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2 - employment, wages, and benefits

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American workers have enjoyed the benefits of both strong job growth and rising wages during the Clinton–Gore administration. Wage inequality began to decrease and real wages began to rise during the late 1990s, following two decades of increasing wage inequality and stagnating average wages.

EMPLOYMENT HAS BEEN GROWING ROBUSTLY

Employment experienced unprecedented growth during this administration—adding 19 million net new jobs in the last 6 years. As a result of this growth, the unemployment rate during 1999 fell as low as 4.2 percent, the lowest rate in 29 years. This strong growth will continue into the next decade, according to projections by the Department of Labor’s Bureau of Labor Statistics (BLS).1

Growth is resuming for stagnant wages and benefits

Since the end of World War II, real wages for production workers have risen by more than half. Most of this growth occurred, however, in the 1950s and 1960s. (See chart 2.1.) After reaching a peak in 1973, real hourly earnings for production workers either fell or stagnated for two decades. During 1996–1998, growth in hourly earnings resumed, accelerating to over two percent in 1998.

For many workers, the stagnating wages of the last quarter century were offset in part by growth in expenditures for other employer-provided compensation, such as healthcare and pension benefits. Dollars spent on benefits grew more rapidly than those spent on wages and salaries during most of the 1980s and the first half of the 1990s, accounting for 28 percent of total compensation in 1995. Beginning in 1995, the benefit portion of workers’ compensation grew more slowly, as employers increasingly chose to offer less expensive types of health care and pension plans in order to minimize the growth of labor costs.2

Stagnating real wages and cutbacks in other compensation, however, do not necessarily mean stagnating income and living standards. In fact, real family income for most Americans has risen, although slowly, over the past quarter century, reflecting the dramatic rise in two-earner families and the increase in the number of hours many families work.

Healthcare coverage. Even though wage growth surpassed benefit growth in the second half of the 1990s, employers responded to increased costs of benefits by moving rapidly to managed-care arrangements, shifting costs to workers in the form of higher premiums, copayments, and deductibles, or dropping healthcare plans altogether. The proportion of the nonelderly population without any form of health insurance increased from 15 percent in 1987 to 18 percent in 1997, primarily due to the decline in employer-provided coverage.3

Average medical-care costs of a 50-year-old are two to three times those of a 30-year-old. Population aging is likely to contribute to higher average medical-care costs, further increasing the cost of employer-provided health insurance. As the average age of the workforce, and the proportion of the workforce without healthcare coverage all rise, national debate regarding the effectiveness of employer-provided benefits and appropriate public policy may intensify.4

Text VersionAverage Hourly Earnings

Pensions. Many employers offer no pension cover-age to their employees. Roughly half of the private-sector workforce is not covered by any employer-sponsored retirement plan. A large percentage of nontraditional workers are excluded from employer-sponsored retirement plans. (See chapter 7, Implications of workplace changes.) Only 20 percent of workers in small businesses have any retirement plan. Low-wage workers are even less likely to have pension coverage. Only eight percent of low-wage workers are covered by an employer-sponsored plan, and many low-wage workers do not earn enough to contribute anything to a "defined contribution" plan even if they are covered.5

Among those employers who do sponsor retirement plans, many have moved to new types of plans that cause workers to bear more responsibility for retirement planning and expose them to risks associated with financial market performance. Such plans also increase the portability of pensions for workers who change jobs. Employers have traditionally provided "defined benefit" plans, which base benefits on years of work and salary. Workers who become vested in such plans are assured a specified level of pension benefits at retirement. Over the past 25 years, however, employers have turned toward defined contribution plans, in which the benefit is the value of funds accumulated in an individual’s account, a value affected by factors such as contributions and investment performance. Of the roughly half of private-sector workers with pension coverage through their employment, coverage through defined contribution plans has more than doubled in 25 years, rising from 33 percent in 1975 to about 80 percent by the end of the century. The proportion of covered workers enrolled in defined benefit retirement plans declined from 87 percent to about 50 percent in the same period.6 Approximately one in five covered workers has both a defined contribution and a defined benefit plan.

In the late 1990s, there has been a further shift away from traditional defined benefit plans towards a new type of defined benefit plan called the "cash balance plan." Under such a plan, employers generally contribute four to seven percent of a worker’s pay each year to an account with a specified rate of return, in many cases the 30-year treasury-bond rate. In 1998, 12 percent of defined benefit plans were cash balance plans, up from 5 percent in 1995.7Employer-provided pension plans may, in the future, continue this trend towards defined contribution plans or others with similar features. Other future changes in public or private pension policies may stem from workers returning to the workplace after retiring from their career jobs.

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Changing Health Care Benefits

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Changing Private Pensions Changing Private Pensions

WAGE INEQUALITY: WILL THE RICH GET RICHER AND THE POOR, POORER?

