds of all R&D
expenditures in a number of countries, including Ireland, Hungary,
and Taiwan (UNCTAD, 2002). Return migration or circulatory migration is another mechanism for international knowledge flows, turning the “brain drain” into “brain circulation” (Saxenian, 1999, 2002).
For example, immigrant engineers in Silicon Valley, through their
language skills, cultural knowledge, and technical expertise are
equally adept in the business world in their home countries as they
are in the United States. Their cross-national networks and pursuit of
______________
12See, for example, the list of web resources in Appendix B of Marquardt and Horvath

(2001).

A New Era of Global Integration 149

business opportunities both in their country of origin and in the
United States promote more rapid global integration through the
transfer of capital, skill, and knowledge.
In some cases, the technology transfer may be viewed as a negative
aspect of global integration. In a recent case, engineers at Boeing
threatened to strike at the end of 2002 if the company did not reduce
its corps of engineers based in Moscow (Holmes, 2003). While Boeing’s strategy for an increased presence in Russia aimed to create a
24-hour worldwide workforce and to increase sales of Boeing planes
in that country, U.S. staff feared the loss of technology and competitive advantage to their Russian counterparts along with the reduction
in jobs because of outsourcing. Similar concerns have been voiced
over the investment in the services-related IT sector in India. As
another example, after years of relying on foreign companies for
high-technology products and knowledge, China is beginning to
exert its influence as the world’s most populous country by developing its own technology standards in such areas as high-definition
television and the next generation of mobile phone technology
(Goodman, 2003a). This would provide China with a dominant position domestically and could even lead to adoption of the technology
in other countries to the benefit of Chinese firms.
The ease with which knowledge and technological know-how can
traverse national boundaries has focused attention on the role of
intellectual property rights in the worldwide marketplace. Systems of
patents, trademarks, and copyrights evolved to allow investors to
reap the returns of their efforts exclusively for a period of time,
thereby providing incentives for costly R&D. These national institutions are now embodied in international agreements designed to
establish common rules through such measures as the World Trade
Organization’s (WTO’s) 1994 Trade-Related Aspects of Intellectual
Property Rights (TRIPS) agreement. Even with such agreements, disparities between countries in their economic bargaining power can
affect access to technology and disputes over intellectual property
rights remain central to many trade-related disagreements (UNDP,
2001). This becomes particularly important when a substantial public interest is associated with a technology that must be weighed
against ensuring private rewards for innovators. Providing access to
drugs at lower cost for treating the HIV/AIDS pandemic in parts of

150 The 21st Century at Work

Africa and Asia is but one example where public and private interests
may collide.

Other Dimensions of Global Integration
The concept of globalization is increasingly taking on other meanings
beyond the economic integration of countries around the world
through trade, capital, and labor linkages. For example, since the terrorist attacks in New York and Washington, D.C., on September 11,
2001, concerns over homeland security in the United States, as well
as security abroad, have become salient. In recent decades, terrorist
organizations have evolved from localized threats to worldwide networks of individuals, interconnected through the same information
technologies that are spurring economic integration (Hoffman, 1998;
Arquilla and Ronfeldt, 2001). With their global reach and potential
access to deadly biological, chemical, nuclear, or conventional
weapons, the threat posed by terrorist organizations is alarming.
Concerns about international terrorism, as well as political instability
more generally, may have implications for the extent to which U.S.
firms engage in direct foreign investment overseas or outsource
operations to companies abroad. For example, the surge of outsourcing of services-related functions to India discussed above may be
threatened by the military tensions between India and Pakistan, two
countries with nuclear arsenals (Schroeder, 2003a).
Likewise, the outbreak of SARS put a spotlight on global health security issues, particularly the potential for new and recurring infectious
diseases to spread quickly in a world where people move rapidly
from place to place. From a first case in November 2002 in Guangdong province in southern China, SARS spread within a few months
to infect more than 4,800 people in 26 countries in Asia, Africa,
Europe, Australia, and North America (Lemonick and Park, 2003).
The costs of the SARS outbreak have been estimated to equal at least
$30 billion as a result of lost tourism, falling retail sales, and market
turmoil, among other things. At the same time, as a result of a global
effort by scientists, health professionals, and others to identify the
disease, develop diagnostic tests, and assess options for treatment
and prevention, the outbreak was brought under control. The SARS
experience illustrates both the potential for infectious diseases to
spread globally as a result of increased world integration and how

A New Era of Global Integration 151

information technologies and global networks can marshal the
resources to treat such diseases and curtail their spread.

FORCES BEHIND GLOBAL ECONOMIC INTEGRATION
World trade and financial flows are the two dominant components of
global economic integration. Their growth can be attributed to a
number of factors, among them declining costs of transporting
goods, falling communication and information-transmission costs,
and reductions in tariffs and other barriers to international
exchange. In many cases, these factors have influenced both trade
and capital flows.

Declining Communication and Information-Transmission
Costs
During the nineteenth century, the growth in trade was fueled by
declining transportation costs following the establishment of navigable waterways (e.g., the Erie Canal), the debut of the steamship,
the introduction of the railroad, and the development of mechanical
refrigeration (O’Rourke and Williamson, 2000). In the latter half of
the twentieth century, a key driver of the growth of trade and capital
flows has been declining costs associated with transporting
“weightless” communications—data and other information content.
For example, the shifting trade and investment patterns of the last
few decades have been facilitated by the advances in telecommunications and computer technology and the rapidly declining prices of
that technology that were discussed in the previous chapter. As Figure 4.7 illustrates, a call from New York to London that would have
cost $1 in 1950 cost just 6 cents as of 1990, and the call is essentially
free today using the Internet (although the quality may not be as
good). Through voice, video, and electronic communications, firms
can work with subsidiaries or suppliers in other countries and ensure
the quality and timeliness of product delivery necessary to meet their
own production processes. The quality of communications has
improved as well, and that has facilitated the transfer of such functional areas as call centers from the United States to countries overseas. For example, telecommunications speed has improved between the United States and India as near-instant communications

152 The 21st Century at Work

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100
90
80

Index (1950 = 100)

70
60
50
40
30
20
10
0
1950

Sea freight
Air transportation
Telecommunications

1960

1970

1980

1990

Year
SOURCE: Hufbauer (1991).
NOTES: Average ocean freight and port charges per short ton of import and export
cargo. Average air transportation cost per passenger mile. Cost of a three-minute
telephone call from New York to London.

Figure 4.7—Transportation and Telecommunications Costs, 1950–1990

through undersea fiber optic cables replaced satellite communications, which entailed a three- to four-second delay (Wharton School,
2002b).
In addition to lower communication costs, the revolution in information technologies also provides a mechanism for rapid transmission across electronic networks of inputs and outputs in the ITenabled services sector. The technologies also provide the means for
supervising work products, monitoring quality, and improving service links between production locations in such areas as transportation and insurance. Other technological innovations support increased scope for inexpensive customization of components and
parts (IMF, 2002). Just as the development of these technologies led
to the vertical disintegration of firms domestically and outsourcing to

A New Era of Global Integration 153

U.S.-based contractors, these same technologies enabled firms to
consider outsourcing on an international scale to take advantage of
lower costs overseas.
Reductions in transportation costs have also played a role in the
expansion of trade in goods in the last half century, but the price
declines have not been as dramatic as those affecting communication costs (see Figure 4.7). The most important innovations in the
past half-century have been the use of containers for ocean transport
and the advent of jet engines and cargo aircraft. While transportation
costs for sea freight transport have been relatively stable since 1960
and air travel since 1980, shipping times have fallen markedly as
transportation methods have shifted to faster ocean vessels and jet
aircraft. For example, between 1965 and 1998, the share of U.S.
imports arriving by air increased from 6 to 25 percent (IMF, 2002).
The increased reliance on air delivery has allowed greater trade in
perishable food and related items (e.g., cut flowers), and inputs into
just-in-time processes. Trading potential remains limited in many
less developed countries due to their more limited transportation
infrastructure (e.g., roads, airports, and container ports) which
results in higher costs. Transportation costs and times may rise in the
future, particularly in the container shipping business, due to additional security measures designed to thwart international terrorists.

Falling Barriers to Trade and Capital Flows
Since the end of World War II, the increased volume of trade and
financial flows has also been propelled by a series of bilateral and
multilateral agreements, as well as unilateral reforms, that have
reduced impediments to global integration.13 The general pattern
involved reducing barriers to trade, followed by removing impediments to capital market integration. Initial progress was made
among developed economies in the 1960s and 1970s. Liberalization
______________
13While there are parallels between the late nineteenth century and the period after

World War II in terms of falling transportation and communications costs (albeit with
different technologies), the same can not be said of trade barriers. The growth of world
trade in the late nineteenth century cannot be attributed to more liberal trade policy.
No overall decline in tariffs in the Atlantic economies occurred between the 1870s and
World War I (O’Rourke and Williamson, 2000).

154 The 21st Century at Work

among developing economies followed in the 1980s and 1990s
(Krugman, 1995; IMF, 2002).
After World War II, the General Agreement on Tariffs and Trade
(GATT) was established as an international organization devoted to
promoting greater world trade. A series of multilateral trade negotiations, among the more recent the Uruguay Round completed in
1994, produced steady declines in tariffs. Other regional trade
agreements, such as the North American Free Trade Agreement
(NAFTA), which went into effect in 1994, promoted greater trading
activity with specific U.S. trading partners. In the case of the NAFTA
trading partners, Mexico and Canada, trade barriers have been
reduced substantially. All goods traded between the United States
and Canada are now duty-free, while Mexican tariffs have fallen
below 2 percent on average and two-thirds of U.S. exports to Mexico
are now duty-free (USDA, 2001). Between 1994 and 2002, total U.S.
goods trade activity with Canada and Mexico combined increased 75
percent, from $346 billion to $607 billion.14 Finally, specialized
agreements have focused on particular categories of products. For
example, the 1996 Information Technology Agreement eliminated
most tariffs on trade in semiconductors, computers, software,
telecommunications equipment, and other high-technology products (Destler, 1999). Transportation costs have been further reduced
by the expanded use of open-skies agreements, which eliminate
restrictions on airline service to and from different countries.15
With trade flows increasing as trade barriers declined, the move to
flexible exchange rates in the early 1970s resulted in a tremendous
growth of international capital mobility, prompted by the desire for
greater portfolio diversification (i.e., risk pooling) (Obstfeld, 1998).
The end of fixed exchange rate regimes allowed countries to relax
regulations and restrictive capital controls in the late 1970s and early
1980s while maintaining autonomy in the setting of monetary policy.
Such new financial instruments as global equity mutual funds
emerged as well to promote international portfolio investments.
______________
14Based on data collected by the Bureau of Economic Analysis at the U.S. Department

of Commerce available at http://www.bea.doc.gov/bea/international/
bp_web/list.cfm?anon=131®istered=0, Table 2.
15For information on such agreements, see the State Department website at http://
www.state.gov/e/eb/tra/c661.htm.

A New Era of Global Integration 155

In addition to relaxed capital controls that affect currency and
financial markets, barriers to FDI have also been eroding over time.
For example, between 1991 and 2001, the number of annual regulatory changes favorable to FDI on a worldwide basis grew from 80
affecting 35 countries to 194 applicable to 71 countries (UNCTAD,
2002). The Asian and Pacific region accounted for 43 percent of the
changes in 2001 alone. Such changes include more liberal entry and
operational conditions, sectoral liberalization, and guarantees. Other
changes promoting greater FDI include bilateral investment treaties,
double taxation treaties, and various strategies to promote exportoriented investment (e.g., general marketing, image-building, and so
on). Singapore is viewed as one of the early movers in the area of
investment promotion, with efforts that date back to the late 1960s.
The growing internationalization of production, represented by the
increase in FDI, has thus benefited from the economic and technological forces that have promoted greater trade, as well as growing
liberalization of FDI policies. Indeed, trade and capital liberalization
are increasingly viewed as complementary (Hummels, Rapoport and
Yi, 1998). For example, greater incentive exists for FDI when trade
barriers are lowered, as the effects of even low trade barriers, such as
tariffs, are compounded by the multiple cross-border transactions
associated with each segment in the production chain. Likewise,
when barriers to FDI are reduced, firms have greater incentive for
vertical specialization in trade because they can invest directly in the
various stages of the production process.
While the trend has been toward increased trade liberalization, substantial barriers to trade still exist for many countries. For example,
average trade-weighted tariffs in 2001 were 28 percent in India, 14
percent in China, and 9 percent in Argentina, compared with 2.8 percent in the United States (World Bank, 2003b). Such tariffs are generally higher in developing countries, but they are high as well in
other developed countries for selected imports (e.g., food products
and textiles in the United States and agricultural goods in Japan and
the European Union) (WTO, 2003). Other impediments to further
trade in goods and services include quotas, product-specific technical regulations or standards (e.g., on agricultural products or sophisticated equipment), and government subsidies of export-oriented
industries. Agricultural subsidies remain notably prominent among

156 The 21st Century at Work

major industrialized countries and serve as a barrier to increased
imports, especially from low-income countries (WTO, 2003).

Future Forces Should Foster Further Globalization
The future course of economic globalization in the U.S. economy is
difficult to predict with much certainty. It depends not only on economic conditions in the United States but also on economic conditions in our major trading partners, as well as on future developments in international trade and investment agreements and other
liberalization efforts. Clearly the path in the last half-century has
been one of the growing importance of trade and capital movements
on a global scale, and, in all likelihood, that path will continue albeit
with cyclical swings above and below that trend line. Future growth
in worldwide trade will be spurred by further reductions in telecommunications costs, driven by many of the technological changes discussed in Chapter Three. Technological advances in IT in particular
will further support the trend toward internationalization of production, including the shift of IT-enabled services to overseas firms. Surveys of multinational corporations indicate plans for continued FDI
in the next several years, with great potential for higher investment in
developing countries with plentiful labor, flexible economies, and
open trading regimes (UNCTAD, 2002).
The projections of future trade activity for the United States through
2010 prepared by BLS show exports increasing at an average annual
rate of 7.8 percent between 2000 and 2010, while imports are projected to increase 7.9 percent per year (Su, 2001). For exports, this is
an acceleration over the trend from 1990 to 2000 (a 7.0 percent
annual rate of change), while for imports it is a lower rate of growth
compared with the prior decade (a 9.3 percent annual rate of
change). The combined effect is to raise the combination of exports
plus imports to 44.2 percent of GDP by 2010, compared with the
recent peak of 25.5 percent in 2000 (see Figure 4.3). It is important to
note that these projections, published in November 2001, did not
take into account the potential effects of the September 11, 2001, terrorist attacks.
Even if the share of exports and imports in the U.S. economy reaches
nearly 45 percent by 2010, the U.S. economy would not achieve the
hypothetical state of “perfect economic integration.” Frankel (2000)

A New Era of Global Integration 157

points out that since the U.S. economy represents about one-fourth
of gross world product, if the United States were equally likely to buy
goods and services from foreign sources as domestic ones, the U.S.
import-to-GDP ratio would equal 0.75. This is about six times the
level of the current ratio of about 0.12. The two other large
economies, Japan and the combined European Union, also exhibit
ratios comparable to the United States. In contrast, the economies of
most other countries are considerably smaller, constituting on average about one-half of one percent of world output. In a perfectly
integrated world, the average country would thus buy or sell 99.5
percent of their output overseas. Only Singapore and Hong Kong
attain this level of integration today. Among the factors cited by
Frankel (2000) that restrain further economic integration are differences in currencies, languages, and political systems, along with the
effects of distance, borders, and other geographical and trade-policy
factors.
Of course the projections for the future level of trade in the U.S.
economy depend critically on policies with respect to tariffs and
other trade and capital flow barriers, both in the United States and
abroad. While major trade agreements were negotiated in the two
decades between 1973 and 1994, future negotiations on major
agreements involving the United States were stalled by the failure to
renew “fast-track” negotiating authority in 1994 during the Clinton
administration (Destler, 1999). Such authority, available to every U.S.
president since Gerald Ford, streamlines the process of negotiating
international trade agreements.16 As of August 2002, this authority—
now labeled “trade promotion authority” (TPA)—was reestablished
through the Trade Act of 2002.17
With this law, the outlook for greater openness of the U.S. economy
looks quite promising. It is expected that new bilateral trade agree______________
16Specifically, fast track committed the Congress to vote on trade agreements within a

fixed period (90 days) with no amendments. This reduced concerns among negotiating partners that Congress would fail to act on or would modify an agreement, once
negotiated (Destler, 1999).
17 Trade promotion authority is set to expire again on June 1, 2005. The Act also

included a number of other provisions renewing and enhancing several existing
agreements with countries in South America, the Caribbean, and Africa (Mewhirter
and Fullerton, 2002).

