[Economic Report of the President (2009)]
[Administration of Barack H. Obama]
[Online through the Government Printing Office, www.gpo.gov]


Education and Labor

Long-term economic growth requires a productive workforce with the
skills necessary to compete in a global labor market. The
Administration's commitment to boosting the high productivity of
American workers is evident in successful education and training
policies. These include initiatives to increase primary and secondary
school accountability, to ensure broader access to higher education,
and to train workers so that they may take advantage of new high-
paying job opportunities.
Real disposable income grew steadily during the Administration, and
earnings per hour outpaced inflation despite large increases in energy
prices and a growing portion of employee compensation being paid in
non-wage benefits. Real median household income did fall slightly
during the Administration, but this decline began prior to the
Administration taking office. The Administration included several
years of strong growth in real median household income from 2004 to
2007. The strongest pension reform measures in over three decades were
also enacted. These offered important protections to workers who
depend on their firm's pension plans for their retirement
Challenges lie ahead, however, and the most successful initiatives of
the Administration must be bolstered. A continued commitment to better
quality in kindergarten through twelfth-grade (k-12) education
and broader access to higher education will help produce the
additional workers the United States needs to meet the increasing
worldwide demand for highly skilled labor.
In addition to these challenges, some related issues will need to be
addressed, and education and labor policy will be important elements.
First, the high level of income inequality in the United States calls
for educating and training a greater number of workers, as better and
more widely dispersed skills will be a force in reducing income
inequality in the United States. Furthermore, the United States also
needs comprehensive reform of its immigration policies. The principles
of this Administration's immigration plan, which include a
number of education and labor initiatives, will likely be the starting
point for future discussions.

The key points of this chapter are:
 Education benefits individuals through higher earnings, and
benefits society as a whole. Administration initiatives to
improve k-12 education, most notably the No Child Left
Behind Act, are demonstrating clear, measurable results.
 Access to higher education was maintained through an
expanded Pell Grant program and proactive efforts that
helped protect Federally subsidized student loans from
recent credit issues faced elsewhere in the economy.
 Despite a small decline in real median household income,
which had begun prior to the Administration taking office,
hourly earnings of workers outpaced inflation, and real per
capita disposable income rose substantially during the past
8 years. Median household income increased steadily after
the recovery began in earnest in 2004. Also, pension reforms
were enacted to help protect retirement income.
 Income inequality and immigration reform must still be
addressed. Strong support for education and a focus on
workers' skills can help close income gaps. Reform of
immigration policies must provide border security while
allowing the economic benefits that immigrant labor provides
to the economy.

Economic Benefits of Education

Education is an investment. As with other investments, people compare
benefits and costs when deciding whether to invest. The benefits of a
quality education are widespread, with greater earnings being enjoyed
by people and families who invest in education. Also, there are
additional, non-pecuniary benefits of education that are enjoyed by
both individuals and society at large. Education is also a key
component of worker productivity and long-term economic growth.
For most people, a strong motivation to obtain additional years of
schooling is the labor market return they expect to receive. Indeed,
according to Chart 8-1, adults with a bachelor's or an advanced
degree earn considerably more than adults with a high school degree.
Likewise, those with a high school degree earn more than those who
failed to complete high school. The gap between the earnings of those
with a college education and those with a high school education,
however, has grown since the 1970s. Currently, the average recipient
of a college degree earns well over twice the amount earned by the
average adult without a degree. Although any one individual's
benefit from a college degree will differ due to ability, choice of
major, and other factors, the expected return for investments in
education undoubtedly motivate people to attend college.
Chart 8-1 does not take into account other individual benefits of
education, most notably improved health. A substantial number of
recent studies have

shown that a direct link exists between educational attainment and
health, even after holding income constant. One reason for this link
may be the fact that people with greater educational attainment make
better choices that impact their health positively, such as getting
more exercise or not smoking. Education might also improve one's
ability to navigate a complex health care system. Although the health
returns to education are difficult to price in monetary terms, people
surely value their health.
In addition to an individual's benefit from more education
(greater earnings and better health), society benefits from a better-
educated population. Education has been shown to foster civic-
mindedness. For example, education makes it more likely someone will
vote or support free speech. It also improves social skills and
reduces crime. These effects of education positively affect fellow
citizens as well as the individuals obtaining the education.
Finally, education is a key component of economic growth. Chart 8-2
illustrates the sustained productivity growth the United States has
enjoyed throughout the past half century. It sets an index of output
per hour of work for all non-farm workers to 100 in 1952 and displays
the index over 5-year increments through 2007. The chart indicates
that productivity has grown more than 200 percent over the past half
century. Chart 8-2 also plots indexes of educational attainment
(measured as the share of adults with a bachelor's degree) and
capital services (for example, machinery and equipment) per hour. Both
educational attainment and capital intensity, which measures the
extent to which capital is used with labor, show strong upward trends.
This means that in recent decades, businesses have not only employed
an increasingly educated workforce, but have also put more capital
(especially computers and high-tech equipment) at the disposal of this
workforce. Through better production processes and management,
businesses have also become more efficient in using labor. Education,
capital intensity, technological advances, and efficiency gains are
all interrelated in complex ways, but research has credited education
with as much as one-third of the growth of U.S. productivity from the
1950s to the 1990s.
As more of the population achieves higher levels of education and the
education they receive is of better quality, additional productivity
benefits start to take hold through spillover effects. Educated
workers share their knowledge and skills with each other, thereby
increasing their combined productivity. Moreover, an increasingly
skilled workforce fosters technological advancements that increase the
demand for even more skilled workers. This technologically driven
increase in demand has been great enough in the United States to drive
up the wages for skilled workers even as the supply of such workers is

