Technology and the American Economic

Transition: Choices for the Future

May 1988

NTIS order #PB88-214127
Recommended Citation:

U.S. Congress, Office of Technology Assessment, Technology and the American Economic

Transition: Chokes for the Future OTA-TET-283 (Washington, DC: U.S. Government Printing

Office, May 1988).

Library of Congress Catalog Card Number 87-619892

For sale by the Superintendent of Documents

U.S. Government Printing Office, Washington, DC 20402-9325

(order form can be found in the back of this report)
Foreword

In many studies during the past decade and a half, the Office of Technology Assessment has

analyzed hundreds of changes in American life that have been brought about by new technologies. In this study, for the first time, OTA steps back from the detailed analyses of individual

industries and sectors to take a broad look at the combined impact of new technologies on American society. From this perspective it is possible to describe the opportunities and risks for the

nation as a whole that are not apparent in studies targeted on topics that are more narrowly defined. The report highlights strategic choices available to Americans as we negotiate a period of

major transformation. The choices we make will have profound consequences for the quality of

work and the amenities available to Americans and for America’s role of leadership in the free world.

Eight committees of Congress asked the Office of Technology Assessment to assess the new

environment in which America’s economy now operates as a result of new technologies, a global

market, and related changes in consumer attitudes and behavior. OTA was asked to identify areas

where existing policy might block attractive avenues of growth and where new policies could

facilitate growth. The requesting committees represent a wide spectrum of congressional interest.

They include the Senate Committee on Commerce, Science and Transportation; the Committee

on the Budget; the House Committee on Energy and Commerce; the Committee on Post Office

and Civil Service; the Committee on the Judiciary; the Committee on Public Works and Transportation; the Committee on Education and Labor; and the Committee on Science Space and Technology.

The analysis begins and ends by focusing on people in their role as consumers and as employees. It uses conventional economic accounting procedures to document economic growth,

but also employs more qualitative standards for measuring progress in eight basic categories of

demand or amenity: food, housing, transportation, health, clothing & personal care, education,

personal communication & business, and recreation & leisure. It also uses standard methods for

measuring gains in compensation paid to workers, but introduces other ways of evaluating job

quality such as opportunities for learning and career advancement, the extent to which work and

family responsibilities can be combined, and whether a person can take pride in his or her work.

The first chapter serves as an introduction to the themes developed in the document and

a summary and guide to the entire report. Readers will find this a useful way to identify sections

on consumption, business structure, trade, employment, education, or other topics that may be

of special interest to them. We feel that the major accomplishment of this document, however,

lies in the way it helps develop a perspective on these issues—showing how the networks of production and consumption are interconnected, how international and domestic economies are connected, and how changes in one area spread through the nation’s entire economic and social fabric.

The study was undertaken with the help of many individuals and institutions around the

United States. We owe a particular debt to individuals in the U.S. Department of Commerce and

the U.S. Bureau of Labor Statistics who not only provided data and reviewed OTA’s work but

gave us crucial insights and guidance about their complex resources. Responsibility for the contents of this document, of course, rests with OTA.

Director

,..

Ill
Technology and the American Economic Transition

Advisory Panel

David Saxon, Chairman

Chairman of the Corporation, Massachusetts Institute of Technology

Cambridge, MA

Claude Ballard John J. McNamara

Partner McCann Erickson

Goldman Sachs New York, NY

New York, NY Kathleen O’Reilly, Esq.

William Baumol Executive Director

Department of Economics Citizens Utility Board

Princeton University Madison, WI

Princeton, NJ

Harvey Brooks

John F. Kennedy School of Government

Harvard University

Cambridge, MA

Richard Crowder

Senior Vice-President

Pillsbury Co.

Minneapolis, MN

Thomas G. Denomme

Vice-President

Chrysler Corp.

Highland Park, MI

Charles F. Sabel

Department of Science, Technology and Society

Massachusetts Institute of Technology

Cambridge, MA

George M. Scalise

Senior Vice President

Advanced Micro Devices

Sunnyvale, CA

Al Sobey

Director of Energy and Advanced Product

Economies

General Motors Corp.

Detroit, MI

Judith Gregory Barbara Starfield

Department of Communications School of Hygiene and Public Health

University of California at San Diego John Hopkins University

La Jolla, CA Baltimore, MD

Henry A. Lichstein Arthur G. Wirth

Vice President Department of Education

Citibank Washington University

New York, NY St. Louis, MO

Mary Jo Manning, Esq. Howard Young

Partner Livonia, MI

Wilkes, Artis, Hedrick, & Lane

Washington, DC

Ray Marshall

L.B.J. School of Public Affairs

University of Texas

Austin, TX

NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members. The panel does not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for the report and the accuracy of its contents.

iv
OTA Project Staff: Technology and the American Economic Transition

Lionel S. Johns, Assistant Director,

Energy, Materials, and International Security Division

Henry C. Kelly, Project Director

Andrew W. Wyckoff

Daniel J. Chenok

Joy Dunkerley

Review & Counsel

Peter Blair

Audrey Buyrn

Walter Parham

Peter Sharfman

Contributors

Food: Mark Belle, Charles Abdalla, John Connor, Kenneth Cook, Jack Giacin, Roger Griffin, Steve Hiemstra,

Eric Hyman, Chester Mackson, Rosanna Morrison, Stanley Johnson, Bruce Harte, Robert Evenson, Carl Pray,

Jonathan Putnam, Theron Dowries, Ronald Cotterrill.

Health: Zeda Rosenberg, Nicholas Ashford, Tony Bale, Howard Berliner, Robert Curtis, Eli Ginzberg, Peter Goldschmidt,

Dale Hattis, Irene Jillson-Boostrom, Louanne Kennedy, Andrew Martin, Mariam Ostow, Curtis Priest, Herbert Semmel,

Alvin Strelnick

Housing: David Dowall, Robert Gold, Vincent Brannigan, Edward Starostovic, Steven Winter, Alton Bradford, *

Don Carlson, * David Claridge, ” Michael Clevenger, * Albert Dietz, * Eric Dluhosch, ” John Eberhard, ” James Gross, *

Harry Mileaf, ” John Millhone, * Piero Patri,* Richard Reisman,* Richard Tucker,* Charles Thornton,* Wendel Wendel,*

Raymond Whitten*

Transportation: Elizabeth Deakin, William Garrison, Robert Cervero.

Education: Francis Fisher, Alfred Bork, * Lewis Branscomb, * John Seely Brown, * Andrew Catkins, * Margaret CoX, *

Richard Cyret, * Christopher Dede, * Dorothy Deringer,* David Docterman, J. Dexter Fletcher, * William Gattis,”

John Goodlad, * John Kemeny, ” Daniel Levin, ” J.C.R. Licklider, * Milbrey McLaughlin, * Arthur Melmed)*

Andrew Molnar, * Billy Reagan, * Theodore Sizer, * Thomas Snyder, * Patricia Sturdivant*

Communications: Robert Bolter, Donald Dunn, Jamie Grodsky, Jim McConnaughey

Recreation and Leisure: Steven Ackerman, Anindya Bose, Arlene Fleming, Margaret Fischer, Haines Gaffner,

Robert Howard, Steve Sieck, Robert November, Peter Verhoven

Textiles and Apparel: Ruth Ruttenberg, Gordan Berkstresser, N.C. Williamson.

Internationaf Trade issues: Steven Haggard, Michael Aho, * Steven Cohen, * peter Kenen, ” Raymond Vernon, ” William

Wallace, * John Zysman*

Manufacturing Issues: Steven Cohen, Barbara Baran, Bruce Guile, Carol Parsons, Robert Scott, Jean Ross.

Analytics: Frank Bean, William Booth, Mary Feng, Jan Graf, David Gillman, Gail McGrew, Lori Renner

Time Use: John Robinson, Jeffrey Holland

Editorial & Inspirational: Robin Clarke, Ann Kelly, Robert Niblock, Emilia Govan

Administrative Staff: Phyllis Brumfield, Lillian Chapman, Linda Long

OTA Publkhing Staff: Kathie Boss, James Agee, John Bergling, James Brown, Debra Datcher, Cheryl Davis,

Dorinda Edmondson, Chip Moore

*Prepared papers for workshops held in connection with this project.
Technology and the American Economic Transition

List of Reviewers

Karen J. Baehler

Roosevelt Center

Washington, DC

Richard S. Belous

The Conference Board

Washington, DC

Howard Berliner

Conservation for Human Resources

Columbia University

New York, NY

Anne P. Corter

Brandeis University

Boston, MA

John Connor

Department of Agricultural

Economics

Purdue University

West Lafayette, IN

Elizabeth Deakin

Institute of Urban and Regional

Development

University of California at Berkeley

Berkeley, CA

Fay Duchin

Director

Institute for Economic Analysis

New York University

New York, NY

Kenneth Friedman

Special Assistant to the Deputy

Assistant Secretary for

Conservation

Conservation and Renewable Energy

U.S. Department of Energy

Washington, DC

William Garrison

Institute for Transportation Studies

University of California at Berkeley

Berkeley, CA

Bruce Guile

National Academy

Washington, DC

Carl Hodges

Director

of Engineering

Environmental Research Laboratory

Tucson International Airport

Tucson, AZ

Kaname Ikeda

Science Counselor

Embassy of Japan

Washington, DC

David R. Johns

Chairman and Chief Executive

Officer

David R. Johns Group

Phoenix, AZ

Ronald Kutscher

Associate Commissioner

Office of Economic Growth and

Employment Projections

Bureau of Labor Statistics

U.S. Department of Labor

Washington, DC

Linda LeGrande

U.S. Congressional Research Service

Washington, DC

Jeff S. Luke

Director

Bureau of Governmental Research

and Service

University of Oregon

Eugene, OR

Larry Mishel

Economic Policy Institute

Washington, DC

Ronald Moroney

Director

Innovative Technology and Special

Projects Division

U.S. Department of Housing and

Urban Development

Washington, DC

Mark Planting

Interindustry Economics Division

Bureau of Economic Analysis

U.S. Department of Commerce

Washington, DC

Art Rosenfeld

Lawrence Berkeley Laboratories

Berkeley, CA

Marc Ross

Energy and Materials Program

Department of Physics

University of Michigan

Ann Arbor, MI

Laura D. Tyson

Department of Economics

University of California at Berkeley

Berkeley, CA

Amy Walton

Jet Propulsion Laboratory

Pasadena, CA

George Wino

American Textile Manufacturers’

Institute

Washington, DC

Paula Young

Bureau of Rconomic Analysis

U.S. Department of Commerce

Washington, DC
Contents

Page

Chapter I: Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Part I: The Networks of Consumption

Chapter

Chapter

PartI1

Chapter

Chapter

Chapter

2: Defining the Consumption Recipe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

3: Eight Amenity Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

The Networks of Production

4: Defining the Production Recipe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ....147

5:Three Perspectives on Structural Change . ..............................165

6: The Networks That Produce Amenity . . . . . . . . . . . . . . . . . .................203

Part III: The International Connection

Chapter7: The Framework of U.S. Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......285

Chapter8: How Trade Enters U.S. Production Recipes . . . . . . . . . . . ...................303

Chapter 9: The Composition of Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321

Part IV: People in the Production Recipe

Chapter 10: How America Uses People at Work

Chapter 11: Matching People to Jobs . . . . . . . . .

Chapter 12: Work and the Amenity Networks . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395

PartV: Policy and the Future

Chapter 13: Alternative Paths for the U.S. Economy . . . . . . . . . . ......................425

Chapter 14: Public Regulation and Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ...445

Appendix on Data and Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...............467

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..............485

vii
List of Related OTA Reports

Technology and the American Economic Transition Supporting Reports

● Special Report

—Technology, Trade, and the U.S. Residential Construction industry

OTA-TET-315, September 1986, NTIS order #PB 87-117 594/AS

—The U.S. Textile and Apparel industry: A Revolution in Progress

OTA-TET-332, April 1987, NTIS order #PB 87-196 762/XAB

● Technical Memorandum

—A Review of U.S. Competitiveness in Agricultural Trade

OTA-TM-TET-29, October 1986, GPO stock W52-OO3-O1O54-2,

NTIS order #PB 87-140 760/AS

● Panel Proceedings

—Technology and the Future of the U.S. Construction Industry

AIA Press, 1986, NTIS order #PB 86-209 442/AS

Other OTA Reports

● New Electric Power Technologies

OTA-E-246, .hdy 1985, GPO stock W52-003-01005-4,

NTIS order #PB 86-121 746/AS

. International Competition in Services

OTA-ITE-328, July 1987, GPO stock W52-OO3-O1O67-4,

NTIS order #PB 87-212 403/AS

● Trade in Services: Exports and Foreign Revenues

OTA-ITE-316, September 1986, GPO Stock W52-OO3-O1O49-6,

NTIS order #PB 87-118 204/AS

● Technology and Structural Unemployment

OTA-lTE-250, February 1986, GPO stock W52-OO3-O1OI7-8,

NTIS order #PB 86-206 174/AS

● Technology, Public Policy, and the Changing Structure of American Agriculture

OTA-F-285, March 1986, GPO stock W52-OO3-O1O18-6,

NTIS order #PB 86-184 637/AS

● Preventing illness and injury in the Workplace

OTA-H-256, April 1985, NTIS order #PB 86-115 334/AS

● Life Sustaining Technologies and the Elderly

OTA-BA-306, .h]y 1987, GPO stock W52-OO3-O1O74-7

NTIS order #PB 87-222 527/AS

● The Electronic Supervisor: New Technology, New Tensions

OTA-CIT-333, September 1987, GPO stock W52-OO3-O1O82-8

NTIS order # PB 88-156 351/AS

● Automation of America Offices

OTA-CIT-287, December 1985, NTIS order #PB 86-185 055/AS

● Computerized Manufacturing Automation

OTA-CIT-235, April 1984, GPO stock W52-003-00949-8,

NTIS order #PB 84-196 500/AS

● Technology, Innovation, and Regional Economic Development

OTA-ST1-238, .hdy 1984, GPO stock W52-003-00959-5,

NTIS order #PB 85-150 894/AS

Note: Reports are available through the U.S. Government Printing Office, Superintendent of Documents, Washington, DC 20402-9325, (202) 783-3238;

and the National Technical Information Service, 5285 Port Royal Road, Springfield, VA 22162-0001, (703) 487-4650,
Chapter 1

Overview
CONTENTS

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Guide to the Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Analysis by Networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Policy Consequences. . . . . . . . . . . . . . . . . . . . . . . . 4........ . . . . 9 . . . . . . . . . . . . . .

The Structure of the Report . ........ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Summary . . . . . . . . . . . . . . . 0 . . . . 0 . . . . . . . . . . . . . . . . . . . . . . 0 . . . . . . . . . .

The New Rules.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

New Technology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

New Challenges From Abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

New Resource Constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

New Values and Tastes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Changes in Public and Private Regulations and lncentives . . . . . . . . . . . . . . . . . . . .

Choices Created by the New Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Economy-Wide Structural Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Stmctural Change in the Eight Major Amenity Networks of the American Economy . . .

Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Clothing and Personal Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Personal Business and Communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Recreation and Leisure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Pulling the Pieces Together . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

5

5

12

14

15

15

15

18

19

19

20

21

21

40

40

41

43

45

46

47

49

50

51
Chapter 1

Overview

INTRODUCTION

During the next two decades, new technologies,

rapid increases in foreign trade, and the tastes and

values of a new generation of Americans are likely

to reshape virtually every product, every service, and

every job in the United States. These forces will

shake the foundations of the most secure American

businesses. Few features of the change seem inevitable. The Nation’s future has probably never been

less constrained by the cost of natural resources or

the limits of human strength, dexterity, or memory.

Much less depends on physical limits to what can

be done and much more on what Americans choose

to do, acting privately as consumers, investors, and

employees and publicly as voters.

The choices will affect the options available to consumers, the rate and nature of growth in different

business sectors, the geography of growth, and the

role played by large and small enterprises. They will

affect America’s position in the world economy and

the number and quality of jobs the American economy produces.

This document is designed to describe the nature

and consequences of some of these choices.

Given the importance of choice, it would be foolish to make confident predictions about the future

of America’s economy. It is possible, however, to outline a set of exciting possibilities. They include opportunities to: extend life and reduce sickness and

disability; create more choices in recreation and entertainment; expand access to information about

products and services; have products and services

more precisely tailored to personal needs and tastes;

and make learning more productive and accessible.

There are also opportunities for making work more

rewarding—in all senses of that term. Technology

can replace many of the most tedious, dangerous,

and dehumanizing tasks while creating jobs that require more intellectual and social skills. Machines

are likely to plant seeds, weave cloth, fabricate metal

parts, handle routine paperwork, enter data, and perform a vast number of other repetitive tasks more

efficiently and more productively than people. By

default, the majority of jobs created in the economy

could be those requiring human, and not machinelike skills: designing; tailoring products and services

to unique customer needs; teaching; caring; entertaining; promoting; and persuading. Ironically, one

result of sophisticated technology may be a work

force whose primary task is dealing with people–

as customers or as colleagues.

With each opportunity for progress, of course,

there are opportunities for serious missteps. Even

change that clearly leads to overall economic growth

can have very uneven effects. Change can lead to

wrenching dislocation and pain for workers with obsolete skills, for management unable to recognize

opportunity, and for communities where traditional

businesses have failed. Change can create an America in graceless decline—its living standards falling

behind those of other world powers. This could mean

an America less able to ensure the operation of free

international markets and less able to ensure the

security of the free world. Change can weaken the

bargaining position of some groups while strengthening that of others. Change can result in a growing gap between those fortunate enough to have the

talents, education, and connections needed to seize

emerging opportunities and those forced into narrowly defined, heavily monitored, temporary positions, This latter group could be forced to bear most

of the costs of uncertainty.

A central issue is at the core of the choices: will

change increase or decrease the power of individuals? Specifically:

●

●

Will it become easier to purchase products tailored to specific interests, or will choices be constrained as national production systems substitute standard products for specialized products

reflecting individual interests or local tastes?

Will businesses change and grow under the assumption that workers will be well educated and

intellectually flexible, or will they plan with the

assumption that workers will be ignorant, untrainable, and unreliable? Another way of asking this question is whether people will be able

to find a variety of attractive opportunities for

work, or whether only a credentialed elite will

enjoy such opportunities.

3
4

From another perspective, the issue is whether the

flexibility and dynamism essential to progress in the

emerging economy will come at the expense of individuals, or whether individuals themselves will become more flexible because of continuous opportunity for learning and growth. In the past it seemed

necessary to make a Faustian compact with technology: efficiency could be improved only by sacrificing individuality. Efficiency demanded mass production of uniform products, and a reasonable income

often required acceptance of a constraining and narrowly defined occupation. It is at least possible that

emerging technology will make it possible to avoid

such a choice.

Can America operate a dynamic and growing

economy and navigate a transition to a new, more

flexible, economic structure without falling into any

of many potential traps? Specifically, can the U.S.

Government create a set of marketplace rules that

bring private and public goals into greater harmony

without stifling the innovation and entrepreneurship

needed to reach these goals? Can both workers and

investors have incentives to undertake major changes

in production systems? Can a major transformation

be managed so that unavoidable trauma will not all

be borne by a single group?

The following pages argue that the answer to all

these questions is yes—but only given an unflinching reexamination of some of the most cherished

notions about the way businesses are managed internally, and about the way networks of enterprises

work together. In the end, the choices governing the

direction taken by the economy will be made by individual Americans acting as consumers with diverse

interests, employees interested in rewarding work,

and investors in search of profits. The rules under

which these choices will be made are the issue. The

collection of rules, regulations, and incentives

adopted over the past several decades for perfectly

good reasons may send misleading signals today.

Programs designed to create growth in new directions require an ability to think in clear, practical

ways about the way skills and investment are connected to the provision of good health, recreation,

and other amenities measured in human terms. The

baffling complexity makes it easy to be misled about

where real opportunities for progress lie. Indeed, it

can make it difficult to believe in the possibility of

system-wide progress.

The analysis that follows provides a practical set

of tools for evaluating the performance of an economy that operates increasingly as a set of complex

networks, which add value in many different ways

and in many different locations before a product or

service finds its way to a household. It also develops

a set of concrete hypotheses about the way economic

networks could operate in the future. The document

does not attempt to forecast the future. Forecasting

implies that choice plays a minor role. Instead, the

analysis attempts to provide the clearest possible

description of the available choices and their implications.

The changes discussed in this volume appear to

make prescriptive government planning less desirable. This does not necessarily mean that the responsibilities of government are reduced. Government

maintains a central role because it creates many of

the rules under which private choices are made. It

may also have a growing responsibility for ensuring that Americans have adequate access to education throughout their lives, for ensuring a continuous flow of invention and innovation, and for

protecting individuals from the dangers and risks of

rapid economic change.

Eight congressional committees asked the Office

of Technology Assessment to take a broad look at

the opportunities and risks created by the new environment in which America’s economy now operates,

in order to identify areas where existing policy might

block attractive avenues of growth and where new

policy could improve incentives.

Real economic growth requires both a belief that

progress is possible and a vision of progress that is

broadly shared. Government cannot create such vision, but it can provide a place where such visions

emerge. The genius that has driven U.S. prosperity

throughout its history has been an ability to combine collective vision with diversity and individualism—to unite grand ideals with hard pragmatism.

As the United States enters the 21st century, this

genius will be put to its severest test.
5

GUIDE TO THE ANALYSIS

Analysis by Networks

Given the broad goals of this analysis, it is necessary to take a very basic look at the way the economy operates as a whole. The vocabulary and the

accounting techniques used to describe the economy,

however, can limit our ability to imagine fundamental change. They embody many implicit assumptions

about values and the way an economy operates.

There is no obvious way, for example, to know

whether a shift to an economy heavily based on

“services” is either a fate to be embraced or avoided.

In many manufacturing industries most employees

never touch production equipment; more than half

the cost of producing a computer, for example, typically results from software development. Should

computer manufacturing now be considered a service? Many “service” workers are now involved in

facilitating the design and delivery of manufactured

products tailored to specific needs, or in facilitating

the formation of production networks needed for

timely delivery of new products. Should growth in

these enterprises be read as the decline of manufacturing?

In an effort to avoid the traps of these and other

abstractions, this analysis concentrates on some basic

concepts:

● However sophisticated the economy may become in the future, its final products must always be the production of what will be called

“amenity” throughout this volume. Amenity is

intended to mean anything that contributes to

the comfort, convenience, or happiness of an

individual or household. While amenity is measured differently by every person, the “amenity

categories” remain essentially unchanged in

basic areas like health, food, housing, entertainment, and security. Progress in the economy

must ultimately be measured by the extent to

which the quality of these amenities has been

improved, and by the extent to which these improvements are shared by the least fortunate

groups in America.

There are no easy ways to monitor gains in

amenity. Growth in average income per person

●

provides only a limited view of changes taking

place. Averages, for example, can mask increasing differences between wealthy and poor households. Growth in spending on burglar alarms

is obviously not a good measure of security. Increased medical spending is not a good measure of national health.

However sophisticated the economy becomes,

the networks providing amenity directly or indirectly generate all the employment created by

the economy. Barring the development of a pill

that increases native intelligence or removes the

need for sleep, the basic resources of time, talent, and enthusiasm available in the work force

will not be altered by any economic transformation.

Change can, however, affect the mix of skills

demanded throughout the economy, and the

links connecting income to skill. It can alter the

quality of education offered by the work force,

and the capacity of workers to learn and adapt

to shifting circumstances. It can alter the quality of jobs, the texture of a working day, and

the extent to which a person can take pride and

pleasure in the work. The quality of working

life is itself an important amenity.

Most of the following analysis is devoted to an examination of the way amenity and jobs are connected

in today’s economy and the way these connections

may change during the next two decades. Understanding these connections, of course, requires a

clear understanding of the way a modern economy

operates. The goal is to enter these intricacies without losing track of the fact that the analysis must begin and end with people.

Paradoxically, even in an economy increasingly

based on information flows the simplest questions

seem more difficult to address. The information available can be overwhelming rather than helpful. The

analytical strategy proposed here attempts to close

the gap between speculation based on anecdotes and

quantitative analysis based on national economic statistics. It uses statistical analysis wherever possible,

but combines these results with the insights of experts in areas where statistics are not available or
6

are difficult to interpret. Above all, the method is

designed to be flexible enough to describe opportunities for basic structural change.

A Parable

Before describing the methods of this study in

more detail, it is useful to look at an example of a

contemporary production network. What could be

more basic than a frozen pizza? A man cooking a

frozen pizza in a microwave oven cares about what

the pizza costs, how it tastes, how its preparation

fits into his increasingly harried lifestyle, and maybe

a bit about whether it is good for his diet or health.

In effect, he cares about the net productivity of the

network of activities (including the time he invested

in cooking and learning about health) that brought

the pizza to his palate. He probably couldn’t care

less whether it was the product of a manufacturing

economy, a service economy, an information economy, or an international economy. But consider a

likely chain of events that culminated in the pizza.

Knowledge about health effects of food came from

a TV talk show and information about a sale on pizza

from a newspaper ad. Wheat for the pizza crust was

grown in Kansas using sophisticated seeds and pesticides. The pizza was assembled automatically and

wrapped in materials that are themselves the product of considerable research. The pizza was probably purchased at a grocery store where a clerk

passed it over a laser scanner, which entered data

into a computer and communication system designed

to adjust inventories, restock shelves, and reorder

products. This system in turn made it possible to

operate an efficiently dispatched transportation system, placing a premium on timely and safe delivery rather than on low bulk hauling charges. The

checkout data were probably also used to analyze

consumer response to the previous day’s advertisement and to ensure that the store was closely following trends in neighborhood tastes.

This pizza parable is important because food remains a major part of the U.S. economy. The parable is even more important, however, because it

contains many of the themes now reshaping the

American economy,

It is difficult to argue that the United States has

moved beyond an agricultural economy when one

person in seven still works directly or indirectly to

bring food to American tables. Demand for food continues, but the jobs involved in supplying it are very

different from those of our grandparents. In 1984,

only 4 of every 100 jobs in food production were

on farms. The number of lawyers, bankers, scientists, and accountants needed to supply food in 1984

was about equal to the number of farmers. More than

half the jobs supplied by the food network were for

sales workers (20 percent), precision craftsmen (12

percent), managers (11 percent), and data entry

clerks (10 percent).

Technology plays a crucial role at each step of the

network of business activity just described. Foreign

products enter at many points: the pizza may contain tomatoes from Mexico, may be prepared by food

handling equipment from West Germany, and may

be sold using checkout equipment from Japan. While

the rules governing the network are primarily those

of private markets, the role of government is pervasive. Government regulations control the safety and

labeling of products. Public funds supply the highways crucial to food delivery. Many farmers spend

hours finding ways to benefit from government farm

programs.

Basic Tools for Representing Networks

The analysis presented in this study begins by

dividing the entire output of the U.S. economy into

10 components, identified by the amenity they

provide:

●

●

●

●

●

●

●

●

●

●

Food, .

Housing,

Health,

Transportation,

Clothing and Personal Care,

Education,

Personal Business and Communication,

Recreation and Leisure,

Defense, and

government activities not elsewhere classified.

Only the first eight amenity groups are analyzed

in detail in the material that follows. Changes in demand and in production efficiencies, have reduced

the fraction of America’s income spent on each

amenity. During the past three decades, the fraction

of spending used to purchase Food has declined

while the fraction spent on Health, Education, Per-
7

sonal Business and Communication, and Recreation

and Leisure has increased (see figure l-l).

The amenity ultimately enjoyed by each individual or household is achieved through a complex series of steps, each of which adds value of some kind.

The value may be contributed by investments of

household time, or maybe added by a business that

contributes to a purchased product or service. The

final value of a purchased frozen pizza, for example, includes value contributed by farmers, packers,

truckers, wholesalers, grocery stores, and the collection of legal, financial, insurance, and other firms

that facilitate transactions needed by the complex

network of activities.

The methods this analysis uses to keep track of

the flow of value in economy are summarized in figure 1-2, which illustrates four basic steps in the network connecting people as consumers to people as

employees and investors:

1. Consumption Recipes. These “recipes” describe

the way households achieve each amenity by

combining time invested by household members, purchased goods, purchased services, and

goods and services purchased by the government. (The mix of private and public spending

in 1985 is summarized in figure 1-3.) A recipe

Figure 1-1.-How America Spent Its Money

(percent of all personal and government

spending in current dollars)

Food

Housing

Transportation

Health

Clothlng & Pers. Care

Education

Pers. Busi, & Comm,

Recreation & Leisure

Government (nec)

Defense

, r ,

Figure 1-2.-Structure of the Analysis

1

Food

Housing

Transportation

Health

Clothing & Pers. Care

Education

Pers, Busi, & Comm,

Recreation & Leisure

Government (n. e c.)

Defense

, 1 1

) 5 10 15 20 25

Percent of current dollar spending

- Household ~ Government

How To Read This Figure: Of ail household and government

spending in 1985, 14.5 percent was spent by households to

purchase food and 0.5 percent by government to purchase

food or support food production.

SOURCE: Office of Technology Assessment (see table 2-2 of ch. 2).
8

a mathematical analysis of the way spending

correlates with price, income, household structure, and other factors); and second, by examining the possibility that entirely new directions

may be taken because of unexpected new products, changes in consumer education, changes

in tastes, or changes in formal regulations.

2. production Recipes. These “recipes” represent

the mix of ingredients needed by producers to

supply household and government buyers with

products and services. Each business produces

output by combining material and services purchased from other businesses with value that

is added by the business itself. This value takes

the form of labor performed by the business’

Figure 1-4.-Where Is Value Added? (value

employees and the returns paid to investors for

use of capital. Tracing the value that ultimately

appears in the price of a consumer product requires an understanding of the way value is

added by a complicated network of businesses

that supply each other. If the purchasing “recipe” of each business is known, it is possible

to estimate the wages and profits generated in

each sector in the process of satisfying the eight

major classes of consumption. The result of such

an analysis for 1984 is shown in figure 1-4. ]

l Information in this and other tables displayed in this chapter must

be treated with some caution. They are based on a large number of

assumptions discussed in greater detail in later chapters.

-added by production sector in 1984)

Food

HOUSING

TransportatIon

Heal t h

Clothing & Pers Care

Education

Pers Busi & Comm

Recreation & Leisure

Government (n e c.)

