U.S. Economy

example, fewer young people choose to train for the profession.

Supply and demand factors change in labor markets, just as they do in

markets for goods and services. As a result, occupations that paid high

wages and salaries in the past sometimes become outdated, while entirely

new occupations are created as a result of technological change or

changes in the goods and services consumers demand. For example,

blacksmiths were once among the most skilled workers in the United

States; today, computer programmers and software developers are in great

demand.

The process of creative destruction carries over from product markets to

labor markets because the demand for particular goods and services

creates a demand for the labor to produce them. Conversely, when the

demand for particular goods or services decreases, the demand for labor

to produce them will also fall. Similarly, when new technologies create

new products or new ways of producing existing products, some workers

will have new job opportunities, but other workers might have to retrain,

relocate, or take new jobs.

Factors Affecting Labor Markets

Changes in society and in the makeup of the population also affect labor

markets. For example, starting in the 1960s it became more common for

married women to work outside the home. Unprecedented numbers of

women—many with little previous job experience and training—entered the

labor markets for the first time during the 1970s. As a result, wages for

entry-level jobs were pushed down and did not rise as rapidly as they had

in the past. This decline in entry-level wages was further fueled by huge

numbers of teens who were also entering the labor market for the first

time. These young people were the children of the baby boom of 1946 to

1964, a period in which the birth rate increased dramatically in the

United States. So, two changes—one affecting women’s roles in the labor

market, the other in the makeup of the age of the workforce—combined to

affect the labor market.

The baby boomers’ effects have continued to reverberate through the U.S.

economy. For example, starting salaries for people with college degrees

became depressed when large numbers of baby boomers started graduating

from college. And as workers born during the boom have aged, the work

force in the United States has grown progressively older, with the

percentage of workers under the age of 25 falling from 20.3 percent in

1980 to 14.3 percent in 1997.

By the 1990s, the women and baby boomers who first entered the job market

in the 1970s had acquired more experience and training. Therefore, the

aging of the labor force was not affecting entry-level jobs as it once

did, and starting salaries for college graduates were rising rapidly

again. There will be, however, other kinds of labor market and public

policy issues to face when the baby boomers begin to retire in the early

decades of the 21st century.

Immigration

Labor markets in the United States have also been significantly affected

by the immigration of families and workers from other nations. Most

families and workers in the United States can trace their heritage to

immigrants. In fact, before the 20th century, while the United States was

trying to settle its frontiers, it allowed essentially unlimited

immigration. see Immigration: A Nation of Immigrants. In these periods

the U.S. economy had more land and other natural resources than it was

able to use, because labor was so scarce. Immigration served as one of

the main remedies for this shortage of labor.

Generally, immigration raises national output and income levels. These

changes occur because immigration increases the number of workers in the

economy, which allows employers to produce more goods and services.

Capital resources in the economy may also become more valuable as

immigration increases. The number of workers available to work with

machines and tools increases, as does the number of consumers who want to

buy goods and services. However, wages for jobs that are filled by large

numbers of immigrants may decrease. This wage decline stems from greater

competition for these jobs and from the fact that many immigrants are

willing to work for lower wages than other U.S. workers.

Immigration into the United States is now regulated by a system of quotas

that limits the number of immigrants who can legally enter the country

each year. In 1964 Congress changed immigration policies to give

preference to those with families already in the United States, to

refugees facing political persecution, and to individuals with other

humanitarian concerns. Before that time, more weight had been placed on

immigrants’ labor-market skills. Although this change in policy helped

reunite families, it also increased the supply of unskilled labor in the

nation, especially in the states of California, Florida, and New York. In

1990 Congress modified the immigration legislation to set a separate

annual quota for immigrants with job skills needed in the United States.

But people with family members who are already U.S. citizens remain the

largest category of immigrants, and U.S. immigration law still puts less

focus on job skills than do immigration laws in many other market

economies, including Canada and many of the nations of Western Europe.