158 The 21st Century at Work

ments will be negotiated in the near term (e.g., agreements with
Chile and Singapore have recently been finalized). Meanwhile,
negotiations will resume in full force for more-complex multilateral
agreements, such as the Free Trade Area of the Americas, which has
been in process since late 1994 (Mewhirter and Fullerton, 2002).
Negotiations pursued under TPA will proceed according to a set of
principles that cover goals for agricultural products, industrial goods,
and services, as well as objectives with respect to labor, the environment, intellectual property rights, and child labor, among others. The
WTO, established by the Uruguay Round ending in 1995, provides
further institutional support for negotiating new trade agreements
among the 148 member countries and for enforcing the provisions of
existing agreements.
Advancement of trade liberalization cannot be assumed to be
inevitable, however (Frankel, 2000). It is conceivable that further liberalization will fail to progress at a pace consistent with the recent
past, as already appears to be the case with the current Doha round
of WTO negotiations (Leonhardt, 2003). However, while a stall in
progress is not out of the question, it seems less likely in the current
climate that the liberalization experienced to date will be reversed.
Yet, it is constructive to consider the experience of the late nineteenth and early twentieth centuries. Historical analysis by
economists suggest that the unfavorable distributional consequences of the wave of globalization more than a century ago
resulted in the previously mentioned trade (and immigration) backlash that occurred in the interwar period (see the review by
Williamson, 1998). One recent analysis of workers in Great Britain
suggests that workers’ perceptions of job insecurity are higher the
greater the amount of foreign direct investment in the industry
within which they work. This suggests a direct link between globalization in an industry and worker insecurity (Scheve and Slaughter,
2002). Such insecurity, along with other concerns about the consequences of globalization, may contribute to a backlash against international integration.
Most analysts expect that, in the United States at least, the protectionist pressures of the past are unlikely to emerge to the same
degree. However, there may be efforts to link further trade liberalization with particular countries or regions to concerns over labor standards, the environment, human rights, the existence of democratic

A New Era of Global Integration 159

institutions, or the protection of property rights (Destler, 1999). Just
as blue-collar workers in the manufacturing sector protested over the
movement of jobs overseas in the past two decades, a new wave of
concern centers on the movement of white-collar jobs overseas
(Engardio, 2003). For example, when a New Jersey state senator
learned that a U.S.-based contractor to the state was outsourcing
work overseas, a bill was introduced in the state assembly requiring
workers on state contracts to be U.S. citizens or legal aliens
(Schroeder, 2003b). Several other states are considering similar laws.
A total of nine jobs were affected in the New Jersey situation, yet this
case drew considerable attention and has broader implications for
workers employed with public funds as well as private-sector workers.
There are also signs that other countries, especially low-income
nations, are more reluctant to seek further trade liberalization without the major industrialized countries relaxing some of their remaining barriers (e.g., subsidies for agricultural products, patent protections on pharmaceuticals) (Leonhardt, 2003). If so, this may limit the
pace of expansion of trade between the United States and developing
countries.

HOW ECONOMIC GLOBALIZATION IS AFFECTING THE
U.S. ECONOMY, THE WORKFORCE, AND THE WORKPLACE
The phenomenon of economic globalization creates both opportunities and challenges for the United States. One the one hand,
increased global economic integration produces a range of benefits
from expanded markets for U.S. products to lower prices and greater
variety of goods and services to consume. Economists have long
argued that countries engaged in cross-border trading benefit from
increased specialization in the production of goods and services in
sectors in which they have a comparative advantage based on available labor, capital, and natural resources (Helpman, 1999; Frankel,
2000). With open markets, countries produce and export those goods
and services for which its costs are relatively less and import those
goods and services that can be produced relatively less expensively in
other countries. Such specialization and exchange results in a more
efficient use of resources and raises living standards in both sending
and receiving countries. Trade is also theorized to promote more

160 The 21st Century at Work

efficient production through economies of scale and to spur innovation as domestic firms have access to and compete in the global marketplace. Open capital markets allow investors in different countries
to pool risks, they provide opportunities for borrowing abroad to
finance investment, and they guard against unsound fiscal and
monetary policies on the part of governments (Obstfeld, 1998).
On the other hand, while greater integration in world trade and capital markets can enhance welfare at the national level and over the
long term, there can be short-term and longer-term consequences
for particular segments of the U.S. economy and workforce as labor,
capital, and other inputs are reallocated to their most efficient uses.
Certain firms and industries may find that in a global marketplace
they cannot compete with lower-priced imports and will go out of
business. Workers in affected industries and firms must be reabsorbed into other sectors of the economy—perhaps in sectors more
insulated from foreign competition—or they may drop out of the
labor force. Even when reemployed, workers may experience longterm wage reductions as a result of displacement because human
capital they acquired is less valuable upon reemployment. Markets
open to trade can also experience longer-lasting effects on the wage
structure to the extent that the prices for different productive inputs
(e.g., labor of different types) become more equal across trading
partners.
As globalization expands to integrate new industries and segments of
the workforce previously insulated from global economic pressures
and integrates more of the world’s population into the global marketplace, what can we expect in terms of the future of work? To
address that question, in this section we consider what we know
about the consequences of globalization in the last several decades—
both the aggregate and distributional effects—as the share of trade in
the U.S. economy has more than doubled, and capital, labor, and
knowledge have flowed more freely among countries. While the level
and nature of economic globalization can be expected to evolve in
ways that have been described above, many of the implications of
further globalization can be inferred from recent experience. In particular, we focus on the implications of the growing importance of
global trade and capital integration in the U.S. economy in terms of
overall economic performance, followed by the effects on competi-

A New Era of Global Integration 161

tion and innovation, employment, wage levels and the wage structure, and employment relationships.
While our discussion in the remainder of this section focuses on the
United States, a related issue concerns the consequences of globalization for other countries. As economic globalization has proceeded, great interest has focused on whether the results are good or
bad for developing countries. Research on this issue generally finds
that when developing countries become more economically integrated with the rest of the world, they too benefit in the aggregate in
terms of higher economic growth (see Box 4.1). Worldwide, the distributional consequences are manifested in the growing gap between
industrialized nations and other countries, primarily those with the
lowest incomes, which have not participated in the latest wave of
global integration.

Strong Economic Performance Accompanied Increased
Globalization
The consensus among economists is that, at the aggregate level, the
increased integration of the U.S. economy in the past half-century
has had a favorable effect on incomes, prices, consumer choice,
competition, and innovation (Burtless et al., 1998). In terms of longrun growth, Figure 4.8 illustrates that, at the same time that trade’s
share of the U.S. economy more than doubled, real GDP per capita—
a measure of U.S. standard of living—did so also. While there have
been the inevitable dips and rebounds associated with the business
cycle (the shaded areas mark periods from the business cycle peak to
trough), the long-run trend has been one of increased standards of
living. 18 Trade contributes to long-run income growth by allowing
U.S. workers to specialize in the production of goods and services
that are our comparative advantage, while gaining access to goods
and services overseas that can be produced at lower cost.
______________
18When compared with other major industrialized economies, the United States has

maintained the highest standard of living since the early twentieth century (see the
comparative data series prepared by BLS on GDP per capita available at: http://www.
bls.gov/fls/). While the economies of Japan and Germany grew faster after the end of
World War II, they did not continue to close the gap with U.S. living standards at the
same pace after the early 1970s. Per-capita GDP in the two countries has stagnated at
about 80 percent of the U.S. level as of the late 1990s.

162 The 21st Century at Work

Box 4.1
The Consequences of Globalization for Other Countries
An extensive literature in economics explores the consequences of trade
and financial liberalization on economic growth and well-being. In terms of
developed economies, the conclusions are much the same as the ones we
reach above in discussion of the benefits and costs of trade for the United
States. The benefits and costs of more openness in developing countries
have also been explored through case studies and analyses of data for
multiple countries, industries, and firms over time (IMF, 2002; Baldwin,
2003). A general finding from that literature is that developing countries, on
the whole, benefit from trade integration in terms of higher income per
capita, increased productivity, and higher rates of economic growth provided that lower trade barriers are accompanied by appropriate exchange
rate, monetary, and fiscal policies.
Financial crises, such as external debt defaults and currency crises (e.g.,
an exchange rate depreciation), have been more common in the last 25
years among developing countries with relatively low openness to trade,
rather than among those that have been more globally integrated (IMF,
2002). Over the long run, there is also evidence that greater financial integration reduces volatility in national output (GDP), as well as rates of inflation and exchange rate shocks. At the same time, higher rates of growth
associated with greater openness do not appear to affect the distribution of
income within countries, although the poverty rate can fall because of rising
incomes on average.
While economic globalization appears to benefit those countries that open
their product and financial markets, the income gap between rich and poor
countries has grown. Considering the twentieth century as a whole, percapita GDP increased sixfold for the richest quarter of the world’s population, while the poorest quarter experienced less than a threefold increase
(IMF, 2000). By and large, those low-income countries that did not see
their incomes converge toward those of higher-income countries were
those that did not successfully integrate into the world economy—nations
in sub-Saharan Africa, the Middle East, and the former Soviet Union (World
Bank, 2002a).

A New Era of Global Integration 163

Box 4.1—continued
Broader measures of welfare, such as life expectancy and other social
indicators, show more convergence across countries than what is found
forper-capita incomes, in part because technological breakthroughs in
agricultural and medical technology were made available despite these
countries’ low incomes. Further diffusion of technological advances offers
the potential for stimulating economic growth and human development in a
virtuous circle beyond what would otherwise be possible (UNDP, 2001).
Market forces are unlikely to be sufficient to achieve this goal for a variety
of reasons. Instead, further progress is likely to depend on international
private- and public-sector initiatives to advance the development of and
access to appropriate technologies for the world’s poorest countries.

RANDMG164-4.8

35,000
GDP per capita (right axis)
Exports + imports (left axis)
Exports (left axis)

30,000

20,000
Imports

15,000

1996 dollars

Percentage of GDP

25,000
20

10
10,000
5

0
1960

5,000
0
1970

1980
Year

1990

2000

SOURCES: BEA U.S. International Transactions Accounts Data, Table 1 (http://www.
bea.gov/bea/international/bp_web); BEA NIPA Tables, Tables 1.1 and 8.7 (http://
www.bea.gov/bea/dn/nipaweb/SelectTable.asp); and NBER Business Cycle Expansions and Contractions (http://www.nber.org/cycles/).
NOTE: Gray shading marks business cycle recessions (from peak to trough).

Figure 4.8—U.S. Trade and GDP Per Capita, 1960–2002

164 The 21st Century at Work

In a completely closed economy, U.S. consumers would consume
only goods and services produced with inputs of materials and labor
available within our borders. We would neither enjoy Chilean fruits
in the middle of the North American winter nor savor the taste of a
French Bordeaux wine with dinner. We would not drive Japanese
cars, play with toys made in China, or wear athletic shoes assembled
in Indonesia. From the perspective of U.S. consumers, trade will
typically expand the range of choices available and may also result in
the reduction of prices for some goods when foreign suppliers can
produce them at lower cost. In their buying decisions, consumers
face more choices, including imports priced lower than similar
domestically produced items. For example, between 1980 and 1996,
the price of imports to the United States rose less rapidly than the
price of exports, and both rose considerably less than prices overall
in the U.S. economy (Burtless et al., 1998).19 Such price competition
requires U.S. producers to adopt more efficient methods and reduce
their costs of production.
As economic globalization has proceeded in recent decades, other
countries have experienced strong rates of growth with levels of economic integration that exceed those of the United States today. For
example, Ireland, known as the “Celtic tiger,” consistently ranks as
one of the most globally integrated countries, with a number-one
ranking on two recent indexes, based on the extent of economic
integration, use of technology, and other factors.20 Between 1991 and
2001, Ireland’s annual growth rate averaged 7 percent per year and
unemployment fell dramatically (World Bank, 2003a). Fueled by an
open policy with respect to FDI, strategic investment in the
telecommunications sector, and investment in the technical education of its relatively young labor force, Ireland’s export growth since
1994, primarily in services and high-tech industries, has been the
highest in the OECD (Burnham, 2003). While the United States is unlikely to achieve the levels of trade experienced by Ireland simply
______________
19Import prices benefited from the strong U.S. dollar during parts of the period. When

the dollar value is high relative to other currencies, it reduces the costs of imports to
the United States, although it makes U.S. exports less competitive.
20See the Globalization Index published annually by Foreign Policy together with A. T.

Kearney (available for 2003 at http://www.foreignpolicy.com/wwwboard/g-index.
php) and the index generated by Andersen and Herbertsson (2003).

A New Era of Global Integration 165

because of the size of the U.S. economy relative to other countries,
the example of Ireland and other countries illustrates that economic
globalization can be accompanied by strong economic performance.

Global Integration Expands Markets, Intensifies
Competition, and Spurs Innovation
For U.S. firms, a more open world economy expands the size of the
market they can sell to, elevating sales and possibly reducing costs
and raising productivity through economies of scale. Larger world
markets can increase the return from fixed investment in R&D (e.g.,
in the pharmaceuticals industry). In markets characterized by network effects (recall Metcalfe’s Law discussed in Chapter Three), such
as telecommunications, expanded world markets increase product
value. U.S. producers also gain access to expanded markets for capital goods and intermediate inputs, which can reduce the costs of
final goods. At the same time, the increased openness of U.S. markets, both through export competition and import competition,
pressures U.S. firms to remain competitive in the global marketplace.
Firms must compete not only with potential rivals in the domestic
market but also with those overseas or transplanted to the United
States through FDI. The expectation is that such market forces will
require U.S. firms that face import competition, or that export products to other countries, to improve their performance over time or
risk going out of business. Such forces will spur innovation and
adoption of technologies and production processes that can reduce
cost. Trade also provides access to foreign technology and ideas (e.g.,
business organization practices), which further allow productivity
gains for U.S. firms.
Consistent with these expectations, one recent study concluded that,
of nine industries examined in the United States, Germany, and
Japan, those that faced greater international competition were the
most productive primarily as a result of adopting innovative manufacturing design methods and best-practice organizational methods
(Baily and Gersbach, 1995). The U.S. automotive industry is one
example considered in the study. As long as U.S. auto companies did
not directly compete against Japanese auto firms, they would not risk
making the innovative, automation-related changes, such as agile
manufacturing and design for manufacturing, that would lead to

166 The 21st Century at Work

productivity gains. Faced with competition, U.S. auto manufacturers
began adopting many of the innovations used by Japanese auto
firms.
Likewise, many of the changes in firm organization discussed in the
context of technological change can be tied to globalization as well.
Increased competition in import-competing or export-competing
industries can lead firms to adopt innovations in production processes and management practices to boost productivity and lower
costs. Thus, the trend toward vertical disintegration of the firm
through outsourcing and the shift to high-performance workplace
practices and associated compensation systems can be linked to
globalization. While the technologies discussed in Chapter Three
enable these changes in firm organization and employment relationships, global competition provides the impetus for their adoption.
In looking ahead, a critical challenge in the face of continued global
competition will be for the United States to maintain its predominant position in the high-technology field. Recent experience indicates that U.S. leadership cannot be taken for granted. The United
States was the world’s leading producer of high-technology products
(specifically aerospace, computers and office machinery, communications equipment, and pharmaceuticals) with about one-third of
world production from 1980 to 1995. 21 During the 1980s, however,
U.S. producers faced substantial competition from Japan. Much of
U.S. firms’ world market share lost during that period was subsequently recovered during the 1990s as U.S. high-technology firms
were forced to innovate and reduce costs. With recovery in the latter
part of the 1990s, the U.S. share of the world market for high-technology products reached 36 percent as of 1998. Among U.S. hightechnology industries, aerospace was the only one to lose world market share in both the 1980s and 1990s, although that was also the sector in which the United States had the largest world market share to
begin with.
In terms of exports, the U.S. high-technology sector had nearly 20
percent of the world total in 1998, yet this represents a decline from
the 1980 peak of 26 percent as a result of competition from such
______________
21The results reported in the remainder of this section draw on an analysis of trade

data prepared by the NSF (2002).