There are also benefits to moving the entire population up to a basic
level of competence because the labor market continues to demand
increasing skills of its participants in virtually all tasks. Thus,
the focus of the current Administration on improving k-12
instruction of every student in the United States is well placed.

Primary and Secondary Education

A strong commitment to education begins with ensuring that every child
has access to quality primary and secondary schools. The No Child Left
Behind Act (NCLB), which is intended to accomplish this goal, has been
the centerpiece of the Administration's education policy. The
NCLB Act was signed into law in January 2002 and has since reshaped
the Federal role in the provision of k-12 education in the
United States. It holds schools accountable for the performance of
students, provides parents with more information and more choices,
gives States and localities more flexibility in using Federal funds to
meet the needs of children they serve, and promotes proven education
methods. Among its many provisions, two innovative approaches to
improve the quality of education stand out: holding schools
accountable for making adequate yearly progress toward NCLB goals, and
facilitating school choice options and supplemental education services
for students in schools that are failing to meet standards.
Under the adequate yearly progress provisions of NCLB, each State is
charged with developing its own guidelines for determining whether
schools make sufficient progress each year toward the NCLB goal that
all students be proficient in math and reading by 2014. If a school
receives NCLB funds due to its low-income status and fails to meet its
State's standards for adequate yearly progress for consecutive
years, that school is identified as needing improvement and faces an
escalating set of interventions. Students can transfer to another
school in the same district. In addition, low-income students in the
schools are offered supplemental education services (such as tutoring
services or other academic help), which are paid for out of Federal
funds. School districts have the obligation to notify parents of these
options and to provide a list of approved supplemental education
service providers in their area. A school that continually fails to
make adequate yearly progress is subject to takeover or restructuring
by the State.

Early Signs of NCLB Success

The success of NCLB will take years to determine, as current cohorts
of students complete high school and move on to college or the
workforce, but early indications are encouraging. The top panel of
Table 8-1 summarizes recent trends in standardized math test scores
for fourth graders as reported by the National Assessment of
Educational Progress, which periodically tests fourth and eighth
graders across the country. Researchers suggest that math test scores
are a good way to judge achievement because they predict future labor
market success well. The scores of students who were in fourth grade
in 2005 and 2007 (no test was given in 2006) provide the most
information because most if not all of their schooling to that point
was during the time of the NCLB. These scores are from national
standardized tests, and each State sets it own definition of
proficiency, so the table is more indicative of general changes in
student performance over time rather than actual progress toward a
specific State's proficiency standard.
Table 8-1 shows that early in this decade, less than 10 percent of
low-income students and less than 25 percent of all students were
proficient in math (with low-income defined as being eligible for
government-sponsored free lunch programs). Over 50 percent of low-
income students were below even basic levels at that time. By 2007,
however, 82 percent of students had reached the basic level, and the
number of students achieving proficiency had increased from 24 percent
in 2000 to 39 percent in 2007. For low-income students, the percent
proficient has nearly tripled, from 8 percent in 2000 to 22 percent in
2007. This is encouraging evidence, but we must use caution in
attributing these increased test scores to NCLB directly. For example,
there were increases in math and reading scores from 2000 though 2003,
and this may reflect some upward trending of scores before NCLB took
effect in 2002. This pre-NCLB trend could be reflective of an
accountability movement that was taking shape across the country,
which culminated in Federal

law through NCLB. The continuing upward trend after NCLB was enacted
is noteworthy, however, and under NCLB, test scores clearly are higher
than they were before NCLB.
Although not shown, math test scores for eighth graders have improved
as well, but the gains are slightly more modest. This is perhaps
because the eighth graders have not had the benefit of NCLB for their
entire school careers. More time will need to pass to appropriately
evaluate results for eighth graders.