Discrimination

Women and many minorities have long faced discrimination in U.S. labor

markets. Employed women earn less, on average, than men with similar

levels of education. In part this wage disparity reflects different

educational choices that women and men have made. In the past, women have

been less likely to study engineering, sciences, and other technical

fields that generally pay more. In part, the wage differences result from

women leaving the job market for a period of years to raise children.

Another reason for the disparity in wages between men and women is that

there is still a considerable degree of occupational segregation between

males and females—for example, nurses are much more likely to be females

and dentists males. But even after allowing for those factors, studies

have generally found that, on average, women earn roughly 10 percent less

than men even in comparable jobs, with equal levels of education,

training, and experience.

Analysis of wage discrimination against black Americans leads to similar

conclusions. Specifically, after controlling for differences in age,

education, hours worked, experience, occupation, and region of the

country, wages for black men are roughly 10 percent lower than for white

men, though occupational segregation appears to be less common by race

than by gender. Issues other than wage discrimination are also important

to note for black workers. In particular, unemployment rates for black

workers are about twice as high as they are for white workers. Partly

because of that, a much lower percentage of the U.S. black population is

employed than the white population.

Hispanic workers generally receive wages about 5 percent lower than white

workers, after adjusting for differences in education, training,

experience, and other characteristics that affect workers’ productivity.

Some studies suggest that differences in the ability to speak English are

particularly important in understanding wage differences for Hispanic

workers.

The differences between the earnings of white males and earnings of

females and minorities slowly decreased in the closing decades of the

20th century. Some laws and regulations prohibiting discrimination seem

to have helped in this process. A large part of those gains occurred

shortly after the adoption of the 1964 Civil Rights Act, which among

other things, outlawed discrimination by employers and unions. Many

economists worry that the discrimination that remains may be more

difficult to identify and eliminate through legislation.

Discrimination in competitive labor markets is economically inefficient

as well as unfair. When workers are not paid based on the value of what

they add to employers’ production and profit levels, society loses

opportunities to use labor resources in their most valuable ways. As a

result, fewer goods and services are produced. If employers discriminate

against certain groups of workers, they will pay for that behavior in

competitive markets by earning lower profits. Similarly, if workers

refuse to work with (or for) coworkers of a different gender, race, or

ethnic background, they will have to accept lower wages in competitive

markets because their discrimination makes it more costly for employers

to run their businesses. And if customers refuse to be served by workers

of a certain gender, race, or ethnicity in certain kinds of jobs, they

will have to pay higher prices in competitive markets because their

discrimination raises the costs of providing these goods and services.

Those who are discriminated against receive lower wages and often

experience other forms of economic hardship, such as more frequent and

longer periods of unemployment. Beyond that, the lower wage rates and

restricted career opportunities they face will naturally affect their

decisions about how much education and training to acquire and what kinds

of careers to pursue. For that reason, some of the costs of

discrimination are paid over very long periods of time, sometimes for a

worker’s entire life.

It is clear that there is still discrimination in the U.S. economy. What

is not always so clear is how much that discrimination costs the economy

as a whole, and that it costs not only those who are discriminated

against, but also those who practice discrimination.

Unions

Many U.S. workers belong to unions or to professional associations (such

as the National Education Association for teachers) that act like unions.

These unions and associations represent groups of workers in collective

bargaining with employers to agree on contracts. During this bargaining,

workers and employers establish wages and fringe benefits, such as health

care and pension benefits, for different types of jobs. They also set

grievance procedures to resolve labor disputes during the life of the

contract and often address many other issues, such as procedures for job

transfers and promotions of workers.

Many studies indicate that wages for union workers in the United States

are 10 to 15 percent higher than for nonunion workers in similar jobs and

that fringe benefits for union workers also tend to be higher. That

compensation difference is an important consideration both for workers

thinking about joining unions, and for employers who are concerned about

paying higher wages and benefits than their competitors. In some cases,

it appears that the higher wages and benefits are paid because union

workers are more productive than nonunion workers are. But in other cases

unions have been found to decrease productivity, sometimes by limiting

the kinds of work that certain employees can do, or by requiring more

workers in some jobs than employers would otherwise hire. Economists have

not reached definite conclusions on some of these issues, but it is

evident that there are many other broad effects of unions on the economy.

