Implications for Future U.S. GDP Growth "pubs_nav.html" -->

October 16-17, 2015
Charles Hulten of University of Maryland and Valerie Ramey of University of California, San Diego, Organizers

Introduction and Overview

Charles Hulten, and Valerie Ramey

Skills, Education, and U.S. Economic Growth: Are U.S. Workers Being Adequately Prepared for the 21st Century World of Work?

This paper studies trends in the demand for and supply of skills and the implications for future U.S. economic growth. Hulten and Ramey begin by noting that new technology not only increases the demand for higher order skills, it also depends on them to create and diffuse the technology. A work force that cannot play this role may limit the rate of innovation and affect the growth in living standards. Analyzing the demand for skills, the researchers link the growth in demand for non-routine cognitive and non-cognitive skills to the rapid growth in intangible capital. When intangible capital is added to a modified version of the BLS sources-of-growth model, it is found to be the largest systematic source of growth, explaining more than a quarter of the growth of output per worker hour from 1995 to 2007. The recognition of intangibles thus accords a significantly greater role for skills and education in the process of growth than the BLS approach. The researchers then review the evidence on trends in the supply of skills and conclude that supply of certain skills is not growing as fast as demand for those skills. This mismatch can explain some of the rise in wage inequality and has negative implications for the future of U.S. growth.

The Macroeconomic Link between Education and Future GDP Growth

Canyon L. Bosler, Mary Daly, John Fernald, and Bart Hobijn, Federal Reserve Bank of San Francisco

The Outlook for U.S. Labor Quality Growth (NBER Working Paper No. 22555)

Between 1950 and 2007, labor quality growth in the U.S. contributed about 0.4 percentage point per year to growth in GDP per hour. This growth was mainly driven by increases in educational attainment and labor market experience associated with population aging. Looking ahead, the leveling off of educational attainment and the retirement of older workers will be drags on labor quality growth. How much of a drag depends on how much of the cyclical adjustment in the composition of employment towards higher skilled workers that occurred during the Great Recession will persist. Taking all of these factors into account, Bosler, Daly, Fernald, and Hobijn forecast that labor quality growth will decline by about 0.25 percentage points a year over the next 10 years compared to the past 15 years. Should employment composition return to its pre-recession levels, the full effects of slower educational attainment growth and Baby Boom retirements would be felt, resulting in labor quality growth well below the researchers' baseline.

Dale Jorgenson, Harvard University; Mun Ho, Resources for the Future; and Jon Samuels, Bureau of Economic Analysis

Education, Participation, and the Revival of U.S. Economic Growth(NBER Working Paper No. 22453)

Labor quality growth captures the upgrading of the labor force through higher educational attainment and greater experience. Jorgenson, Ho, and Samuels find that average levels of educational attainment of new entrants remain high, but will no longer continue to rise. Growing educational attainment will gradually disappear as a source of U.S. economic growth. They find that the investment boom of 1995-2000 drew many younger and less-educated workers into employment. Employment rates for these workers declined during the recovery of 2000-2007 and dropped further during the Great Recession of 2007-2009. Based on estimates of labor quality growth, growth in total factor productivity, and growth in capital quality, The reseachers project labor productivity to grow at 1.3% per year. This implies a GDP growth rate of 1.8%.

The Link between Future Skills Requirements and Jobs

Jaison Abel and Richard Deitz, Federal Reserve Bank of New York

Underemployment in the Early Careers of College Graduates Following the Great Recession
Chapter in the NBER book Education, Skills, and Technical Change: Implications for Future US GDP

Though labor market conditions steadily improved following the Great Recession, underemployment among recent college graduates continued to climb, reaching highs not seen since the early 1990s. In this paper, Abel and Deitz take a closer look at the jobs held by underemployed college graduates in the early stages of their careers during this period. The researchers show that relatively few recent graduates were working in low-skilled service jobs, and that many of the underemployed worked in fairly well paid non-college jobs requiring some degree of knowledge and skill. The authors also find that the likelihood of being underemployed was lower for those with technically oriented and occupation-specific majors than it was for those with degrees in more general fields. Moreover, their analysis suggests that underemployment is a temporary phase for many recent college graduates as they transition to better jobs after spending some time in the labor market, particularly for those who start their careers in low-skilled service jobs.