A New Era of Global Integration 167

newly industrializing countries as Singapore and Taiwan. The United
States was also the export leader in all the component high-technology industries except for pharmaceuticals. These shares, however,
were also lower than they had been in 1980 (with the exception of
those for communications equipment). In the future, such countries
as China are likely to emerge as significant competitors in various
segments of the high-technology market. For example, as noted
above, China is currently challenging the lead of U.S. and European
companies in the development of the next generation of cellular
phone technology. In emerging areas, such as nanotechnology, the
United States is viewed as a leader in R&D, yet other countries
including Japan are making major investments in the area and could
eclipse the U.S. advantage (NNI, 2003).
The United States also currently leads the way for knowledge-intensive services industries—those incorporating science, engineering,
and technology in their services or delivery of their services—with
about 40 percent of world revenues between 1980 and 1998. In each
of five sectors—communications, financial, business, educational,
and health—the United States was the leading provider of services as
of 1998. The U.S. share of the world market as of that year reached 53
percent for financial services (Japan was second at 6 percent) and 36
percent for business services (France ranked second at 17 percent). It
was 37 percent for communications services (followed by Britain
with less than 18 percent). The United States has also consistently
maintained a dominant position in trade in intellectual property,
including royalties and fees. In the future, U.S. leadership in these
fields depends on continued advances in technology, as well as having a skilled workforce capable of producing knowledge-intensive
services.

Trade Alters the Mix of Jobs, with Displacement in Some
Sectors Matched by Growth in Others
Perhaps the most talked-about aspect of foreign trade is the movement of jobs from the United States to other countries as a result of
increased specialization. Newspaper accounts abound regarding the
closure of U.S. manufacturing plants with the jobs transferred overseas to be performed by workers receiving lower wages. With the
increased pattern of vertical trade, manufacturing jobs in lower-wage

168 The 21st Century at Work

countries may include intermediate products as well as final products. More recently, as discussed earlier in this chapter, there is
movement of higher-skilled jobs and white-collar jobs overseas—
either through outsourcing or offshoring—as countries with lower
wages invest in education and training, including in the technology
field. With increasingly skilled workers in low-wage countries, the
cost-quality trade-off in shifting work overseas is not as stark as it
used to be. As noted above, one recent estimate projects 3.3 million
U.S. services-related jobs, or about 2 percent of employment, will be
outsourced to such low-wage countries as China, India, Russia, and
the Philippines by 2015 (McCarthy, 2002).
These examples, viewed in isolation, raise concerns that trade has
been and will continue to be responsible for net job loss, whether in
manufacturing or in services. While it is true that some jobs previously performed by U.S. workers are now performed by workers
overseas, it is also true that trade generates new jobs for U.S. workers
in domestic exporting industries. As of 1999, an estimated 11.6 million jobs in the United States were supported directly or indirectly by
goods and services exports, representing about 9 percent of
employment.22 With continued growth in exports relative to GDP,
that share is likely to expand. In two industries—computers and
electronic products and primary metals—more than one-third of
jobs were tied to exports as of 1997 (U.S. DOC, 2001). Other sectors,
like agriculture, also rely heavily on foreign markets for the goods
they produce. On balance, research suggests that the employmentgenerating effect of expanding exports exceeds the employmentreducing effect of increasing imports (Kletzer, 2002) (see Box 4.2).
Thus, the consequence of trade for overall employment levels is, at
most, small, and there is little reason to expect this pattern to differ
as the United States becomes more integrated into the global economy.
Although the overall effect of trade on economywide employment
levels appears to be relatively small, the increased openness of the
U.S. economy does result in job losses in some sectors, while other
sectors experience gains, a feature that can be expected in the future
______________
22 These data are cited by the Office of the U.S. Trade Representative, available at

http://www.ustr.gov/outreach/statemap.shtml.

A New Era of Global Integration 169

as well. In the same way, technological advances will displace workers in certain occupations that are no longer required, while raising
the demand for workers in other occupations. Kletzer (1998, 2000,
2002) considers the link between trade and job displacement by
examining patterns of job displacement in manufacturing industries
facing import competition from the mid-1970s to the mid-1990s.23 In
U.S. industries with increasing foreign competition, such as
footwear, leather products, watches and clocks, and toys, more jobs
have been lost over the period studied and the adjustment burden on
workers displaced in those sectors could have been substantial. At
the same time, other industries facing import competition (e.g.,
office machines, photographic equipment) have experienced rates of
displacement below the economywide average. Still others with
higher job displacement (e.g., space vehicles, health services supplies) faced little or no import competition. Kletzer’s assessment is
that, while trade can be clearly linked to job loss in some importsensitive sectors, the economywide effect of trade on job displacement is small.
As a result of trade-related displacement that will occur in the future,
workers in the shrinking industries and occupations may face spells
of joblessness, and they may experience permanent wage losses.
Recent experience with economywide job displacement, due to any
number of factors, provides some perspective on the expected consequences. During 1997 and 1998, 1.9 million workers with long
tenure (at least three years) permanently lost their job because of a
plant move or closing, a position that was shifted or abolished, or insufficient work.24 That represented 2.5 percent of all long-tenured
______________
23 Job displacement in this context is typically defined as an involuntary (to the

employee) job loss resulting from an employer’s operating decisions (e.g., plant closure, position elimination, etc.).
24This discussion is based on a special analysis of the displaced worker supplement to

the February 2000 CPS, a biennial survey of displaced workers (see Helwig, 2001). Data
from the January 2002 CPS displaced worker supplement show 4.0 million workers
with long tenure permanently lost their job during the three-year period between 1999
and 2001 due to plant move or closing, a position that was shifted or abolished, or insufficient work (BLS, 2002b). Because the 2002 supplement covers the recent recession, fewer workers (two out of three) were reemployed as of the survey date. The
earnings losses as of 2002 were larger as well, compared with displaced workers in the
2000 survey.

170 The 21st Century at Work

Box 4.2
Trade and Aggregate Employment
Overall, growth in U.S. employment has remained strong over the past
four decades as the degree of openness of the U.S. economy expanded.
For example, Figure 4.9 plots the employment-to-population ratio—the
share of the U.S. population who are employed—along with total trade
activity’s share of GDP. Again, while the business cycle swings are evident, the longer-run pattern is one of successively higher and higher
employment rates with each business cycle peak. The rising employment
rate over this period reflects, in large part, the increased labor force participation of women discussed in Chapter Two. Yet, the growing importance
of trade in the U.S. economy did not hinder the absorption of these new
workers into the labor force (Burtless et al., 1998). Moreover, in the business cycle expansion of the 1990s, while trade represented close to onequarter of the economy, the unemployment rate reached remarkable lows.
It is the case that the share of employment in the manufacturing sector
has been steadily declining, from 43 percent of full-time equivalent
employment in the private sector as of 1960 to 23 percent by 2001.25 But
the shift of employment from the goods-producing to the services-producing sectors is part of a long-run trend associated with shifting consumption
patterns and productivity gains that predates the growth of trade in the
U.S. economy in the postwar era (Kletzer, 2002). Burtless et al. (1998)
estimate that trade played at most a small role in the overall decline in
manufacturing employment between 1960 and 1994. Instead of the actual
decline of 15 percentage points over that period, if the entire trade deficit
after 1975 had been eliminated, the decline in the share of manufacturing
in overall employment would have been 14 percentage points.
As another example, consider the case of the evidence regarding the
effects of NAFTA on U.S. employment. Prior to the passage of NAFTA,
extraordinary claims were made of a “giant sucking sound” that repre-

______________
25 Based on data from the Bureau of Economic Analysis, National Income Product

Accounts, for 1960 and 2001 (see http://www.bea.doc.gov/bea/dn1.htm).

A New Era of Global Integration 171

Box 4.2—continued
sented the movement of jobs and capital south across the Rio Grande.
Rigorous studies at the time indicated the benefits would be small but
positive for the United States and large and positive for Mexico (Burfisher,
Robinson, and Thierfelder, 2001). It has been challenging to isolate the
effects of NAFTA, given other economic and policy changes that
coincided with the greater openness of trade between the United States
and Mexico. However, research indicates that imports from Mexico
potentially displaced about 37,000 U.S. jobs annually, primarily in manufacturing (as compared with employment growth during the 1990s of
about 200,000 jobs per month). When accounting for increased exports,
the consensus among studies is that NAFTA has no overall effect on
aggregate employment (Burfisher, Robinson, and Thierfelder, 2001).
RANDMG164-4.9

30
Employment to population
ratio (right axis)
Exports + imports (left axis)
Exports (left axis)

64
62

20
60
Imports

58
56

10
54

Percentage of population

Percentage of GDP

5
52
0
1960

50
1980
1990
2000
Year
SOURCES: BEA U.S. International Transactions Accounts Data, Table 1 (http://www.
bea.gov/bea/international/bp_web); BEA NIPA Tables, Table 1.1 (http://www.bea.gov
/bea/dn/nipaweb/SelectTable.asp); BLS Labor Force Statistics from the CPS, Series ID
LNS12300000 (http://data.bls.gov/cgi-bin/surveymost?ln); and NBER Business Cycle
Expansions and Contractions (http://www.nber.org/cycles/).
NOTE: Gray shading marks business cycle recessions (from peak to trough).
1970

Figure 4.9—U.S. Trade and Employment-to-Population Ratio, 1960–2002

172 The 21st Century at Work

workers (Helwig, 2001). 26 Among long-tenured workers displaced
during that period, nearly four in five were reemployed as of February 2000 (Helwig, 2001). The typical, or median, worker displaced in
the late 1990s experienced a little more than five weeks of unemployment before finding a new job. Earlier in the 1990s, when the
labor market was weaker, the typical unemployment spell was about
three weeks longer. Less than one in two displaced workers who were
reemployed relied on unemployment insurance benefits, while one
in five exhausted their benefits by the time they found a new job.
About half of all reemployed workers switched to a different industry
but most stayed in the same occupation.
While the typical or median reemployed displaced worker during
1997 or 1998 reported no loss in earnings between their old and new
job, workers who remained employed over the same period experienced an average increase of 10 percent in earnings. In recessionary
periods, the short-term earnings loss among those reemployed is
closer to 15 percent (Helwig, 2001). Studies of the longer-term consequences of job displacement suggest permanent earnings losses in
the range of 5 to 15 percent (Kletzer, 1998). In the case of workers
displaced from import-competing manufacturing jobs, earnings
losses are considerably larger for those reemployed in the trade or
services sector compared with those who are reemployed in manufacturing (Kletzer, 2000).
Because the phenomenon of trade-related displacement in the IT
sector and IT-enabled services sector is a relatively recent phenomenon, researchers have not focused on the specific consequences of job loss for these workers. Other studies of job displacement suggest that, in general, more-educated workers are
reemployed more rapidly than their less-educated counterparts and
their relative earnings losses tend to be smaller, presumably because
their skills are more transferable from one job to the next (Kletzer,
1998). This suggest that, while painful, trade-related job loss associated with higher-skilled services sector employment (e.g., IT-related
jobs) may not be as costly in terms of unemployment and permanent
______________
26Kletzer’s (1998) survey article reports displacement rates closer to 10 percent when

displaced workers of any tenure are counted relative to the pool of all workers.

A New Era of Global Integration 173

wage loss as earlier waves of blue-collar, trade-related, job displacement were.
To the extent that global economic integration has distributional
consequences in the form of job losses for some U.S. workers,
economists have long noted that the aggregate gains to the country
can be used, through the tax and transfer system, to provide assistance to those workers. This approach places the spotlight on
domestic policy, rather than on trade policy, through programs such
as Trade Adjustment Assistance (TAA), established in 1962 and
reauthorized in 2002. The program provides for up to 104 additional
weeks of income support (called Trade Readjustment Allowances)
once unemployment insurance benefits are exhausted for workers
whose job loss is associated with increased import competition
(including those affected by NAFTA, as well as “secondary” workers
of an upstream supplier or downstream producer).27 Other benefits
include up to 104 weeks of training, job search allowances, relocation
allowances, and tax credits for assistance with health insurance coverage. An Alternative TAA Program, provided for with the 2002 TAA
reauthorization but not yet implemented, allows qualified workers
age 50 and above who are reemployed full-time to receive for up to
two years, in lieu of other benefits, half the difference between their
previous wage and their new wage, up to a maximum of $10,000. This
represents a form of insurance against earnings losses associated
with trade-related displacement. The 2002 reauthorization also
established a TAA program for farmers.
Although nearly 228,000 workers were certified under the TAA program in fiscal year 1999, far fewer received readjustment allowances
(37,000) or training (32,000), primarily because they were reemployed before they were eligible to claim benefits (U.S. GAO, 2000).
In the latter part of the 1990s, the largest numbers of trade-affected
displaced workers in these programs were in the apparel and textile
industries. Limited data indicate that the program meets with some
success in reemployment rates and the extent of wage replacement.
______________
27As part of the Trade Adjustment Assistance Reform Act of 2002, the basic income

support period of 52 weeks was extended by 26 weeks for those involved in training,
and another 26 weeks for those requiring remedial education. For a summary of the
2002 Act, see http://www.doleta.gov/tradeact/2002act_summary.cfm.

174 The 21st Century at Work

Global Competition Has Had Modest Effects on the Wage
Structure to Date
Just as technology has been linked to the growing wage gap between
more- and less-skilled workers, economists have pointed to globalization as another driver of falling real wages for low-skill workers
and, concomitantly, rising wage disparities. Thus, some have argued
that increased trade with low-wage countries not only is responsible
for the loss of jobs in the United States, but also for putting downward pressure on U.S. wages. The pressure is believed to be particularly heavy on less-skilled U.S. workers, who must now compete with
their counterparts in other countries who are paid considerably
lower wages. The trends in wages by education level reported in Figure 3.8 confirm that real wages have been declining since the 1970s
for workers with a high school education or less, while they have
been rising for more-educated workers.
The argument that trade has depressed average wages is not supported by the evidence. For one thing, jobs in export-oriented sectors
are associated with higher wages on average; in the goods sector, for
example, export-related jobs pay 13 to 16 percent more than those
not related to export.28 More to the point, Burtless et al. (1998) show
that the stagnation in wage growth since 1973 is attributable to the
slower productivity growth after that year, not to changes in patterns
of trade.
It has been more challenging to determine the effect of trade on
relative wages between workers of different education or skill levels,
or overall wage inequality. Indeed, economists have been intensively
studying and debating the relationship between globalization and
the U.S. wage structure for at least a decade, using a number of
approaches (see Box 4.3).29 While some differences can be found
across studies, most analysts find a relatively modest effect (see, for
example, reviews by Freeman, 1995; Richardson, 1995). Perhaps 10 to
20 percent of the relative wage decline of the wages of low-skilled
______________
28See the Office of the U.S. Trade Representative data available at http://www.ustr.

gov/outreach/statemap.shtml.
29 For a discussion of the strengths and weaknesses of the various approaches see

Burtless (1995), Freeman (1995), Collins (1998), Krugman (2000), and Leamer (2000).

