The Wall Street Journal
In prosperous times like these, Labor Day ought to be a moment for celebration. But in fact the real wages of many Americans have stagnated or declined over the past quarter century. Surpisingly, this trend has provoked little comment.
According to a Department of Labor report on 1998 wages, a 30-year-old American man with a high school diploma earned, on average, $29,057. That's about 20% less, adjusted for reported inflation, than in 1974. Although there is some debate about real vs. reported inflation and although women did better than men in percentage gains, it still appears that high school graduates overall have made little or no real gains in a generation.
The issue isn't lack of jobs -- America is the envy of the world for creating more than 50 million new jobs in the past three decades. The real challenge is that wage disparity, based on different levels of education, is getting wider. The solution is to manage our human capital as well as we've managed financial capital. We can do that if we make education and training a greater national priority.
Where's the Revolution?
In 1980, a new employee with a master's or doctoral degree earned just a little more than twice as much as someone who didn't complete high school. Today, that spread is more than 4 to 1. And despite many exceptions, including such well-publicized successes as Microsoft's Bill Gates and Oracle's Larry Ellison, four-year college graduates now earn about twice as much as those with high school diplomas. That's double the 50% premium of 20 years ago.
Since 75% of Americans lack a bachelor's degree, the majority of Americans are stagnating economically when you calculate their wages in constant dollars. So where's the revolution? Why aren't 75% of our citizens marching in the streets or storming the halls of Congress?
I suggest that three trends have helped avoid unrest:
First, asset values. Between my sophomore year at the University of California, Berkeley in 1965 and the establishment of my family's charitable foundation in 1982, a lot happened in the world. But if you were an average investor who stayed in the stock market for those 17 years, not much happened. The Dow Jones Industrial Average compounded about 1% a year. Even if you reinvested dividends, your 5.6% return wouldn't have matched what you could have earned by rolling over certificates of deposit.
Then, between 1983 and 1999, the Dow produced a total compounded return exceeding 18% a year. During this more-recent period, a significant percentage of high school graduates became stockholders through 401(k) plans and individual retirement accounts. The growing balances on their quarterly portfolio statements made them feel secure, despite anemic real wage income.
In fact, the Federal Reserve reports that Americans' household wealth was 6.3 times income last year, up substantially from less than 5 times income in the early 1990s. Many households in recent years tapped that wealth through home-equity loans, and used it for consumption. Some even decided to forego wages entirely in the belief that they could make a living by day trading or buying initial public offerings.
Second, interest rates. Despite rising prices, payments are often less per month to finance a house, a car or a refrigerator than in 1980. Today, payments on a typical $25,000 car, assuming a 20% down payment, a five-year term and an interest rate at prime, are about $420 a month. Although it isn't a perfect apples-to-apples comparison because of different financing practices, in 1980 the typical car required a larger payment. Five-year loans generally weren't available and the prime rate was peaking above 21%. At the peak, a $10,000 car with a 20% down payment and the then-common 36-month term had a monthly cost (adjusted to current dollars) of $592.
Finally, multiple wage earners. In 1980, there were 53 million households with more than one paycheck. Today, there are 68 million, a 28% increase. And many of those 15 million additional households have more than two wage-earners. The extra individual paychecks help mask the fact that each paycheck often buys less.
Can these three trends continue? On any historical basis, it's hard to imagine that stocks will continue to produce a total return of 18% compounded annually for another two decades. Interest rates can't drop as much as they have in the past 20 years because that would put them well into negative territory. And there simply aren't enough single-earner couples left to continue the third trend. As a result, I believe we face the possibility of social unrest unless we can increase the skill sets of American workers so their employers can afford to pay them more.
As recently as 1950, there were three unskilled jobs for every skilled position. Today, jobs requiring skills are four times more prevalent than those for which manual labor suffices. Social mobility increasingly depends on access to higher education. But if only a quarter of our citizens get a college degree, and the rest are falling behind, then we must deliver new means of knowledge access.
I saw the first glimmers of this issue in the late 1960s when I joined the research department of an investment banking firm. Even then, we saw a shortage of the crucial skills needed to automate our processes and cut through a growing mountain of back-office paper. As a result, we were willing to pay higher salaries to attract people with the right knowledge. Over the years, the skills premium has widened in almost every industry.
Other trends compound the skills shortage. First, the baby boomers will soon start retiring. Over the past 25 years, the number of 35-54 year-olds grew 57% in the U.S. But in the first quarter of this new century, the 35-54 age group is actually projected to decline by 1% while the number of Americans over 65 will expand by 80%. With fewer prime-working-age people, we'll need to keep making the workforce more productive at all levels if we want to sustain economic growth.
Accelerating technology amplifies the need. Old-economy skills used to be good for a lifetime of work. But as technology dominates more job categories and the rate of technological change accelerates, skills must be renewed constantly. It took 65 years from the invention of the airplane until 25% of Americans had flown in one. The same level of consumer penetration was reached 30 years after video recorders first appeared. For the Internet, it took only seven years. This is a major challenge for traditional institutions of learning.
It's also a challenge for individual employees. A generation ago, most of them provided for their families entirely by using their job skills. Today, more than 50% of the population earns at least some income from investments, and "The Millionaire Next Door" is more than a catchy book title. It's certainly good for America to have such broad participation in financial markets. But some workers with short memories may be relying too much on stock market gains and rising home values.
Most of their gains -- in fact, most of our national prosperity -- reflect the productivity of human capital. All the equities in all the 401(k) plans today don't represent much ownership of bricks and mortar; they are primarily claims on the future value of what employees can produce. If those employees want to enjoy future market gains to supplement their income, then they'll collectively have to increase their productivity.
Experienced workers need the latest skills to remain productive earners long after "normal" retirement age. Younger workers need ongoing training to stay competitive in an economy that sees more than half of all capital investment going into technology. Students need access to world-class educational resources online. And preschoolers, especially in poorer communities, need innovative educational experiences to keep from falling behind.
Labor Is Capital
Fortunately, the days of a sharp division between labor and capital are long past. Today, labor is capital. The most successful workers now balance their investments between "hard" assets and their own store of knowledge. They also recognize that the best legacy they can leave their children is not just a "good education," but the habit of pursuing new knowledge at all stages of life.
Stocks, bonds, roads, factories, equipment and other capital goods comprise only a small fraction of our national balance sheet. The vast majority of assets are in human capital -- the skills and experience of people. We need to nurture those assets by giving every citizen access to lifelong learning. By investing more of the nation's abundant resources in education, we can help assure the future of our democracy.
Michael Milken is co-founder and chairman of Knowledge Universe, Inc., a technology and learning company with headquarters in Los Angeles and Menlo Park, Calif.