Maury Gittleman, Kristen Monaco, and Nicole Nestoriak, Bureau of Labor Statistics

The Requirements of Jobs: Evidence from a Nationally Representative Survey
Chapter in the NBER book Education, Skills, and Technical Change: Implications for Future US GDP

The Bureau of Labor Statistics (BLS) is currently conducting the Occupational Requirements Survey (ORS), which promises to provide new information on the skills needed and tasks that must be performed by workers at the detailed occupational level. The ORS, developed in collaboration with the Social Security Administration (SSA), collects elements in four categories – educational requirements, mental and cognitive demands, physical demands and environmental working conditions. While the primary reason for the initiation of the ORS is for potential use by SSA as a data source in disability adjudication, the data will be useful for numerous stakeholders due to the level of detailed estimates that will be available as the first years of collection are completed. Using pre-production data, information on 7,109 quotes or jobs is available from 1,851 establishments. These jobs span all 22 unique 2-digit SOCs in scope for ORS and 704 unique 8-digit SOCs. Gittleman, Monaco, and Nestoriak present some initial estimates of occupational requirements, including educational, mental and cognitive, and physical demands and provide comparisons with existing data sources. They exploit the linkage between ORS and BLS's National Compensation Survey to provide an exploratory analysis of the relationship between ORS elements and wages, illustrating the use of ORS data for labor market analysis. Authors also examine the relationship between job requirements and safety outcomes using occupation-level ORS elements and injury outcomes as measured by the Survey of Occupational Injuries and Illnesses.

Skills, Inequality, and Polarization

Shelly Lundberg, University of California, Santa Barbara

Non-Cognitive Skills as Human Capital
Chapter in the NBER book Education, Skills, and Technical Change: Implications for Future US GDP

In recent years, a large number of studies have shown strong positive associations between so-called "non-cognitive skills" — a broad and ill-defined category of metrics encompassing personality, socio-emotional skills, and behaviors — and economic success and wellbeing. These skills appear to be malleable early in life, raising the possibility of interventions that can decrease inequality and enhance economic productivity. In this paper, Lundberg discusses the extensive practical and conceptual barriers to using non-cognitive skill measures in studies of economic growth, as well as to developing or evaluating relevant policies. The researcher demonstrates several of these problems through a set of empirical analyses based on the non-cognitive measures available in NLSY97 and AddHealth data. There is a lack of general agreement on what non-cognitive skills are and how to measure them across developmental stages, and the reliance on behavioral measures of skills ensures that both skill indicators themselves, and their payoffs, will be context-dependent. The empirical examples show that indicators of adolescent skills have strong associations with educational attainment, but not subsequent labor market outcomes, and illustrate some problems in interpreting apparent skill gaps across demographic groups.

Stijn Broecke and Glenda Quintini, OECD, and Marieke Vandeweyer, KU Leuven

Wage Inequality and Cognitive Skills: Re-Opening the Debate
Chapter in the NBER book Education, Skills, and Technical Change: Implications for Future US GDP

Inequality in the United States is high by international standards, and keeps rising. This is likely to bring significant social as well as economic costs, including lower growth. In this paper, Broecke, Quintini, and Vandeweyer use the Survey of Adult Skills (PIAAC) to revisit the debate on the relative importance of skills in explaining international differences in wage inequality. While simple decomposition exercises suggest that skills only play a very minor role, demand and supply analysis indicates that the relative net supply of skills could explain 29% of the higher top-end wage inequality in the United States. The authors' analysis also suggests that skills could explain a substantial portion of the racial wage gap, as well as between individuals from different socio-economic backgrounds. Finally, the researchers find little support for the argument that higher wage inequality in the United States may be compensated for by better relative employment outcomes of the low-skilled.