A New Era of Global Integration 175

Box 4.3
Methods for Assessing the Contribution of Trade to the Changing
Wage Structure
The expectation that the wage structure is linked to trade comes from a
classical theorem in trade economics stating that trade between two
countries will result in the equalization of factor prices, such as the wages
of less- and more-skilled workers (Bhagwati and Dehejia, 1994; Helpman, 1999). 30 The challenge in testing this theory is to make inferences
about the U.S. wage structure in a situation that we do not observe: the
absence of the growth of trade in the last several decades.
In the absence of observing this situation, one set of studies proceeds by
examining labor quantities associated with domestic production and
trade. The effect on relative wages by education level is determined by
comparing the actual level of low-skill employment in import-competing
industries with what employment would have been if all imports were
produced in the United States. The same comparison is made regarding
U.S. exports. These comparisons are based on the following market relations: By purchasing imports from low-wage countries, the United States
reduces the effective demand for low-skilled domestic workers, thereby
placing downward pressure on low-skill wages. U.S. exports of higherskilled products to low-income countries raise the effective demand for
higher-skilled workers and consequently their wages. By assessing the
implicit shifts in the balance between supply and demand for workers by
skill level as a result of trade, the implied effect on relative wages can be
assessed. Studies by Murphy and Welch (1991); Katz and Murphy
(1992); Borjas, Freeman, and Katz (1992, 1996, 1997); Sachs and Shatz
(1994); Wood (1994, 1995); and Krugman (1995, 2000) among others
adopt this “factor content” approach.

______________
30This theorem derives from the Heckscher-Ohlin-Samuelson two-factor, two-good

model of trade. Trade theorists have considered more-complex variations on this
model and identified the strong assumptions that must hold for the factor price equalization theorem to extend to an n-factor, n-good world. These strong assumptions
have cast doubt on the ability of this model to explain real-world wage patterns, and
certainly limit the applicability of full factor price equalization (Bhagwati and Dehejia,
1994).

176 The 21st Century at Work

Box 4.3—continued
Another set of studies, in contrast, has proceeded by considering the
effects of trade on the prices of goods produced by low-skilled workers
and then making inferences about the demand for low-skilled labor and
hence the effect on their wages. According to the trade model, prices
should fall in the import-competing industries (and ultimately all industries
employing low-skilled labor), thereby lowering the relative wages of
lower-skilled U.S. workers. The lower cost of labor should lead industries
in both the traded and nontraded sectors to increase their employment of
lower-skilled workers. In these studies, then, analysts determine whether
price changes in import-competing industries and labor utilization by
industry are consistent with the model’s predictions. This approach has
been employed in studies by Lawrence and Slaughter (1993), Sachs and
Shatz (1994, 1998), and Leamer (1998, 2000), among others.

workers can be attributed to trade (Krugman, 1995; Freeman, 1995;
Collins, 1998).31 As noted in Chapter Three, the changes in the wage
structure have been attributed to the confluence of several factors
rather than to a single cause. In sorting out the relative importance of
various factors, studies that consider multiple explanations generally
give less weight to trade than to the role of technology or other
supply-side factors (e.g., slower growth in the number of educated
workers, immigration) or the combined effect of various institutional
factors (e.g., the minimum wage, unionization) (see the related discussion in Chapter Three and the references cited therein).
Several explanations support the general finding that trade effects on
the wages of low-skilled U.S. workers have been relatively modest to
date (Freeman, 1995). One is that most U.S. trade is with other industrialized countries (see the discussion above), where wage levels are
comparable, or with faster-growing newly industrializing countries
where wages and other production costs are rising along with skill
levels. Depending on which countries are counted as having low
______________
31Among the studies that find effects above this consensus view are those by Wood

(1994, 1995) (who attributes all the rise in inequality to trade) and Leamer (1993, 1994,
1998). In contrast, Bhagwati (1999) has argued that increased trade between highwage and low-wage countries will not reduce wages in the former but may actually
have a favorable effect.

A New Era of Global Integration 177

wages, trade with such countries as a share of GDP ranges in the low
to mid-single digits (Burtless et al., 1998; Krugman, 2000). A second
explanation is that in the 1980s and beyond, less than 15 percent of
U.S. employment was in the manufacturing sector (the sector most
affected by trade with low-income countries). Most low-skilled workers are employed in such nontradable services as retail trade and
other personal services. In the future, if trade in services that involve
more highly skilled jobs continues to grow, trade will affect a larger
share of the workforce, so the effect on the wage structure could
become larger over time. However, to the extent that more-skilled
U.S. workers now face greater competition from workers overseas, it
may serve to dampen the rate of growth of wages among more educated workers, thereby lowering wage disparities.
While trade may be associated with a modest increase in wage dispersion among groups of workers defined by education level, a
potential benefit from the increased competition induced by greater
economic openness is a reduction in wage discrimination. Economists have long argued that discrimination is difficult to maintain in
an increasingly competitive environment because discrimination is
costly in terms of resource utilization. Provided markets are competitive, employers who do not discriminate would be able to drive
those who do out of the market. In a recent study, Black and Brainerd
(2002) show that the increased product market competition associated with growing trade in the 1980s and 1990s was also associated
with a narrowing of the male-female wage gap, an effect strongest in
those industries that were most highly concentrated (i.e., in those
sectors where the effect of import competition would be the
strongest). The evidence is weaker but still suggests that greater
competition from trade also increased the relative employment of
women and women in management positions and reduced the wage
gap between white and nonwhite men. This potential benefit would
be expected to continue as the share of trade in the economy
expands even further.

Global Competition May be Tied to Changing Employment
Relationships
In addition to concerns about adverse wage and employment consequences of globalization, the increased competition from abroad has

178 The 21st Century at Work

raised concerns that globalization has weakened the traditional
employer-employee relationship, with long-term implicit contracts
giving way to less stable relationships. As a result of competition
from abroad, there is a reduced expectation that U.S. workers will be
employed with a given employer or in a given industry for much or
all of their working life. Rather, it is argued that workers face a greater
likelihood of being displaced as firms downsize or relocate plants
overseas to take advantage of lower wages. This may be manifested
in greater job instability (i.e., job turnover for voluntary or involuntary reasons) or in increased job insecurity (i.e., involuntary job loss).
Recent research, however, largely fails to find any strong patterns of
rising instability or insecurity in the U.S. labor market, particularly in
the 1990s as the economy became even more open to trade (see
Neumark, 2000, and the studies included in the same edited volume).
On the other hand, survey data on workers’ perceptions of job insecurity have been rising through the mid-1990s (Aaronson and Sullivan, 1998).
Other studies have looked for a more direct link between changing
employment contracts and global competition. They have begun
with the proposition that, once workers are hired, their wages are
determined through policies internal to the firm, such as administrative rules and customs only weakly tied to external market conditions. Bertrand (1999) focuses on whether employers, in the face of
increased import competition, still shield workers’ wages from competitive pressures. Based on data from 1976 to 1992, the analysis
indicates that industries that face greater import competition show a
greater responsiveness of wages to current labor market conditions
(e.g., the unemployment rate). These results suggest that competitive
pressures stemming from foreign trade can weaken employers’ use
of implicit contracts that shield workers’ wages from the vagaries of
the external labor market. If so, the labor market would operate more
like a spot market with wages determined by current employment
conditions.

ECONOMIC GLOBALIZATION AND THE FUTURE OF WORK
The second half of the twentieth century, particularly the last several
decades, can be considered the start of a new era of globalization.
For the world as a whole and the United States in particular, the

A New Era of Global Integration 179

movement has been toward greater economic integration in terms of
trade, capital flows, and the flow of labor and ideas. To some extent,
the future implications of globalization for the U.S. labor market
depend on the path taken by the United States and other countries
with respect to further trade and capital market liberalization, a process that could lose some of its recent momentum as trade negotiators confront some of the more contentious issues, such as agricultural subsidies, labor standards, the environment, and intellectual
property rights. At the same time, the technological forces that have
spurred greater economic integration in the last several decades will
further reduce the costs associated with global integration on a wider
scale. Thus, a high degree of openness with the rest of the world can
be expected to be a defining characteristic of the U.S. labor market in
the coming decades, with both the opportunities and challenges
such economic globalization presents.
The evidence to date of the consequences of globalization for the
U.S. economy indicates that there have been both aggregate effects
and distributional consequences. For the economy and for the labor
market as a whole, trade has generally produced favorable outcomes:
continued employment growth because of expanded markets, high
rates of innovation and productivity gains as a result of more competitive markets, and rising standards of living. At the same time,
trade has distributional consequences as labor, capital, and other inputs are reallocated toward their most productive uses. For U.S.
workers, that means job declines in some sectors of the economy,
counterbalanced by job creation in others. This is similar to the effect
of technology discussed in the prior chapter: gains to the economy as
a whole from innovation and technological progress but distributional consequences as new technologies displace workers or alter
the skill content of jobs.
Given the links between the era of globalization discussed in this
chapter and the technological advances discussed in the prior chapter, it is not surprising that many of the implications for U.S. labor
markets in the future are interrelated. Again, we will turn to these
issues in Chapter Five but offer a preview here.
•

The reach of global competition. As the U.S. economy became
more open to world markets in the past half-century, the focus
has been on the ability of U.S. manufacturers to compete in a

180 The 21st Century at Work

global economy. Likewise, globalization was expected to have
the greatest effect on lower-skilled U.S. workers, given the abundance of lower-skilled workers in low-wage countries overseas.
The expansion of trade to cover more sectors of the economy,
such as various IT-enabled services, will extend the reach of
global competition to new sectors of the economy, as well as to
the higher-skilled workers they employ.
•

Skill requirements for the workforce. In Chapter Three, we
focused on the implications of technological advances in terms
of the demand for skilled labor, particularly those sectors that
involve high technology. In a similar vein, the U.S. comparative
advantage in world trade is based on sustaining a highly-skilled
labor force. Many of the industries with strong competitive positions, such as the IT sector and tradable services—are precisely
those that require a highly skilled workforce.

•

The dynamics of work. Issues of job displacement and job instability suggest that workers facing rapid technological advances
and open global markets will need to upgrade their marketable
skills throughout their working life. Workers displaced by foreign
imports may need to seek reemployment in another sector of the
economy that requires a different set of skills. Workers exposed
to new technologies may experience a change in their job content that requires learning new skills for working with the technology or for navigating within a restructured workplace. Such
training may be provided on the job or through formal learning
opportunities available through the public and private sectors.

•

The nature of firms and work. Just as new technologies have led
to changes in the way firms are organized and work is conducted
across a broad array of economic sectors, global competition is
reinforcing those trends. The vertical disintegration of firms and
the associated increased specialization within firms is manifested on a global scale in the vertical disintegration of production and specialization of countries in stages of the production
process. The same technologies that support telecommuting for
U.S. workers extend on a global scale to international teams coordinating efforts across vast geographic distances. Higherskilled U.S. workers can market their talents in a worldwide labor
market as freelance talent or within multinational organizations.

A New Era of Global Integration 181

These implications and others are explored in the next chapter, as
are the challenges they present for the public and private sectors in
responding to the future of work in the twenty-first century.

Chapter Five

IMPLICATIONS FOR WORK IN THE
TWENTY-FIRST CENTURY

In the preceding chapters, we have examined three forces that will
influence the world of work in the twenty-first century. The demographic trends point to a workforce that will not grow as rapidly as in
the past but will continue to evolve in terms of its composition by
gender, age, race and ethnicity, language, and family responsibilities.
The labor force may grow more rapidly if some population groups
increase their participation in the labor market, and skill will be the
defining characteristic of future workers. At the same time, ongoing
technological progress in information technologies, biotechnology,
and nanotechnology will continue to reshape production processes,
the task content of jobs, how firms are organized, where work is conducted, and the delivery of work-related education and training.
Such technologies will demand—and reward—a highly skilled
workforce, but one that may be increasingly less tied to particular
locations for job performance. Finally, advances in IT and other factors have contributed to the increased economic globalization of the
U.S. economy. U.S. firms and workers increasingly compete in a
worldwide marketplace that generates aggregate benefits for the U.S.
population but also spawns both winners and losers as a result of a
more open economy.
As we noted in the first chapter, the three forces we have examined
do not move independently of one another but can be expected to
have important interactive effects. For example, we discussed in
Chapter Four the role of the IT revolution in promoting greater economic integration among world economies as communication and
data transmission costs have fallen and as long-distance interactions
have become more manageable. In turn, for the U.S. economy and

183

184

The 21st Century at Work

other countries, the increased openness to world markets generates
greater competitive pressures to stay on the cutting edge of technological innovations through R&D and investments in the productive
capacity of the workforce. Together, the forces of technology and
globalization are altering the nature of work, the organization of
firms, and where work is conducted.
Technological advances can alter the composition of the U.S. workforce by enhancing the health and longevity of the population or by
providing incentives for individuals to remain in the labor force or
leave as job skill requirements change. In turn, the skills of the
workforce can shape the future course of technological progress
through high-end knowledge in the sciences and engineering or
through the ability to adapt to changing technologies in the workplace. Also, the aging population drives demand for pharmaceutical
products and high-tech medical devices, thereby spurring and
directing growth in the development and manufacturing of the
underlying technologies. Interactions also occur between the demographic composition of the workforce and economic globalization.
To the extent that labor becomes more mobile in an economically
integrated world, the workforce in any given country is a function, in
part, of the size and composition of the immigrant population.
Immigrants, in turn, can foster further economic integration through
their strong international networks or through return migration that
transmits knowledge across international boundaries.
Given these interactions, we seek to anticipate the implications of
these interrelated and interacting forces for the future of work. These
issues are relevant from the perspective of current and future workers who wish to anticipate the trends to come and how these workers
might respond in terms of investments in their human capital and
other decisions throughout their working lives. Other issues pertain
to choices that employers make about how to organize their workplaces, invest in their employees, and structure employee compensation. Policymakers at the federal, state, and local levels also make
decisions that shape the laws and regulations governing the workplace and make other policies that may provide incentives or disincentives for behavior on the part of workers or employers. Other
interested parties include public- and private-sector education and
training institutions that help shape the quality of the future workforce.

Implications for Work in the Twenty-First Century 185

The affected areas may be summarized as follows:
•

The organization of production. Technological advances and
globalization are pushing firms toward vertical disintegration
and specialization, decentralized decisionmaking, and attaching
a premium to acquiring and sustaining knowledge as a means of
achieving competitive advantage. In some sectors, these trends
could result in the disintegration of firms to the individual level
in the form of numerous IT-enabled, networked, self-employed
individuals—or “e-lancers.”

•

The nature of employer-employee relationships and work location. The forces driving the reorganization of production will also
increase the fraction of work performed in such nonstandard
arrangements as self-employment, contract work, and temporary help. As advances in IT continue to weaken the bonds
between work and place, a greater proportion of the labor force
will be working at home or in other locations removed from their
employer’s headquarters.

•

Safety, security, and privacy. Technological advances may provide both solutions (e.g., through ergonomics) and challenges
(e.g., via nanoscale materials that may be inhaled) to workplace
safety. Workplace security, in the face of terrorist or other security threats to workers in the United States or overseas, raises
issues regarding the balance between public-sector investments
in workplace security and those of the private sector. Privacy
concerns will become more prominent as a result of various
technological advances that facilitate employee monitoring and
access to sensitive information.

•

The nature of work and job skill requirements. Future technological developments will increase the demand for highly skilled
workers while demographic and other factors will drive demand
for traditionally lower-skilled jobs in various services. The labor
market will require employees adaptable throughout the course
of their careers to changing technology and product demand. In
this context, consideration must be given to how the U.S. education and training system can evolve to better meet the needs of
the twenty-first century workforce. Technology-mediated learning may help meet training challenges and support lifelong
learning.

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•

The size and composition of the workforce. Slower labor force
growth ahead will increase the pressure to ensure that all segments of the population participate in the labor force. Accommodations of various types could aid the participation of older
people, women with children, and those with disabilities. Technological advances may aid the labor force participation of people with disabilities by alleviating the disabilities themselves or
their impact on the ability to work.

•

Compensation in the form of wages and benefits. The mechanisms driving greater wage disparities in the recent past, namely
technological change and globalization among others, can be
expected to exert the same pressures in the near term. In the
absence of a strong increase in the supply of skilled workers in
response to the higher returns to education, wage dispersion will
likely remain at current levels or continue to widen. Meanwhile,
a variety of factors may weaken the tie between employment and
access to fringe benefits. Employers that do offer benefits may
move toward more-personalized structures, tailored to meet the
circumstances of each employee.

We have raised most of these points previously in the study. This
chapter integrates them and highlights several important implications and challenges. With that objective in mind, we will be more
speculative than definitive while we identify some of the wide-ranging implications of these three forces for the future of work.