NCLB Challenges

Although the success in math that is illustrated in Table 8-1 is
encouraging, the reading scores in the bottom panel of Table 8-1 have
not increased as much as math scores. Math scores are better
predictors of future labor market success, but the slower pace of
improvement in reading scores should not be dismissed. The
Administration's Reading First Program was enacted as part of
the NCLB Act in 2002. This Department of Education program supports
State educational agencies and local school districts that submit a
plan to implement a scientifically based instructional reading
program. Each submitted plan must demonstrate that students will be
able to read by the end of third grade. The amount of support is based
on the proportion of children in low-income households in each State.
The program has demonstrated success in improving reading
comprehension. For example, 44 State educational agencies reported
improvements, and 31 of them reported an increase of at least 5
percentage points. Unfortunately, funding for this program was
substantially reduced in fiscal year (FY) 2008.
Low test scores in poorer households are improving, according to Table
8-1, and achievement gaps are narrowing. Continuing to narrow the
achievement gaps by raising test scores of low-income students remains
an ongoing challenge that will require that attention be paid to some
unique problems facing schools in high-poverty areas. For example,
there is a high rate of teacher turnover in schools that serve low-
income students. The most recent data available show a turnover rate
in public schools in high-poverty areas that is 50 percent higher than
in low-poverty areas.
Two components of the NCLB program that may help address the needs of
low-income students are NCLB's supplemental education service
and school choice options for students in failing schools. These
programs are currently underutilized, alarmingly so in some districts.
Parental outreach could be improved by providing more timely and
better information about students' eligibility for these
programs, and new Department of Education regulations specifying early
notification requirements may help. In addition, ways to make school
choice options more convenient for parents should be explored, because
many parents are currently reluctant to enroll their children in
alternative schools largely because of the perceived inconvenience of
doing so. School choice options are limited, however, for many
districts where there are no schools to which a student can reasonably
Finally, high school graduation is valuable for future labor market
success (Chart 8-1) and is the most likely path to college enrollment.
An accurate method of calculating graduation rates that is uniform
across States is necessary to improve high school accountability.
Requiring school officials to have written confirmation that a student
transferred out, immigrated to another country, or is deceased before
removing the student from their graduation cohort will improve the
accuracy of graduation rate calculations. Written confirmation will
ensure that students who have dropped out of school are not counted as
transfers; consequently, schools will be held accountable for dropouts
and others who do not graduate from high school with a regular
diploma. The final NCLB regulations require States to use the
methodology adopted by the National Governors Association. This
``4-year adjusted cohort graduation rate'' uses the number
of students who graduate in 4 years with a regular high school diploma
divided by the number of students who entered high school 4 years
earlier (adjusting for transfers in and out). The use of the 4-year
adjusted cohort graduation rate is an improvement over previous
systems not only because it is a uniform method of calculating
graduation rates, which will allow for more meaningful cross-State
comparisons, but also because this particular method will give parents
and educators a more accurate picture of high school completion in
their communities. This will improve the understanding of the scope
and characteristics of the population of students who do not earn
regular high school diplomas or take longer to graduate. Educators
will be able to use this information to help local education agencies
meet their State graduation rate goals and thus make adequate yearly
Currently, high school dropout rates hover around 10 percent and have
fallen since the inception of NCLB, from 10.5 percent in 2002 to 9.3
percent in 2006. High school dropout rates among certain population
groups, however, remain remarkably high. For example, Hispanic
students dropped out of school at a rate of 22.1 percent in 2006.
Although this has decreased from 25.7 percent in 2002, it is still
over twice the national average. Dropout rates in the southern United
States (11.7 percent) far exceed those in the Midwest (6.1 percent)
and Northeast (6.5 percent).
Because teachers are on the front line of the NCLB mission, future
Administrations will need to do more to keep our best teachers in the
classroom, particularly those who have been successful in reaching
low-income students. The Administration supported tax deductions for
the out-of-pocket expenses teachers incur while providing instruction,
as well as loan forgiveness programs for teachers in low-income
schools. While both of these programs are likely to provide some
financial incentives, the need to find new ways to help keep good
teachers in classrooms still remains a challenge for improving
k-12 education. The President's Teacher Incentive Fund has
supported several pay-for-performance models around the country to
help reward and retain outstanding teachers.

