Testimony of

Jared Bernstein

Senior Economist, Economic Policy Institute

<jbernstein@epi.org>

Committee on Education and Labor

Subcommittee on Workforce Protections

Of the United States House of Representatives

The Growing Income Gap in the American Middle Class

July 31, 2008

***Inequality: Evidence, Causes, and Solutions***

Chairwoman Woolsey, Ranking Member Wilson, I thank you for the
opportunity to testify, and I commend the committee for targeting the
critical challenge of economic inequality and the American middle class.
In doing so, you are targeting what many economists and policy makers
consider the most important economic challenge we face.

Of course, in the current American economy, challenges abound. We are
faced with the aftermath of the bursting of a massive housing bubble,
and the spillovers from that event are significantly constraining
financial markets. The economy, while not officially in recession, is
clearly weak in key sectors, most notably in the job market, where
employment is down by about 440,000 jobs on net, and unemployment up
about a point compared to one year ago to 5.5%. The underemployment
rate, a more comprehensive measure of diminished job opportunities was
9.9% in June. These job market declines, in tandem with spiking prices
driven by higher food and energy costs, are leading to real declines in
compensation. Simply put, the paychecks of middle-income are falling
behind these families' economic needs, and their living standards are
sliding.

Though these problems are of recent vintage, and can to some extent be
closely tied to the bursting of the housing bubble, they are also
microcosm of the topic we are here to discuss today: the inequality of
economic outcomes.

**Figure 1** shows this relationship by plotting the productivity of the
American workforce against the real income of the median family. While
output per hour increase smartly in the 2000s, up 19%, real income for
the typical family fell by about 1%. In fact, this split between
productivity and median family income has been ongoing since the
mid-1970s, and is regarding as one symptom of increasing inequality.
When economic growth is concentrated at the top of the income scale,
many families responsible for creating that growth will fail to reap its
benefits.

![](media/image1.wmf){width="5.992361111111111in"
height="3.502083333333333in"}

This period stands in stark contrast to the first few decades of the
post-WWII era, when, as shown in the next **figure**, productivity and
median family income grew in lock-step, both doubling over these years.
Clearly, the current era of rising inequality began in the mid-1970s, a
fact that will be useful in diagnosing the problem later in this
testimony.

![](media/image2.wmf){width="5.997222222222222in"
height="4.090277777777778in"}

Since committee staff has asked me to focus on causes and solutions, I
will spend little time on the spate of statistics that document the
increase in inequality. Those interested in such analysis should examine
Chapter 1 of the book State of Working America, wherein myself and
co-authors (Mishel, Shiersholz) present the evidence in great detail.
Here, I will offer one very long term look at the issue, which tracks
the share of national income held by the top 1%, including capital gains
(an important component of income/wealth inequality), going back to 1913
(**Figure 3**). In 2006, most recent data point for this series, this
share was 23% the second highest in the series. As the figure reveals,
there was only one year with a higher share: 1928. Note also that the
current share is twice that of the early 1970s.

![](media/image3.wmf){width="5.997222222222222in"
height="4.090277777777778in"}

Such evidence of historically high levels widely accepted. The causes,
on the other hand, are hotly debated. And since appropriate solutions
require accurate diagnoses, I will spend the rest of this testimony on
causes and solutions.

***Inequality: Causes and Solutions***

***Labor Earnings:*** Most commonly, increased inequality of labor
earnings is attributed to technological change and the unmet demands of
employers for skilled workers. Often, this explanation is discussed
under the rubric of "skill biased technological change," or SBTC. Simply
stated, the theory maintains that the production of the goods and
services in the economy has become more complex, and employers need more
highly skilled workers to undertake the necessary tasks. When the supply
of such workers is low relative to employers' demands for them, the
relative wage---the pay of highly skilled workers compared to
others---increases, i.e., wage inequality goes up.

In this sense, some economists view wage inequality as a race between
technology and the supply of skilled workers. In periods when
technological advances win that race, inequality rises, and visa-versa.
Offsetting rising inequality in this framework requires an increase in
the relative share of skilled workers, which, in the policy debate,
usually translates into more college graduates with the skill sets that
are complementary to the relevant technologies.

