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Last Updated: 09/10/04

News Release

Chicago Fed President on Wages

The September 10 edition of the Financial Times editorial page featured an opinion piece by Chicago Fed President Michael Moskow on wages.

Following is the text:

Invest in skills to safeguard growth in wages

A great deal of public debate has focused on the wages for jobs created since US employment finally began to grow in earnest this year. Since real, or inflation-adjusted, wages are the key to how fast living standards improve, they deserve scrutiny. However, much of the recent analysis says little about the long-term prospects for wage growth or the policies that would support faster wage growth.

Daniel Aaronson of the Federal Reserve Bank of Chicago has found, as several analysts have, that job growth in the last six months has been slightly more concentrated in low-wage industries. But Mr. Aaronson also points out that the mix between high- and low-wage job growth is tied to the business cycle. High-wage job growth tends to be more rapid than low-wage job growth when labour market conditions are strong; the reverse is true when labour markets are weak or in the earlier stages of improvement. We have every reason to think this normal business cycle pattern will continue.

Rather than focusing on the wage mix of jobs created in the past half-year, we should keep our eyes on more important factors while assessing the prospects for real wage growth. Productivity is the main driver of wage growth. The news here has been positive: productivity growth has been very strong over the past decade and is likely to remain solid. This bodes well for average real wage growth.

But not all US workers have benefited equally from increases in productivity. Workers with more education and skills have generally seen their real wages rise substantially; those with less education have seen little increase and perhaps even a decline.

Much of the increase in the wage premium for education and skills is due to technological change that has increased demand for highly educated workers. Another portion is due to factors such as deregulation and globalisation, which have increased competition in both product and labour markets. Workers with only a high school education were once able to find jobs in industries so insulated from competition that they could expect a lifetime of secure employment and high wages. But such jobs are disappearing.

In the coming years, the trend towards greater competition is likely to accelerate. With the development of the internet and improvements in telecommunications, part of the service economy may be on the verge of a major increase in labour and product market competition. As these forces spread, wages will be more closely tied to workers' skill levels -- not just their cognitive skills but also non-cognitive skills such as the ability to think creatively, work well in teams and communicate complex ideas clearly.

There is some positive news on education -- for instance, the fraction of the workforce with at least some college education has increased substantially -- but many US schools are not making the grade. The high-school graduation rate has been falling since the mid-1960s. People who enter the workforce without a high-school degree already face a tremendous disadvantage. This is only going to get worse.

We must improve the graduation rate. At-risk children need special resources, and research suggests that the benefits to society from investment in these children can be sizeable. But additional spending is not enough. We must develop appropriate standards of accountability for teachers, with incentives properly designed and high achievers rewarded. We must also find ways to inject more competition into the education system.

Human capital investment is not limited to schools. Cognitive and non-cognitive skills development begins at birth and continues well after we turn in our last exam paper. Early intervention programmes can help children get off on the right foot -- especially in economically disadvantaged neighbourhoods. And in our dynamic economy, in which technology, international trade or other developments can displace even good workers, retraining needs must be met. The record of government-sponsored training programmes is far from uniformly positive. Still, it will be increasingly important to provide retraining that is efficient, effective and sensitive to labour market needs.

By training workers, rather than protecting jobs, we can take full advantage of the gains from technological advance and international trade. Researchers continue to evaluate society's investments in human capital. Even in an age of sizeable budget deficits, we should invest in programmes for which this research shows the benefits clearly outweigh the costs.

The writer is president and chief executive of the Federal Reserve Bank of Chicago

Federal Reserve Bank of Chicago, 230 South LaSalle Street, Chicago, Illinois 60604-1413, USA. Tel. (312) 322-5322

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