Higher Education

The U.S. higher education system is the best in the world. World
rankings are dominated by American institutions, and the United States
has long been the destination of many of the world's best
students, teachers, and researchers. The American Competitiveness
Initiative embodies the Administration's strong commitment to
maintain the United States's standing as a leading producer of
scientific knowledge, and it would increase the funding capabilities
of grant organizations and expand the math and science curricula at
primary and secondary schools. While keeping American universities
competitive should remain a priority, maintaining student access to
these institutions is perhaps even more important.
After several decades of growth, the share of high school graduates
immediately transitioning to either a 2- or 4-year college has hovered
around two-thirds since 1996. Although college enrollment is more
likely among high school graduates from high-income families, about
half of the students who graduated from high school in the poorest
fifth of families have immediately enrolled in college since 2000.
Enrollment does not necessarily mean that a student receives a college
degree. According to Chart 8-1, completing a 4-year degree is
associated with the highest earnings. Thus, Chart 8-3 shows an
unfortunate trend. Since 1996, there has been a large and steady gap
between the number of students completing a bachelor's degree
and the number of students enrolling in college 4 years before.
Because it is true that many students take longer than 4 years to
graduate from college, the gap depicted in Chart 8-3 does not capture
everyone who will drop out. Nevertheless, the relative steady space
between the two trends does show that college completion rates are
low. This finding is backed up by more exact information on the number
of enrollees who ultimately complete college (regardless of the number
of years it takes), which indicates that the completion rate is only
slightly above 50 percent. Furthermore, among 25- to 29-year-olds, the
proportion of all college attendees with no bachelor's degree
has remained at about 50 percent over the past decade. There are two
things that can be done to help increase completion rates: continue
with the Administration's efforts to improve k-12
education so that students are better prepared for college, and
maintain access to grant aid to defray the increasing costs of

College Preparedness

One reason for low college completion rates may be that many students
are ill-prepared for the rigors of college education. One recent study
suggests that nearly half of public high school graduates attending
college in 2005 felt that there were notable gaps in their high school
preparation. Moreover, college professors reported that about 42
percent of public high school graduates are not prepared for college-
level classes.
There are reasons to be optimistic, however, because of the improved
scores for fourth and, to some extent, eighth graders. In addition,
the American Competitiveness Initiative contains a sound plan to
devote significant resources to improving college preparedness through
investments in math and science education. Congress also recently
enacted the Adjunct Teacher Corps, a program proposed by the President
that encourages well-qualified math and science professionals to serve
as adjunct middle or high school teachers. There is more work to do at
the high school level, however, and encouraging good teachers to
remain in classrooms would likely improve college preparedness.

Funding Higher Education

The real cost of education (tuition and fees less aid and tax
benefits) has increased substantially during this decade. In response
to the rising costs, the Administration substantially expanded the
Pell Grant program. Under this Administration, the total value of Pell
Grants more than doubled from $8 billion in the 2000-2001 school
year to $16.3 billion in the 2008-2009 school year. During
2008-2009, the maximum award available was $4,731, which exceeds
the annual tuition and fees of attending a public 2-year institution
and covers over 70 percent of the average tuition and fees of a public
4-year college. Pell Grant aid, however, is targeted to families with
the greatest financial need, so the reality is that even large
expansions in grant programs cannot keep up with increasing college
costs for many families whose incomes are too high to qualify for Pell
Grants. For millions of students, Federal Stafford loans provide
essential assistance to help cover costs.
Stafford loans come in two forms. Subsidized loans defer payments
until after students complete college, and the Government pays the
interest while the students are in school. Unsubsidized loans allow
deferred payments, but interest accrues while students are in school.
Schools can sign up for Stafford loans to be handled by the Department
of Education through the Federal Direct Loan Program or through
private lenders that offer students loans through the Federal Family
Education Loan Program. Because students represent a greater credit
risk (they tend to be younger and have lower incomes), private lenders
rely on the Government's guarantee against borrowers defaulting
on loan payments. The Administration took action this year, as
discussed in Box 80-1, to ensure continued access to the Federal
student loan program in the face of credit markets disruptions.
Box 8-1: The Ensuring Continued Access to Student Loans Act of 2008

Largely unnoticed in the turmoil of the financial markets in 2008 was
the fact that the Administration was proactive in avoiding a crisis in
the student loan market. Many student lenders finance their lending by
repackaging student loans and reselling them to investors in the
secondary market. However, in early 2008, the disruption in credit
markets made it increasingly difficult for lenders to resell loans. As
a result, many of these lenders warned that they might not take part
in the Federal student loan program for the 2008-2009 school
year. The Administration stepped in with an innovative program that
was embraced by both parties in Congress.
On May 7, 2008, the President signed into law HR 5715, the Ensuring
Continued Access to Student Loans Act of 2008. One of the critical
provisions of this law granted the Secretary of Education the
authority to purchase Federal Family Education Loan (FFEL) Program
loans. Under this authority, the Department of Education created two
programs: one in which it offers lenders the option to sell fully
disbursed FFEL loans and another in which it purchases a participation
interest in 2008-2009 FFEL loans. The programs were designed to
retain lenders who might otherwise not have participated in the FFEL
program; the ability to sell loans to the Department assured lenders
that even if they had difficulty reselling the loans in the secondary
market, they would not be stuck with the loans. The programs have also
ensured that lenders originated new loans to students because lenders
who sold their loans to the Department then had the funds necessary to
originate new loans.
The intervention has helped the Federal student loan program function
effectively so far this academic year despite the condition of
financial markets. A projected 8.5 million students are attending
college partly because they were able to finance their studies through
the FFEL program. Recognizing that the financial crisis may impact the
student loan program for the 2009-2010 year, Congress recently
extended the authority for the Department of Education to purchase
loans for another year. The Department has announced that it will
replicate the current programs for the 2009-2010 school year.
This will help ensure that students who are investing in their future
through education will have access to Federal student loans despite
current conditions in credit markets.