De fen se

Exports

n Construction & Other

EZZl Social Services””

= Transactions

D Transport & Trade

= Manufacturing

- Natural Resources*

11111111 1

0 100 200 300 400 500 600 700 800

BI I lions of $198 0

How To Read This Figure: In 1984, the U.S. gross national product (GNP) was $2,890 billion (1980 dollars). Of this total, approximately $430 billion went to produce food for U.S. household and government purchasers. Of this $430 billion, $64 billion ended

up as value-added (primarily employee compensation and profits) earned in Natural Resource businesses (a category that includes farming, fisheries, energy, and mining businesses). If the bars for each amenity group were placed end to end, the

sum would equal the total U.S. GNP.

● Farming, Mining, and Energy.

“ “Education, Health, and other Government.

SOURCE: Office of Technology Assessment (see table 4-Sa of ch. 4).
9

International Connections. Imported products

have insinuated themselves into the domestic

production recipes in complex ways (see figure

1-5), while nearly 10 percent of the U.S. gross

national product (GNP) is sold abroad as exports.

Trade of this magnitude obviously changes some

of the basic rules under which domestic production networks operate. Different parts of the

economy vary greatly in the way they are affected by trade. One dollar in five spent for

Transportation ends up abroad, either directly

(as in purchases of foreign cars or fuel) or indirectly (as in expenditures for steel used to produce automobile parts). About 12 percent of the

price of products exported by U.S. firms results

from imported products. Patterns of involvement can change rapidly. Housing, for example, was comparatively isolated from world trade

in 1984 but there may soon be rapid growth

in imported housing components.

Figure 1-6 provides a rough estimate of the

way trade affects domestic employment. Estimates of the displacement effects of imports are

highly artificial, since they depend on assumptions about how U.S. firms would produce substitutes for imports. Gains and losses exceed 25

percent in some sectors.

Figure l-5.-lmports Used Directly or

Indirectly To Produce Amenity in 1984

Tranportatio n

Clothing & Pers Care

Federal Defense

Exports

Recreation 8 Leisure

Food

Housing

Government (n e c )

Health

Pers Busi & Comm

Education

1 I !

o 5 10 15 20 25

Percent of domestic spending on amenity

How To Read This Figure: 21.2 percent of the money spent

by U.S. households and government for transportation in 1984

was spent abroad to purchase petroleum, automobiles, automobile components, and other products and services.

SOURCE: Off Ice of Technology Assessment (see table 7-11 of ch 7).

44 People in Production Recipes. The value that

is added by each U.S. business depends on the

contributions of employees with different kinds

of skills. Figure 1-7 completes the network described at the beginning of this discussion by

showing how effort by people with different occupations translates into amenity. Occupation

is used as a proxy for skill since no other good

substitute exists.

The American economy in 1900 allocated occupations to amenity very differently than the economy described by figure 1-7. A much larger fraction

of all jobs would have been devoted to the production of Food and Clothing, for example, and a larger

share of these jobs would have been directly involved with farming or other natural resources.

What might happen to such structures in the future? The method of analysis just described provides

a systematic framework for examining hypotheses

about changes in consumption recipes, production

recipes, trade, and the use of skills in production.

Public policy sets the rules under which choices are

made in each of these four areas. These policies are

discussed in greater detail in chapter 14.
10

Figure 1-7.-J Jobs Required To Provide Amenity in 1984

Food

HousIng

Transportation

Heal t h

Clothing & Pers, Care

Education

Pers, BusI, & Comm,

Recreation & Leisure

Government (nec,)

Defense

Exports

1 I 1 I I

Sales & Other Customer Contact

Managers & Support

o 5 10 15 2 0 2 5

MI I I ions of jobs

How To Read This Figure: In 1984, the U.S. economy produced approximately 107 million jobs. Of this total, approximately

17.5 million jobs resulted from the production of food for U.S. households and government. Of these, approximately 1.6 milI ion jobs were created for managers and management support occupations. All reported jobs in the U.S. economy are recorded

somewhere in this figure,

SOURCE: Office of Technology Assessment (sea table 10-6 of ch. 10).

Chapter 13 of this volume traces plausible hypotheses about changing choices in consumption recipes,

production recipes, trade, and staffing by occupation.

Figure 1-8 shows one of the many different scenarios

examined. It represents an extreme case in that it

shows what could happen if a major transformation

occurred in each of the four analytical areas: consumption recipes that might improve amenity (for

example, it assumes that investments in health promotion and disease prevention succeed); production

recipes built around new paradigms (for example,

it assumes a shift to a tightly integrated network connecting fiber production to retail apparel outlets); reduced reliance on trade; and a work force built

around comparatively well-educated workers. It reflects comparatively rapid productivity growth with

the real U.S. GNP rising at 3 percent per year.

Under the hypotheses leading to the economy described in figure 1-8, productivity would greatly reduce employment in most mechanical jobs while employment in managerial, technical, and sophisticated

clerical tasks would increase. Fewer people would

be needed to provide basic materials or material

processing. Many more would be needed to manage

complex transactions and tailor products to individual needs. Since it is difficult to alter the productivity

of tasks where direct human contact is essential, the

share of all jobs required to provide education, entertainment, and basic government services (like fire,

police, and other services) would increase in proportion to the rest of the economy.

Chapter 13 describes a variety of other scenarios.

It may be possible, for example, to achieve high

levels of amenity and a decline in the number of

hours worked even though the dollar value of GNP

grows comparatively slowly. There is no absolute

way to measure the desirability of any of these

scenarios.

Basic Characteristics of the Networks

Economic networks have been growing in size and

complexity for some time. Each generation of new

technology appears to increase the interdependence

of businesses and individuals as well as the number of people and businesses tied together. Specifically:
11

Figure 1-8. -A Scenario of Jobs Required To Produce Amenity

Foo d

Housing

Transportatio n

Healt h

Clothing & Pers Car e

Educat[o n

Pers Busi & Comm

RecreatIon & Leisure

Government ( n e c )

Defense

Export s

in 2005 (one of several considered)

Machine & Transportation Operators,

Laborers, and Farmers

Managers & Support

I I 1 I I I

o 5 10 1 5 20 25

Millions of jobs

How To Read This Figure: Several scenarios for the future structure of the U.S. economy are considered throughout this document. Under the assumption that significant, but plausible, changes occur in consumption recipes, production recipes, trade,

and staffing patterns, this figure shows where jobs would be created in the U.S. economy in the year 2005. The format is identi -

cal to figure 1-7.

SOURCE: Office of Technology Assessment (see table 13-12 of ch. 13).

. Virtually no part of the economy now operates

without heavy reliance on elaborate production

networks. Production, marketing, sales, and

transactional activities combine to deliver everything from frozen pizza to health care.

● Technology can increase the efficiency of a network acting as a whole as well as the performance of each enterprise in the network. Data

provided by laser readers in grocery checkouts

and improved communication systems permit

efficient operation of tightly integrated networks

of wholesalers, truckers, food processing firms,

advertisers, and other businesses. This can be

more important than efficiency improvements

of any single business in the network.

● Taken together, new technologies can greatly

increase the efficiency with which energy and

materials are used. The efficiency gains, however, can typically only be achieved with increased spending for design and management.

● Intricate interconnections mean that problems

and prosperity propagate quickly and affect

●

●

●

many parts of the economy indirectly. Imports

that affect a manufacturing firm also affect its

web of suppliers. Exports create an elaborate

trail of wealth.

The new networks can have a surprising capacity for regeneration. New connections grow

quickly when others are cut. Network components can shift rapidly to produce new products

and services or to adopt new production

strategies.

Many of the networks have become international. Products, money, and ideas move about

the world with new ease and speed. When production networks consist of many independent

components, it is easier for both foreign and domestic businesses to enter.

The complex networks have greatly expanded

the role of transactional businesses—banks, lawyers, accountants, and communication specialists.

Transactional costs can be measured by the increase in purchases of legal or financial services needed to make and enforce contracts, or
12

in purchases of other specialized business services. They can also be measured by the growth

of management occupations and other transactional overhead costs in corporate bureaucracies,

● While disaggregate production networks could

in principle spread economic activity widely in

the United States, in fact they appear to have

resulted in the concentration of economic activity in coastal cities. Businesses are choosing

locations where they can find workers with adequate skills, and where extensive networks of

personal contacts can be maintained. In the past

much of American business needed easy access

to natural resources.

● New networks are not only changing the relations between businesses, they are also changing the relationship between the market economy

and the unpaid work done by family members.

Capital investment in things like microwave

ovens and video tape recorders ties households

to food and entertainment networks in new

ways. Child care, care for the elderly, and other

“household” tasks are entering the market

economy.

● People most likely to prosper in these networks

are protean—able to change, adapt to unfamiliar

work, and learn new trades as a continuous part

of working experience. The talents needed are

not clever hands or a strong back but rather the

ability to understand instructions and poorly

written manuals, ask questions, assimilate unfamiliar information, and work with unfamiliar

teams. In short, the new networks require the

skills provided by a solid basic education.

There is a paradox in all of this. Countries, establishments, communities, and individuals are finding themselves ever more tightly connected, and yet

the networks allow more independence and choice.

In particular, technology may tie production systems

in different countries more closely together while nations may become less and not more dependent on

imported supplies of energy, food, and manufactured

products. The “green revolution” used technology

to make many nations that were formerly food importers self-sufficient in food production. Material

substitution and efficiency can reduce needs to import energy and minerals. In such situations the

movement of materials may have decreased while

the strength of linkages moving information, technology, ideas, and capital equipment has increased.

The shift to any new economic structure leads to

effects resulting from the transition itself. These can

often be difficult to distinguish from more lasting patterns of change. In a period of transformation one

can expect rapid abandonment of older equipment

(depreciation has grown steadily as a percentage of

GNP), changes in business structure (rates of mergers,

acquisitions, divestitures, and other transactions are

extraordinarily high), and changes in demand for

labor (there are large differences between the average job in the work force and the new jobs added

during the past few years).

Policy Consequences

The depth of the changes underway in business

networks, and the speed of change, requires a fresh

look at policies designed to stimulate growth and mitigate the pain of adjustment. It is useful to divide

options into two basic classes:

1. policies that affect the performance of the economy as a whole, changing rules in ways likely

to facilitate choices made by consumers and pro

ducers; and

2. policies that facilitate the performance of specific

networks like Education, Housing, or Health.

It is essential that the two policy strategies be coordinated. Policies designed to improve the performance of specific networks affect and are affected by

programs designed to improve business performance

through basic fiscal policy.

Analysis presented later suggests that production

networks in diverse areas are becoming much more

similar in the way they are managed, in the way they

are linked to the rest of the economy, in the range

of skills expected of employees, in the way they depend on the products of research and development,

in the way they are regulated, and in the way they

react to signals from the financial markets. Each network, however, retains unique features that must

receive separate attention.

Programs designed to facilitate economic growth

and expand the range of choices available to individuals can be built around the major elements of

the network structure described in figure 1-2:

● The performance of consumption networks can

be improved by providing individuals with more

information, by ensuring that their education
13

is adequate to make informed choices in an increasingly complex society, by reviewing the incentives created by tax and regulatory policy,

and by improving the way the government itself behaves as a consumer.

● Production recipes can be improved by changing the financial rules that may reward shortterm profit taking over long-term investment,

and by reshaping regulations that may place unnecessary constraints on the emergence of new

production networks.

● The growth of international production networks

makes it increasingly difficult to manage the

economy in the absence of international coordination and cooperation. Regulation in areas as

diverse as banking, communications, and antitrust needs to be undertaken with even greater

attention to the way domestic networks are tied

to international ones.

. Policy can influence the way employers use People in production recipes in a variety of ways.

Policy can encourage employers to achieve flexibility through teams of skilled employees rather

than by relying on “disposable” workers. A variety of incentives can be used to encourage

compensation schemes that reward investment

in training and that allow firms to adjust to hard

times by reducing bonuses instead of laying off

the most vulnerable employees. Policy can also

encourage workers to be more flexible by reducing the pain of adjustment. Public investment and incentives can ensure employees access to training needed throughout a career.

Retirement and health benefits can be made

more transportable.

While the strategies are diverse, a number of

themes emerge. Complex networks make centralized management of economic activity less feasible

and less desirable. Networks in which productivity

demands freedom to adapt and change may be

impeded by regulation. This does not mean that

planning is unwise, but rather that a new kind of

planning is required. A firm confident in future demand for a specific product can plan to reduce costs

through mass production. A firm certain that it cannot predict future demand must plan to have the

flexibility needed to accommodate change.

The changing networks make it important to understand how the effects of public policy ripple

through the economy. The flexibility of the emerging networks, for example, makes it comparatively

easy for firms to evade conventional regulation. It

can only become harder, and not easier, to define

and regulate “banks,” “emergency care facilities,”

“communication common carriers, ” or even “electric utilities.” Restrictions applied to groups of products seem increasingly easy to subvert.

The problems associated with many kinds of traditional business regulation have led to an increased

emphasis on programs designed to protect individuals rather than to regulate institutions. It is likely

that this trend will continue. Steps can be taken to

improve the information available to consumers as

they make complicated decisions in areas ranging

from health care to home purchasing. New rights

to education, insurance, and pensions can be given

to individual employees. New steps can be taken to

ensure that markets take adequate account of safety,

environmental, and other costs. These are difficult

enough to regulate when production systems remain

comparatively static. They are more so when systems are in flux.

Earlier economic transformations were associated

with a major public investment in infrastructure:

canals, railroads, electric lines, and highways. The

transformation taking place today seems to require

an entirely different kind of public involvement. An

educated population is the most critical infrastructure of the emerging economy. It is critical for both

the economic growth of the Nation as a whole, and

the success of individuals acting as either consumers

or employees.

Education has, of course, always been a central

interest of American policy. Two things are new.

First, the emerging economy places an unprecedented

demand on the intellectual skills and knowledge of

American workers. Old standards of competence are

no longer adequate. Second, technology is making

it possible to look for significant changes in the

productivity and quality of teaching and learning for

the first time. A system allowing any person, anywhere, with any background, and any assortment

of gaps in education, access to training on any subject is within the state of the art of existing technology.
14

The Structure of the Report

It is obviously difficult to take a many dimensional

network and describe it in a linear prose essay. Figure 1-9 illustrates how the remainder of this document is organized. Each of the four major parts covers a different element of the American economic

system. Each introduces a set of analytical tools for

using national statistical series to look at economywide patterns of change. Each of the four parts, however, also contains a discussion of issues unique to

each amenity network. These analyses are based on

an enormous variety of sources ranging from national statistical accounts to specialized journals. The

analysis of specific networks includes an effort to define progress in areas like Health and Education, a

description of the peculiar features of each network,

an analysis of trends in the way the network operates, and speculation about how it could operate in

the future. These examinations include a review of

changes in patterns of consumer and government

purchases, changes in the way producers combine

to deliver products and services (and the net productivity of these combinations), and changes in the way

people with different skills are linked together directly

and indirectly in these networks.

The final two chapters pull the pieces together.

Chapter 13 develops a set of hypotheses about the

future structure of the economy built from a series

of specific hypotheses concerning consumption, production, trade, and labor. Chapter 14 reviews options for revising the regulations and incentives that

shape the direction of U.S. economic growth.