NEW PARADIGMS FOR THE ORGANIZATION OF
PRODUCTION
The forces of technology and globalization have implications for the
nature of business organizations in the future. The chief thrust of
organizational evolution will be decentralization, perhaps to the
point at which some firms will disappear altogether, replaced by
networks of individuals.

Structure of Firms
Three shifts are evident in the form that business organizations are
expected to take in the future. One is the movement from vertically

Implications for Work in the Twenty-First Century 187

integrated business organizations to less–vertically integrated, specialized firms. Another is the shift within firms away from commandand-control leadership styles to decentralized management and
employee empowerment across all levels of the organization. The
third is the paradigm of knowledge-based organizations, where intellectual capital becomes an important asset for generating competitive advantage in U.S. and worldwide markets.
As discussed in Chapters Three and Four, technology and globalization are fundamentally altering the organization of firms, from a
model calling for ownership of as much of the production pipeline as
possible to one of vertically disintegrated specialization. Such specialization allows firms, which may remain as large as ever, to exploit
their comparative advantage in the provision of particular goods and
services and to outsource functions that are peripheral to the core
business. While outsourcing has been common for such functions as
security and cleaning, increasingly firms are contracting such activities as industrial design, manufacturing processes, business processing tasks, human resources, IT, and other business activities that
used to be considered central. While these functions may have once
been located in the same city, state, or country, outsourcing is now
available on a global scale. Other manifestations of the disintegration
of the vertically integrated corporate structure are large companies
that have divided into semiautonomous or autonomous units that
interact almost as if they were separate companies. Global teams
assembled for specific projects that subsequently dissolve provide
another example of more decentralized business activity.
Vertical disintegration is fostered by new communication and information technologies that reduce the costs of coordination across
entities that would be otherwise bureaucratically integrated in one
organization. These technologies allow coordination across geographically dispersed entities connected through electronic networks. Work products, data, and information can be transmitted
rapidly and inexpensively, eliminating the need for hierarchical coordination structures. As the Internet and other information technologies reduce the costs of acquiring and exchanging information,
more decentralized, market-based coordination within and between
organizations can take the place of centralized bureaucracies. Within
this business form, firms are more efficient and flexible in their ability to respond to local or global market conditions and to technologi-

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cal change, shedding or adding functions (and labor) through supply
chains as conditions warrant.
Other technologies are expected to support this trend as well. For
example, vertical disintegration and outsourcing may be facilitated
by the shift toward rapid prototyping, the ability to combine
computer-assisted design with rapid fabrication methods in manufacturing (Antón, Silberglitt, and Schneider, 2001). Rapid prototyping
allows companies to develop multiple inexpensive prototypes that
can be tested before committing capital infrastructure to production
of the items. A more agile manufacturing capability would allow
companies to outsource the production of goods designed and tested
in-house.
The same forces behind the transition to a more decentralized organizational form also support the shift to decentralized decisionmaking processes within organizations. Chapter Three noted the movement toward providing frontline employees with greater authority
and decisionmaking through various participatory, high-performance workplace systems; we also indicated the productivity advantages to firms that adopt such practices. Striking the right balance
between empowerment and control will be an important management element in the future workplace (Malone, 1997b). Instead of
serving a command and control function, corporations may exist to
provide the rules, standards, and culture that define the environment
within which more autonomous employees operate (Malone and
Laubacher, 1998).
We have discussed the continuing shift to a services-based economy,
combined with the global competitive pressures and growing importance of technology in both the manufacturing and services sectors.
As a result of these trends, an increased emphasis is being placed on
knowledge as the key source of comparative advantage for businesses and their employees in the twenty-first century economy (Earl
and Scott, 1999; Zack, 2003). While the concepts of knowledge workers, knowledge organizations, and knowledge management have
taken on a variety of meanings, at the core, knowledge embodies
another economic input that combines with capital, labor, or natural
resources to produce goods and services. In this context, knowledge
is more than just technology but also embodies understanding of

Implications for Work in the Twenty-First Century 189

markets, customers, suppliers, business processes, best practices,
and other invisible assets of the organization.
Classic examples of knowledge-based industries include software,
financial services, and consulting (although not all firms in these
industries are necessarily organized as knowledge-based institutions). This paradigm, however, embraces potentially all industries to
the extent that there is knowledge in what firms in the industry do,
how they do it, and why that adds value to the output of goods or
services (Zack, 2003). The increased emphasis placed on knowledge
work is manifested in the creation of chief knowledge officers in
many corporations to help manage intellectual capital and create an
environment supportive of knowledge development. These positions
are often distinct from the human resource and IT functions (Earl
and Scott, 1999; Herschel and Nemati, 2000).

The E-Lancing Model
Following the vertical disintegration and decentralization of the firm
to one extreme, some analysts posit the eventual disappearance of
large corporations, even to the point where the basic unit of the
economy is no longer the corporation but the individual (Malone
and Laubacher, 1998). Just as the hierarchical corporation defined
the organization of industry in the twentieth century, some argue
that the new form of business organization for the twenty-first century will be based on electronically connected networks of freelancers, or “e-lancers.” Comparisons are made to the Hollywood
model of production, in which each project brings together a new
team of individuals and small specialized firms—actors, directors,
screenwriters, producers, and so on—to provide the range of
required skills and expertise. This is in contrast to the previous model
of the big studios that controlled the entire production process during the 1920s to the 1940s. In this new business model, individuals
may compete in a global market for project opportunities and may
work on multiple projects at any given time. Project teams continually dissolve as old projects are completed and form as new projects
begin. Project involvement may last for as little as a day or two and
may involve collaborators distributed over the globe.
Variants of this form of work organization are operating in some sectors of the economy today. However, the present system of employ-

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ment laws and regulations, the provision of employee benefits, and
the tax treatment of benefits are generally predicated on the traditional employer-employee model. Issues associated with a more decentralized e-lance model of production include access to such traditional employee benefits provided by employers as health, life, and
disability insurance, and pensions. Furthermore, tax treatment of
such benefits in traditional employment relationships differs from
that for independent contractors or the self-employed (Malone,
1997a). The vision of a labor market defined by companies of one or
a few individuals also raises concerns over the nature of social interactions in such transient, virtual organizations. These organizational
forms also place the risk of ensuring sufficient demand for the individual’s talents on the individual worker, who now must market his
or her services and manage time allocation across projects. Responsibility for ongoing skills investment also rests with the individual.
The distribution of earned income may also be more dispersed under
this more decentralized model, which no longer imposes a corporate
internal wage structure and which more closely ties rewards to the
open-market value of an individual’s talents.
In response to some of these concerns, visionaries in this field anticipate the growth of worker associations in which membership and
benefits would be independent of a particular employment relationship (Malone, 1997a; Laubacher and Malone, 1997; Malone and
Laubacher, 2002). These associations would be the principal mechanism for linking e-lancers to a “home base” and for providing access
to the types of benefits provided by traditional employers. Again,
taking a cue from Hollywood, the Screen Actors Guild (SAG) provides
a model of such a confederation of individuals in which a share of
members’ base pay goes toward providing health benefits, pensions,
and professional development programs. Such associations could
also provide insurance against poor outcomes (e.g., spells of unemployment), as well as opportunities for training, mentoring, social
interaction, and professional identity. They could also provide clearinghouses for matching workers to projects by using the Internet. In
addition to SAG, organizations exist now to provide all or some of
these benefits for other professional groups. Such organizations
include the National Association for the Self-Employed; the Freelancers Union, established by Working Today; and labor unions in
the construction trades (Laubacher and Malone, 1997). Other exist-

Implications for Work in the Twenty-First Century 191

ing professional or community groups (e.g., school or employer
alumni associations) may take on these functions in the future, or
new organizations may be established, defined by occupational
groups or geographic areas, to take on this role.
The future evolution of organizational forms in the next 10 to 15
years is not expected to rapidly converge on any one particular
model. Instead, organizations are expected to adapt in response to
the nature of innovation, markets, networks, and information costs
(Langlois and Robertson, 1995). Thus, we can expect large corporations to continue to exist, albeit with greater specialization of function than in the past, while the prevalence of decentralized networks
of small organizations grows. Within these new paradigms of specialized firms, decentralized decisionmaking, and knowledge-based
organizations, employers in the coming decades will require a
workforce with well-developed analytical skills and communication
and collaboration skills. While these approaches do not necessarily
affect the orientation and task content of jobs for all employees in a
firm, a growing segment of the workforce can be expected to require
these skills.

SHIFTS IN EMPLOYMENT RELATIONSHIPS AND WHERE
WORK IS PERFORMED
Concurrent with the changes in the organization of production and
the internal organization of firms, the demographic, technology, and
globalization forces are also operating to change the nature of
employer-employee relationships and the locations where work is
performed. We can expect an increase in the fraction of workers in
such nonstandard work arrangements as self-employment, contract
work, temporary help, and lease agreements. Technological
advances and the changing makeup of the labor force also suggest
growth in such nontraditional workplace arrangements as homebased work and telecommuting. These changes are likely to lead to
adjustments in the delivery of employee benefits, in social insurance
programs, and in workplace laws and regulations, all of which
evolved in the context of twentieth-century work arrangements.

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Shifts to Nonstandard Work Arrangements
Changes in the organization of firms suggest a new paradigm for the
nature of the employment relationship as well (Malone and
Laubacher, 2002). At one extreme are jobs that essentially offer lifetime employment with a long-term employer-employee relationship
governed by the internal labor market and procedures of the firm. At
the other extreme are the e-lance jobs described above: freelance
work that takes place over weeks and months, often in collaborative
teams. These employment relationships are governed by the market
and mediated by institutional rules. One variant of the form consists
of “expert spot markets” in which the duration of work might be a
few hours or minutes.1 Between these two extremes fall jobs that are
more permanent than freelance work yet do not promise lifetime
employment. Such jobs imply a more tenuous, “at-will” employment
relationship that will last as long as conditions are favorable from the
perspective of both the employer and the employee. While long-term
employment has been more common, less-permanent employment
arrangements have taken root and are likely to become more prevalent in the face of rapid technological change and competitive market
pressures (Cappelli, 2003; see also Jacoby, 2003, for a contrasting
view).
As discussed in Chapter Three, almost one in ten workers is currently
in an alternative or flexible work arrangement. These workers are
primarily independent contractors but also include on-call workers,
temporary-help agency workers, and workers employed by contract
firms. When self-employed individuals and those working part-time
are included, about one in four workers is currently in a
“nonstandard work arrangement” (Wenger, 2003). Taking an even
broader view, surprisingly few workers today are employed in what
might be thought of as a “traditional” job. One estimate for California
revealed that, in 1999, just one in three workers held only one
dayshift on-site job that was permanent, full-time, year-round, and
paid by the employer as a regular employee (Institute for Health
Policy Studies, 1999). While the economywide use of such work
______________
1 An example is Guru.com (soon to be Emoonlighter.com), which matches experts in

IT, creative design, office administration, and business consulting with organizations
seeking top professional advice.

Implications for Work in the Twenty-First Century 193

arrangements does not seem to have changed much (aside from
cyclical fluctuations) in the past two decades, many analysts anticipate growth in the number of workers in nonstandard work
arrangements (Neumark and Reed, 2002). This trend may be driven
by technology and changes in the organization of work that could
lead to greater numbers of e-lancers, as discussed above. It could
also result from increases in labor force participation among subgroups of the population, such as the disabled or older workers, who
have a preference for more flexible work arrangements (see the discussion below).
For many workers, nonstandard work arrangements are a matter of
choice: They offer entrepreneurial opportunities and greater autonomy (for independent contractors and the self-employed), or they
meet the needs of workers who want more flexibility in their work
schedules (for temporary-help and on-call workers). For other workers, such jobs are a point of entry into the labor market, a source of
income while obtaining additional schooling, or jobs of last resort;
for yet others, they provide a useful bridge to retirement. The fraction
of workers in nonstandard arrangements who prefer full-time wage
and salary employment is highest among temporary-help agency
workers and those on call (Wenger, 2003). The preference is lowest
for the self-employed and self-employed independent contractors.
This demarcation also divides the relative pay for nonstandard work:
The self-employed and independent contractors receive higher
wages on average than those in standard work arrangements, while
the reverse is true for part-time workers, temporary-help workers,
and on-call workers.
To the extent that the ranks of workers in nonstandard work
arrangements grow in the future, one issue will be access to traditional workplace benefits. Part-time employees, whether in nonstandard or standard employment relationships, typically do not qualify
for such benefits as health insurance and pensions. Even full-time
workers in nonstandard arrangements, however, are less likely to
receive these two benefits than are full-time wage and salary workers
(Wenger, 2003). Similarly, workers in nonstandard work arrangements are less likely to receive company-sponsored training to
update their skills. Responsibility for the initiative and burden of
continuing adult learning is therefore shifting onto individual workers. More generally, shifts in employment relationships have impli-

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cations for workers’ access to the full range of tangible and intangible
benefits that come with traditional full-time employment relationships: economic security through employment continuity and subsidized employee welfare benefits, professional development
through training and other opportunities, career progression
through internal labor markets, and social connections to workplace
colleagues and a sense of professional identity (Laubacher and Malone, 1997). It may be worthwhile to implement policies promoting
health and pension coverage among workers in nonstandard
arrangements, whether through the tax code or access through business or professional associations. The latter may be modeled on the
worker associations as discussed above (Laubacher and Malone,
1997). As noted, such associations may also perform some functions
traditionally provided by employers, such as training and professional development, job matching, and social connections.

Growth in Distance Work
As technology permits a delinking of work and place, new workplace
arrangements may evolve to meet the needs of employers and various segments of the labor force in traditional work arrangements.
Many wage and salary jobs—particularly those involving goods production and face-to-face service provision—will continue to be tied
to a designated work site where productivity is highest and workers
can be appropriately monitored. However, off-site work, whether at
home or at a third site, is potentially relevant for a growing segment
of the labor force, such as many of the IT occupations slated to grow
rapidly (e.g., computer software engineers and desktop publishers;
see Hecker, 2001). Part-time or full-time telecommuting can allow
employers to accommodate the needs of workers who care for children at home or for a sick family member. Older workers and the disabled may also benefit from nontraditional workplace arrangements.
Despite the growth in nontraditional workplace arrangements, few
data exist on implications of mixed home-office work and telecommuting, and their implications are not entirely clear. There are indications that home-based work or telecommuting may be disruptive
to family relationships and be socially isolating (NSF, 2002). Some
evidence suggests that telecommuting and face-to-face interactions
are complements rather than substitutes so that workers who

Implications for Work in the Twenty-First Century 195

telecommute have increased working hours at home without a corresponding decrease in the time spent in the office (Autor, 2001).
Some evidence also suggests that there is a strong unmet demand for
telecommuting among today’s workforce. In a survey conducted in
January 2000, 41 percent of workers reported that they could perform
their job while telecommuting from another location with access to a
phone, fax, and Internet connection. Yet only 16 percent of workers
were offered this option, and just 9 percent reported they actually
telecommuted one day or more a week (Heldrich Center for Workforce Development, 2000). In terms of benefits, telecommuters in the
same survey reported being more productive and having higher job
satisfaction, although this may have been because those who chose
telecommuting were predisposed to such reactions. If such benefits
accrue to others as well, there is potential for a growing pool of workers to be productively engaged in arrangements not based on the
traditional workplace.
With the “death of distance” afforded by telework and other forms of
virtual work, some have suggested that geographic place will become
even less relevant in the future world of work. In one view, technologies that allow individuals to locate anywhere and connect to virtual
workplaces might make cities obsolete. 2 Another perspective suggests that the economy of the early twenty-first century will not be
centered in the old megacities or even such older suburbs as Long
Island and the San Fernando Valley. Instead, it will emanate from the
new high-tech centers, or “nerdistans,” represented by Silicon Valley,
and Routes 128 and 495 near Boston (Kotkin, 2000; Kotkin and Siegel,
2000). In the United States, high-tech enclaves are emerging on the
fringes of major metropolitan areas or in such smaller urban areas as
Albuquerque, New Mexico; Austin, Texas; and Raleigh, North Carolina. Just as technology supports the vertical disintegration of large
corporate forms, the same forces foster the vertical disintegration of
geographic space into smaller horizontal cities with specialized
agglomeration. These regions are supported by networks of firms
that gain advantage in terms of an educated labor pool, R&D, and
______________
2 This extreme view considers only workplace requirements. There may be very good

cultural or social reasons that keep cities relevant. For example, museums, sports arenas, and concert halls need a certain critical mass of potential visitors to remain
viable.