This common-sense explanation certainly makes sense and describes a
relevant dimension of the problem, but it is too reductionist. By
definition, if inequality is increasing in this model, skill deficits
are to blame. Such analysis can only return one policy recommendation:
more skilled workers, or, more precisely, raise the relative supply of
college graduates. That is generally a good idea for any economy, since
skilled labor is integral to a productive economy, but it cannot be the
sole reaction to rising inequality.

First, we must recognize that 70% of today's workforce has less than a
four-year college degree. Thus, unless we are willing to consign this
majority to declining living standards, either relative or absolute
(i.e., real income stagnation), simply pressing for higher skills is too
narrow an agenda.

Second, in recent years, the college wage premium has actually been
fairly flat, as shown in the table below. The values in the table are
the wage advantage of college-education over high-school educated
workers, controlling for the variety of factors noted above. The measure
grew by about 14 percentage points over the 1980s, about half that much
over the 1990s, and about zero in the 2000s. Thus, to the extent that
wage inequality rose over the 1990s and especially the 2000s, it was
increasingly a function of growing disparities within educational
groups.

  --------------------------- ----------------------------------- --- --- --
  Regression-adjusted college                                             
  premium                                                                 

                                                                          

  1979                        23.4%                                       

  1989                        37.8%                                       

  2000                        45.3%                                       

  2006                        45.4%                                       

                                                                          

                                                                          

  Source: State of Working                                                
  America, 2006/07                                                        
  --------------------------- ----------------------------------- --- --- --

Heuristically, this might be understood be considering a school teacher,
a mid-level office manager or HR director, a lower-level computer
programmer, compared to an investment banker. All of these workers could
be college-educated, but many faced stagnant earnings in recent years
(the real college wage rose 2.5%, 2000-07, compared to 15%, over the
1990s), while others---the banker in our example---experienced large
gains. This is an example of "within-group" inequality growth, and it is
less amenable to skill upgrading solutions.

Thus, while increasing the share of skilled workers is part of the
solution, it is not the sole solution. It remains a critically important
one, and I return to it below. But those interested in wielding policy
to turn this inequality tide need also consider various mechanisms and
institutions within our economy that have historically ensured that the
benefits of growth are more broadly shared.

***Capital Income:***[^1] Another important reason why the skills
explanation is incomplete is that it refers largely to labor earnings,
while non-labor, or capital income---profits, dividends, interest
income, capital gains---has become an increasingly important component
of rising inequality, particularly at the very top of the income scale.

Two trends have reinforced the increasing important role of capital
income: 1) such income has become more concentrated among households at
the top of the income scale, and 2) capital income accounts for a larger
share of total income.

On the first point, the receipt of capital income has become much more
concentrated over the last few decades, according to the data from the
Congressional Budget Office. Whereas the top 1% received 34.2% of all
capital income in 1979, their share rose to 58.6% by 2000 and rose
further to 65.3% in 2005 (the latest year for these data). Thus, the top
1% roughly doubled its share of capital income between 1979 and 2005.
Correspondingly, the share of capital income going to the bottom 90%
declined from 36.7% in 1979 to just 15.1% in 2005.

Second, the economy, particularly the corporate sector (excluding
government, non-profits, and proprietors) is now generating both higher
returns to capital income (greater profits and interest), and this has
expanded capital's share of total income. For instance, income such as
capital gains, interest, and dividend income comprised 18.0% of personal
market-based income in 1979 and 24.2% in 2007. This necessarily
generates greater income inequality since, as the CBO reveal, most
capital income is received by those who are well off.

Likewise, the share of income in the corporate sector going to capital
income in the recent recovery was the highest in nearly 40 years: in the
2004-07 recovery capital income accounted for 22.3% of corporate income,
a jump from its 19.2% share in the 1976-99 recovery. The share going to
compensation was correspondingly at a low point. The resulting
historically high returns to capital are associated with the average
worker's compensation being 4.4% lower and the equivalent of
transferring \$206 billion dollars annually from labor compensation to
capital incomes.