Figure l-9.-Organization of the Volum e

Chapter 1: 1ntroduction and Summary

Consumption

Net works

Setting Up

the Analysis

n

Chapter 2

Production

Net works

Trade

Net works

Chapter 7

Chapter 8

Chapter 9

Labor in

Production

Net works

Chapter 10

Chapter 11

r

Chapter 12

I

Chapter 13: Defining Alternatives

Chapter 14: Defining Choices

SOURCE: Office of Technology Assessment.
75

SUMMARY

The following section provides a brief summary

of the topics covered throughout the remainder of

this volume. The reader is due two warnings before

proceeding:

1. No attempt is made in this summary to provide

references for facts or detailed arguments in support of conclusions. For this, the reader is referred to the sections of the report cited.

2. The discussions result in an assessment of strategic choices and provide a list of specific policies that could be used to implement these

choices. The discussions of choice are divided

THE NEW

The rules under which the economy operates are

being reshaped by four major forces:

●

●

●

●

new technologies—primarily those built around

microelectronics;

the loss of U.S. preeminence in international

markets;

the possibility that the price of energy and other

resources may increase sharply by the turn of

the century; and

changes in consumer and labor markets and

a new attitude toward public regulation of economic activity, resulting—at least in part-from

new values and tastes.

Taken together, these forces appear to open more

opportunities than they foreclose.

New Technology

Technology has forced the U.S. economy through

profound changes in the past and shows every indication that it will do so again. The introduction

of steam power, railroads, and mass production

equipment at the beginning of the 19th century

serves as one example; the development of electric

power, inexpensive steel, automobiles and telephones

at the beginning of the 20th century provides another.

These inventions did much more than improve on

the way things had been done in the past. They

changed basic conceptions about the limits of human ingenuity, removing seemingly insurmountable barriers. Moreover, they had effects going far beinto two parts. The first part outlines a set of

public policy goals and objectives that grow

directly from the analysis of this report. The second part, which suggests options for achieving

these objectives, enjoys no such connection and

has not been analyzed in any detail. The options are offered to demonstrate that public

choice can have a significant effect in moving

the economy toward a desired objective. They

are not intended to form a comprehensive fist.

Neither the costs nor the benefits of specific options are estimated in detail.

RULES

yond the markets for which specific inventions were

originally developed. Each cluster of technologies

led to rapid growth in wealth, standards of living,

and employment. The texture of everyday life was

transformed.

Weaving machines, for example, took work that

had been performed in most households for generations and moved it to towns and factories. Inexpensive cloth improved comfort and sanitation and revolutionized fashion. New techniques used in the

production of textiles and apparel turned villages into

cities, changed the terms of international trade, and

helped make England a world power.

The automobile quickly became more than just

an improved horse. Affordable cars reshaped everything from the design of cities and suburbs to styles

of courtship. They generated noise, pollution, accidents, poetry, and an unimagined range of personal

mobility. A curiosity at the beginning of the century,

auto production dominated U.S. industry by the

1950s.

Do the technologies now entering the economy

have the potential to so transform society that their

impact can be considered revolutionary? Can any

of them do something that could simply not be done

before, or reduce costs to a point where they can

change basic paradigms of production throughout

the economy? These are not easy questions. An overwhelming body of evidence suggests, however, that

new technologies for collecting, storing, manipulat-
16

ing, and communicating information do have the

potential to revolutionize the structure and performance of the national economy. They would have this

potential even if the technology were to freeze at

present levels—which it plainly will not. This is not

to say that other emerging technologies will not also

have a significant effect on the economy. Bioengineering can reduce the incidence of disease, extend

life expectancy, reduce the cost of producing food,

and improve the quality of American life in a variety of other ways. New materials can improve the

performance of machines ranging from automobile

engines to space stations. But while surprises are to

be expected, it is likely that most of these technologies will do something familiar in a better way—at

least during the next two decades. Information technologies have the potential to change the performance of the economic system itself.

If a revolution of some sort is underway, measuring its impact with any precision has proven to be

exasperating. As in the past, technologies with the

power to reshape the basic structure of production

have effects where they are least expected and where

official government statistics are poorly designed to

chronicle the change (statistical series are usually

best suited to chronicle the previous technical revolution). Some evidence of the astonishing impact

of the new technology, however, can be seen in the

fact that over 40 percent of all new investments in

plant and equipment are now in a category called

“information technology ’’-computers, copying machines, and the like. This is double its share in 1978

(see figure 1-10).

Much of this equipment is purchased by businesses specializing in transactions (law, banking, insurance, etc.), education, retail and wholesale trade,

and in parts of manufacturing, health, and transportation traditionally associated with “overhead” or

“margins.” These are businesses where output cannot be measured in concrete terms. Convincing evidence of productivity growth has yet to be measured

in many of these businesses. It is difficult to determine whether this is a transitional effect associated

with learning during a period of massive change,

a defect of measurement, or a real limitation of the

technology.

The transitional problems associated with learning how best to use information technologies are

Figure I-lO.-Investment in Information

Equipment as a Percent of all

Investment in Producer Durables

40

30

20

10

0

1950 1955 1960 1965 1970 1975 1980 1985

How To Read This Figure: Measured in constant 1982 dollars, 40.4 percent of all producer’s durable equipment (PDE)

was spent to purchase computers, communication equipment, or related information equipment in 1984. About half

of all investment in the U.S. is spent for PDE, the rest is used

to purchase houses, and other construction products.

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts, ” historical diskettes, table 5.7

(see figure 4.1 of ch. 4).

large. As was the case with earlier innovations, however, the more sophisticated information technology

becomes, the easier it is to operate and the more

widespread is its adoption. It would have been difficult for James Watt to believe that heat engines (in

automobiles) could be operated by people unable

to distinguish a wrench from a peony. Information

equipment has made an important transition during the past few years. Computing power once confined to specially equipped, air-conditioned rooms

has already insinuated itself into everything from automobile carburetors to greeting cards and teddy

bears. Like the carburetor, the computer has become

invisible for most users.

One of the problems of measurement is that information technology affects the structure of the

economy in unexpected ways. Three areas appear

to be of particular importance:

1. Information technologies can increase the productivity of operations where real productivity

changes once seemed so remote that they may

never have been considered seriously. Paper

shuffling occupations provide a prime example.

Clerical or quasi-clerical data entry, processing,

communication, or manipulation is the principal
17

occupation of at least 16 percent of the work

force (27 percent if managers are included). The

potential productivity gains in this area—the

movement and organization of information—

are at least as great as those produced when

the first Industrial Revolution began to revolutionize productivity in moving and transforming material objects.

Education provides another unexpected example. At least 8 percent of the work force is

engaged in teaching. The new information technologies have the potential to increase the quality and the quantity of learning that occurs per

unit of a student’s time and per unit of teaching time. Quality means learning in greater

depth. It means an ability to tailor teaching techniques to individual abilities and more time for

teachers to talk to students.

Making full use of information equipment,

however, requires a willingness to undertake

a basic reexamination of management strategies and job descriptions. This is always a painful and uncertain process. Successful use of new

information equipment seldom involves the direct replacement of a task by automation. Instead, entire operations (like data entry, filing,

and routine management tasks) may be replaced

with a combination of information equipment

and jobs with new responsibilities (typically

“quasi-professional” jobs involving clerical, interpersonal, and analytical skills). The potential for using technology in education depends

on a willingness to reshape what is taught,

where it is taught, how it is taught, the point

in a person’s career when it is taught, and the

range of talents needed by the teaching staff.

2. Information technologies have the potential to

link production systems together in ways that

improve the performance of entire networks.

These technologies can make it easier to serve

large numbers of highly specialized markets.

They make it possible to tie together complex

networks of producers around the Nation or

around the world by forging tighter links between retail, wholesale, transportation, and

manufacturing operations. They also make it

possible to concentrate production in areas

where labor skills, wages, business conditions

or living conditions are judged to be favorable.

Fundamental changes in management practices are needed throughout business networks

if the full potential of the new technology is to

be harnessed. Many such changes are already

underway. Unprecedented scrutiny of management practices, inventory control, sales strategies, and other activities has already led to the

growth of tightly integrated systems connecting

manufacturers and business services. Tight networks now connect grocery stores to warehouses

to food producers. Networks will shortly tie

clothing retailers to apparel manufacturers to

textile producers to the fiber industry. These

changes impose a range of new demands on

production technology and supporting services.

For example, the new systems place a premium

on rapid response and efficient batch production rather than on mass production. They place

a premium on fast, reliable transportation of

comparatively high-value products, rather than

on low-cost transportation of bulk materials. As

a result, they demand considerable support from

service enterprises.

3. Information systems can change the ways business performance and financial information are

gauged, and can increase the rate at which markets respond to new business conditions. Information technology that can make information

both cheaper and easier to use can obviously

have a deep, though subtle, effect on the efficiency of a free economy. It can affect both how

producers organize their activities, and how consumers decide to spend their money.

Time-sensitive prices of such things as electricity can be continuously communicated to individual residences, for example. Businesses can

also be made much more sensitive to market

trends, and can tailor production planning more

closely to market demand.

The international stock market crash of October 1987 provided a stunning reminder of the

way that information processing equipment

(facilitated by regulatory change) allows enormous amounts of money to shift hands quickly.

The equations imbedded in the computer software

conducting such trading do not just anticipate

the performance of the national economic system but, to a major extent, have become part

of the system. Regardless of whether this practice should be celebrated or condemned, there

can be little doubt that information is influenc-
18

ing the way national capital resources are allocated.

New Challenges From Abroad

The networks that combine to deliver amenities

to Americans have taken on an increasingly international dimension. Exports and imports nearly doubled their share of GNP during the 1970s (see figure 1-1 1).

The factors that make it possible for producers to

divide production into separate steps in comparatively small establishments located across the country

also make it possible to tie foreign producers into

these networks. Once confidence is developed in foreign suppliers, it is easier for U.S. firms to expand

operations abroad; once foreign producers establish

a reputation for quality, they can build on this reputation. The process is cumulative and, barring catastrophic events, irreversible.

While the establishment of familiar links with foreign producers irreversibly opens the potential for

foreign production, these links do not necessarily

imply a continuing expansion of foreign production.

Long transportation and communication lines add

costs, both directly through increased shipping and

inventory costs, and indirectly through inflexibility.

Domestic ingenuity can be substituted for foreign

supplies of energy and materials. It is entirely possible that the advantages of quick access to domestic markets and production links will offset any advantages of foreign production. This topic will appear

repeatedly in this analysis.

The growth in trade over recent decades has resulted largely from the economic recovery of Japan

and Western Europe following World War 11. This

recovery was, of course, a central goal of U.S. foreign policy for four decades—based on the sound

belief that prosperity is a strong bulwark against Soviet destabilization. A second major factor has been

the explosive growth of Korea, Taiwan, Hong Kong,

Singapore, and other producers on the Pacific Rim

who have developed rapidly, in large part because

of their ability to offer competent workers with a

sound basic education at low wages. In 1970, 40 percent of South Koreans of appropriate age were in

the equivalent of high school. In 1982, 82 percent

were enrolled. It also appears that the quality of the

schooling received is high.

Figure l-11.-Exports and Imports

(percent of GNP in constant 1982$)

Percent of GNP

15

10

5

0

-5

-10

-15

-20

*

1950 1955 1960 1965 1970 1975 1980 1985

— Net Exports = Exports ~ Import s

How To Read This Figure: In the third quarter of 1987, exports totaled about 11 0

/0 of the U.S. GNP while imports totaled about 15%. The trade deficit was about 4% of the GNP.

“1987 third quarter.

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts, ” historical diskettes, table 1.2 (see

discussion In ch. 8).

The gap separating productivity levels in Japan,

Australia, the United States, Canada, and major European economies has been cut in half during the past

100 years. This has meant a convergence in living

standards, incomes, and labor costs.

There are some obvious reasons why followers

gain on the leaders. Imitation is much easier once

the basic paths have been revealed. Ideas flow rapidly—increasingly so, if some recent studies are to

be believed—across international borders. Expanding economies are more likely to take risks with state

of-the-art production systems than established firms

with large investments in existing equipment.

While loss of overwhelming U.S. dominance in

world trade was expected, the rapid erosion of U.S.

capabilities in advanced technologies was not. The

theory of the “product cycle” seemed to explain U.S.

leadership for many years. The theory was based

on an assumption that U.S. producers operated in

an economy with some of the world’s most affluent

consumers and best paid workers. Technologies developed for such an economy were unique, emphasizing high labor productivity and sophistication. As

other nations approached U.S. living standards, and

as the technologies involved became comparatively

routine, they would naturally pass out of U.S. hands

while U.S. producers moved to ever more sophisticated production.
19

This cycle has not only been slowed by the convergence of living standards, it may have been

reversed. Foreign firms, recognizing that dynamic

exploitation of technology is the key to international

competitiveness, may have taken the lead. Having

broken the product cycle, foreign producers are suddenly in a position to finance the next generation

of technology with income earned from sales of the

current generation. U.S. producers are left trying to

leapfrog competitors without such a revenue source.

In the case of consumer electronics, U.S. producers

appear to have all but abandoned the effort. The

rules of trade have changed in fundamental ways

for U.S. producers. Increased linkages in the domestic economy also mean that trade problems in one

area (e.g., manufacturing) quickly translate into prob

Iems in many parts of the economy (e.g., business

service firms that owe a good portion of their livelihood to domestic manufacturing).

Loss of U.S. dominance does not mean that U.S.

living standards will necessarily fall; indeed, living

standards in the United Kingdom rose steadily for

a century after it lost its dominant position in the

world economy. It simply means that undisputed

U.S. economic leadership may be lost. Certainly, it

is now possible that the United States will find its

living standards in decline with respect to its competitors, and discover its role as an economic and

military leader of the free world called into question

during the next two decades.

New Resource Constraints

The availability of natural resources once dictated

the pattern of the U.S. economy. Today, as industries learn to make more with less and to substitute

light, high-value products for heavy, cheap ones, far

fewer firms are constrained by lack of resources. This

is already altering the geography of U.S. industry in

major ways.

But two natural resource issues will continue to

demand attention: the availability of petroleum, and

the limits of the environment’s ability to absorb

waste. Both can be surmounted given adequate planning. Without such planning, the comparatively

heavy energy dependence of the United States could

become a major liability. U.S. lifestyles would suffer if the price of petroleum increased suddenly (60

percent of U.S. petroleum consumption is for personal vehicles); furthermore, the comparative energy

inefficiency of U.S. products (cars and appliances,

for example) and production systems could make

U.S. products less attractive in international markets

and foreign products more attractive in U.S. markets. Resource policy leading to inefficient energy

use can also lead to inefficient use of capital. Lack

of attention to energy efficiency resulting from poor

utility regulation, for example, can lead to massive

diversion of capital to energy projects.

With current technologies, rising energy use translates into growth in solid waste and increases in air

and water pollution. Fortunately, technology that improves the efficiency with which energy and materials are applied to products and services usually has

the serendipitous effect of simultaneously reducing

emissions. While energy use per dollar of GNP in

the United States is still nearly twice that of Europe

and Japan, it fell 25 percent during the 1973-86

period. U.S. consumption of steel, cement, paper,

ammonia, chlorine, and even aluminum per dollar

of GNP and per capita has either stopped growing

or begun to decline. Electricity was the major exception to the trend, increasing nearly as fast as GNP

since 1970.