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other intellectual and business exchanges. The primary drivers are
the infrastructure and amenities that support the exchange of information and knowledge, rather than the need to exploit such geographic features as rivers and ports. The Internet and other information technologies have also expanded opportunities for more-rural
areas, which offer other quality-of-life amenities for those who can
take advantage of virtual work (Kotkin and Siegel, 2000).
With more workers employed at virtual work sites, one potential policy issue concerns the location of teleworkers in jurisdictions having
employment regulations or employment-related social insurance
programs differing from those in their employer’s jurisdiction. Workers based at home in a different state from their employer are one
example; those located in another country from their employer provide another. The recent case of a Florida resident who, prior to
becoming unemployed, worked from her home for a company in
New York state illustrates the challenges that lie ahead (Baker, 2003).
The New York State Court of Appeals ruled that the former employee
was not eligible for New York unemployment benefits because she
was unavailable for work in New York state. The state of Florida ruled
that the individual was not eligible for benefits in that state either.
The New York–Florida case is unlikely to be the last. Such issues can
be expected to arise in regard to a range of employment-related
regulations and benefits. For example, California is one of the first
states to establish paid family and medical leave support by
employer contributions to the state disability insurance program.
Will employees of California-based firms working from home in
another state be eligible for benefits under the California program?
Will employers be required to contribute premiums for unemployment insurance, disability insurance, or workers’ compensation in
every state where their employees are based, even if it is just one
employee in a given state? To the extent that work and workers
migrate virtually across state boundaries more easily in the decades
ahead, information technologies may minimize the transaction costs
associated with employers interacting with multiple jurisdictions
and programs. If future case law holds that the relevant laws and
benefits are those that apply where an individual physically works,
mobile workers may choose where to live based on the attractiveness
of a state or locality’s employment-related policies. Thus, instead of
fashioning a business climate appealing solely to traditional busi-

Implications for Work in the Twenty-First Century 197

nesses, state and local policymakers may also compete for freelancers, independent contractors, the self-employed, and other virtual workers to fashion their jurisdictions as desirable places to
locate.

Other Changes in Employer-Employee Relationships
Changes in business organization, management structures, and
employment relationships have other implications for the relationship between employers and their employees in more-traditional
employment relationships (Blair and Kochan, 2000). On the one
hand, shifts in organizational form and the use of nonstandard work
arrangements weaken the bonds between employers and their
employees. On the other hand, many employers increasingly recognize the human capital and knowledge base of their employees as a
critical asset. Within this context, the use of high-performance
workplace practices that give greater decisionmaking authority to
frontline employees is blurring the traditional distinction between
“labor” and “management.” Likewise, when workers become owners
through employee stock ownership plans or shared governance
arrangements (whereby they collectively have an equity stake in their
firm and are represented on the board), the dynamics of labor-management relations can change. Workers become more vested in the
financial success of their employer and gain additional decisionmaking power. At the same time, these changing roles require workers to
develop more substantive knowledge of the business and to engage
in collective decisionmaking. It is expected that these dynamics will
continue to evolve along with changes in organizational form and the
organization of work within firms.
Changes in the nature of the employment relationship also have
implications for unionization rates in the U.S. labor market. The
long-run trend, driven by the decline in traditionally unionized
industries and other factors, has been toward falling rates of union
representation among the U.S. workforce. As of 2002, just 13 percent
of wage and salary workers were union members, compared with the
peak in the 1950s of 35 percent (BLS, 2003c). Union representation
may be further eroded by growth in the labor force among demographic groups and in occupations and industries that have not historically been unionized.

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At the same time, unions are responding to the competitive pressures of the global marketplace with strategies to increase membership (Freeman, 2002). For example, many unions view the Internet
and other communications technologies as key resources for
addressing the needs of an increasingly diverse workforce. Increased
economic integration of the world’s economies have led unions to
use the Internet to create a “new internationalism” linking workers
and their shared issues around the globe.

OTHER WORKPLACE DIMENSIONS:
SAFETY, SECURITY, AND PRIVACY
In addition to the implications of demographics, technology, and
globalization for workplace arrangements, other aspects of the
workplace will likely be affected by these forces. In this section, we
focus on three in particular: safety, security, and privacy.
Workplace safety has been a traditional area of concern for business
and government. While such concerns may have focused in the past
on high-risk industries in the goods-producing sector, such as
extractive industries or factory production using dangerous machinery, workplace safety and security issues now resonate with virtually
all employers and the entire workforce. In the coming decades, the
aging of the workforce may raise new safety concerns in the workplace in traditional or emerging industries. For example, workers age
65 and older have been shown to experience higher rates of permanent disabilities and workplace fatalities than their younger counterparts do in the same industries and occupations (Mitchell, 1988). At
the same time, new technologies may provide solutions for improving worker safety, from the use of ergonomic equipment by office
workers to safety improvements in traditional manufacturing plants.
Emerging technologies may also present their own health and safety
concerns as workers are exposed to potentially hazardous chemical
or biological materials. For example, critics of the pace of development of products derived from nanotechnology contend that health
risks might be associated with inhaling or ingesting nanoscale materials (Feder, 2003).
Beyond traditional concerns about occupational health and safety,
since the terrorist attacks on September 11, 2001, U.S. employers and

Implications for Work in the Twenty-First Century 199

workers from offices to factories to physical plants see themselves as
potential targets. However, recent data suggest that employers have
only modestly increased security spending since the attacks (Whiting
and Cavanagh, 2003). Of the more than 300 businesses surveyed
nationwide, the typical (or median) company increased security
spending by about 4 percent. At one extreme, about 7 percent of
companies increased their spending by 50 percent or more. Spending increases were highest in critical infrastructure industries, such
as transportation, energy and utilities, financial services, IT, health
care, and media and telecommunications. Companies in such northeast U.S. cities as Boston and New York also reported spending more.
Fewer than one in four companies reported creating a specialized
security position or chief security officer.
At the same time, insurance costs have been increasing, and companies report paying more for risk management services as well. It is
not clear what the balance should be between public-sector investments in workplace security and private-sector security investments—especially when companies are reluctant to devote funds
that do not add to the bottom line. In addition, self-protection on the
part of firms in one industry may lead terrorists to substitute other,
more vulnerable targets, a potential unintended consequence or
negative externality. In this context, Lakdawalla and Zanjani (2002)
argue that more-efficient protection may result from government
subsidies promoting more-complete insurance against terrorism,
complemented by public-sector security efforts.
Concerns about workplace safety and security must be considered in
the context of an increasingly open economy. In terms of traditional
safety concerns, efforts to promote greater workplace safety through
regulation may have implications for the competitiveness of U.S.
industry to the extent that such practices are costly and not followed
by our competitors. In terms of emerging workplace security issues, a
more mobile and geographically dispersed workforce creates security concerns for U.S. businesses operating at home, but even more
so for those operating abroad. Recent terrorist attacks overseas have
targeted places where U.S. citizens based in other countries work,
live, and congregate, as well as other interests identified with the
United States (e.g., embassies and military facilities). Residents in
other countries employed by U.S. multinationals may also become
targets of such attacks.

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While IT is spurring the trend toward a more productive and competitive workforce, potential downsides also exist from the electronic
means used to communicate and conduct work on the job. One area
of concern is workplace privacy. There is evidence of increased use of
technology to monitor employees and their activities on the job
(Schulman, 2001). Some of this oversight is desirable to improve
worker performance, to prevent shirking and other forms of unproductive behavior, and to allow employers to monitor workers who
are off-site. Privacy advocates are concerned that workers may not be
aware of such monitoring and the consequences involved. Other privacy concerns revolve around the use of personal data, such as
medical, financial, and criminal records, for employment screening
and evaluation. With future advances in biotechnology, the potential
for misuse of results from genetic screening will become another
area of concern. This is already an issue of debate in the United
Kingdom. Under proposals put forth by the British government,
every child born in the country could be genetically screened and the
results could be stored to plan their future health care (Firn, 2003).

THE CHANGING NATURE OF WORK AND THE SKILL
REQUIREMENTS OF JOBS
The twenty-first century labor market is expected to demand a more
skilled workforce whose members are adaptable throughout their
career course to changing technology, product demand, and global
competition, along with a lesser-skilled services-oriented workforce.
As the reach of the technologies described in Chapter Three grows,
an increasing fraction of the workforce will develop or produce hightechnology products and services, or interface with these new technologies as part of the tasks they perform. A key challenge for the
public and private sectors will be developing an education and
training system that responds to the needs of the twenty-first century
labor market.

A Continued Emphasis on Highly Skilled Employment
As Chapters Two, Three, and Four have indicated, the skills of the
workforce will increasingly be the defining characteristic that
determines the extent to which an economy can develop and exploit
new technologies and compete in the global marketplace. A highly

Implications for Work in the Twenty-First Century 201

skilled workforce will be needed to realize and take advantage of
change in IT, biotechnology, and nanotechnology. The shift in organizational forms and the nature of employment relationships also
favor strong cognitive and entrepreneurial skills. For example, as
noted in Chapter Three, knowledge workers require high-level cognitive skills for managing, interpreting, validating, transforming,
communicating, and acting on information. Valued skills include
such nonroutine analytic skills as abstract reasoning, problemsolving, communication, and collaboration. Workers with these skills
can perform tasks that require higher-skill human action not easily
codified into computer software.
In addition, independent contractors, freelancers, and others in
alternative work arrangements will require strong entrepreneurial
skills to market their products and services, as well as the capacity to
manage their time and workload in a nonhierarchical environment.
These workers and others who increasingly interact in a global marketplace and participate in global work teams will also require the
skills needed to collaborate and interact in diverse cultural and linguistic settings (Marquardt and Horvath, 2001). Individuals who can
exploit diversity to generate new knowledge about customers, suppliers, products, and services will be more likely to succeed in a
competitive global environment. Advances in technology in the form
of real-time translators or other devices may facilitate these interactions to some extent, but the human factor is likely to remain
paramount.
While technological change places a priority on maintaining a highly
skilled workforce, the forces of global integration exert the same
pressure. The U.S. standard of living in open world trade is predicated on maintaining a highly productive, educated workforce. Such
a workforce characterizes high-tech sectors of the economy—for
example, aerospace, computers and office machinery, communications equipment, and pharmaceuticals—in which the United States
maintains a large share of the world’s production. A growing
emphasis on knowledge workers and knowledge-based organizations can further define a source of competitive advantage for U.S.
workers and employers. As noted in Chapter Two, however, the
United States does not rank very high among developed countries in
schoolchildren’s achievement or in adult skills, despite educational
attainment levels unmatched by other developed countries. More-

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over, many newly industrializing countries and rapidly growing
developing countries are heavily investing in the education of their
populations. Just as Indian computer scientists and software engineers now compete for jobs once held by U.S.-based workers, other
countries with more highly skilled workforces are poised to compete
in the world labor market as well.
One expectation is that the rise in the college wage premium will
induce more young people to complete a postbaccalaureate degree.
Indeed, some evidence of a supply response exists. The percentage of
high school graduates who went on to college grew from 52 percent
in 1970 to 67 percent in 1997. However, perhaps in response to enticing immediate job opportunities in the booming economy, that percentage subsequently dipped to 63 percent in 2000. Technology in
the future may improve the flow of information about future labor
market prospects to youth, who often misperceive the returns for
staying in school and acquiring more education or training (Blank,
1998).
Demand for highly skilled labor in the recent past in some sectors
has been met, in part, by highly skilled temporary foreign workers
(so-called specialty occupation workers, H-1B visa category). In fiscal
year 2001, 331,000 H-1B visas were approved, of which 58 percent
were for computer-related jobs. As a result of the widespread
retrenchments in the IT industry, only 198,000 H-1B visas were
approved the next year (INS, 2003a). In the face of potential shortages of skilled workers, U.S. immigration policy can be expected to
continue to play an important role in meeting the need for a skilled
workforce. At the same time, the globalization of production may
mean that, rather than bringing foreign workers to the United States,
U.S. employers will bring the jobs to foreign workers. This may not
be an option for a large portion of very skilled jobs because of the
importance of location for some aspects of employment, but it may
become more common, judging from the recent outsourcing of
white-collar work overseas.
It is also important to recognize that there will continue to be considerable demand for jobs traditionally requiring lower skill levels in
such service sectors as retail trade, eating establishments, health
care, child care, and other personal services. Much of this demand is
driven by demographic factors. These include an aging population

Implications for Work in the Twenty-First Century 203

that consumes more health care and other personal services and the
increased labor force participation of women, which leads to substitution of market-purchased personal services for their home-produced equivalents. Because these services are not tradable on the
international market, the low-skilled workers that produce them are
not directly affected by competition from less-expensive workers
overseas.
BLS has projected that, of the 15 occupations with the largest absolute increases in employment through 2010, 10 will be lower-skill
service-related occupations, such as food service workers; customer
service representatives; retail salespersons; and nursing aides, orderlies, and attendants (Hecker, 2001). Among the occupations projected to grow the fastest between 2000 and 2010, personal and home
care aides, medical assistants, social and human service assistants,
and home health aides rank in the top 15. None of these jobs typically requires postsecondary education, although training often is an
important component of job preparation. In addition, more of these
jobs in the future are likely to incorporate new technologies but typically with intuitive interfaces accessible to individuals who are not
technologically sophisticated (Anderson et al., 2000). For example, as
technology becomes more pervasive in health care delivery, home
health care workers and other support personnel may employ information “appliances” to manage health data, monitor vital signs, and
direct treatment regimes.

Adapting to a Dynamic Career
Although little evidence had been found as of the late 1990s that a
marked increase in job instability or job insecurity had occurred,
there are signs that worker tenure—the length of time spent on the
job—may be falling among some groups of workers, particularly men
(Kruse and Blasi, 1998; Neumark, 2000). This may be an early indicator that the labor market may be shifting toward less job stability. As
discussed above, a variety of forces appear to be shifting the workforce away from more permanent or lifetime jobs toward less permanent, even nonstandard, employment relationships. Even within
more standard employment relationships, less stability may result
from job displacements caused by technological change or competition from trade. For example, technological change can lead to

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worker displacement as technology substitutes for human labor or
technological advances shift production from old to new industries.
The growing reach of globalization beyond the manufacturing sector
and into the services sector suggests that a greater fraction of the
workforce may face the prospects of job displacement caused by
trade. Chapter Four noted the movement of IT and other IT-enabled
service-sector jobs to overseas locations in lower-wage countries.
Current estimates place the magnitude of the imports associated
with these jobs at less than one-twentieth of 1 percent of GDP.
Nonetheless, there may be a tipping point at which enough U.S.
firms have adopted the practice that it becomes necessary for others
to follow suit in order to remain competitive (Gongloff, 2003; Greenhouse, 2003).
Shifts in demand across occupations and industries will be less costly
for individuals who can retrain to meet new skill requirements when
old capabilities become obsolete. Thus, it will not only be initial education and skills acquisition prior to labor market entry but also
training and retraining as part of lifelong learning that will influence
the skills of the U.S. labor force. Greater turnover within traditional
employment relationships and shifts to nonstandard employment
relationships also spotlight the importance of fringe benefits that are
portable across jobs, or even independent of jobs (in the case of
freelancers, for example).
The prospects of continued or even accelerating job displacement as
a result of technological change and trade also invite consideration
of current and future policies to help workers adjust to these shocks.
Chapter Four discussed the current role of trade adjustment assistance programs that essentially provide additional weeks of traditional unemployment benefits as well as job training for those who
lost their jobs because of import competition. To the extent that
future labor markets evolve to place a greater emphasis on small
business forms, such as freelance work and self-employment, these
adjustment programs may be tailored to promote nonstandard
employment opportunities among displaced workers. This emphasis
is already present in the traditional unemployment insurance program. For example, some states provide self-employment assistance
programs to allow eligible unemployed workers to start their own

Implications for Work in the Twenty-First Century 205

business rather than searching for another wage or salary job (Karoly
and Zissimopoulos, forthcoming).3 The U.S. Department of Labor
and the Small Business Administration have joined in a demonstration called Project GATE (Growing America Through Enterprise),
which promotes self-employment through microenterprise, in this
case in urban and poor rural areas.

