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Toward a New Social Compact: The Role of Business

U.S. Secretary of Labor Robert B. Reich

National Alliance of Business in Dallas, Texas

September 27, 1994

Not long ago we all worried about restoring America's "competitiveness." American industry, it seemed, was short-sighted, slow-footed, and dim-witted, and the American economy on an inexorable decline. Europe and Japan -- the inefficiencies of the past seared away by World War II -- were charging past us.

Now let me read you something that appeared in this city's own Dallas Morning News, two and a half weeks ago: "The United States has climbed to the top of a list of the world's most competitive economies, displacing Japan." The source is the World Economic Forum, a respected Swiss association that each year charts the economic performance of industrial nations.

What gives? Were the experts crazy then? Are they crazy now? Has everything changed completely in just a few years?

Well, for one thing, the United States is enjoying an economic recovery, while other advanced economies are still struggling to come out of recessions. But beyond the transitory ups and downs is the more fundamental success of American business in restructuring itself and investing in new equipment, with the result that productivity growth since 1990 has been averaging a healthy two percent a year. Factory productivity alone has leapt over 5 percent during the past year.

And yet, are we really competitive? What do we mean by "competitiveness" anyway? Rarely has a term of public discourse gone so directly from obscurity to meaninglessness without any intervening period of coherence. Surely the ultimate test of competitiveness should be the standard of living of Americans. And not just the average American: averages don't always reveal the most telling realities. Shaquille O'Neal and I have an average height of six feet.

The reality is that American incomes have barely edged upward, and most Americans find themselves on the same downward track they've been on for fifteen years. And although over 4 million new jobs have been added to the American economy, 8 million Americans are still unemployed and 4 million are working part-time who would rather have full-time jobs.

Broad trends that have accelerated since the mid-1970s are splitting America's middle class into three new groups: An underclass largely trapped in center cities, increasingly isolated from the core economy; an overclass of those who are positioned to profitably ride the waves of change; and in between, the largest group, an anxious class, most of whom hold jobs but who are justifiably uneasy about their own standing and fearful for their children's futures.

For much of this century, Americans of diverse backgrounds and conditions were bound together by two powerful forces. One was the threat of Soviet aggression. The looming presence of a rival "superpower" stoked our sense of shared purpose. The other was a growing economy. Our sense of common destiny was nourished by the certainty that a rising economic tide would lift all Americans.

Today, in almost opposite fashion, each of these once-sturdy bonds have come undone. The Cold War ended dramatically. We watched it on CNN. And now, we welcome the newly liberated world it has wrought. But America's middle class crumbled quietly. We watched it happen day by day, but somehow never really saw it. And now, we confront its consequences.

Over the next few months, I will be talking about what government and individuals can do to boost more Americans into a new middle class. But this morning, I want to address the special role of the private sector. This is both because the private sector is the most formidable force for recreating America's middle class, and because a clear-eyed calculation of corporate interests must reckon such a renewal as vital for long-term business success.

Let me first address the cause of the disintegration of the middle class. What divides the over, the under, and the anxious classes is both the quality of their formal educations and their capacity and opportunity to learn throughout their working lives. Skills have always been relevant to earnings, of course. But they have never been as important as they are today. Today, skills shape the fundamental fault line running through the American workforce. Only fifteen years ago, a male college graduate earned 49 percent more than a man with only a high school degree. That's a sizable difference, to be sure. But it's a divide small enough for both men to occupy terrain each would call middle class. Now shift to the present. In 1992, a male college graduate out-earned his high school graduate counterpart by 83 percent -- a difference so great that they no longer inhabit common territory or share common prospects. Women are divided along similar, though slightly less stark, lines.

Use a different lens and the picture sharpens further. Traditionally, membership in the American middle class included not only a job with a steadily increasing income, but a bundle of benefits that came with employment. Once again, we see a widening gap, related to education and skills. Employer-sponsored health coverage for workers with college degrees has declined only slightly, from 79 percent in 1979 to 76 percent in 1993. But for high school graduates, rates have fallen further: 68 percent to 60 percent over the same period. And rates for high-school dropouts have plunged -- from an already low 52 percent in 1979 to only 36 percent last year. Retirement will only harden these divisions. Nearly two out of every three workers with college degrees get pension coverage on the job. More than three out of four high dropouts do not.