***First, Do No Harm:*** All of the data and arguments presented this
far are in regards to inequality from market outcomes, i.e., before
taxes and transfers. And clearly, these market outcomes have become much
more unequal in terms of distribution. It is thus important not to
exacerbate the problems we have with policies that further amplify
market-driven inequalities. For example, changes since 2001 to the
Federal tax code have worsened the distributional outcomes, by
disproportionately lowering the tax liabilities of the wealthiest
families.

Such regressive tax policies hurt most families both directly and
indirectly. Directly, they exacerbate the already excessive inequalities
in market outcomes (i.e., the pretax distribution). Indirectly, they
diminish revenues such that the Federal government is less able to
perform needed functions (without borrowing), many of which, like safety
net policies, disproportionately benefit the least well off. While the
direct impact of the regressive tax cuts has been extensively measured
and is well-appreciated, this indirect effect---the defunding of public
services that boost economic security of the least advantaged---is also
important and problematic.

Beyond tax policy, other policy "sins of omission" have contributed to
higher inequality. We have failed to strengthen workers' legal ability
to organize, gutted investments in their skills and training,
under-invested in our public infrastructure, or stood by as the
employer-based systems of health coverage and pensions slowly unravel.

The following section briefly suggests policies to proactively push back
against the trends toward greater inequality.

***Reconnection Growth and Living Standards of Middle and Lower Income
Families***[^2]

These policies can be grouped into four categories, bargaining power,
macro conditions, safety nets, and investments in human and physical
capital.

***Bargaining Power:*** The inability of most workers' to bargain for a
greater share of the value they're adding to our economy is at the heart
of the various gaps documented above. Historically, a broad set of
policies and norms, including unions, minimum wages, defined-benefits
pensions, and health care provisions, helped to lift workers' ability to
bargain, and were thus associated with more broadly shared prosperity.

Many factors have eroded these institutions and norms. Global
competition clearly has strong upsides, as the increased supply of goods
and capital has lowered prices and interest rates. But this same
increased supply has hurt the bargaining power of many workers in this
country, particularly those with less than a college education. Indeed,
recent trends in the offshoring of white collar work are reducing the
bargaining power of more highly educated workers as well.

Unions play a key role in precisely this area. Research reviewed in
Mishel et al (2007, table 3.37) shows that the decline in union density
explains one-fifth to one-half the increase in male wage differentials
over the past 25 years, and union wage premiums remain highly
significant, even after controlling for human capital and observable
characteristics.

The decline in unions is partly a mechanical function of the loss of
jobs in unionized industries, like manufacturing, but the more important
explanation is the very unbalanced playing field on which unions try to
gain a foothold. In fact, Freeman (2007) argues that slightly more than
half of the non-union workforce would like some type of union
representation, a finding that is not particularly surprising given the
divergence of incomes and productivity shown above.

The problem here is that the legal and institutional forces that have
historically tried to balance the power of anti-union employers and
their proxies have significantly deteriorated in recent decades, as
described by Shaiken (2007). One legislative solution is the Employee
Free Choice Act (EFCA), a bill that helps to restore the right to
organize in the workplace. A central component of EFCA is so-called
majority sign-up or "card-check," which gives the members of a workplace
the ability to certify a union once a majority sign authorizations in
favor the union. The law also puts much needed teeth back into labor law
by ratcheting up the penalties for those who violate the rights of
workers trying to organize or negotiate a contract.

***Macro-Economic Conditions:*** Full employment---a tight match between
labor supply and labor demand---is another important criterion for
reducing the gap between overall growth and living standards of working
families. Historically, very low unemployment rates have also been a key
contributor to workers' bargaining power, ensuring that employers needed
to bid compensation up to get and keep the workers they needed in order
to meet the demand for their goods and services.

We do not need to look back too far in time to corroborate such
assertions, as the latter 1990s was a period of uniquely low
unemployment in the context of the last few decades (unemployment was 4%
on average in 2000). Overall poverty fell by 2.5 points, 1995-2000, but
declines among minorities that were more than twice that magnitude. In
the 2000s, though unemployment did fall to the mid-four percent range at
its lowest, job markets were never as tight, job creation was much
weaker, and poverty was higher at the end of the cycle than at the
beginning.