An Education and Training System for the Twenty-First
Century
Meeting the needs of the future workforce in terms of skill and the
capacity for lifelong learning will require an education and training
system that is up to the challenge. The present U.S. education and
training system largely evolved to meet the needs of the early twentieth century workforce, and the basic parameters have changed little
since that time.4 The system that evolved was predicated on the
model of first obtaining education and knowledge until young adulthood, followed by entry into the labor force and a career lasting 40
years or more (Greenspan, 2001). Additional training required for a
given occupation might be acquired early in the individual’s working
life, with the expectation that such training would remain relevant
for his or her entire career. Increasingly, this system is less relevant
for the twenty-first century workforce. Given the pace of technological change and the evolution of the business world, skills obtained
early may become obsolete. The new model for workforce education
and training is predicated on the need for continuous learning
______________
3 A monthly allowance, equivalent to the unemployment insurance benefit, is paid to

eligible individuals while they work full-time establishing their small business. Individuals are also provided technical assistance and business training opportunities.
4 As the economy shifted in the early part of the twentieth century from one based on

agriculture to one based on manufacturing, the system of public secondary education
developed, in part, in response to the demand for even more literate workers with the
analytical skills required for the growing number of factory and office jobs (Goldin and
Katz, 1998, 1999a). High schools expanded and the percentage of youth that attended
high schools rose. The system of higher education also responded with expanded
opportunities in public and private institutions for contributing to scientific knowledge and the professions (Goldin and Katz, 1999b). One dimension of the system has
been changing in recent years. The U.S. system of community colleges has been
expanding its focus to include not only traditional students who enter after high
school completion but also returning adults who seek opportunities for skill upgrading
and retraining through degree and nondegree programs (Leigh and Gill, 1997).

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throughout the working life, a process of lifelong learning involving
training and retraining that continues well past initial entry into the
labor market.
Providing an education and training system for the twenty-first century workforce represents a challenge for both the private and public
sectors. The first challenge is to improve educational outcomes at the
primary and secondary levels of education. As discussed in Chapter
Two, many children and youth fail to meet achievement standards
and expectations for proficiency even in basic math and reading
skills. Dropout rates remain high for some demographic groups, such
as Hispanics. Failure to graduate from high school or to graduate
with sufficient skills in math, reading, and the sciences required for
the higher-skilled jobs of the future potentially limits the lifelong job
market prospects of less well-prepared labor market entrants. Educational reform at the primary and secondary levels remains at the top
of the nation’s policy agenda, as evidenced by such federal initiatives
as the Leave No Child Behind Act of 2001. A focus on improving educational outcomes in mathematics and the sciences is particularly
crucial given the future pace of technological change and extent of
global competition (National Commission on Mathematics and Science Teaching for the 21st Century, 2000). As discussed in Chapter
Two, the use of technology-mediated learning to improve educational outcomes offers tremendous promise, but such methods must
be implemented appropriately to have their full effect.
The second challenge is developing opportunities for lifelong learning through formal and informal training opportunities. While employers can be expected to support some opportunities for acquiring
job-specific training, they are less likely to invest in the general skills
of their workers because these skills are more readily transferable to
another employer (Becker, 1975). Yet, employers make substantial
investments in training their workforces, whether through on-thejob training, by formal training programs at corporate universities, or
through partnerships established with such external training institutions as community colleges. One recent employer survey indicated,
for example, that 80 percent of employers provide some type of formal training, although employers vary in the nature and depth of
training they provide (Lynch and Black, 1995). However, training
rates rose with education levels, indicating less-skilled workers do

Implications for Work in the Twenty-First Century 207

not have the same access to employer-provided training as higherskilled workers (Ahlstrand, Bassi, and McMurrer, 2003).
In the twenty-first century labor market, opportunities for continued
education and training may become an important fringe benefit
used by employers to attract and retain a highly skilled workforce
(Ahlstrand, Bassi, and McMurrer, 2003). For example, United Parcel
Service (UPS) currently has a program called “Earn and Learn” TM
designed to “recruit and retain qualified student employees by providing them with cash reimbursements and student loans for college.”5 The program, initiated in 1999 and now available in 51 locations, provides reimbursement for tuition and fees: up to $3,000 per
year and $15,000 lifetime for part-time employees and up to $4,000
per year and $20,000 lifetime for part-time management employees.
Loans are forgiven as individuals continue their employment with
UPS. Such opportunities may become more prevalent as employers
compete for well-qualified workers. On the other hand, to the extent
that employment relationships evolve toward nontraditional forms,
the burden of continuous skills upgrading will fall on the individual.
As noted earlier, worker associations may help provide high-quality
training opportunities and other forms of professional development
for their members.
The need for lifelong learning in a future labor market identified by
rapid technological changes and shifting demand spurred by international trade is one area in which technology itself may provide a
solution. As noted in Chapter Three, the Internet and other communications technologies offer great potential for improving worker
skills through technology-mediated learning. For instance, companies may create online training courses for new workers or update
the training of workers previously hired and provide access to training and reference materials whenever needed. Government trade
assistance programs may take advantage of distance learning to help
workers retool for reemployment. Such efforts would benefit from
the ADL Initiative, designed to reduce the costs of making e-learning
materials available (see Chapter Three).
______________
5 For details on this program, see http://www.pressroom.ups.com/mediakits/human

resources/earnandlearn/0,1374,,00.html.

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Technology-mediated learning offers the advantage of individualized
learning programs that can be accessed “any time, any place,” an
important feature for workers who want to advance their skills but
face challenges in balancing their work and family obligations. The
flexibility to schedule distance-learning sessions to accommodate
other work-life demands may allow more individuals to take advantage of such opportunities. In addition, as e-learning materials
become more common in routine work processes (e.g., the use of
wearable devices with procedural information to supplement prior
training and reduce errors), continuous training and lifelong learning
may become a reality.
Training and skill-upgrading through technology-mediated learning
may turn out to be less expensive and more effective than using traditional approaches. If so, it may increase the percentage of the labor
force that can take advantage of learning opportunities through private sources (e.g., employers, work associations, postsecondary institutions) or public sources (e.g., publicly provided job-training programs). While there is some evidence of the effectiveness of distance
learning at the postsecondary level, the effectiveness and cost advantages for job training are relatively unproven (Autor, 2001; NSF,
2002). Thus, it remains to be seen whether this promising approach
will be viable for maintaining and upgrading the skills of the workforce.
In any event, workers appear to be open to distance-learning opportunities. According to a survey conducted in January 2000, 61 percent
of workers expressed interest in receiving education and training
through distance learning, yet just 26 percent had participated in
such opportunities (Heldrich Center for Workforce Development,
2000). Rates of past participation in distance learning rise with education and income levels and the extent of IT use on the employee’s
current job, yet the overall interest in distance learning is equal
across income levels.
More-educated workers are more likely to have participated in traditional training programs. Thus, it is important to determine whether
the lower-skilled workers can take advantage of e-learning and other
technology-driven learning opportunities when such training would
be beneficial. This is the population that faced declining real wages
in the recent past and for whom skill upgrading is often a challenge.

Implications for Work in the Twenty-First Century 209

For example, public training and job-search programs aimed at disadvantaged workers often fail to produce much in the way of earnings increases, although recent welfare-to-work programs for lowincome mothers and intensive job-skills development for youth are
exceptions (Blank, 1998; Karoly, 2001; Grogger, Karoly, and Klerman,
2002). Jobs held by lower-skilled workers often do not allow the
workers to be absent for training, which further limits their ability to
upgrade their skills. At the same time, case study evidence suggests
that employers of low-skill workers have yet to take advantage of
e-learning opportunities. This seems particularly well suited for
lower-skilled employees, given the need for more flexibility about
when training takes place and the possibility for making training an
integral part of job performance (Ahlstrand, Bassi, and McMurrer,
2003). This points to the broader issue of access to technology-driven
education and training opportunities among the least advantaged
populations.
A third challenge, particularly in the high-technology field, is to meet
the growing need for scientists and engineers who can advance the
new technologies in the laboratories, develop the applications, and
then bring them to market. The United States, for example, is generally regarded as a leader in R&D for nanotechnologies, yet, with
major investments by such countries as Japan, it will be a challenge
to retain that lead (NNI, 2003). Continued leadership in the field
requires sufficient scientific personnel, often with the multidisciplinary training required to contribute to emerging cross-cutting
fields, such as biotechnology and nanotechnology, to make the basic
scientific discoveries and translate them into commercial applications. Retaining global leadership also requires entrepreneurs in the
business field who are capable of bringing new applications to the
global marketplace. At each step of the process of scientific discovery, applications development, and market development, the United
States faces vigorous competition from other countries with highly
trained scientific personnel backed by public and private resources
invested in R&D and market development.

SUPPLYING THE WORKFORCE NEEDS OF THE FUTURE
Demographic trends, technological change, and globalization all
have implications for the future composition of the U.S. workforce.

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From the demographic perspective, the aging of the baby boom and
the relative size of later cohorts imply slow growth in the labor force
in the near future and even slower growth thereafter. At the same
time, claims on such entitlement programs as Medicare and Social
Security are projected to rise dramatically. Another demographic
reality is that the U.S. workforce has become and will continue to
become more diverse in its racial and ethnic composition. Increasingly, however, minority group representation has become blended,
creating an even more complex racial and ethnic mosaic. Within this
context, a key challenge for the future is ensuring that the pool of
potentially available labor is fully utilized. Employer policies and
public policies may encourage (or discourage) greater labor force
participation among such key demographic groups as older workers,
the disabled, and women.

Slower Labor Force Growth and Possible Labor Shortages
As discussed in Chapter Two, current demographic forecasts estimate no change in the growth rate of the labor force in the coming
decade and even a likely slowdown after that. Such projections
depend critically on assumptions regarding underlying population
growth rates (immigration being one important factor) and rates of
labor force participation among demographic subgroups.
If labor force growth proceeds at the projected rate, it will be difficult
for the U.S. economy to maintain its recent rates of growth in aggregate output. The U.S. economy of the 1990s managed high rates of
growth with a labor force that grew about as fast as what is projected
for the coming decade. As discussed in Chapter Three, strong growth
in productivity helped propel the economy forward. At the same
time, the labor market of the 1990s boom was extremely tight, which
suggests that any future periods of rapid growth will also face tight
labor markets and skill shortages in some areas (Lofgren, Nyce, and
Schieber, 2003).
How will employers likely respond to potential worker shortages in
the future? From the perspective of supply and demand, the first
possibility is that wages will increase in the face of worker shortages.
The effectiveness of higher wages will depend on how much more
labor is supplied in response to increased wages and the extent to
which wage increases cause employers to alter production processes

Implications for Work in the Twenty-First Century 211

or substitute other inputs. Alternatively, employers may seek to
recruit workers more aggressively, perhaps from nontraditional labor
pools, or they may lower their hiring standards. For skilled workers,
such recruitment may also take place within foreign labor pools, with
H-1B visas used to import qualified workers from overseas. Alternatively, employers may migrate more-skilled jobs with high vacancy
rates overseas to where the workers are, rather than bring the workers to the jobs.
As for less-skilled workers, wages did rise during the tight labor market of the 1990s, and employers were apparently more willing to hire
a range of disadvantaged workers, including minorities, welfare
recipients, and those with fewer educational credentials or less
experience (Holzer, Raphael, and Stoll, 2003). At the same time,
employers used more-sophisticated screens, such as tests and background checks, to identify suitable candidates. Although some of
these trends reversed as the economy weakened in 2000 and 2001,
the hiring prospects of less-skilled workers may improve with the
next economic expansion and expectations of slower labor force
growth. The expected growth of Internet use for recruitment and
screening may or may not be favorable for lower-skilled workers.
They may benefit to the extent that information costs for job seekers
and employers are reduced, providing for more-rapid and better job
matches. Lower-skilled workers will only benefit, however, if they
have access to and take advantage of these new technologies for job
search and recruitment.

Employing All Available Skills in the Future Workforce
Labor force growth rates can exceed current projections to the extent
that labor force participation can rise for groups not fully employed.
Thus, an important issue is whether there is scope for tapping
underutilized labor force capacity. Based on the labor force participation trends discussed in Chapter Two, opportunities to retain
greater numbers of older workers who might otherwise retire early
have arisen and some evidence exists that older workers are already
choosing to stay in the workforce longer. Greater attention to work–
family life balance issues may increase the labor force participation
of women, particularly those with children. Other demographic
groups that may be targets for greater inclusion are individuals with

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work-limiting disabilities, low-income women with children, former
military personnel, and immigrants.
Recruiting a workforce from diverse population groups presents both
opportunities and challenges. To the extent that pools of skilled and
semiskilled workers remain untapped, there may be ways to increase
the size of the available workforce and resolve short-term or chronic
skill shortages. Yet barriers to increasing access to job opportunities
for population groups with traditionally low rates of labor market
participation may be encountered. For example, women with children may face child care barriers; people with disabilities may be
hindered by their physiological condition or its interaction with
workplace conditions; older prospective workers may experience
issues related to care for an ailing spouse; and so on. More generally,
current participation rates reflect a balance among desire for
income, health, family responsibilities, nonlabor income, and other
factors. For participation to rise, some elements need to shift, for
example, by a higher wage offer, an accommodation of a health
condition, an accommodation of family responsibilities, a removal of
pension incentives to retire young, and so on.
From the perspective of employers, strategies to make working more
attractive than remaining out of the labor force are not cost-free. In
tight labor markets, employers may offer higher wages, with obvious
cost implications. They may also offer more-attractive work conditions (such as flexible scheduling or telecommuting) or moregenerous fringe benefits (such as time off for family emergencies, onsite child care, or assistance with elder care). Such improved working
conditions and benefits also imply potentially nontrivial costs. In
their negotiations over compensation, prospective workers and firms
may trade off cash wages, working conditions, and benefits.6 The key
challenge will be to identify the compensation mix that attracts the
most new workers for any given total cost increase. Dollar for dollar,
some subpopulations may be far more responsive to better working
conditions or more-generous benefits than to higher wages. Some
______________
6 Economists generally find that the costs of various employer-provided benefits are

shifted to employees in the form of lower wages (see, for example, Gruber, 1994). All
else being equal, to the extent that employees seek more work-related benefits,
employers would be expected to reduce wages to leave total compensation unchanged.