New Values and Tastes

Another basic change in the rules involves changes

in the tastes and values that motivate decisions in

consumer markets, public spending, and labor markets. Changes in these areas have had dramatic and

sometimes complex influences. Strenuous objections

to nuclear power in the United States, the growth

of the environmental protection industry, new interest in exercise and nutrition, and the growth of

female participation in the work force have all resulted primarily from changes in values having littIe to do with economic forces.

Demographic and Social Factors

The size and structure of U.S. households and the

role of women in the economy have both changed

dramatically over the past decade. There has clearly

been a change in the behavior that Americans find

acceptable, and a consequent increase in the range

of choices available for individuals. These changes

come on top of an underlying pattern of demographic

change of no small consequence. Taken together,
20

they have been responsible for qualitative changes

in patterns of consumer expenditure and in labor

markets.

Those born during the baby boom recently left the

Nation’s educational system. They are now at an age

to make major consumption decisions—decisions

that often reflect changes in values from the generation they have replaced. This generation has created booms in a number of markets (such as increased spending on health, fitness, and travel), and

in some areas this has led to congestion. Many young

families are discovering, for example, that population pressures in areas where new jobs are being

created have driven prices for housing to levels that

are prohibitive for new home buyers.

This process is paralleled by a growing population of elderly people and a radical transformation

in the size and structure of households. Divorces,

late marriages, and growing acceptance of previously

unacceptable living arrangements, such as singleparent households, have led to a rapid growth in

comparatively small households. The average size

of an American household fell from 3.3 people in

1960 to 2.7 in 1986.

Women are now much less likely to leave the work

force even when they have young children. Many

are forced to work since they are the sole source of

support for their families. Moreover, the expansion

of female employment opportunities has meant that

women are much less willing to subsidize the economy with poorly paid work. Markets for nurses,

teachers, and other traditionally female occupations

have changed greatly as a result.

The increase in female participation has been offset by a sharp trend toward early retirement, resulting in part from more generous retirement programs

and in part from a troubling trend toward the disposal of older workers for whom retraining is not

judged to be profitable. Young married women are

now as likely to be in the work force as older men

(see figure 1-12). The number of hours worked in

the economy by the average adult (age 16 to 65)

seems to actually have declined during the past decade. Since the baby boom has recently increased the

percentage of all Americans who are adult, however,

the number of hours worked per member of the total U.S. population has increased.

Figure l-12.-Work Force Participation

for Older Men and Young Married Women

Percent

‘oo~

8 0 -

Men aged 66-64 f“~

. . -

6 0 -

--- -

Married women aged 26-34 --- -

L

- - -

~.”

.-

- -

t

~-

40 . . ----

----

---

-----

------------

20

o~

i

1955 1960 1965 1970 1975 1980 1985

How To Read This Figure: In 1966, approximately 67 percent

of married women aged 25 to 34 participated in the work force

(e.g., were working for pay or actively looking for work). Approximately the same percentage of all men aged 55 to 64

participated in the work force.

SOURCE: U.S. Department of Labor, Bureau of Labor Statistics, Handbook of

hborSt Wst/cs, Bulletin 2217 (Washington, DC: U.S. Government Printing Office, Juna 1965); data since 1963 provided by the Bureau of Labor

Statistics (see discussion in ch. 11).

Changes in Public and Private

Regulations and Incentives

The phrase “regulations and incentives” is used

throughout this document to mean the answer to

the question “What explains the behavior of the individuals involved in economic activity?” These rules

fall into two basic types: the profit motive of free markets, as modified by formal incentives and regulations promulgated by the government; and informal

patterns of management that have evolved historically, often without reference to economic logic.

For better or for worse, both the formal and informal regulations governing the U.S. economy are

undergoing changes that increase the freedom of

American businesses. This is not a return to a halcyon past that was free of regulation. Most business

activity was much more heavily regulated in the past.

Regulatory reform has eliminated or greatly reduced controls that once tightly constrained competition in enterprises throughout the economy.

Many emerging technologies have the effect of reducing the size of economically competitive facilities.

In some circumstances, privately owned phone
21

switches can compete with utility telephone switches,

and cogeneration plants can compete with utility generation of electricity. Other technologies have introduced competition in areas once dominated by a single technology (such as alternatives to broadcast

television and business communication systems).

The result has been to undermine the logic of using

principles of “natural monopoly” to regulate broad

areas of the economy. Pressures of international competition are also destroying many traditional management mechanisms in businesses ranging from

textiles to insurance.

While the logic of monopoly control may have

been altered in many ways by the emergence of new

technologies and demands for new network flexibility, the changes may increase the need for regulation to protect the health, safety, and privacy of

individuals.

Perhaps the most critical question has to do with

the motivation of individuals. Hard work, dedication,

and inspiration cannot be entirely explained by looking at how a rational person would maximize income

under prescribed rules. What keeps an inventor

working through the weekend? The prospect of fortune plainly helps, but interviews with innovators

continually suggest that much more is involved. A

sense of pride, the admiration of colleagues and employers and, at least in traditional societies, a sense

of contribution to a collective or national accomplishment all play a critical role. Interviews with entrepreneurs who left large firms to start their own

repeatedly suggest that a desire for independence

contributed as much as a desire to earn more money.

Public or private rules that frustrate such intangible

individual incentives are unlikely to promote real

national growth.

CHOICES CREATED BY THE NEW RULES

The rules shaping opportunities for economic

growth have changed in ways that undermine many

basic paradigms for public and private management.

Deep structural changes are underway in virtually

every U.S. business sector. Some are painfully obvious: firms threatened by extinction in the face of

foreign competition, or a health care industry revolutionized by new technology that has overwhelmed

traditional means for managing health financing. In

other parts of the economy, change is more subtle:

an insurance industry in which products and production processes have been transformed by competition and new information technology, or a transportation system reshaped by new demands for

speed, reliability, and quality in the delivery of comparatively small, lightweight products. Still other

parts of the economy (education and home building, for example) remain comparatively stable, but

there is potential for major change.

The choices created by the new rules are viewed

from two perspectives: 1) structural change underway at the level of the entire economy and the policy choices presented by these changes, and 2) structural change underway in specific amenity networks

and the choices presented by these changes.

Changes affecting the entire economy are measured by shifts in the relative role of different types

of businesses (e.g., farming, manufacturing, and service enterprises), in the nature and volume of trade,

and in the kinds of jobs created and lost. Choices

exposed by an examination of economic performance at this level suggest a review of the incentives

and disincentives created for businesses by laws

affecting finance, trade, and labor policy. In many

cases these signals seem incompatible with the

course of action most likely to capture the opportunities of the new rules.

Changes in the performance of specific amenity

networks can only be seen by examining the unique

features of Health, Education, Transportation, and

other sectors. Each require programs specialized to

their unique problems and opportunities. Choices

made about such programs work best when coordinated with programs designed to stimulate innovation and growth throughout the economy, and when

made with a clear view of problems and opportunities shared by different sectors.

Economy-Wide Structural Change

The following discussion examines structural

change in the U.S. economy by tracing changes at

each of the four stages that connect people as consumers to people as employees and investors described in figure 1-2:
22

1. changes in consumer and government spending (consumption recipes),

2. changes in the way purchased goods and services are produced (production recipes),

3. changes in the way trade modifies these production recipes, and

4. changes in the use of people in production

recipes.2

Each of these discussions lead to a distinct set of

choices for public policy.

Consumption Recipes (Ch. 2)

The term “consumption recipe” is defined to mean

the combination of private and public investment

used to achieve an amenity like good health (see

table l-l). These recipes are based on a complex

combination of logic and whimsy. They are shaped

by changes in demographics, incomes, income distribution, prices, and by the emergence of new products and services. They can be strongly influenced

by public regulation, tax policy, and information.

Describing Recent Trends.—American households are looking for–and finding–greater quality

and diversity in products and services. This results

in part from the fact that U.S. households are growing more diverse, and in part from the fact that technology and trade bring a greater variety of products

to market at prices not significantly higher than those

of “mass produced” goods. Technology also makes

it possible to reach small markets efficiently.

While the rate of change in household types is

likely to slow during the next two decades, the new

diversity of American households will continue to

shape demand for products and services tailored to

a range of interests as the baby boom generation

moves through middle age. Only one-fifth of house2 The compensation and unearned income generated in step 4, of

course, provide a basic constraint on purchasing patterns described in

step 1. The analysis is designed to be internally consistent, but no attempt is made to produce a closed economic model.

Table I-l. -Elements of the Consumption Recipe

Household purchases from labor and capital income

+ Household purchases from transfer and other income

+ Unpaid time of household members

+Government purchases of goods and services

=Total final demand

SOURCE: Office of Technology Assessment, 1988.

holds now have a working father, a housewife, and

children, down from about one-third in 1972. Households headed by the elderly are increasing rapidly.

Changing incomes and income distribution also

shape purchasing patterns. Higher income families,

for example, tend to spend a higher fraction of their

incomes on Recreation, Education, and Clothing and

less on Food and Health. Demographic effects (particularly the increase in households headed by single women) and inequality in the distribution of

property-type income has led to greater inequality

in the distribution of after-tax income among families. While income distribution is obviously important for reasons of social policy, it has a surprisingly

small effect on levels of relative spending in major

consumption categories.

Direct consumer purchases of services are increasing. Much of the growth has been in the form of demand for financial services (including credit), hired

substitutes for work formerly performed by unpaid

household labor (like child care and care for the

elderly), and increased expenditures on health care.

A declining share of U.S. income has gone to purchases of Food, but the share spent on food-related

services (primarily in restaurants) has increased over

the past 30 years.

Purchases of energy and materials are declining

as comparatively light, high-value products (such as

personal computers) represent an increasing share

of purchases. Purchases of heavy durables are leveling off. And people are buying more and more

products tailored to their specific needs, from magazines to insurance policies. There has always been

a demand for tailored services of this kind, and new

technology is now making it possible to serve specialized markets by lowering the differences in cost

that have traditionally made batch production more

expensive than mass production.

Purchasing decisions also depend heavily on the

availability of a person’s time. Americans reported

spending 108 minutes more per week in paid work,

commuting, and household-related work in 1985

than in 1975; they therefore had less free time for

eating, personal care, and other household activities (see figure 1-13). There was less time for housekeeping as well, Men did approximately 1 hour more

housework per week in 1985 than in 1975, but

women did about 5 hours less per week. Time avail-
23

Figure l-13.-American Time Budgets

Work, Commuting

8 Education

Housework, child care,

shopping, family travel

Eating & personal care.

Free time

-.-—-—————————--————

Work, Commuting

& Education

Housework, child care,

shopping, family travel

Eating & personal care’

Free time

//////////////////&///

Men

o 10 20 30 40 50

Hours per week per adult

m 1975 = 1985

How To Read This Figure: In 1975, American women 18 years

of age or older had 40 hours per week for “free time” activities (organizations, social life, recreation, television and other

electronic media, leisure travel, etc.). By 1985, this had fallen

to 36.6 hours.

● Not including 7.5 hours/night.

SOURCE: Office of Technology Assessment (see table 2-3 of ch. 2).

able for leisure also seems to have declined in the

past decade, in part due to the 40 percent increase

in work-related hours. Women were affected the

most, losing an average of 3 hours free time per

week. Both sexes spent much less time spent socializing and participating in social organizations. There

was even a slight decline in time spent watching tele

vision.

The mix of private and public spending used to

achieve amenity has remained remarkably stable at

levels that were shown in figure 1-3. There are some

exceptions. For example, two-thirds of medical spending came directly from patients in 1950. In 1983, 73

percent of all spending came from insurance companies or government programs.

Strategic Choices.—An economy that increasingly takes the form of complex and interlocked networks can have the effect of putting more power in

the hands of consumers. While the complexity of

choice increases, the time available for making informed decisions is declining for many households.

The joy of frivolous and capricious purchases and

the principle of “caveat emptor” are obviously important driving forces in a free economy. Enthusiasm

for them diminishes when it appears that ignorant

consumers may place their health or savings at risk

out of ignorance, or when the social costs of poorly

informed consumers are high.

The high social costs of poor consumer choices

can be illustrated by the following, admittedly extreme example: poorly informed consumers might

buy air conditioners that are much less efficient than

ones that would have been purchased with the benefit of an informed analysis of the returns to an investment in higher efficiency. These poorly informed

decisions would create a demand for electricity that

is higher than would have been the case if all consumers were better informed. This, in turn, could

force the construction of a new generating station,

for which real returns to capital invested are much

lower than the returns that consumers would have

earned on added investments in air-conditioners.

Leaving all other issues aside, the net result of such

a series of events is an inefficient use of national capital resources.

New technologies can help to some extent by making it easier for consumers to sort out information.

New information systems could even permit purchasers to play a more active role in designing products and services tailored to their personal needs,

and even to receive “on-line” guidance about price

trends in products and services of interest to them.

Policy can help improve consumption recipes in

several ways:

● Regulations designed to protect consumers,

which may have made perfectly good sense

when first enacted, may have outlived their usefulness in areas ranging from banking to housing to electric utilities. Many of the specific issues are discussed in the individual amenity

network discussions. Three principles, however,

seem to have general value in reviewing how

regulations might be rebuilt to facilitate the

emergence of a more productive, restructured

economy:

1. Arguments about regulations governing the

pricing of regulated monopolies, or those

governing business entry or exit, need to be

kept distinct from arguments about the need

to protect consumers against fraud, unsafe

practices, or environmental damage. Changing technologies may undermine the logic of

regulated monopolies or elaborate programs

of cross subsidies, but increase the need for

government inspection and safety controls.
24

●

●

●

2. Subsidies for low-income groups are commonly used to justify regulation of transportation, housing, communications, and other

major parts of the economy. They may, however, be inefficient ways of allocating public

funds when a large portion of the subsidy

does not end up helping the poor.

3. Standards for public regulation of hazards in

the environment vary widely. High standards

are set in one area (e.g., mobile source emissions), while other problems (e.g., indoor air)

are largely unregulated. Contaminants in

some kinds of foods are held to very low

levels while others are more loosely regulated. In neither case does the response seem

to correlate with levels of risk. It would be

useful to have a uniform way to measure environmental exposure and associated risks

from all sources—food, water, and air. There

has been no comprehensive assessment of

environmental regulation parallel to the omnibus review of the penal code that occurred

several years ago.

Labels can provide consumers with information

not otherwise available for making intelligent

choices. Energy efficiency labels on air-conditioners encourage consumers to consider energy

costs when making an investment decision,

much as miles per gallon labels help consumers

make choices about cars. Warning labels on

cigarettes and nutrition labels on food products

also help in this process. There are many areas

where labeling to give quality ratings could be

improved, ranging from food products—where

information about cholesterol, alcohol, sodium,

saturated fat, and pesticide residues appears

only voluntarily—to houses, where precise information about energy efficiency and other

quality features is extremely hard to obtain.

Personal income taxes strongly affect consumer

incentives, by doing such things as making investments in houses (of any size) more easily

deductible than investments in education. These

priorities could be reviewed.

The Federal Government, considered a consumer because of the peculiarities of standard

accounting practices, can improve the way it

makes critical purchasing decisions and can support research designed to improve its own productivity. Government buildings and vehicles

are often less efficient than those purchased by

the private sector. The U.S. Government, for example, pays more than $1 billion per year to

subsidize heating for public housing—structures

often having energy bills far higher than necessary. Major government enterprises, such as

public education, are not backed by consistent

research support or funds for capital investment.