Unions and collective bargaining in the United States are markedly

different from such organizations and procedures in other industrialized

nations. U.S. unions generally practice what is often described as

business unionism, which focuses mainly on the direct economic interests

of their members. In contrast, unions in Europe and South America focus

more on influencing national policy agendas and political parties.

The different focus by U.S. unions partly reflects the special history of

unions in the United States, where the first sustained successes were

achieved by craft unions representing skilled workers such as carpenters,

printers, and plumbers. These skilled workers had more bargaining power

and were more difficult for employers to replace or do without than

workers with less training. Unions representing these skilled workers

were also able to provide special services to employers that allowed both

the unions and employers to operate more efficiently. For example, craft

unions in large cities often ran apprenticeship programs to train young

workers in these occupations. And many craft unions operated hiring halls

that employers could call to find trained workers on short notice or for

short periods of time.

Most of these craft unions were members of the American Federation of

Labor (AFL), founded in 1886. The strong bargaining position of these

skilled workers, and the fact that these workers typically earned much

higher wages than most other workers, led the AFL unions to focus on

wages and other financial benefits for their members. Samuel Gompers, the

president of the AFL for nearly all of its first 38 years, once

summarized his philosophy of unions by saying, “What do we want? More.

When do we want it? Now.”

By contrast, industrial unions—which represent all of the workers at a

firm or work site, regardless of their function or trade—were generally

not successful in the United States before Congress passed the National

Labor Relations Act of 1935. This law, also known as the Wagner Act after

its sponsor, Senator Robert F. Wagner of New York, changed the way that

unions are recognized as bargaining agents for workers by employers, and

made it easier for unions representing all workers to win that

recognition. The Wagner Act largely put an end to the violent strikes

that often occurred when unions were trying to be recognized as the

bargaining agent for employees at some firm or work site. The act

established clear procedures for calling and holding elections in which

the workers decide whether they want to be represented by a union, and if

so by which union. The Wagner Act also established a government agency

known as the National Labor Relations Board (NLRB) to hear charges of

unfair labor practices. Either employees or employers may file charges of

unfair labor practices with the NLRB.

After the Wagner Act was passed, the number of workers who belonged to

unions increased rapidly. This trend continued through World War II (1939-

1945), when unions successfully negotiated more fringe benefits for their

members. These fringe benefits were partly a result of wage and price

controls established during the war, which made large wage increases

impossible. In the 1950s union strength continued to grow, and the

national association of industrial unions, known as the Congress of

Industrial Organization (CIO) merged with the AFL.

Since the late 1970s, total union membership has fallen. The percentage

of the U.S. labor force that belongs to unions has decreased dramatically

in the last half of the 20th century, from more than 25 percent in the

mid-1950s to 14 percent in 1997. A number of reasons explain the decline

in union representation of the U.S. labor force. First, unions are

traditionally strong in manufacturing industries, but since the 1950s

manufacturing has accounted for a smaller percentage of overall

employment in the U.S. economy. Employment has grown more rapidly in the

service sector, particularly in professional services and white-collar

jobs. Unions have not had as much success in acquiring new members in the

service sector, with the exception of government employees.

Union membership has also declined as the government established laws and

regulations that mandate for all workers many of the benefits and

guarantees that unions had achieved for their members. These mandates

include minimum wage, workplace safety, higher pay rates for overtime,

and oversight of the management of pension funds if employers fund or

partially fund pensions.

Third, many U.S. firms have become more aggressive in opposing the

recognition of unions as bargaining agents for their employees, and in

dealing with confrontations involving existing unions. For example, it is

increasingly common for firms to hire permanent replacement workers if

strikes occur at a firm or work site.