Such trends are not at all unique to the 1990s cycle: longer term
analysis confirms the result. For many of the years over the period
1949-73, the unemployment rate was actually below the so-called NAIRU:
the lowest unemployment rate considered to be consistent with stable
prices.[^3] Recall from Figure 2, however, that this was the period when
real median family income grew in step with the overall economy.
Conversely, over the post-73 period, the labor market was often slack,
as unemployment was higher than the rate associated with full
employment. As has been shown, middle-incomes grew much more slowly over
these years and inequality increased.

Of course, the conventional response would be that inflation must have
grown more quickly over the earlier period, when job markets were
especially tight but, in fact, the opposite is true. Even controlling
for the steep inflation of the latter 1970s, inflation actually grew
more slowly when the job market was "tight than recommended," at least
based on the NAIRU criterion. We relearned this lesson in the latter
1990s, also a period of decelerating price growth, even while the
unemployment rate was headed for 30-year lows.

In order to take a closer look at the benefits of full employment, and
the costs of its absence, the next table examines these dynamics from
the perspective of African-American median income. I take advantage of
the Congressional Budget Office's series of the so-called "natural rate"
of unemployment (the rate associated with stable price growth). By
comparing this rate to the actual unemployment rate, we have a measure
of whether the job market was above or below full employment (i.e.,
slack, meaning lots of job seekers and too few jobs, or taut, meaning
the a tight match between the number of workers and the number of jobs).

The first column of the table accumulates the annual percentage-point
differences over the two time periods. Thus, if CBO's natural rate was
5% and the actual jobless rate was 4.5%, this would show up as a -0.5
percentage point in the analysis. Between 1949-73, the unemployment rate
was often below the "natural rate," cumulatively 19 percentage points.
This happens to be about the same number of points that unemployment was
above this rate in the latter period. In other words, in the first
period, job markets were typically much tighter than in the second
period.

When job markets were much tighter---when the unemployment rate average
4.8%---the incomes of black families grew at an average annual rate of
3.7%, compared to less than 1% in the latter period, when unemployment
average 6.2%. Of course, many other factors were in play here. As shown
above, every group's income grew more slowly in the latter period. The
early progress of blacks grew off of a very low base, making it easier
to post large percentage gains. Also, a larger share of black families
was headed by single parents in the latter period, and this too
contributed to the income slowdown. But less favorable job market
conditions surely played an important role as well.

The last column in the table is offered to rebut the commonly heard
caveat regarding tight job markets: they generate unacceptably high
levels of inflation. This simple comparison shows that inflation was
lower when job markets were much tighter, contradicting the simple
story. Clearly, tight labor markets, persistently below the supposed
natural rate, have been associated with much better income growth for
African-American families.

  ------------------ --------------- ------------------------ -------------- -------------
  **Full Employment,                                                         
  African-American                                                           
  Family Income,                                                             
  Unemployment, and                                                          
  Inflation,                                                                 
  1949-2006**                                                                

                                                                             

                     Cumulative                                              
                     Points                                                  

                     Below or Above  Real Annual Growth,      Average        
                                     Median                                  

                     Full Employment Income, Afr-Am Families  Unemployment   Inflation\*

  1949-73            -19.1%          3.7%                     4.8%           2.4%

  1973-2006          20.7%           0.8%                     6.2%           3.7%

                                                                             

  \* Post-73                                                                 
  comparison leaves                                                          
  out 1979-82 to                                                             
  avoid upward bias.                                                         
  Including                                                                  

  these years gives                                                          
  an average of                                                              
  4.3%.                                                                      

                                                                             

  Sources: CBO NAIRU                                                         
  estimates; Census                                                          
  Bureau, median                                                             
  family income (RS                                                          
  deflator);                                                                 

  BLS, unemployment;                                                         
  BLS, CPI-RS                                                                
  deflator.                                                                  
  ------------------ --------------- ------------------------ -------------- -------------

In this regard, the 2000s were an important reminder of the impact on
minorities of less then full employment. Interestingly, once the jobless
recovery ended in the fall of 2003, the job market over this cycle was
roundly praised by many commentators, mostly with reference to the low
unemployment rate. But employment growth was weak over this recovery,
and the low unemployment rate partially masked other problems (like
declining employment rates) that depressed the bargaining power of
minority workers.