Production Recipes (Chs. 4 and 5)

The term “production recipe” refers to the combination of products and services a firm purchases

from other firms, It includes items from both foreign

and domestic suppliers, and both capital equipment

and supplies.3

Producing for the diverse and rapidly changing

markets just described requires alert and integrated

production networks. These production networks

connect many kinds of manufacturing enterprises,

service firms, transportation operations, wholesalers,

and retailers. The performance of these networks

cannot be measured effectively by looking only at

the performance of component businesses—the customer sees the performance of the system acting as

a whole. A trucking firm specializing in on-time delivery of comparatively small batches may seem to

have lower productivity than another firm with lower

charges per ton-mile. Yet the flexibility offered by

the more responsive trucking service could reduce

costs throughout a complex production and retailing network.

Describing Recent Trends.—Change in the

structure of production networks is measured in

three ways:

1. Changes in the recipes used by individual businesses. Each business creates a product by purchasing inputs from other businesses (materials, capital equipment, business services, etc.)

and adds value of its own through the skill of

its employees and the capital supplied by its

owners (see table 1-2).

2. Changes in the size of the establishments that

comprise the production network, and in their

ability to produce more than one product. Ford’s

sin techn~ca] terms, the “recipes” considered here include both fixed

investment and intermediate inputs.
25

Table 1.2.—Components of the Production Recipe

Products purchases from domestic producers

+ Products purchased from abroad

+Value added

Capital costs

Labor costs

Indirect taxes

=Total value of industry output

SOURCE” Office of Technology Assessment, 1986

3.

enormous Rouge River plant, which took raw

materials in one end and pushed finished cars

out the other, seems unlikely to be the model

for future production. Instead, production networks are being organized in ways that defy

easy classification. This applies to both the size

of establishments and the size of firms that may

own multiple establishments.

Changes in the geography of production.

Changes in production networks can also be

measured by shifts in the physical location of

businesses. Changes in recipes, changes in the

scale of manufacturing and service enterprises,

and a variety of other factors have redefined the

logic of firm location.

Changing lnputs.—New technologies, and the

complex networks in part made possible by these

technologies, make increasingly efficient use of natural resources and energy inputs. The decline in the

share of GNP contributed by natural resource businesses (farming, mining, and energy) resulted mostly

from a decline in domestic demand for their products (see figure 1-14).

The declining share of natural resource businesses

is more than offset by growth in transactional businesses (law, finance, insurance, business services,

etc.). Between 1972 and 1984, these gains were

almost equally divided between increases in consumer and government demand and increased use

of transactional activities as inputs by other businesses (see figure 1-1 5). The rising use of transactional inputs results in part from increased demands

for information, and in part from the fact that the

management of these networks has become more

complicated—the emerging networks require both

more complex external contracting and more complex flows of products and information within firms.

The three fastest growing direct inputs into the Nation’s production processes are wholesale and retail

Figure l-14.-Shares of GNP

(in constant 1982$)

~F Percent of GNP

.“ I Manufacturing I

20-

How To Read This Figure: Measured in constant 1982 dollars, the fraction of the gross national product contributed

by farms, mines, energy companies, and other natural resource

businesses fell from 12.8 percent in 1950 to 8.7 percent in

1985. The share contributed by manufacturing appears to

have remained close to 22°/0 during the entire period but there

is reason to believe that some of the procedures leading to

this estimate are fiawed (see chapter 5).

SOURCE. U.S. Department of Cammerce, Bureau of Economic Analysis, “National Income and Product Accounts,” historical diskettes, table 62 (see

figures 5-2b, 5-3b, and 5-4 b).

Figure l-15.-Explaining Changes

in Sector Shares: 1972-1984

Losing Share of GNP Gaining Share of GNP

r‘~ ——..

-

~~

4 - 2 0 2 4 6

Percentage point change ($1980)

~ Domestic Demand

How To Read This Figure: Between 1972 and 1984 the percent of the U.S. GNP produced by Natural Resource businesses fell 2.4 percentage points. Changes in househoid and

government demand reduced the share by 1.1 percentage

points, changes in trade reduced the share by 0.4 percentage

points, and changes in the production recipe of businesses

reduced the share by 0.9 percentage points.

SOURCE Office of Technology Assessment (see table 5.1 of ch, 5).
26

trade services, business services like advertising and

consulting, and communications.

While the contribution of manufacturing appears

constant in figure 1-14, its share of overall employment has been falling rapidly. Calculations showing that manufacturing commands a fixed share of

the GNP, however, depend heavily on techniques

used to adjust for inflation. Half of the growth in

manufacturing’s contribution to GNP estimated for

the 1980-86 period resulted from the difference between the inflation adjustment for computers and

other information equipment and the average adjustment made for all U.S. businesses. Techniques

discussed in chapter 5 suggest that the part of manufacturing paying the highest wages (such as the automobile and steel industries) may have fallen as a

percent of GNP during the past few years, resulting

in an overall decline in the share of manufacturing.

Deficiencies in available data leave the issue clouded.

International trade had a relatively minor effect

on the changing GNP shares of most sectors in the

U.S. economy before 1980, but has since had an effect nearly as large as shifts in domestic demand.

The negative effect of trade was felt most heavily

in manufacturing. Transportation, wholesale and retail trade, and transactional services all benefited

from trade because many of these enterprises gained

business from exports.

There is no good index for measuring the growth

of networks. One way is to see how much business

a firm generates for its suppliers. An economy-wide

index of linkage based on this concept increased 5

percent between 1972 and 1980.

While the entire economy became more tightly

linked during this period, conflicting forces are at

work. The links connecting manufacturing firms to

the rest of the economy, especially to the service sector, seem to be growing: the linkage index for manufacturing industries paying the highest wages increased 15 percent between 1972 and 1980. On the

other hand, the transactional businesses gaining

share in the economy are not very highly linked to

other parts of the economy, since a large fraction

of their sales result from their own “value-added”

(rather than from the cost of inputs purchased from

other firms). On average, manufacturers keep only

about one-half of the value of their sales in the form

of profits or wages paid to employees—paying the

rest to their suppliers. In contrast, service firms keep

nearly two-thirds. Service businesses are linked to

the rest of the economy primarily through purchases

of capital goods, such as buildings and computers.

In 1984, demand for manufactured goods generated

approximately 6.3 million service sector jobs—about

1 out of every 1 l—while demand for service products indirectly created about 4.3 million manufacturing sector jobs—about 1 out of every 5.

Changes in Scale and Scope.—Given the striking

transformations underway in production networks,

it is not surprising that many traditional management strategies are under intense scrutiny. The prevailing wisdom about the optimum size of production facilities, relations to domestic and foreign

suppliers, and investment in research and new production technology is being challenged across a

broad front. As expected, responses from established

management vary from enthusiasm to intransigence.

In some cases it seems to swing wildly from one pole

to the other.

There is much debate, and no convincing data,

about the kinds of business structure that will prove

most successful in the emerging economy. Indeed

the very vocabulary available for describing the

different formal and informal business networks and

management strategies being tried proves to be inadequate. It is obvious that an enormous amount

of experimentation is underway. Many large firms

are adopting a management style that allows subsidiaries to act with greater independence. It is common to find many establishments owned by a large

firm that provides services such as communication

networks, billing, advertising, and personnel management. Clusters of small firms can operate under

the umbrella of a larger firm (e.g., suppliers to computer industries).

Under the pressure of intense domestic and international competition, the marketplace should soon

provide some clarifying signals. In the meanwhile,

there is great confusion over whether smaller enterprises are more flexible, more innovative, more

likely to invest in long-or short-range research and

development, or more likely to be attractive places

to work than larger, more bureaucratic institutions.

Economies of scale in individual establishments appear not to be as much of an advantage as they once

were. Indeed, there appear to be diseconomies if es-
2 7

tablishments become so large than management

loses touch with employees. Rigidly managed larger

firms have suffered from an inability to move quickly

to exploit new market niches and new production

technologies. In their attempts to impose uniformity, such firms may be unable to learn from their

employees. On the other hand, the larger firms can

sustain major development projects requiring large,

long-term investments. They can also be better employers, offering employees more benefits and more

job stability.

One measure of the rate of restructuring can be

found in the surge of mergers, takeovers, and divestitures that have taken place in the past decade,

made possible by reduced regulatory restrictions (see

figure 1-16). Hostile takeovers represented only a

small fraction of the total. The net result of mergers,

and of patterns of new business formation and bankruptcy, has been a change in the size of the average U.S. establishment and in the range of products

that it produces.

Management styles seem to be converging across

the U.S. economy. Large farms, for example, are being managed as sophisticated, heavily capitalized enterprises. The owner is often, in effect, a professional

Figure l-16.-Mergers and Takeovers,

1972-86 (constant 1982$)

~111 OnS of dollars ( 1982$]

~ ~lc

I

1972 1974 1976 1978 1980 1982’ 1984 198 6

= All merger activity = Hostile takeovers

How To Read This Figure: In 1986, the value of mergers and

takeovers totaled more than $150 billion (1982 dollars), up

from $40 billion (1982 dollars) in 1972. The value of takeovers

considered hostile totaled about $30 billion in 1986.

“Data for hostile takeovers not available prior to 1982.

SOURCE: Julius Allen, “Corporate Takeovers: A Survey of Recent Developments,”

U.S. Congressional Research Service report No. 87-726-E, Washington,

DC, Aug. 6, 1987; and Carolyn Kay Brancato, “Merger and Acquisition

Activity: The Level of Hostile Mergers,” U.S. Congressional Research

Service report No 87-507 E, Washington, DC, June 16, 1987 (see discussion in ch. 5).

manager. The construction industry is increasingly

resembling a manufacturing enterprise, with more

components assembled in factories. Fragmented

“low-technology” enterprises, such as those found

in the textile and apparel industries, are becoming

consolidated and are coming to depend heavily on

advanced production technology. Large integrated

facilities, such as those in automobile production,

are moving toward smaller establishments and

shorter production runs. Large banking and insurance businesses are investing heavily in computer

and communications equipment. Hospitals and

groups of physicians are moving toward professional

management, with physicians as paid employees.

Schools may move toward a more differentiated

teaching staff and increased capital investment.

In 1984, 73 percent of all manufacturing employees worked in establishments employing more than

100 people, a 2.3-percent decline from 1982, while

only 40 percent of employees in finance, insurance,

and real estate worked in establishments with more

than 100 employees (up 3.2 percent). Nevertheless,

enterprises with fewer than 100 employees added

47 percent of all jobs gained by the economy between 1976 and 1984, even though they supplied

only 37 percent of all jobs in 1976. The largest gain

in employment share between 1978 and 1982, however, was in small establishments of large enterprises.

While small firms have generated a growing percentage of all jobs, they appear to generate a decreasing share of output. Businesses with 20 to 500 employees increased their sales annually by 4.3 to 9

percent between 1976 and 1982, while firms with

more than 10,000 employees grew at 16 percent. Part

of this growth can be attributed to recent acquisitions and mergers. The strategies behind the mergers

are frequently difficult to ascertain since most recent

mergers have been classified as “conglomerates,”

a category that includes both mergers made to achieve

system-wide productivity gains and mergers that represent portfolios of convenience for speculators.

While only 50 percent of mergers were classified as

conglomerate in 1950, 90 percent were classified this

way in 1979.

Mergers tend to make the parent firm more diverse. Between 1963 and 1982, the number of different products made by a single manufacturing firm

increased 15 percent. At the same time, establish-
28

ments that are a part of larger firms have become

more specialized. The number of different products

made by single manufacturing establishments declined by a factor of 3 over the same period.

The Geography of Production.-A map showing

such natural features as rivers and harbors, or even

minerals, no longer says a great deal about where

economic activity will occur in the United States.

New forms of communication, declines in the scale

of individual establishments (in both manufacturing

and services), a decline in the resource demands of

manufacturing, movement of jobs from the shop floor

to offices, improved flexibility and responsiveness

in transportation, and a variety of other factors remove many of the constraints that formerly limited

choices about business location.

The theoretical possibility of locating a manufacturing or back office service firm virtually anywhere

has, however, apparently been more than offset by

other factors. The attraction of locations offering a

well-educated labor pool (even where this means

higher taxes), and access to major research centers

and financial institutions, increases as other constraints on location diminish. A survey of “high technology” manufacturing firms taken in 1982 indicated

that “access to raw materials” was 12th in a list of

12 reasons for selecting a plant location. The availability of skilled labor topped the list, ahead of concern about labor costs. Moreover, rapidly expanding businesses, such as banking, insurance, law, and

real estate, still depend on networks of personal contacts and communications. This often translated into

a decision to locate new facilities in the immediate

vicinity of urban centers: New York, San Francisco,

and more recently Los Angeles, Dallas, and Houston. The excitement and variety of these areas are

plainly also a lure.

The result has been an increasing concentration

of employment, particularly high-wage employment,

around major metropolitan areas of both coasts (see

figure 1-17). Indeed, there has been rapid movement

of economic activity down the east coast, from Boston to Miami; continuing expansion in Texas, Arizona, and southern California; and continuing losses

of population and economic activity in the rust belt

regions of the northern midwest.

While inequalities in regional incomes declined

during the 1970s, the decline appears to have stopped.

Figure l-17.-Regional Wages:

Percent Above or Below National Average

Percent

16 I I

n

14

12

10

8

6

4

2

0

- 2

1970 1975 1980 1986

= East Coast ~ West Coast

= Pennsylvania, Ohio,

Michigan, Illinois, Indiana

How To Read This Figure: In 1988, wages in States bordering the Atlantic coast were 8.1 ‘Io above the national average

and wages in States bordering the Pacific coast were nearly

11.7°/0 above average.

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “Regional Economic Information System,” tables SA1, SA2, and SA3, unpublished, August 1987 (see discussion in ch. 5).

In fact, during the 1980s New England and the Pacific coast regions appear to have regained their significant lead in average incomes. Incomes in Ohio,

Illinois, Indiana, Michigan, and Wisconsin, which

were above the national average in 1970, are now

below average. Although they remain below the national average, incomes in States on the southern

Atlantic coast showed a steady gain from 1970 to

1985. The southern Appalachian and Gulf Coast

States, however, have incomes that remain 20 to 25

percent below the national average—a position unchanged since the 1960s. On the whole, the economies of the U.S. coastal States appear to be prospering, while the center of the Nation falters.

It is difficult to account for the continuing attractiveness of coastal cities and the failure of U.S. companies to move to low-wage regions. Employers appear to be willing to pay a premium for access to

people with good training and job skills, and use their

new mobility to pay lower wages to relatively welltrained people abroad. An employee in Taiwan with

a solid high school training in mathematics, for example, costs far less than a person with a mediocre

education in the United States.

With the exception of New York, most of the

growth has occurred in centers associated with a major city but not in the traditional core of the city. Pop
29

ulation shifts to the suburbs have allowed many people to live in relatively inexpensive areas while

keeping commuting times reasonable. However, this

has also made public transportation virtually impossible. And since the headquarters of most major firms

are usually located in downtown areas, movement

to suburbs may have blocked contacts critical for career advancement. Suburban business growth can

also create problems for mid-level minority workers, many of whom cannot afford to live in suburban areas and are unable to commute thereon public transit.

Population has followed economic activity, and

Americans remain extremely mobile. Only half of

the population lived in the same house in 1985 as

in 1980, and one-third had moved from a different

U.S. county or a different country. A survey of movers

in the early 1980s indicated that the 50 percent

moved to take a new job or military assignment.