Robert G. Valletta, Federal Reserve Bank of San Francisco

Recent Flattening in the Higher Education Wage Premium: Polarization, Deskilling, or Both?
Chapter in the book Education, Skills, and Technical Change: Implications for Future US GDP

The wage premium for individuals with a college or graduate degree rose substantially in the 1980s and 1990s but has changed little since the year 2000. Valletta assesses this flattening in the higher education wage premium with reference to two leading explanations of employment patterns in recent decades: the "polarization" hypothesis (Autor 2014) and the "deskilling" hypothesis (Beaudry, Green, and Sand 2013). The results suggest that ongoing polarization in employment patterns has not bolstered the relative wages of highly educated workers in occupations that require extensive skills. The flattening of returns to higher education appears to be driven by direct competition across higher education groups for similar jobs, broadly consistent with deskilling.

Skill Acquisition outside of Traditional Education

Gordon Hanson, University of California, San Diego and NBER, and Matthew J. Slaughter, Dartmouth College and NBER

High-Skilled Immigration and the Rise of STEM Occupations in US Employment (NBER Working Paper No. 22623)

In this paper, Hanson and Slaughter document the importance of high-skilled immigration for U.S. employment in STEM fields. To begin, they review patterns of U.S. employment in STEM occupations among workers with at least a college degree. These patterns mirror the cycle of boom and bust in the U.S. technology industry. Among younger workers, the share of hours worked in STEM jobs peaked around the year 2000, at the height of the dot-com bubble. STEM employment shares are just now approaching these previous highs. Next, the researchers consider the importance of immigrant labor to STEM employment. Immigrants account for a disproportionate share of jobs in STEM occupations, in particular among younger workers and among workers with a master's degree or PhD. Foreign-born presence is most pronounced in computer-related occupations, such as software programming. The majority of foreign-born workers in STEM jobs arrived in the U.S. at age 21 or older. Although the authors do not know the visa history of these individuals, their age at arrival is consistent with the H-1B visa being an important mode of entry for highly trained STEM workers into the U.S. Finally, the researchers examine wage differences between native and foreign-born labor. Whereas foreign-born workers earn substantially less than native-born workers in non-STEM occupations, the native-foreign born earnings difference in STEM jobs is economically much less significant. Further, foreign-born workers in STEM fields reach earnings parity with native workers much more quickly than they do in non-STEM fields. Whereas in non-STEM jobs, foreign-born workers require 20 years or more in the U.S. to reach earnings parity with natives, in STEM fields they achieve parity in less than a decade.

Caroline Hoxby, Stanford University and NBER

Online Education, Labor Productivity, and Technological Innovation

Issues in the Structure of Education Returns and Financing

Grey Gordon, University of Pennsylvania, and Aaron Hedlund, University of Missouri

Accounting for the Rise in College Tuition (NBER Working Paper No. 21967)

Gordon and Hedlund develop a quantitative model of higher education to test explanations for the steep rise in college tuition between 1987 and 2010. The framework extends the quality-maximizing college paradigm of Epple, Romano, Sarpca, and Sieg (2013) and embeds it in an incomplete markets, life-cycle environment. The researchers measure how much changes in underlying costs, reforms to the Federal Student Loan Program (FSLP), and changes in the college earnings premium have caused tuition to increase. All these changes combined generate a 106% rise in net tuition between 1987 and 2010, which more than accounts for the 78% increase seen in the data. Changes in the FSLP alone generate a 102% tuition increase, and changes in the college premium generate a 24% increase. The researchers' findings cast doubt on Baumol's cost disease as a driver of higher tuition.

Edward Wolff, New York University and NBER

School Spending and Student Performance in OECD Countries, 1998-2011

Using data on school spending for 31 OECD countries over years 1988 to 2011 by level and type of expenditure, Wolff first presents a new formulation of the cost disease model and derives a new implicit price deflator for educational expenditures. The cost disease effect in overall education spending is estimated to be about one percentage point per year relative to the GDP deflator. Second, unlike many previous studies, Wolff finds a positive and significant effect of secondary school spending on both PISA math and literacy scores (both significant at the one percent level). Primary school spending is also a significant factor in explaining PISA literacy scores. The econometric results are slightly weaker on the basis of the new educational deflator.