Labor Issues: Income Trends,
Worker Flexibility, and Pension Reform

Real hourly earnings grew during the Administration, and real per
capita disposable income (which includes income from labor and non-
labor sources) rose substantially. The Administration also worked to
promote retraining so that workers could fill jobs in demand. Finally,
pension reform enacted in 2006 will help protect retirement incomes.

Recent Trends in Real Incomes

A common belief is that the incomes of working American families have
not kept pace with inflation in recent years. Adjusting for inflation,
it is indeed true that the annual median household income (measured in
2007 dollars) was $408 less in 2007 than it was at its peak in 1999,
two years before this Administration took office. Although this is a
decline in real terms, it tells an incomplete story of what happened
during the Administration. Real median household income fell through
2004, but this represented a trend that began before the Presidency.
Real median income strongly rebounded beginning in 2004 and reached
near-peak levels by 2007.
Annual median household income, as reported by the Census Bureau, also
includes both labor income and non-labor income. Thus, changes in
median household income can be driven not only by changes in labor
income but also by changes in income from investments and government
transfer payments, such as Social Security or unemployment benefits.
Turning to more specific measures of labor income, workers fared well
during the Administration. Chart 8-4 plots an index of real hourly
earnings for private non-farm production or non-supervisory workers
from 1988-2007 (with real earnings in 1988 set to 100). The
chart shows that real hourly earnings fell slightly through the early
1990s. After that, however, there was a long period of strong growth
starting in the mid 1990s and continuing into the early part of this
decade. Although it is true that real earnings are still less than
their historic highs in the 1970s, 2007 marked their highest point
since 1979.
Chart 8-4 reveals one other important point about recent trends in
labor income. Workers are increasingly getting less of their pay in
terms of cash wages and more in terms of benefits. Real total
compensation per hour for private non-farm workers is plotted using
the Employer Cost Index, which includes wages, salaries, and employer
costs for employee benefits. Again, the index is set to 100 in 1988.
Real total employee compensation grew considerably faster throughout
the last 20 years than real hourly earnings. In 2007, total employee
compensation in real terms reached its highest point on record. The
growth appears most pronounced during the first half of this decade.
This rise in total compensation likely stems from the growth in the
costs of employer-provided health and retirement benefits, which far
outpaced the growth in cash wages (and inflation) during the
Administration. The increase in the dollar value of compensation
received in the form of non-wage benefits has reduced the real wage
increases that workers would have otherwise received.
Finally, the real household income decline noted at the start of this
section, as well as the changes in worker wages, masks one other
important factor. These are pretax measures and therefore are
imperfect gauges of what people and households are able to spend,
save, and invest. One measure that looks at after-tax income tells a
much different story. Specifically, real per capita disposable income,
another important measure of income derived from the Bureau of
Economic Analysis's National Income and Product Accounts,
reflects after-tax income and is more reflective of purchasing power.
From 2000 to 2007, there was a steady increase in per capita real
disposable income that averaged 1.68 percent per year, compared with
2.12 percent annual growth in real disposable income over the 8 years
from 1992 to 2000. Given the rise in energy prices during the current
Administration, however, as well as the fact that there was an
economic downturn over its first several years, the growth in real
disposable income is noteworthy. Like real median household income,
however, real per capita disposable income reflects both labor and
non-labor income.
Although 2008 and 2009 will undeniably be difficult for many workers
and their families as unemployment rises, data from 2000-2007
show that most measures of real income (that is, labor income, total
compensation, and per capita disposable income) grew during the

