Education, Training and the New Economy

A Forum — February 19, 1999

The American economy is undergoing a fundamental transformation, observed Robert D. Atkinson, Director of the Technology, Innovation and the New Economy Project, Progressive Policy Institute (PPI).  The New Economy Project aims to educate federal, state and local policymakers about this emerging economy, and to foster policies that support and promote innovation, technological advances and entrepreneurship.  As part of the Project, PPI organized a New Economy Task Force composed of legislators and entrepreneurs. The Task Force functions as a "think tank," linking the public and private sectors in an open discussion about the challenges of the new economic order and the ways in which the government can better respond to theses challenges.

Atkinson and Randolph H. Court, authors of The New Economy Index: Understanding America's Economic Transformation, a PPI publication, consider that the new economy is characterized by four basic trends:

1. Industrial and occupational changes - The economy is no longer organized around standardized mass-production of goods in large factories. Currently, 80 percent of the workers are found in offices processing or generating information, or providing services to people.  The knowledge required in the new economy is also changing.  While the market for high-skilled and low-skilled workers is expanding, that for mid-skilled workers is on decline.  Low-skilled occupants such as cashiers, janitors, salespersons and waiters are expected to account for 13 percent of all new job growth.   Occupations that require an associate's degree and above will account for 32 percent of all jobs in 2006.
   
2. Globalization - In this new economy, business must invest globally to reach markets, technology and knowledge.  Globalization has doubled since mid 80's, bringing more competition and making innovation more critical to success.
   
3. Dynamism and competition - "Gazelles" is the term used by PPI to identify fast-growing companies with sales growths of at least 20 percent per year for four straight years.  The number of "gazelles" has grown 40 percent since 1993, and is now more than 355,000.  These companies were responsible for creating 70 percent of the net new jobs added to the economy between 1993 and 1996.  These new jobs have contributed to the lowest unemployment rate in 30 years. However, the growth in net total employment masks a constant "churning" of job creation and destruction.  Approximately 30 percent of all jobs are either being created or eliminated every year, a rate three times greater than in the 1970's.  As companies compete to be the survivors of churning, they are less likely to protect workers against layoffs or to invest in training and research.
   
4. The information technology revolution - Technology has shortened the cycles between the market introduction of a product and its eventual replacement. Information technology is increasing efficiency and cutting costs. Consumer choices have expanded, while the costs of computing and data transmission costs are plummeting.

The impact of this new economy on Americans must be analyzed with care.   Conventional indicators show a strong economy with low inflation and unemployment.   However, fundamental measures of economic well being are of concern.   Productivity and income growth rates are lagging, and the income distribution is uneven. While the wages of college-educated workers have had a significant increase, particularly during the 1980's, those of the less-skilled workers remained stagnant.   This trend has slowed recently for individual wages, but the inequality of family income has continued to grow.  Between 1980 and 1996, real incomes went up 58 percent for the wealthiest five percent of American households, but less than four percent for the lowest 60 percent.  The reduction in unemployment and underemployment has been accompanied by reductions in employee benefits and tenure, and modest increases in contingent work (part-time, temporary and contract work).  These indicators suggest that the new economy has not realized its full potential.  The challenge facing policymakers is to ensure that this economic potential is attained.  Atkinson proposes three main foundations to sustain the growth of the new economy:

1. Improving skills and knowledge - Per-pupil funding for K-12 public schools has almost doubled in the last 30 years, but student performance has flattened out. The numbers of engineers and scientists have grown, but not at the rate required by the new economy.  In addition, companies are spending less on skills training, due to increased competition and churning of firms and to low employee tenure.  PPI proposes that companies collaborate-- as networks, partnerships or consortia--to invest in training to ensure innovation and growth.  PPI also proposes that government needs to become more engaged in training, particularly for small and medium-sized companies.   Atkinson proposes regional alliances between the government adn businesses to invest approximately $50 million in skills training.  One-third of the cost would be financed by the federal government, while consortia of companies would contribute the remaining two-thirds.
   
2. Investing in research and innovation - Public investment in research and development (R&D) is critical for economic growth. For instance, the Internet and the Web browser were both conceived and developed with government dollars. However, federal support for non-defense R&D has been steadily falling and is now less than half a percent of the GDP. Business-funded R&D has been growing, but private investments on basic research have declined. Company collaboration can also increase investment in basic R&D without fear of competition.
   
3. Speeding the transformation to a digital economy - The Internet, the most significant component of electronic commerce (e-commerce,) is critical for the new economy. Between 1996 and 1997 the total U.S. Internet economy more than doubled and business-to-business e-commerce is expected to account for the largest share of the Internet economy next century. More American households are online, even low- income households, as well as more business and schools. From 1994 to 1995, the percentage of classrooms with Internet access increased from three percent to 27 percent. However, the government is lagging behind the digital revolution and is not investing at the same rate as consumers and business. Bandwidth buildup is a priority area for investment. Bandwidth is the carrying capacity of the connections between the sender and receiver of the data. It determines the ability to transfer large amounts of data. A bandwidth buildup is essential for faster transmission of larger amounts of data. New policies must favor investment on, and expansion of cable and new asymmetric digital subscriber line (ADSL) services.

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