Nearly one out of every six people classified as “displaced” between 1981 and 1985 moved. Surprisingly,

the highest percentage of displaced workers who

moved were not the youngest workers but those aged

45 to 54.

Strategic Choices.—lt is apparent that a deep

structural transformation is taking place in production networks. Trends are difficult to read because

of complex patterns of experimentation. The challenge of policy here is to create a system of rules

that encourages experimentation, transformation,

and growth without sacrificing the traditional responsibilities of government to provide protection against

monopoly abuse and protection for individuals and

communities forced to bear the burden of adjustment.

The challenge is to find practical ways to enjoy

the advantages of competition and “creative destruction” in fostering change, while minimizing the risk

that such a process will destroy the ability to engage

in long-term development work. There is no magic

way to do this. The most promising places to look

for solutions are first in the financial rules that guide

investment decisions, and second in research and

development policy.

Financial Rules.—The rate at which constructive

changes are made in production networks, as well

as the kinds of networks created, depend heavily

on the financial rules under which investors operate. Typically, failure of the U.S. financial system does

not occur in its support of invention or innovation.

The United States continues to lead the world in

many research fields, and has a strong venture capital community. Problems seem to develop when

hundreds of millions of dollars must be found for

comparatively risky projects that require many years

to reach maturity; in effect, the system seems to fail

once the invention in the garage starts working, Pub

Iic policy in areas like tax law, as well as the techniques used to evaluate managers, can influence the

planning horizon of investors and businesses. Some

financial instruments are obviously keyed to very

short-term, speculative trading that is only weakly

tied to the long-term interests of a firm. On the other

hand, the pressure of aggressive financial markets

is necessary to ensure effective management of national capital assets. Takeover threats and the potential for stockholder rebellion can provide a defense against inattentive management.

The following policy options may improve the mix

of patient capital and effective competition for capital resources:

●

●

●

●

Tax reform:

—reduce or abolish income tax paid on capital

gains from assets that are held for more than

3 years;

—limit the deduction for housing interest to a

fixed amount;

—reform or abolish the corporate income tax

(it contributes only 7 percent of government

revenue; its complexity distorts private investment decisions; the transactional costs associated with tax compliance are high; the tax

acts as a non-progressive sales tax for U.S.

consumers; and it increases the cost of U.S.

exports).

Reform of the system regulating financial institutions (limitations on merchant banks, for example), which could allow for greater diversity

in capital assets available to corporations and

could encourage more long-term plans for new

products and production networks.

Reduction of transactional costs, by developing

better techniques for combining regulation, negotiation, and freedom to sue for damages.

Review of priorities for the $200 to $300 billion

in federally supported loans and loan guarantees now largely directed to housing and agriculture.
30

Research and Innovation.—A competitive and

prosperous economy depends both on a system of

incentives that encourages investors to make money

from new ideas, and on a continuous supply of new

ideas; neither is adequate in itself. Research and innovation play a growing role in the health of every

sector in the economy. Even areas where research

has not traditionally played a major role (e.g., home

construction and apparel) are likely to find their

productivity and competitive position strongly influenced by the ability to conduct and absorb the products of research. It is essential that the United States

improve on the way it combines corporate and public

resources in the pursuit of innovation. Like education, this is an area where government expenditure

should be considered as investment and not consumption.

There are many areas of pure research that cannot be sponsored by corporate funds because of the

high risks involved. Also, areas of applied engineering can play a crucial role in national economic development, but their value is likely to be spread so

broadly that no firm can expect to regain its investment in full.

The challenge is to find ways of spending public

funds in a manner that neither competes with existing private innovation nor disappears in pursuit

of white elephants. Two basic strategies deserve attention:

1. Cooperative Research Facilities. Measured in

terms of the development of inventions that

have provided a key to world economic growth,

Bell Laboratories surely was one of the best research facilities in the history of the world. It

has, of course, been largely reorganized following the breakup of the AT&T system. A variety

of mechanisms have been proposed for building laboratories of this quality around clusters

of pure and applied research issues:

a. a mechanism for mingling public and private

funds in ways that allow public disclosure of

discoveries affecting the common interest,

while permitting private firms to maintain

rights to specific proprietary ideas;

b. a reputation for research excellence that

would attract the best people in the field (it

may be necessary for the facility to be associated with a degree program at a major university);

c.

d

e.

f.

research freedom adequate to permit exploration of novel ideas, coupled with a set of

general themes tied to practical markets;

a way to disburse funding through grants and

venture allocations to small research groups;

a way to combine academic research with research keyed to practical needs that does not

compromise the intellectual freedom of universities; and

a way to encourage research capable of improving productivity in business services

(since service productivity is of growing importance to overall economic growth).

The Bell management provided guidance on the

balance between pure and applied research. Research ventures pooling resources from many

firms could be managed by a private board with

an interest in seeing that funds are well used.

A number of sectors of the economy do not

conduct significant amounts of research and

might benefit from a coherent research program, such as new technologies for learning and

teaching, residential construction, and textiles

and apparel. Government itself is a major information enterprise, and could justify research

designed to improve the net efficiency of data

processing and communication within its own

bureaucracy. This, coupled with a careful procurement policy, could work to stimulate efficiency in private firms and to encourage new

information technology.

2. National Goals. Research in some areas could

be stimulated by the clear articulation of a national vision—a goal with the power of the space

program that could be accepted as important

by all Americans. Candidates include a Learning Research Institute, the renewal of space exploration, or even the development of a radically new form of personal transportation. Such

projects are, by definition, impossible to justify

on the basis of a purely rational calculus of cost

and benefit. But they can couple public imagination and support of private genius in ways

not otherwise possible. Properly constructed,

the project could provide a home for a variety

of research efforts and a market for many of the

products of research. Defense-related projects

can focus research efforts, but they may not be

an adequate substitute; security classification,

specialization in areas without clear commer-
31

cial applications, and other factors limit the extent to which defense research facilitates opportunities for civilian economic growth.

International Connections (Chs. 7 and 8)

Describing Recent Trends.—Production networks have always operated across international

borders. In the past two decades, however, the networks connecting the United States to the rest of the

world have changed in both size and scope. Nearly

7 million American workers now owe their jobs to

exports, a percentage that has nearly doubled in a

decade. Because of the large trade imbalance, however, U.S. employment might have been 10 percent

higher in 1984 without imports.~ Figures 1-5 and 1-

6 showed that trade has entered virtually every production network and has had a significant impact

on virtually every U.S. business. The few areas that

are not already involved heavily in trade (home construction, for example) may soon find themselves

parts of international production networks.

If nothing else, trade creates direct competition between American styles for managing networks and

those of other countries. Until very recently, it could

comfortably be assumed that American firms would

be at the lead in development of new products and

labor-saving technology. America led the world in

both supplies and demand for innovation. American

commitment to research and innovation was strong,

and America had the most affluent consumers and

most expensive labor. Forces driving both supplies

and demand, however, have changed rapidly during the past few years.

The ambiguity about whether new technology

would encourage geographically dispersed production

networks in the United States (as seems theoretically

possible), or would lead to further concentration in

favored regions translates directly to ambiguity over

the effect of technology on trade. In some cases,

technology has encouraged the spread of economic

activity:

4These estimates, and many that follow in this summary, are based

on an input/output analysis approach discussed in chapter 7. They must

be treated with great care. Obviously, it is difficult to estimate how the

economy would operate without imports since the price of domestically

produced items is different. Assumptions needed to make the estimates,

and the limitations of the methods, are discussed at length in chs. 4

and 7.

●

●

●

●

The complexity of production networks, and the

decline of large production establishments, has

allowed more points of entry for foreign products.

The declining significance of resources, and the

growing importance of a firm’s ability to manage innovation, has made it possible for alert

and aggressive foreign firms to compete successfully in U.S. markets.

Communication and efficient transportation of

lightweight, high-value products makes it possible to tie diverse networks together. Advanced

telecommunication equipment has created worldwide financial networks.

The previous discussion showed how technology can affect the scale of production. It proves

difficult, however, to demonstrate the effect of

scale on international competition. Anecdotes

can be provided showing how small, entrepreneurial U.S. firms have fallen victim to large, patient, bureaucratic foreign organizations (e.g.,

producers of semiconductors). Examples can

also be found where small, aggressive foreign

firms entering U.S. market niches have beaten

bureaucratic firms in the United States (e.g.,

manufacturers of textile machinery).

There are also reasons to believe that technology

may undermine trade and exaggerate, rather than

shrink, the difference between living standards in

rich

●

●

●

●

and poor nations:

Technology capable of making efficient use of

energy and material resources can limit needs

for world trade in these products.

Technology capable of making small batch production nearly as efficient as large mass production can reduce the advantage of large plants

producing for world markets.

The growth of niche markets, and of domestic

production networks requiring rapid movement

of products between establishments, can increase the advantage of proximity.

Networks connecting retailers and producers in

ways that minimize inventories depend on an

ability to respond quickly to changes in markets—this increases the value of producing in

locations physically close to the market served.

Changing Comparative Advantage. -Under

ideal conditions, the economics of trade should encourage each nation to specialize in the production
32

of goods and services that its firms make at comparatively low cost. If the ratio of exports to imports

of a given product decline, trade may have revealed

a decline in the nation’s comparative advantage in

that product or service. While real international markets fall far short of the ideal markets that in theory

would reveal comparative advantage, since national

policies frequently shape trade patterns, it is useful

to see what the record shows about changes in

America’s comparative position in different areas.

Trade forces attention to the links connecting

different parts of production networks. Figure 1-18

shows, for example, that a significant fraction of all

jobs hypothetically lost from U.S. imports of manufactured products in 1984 were lost in service enterprises that played a role in production networks.

About 1.5 million jobs in transportation and trade

and over 600,000 jobs in transactional activities were

lost indirectly because imports displaced domestic

manufacturing activity. All told, 4 of every 15 jobs

hypothetically displaced by imported manufactured

goods are in the service sector,

Figure l-18.-The Jobs Lost Because of

Imports of Manufactured Products in 1984

(illustrating trade linkages)

1- 1 1 , , i

0 500 1000 1500 2000 2500 3000

Thousands of jobs

How To Read This Figure: Imports of manufactured products

in 1984 resulted in the loss of 1.5 million jobs in Low Wage

Manufacturing industries, 2.3 million jobs in Medium Wage

industries and 1.6 million jobs in High Wage Manufacturing

businesses. The loss of business for manufacturing, however,

also creates losses for businesses that supply manufacturers

with resources and services. Imports of manufactured products

in 1984, for example, resulted in the loss of 300,000 jobs in

Natural Resource businesses and 660,000 jobs in Transactional businesses.

SOURCE: Office of Technology Assessment (see table 7-10 of ch. 7).

Considering both direct and indirect effects, trade

appears to have reduced business for nearly all U.S.

“high technology” production between 1972 and

1984. Chemical products was one of the only industries that gained in relative rank between 1972 and

1984, while businesses in electronic components,

office and computer equipment, engines, aircraft, and

other technology-sensitive industries lost rank. In

general, 18 of 20 industries designated as “high technology” lost rank over this period. Businesses with

heavy natural resource components (i.e., lumber,

leather, tobacco, and paper) gained rank, as did service and support businesses.

Measured from the perspective of occupations

gaining or losing advantage from trade, manufacturing employees lost in comparative terms between

1972 and 1984 while lawyers, communication equipment operators, and farmers gained rank. Of all

“hand working,” “machine setting, ” and “precision

production” jobs in 1984,23 to 32 percent were displaced by imports. These occupations, however, also

gained the most from exports, with 12 to 17 percent

of their 1984 jobs resulting directly or indirectly from

exports. The period showed a sharp break between

the way engineers and scientists were affected by

trade. Scientists benefited from changes in trade,

while engineers were among those most heavily disadvantaged. Had all imports that could be manufactured in the United States in 1984 been so manufactured, there would theoretically have been 21

percent more jobs for engineers. On the other hand,

14 percent of U.S. engineers owed their jobs to exports. Natural scientists, computer experts, and

mathematicians were less heavily affected, with a

12 percent loss from imports and an 8 percent gain

from exports. The occupations least affected by trade

were in services (i.e., teachers, health services, clericals, and sales personnel).

Strategic Choices.—It is theoretically possible for

trade to improve living standards throughout the

world, but this promise remains clouded by the stubborn realities of nationalism, protectionism, and distrust. The central objective of trade policy must be

to make trade a positive sum game for all participants, including the United States.

Even in the best of circumstances, the theoretical

advantages of free trade can be demonstrated only

for the average American over the long-run. There
33

will be winners and losers as trade expands production networks across international borders. A second objective, therefore, must be to find ways to

share the pain and the advantages of trade as widely

as possible. At a minimum, no group should bear

the bulk of the burden of adjustment.

It is worth beginning by being clear about some

of the problems associated with trade even under

favorable circumstances:

●

●

●

●

●

Expanding trade increases the difficulty of managing the domestic economy without international cooperation.

Expanding trade takes jobs from the individuals

with the lowest skills in the United States, and

increases uncertainty throughout the economy.

Trade has a comparatively large effect on those

with poor educations. In the economy as a

whole, one job in five is held by a college graduate. Only one job in seven lost to trade, however, is lost by people likely to have college

degrees.

Statistics underestimate the disruption caused

by expanding trade, since the jobs created by

exports are not necessarily in the same companies, or located in the same place, as the jobs

lost due to imports.

Foreign producers able to expand their productivity rapidly may have a significant short-term

advantage in crucial areas before wages in their

home countries increase to reflect productivity

growth. New or infant industries may be hurt

by foreign targeting, although with rapid economic change, successful businesses prosper by

being perpetual adolescents.

A productive and innovative domestic economy

is essential for national security-particularly in

areas where the United States relies on technical advantages rather than on advantages growing out of higher levels of spending or manpower.

The most important tool for improving the U.S.

trading position is clearly the restoration of leadership in areas critical to America’s export performance, as well as productivity gains in manufacturing. Indeed, manufacturing exports are likely to be

the only way that the United States will avoid massive trade deficits in the foreseeable future. But improvements in domestic productivity alone are unlikely to be adequate in a global environment where

explicit manipulation of trade by foreign governments is the norm.

To have any positive effect, management of trade

must be patient and skillful. Under present circumstances, unilateral steps taken even by the largest

economy in the world are unlikely to be effective.

Only multinational action is likely to move constructively toward this objective.

U.S. leadership is of vital importance. This leadership can grow only from a coherent strategy built

around a clear set of objectives and from skillful and

patient negotiations in a variety of international forums. Finding a way to put the U.S. trade and spending accounts in order by shrinking the deficits in government budgets and trade accounts is an essential

first step.

The following options deserve consideration:

●

●

●

●

Banking and fiscal policies among nations belonging to the Organization for Economic Cooperation and Development (OECD) could be

coordinated in fact, not just in rhetoric, to ensure that such policies are not working at cross

purposes.

Policies coordinating international development

assistance and trade policy in the OECD could

ensure the economic growth in the third world

necessary for a long-term solution for their debt

problems.

Domestic policy decisions could be scrutinized

more closely for their effects on the U.S. trading position. Prior to the post-war era, trade

played such a small role in U.S. business transactions that public choices in critical areas, ranging from telecommunications to banking to agriculture, were made with little attention to the

impact of these choices on the competitive position of U.S. firms—or, in the case of telecommunications, to the impact of opening U.S. markets to foreign competition without obtaining

reciprocal opportunities for U.S. suppliers to enter foreign markets.