Worker Flexibility and Training

The U.S. labor market is part of a dynamic worldwide market with
constantly changing demands brought about by technological change and
international trade. The U.S. labor market, however, is well
structured to meet these challenges. The United States has a long
history of limiting the amount of government intervention between
workers and firms, thus allowing for flexibility in the American
workforce. Specifically, businesses in the United States are less
limited than businesses in other developed countries in their ability
to discharge a worker, thereby making them more willing to hire
workers, knowing that they can more easily fire an unproductive
employee. In times of growth, job openings are plentiful and workers
are willing to search for the job that best matches them. The flexible
employment relationship in the United States is evidenced by the
relatively high rate of job mobility. Although it must be recognized
that workers do build up specific skills from remaining at a firm and
that not all job separations are advantageous, a growing economy still
requires that workers be flexible and change jobs to find the correct
match for their skills.
Among countries in the Organization for Economic Co-operation and
Development (OECD), the United States has by far the most mobile
workforce. Since January 2001, about 1 in 30 workers separated from
their job in an average month (or about 4.39 million jobs were
vacated). During these months, an average of 4.54 million workers were
hired each month, suggesting that the economy was both creating new
jobs and that workers were quickly filling positions that opened. The
majority of job separations during these years were also created by
workers voluntarily quitting, suggesting that many workers left jobs
for new opportunities. Although these numbers have become more
volatile in the latter half of 2008, with layoffs making up a higher
percentage of job separations, during times of growth the rate of job
openings in the United States is a testament to the relative
flexibility of the U.S. labor market.
Workers in the United States have also shown more willingness to move
to where jobs are located. According to the OECD, in each year from
2000 to 2005, over 3 percent of the U.S. working-age population moved
across State lines. In comparison, only 1 percent of the working-age
population in the EU-15 (the 15 European Union members before the 2004
expansion) moved between the 72 recognized European regional
subdivisions. Moreover, less than 0.25 percent moved between EU-15
countries annually over this period. Obviously language barriers
preclude some EU-15 mobility, but the greater geographic mobility in
the United States also compares favorably to Australia and Canada. In
short, the willingness of workers in the United States to move is an
important part of the structure of the labor force and a reason for
its flexibility.
Another key to meeting the growing demand for new and changing skills
in the labor force will be the continued willingness of American
workers to get the education and training needed to fill the new jobs
that are created in the economy. A commitment to education,
particularly in more technical fields, will prove to be important in
the coming decades. The Administration's job training
initiatives, including the Community-Based Job Training Grants and the
High Growth Job Training Initiative, have helped prepare workers for
jobs in high-demand industries. The Administration also proposed
Career Advancement Accounts that put funds directly in the hands of
people to pay for expenses related to education and training and put
strict limits on administrative overhead in order to increase
resources available for job training. Finally, international trade has
also created many new opportunities for American workers, and Box 8-2
describes programs aimed to help workers take advantage of these

Retiree Income

As life expectancies increase, American workers will likely spend an
increasing amount of time in retirement. The Federal Government
provides substantial retirement assistance through the Medicare and
Social Security programs, but the challenges faced by these
entitlement programs are substantial and are discussed in Chapter 6.
Private savings and individual pensions provided by employers continue
to be essential.

Box 8-2: Trade Adjustment Assistance

International trade brings substantial benefits to the U.S. economy.
Not only are American consumers able to take advantage of a greater
number of goods at lower prices, but workers in industries whose
products and services are in high demand internationally benefit as
well.  In 2006, for example, an estimated 13 million U.S. jobs were
supported by exports.  The wages of manufacturing workers in plants
that export are 9 percent higher than the wages of workers in
non-exporting plants, and the wage premium in service-oriented firms
that export is 13 percent over non-exporting firms.  Furthermore,
exports accounted for approximately 30 percent of economic growth in
Although the benefits of trade are enormous, workers in industries
that must compete with imports can be adversely affected.  Because of
this, Trade Adjustment Assistance (TAA) exists to provide benefits to
workers who are potentially adversely affected by trade.  Though the
TAA has been in operation since 1974, it was changed substantially when
it was reauthorized in the Trade Act of 2002.  The Act consolidated the
TAA and the North American Free Trade Agreement (NAFTA) TAA programs,
expanded the eligibility to cover workers affected by shifts in
production to certain other countries and to workers secondarily
affected upstream or downstream from TAA-certified firms, expanded the
training opportunities available, provided a health coverage tax
credit, and promoted earlier intervention to allow more rapid
enrollment, training, and reemployment of eligible workers.  In FY
2007, firms covered by TAA certifications employed nearly 147,000
workers. Of these, over 49,000 eligible workers entered TAA training.
Of the eligible workers who took up benefits in the program in fiscal
year 2007, 68 percent received some form of training, 59 percent
received specific occupational training, and 13 percent received
remedial training.  The TAA program has also become successful over
time in finding new employment for workers.  While in 2001 only 63
percent of workers who exited the program were successfully reemployed,
with a wage replacement rate of 87 percent, by 2006, 72 percent of
workers exiting the program were reemployed, with a wage replacement
rate of 89 percent.
In discussions of TAA reauthorization during 2007, debate developed
in Congress over potential ways to expand the TAA program.  The
Administration supported reforms to the TAA to improve the delivery of
services, to offer greater flexibility, and to enhance training for
eligible workers.  Several legislators and policymakers, however,
suggested a number of expansions to TAA benefits, most notably: (a)
allowing service workers, in addition to manufacturing workers, to
receive benefits; (b) allowing workers who produce service-related
goods to receive benefits; (c) allowing entire sectors to be eligible
for coverage under TAA benefits; and (d) increasing the amount of
funding for benefits and training.  The fiscal and economic costs of
such an expansion were uncertain, and some estimates indicated they
would be substantial (the Congressional Budget Office estimated an
additional $8.6 billion over the 2008�2017 period).  Beyond the fiscal
cost, however, there were additional concerns regarding economic
efficiency.  Extending TAA benefits to substantially more workers could
lead to economic losses by creating longer-term, higher unemployment in
the covered industries.  Furthermore, service workers experience
minimal wage loss during displacement when compared with manufacturing
workers, indicating that expanding benefits to them may not be
justified.  Finally, there were worries that expansion would open the
door for further, unwarranted expansions of TAA benefits.