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Average Weekly Earningsby Educational Attainment Level

The last few years of the 1990s have provided significant real earnings growth for nearly all groups. However, this recent trend does not counter a trend of the past two decades. Earnings among high-, middle-, and low-wage workers have grown at different rates.

High-wage earners have had comparatively larger increases in their wages than middle- and low-wage workers. (See box 2.3.)

Twenty years ago, the average college graduate earned 38 percent more than the average high-school graduate. Today, it is 71 percent more.

Real weekly earnings for workers with less than a high–school diploma fell from $462 in 1979 to $337 in 1998. This downward trend continued for all workers who were not college graduates— nearly three-quarters of the civilian labor force in 1995. (See chart 2.2.) In contrast, workers with a college degree attained gains during the period, with real weekly earnings rising from $758 in 1979 to $821 in 1998.8

Over the past quarter century, wage gaps between workers with different education levels have increased, largely due to falling real earnings for those with less education. Even with improvements in the late 1990s, workers who lack the required education and skills will continue to face declining job opportunities and wages.

Over the long term, not only have the earnings of more highly educated workers been increasing relative to the wages of less highly educated workers, but inequality has increased even within groups of workers with the same educational attainment. The spread between lower-paid and higher-paid workers in each education group widened, particularly in the 1980s, reflecting the fact that education level is just one dimension of skill. This increased wage inequality within groups having similar educational attainment may indicate increased differentials in other workers’ skills for those with similar education. The rapid growth in employers’ need for more-skilled workers may be the key to explaining rising inequality and changing wage structure.

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The Wage Gap

A commonly accepted way of assessing the change in wage inequality is to measure the extent to which change occurs in the ratios of high-wage, middle-wage, and low-wage workers. For the period 1979 to 1998, chart 2.3 illustrates the wage gap as the ratio of a high-wage worker’s earnings (at the 90th percentile of the wage distribution) to those of a low-wage worker (at the 10th percentile). Similarly, to learn whether the wage gap is growing or falling across the entire wage distribution, we can compare the ratio between high- and middle-wage (at the 50th percentile) workers’ earnings with that between middle- and low-wage workers’ earnings. (See chart 2.4.)

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Weekly Earnings Ratio

We can see in chart 2.3 that the gap between high- and low-wage workers expanded rapidly during the 1980s. After forty years of narrowing inequality, the high-to-low wage ratio increased by 19 percent between 1979 and 1999 (from 3.7 to 4.4), largely because low-wage workers’ earnings fell dramatically.

During the 1980s, the 90/50 and 50/10 ratios both increased rapidly; relatively speaking. During the 1990s, however, low-wage workers began to catch up with middle-income workers, due in part to increases in the minimum wage and similar government policies. The steady widening of the gap between high and middle earners is largely responsible for the overall increase in inequality over the last 25 years.

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Weekly Earnings Ratio

What the fastest growing jobs require

Among the 30 occupations the BLS projects to grow the fastest (from 1996-2006), educational requirements and earnings of workers are quite varied. Only about half of these occupations require education or training beyond high school.

However, jobs requiring an associate’s degree or higher are projected to grow faster than the average for all occupations. Occupations requiring a bachelor’s degree will grow almost twice as fast as the overall average. The three fastest growing occupations, which are all computer-related, require at least a bachelor’s degree and have average earnings much higher than the average for all full-time wage and salary workers. And all of the 20 highest paying occupations require at least a bachelor’s degree. Note, however, that while jobs usually requiring an associate’s degree or higher are expected to grow faster than average over the 1996–2006 period, the majority of new jobs are expected to be in occupations requiring less than an associate’s degree. Thus, most low-skilled workers may not lack employment opportunities. The challenge is how to make those jobs pay more than they currently do.


1 Employment is projected to increase by 14 percent in the 1996-2006 period, with unemployment projected to be 5.4 percent in 2006. This slower growth rate than the pre-ceding decade is due to a decreasing rate in the growth of the labor force.

2 Economic Report of the President, transmitted to the Congress February 1997, Washington, D.C.: United States Government Printing Office, 1997, p. 383, Table B-48.

3 Paul Fronstin, "Sources of Health Insurance and Characteristics of the Uninsured: Analysis of the March 1998 Current Population Survey," EBRI Issue Brief, December 1998, p. 4.

4 Joe Manning, "Health Care Costs to Rise with Increasing Age of Employees," Washington Times, May 17, 1999.

5 Pension Benefits Guaranty Corporation, 1998 Annual Report, Washington, D.C.: 1999, p. 6.

6 U. S. Department of Labor, Private Pension Plan Bulletin: Abstract of 1995 Form 5500 Annual Reports, Washington, D.C.: Spring 1999, p. 67.

7 Stephanie Armour, "IBM Retools Pensions," USA Today, May 4, 1999, p. 1.

8 U.S. Department of Labor, Bureau of Labor Statistics, Current Population Survey.

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