The policy levers here, at least in normal times, i.e., outside of
recessions, rest mainly with the Federal Reserve, but Congress can also
play an important role which I discuss below under the rubric of
investment policy.

***Safety Nets:*** Historically, working families in our country have
depended on employers to provide health care and pensions, but it is not
an exaggeration to observe that this system of employer-based coverage
is slowly unraveling. A slow but undeniable shift is occurring, as the
economic risks associated with illness and aging out of the workforce
are shifting from employers to workers. This shift is not simply
affecting the least skilled workers, but, as Gould (2007) shows in the
area of employer-based health coverage, it is reaching workers at all
wage and skill levels. In the area of pensions, the shift from defined
benefits (a guaranteed pension) to defined contribution has been at the
heart of the process of shifting risks from firms to workers.

These shifts have motivated a vibrant debate regarding reform of our
health care system. Such reform is especially urgent given the
realization that the rate of increase in health spending in both the
public and private sector is unsustainable. But this debate also has
considerable bearing on the inequality debate, since the distribution of
health care coverage and even outcomes have increasingly been skewed in
a similar manner to other economic variables discussed thus far.[^4] And
in this regard, certain types of health care reform, such as "pay or
play," or single payer models, could also involve considerable
redistribution from the with above average care to those with less (or
no) coverage. Similarly, the lack of savings preparedness among many
persons approaching retirement (see Weller and Wolfe, 2005) and the
shift from guaranteed pension underscores the need for pension reform as
well.

It is beyond my scope here to review these plans. I refer interested
parties to EPI's Agenda for Shared Propserity, an initiative by our
institute to elaborate in some detail the best plans for meeting these
challenges. I raise these issues in the context of this testimony
because in this era of increasing inequality, health and pension
coverage, especially through the job, are eroding, even as the economy
expands. As ongoing technological change, globalization, and the lost
bargaining power of many in the workforce have led to trends documented
above, employers have been in the process of backing off their
historical commitments to their workforce in many ways, including these
types of coverage. And of course, the least advantaged workers rarely
had such coverage to lose in the first place.

The inequality data along with information on profitability reveal that
it is not for lack of resources that firms have been cutting back on
health and pension coverage, although rising health costs can and should
also be viewed as a competitiveness issue. Instead, it is yet another
symptom of the unbalanced nature of growth in the current economy, as
wealth flows upwards and risks flow down.

As these policy debates unfold, I urge the committee to view the issue
of health care and pension reform as one that is intimately related to
the findings regarding incomes, wages, and inequality in the first
section of my testimony. By helping to provide workers with access to
health care and pensions, we take a huge step towards improving job
quality and blocking the ongoing risk shift.

Finally, given the changes in the structure of work and the demography
of the workforce, our nation's Unemployment Insurance system is also in
need of reform and modernization. The Unemployment Insurance
Modernization Act, already passed by this chamber, would make such
changes, including providing benefits to both part-time workers and
those who leave their jobs for compelling family reasons. The bill also
accounts for shorter job tenures by considering a worker\'s most recent
work history when determining eligibility for UI benefits.

***Investments in Human and Physical Capital:*** The emphasis in this
section thus far has been more towards creating good jobs than on
improving the skills of workers. That "demand-side" emphasis is
important, because, as noted earlier 70% of the workforce is non-college
educated, and we must have a strategy for improving the quality of all
jobs, not just those for workers with high levels of education.
Similarly, regardless of skill levels, all workers will benefit from
more effective and efficient safety nets.

But it's also critical to invest in the skills of the workforce of both
today and tomorrow. Unfortunately, our budgetary priorities have been
moving in the opposite direction, as federal budgets over the past few
decades have shortchanged training programs. Eisenbrey (2007), for
example, shows that Federal investment in employment services and
training is down about \$1 billion in real terms since 1986 (from about
\$6 to \$5 billion, 2006 dollars) even while the workforce has grown in
size considerably over those years. The result is a decline in the
budget for worker training and services from \$63 to \$35 per worker, in
2006 dollars.