But earnings and benefits don't even tell the complete story. Merely getting a job and holding on to it depend ever more on skills. In the 1970s, the average unemployment rate for people who had not completed high school was 7 percent. By the 1980s, this rate grew to 11 percent; by 1993 it had passed 12 percent. Job loss for high school graduates has followed a comparable trajectory. By contrast, the unemployment rate for workers with at least a college degree has remained around 3 percent.

In a seeming paradox of today's economic news, financial markets fret that unemployment is too low to contain inflation, even while 8 million willing American workers remain jobless. Part of the answer to the apparent contradiction is that markets for highly skilled labor are becoming tight in many parts of the economy, creating the conditions that can kindle inflation worries. But millions of less-skilled workers remain idle or underemployed. This wasted workforce is walled off by skill barriers from the leading edges of the economy where capacity constraints loom. The best way to expand the economy's capacity and lower the level of unemployment needed to bridle inflation is to dismantle these walls by preparing underutilized workers for more productive work.

When flashed on a screen in a hotel ballroom, bar graphs and trend lines have a certain innocuous quality. They're abstract, and they're fleeting. Click a button and the numbers vanish. But as they take hold in the neighborhoods and workplaces of America, these forces are ominous. Consider the physical separation they have already helped forge. The overclass has moved to elite suburbs -- occasionally into their own gated communities or residential compounds policed by their own security forces. The underclass finds itself quarantined in surroundings that are unspeakably bleak, and often violent. And the anxious class is trapped, too -- not only by houses and apartments often too small for growing families, but also by the frenzy of effort it takes to preserve their standing, with many families needing two or three paychecks to deliver the living standard one job used to supply.

In other words, even as America's economic tide continues to rise, it no longer lifts us all. Only a small portion of our population benefited from the economic growth of the 1980s. The restructurings and capital investments launched during the 1980s and continuing through the 1990s have improved the productivity and competitiveness of American industry, but not the prospects of most Americans. And the people left behind have unleashed a wave of resentment and distrust -- a wave buffeting government, business, and other institutions that the anxious class believes has betrayed them.

Consider the striking turnaround in public opinion. In 1975, according the Gallup poll, 40 percent of the American public said it had confidence in Congress. Today, the figure is 18 percent. In 1975, more than a third of Americans said they had confidence in big business. Today, only a one-quarter do. Nearly every institution in this country -- public schools, newspapers, television, labor unions, even organized religion -- have suffered declines in public esteem. Nearly every leader in society has become a lightning rod for public frustration.

This creates fertile soil for the demagogues and conspiracy theorists who often emerge during anxious times. People in distress, people who fear their future, naturally cling to what they have and often resist anything that threatens it. People who feel abandoned -- by a government that has let them slide or a company that has laid them off -- respond to opportunists peddling simplistic explanations and sinister solutions. Why are you having trouble making ends meet? We're letting in too many immigrants. Why are you struggling to pay your bills? Affirmative action tilts things in favor of African-Americans and Hispanics. Why is your job at risk? Our trade policies have not been sufficiently protectionist.

Such sentiment transcends ideological divisions. Conspiracy theorists on the left concoct stories of a cabal of corporate puppeteers pulling the strings of global trade; those on the right spin tales of a President who orchestrates murder. Talk radio, that otherwise sparkling tribute to free expression, has taken on a newly malevolent edge -- elevating ratings by escalating rage. And odd alliances have formed to repel the notion that free trade can produce middle class prosperity. Recall the recent debate over NAFTA, from which I still carry scars.

So what's the solution? We can't turn back the clock and return to the safe old world of routine mass production that dominated post-war America. Efforts to do so -- say, by keeping foreign investment and goods outside our borders or by stifling technological advances -- would not resurrect the old middle class. They would only inhibit the ability of every American to prosper amid change.

The real solution is to give all Americans a stake in economic growth, to ensure that everyone benefits from our newfound competitiveness. That way, we can grow together -- and increase our capacity for non-inflationary growth. 12 million unemployed or underemployed Americans, and millions more whose wages are stagnant or declining must be puzzled at talk of an overheating economy. We can do better than that. This economy will not be at full capacity until we tap the potential of all our citizens to be more productive.