Employer-provided pensions come in one of two types: defined benefit
plans or defined contribution plans. Defined benefit pension plans
specify an amount to be paid upon retirement, normally calculated
using a formula based on an employee's years of service with the
company and his or her earnings history. Defined contribution pension
plans consist of an individual employee account into which the
employer and/or employee contribute, usually at a fixed percentage of
the employee's salary. Upon retirement, individuals have access
to the balance in the account. Historically, defined benefit plans
have been dominant, but over the past several decades, defined
contribution plans have become more popular.
The first Federal protections of worker pensions were set by the
Employee Retirement Income Security Act (ERISA) of 1974, which, among
other things, established the fiduciary responsibilities of plan
managers. It also established the Pension Benefit Guaranty
Corporation, which protects the defined benefit plans (up to a
statutory limit) of private sector workers against the possibility
that an employer will fail to pay the promised benefits. The Pension
Benefit Guaranty Corporation is funded primarily through premiums
established by law paid by the sponsors of defined benefit plans.
There have been many changes in pension provision since ERISA was
passed in 1974, including the increased prevalence of defined
contribution plans and heightened concerns regarding underfunded
private plans. The Pension Protection Act of 2006 accomplished several
important goals. First, with regard to defined benefit plans, greater
premiums were imposed on companies with underfunded plans. Moreover,
caps on the amount employers could put into plans were raised to allow
employers to build a cushion during good economic times.
The Pension Protection Act also addressed the growing use of defined
contribution plans by including provisions that give workers more
information and control over the investment of their account balances.
It also provided incentives for employers to automatically enroll new
employees in defined contribution plans, which likely will increase
plan participation. Furthermore, after observing the potential for
notable shortfalls in pension plan funding, the act also improved the
process employed to value plan assets and liabilities. By utilizing
fair-market valuations, the pension reform was able to limit the use
of valuation-smoothing practices that often made it difficult to
detect gaps in pension funding, thus helping to prevent funding
shortfalls. The various reforms in the Pension Protection Act followed
an initiative led by the President in his 2005 pension reform
proposal. These reforms will make retirement incomes of millions of
Americans more secure.

Looking Ahead

As we look toward the future, there are a number of education and
labor issues that will likely receive attention. First, the
distribution of income in the United States is more skewed toward the
wealthy than in other developed countries. The lower level of
intergenerational economic mobility in the United States, compared
with other countries, suggests this is a concern that will persist.
Second, a need for comprehensive immigration reform exists and will
necessarily require education and labor policies to be balanced with
border security. The Administration has been a strong supporter of
such reform, and the ideas generated by the Administration will likely
shape discussions in the years ahead.