According to the Coalition for Human Needs (2008) analysis of
Congressional appropriations for a number of training programs, real
declines have occurred in a number of job training programs between FY05
and FY08. Spending on both adult (-12%) and youth training (-14%)
through the Workforce Investment Act are down, as are dislocated worker
training (-9%) and adult basic education (-12%).

As Savner and Bernstein (2004) discuss, one reason this disinvestment is
misguided is that recent initiatives in worker training have shown
considerable promise relative to earlier, less effective approaches. Our
analysis was partly motivated by the evident limitations of work-first
policies, i.e., programs that placed workers in jobs with little
attention to job quality or career opportunities. In reaction, there has
been a growing emphasis on programs designed to help job seekers prepare
for good jobs and advance to careers. As we wrote:

"This new generation of programs shares several key elements. First,
they\'re grounded in extensive knowledge of the local labor market,
focusing on occupations and industries that offer the best opportunities
for advancement. Second, they help workers access education and training
at community colleges, community-based training programs, and
union-sponsored programs that work with employers to design curricula
based on the skills that employers actually need. And third, they
provide access to remedial services \-- often referred to as "bridge"
programs \-- so that people who have weak basic skills can prepare for
postsecondary-level programs."

Savner and I also recognized that even the best training programs will
not work when the jobs aren't there. There will always be disadvantage
localities beyond the reach of even the strongest macroeconomic booms,
and neither full employment in the rest of the economy nor the most
integrated training program will help. In these cases, we advocate the
creation of public-service jobs to keep people gainfully employed,
drawing on the successful experience of transitional jobs programs that
have sprung up around the country using public funds to create work for
people struggling to get a foothold in the labor market.

![](media/image4.wmf){width="5.997222222222222in"
height="4.090277777777778in"}

Of course, educational disadvantages begin well before most people reach
the workforce. Income inequality itself is a factor, preventing
children's whose abilities should lead to higher academic achievement,
but whose income class blocks their opportunity. Figure 4 shows that
even once we control for academic ability, it remains the case that
higher income children are more likely to complete college. Each set of
bars shows the probability of completing college for children based on
income and their math test scores in eighth grade. For example, the
first set of bars, for the students with the lowest test scores, shows
that 3% of students with both low scores and low incomes completed
college, while 30% of low-scoring children from high-income families
managed to complete college.

The fact that each set of bars has an upward gradient is evidence
against a meritocratic system. The pattern implies that at every level
of test scores, higher income led to higher completion rates. The third
set of bars, for example, shows that even among the highest scoring
students in eighth grade, only 29% of those from low-income families
finished college, compared with 74% of the from the most wealthy
families. In fact, this 29% share is about identical to the completion
rates of low-scoring, high-income students (30%), shown in the first set
of bars. In other words, high-scoring, low-income children are no more
likely to complete college than low-scoring, wealthy children.

Such barriers to higher education revealed in these last two figures are
costly in terms of reduced mobility. Recent research by mobility
analysts at the Brookings Institution revealed that among those who
lived as children in the lowest income families, college completion was
strongly associated with leaving the bottom fifth in adulthood: 16% of
those with a college degree remained low-income as adults, compared to
45% without college. Similarly, 54% of high-income children who
completed college were high-income adults. But less than half that
share---23%---without a college degree managed to maintain their
top-fifth status. That is, 77% of the children who grew up in top-fifth
families but failed to complete college, fell to lower income classes as
adults.

Though much recent educational policy has stressed accountability and
standards, these results should serve to remind us that education policy
designed to offset inequality also needs to be concerned with access to
educational opportunity. Students with the cognitive strengths to
achieve higher educational completion are too often blocked by income
constraints, and the costs of such barriers in terms of diminished
mobility are very high indeed.

Along with human capital, investments in public physical capital should
also be considered. Though such ideas are not typically discussed in the
context of inequality, I raise them as such here, because I believe they
are an important complement to the macroeconomic discussion above. The
reality of a recession-like contraction in the job market means that the
bargaining power associated with tighter labor markets is conspicuously
absent. As such, workers wages and compensation are falling in real
terms, due to slower wage growth and fewer hours of work (faster price
growth is also a major factor for real wage losses in the current
context). In this regard, investment in public infrastructure can be
considered one way to generated much needed labor demand and jobs for
those falling behind.