Implications for Work in the Twenty-First Century 213

employers may even want to customize their offers to the preferences and family circumstances of individual applicants. Such institutional features as internal wage structures and the minimum wage
or other government labor market regulations may preclude such
adjustments.
The rising labor force participation rate of women has been a key
source of labor force growth in recent decades. Whether that trend
continues will depend to a great extent on working parents’ ability to
balance work and family. As a woman enters the labor force, not all
of her homemaker responsibilities will be transferred to others.
These dual work and homemaker responsibilities can strain a woman’s limits on time and effort. Women (and their spouses or partners
who share in homemaking responsibilities) are therefore likely to
increasingly favor family-friendly workplace policies and benefits.
These may include child care at work, health and wellness programs,
(more-generous) parental leave, family emergency leave, vacation
time, unpaid leave, and so on (Honig and Dushi, 2003).
The cost and quality of child care, in particular, appear to be important factors in determining mothers’ labor force participation (see
the review provided by Blau, 2001). While not widespread, employerprovided or -sponsored child care is becoming available. Overall, 4
percent of firms offer some form of support for private child care,
such as on-site child care or subsidized off-site child care (BLS, 1998).
Medium-size and large firms are somewhat more likely to offer child
care (7 percent), and it is disproportionately offered to professional
and technical employees (15 percent). In addition, a number of
states are moving toward implementing universal pre-kindergarten
programs for children as young as age 3 or 4. Further efforts on the
part of the private or public sectors to affect the availability of child
care could promote modestly greater work participation among
women with young children.
Working adults may also face greater demands from their parents or
parents-in-law. The proportion of elderly requiring help with daily
activities increased from 35 percent in 1984 to nearly 43 percent 10
years later (Tracey, 2000). To provide this help, middle-aged and
older workers may increasingly prefer work arrangements with flexible scheduling and perhaps assistance with arranging elder care
(Honig and Dushi, 2003). Individuals who need to care for both chil-

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dren and parents—the so-called sandwich generation—will be particularly squeezed. This type of dual responsibility appears to be
becoming more common (Raphael and Schlesinger, 1994).
New technologies may offer solutions for helping workers address
the balance between their jobs and caregiving responsibilities at
home. Motivated by the expected sharp increase in the number of
individuals suffering from Alzheimer’s disease, technologists are
developing applications using radio-frequency tags to monitor the
movements of memory-impaired elderly persons living at home
(Dishman, 2003). Other potential IT applications include improving
access to health information and medical records, monitoring vital
signs remotely, and monitoring patient adherence to treatment
regimes (e.g., medications and other therapies). Such assistive technologies would potentially reduce the time and other costs facing
adult family caregivers and lower the stress associated with balancing work and family needs.
Another group with relatively low labor force participation is older
men and women. For a variety of reasons, it appears that older workers may already be shifting toward longer work careers. Employer
behavior and government policies may further stimulate or slow that
trend. For example, older workers are more likely to be in poor
health, and employers may be able to retain them by accommodating their special needs. Hurd and McGarry (1999) found that workplace flexibility and employers’ accommodation of older workers
increased the length of older workers’ anticipated work-life. Older
workers may require more flexibility in hours or responsibilities than
their younger counterparts do. More than half of workers age 59 and
older in the 2000 Health and Retirement Study preferred to gradually
reduce hours worked, with equal pay per hour (Panis et al., 2002). At
the same time, 63 percent stated that their employer would not let
older workers move to a less demanding job with lower pay if they
wanted to. Signs that employers may be gradually adopting policies
that will appeal to older workers and increase their retention have
emerged. For example, phased retirement programs that allow a
gradual reduction in hours are becoming more common, although
fewer than one in five firms offered them as of 1999 (Lofgren, Nyce,
and Schieber, 2003).

Implications for Work in the Twenty-First Century 215

Technology may have an effect on the timing of labor force withdrawal for older workers. Workers who receive substantial on-the-job
training are more likely to work longer to recoup the investment in
job skills. Thus, access to new technologies and the training to take
advantage of them may further determine the length of career and
the path to retirement. Moreover, the aforementioned delinking of
work and place brought about by new technologies may benefit older
workers. By combining work at home and in the office, the physical
needs of older workers may be better accommodated. Home-based
work may also allow older workers in some occupations to work from
home and care for an ill spouse while continuing to work.
Government policies may also have implications for the ability to
increase participation in the labor market at advanced ages. For
example, government policies limit employers’ ability to adjust benefits for older workers to account for changes in preferences for
health insurance, pension benefits, and other employee benefits as
workers age. Employers are also constrained—through downward
rigidity of wages or lumpiness of health insurance benefits—in their
ability to adjust total compensation in line with changes in productivity or hours worked at older ages. A more gradual transition to
retirement could be facilitated by greater flexibility for older workers
and their employers to renegotiate such terms of employment as
wage levels, health insurance coverage, pension accumulation, and
perhaps weekly hours and the nature of workers’ responsibilities. For
example, as part of a process of phased retirement, it may be beneficial for older workers to receive pension benefits early while shifting
to part-time work, or not to accumulate additional pension rights
(Panis et al., 2002; Purcell, 2000).
Employers and workers who would like to agree on such phased
retirement currently face legal obstacles. Under current IRS rules, it
is generally illegal to pay pension benefits to an active employee who
has not yet reached the plan’s normal retirement age. It is therefore
illegal for employees between the early and normal retirement ages
to partially retire (shift to part-time work and collect partial pension
benefits). Some employers are calling on Congress to amend the tax
code to allow them greater flexibility in designing phased retirement
programs for their employees (Purcell, 2000). In 2000, legislation with
that purpose failed to become law.

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As discussed in Chapter Three, medical breakthroughs now and in
the future may improve the functioning of those with such disabilities as blindness, deafness, and paralysis. To the extent that these
advances become a reality, it will shift the emphasis away from
workplace accommodations for those with disabilities to obtaining
access to the latest medical advances in order to treat progressive or
permanent disabilities. Such treatments will likely be expensive, at
least initially, but the increase in economic productivity that results
may outweigh the costs of remediation.
Even without such advances, technologies can improve the functioning of individuals with disabilities so they can participate in meaningful work or continue a career once they become ill. Some of these
technologies may be employed in the workplace along with other
accommodations, but disabled workers, especially those less able to
travel, may also be able to take advantage of telecommuting. Indeed,
there is some evidence indicating that telecommuting is on the rise
among workers with disabilities, with expectations that 10 to 20 percent of disabled workers will be telecommuting within 10 years
(Tahmincioglu, 2003). Likewise, new medical treatments for chronic
illnesses and life-threatening diseases may improve the quality of life
for individuals with these afflictions, thereby increasing the length of
their participation in the labor market.
An important component of increasing the labor force participation
of less-represented groups is matching workers to jobs. Here again,
technology may play a role in reducing information barriers associated with job search. In particular, the Internet is growing in importance as a tool for matching employers with potential employees
(Autor, 2001; Freeman, 2002). Workers now post resumes on Internet
job boards and search online job banks for openings; employers
advertise job openings on their own websites or in job banks and
search online resumes for viable candidates; and employers and job
candidates make contact through various communication technologies (e.g., online job applications or e-mail exchanges). In some
cases, intermediaries for these services are for-profit firms (e.g.,
Monster.com) while others are offered by the public sector, such as
the U.S. Department of Labor’s America’s Job Bank (www.ajb.org).
Unemployed job seekers already use the Internet at about the same
rate as they use traditional help-wanted ads (about 15 percent), and

Implications for Work in the Twenty-First Century 217

7 percent of employed workers regularly search on the Internet for
new job opportunities (Autor, 2001).
While the Internet offers tremendous potential for facilitating and
speeding employer-employee matches and improving their quality,
it remains a challenge to ensure that access to this technology is
widely available across the diverse population of potential employees. Indeed, in the area of technology, a concern recurs perennially
regarding the “digital divide” that precludes some individuals and
population subgroups from fully exploiting the transition to the
information age (Bikson and Panis, 1999; U.S. DOC, 2002).

CHANGING THE REWARDS TO WORK
As discussed in Chapters Three and Four, past and future trends in
technology and globalization have important implications for the
U.S. wage structure, including the growth in average wages, changes
in the wage distribution, and the nature of compensation arrangements. While overall wage growth will likely occur, given expected
increases in productivity, little evidence suggests that the trend
toward greater wage dispersion will be reversed. In addition, a variety
of factors may weaken the tie between employment and access to
various fringe benefits. At the same time, employers that offer benefits may move toward more personalized benefit structures, tailored
to meet the circumstances of a given employee.

Average Wages and the Wage Distribution
Chapter Three highlighted the potential for continued technological
progress to sustain the higher rates of productivity growth attained in
the second half of the 1990s. Such continued productivity gains
would support growth in real wages (or total compensation to the
extent that compensation patterns shift from wages to benefits).
Future trends in technology, globalization, and demographics are
also likely to affect the distribution of wages just as they have in the
past several decades. As discussed in Chapters Three and Four, the
persistent rise in wage disparities—particularly in the 1980s as measured by the wage differential by education level—is attributable to a
number of factors, including technological change that favors moreskilled workers, and, to a lesser extent, increased economic globaliza-

218

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tion of the U.S. economy. While debate continues about the relative
contributions of these and other factors in the past, the mechanisms
driving wider wage disparities are expected to exert the same pressures in the near term (Johnson, 1997). In the absence of a strong
increase in the supply of skilled workers in response to the higher
returns to education, wage dispersion—particularly as measured by
the gap between more- and less-educated workers—will likely
remain at current levels or even continue to widen. At the same time,
the relative stability of wage inequality over much of the 1990s’ economic expansion and the attenuation of the growth in the college
wage premium during the same period may indicate that wage disparities have reached a plateau and may not increase further as they
did during the 1980s (Card and DiNardo, 2002a, 2002b).
More-significant shifts in the organization of production and the
nature of employment relationships, such as those discussed above,
also have implications for the distribution of labor market rewards.
An increase in the proportion of the workforce in nontraditional
relationships would be expected to produce a more dispersed distribution of earnings. Among the self-employed, there is more dispersion in earnings compared with wage and salary workers, with more
of the self-employed reporting earnings below zero as well as very
high earnings (Hamilton, 2000). The same might be true of the distribution of earned income among e-lancers and other independent
workers. For these workers, rewards are more closely tied to how an
individual’s talents are valued on the open market, and while many
will succeed, others will fail. In some cases, the outcomes for independent workers may exhibit the “winner take all” feature associated
with markets for sports professionals and entertainers (Frank and
Cook, 1995; Autor, 2001). Just as there are global star athletes and
artists, professionals in medicine, law, architecture, financial services, consulting, and corporate management may increasingly be
dominated by a few “stars” with worldwide reputations and large
rewards.
An issue for future labor market policy is the potential impact of
changes in the wage structure on labor market behavior. For example, reduced labor market opportunities for low-skill workers has
been linked to their earlier withdrawal from the labor force (Juhn,
1992). Participation rates among lower-skilled younger workers may
also decline in the face of reduced labor market opportunities. Wage

Implications for Work in the Twenty-First Century 219

opportunities also affect participation decisions among lower-skill
women, such as those making the transition from welfare to work. To
the extent that the increased openness of the U.S. economy places
downward pressure on the wages of lower-skill workers, the supply
of workers may fall, further exacerbating the slow overall growth of
the labor force.

Employer-Provided Benefits and Other Forms of
Compensation
Beyond wages and salaries, employer-provided benefits—particularly health insurance and pension benefits—are the other important
dimension of the compensation system. As of 2001, 54 percent of
U.S. workers were covered by health insurance on the current job
under their own employer.7 For some, this is a fully subsidized benefit; others contribute some or all of the premium cost. Even for
those who pay the full premium, the cost of group health insurance
coverage is typically considerably less than the cost of individual
coverage purchased in the private market. In the same year, 55 percent of the U.S. labor force worked for an employer that offered a
pension plan, although just 43 percent were included in their
employer’s plan.8 Over time, employers have shifted away from providing DB pension plans to DC plans, a shift that transfers retirement
security risk from employers to employees.9 Other important
employer-provided benefits include retiree health benefits; life and
disability insurance; sick, vacation, and holiday pay; and subsidized
child care and transportation costs.
Within this setting, the demographic, technology, and globalization
forces reviewed in the previous chapters have important implications for employer-provided benefits as a whole and for specific
______________
7 Based on data from the March 2002 CPS, available at http://ferret.bls.census.gov/

macro/032002/noncash/toc.htm.
8 Based on the March 2002 CPS; see previous footnote.
9 In DB plans, lifelong guaranteed benefits are based on the worker’s wage history,

tenure, and age. In DC plans, a lump-sum benefit is based on employer and employee
contributions and accumulated interest on plan balances. Uncertainty about accumulated interest generates investment risk. Uncertainty about the potential to outlive
one’s DC plan balance involves longevity risk.

220

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components of the benefits package. In terms of the demographic
shifts, the changing composition of the workforce may have implications for who has access to employer-provided benefits and the
effect of benefit structures on worker recruitment and retention.
Older workers, for example, may prefer a package of benefits different from one preferred by younger workers, particularly if they
already have access to pension or retiree health benefits through a
prior job. Immigrant workers who intend to return to their home
country may prefer more portable forms of deferred compensation,
such as DC pension plans. In addition, future policy changes with
respect to such social insurance programs as Social Security and
Medicare may have implications for the structure of benefit plans
offered by employers. For example, future Social Security reforms
may reduce the incentive for workers to retire early, an incentive that
may be reinforced or counterbalanced by shifts in employer pension
plan features. Ultimately, the provision of employee benefits may
shift toward more personalized benefit structures, with more workers able to select benefits that fit their circumstances with corresponding adjustments in cash compensation. Information technologies and outsourcing may support this trend by reducing the
costs associated with managing a more complex system of employee
benefits.
Benefit coverage in the aggregate or for particular subgroups will be
affected by the use of alternative or flexible work arrangements, such
as contract, leased, or part-time employment, which are less likely to
provide benefits than traditional jobs are. Growth in freelancing and
self-employment may further erode the tie between employment
and access to health insurance, pensions, and other benefits. As a
result of global competition, employers may face a growing pressure
to reduce overall compensation costs to maintain more competitive
cost structures. This may lead to reductions in the generosity of
benefits or loss of benefit coverage altogether. On the other hand, in
some sectors in which competition for high-quality employees is
strong, fringe benefits may be an important component of the total
compensation package offered to attract and retain top talent.
In response to a more dynamic economy, employer-provided benefits could be made more portable so that job transitions do not necessarily entail lost access to benefits. For example, COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985) allows workers to

Implications for Work in the Twenty-First Century 221

purchase health insurance at the employer-group rate for 18 to 36
months following certain qualifying events that lead to health insurance loss. Future progress with respect to retirement income security
may depend on greater portability of pension benefits. The worker
association model discussed earlier in the context of e-lancers provides one approach for providing access to group-rate benefits that is
independent of the nature of the employment relationship and job
transitions.
As noted in Chapter Three, new forms of compensation—performance-based pay, profit sharing, stock options—have become more
common in recent years for employees who did not previously work
under such arrangements. To the extent that these approaches
favorably affect recruitment, motivation, and retention, they may
become more prevalent. However, some of the enthusiasm for these
new compensation arrangements has been tempered by the recent
economic downturn and the dot-com bust, exposing workers to the
downside risk of such variable compensation systems. Recently,
Microsoft—a company that has created more than 1,000 millionaires
since its founding in 1975—announced it would no longer grant
stock options to employees but instead shift to awarding stock
directly (Markoff and Leonhardt, 2003). This move was reportedly in
response to concerns from new employees that, in a slower economy, they would not benefit from an incentive-based pay system that
relied on stock options.10 At the same time, stock options remain an
important component of the compensation package in many hightech start-up companies that rely on a workforce willing to innovate
and take risks.

CONCLUSIONS
The demographic, technology, and globalization forces that have
been the focus of this book have wide-ranging implications for the
future of the U.S. labor market. While the future course for the
workplace and workforce is not known with certainty, we can gain
some sense of the direction in which trends will run and of the challenges the private and public sectors will face. To a large extent, the
______________
10Companies are also under pressure to treat stock options granted to employees as

an expense.

222

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U.S. labor market in the next 10 to 15 years will be shaped by the
decisions of millions of economic actors, from workers to firms, from
the least to the most skilled, and from small businesses to large
multinational corporations. Market forces in the U.S. economy and
increasingly in the world economy will determine who works, what
jobs they will hold, the type of work arrangements they will face, and
the compensation they receive.
Given the multitude of actors, any prediction more specific than that
cannot be made with great confidence. However, some trends
appear more likely than not. Among the more important of those is
that employer-employee relationships and work arrangements will
be redefined, as corporations increasingly specialize and workerentrepreneurs become more numerous. Worker skills will determine
the competitiveness of the U.S. labor force. A college education will
still be a critical qualification, but the most successful workers will be
those who can retrain in midlife in response to technological change
and shifting demand. As the growth in the labor force subsides,
employers will compete to attract currently underrepresented
groups, such as women, older people, and persons with disabilities.
Accommodations will undoubtedly be made to their desires for more
flexible work arrangements. The latter will be facilitated by advances
in IT, as will the need for retraining.
Many of the institutional features of the U.S. labor market evolved in
the context of an earlier era—such features as the laws and regulations that govern employment, hours, wages, fringe benefits, occupational health and safety, and so on. In some cases, these policies
need to be reexamined in light of the evolution of the labor market in
the coming decades. Are there distortions or unintended consequences associated with current policies that preclude desirable
market adjustments? Are policies put in place to address market failures in the past less relevant, given parameters that exist today and
their likely future evolution? Are there new market failures that policy
can address? Are there distributional consequences that could make
a case for government intervention? These questions merit a more
detailed examination in the context of the future of the workforce,
workplace, and compensation in the twenty-first century.

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