Posting this portion of the speech does not mean that I agree with the ideas.
Speech to the Center for the Study of Democracy
2006-2007 Economics of Governance Lecture
University of California, Irvine
By Janet L. Yellen, President and CEO, Federal Reserve Bank of San Francisco
November 6, 2006, 4:00 PM Pacific Standard Time
Economic Inequality in the United StatesIn recent years, globalization and skill-biased technological change may have been working in combination to particularly depress the wage gains of those in the middle of the U.S. wage distribution, accounting for the twist in the trend that I mentioned earlier. The explanation goes like this. The surge in the use of new technologies that began in the mid-1990s led to major changes in the way business was conducted and organized within the U.S. and globally. Technological change and globalization, especially outsourcing, complemented the skills of highly able workers performing non-routine work requiring problem-solving skills. This explains the continued rapid increase in real wages at the top of the distribution. In the middle of the distribution, however, technology and globalization had the opposite effect—substituting for workers performing routine or repetitive tasks and depressing their wages. At the bottom of the distribution, these developments have had little impact during the last decade. By that time, many low-wage jobs that could be eliminated by technology had already vanished. Most of the remaining low-wage jobs involve manual and service work that cannot easily be automated. This may explain why, as I said, wages in the middle not only rose far more slowly than those at the top, they also rose more slowly than those at the bottom of the distribution during the 1990s.
Let me elaborate with an example from the technology side. Take the accounting profession. Computers and telecommunications technologies have increased wages for accountants, who tend to be at the top end of the distribution. In contrast, in the middle of the distribution are workers like bookkeepers, who are being replaced by technology. At the lower end, the labor market has already largely adjusted to the impact of skill-biased technological change. Therefore, the wages of those workers, who perform manual tasks in sectors like business services—janitorial work is an example—are now largely untouched by computers.10
Globalization in combination with advances in technology, especially communications technology, leads to similar patterns. At the upper end, it has boosted demand for those who have the skills to manage large, complex, global operations. In contrast, an increasing share of domestic jobs in the middle of the wage spectrum has experienced lower demand because companies can now look all over the world for workers able to perform computer programming tasks, communications tasks, and similar jobs—even medical services. At the same time, such outsourcing is far less feasible for manual jobs and for service jobs that require face-to-face interactions and lie at the low end of the wage distribution….
I will begin with education. There can be little doubt that programs that support investment in education, broadly conceived, are worthwhile. Increasing skill has been a significant source of productivity growth. Moreover, since the gap between the earnings of workers with more and less skill in part represents the return to education, a widening of that gap clearly signals the need for such investment to increase the supply of higher-skilled workers.
But investment in education takes resources, which complicates the debate: the resources are limited and to a large degree should be directed to where they will pay the highest return. At the college level, one possibility is just to "let the market work." If college pays off, more young people will enroll. Indeed, the rising returns to education at the upper end of the earnings distribution did precede an increase in college attendance through the mid-1990s, suggesting that market forces may have worked as expected. Since then, however, despite further growth in the returns to college and advanced degrees, college attendance has flattened out. For example, enrollment rates among recent high school graduates hovered around 65 percent between 1996 and 2004, after increasing noticeably in the preceding decade.22
Does this imply that the highest priority for public funding for education should be the college level? Not necessarily. There certainly is a lot of public discussion by educators and politicians about problems with the quality of K-through-12 education in the U.S., and international comparisons show that American students rank relatively low on standardized tests in science and math, the very kinds of skills that earn higher rewards.
But there is yet another contender for the scarce public funding for education. Recently, researchers led by James Heckman from the University of Chicago have argued that these funds should be targeted at even younger children.23 Family background factors are critically important in student achievement, and recent evidence suggests that the cognitive and social skills associated with college attendance are developed very early in life. Moreover, skill acquisition is a cumulative process that works most effectively when a solid foundation has been provided in early childhood. As such, programs to support early childhood development, such as preschool programs for disadvantaged children, not only appear to have substantial payoffs early but also are likely to continue paying off throughout the life cycle.
But what about struggling adults, especially those who find that their skills have become outmoded due to technological change or globalization? Should the highest priority for public funding of education be the expansion of federally subsidized retraining programs, such as those associated with the Job Training Partnership Act, the Comprehensive Employment and Training Act, and the Job Corps program for disadvantaged youth? Some researchers, such as Alan Krueger of Princeton University, view the outcomes of these programs as evidence that training investments often have high returns, especially for the economically disadvantaged, who cannot finance educational and training investments on their own.24
Entire speech: Federal Reserve Board
With important comments on the role of education.