Income Inequality

In addition to arguments centered in theories of social justice, high
income inequality may create more tangible problems. Some argue that
inequality leads to a breakdown in social cohesion, which lowers a
population's aggregate health (even holding income constant).
Violent crime also increases as gaps between the poor and wealthy
widen. Apart from that, high inequality threatens to squander the
abilities and talents of a larger number of children in poorer
families if upward economic mobility is also low. This is the case in
the United States, where intergenerational mobility is relatively low
and income inequality is high.
The most common method for measuring income inequality is the Gini
coefficient, which is a value that ranges from zero (perfect equality,
or everyone has an equal amounts of income) to one (perfect
inequality, or all income is held by one family). The U.S. Gini
coefficient is currently 0.45, according to the most recent cross-
country comparison measures from the Central Intelligence Agency (or
0.46, according to the most recent Census Bureau estimates, which
measures U.S. inequality). This level of inequality exceeds that of
most other developed countries, with many European nations having Gini
coefficients below 0.30. In fact, the U.S. level of inequality exceeds
that in some lesser developed countries such as Indonesia (0.36) and
is comparable to kenya (0.45). Only a few countries noticeably exceed
the United States in terms of inequality (for example, Brazil (0.57)
and South Africa (0.65)). In short, the level of inequality in the
United States is unusually high given our level of development and
In addition to the Gini coefficient of the United States being high by
international standards, it has steadily risen over the past several
decades. Many researchers have tried to explain the reasons for the
high and growing level of income inequality in the United States.
Although some have attributed the greater inequality to institutional
factors such as the declining real value of the minimum wage and lower
rates of unionization, institutional explanations fail to match some
of the more recent trends in inequality that look beyond the Gini
coefficient. Specifically, an analysis of the wage distribution of
workers suggests that the gap between mid-level earners and low-wage
workers has remained relatively steady over the past decade despite a
declining real value of the minimum wage. Instead, the gap between the
highest earners and mid-level earners has increased over the past
This most recent analysis of trends argues that technological change
since the 1990s, particularly in the area of information technology,
has benefited workers who possess skills for which these advances are
complementary. These include highly skilled workers who are in jobs
where technology is used in combination with interpersonal skills,
such as in management or professional positions. These jobs are not as
easily automated or outsourced as the tasks performed by middle-
educated white collar or production workers. Those with less education
but wages in the middle of the distribution have seen the difference
between their wages and the wages of the highest earners widen.
One way to bring more of the workforce into the group of highly
skilled workers whose jobs are not easily automated or outsourced is
to provide a greater emphasis on education, particularly in math and
science. Recent successes in raising math test scores and expanding
the Pell Grant program are important steps. A continuing focus on
increasing educational attainment for children across the income
distribution is critical. Increased access to quality education will
create more productive workers and greater wages for an increasing
share of the population, thereby closing income gaps.

Immigration Reform

The United States is a nation of immigrants and has long depended on
the contributions of the foreign-born to its economy. A sound
immigration policy must continue to foster the economic benefits of
immigrants by recognizing that foreign-born labor complements the
existing strengths of the
U.S. workforce. Such an immigration policy should also promote fluency
in English, which not only enhances the earnings potential of
immigrants but also can help improve productivity. Furthermore, the
flow of immigration must also be regulated and restricted to legal
Residents of foreign countries will immigrate when the benefits of
migration outweigh the costs. The benefits typically are the earnings
differentials between the United States and their home country.
Because of this, the United States usually attracts immigrants of all
skill levels. The highly skilled are attracted to the greater earnings
they receive in the United States given their skill level. Immigrants
with fewer skills are attracted to the better wages and potential
opportunities for their families.
The United States benefits from both types of immigration. The
scientific establishment and high-technology industries have long
benefited from workers with superior skills who immigrate to the
United States and boost productivity. Immigrants with fewer skills
perform jobs that complement existing labor in this country.
Education and labor policies have their roles in a comprehensive
approach to immigration policy in the United States. While many
immigrants are highly skilled, the average educational attainment of
immigrants lags behind the native-born. Promoting English fluency is
important because it increases labor market opportunities for
immigrants, boosts their productivity, facilitates higher earnings,
and promotes greater assimilation. To enhance the potential
contribution of immigrants and to improve their well-being, it is also
important to continue this Administration's sound education
policies. NCLB, Reading First, and policies that increase access to
higher education are all targeted toward students that need the most
assistance, and the U.S. immigrant population stands to gain much from
these programs. The U.S. economy will benefit in turn.
The issues the United States confronts with regard to its immigration
policy are complex, and the Administration introduced comprehensive
immigration reform as part of its domestic policy agenda in 2004. This
proposal addressed many issues, including devoting more manpower to
border security and increasing worksite enforcement of immigration
laws. To ensure that the United States has an immigrant workforce that
complements the existing U.S. workforce and meets economic needs, the Administration called for a flexible temporary guest worker program. To improve the productivity of immigrants, enhance their contributions to
U.S. labor markets, and improve their welfare, assimilation proposals
that promoted English and cultural literacy were advanced. The sweeping
reforms of this proposal, however, failed to gain the necessary
Congressional support. The need for these immigration reforms endures,
and the Administration's plan remains one that is sound in terms
of both securing borders and promoting economic progress.


The Administration has been committed to ensuring that the U.S. labor
force remains productive for decades to come. Significant progress has
been made in the U.S. educational system to help current and future
students meet the ever-increasing and changing demand for skills in
the more global, competitive labor market. k-12 education has
improved, test scores are rising, and students in underperforming
schools now have more education options. Also, access to the U.S.
higher education system has improved through expansions of the Pell
Grant program and reforms enacted in the student loan program. Despite
these successes, there are challenges that remain. Income inequality
in the United States is high and suggests that a continued emphasis on
education is necessary to raise the incomes of those in the lower half
of the income distribution. Also, education and labor policy will need
to be part of comprehensive immigration reform in the United States.
This reform must reduce illegal immigration while continuing to allow
the U.S. economy to benefit from legal immigrants.