We must together build a new middle class -- a middle class based on the power of ordinary workers to add ever more value because they have the skills to do so.

Individuals and families shoulder much of the responsibility here, of course. Ultimately, they must face the realities of the new economy, and ensure that they and their children have the basic intellectual tools to prosper in it. Government has a role, too. It can clear away some of the obstacles -- improving the quality of public education, setting skills standards, and smoothing the transition from school to work and from job to job.

But individuals, however resourceful, and governments, however reinvented, can't build a new middle class on their own. Business has an indispensable role to play. And let me put the issue cleanly: Unless business joins in rebuilding America's middle class -- training and empowering ordinary workers to be productive and innovative -- this task cannot succeed. I recognize the stakes this sets. But I believe that business will, in the end, find the motives to fulfil its central role. There are two good economic reasons for business to enlist: First, the members of America's imperiled middle class are key productive assets. Second, they form the majority of most companies' customers. Consider each of these reasons in turn.

It is no news to business leaders that a skilled workforce can be a strategic trump card. Other elements of a business can be replicated by competitors -- machines, processes, raw materials, access to cheap labor around the world. But a skilled, flexible workforce that can create value in ways that matter in the marketplace can offer enduring competitive advantage.

Companies throughout America are demonstrating that success often hinges on treating workers as assets to be developed, not costs to be cut. And they're doing it with front line workers who are not necessarily four-year college graduates. In my travels around the country, I have seen the pattern again and again: at an electro-galvanizing steel plant in Cleveland, a telephone assembly plant in Atlanta, an insurance company in Hartford, an accounting firm in Chicago, a machine-tool company in Rochester. Many of the companies represented here in this room are among the pioneers of this approach to creating profits and productivity in the new economy. In the process, you have helped create the vanguard of this new middle class: technician workers with training beyond high school, but not necessarily a college degree.

Lew Platt, the CEO of Hewlett-Packard, told me the other day about HP's integrated circuit plant in San Jose. Yields had been too low, the reject rate too high, even after HP had installed state-of-the-art machinery. What was the problem? HP discovered that its front-line workers in San Jose, most of them without college degrees, knew a lot about what wasn't working in the plant. What they needed was an extra increment of training, and the authority to implement their solutions on the spot. HP decided to try a campaign of training for the San Jose electronics workers -- thousands of them -- and it transformed these front-line workers into technicians. It worked. Quality improved dramatically, yields jumped, and the plant became enormously competitive. Not only did HP turn its plant around, it also added thousands of workers to the ranks of the new middle class.

So my first reason for optimism that business will play its part in building a new middle class based on skills is that workforce investments often make excellent business sense, and business increasingly knows this.

The second reason also affects the bottom line, if a bit less directly. For most American companies, their major market remains American consumers. In the 1950s and 1960s, the American consumer market was the most buoyant in the world. Selling into a prosperous, sophisticated home-country market gave American companies a world-beating edge in industry after industry. Company profits and middle class incomes climbed in tandem. Mass production spawned the middle class; the middle class fueled mass production. But since the mid 1970s -- as incomes stagnated, divisions widened, and America's mass market fragmented -- the U.S. market has become less dominant as a commercial launching pad. A revitalized middle class means stronger domestic demand and a better proving ground for global business success.

These are good reasons for business to invest in human capital, but apparently not reason enough. A new survey by the Bureau of Labor Statistics found that not quite half of all establishments provide any formal training in job skills. Other recent data show that employers tend to concentrate training investments on workers who are already skilled. A third of young workers with college degrees receive work-related training. But only one out of six workers with a high school degree got such training, and only one out of ten high school dropouts.

When nations are wise and lucky--as America has been for much of its history -- an implicit social compact knits together business success, rising living standards, and pro-business politics. But the erosion of the old middle class poses a threat to the bargain that has paid off so well for so many American citizens and American companies. Business success no longer automatically brings rising living standards for all. There is a danger that the interests of corporations playing on a global scale will be seen as distant from the interests of American citizens, that higher rates of productivity will not be understood to mean higher living standards for ordinary Americans. As most Americans find themselves working harder for less, and the American dream recedes, the much-vaunted competitiveness of the American economy seems like a cruel hoax.