Finally, workers with college degrees held a larger percentage of jobs in

the U.S. economy in the late 1990s than in earlier decades. These workers

are more likely to be in jobs with some level of managerial

responsibilities, and less likely to think of themselves as potential

union members.

Unions, however, continue to play many valuable roles in representing

their members on economic issues. Equally or perhaps more importantly,

unions provide workers with a stronger voice in how work is done and how

workers are treated. This is particularly true in jobs where it is

difficult to identify clearly how much an individual worker contributes

to total output in the production process. During the 1990s, many U.S.

manufacturing firms adopted team production methods, in which small

groups of workers function as a team. Any member of the team can suggest

ideas for different ways of doing jobs. But management is likely to

consider more carefully those that are recommended by the union or have

union support. Workers may also be more willing to present ideas for job

improvements to union representatives than to managers. In some cases,

workers feel that the union would consider how the changes can be made

without reducing jobs, wages, or other benefits.

Unemployment

A persistent problem for the U.S. economy and some of its workers is

unemployment—not being able to find a job despite actively looking for

work for at least 30 consecutive days. There are three major kinds of

unemployment: frictional, cyclical, and structural. Each type of

unemployment has different causes and consequences, and so public

policies designed to reduce each type of unemployment must be different,

too.

Frictional unemployment occurs as a result of labor mobility, when

workers change jobs or wait to begin a new job. Labor mobility is, in

general, a good thing for workers and the economy overall. It allows

workers to look for the best available job for which they are qualified

and lets employers find the best-qualified people for their job openings.

Because this searching and matching by employees and employers takes

time, on any given day in a market economy there will be some workers who

are looking for a new job, or waiting to begin a job. Even when

economists describe the economy as being at full employment there will be

some frictional unemployment (as much as 5 to 6 percent of the labor

force in some years). This kind of unemployment is generally not a major

economic problem.

Cyclical unemployment occurs when the economy goes into a recession. The

basic causes of cyclical unemployment are decreases in the levels of

consumption, investment, or government spending in the economy, or a

decrease in the demand for goods and services exported to other

countries. As national spending and production levels fall, some

employers begin to lay off workers. Cyclical unemployment varies greatly

according to the health of the economy. Some of the highest unemployment

rates for the last decades of the 20th century took place during the

recession of 1982 to 1983, when unemployment levels reached almost 10

percent. The highest U.S. unemployment rate of the 20th century occurred

in 1933, when the Great Depression left almost 25 percent of the labor

force without work.

Sometimes the government can use monetary or fiscal policies to increase

spending by businesses and households, for instance by cutting taxes. Or

the government can increase its own spending to fight this kind of

unemployment. . Perhaps the most famous example of this kind of tax cut

in the United States was the one designed in 1963 and passed in 1964 by

the administrations of U.S. president John F. Kennedy and his successor,

Lyndon B. Johnson.

Structural unemployment occurs when people who are looking for jobs do

not have the education or skills to fill the jobs that are currently

available. Most policies designed to reduce structural unemployment

provide training programs for these workers, or subsidize education and

training programs available from colleges and universities, technical

schools, or businesses. In some cases, the government provides support

for retraining when increased competition from imported goods and

services puts U.S. workers out of work or when factories are shut down

because production is moved to another state or country.

Unemployment rates also vary sharply by occupation and educational

levels. As a group, workers with college degrees experience far lower

unemployment rates than workers with less education. In 1998 the

unemployment rate for U.S. workers who had not graduated from high school

was 7.1 percent; for high school graduates, the rate was 4.0 percent; for

those with some college the rate was 3.0 percent; and for college

graduates the unemployment rate was only 1.8 percent.

Income Inequality

Another issue involving the operation of labor markets in the U.S.

economy has been the growing difference between the earnings of high-

income and low-income workers at the end of the 20th century. From 1977

to 1997, families who make up the top 20 percent of income groups have

seen their money income rise from 40.9 percent of the national income to

47.2 percent. Over the same period, families in the lowest 20 percent of

income groups have experienced a decline from 5.5 percent of the national

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