Three facts motivate this contention. First, American households are
highly leveraged, and may well be poised for a period of enhanced
savings and diminished consumption. In this context, public investment
should be viewed as an important source of macro-economic stimulus and
labor demand---the creation of new, and often high quality jobs---which
is clearly lacking from our current labor market.

Second, there are deep needs for productivity-enhancing investments in
public goods that will not be not made by any private entities, who by
definition cannot capture the returns on public investments in roads,
bridges, waste systems, water systems, schools, libraries, parks, etc.
Three, climate change heightens the urgency to make these investments
with an eye towards the reduction of greenhouse gases and the
conservation of energy resources.

One area of particularly significant job loss has been in construction.
Jobs in residential building and contracting are down 480,000 over the
past two years, and when we include other jobs related to housing, such
as real estate, we find a decline of over 600,000 jobs since June 2006.
In other words, there exists considerable labor market slack that will
certainly deepen if the economy is in or near recession.

In this regard, infrastructure investment serves a dual role of
deepening on investments in pubic capital while creating good jobs for
workers that might otherwise by un- or underemployed. One common
argument against such investment in the context of a stimulus package is
that the water won't get to the fire in time, i.e., the implementation
time lag is too long to quickly inject some growth into the ailing
economy. However, research by EPI economists has carefully documented
current infrastructure needs that could quickly be converted into
productive, job-producing projects (Mishel et al, 2008).

Take, for example, the August 2007 bridge collapse in Minneapolis. The
concrete for the replacement bridge began flowing last winter, and the
bridge is now halfway done, with full completion expected by December.
The American Association of State Highway and Transportation Officials
claim that according to their surveys, "state transportation departments
could award and begin more than 3,000 highway projects totaling
approximately \$18 billion within 30-90 days from enactment of federal
economic stimulus legislation."[^5]

The following are other relevant examples identified by these
researchers:

-   There are 772 communities in 33 states with a total of 9,471
    identified combined sewer overflow problems, releasing approximately
    850 billion gallons of raw or partially treated sewage annually. In
    addition, the Environmental Protection Agency (EPA) estimates that
    between 23,000 and 75,000 sanitary sewer overflows occur each year
    in the United States, releasing between three to 10 billion gallons
    of sewage per year.

-   According to a survey by the National Association of Clean Water
    Agencies, communities throughout the nation have more than \$4
    billion of wastewater treatment projects that are ready to go to
    construction, if funding is made available. Funds can be distributed
    immediately through the Safe Drinking Water and Clean Water State
    Revolving Funds and designated for repair and construction projects
    that can begin within 90 days.

-   The National Center for Education Statistics (NCES) put the average
    age of the main instructional public school building at 40 years.
    Estimates by EPI find that the United States should be spending
    approximately an \[additional\] \$17 billion per year on public
    school facility maintenance and repair to catch up with and maintain
    its K-12 public education infrastructure repairs.

-   According to a 1999 survey, 76% of all schools reported that they
    had deferred maintenance of their buildings and needed additional
    funding to bring them up to standard. The total deferred maintenance
    exceeded \$100 billion, an estimate in line with earlier findings by
    the Government Accounting Office (GAO). In just New York City alone,
    officials have identified \$1.7 billion of deferred maintenance
    projects on 800 city school buildings.

-   The U.S. Department of Transportation has identified more than 6,000
    high-priority, structurally deficient bridges in the National
    Highway System that need to be replaced, at a total cost of about
    \$30 billion. A relatively small acceleration of existing plans to
    address this need---appropriating \$5 billion to replace the worst
    of these dangerous bridges---could employ 70,000 construction
    workers, stimulate demand for steel and other materials, and boost
    local economies across the nation.

-   The House Committee on Transportation and Infrastructure has
    identified more than \$70 billion in construction projects that
    could begin soon after being funded. An effective short-term
    stimulus plan could include resources directed at projects for
    roads, rails, ports, and aviation; only projects that can begin
    within three months would be considered.

Finally, while I have discussed these infrastructure needs in the
context of recession and stimulus, it is important to recognize that a)
these are all necessary and productivity- enhancing investments that
should be made regardless of the state of business cycle, and b) recent
history suggest that it is a mistake to think that labor market slack
will no longer be a problem when the recession officially ends.