Now is the time to renew the compact among American businesses, American government, and American working men and women. Now is the time to reknit the connections between the two defining national traditions of free enterprise and broadly shared middle class prosperity.

The Clinton Administration is pledged to deliver on government's side of this new compact. This Administration's commitment to building a new middle class already has produced results -- but perhaps because many were born in bipartisan harmony rather than partisan discord they have gone unnoted. Political conflict is a far more exciting spectator sport.

An additional 130,000 children each year can now be made ready to learn through Head Start. About 120,000 disadvantaged students participated in this year's summer job program. Almost a half million young Americans will be entering youth apprenticeships. Three and a half million Americans each year will gain the option of repaying their education loans as a percentage of future income. Twenty thousand young Americans -- more than ever served in the Peace Corps even at its height -- will be working on national service projects in their communities. Fifteen million working families with modest incomes have gotten the tax relief necessary to make work pay. And -- with your help -- we've begun transforming the old unemployment system, built for another era and another economy, into a modern reemployment system. This year alone more than half a million permanently laid-off Americans will get the help they need to find new and better jobs.

This Administration has made bold moves, in addition, to get the nation's economic house in order. Consider the record: The deficit, as a portion of GDP, is at its lowest level in fifteen years, and is projected to remain there even without additional spending cuts. Government payrolls are being reduced by 250,000 workers. Inflation is low, and there are scant signs of overheating. We are committed to free trade. Thanks to the North American Free Trade Agreement, our exports to Mexico are now growing at three times the rate of exports to the rest of the world. Soon, Congress will approve the latest GATT agreement, opening even more markets to more American services as well as goods. And no Administration has been more vigorous in promoting American business overseas -- from Saudi Arabia's $6 billion aircraft purchase, to Brazil's $1.5 billion contract with Raytheon, to the Commerce Secretary's recent mission to China, to the Energy Secretary's mission to Pakistan.

Today, this Labor Secretary embarks on a mission as well. This mission is to American business, and Dallas is my first stop. The aim of my mission is to stress the urgency of the other side of this compact. For the future prosperity and stability of this nation, American business must reciprocate by investing in American workers.

How should this be done? What should be the specific contents of this compact? I cannot predict the exact provisions. Obviously, one means of committing American business to workforce investment would be through a simple requirement that firms spend a small portion of their payrolls upgrading the skills of all employees.

The administration is not advancing such an option as a formal policy proposal because we are not convinced it is the best way to achieve the goal of stepped-up investments in worker skills. Flat requirements like this can invite endless legal pirouettes, resulting in ever more intrusive regulation. I hope we can discover together a better way -- voluntary commitments to, and disclosure of, such workforce investments; cooperative agreements among firms in an industry to share the costs of basic skill training; agreements between large firms and their smaller suppliers and customers to do so; employee education as an object of collective bargaining; awards or certifications for businesses that invest substantially in their workers; collaborations between high schools and companies to hire school-to-work apprentices; shifts in the tax code to create added incentives for workforce training. These and other approaches -- alone or in combination -- may be more effective than a uniform requirement. But if we cannot develop a superior approach, it would certainly be better to embrace that method than to abandon the goal. Let's get to work on the options.

You in the National Alliance of Business, and the broader business community you represent, have already accomplished a great deal, and ought to be proud of your achievements. But the centrifugal forces that are pulling America apart call for even greater resolve. We can build a new middle class, and new ladder into it for the underclass. You and I know it's possible. We've glimpsed its beginnings. But without the redoubled energies of American business -- without the fundamental understanding that no task is more central to our future -- the sturdy middle class that was once our country's defining quality will continue its steady erosion.

So as I launch my mission to American business, I ask that you lend your resolve to the creation of a new compact -- for profitability, for shared prosperity, for an easing of economic anxiety and the social tensions it spawns. Join in the debate over the terms of that compact, and the business role in building workplace skills. And commit yourselves to renewing the American dream, to nurturing a new middle class that is even more inclusive than the old, and equipped to master the challenges of the new economy.

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