This last point deserves a bit of elaboration. Much of the current
recession/stimulus debate has stressed that recent recessions---the ones
in 1990-91 and 2001---were both mild and short-lived, and perhaps the
next recession will follow the same pattern. It is critical to recognize
that these claims are based solely on real output growth, and not on job
market conditions. The allegedly mild 2001 recession, wherein real GDP
barely contracted, was followed by the longest "jobless recovery" on
record. Though real GDP grew, payrolls shed another net 1.1 million
jobs. The unemployment rate rose for another 19 months and for just
under two years for African-Americans. The pattern was similar, though
not quite as deep, after the early 1990s recession.

Part of the explanation for this disjuncture has to do with the way
recessions are officially dated by the committee at the National Bureau
of Economic Research, as they have apparently given less weight to the
job market and greater weight to output growth. But policy makers are
likely to give greater consideration to working families whose
employment and income opportunities are significantly weakened as
unemployment rises and job growth contracts. Thus, from a stimulus
perspective, these investments will be still be relevant well after the
recession is officially ended.

***Conclusion***

The existence of historically very high levels of income concentration
in the American economy is well documented. While there is certainly
debate about the causes of this trend, one factor widely agreed upon is
education, in that skilled workers clearly have a large and growing wage
and income advantage over less skilled workers. But other factors,
including weakened distributional institutions, the absence of full
employment, and deficient safety nets and investment are also
problematic. At the same time, changes in tax policy have exacerbated
inequalities that are already being driven up by imbalanced market
outcomes.

I have elaborated ways to strengthen the mechanisms which historically
have been called upon to ensure a fairer distribution of the fruits of
growth. I recognize that many of these steps are ambitious, such as
creating greater access to higher education by economically
disadvantaged children. Others, such as tight labor markets or
infrastructure investment, cut across many committees in Congress and
even across government institutions, like the Federal Reserve.

Such an ambitious agenda is necessary, if we are to accomplish what must
be a foremost goal of public policy: the reconnection of growth and
living standards. The existence and expansion of this gap strikes at the
heart of our core economic values, such as the belief that working
families' living standards should reflect their contribution to the
economy's growth. Every year that productivity rises, but middle incomes
stagnate, poverty increases, and children are blocked from the
opportunities to realize their potential, is another year in which the
basic American economic contract is broken. I commend the committee for
investigating this serious problem and look forward to working with in
any way that would to helpful to fix it.

Bibliography

Mishel, L., Bernstein, J., & Allegretto, S. (2007). *The State of
Working America 2006/2007*. Ithaca: Cornell University Press.

Freeman, R. B. (2007). America *Works: Critical Thoughts on the
Exceptional US Labor Market*.  New York, Russell Sage Foundation.

Mishel, L., Eisenbrey, R., & Irons, J. (2008, January). Strategy for
Economic Rebound: Smart stimulus to counteract the economic slowdown.
Washington, D.C.: EPI Briefing Paper No. 210, Economic Policy Institute.

Savner, S., & Bernstein, J. (2004, August). Can Better Skills Meet
Better Jobs? *The American Prospect*.

Shaiken, H. (2007, February). Unions, the Economy, and Employee Free
Choice. Washington, D.C.: EPI Briefing Paper No. 181, Economic Policy
Institute.

Weller, C., & Wolff, E. N. (2005). *Retirement Income: The Crucial Role
of Social Security*. Washington, D.C.: Economic Policy Institute.

[^1]: This section is adapted from the forthcoming State of Working
    America, 2008/09, by Mishel, Bernstein, and Shierholz.

[^2]: Some of this section originally appeared in earlier testimony
    (<http://www.epi.org/content.cfm/webfeatures_viewpoints_testimony_20080213>)
    though I have updated some of the analysis.

[^3]: NAIRU is an acronym for non-accelerating rate of unemployment.
    These findings are described in Bernstein (2007a).

[^4]: <http://www.epi.org/content.cfm/webfeatures_snapshots_20080716>.

[^5]: <http://www.transportation.org/news/96.aspx>