Cooperative research programs in areas of clear

mutual interest could be expanded. There are

many areas where the combined world benefit

of having a problem solved rapidly is far greater

than the short-term gain that any single country could enjoy by reaching the goal first. Breakthroughs in medicine or safety for a variety of
34

industrial operations would be mutually beneficial.

● Tariffs, rather than non-tariff barriers, could be

used when temporary protection is warranted,

Tariffs maintain price competition and the value

of the higher price paid by consumers remains

in the United States, whereas quotas allow benefits of price increases to flow primarily to foreign

suppliers—thereby enabling them to further improve their long-term competitive position and

expand their markets.

● A variety of programs in export promotion could

help businesses unfamiliar with the complex

world of international markets find outlets for

their products. Many of the Nation’s competitors have far more sophisticated systems than

the United States in this area. Information alone

can help. The Department of Agriculture, for

example, has introduced a successful data network that assists comparatively small farming

operations in bidding on foreign solicitations.

● Increased language training, translation, and

education about the culture of U.S. trading partners could help U.S. exporters understand export markets and more easily penetrate the labyrinth of foreign marketing problems.

People in the Production Recipe

(Chs. 10 and 11)

The cycle suggested in figure 1-2 connects people in their role as workers and investors to people

in their role as consumers. Some of these people

know each other. Some are connected only by passing products to each other, and some are connected

through paper flows and electronics. Figure 1-7 provided a crude description of how these networks

operated in 1984.

Capital invested in new technology, and the way

management chooses to use this technology, has the

potential to reshape these relationships in very basic

ways. Specifically, information technology has the

ability to mechanize tedious and repetitive intellectual tasks in much the same way that farming and

manufacturing equipment mechanized tedious and

repetitive physical tasks. Many of the jobs being created in the emerging economy do not appear in conventional categories. While the “labor” part of many

tasks proves comparatively easy to automate, the part

of a job that requires imagination, a capacity for

learning, or an ability to work with other people is

not easy to automate and therefore represents a

growing fraction of all jobs.

The new networks can make the links connecting a person’s daily work and a job’s contribution

to human welfare more transparent. This can mean

that an apparel worker operating as a part of a responsive team tailors batches of products for specific clients instead of doing repetitive mass production. It can mean an insurance “para-professional)”

discussing policies with a customer on the phone

and entering data into a terminal rather than keypunching anonymous data. It can mean a teacher

having more time to spend with individual students.

Productive use of new technologies will require

deep changes in management strategies and job

descriptions in areas as diverse as insurance, education, health, and apparel production. These changes

in turn can undermine long-standing assumptions

about the role of people with different skills, the

power commanded by different groups, the role of

managers, the factors that motivate work, and the

links connecting pay with skill. Some connections

can be explained using the economics of “human

capital.” The networks are obviously also connected

by pride, loyalty, prejudice, compassion, whimsy,

love, and many other factors not measured by bookkeepers.

For better or for worse, the influence of all these

factors is likely to be reshaped as production networks are transformed. The impact is enormously

important but impossible to measure. Systems based

on one kind of prejudice or irrationality may well

be replaced by systems based on others. The task

of management is changed when jobs become less

precisely defined or when the job definitions themselves are changing. This can mean that the bargaining power workers have achieved on the basis of

unique skills will be diminished, and that employers

will have difficulty developing satisfactory techniques

for measuring individual contributions.

Education is likely to play a central role in determining who is advantaged and disadvantaged by

structural change. Education seems important not

just for making a person productive as a member

of a team with a fixed purpose, but also because it

helps people learn and change to keep pace with

dynamic production networks.
35

Since little is known about the merits of different

approaches to using much modern production and

information equipment, there is little certainty about

the kinds of jobs that should be created. Radically

different strategies are possible:

●

●

It appears possible to create efficient production

networks basing their performance and flexibility on the intellectual and social skills of employees.

It is also possible to envision a system where

a well-educated elite enjoys a majority of the

benefits, while the costs of flexibility are paid

by workers forced to take temporary jobs with

narrowly defined tasks monitored by electronic

surveillance.

While it is possible that the second of these alternatives would prove most effective in a highly competitive economy, a wealth of anecdotes suggests that

it would not. Choices made in the next few years

can play a critical role in shaping the outcome. Policy designed to capture the first of the alternatives

must accomplish two things, neither of which is adequate in itself: first, it must ensure an adequate supply of well-trained individuals (meaning education

available throughout a person’s career); and second,

it must ensure a productive and innovative economy capable of providing jobs that can take advantage of a skilled work force.

Describing Recent Trends.–while changes in

the structure of the economy are changing supplies

of new jobs, the entry of the baby boom into the work

force, the rapid growth of women in the work force,

a move toward early retirement for older men, and

a new wave of immigrants have changed the “supply”

of skills and experience in the work force. There has

also been a change in the racial composition of the

work force. An absolute majority of all people joining

the work force between 1985 and 2000 will be minorities, many of whom will enter with comparatively poor

educations.

Changes in the role played by transactional, manufacturing, natural resource, and other business sectors

translate directly into changes in their share of U.S.

employment. The effect is magnified by differences in

the rate of growth of labor productivity in each sector.

In part because of the comparatively rapid growth

in productivity, the proportion of manufacturing jobs

in the economy has declined—from 27 percent of all

full-time equivalent employment in 1950 to 18 percent

in 1986. Over the same period, jobs in business services and related activities grew from 6 to 15 percent.

Changing demand and changing regulations were

largely responsible for the sharp increase in health care,

education, and other government employment during

the 1950s and 1960s, and for their relatively unchanged

share of national employment since 1975.

Changes in production recipes, and even changes

in the overall number of people a firm requires to produce its products, explain only a small part of the radical change in occupations emerging in the economy.

Many of the new jobs fall into unfamiliar categories.

This is particularly true in areas where information

equipment has transformed processes and management strategies. Awkward terms like “para-professional,” “para-librarian,” and “super clerk” are used

to bridge the gap between old paradigms about job

categories and ones that remain to be developed.

Professions like “teacher” are likely to be transformed into many identifiable specialties in the next

few years.

Since figure 1-7 contains all the jobs in America, it

is possible to follow the contributions of different jobs

to their ultimate contribution in the form of amenity.

Figure 1-19 shows, for example, that jobs for natural

scientists, engineers, and other technical professionals

are heavily concentrated in Defense and Exports. LawFigure l-19.-Where Managers and

Professionals Contribute Value*

Percent of all workers [n occuoatlon

- -

, 1 1

0 5 1 0 15 20 25 30

= Managers = Tech Professionals”

m Other Professionals’

How To Read This Figure: Nearly 15°/0 of all managers and

9.6°/0 of all technical professionals in the U.S. are emp~oyed

directly or indirectly in the process of producing Food for

domestic markets.

“Not including education and health professionals.

SOURCE: Office of Technology Assessment (see table 10-6 of ch. 10)
36

yers, social scientists, and other professionals are concentrated in Health, Education, and Recreation.

Looking at the national statistics, managers and

professionals were responsible for nearly 40 percent

of net jobs added between 1972 and 1986 (see figure

1-20). Undoubtedly, many are doing tasks that would

have been handled by clerical personnel in an era

where entering and thinking about data could be clearly

separated. Jobs in sales, administrative support, and

services (other than household or protective services)

also increased sharply, while there was a net decline

in the number of persons holding jobs as laborers, fabricators, and operatives.

Changes in the scale and scope of firms and establishments that form parts of production networks,

and changes in the scale and scope of work teams

within individual establishments, obviously reshape

the nature of work and the kinds of jobs required.

Occupations once part of rigid hierarchies, like mass

production manufacturing, may be redefined if productive use of production equipment requires more

independent intervention on the part of operators.

Attempts to introduce “mass production” management into clerical work have not enjoyed much success. On the other hand, occupations with a tradition of independence (e.g., teachers, home builders,

Figure l-20.-New Jobs and Existing Jobs

Techmclans & Sales

Service Occupations

Precision Production,

Craft, and Repair

Operators, Fabricators,

and Laborers

Farming & Forestry

by Occupation -

I *

! I

-10 0 10 20 313 40 5(3

_%,:~.all 1972 ~~o~:all 198 6

m % of 1980-1986 job growth

How To Read This Figure: Managers and Professionals held

19.6 percent of all U.S. jobs in 1972 and 24.5°/0 of all jobs in

1986. About 45% of all job growth between 1960 and 1986,

however, resulted from the addition of jobs in these occupations.

SOURCE: Office of Technology Assessment (see table 10-10 of ch. 10),

and physicians) may find themselves in more bureaucratic settings.

The changes in occupations are extremely diverse.

It appears, however, that on average new jobs are

being created most rapidly in areas that require significant amounts of education (see figure 1-21). Growing unemployment rates among young workers with

4 or fewer years of high school was responsible for

a significant part of all growth in U.S. unemployment

rates in the last decade. High correlations between

education and income persist, although the connection between skills learned in formaI education and

skills actually required on the job may be becoming less clear.

There may be a growing gap separating people

able to grow and prosper with economic change from

people who, for lack of good education or other reasons, remain trapped in positions with little future.

Janitors, employees in fast-food emporiums, farm labor, maids, and a variety of other occupations are

likely to represent a large part of the American work

force for the foreseeable future.

Changes in Pay and Job Quality.—While a review

of changes in the kinds of jobs produced provides

one measure of how the new production networks

have changed the nature of work, it is also important to see how they have changed the quality of

Figure l-21.-The Growing Demand for

Education (percent of jobs for

indicated level of education)

45 I

I

= All jobs in 1986 m Jobs added 1983-86

How To Read This Figure: About 22 percent of all jobs in 1986

were held by people with four or more years of college education. Nearly 27°/0 of all new jobs created between 1983 and

1986 were for positions held by people with 4 or more years

of college education.

SOURCE: Office of Technology Assessment (see table 11-4 of ch. 11).
37

the jobs created. Job quality can be measured in a

variety of ways: (a) the wages and benefits paid; (b)

the equality in allocation of wages and benefits (it

is entirely possible for the average wage to grow

while the real wage of many employees falls); (c) the

extent to which working hours can be adjusted as

needed to combine work with raising children, an

education, or partial retirement, while maintaining

the security of the job; and (d) the extent to which

a job provides non-cash rewards in the form of selffulfillment, pride, and fun. Each of these ways of

measuring quality require a different approach.

(a) Changes in the wages and benefits paid in

American jobs are filled with paradoxes. Real hourly

wages for non-supervisory production workers have

not increased for 15 years while real GNP per capita has grown almost constantly. Employee compensation increased at almost exactly the same rate as

productivity until the late 1970s, but comparatively

little of productivity growth since the 1970s has been

passed to employees in the form of increased compensation (see figure 1-22).

Some of these paradoxes can be explained by the

fact that increased international and domestic competition put pressure on U.S. wages. The effect was

reinforced by the rapid growth in the work force resulting from the entry of the baby boom. The fall

in the fraction of GNP paid as wages and salaries,

however, resulted from several other factors. Economic transformation meant that a larger fraction

of GNP was needed by businesses replacing equipment. This meant high rates of depreciation and a

decline in the fraction of GNP paid as personal income. Non-wage benefits represent a growing fraction of compensation; more personal income was

paid in the form of retirement benefits and welfare

assistance. interest, dividends, rents, and other unearned income became a larger fraction of all income.

The many forces at work have made changes in

compensation difficult to explain. The industries

where compensation increased faster than the average between 1970 and 1985 make a rather curious

collection: legal services, the armed services, telephone and telegraph, metal mining, government enterprises (like the Tennessee Valley Authority), motion

pictures, health services, and investment companies.

Among other things, new patterns of capital investment have redefined the way wages are paid.

Figure 1-22.-The New Gap Between

Growth in Productivity and Compensation

(real output & compensation per hour)

1977=1000

“oo~

1

/

900

I I I 1 ,

! , ( I I 1 1 1 I , , 1 1 I , 1 1 1 1 ? 1

1960 1965 1970 1975 1980 1985 “

— Real Output/Hour -

-

-

- Real Cc~mlp/Hour

How To Read This Figure: Between 1977 and 1987 U.S.

productivity increased 8.4 percent but compensation remained nearly unchanged.

“Preliminary.

SOURCE: Economic Repo~ of the President 1988 (Washington, DC. US. Government Printing Office, 1988), p. 300 (see discussion in ch. 11).

Some service industries have invested more money

per employee than manufacturing firms since the

recession of the early 1980s. Competitive markets,

however, mean that these differences are not necessarily linked to wages. High rates of capital investment per worker may actually reduce the skill levels

required of workers.

Connections between pay and skill become more

ambiguous when the most critical skill offered by

an employee may be a capacity to learn new tasks

quickly, to perform well in unique situations, and

to work well with people. These are “general” skills,

rather than “specific” skills that allow workers to benefit from a limited supply.

(b) The factors just discussed, coupled with the

shifting pattern of occupations, have reshaped the

way income is distributed. The wages of men have

become somewhat less equally distributed, as have

the wages of women. On average, however, the gap

separating male and female wages is closing, thereby

removing a major source of wage inequality in the

work force. The net effect of these changes is that

overall wage inequality has not changed significantly.

Inequality in compensation has probably grown

more rapidly than inequality in wages because the

benefits offered for different kinds of jobs differ

greatly.
38

Even if inequality in wages and salaries is not increasing, demographic and other factors are increasing inequality of household income. Growing numbers of households headed by single women, the

growing importance of unearned income (which is

very unequally distributed), and the fact that highincome people tend to marry each other created a

situation where income per household became strikingly less equal during the 1980s.

These and other effects have resulted in a situation where real after-tax income has fallen for more

than 90 percent of American households. Some of

this has resulted from the decline in family size.

Household incomes “per adult-equivalent family

member” have increased for most household types,5

Inequality in household income per family member

has, however, also increased during the past decade.

(c) Apart from pay, a worker’s ability to controf

working hours, and ultimately the ability to keep a

job, is obviously a critical measure of job quality.

Two perspectives on this issue are important. Flexibility is important to employees as well as to employers, although for different reasons.

Working parents, students, people in semi-retirement, and people interested in job mobility often find

flexibility in working hours an asset. Employers need

flexibility to respond to new competitive pressures,

business cycles, and to introduce new production

schemes. The record on balancing the employer and

employee interest in flexibility is mixed.

The search for greater flexibility has caused many

employers to minimize commitments to permanent

staffs. The number of people working in temporary

or part-time jobs has increased rapidly. This is an

advantage for some and a liability for others. The

key question is the extent to which changes in working hours are under a worker’s control. Mothers

wishing to work at home, independent owner-operators, self-employed construction managers, and

farmers are often willing to trade uncertainty for the

sense of independence they can achieve by working for themselves or by themselves. For many, however, the uncertainty is highly unwelcome. The number of women who worked part time involuntarily,

for example, increased 300 percent between 1967

and 1984.

SAn adu]t-cquiva]cnt counts children as a fraction of an acfult. See

ch. 11 for a further discussion.

Surprisingly few people in the United States hold

stable, 40 hour a week jobs. Throughout the economy, temporary, part-time, and self-employed workers increased 25 percent between 1975 and 1985

and now represent 27 percent of the work force. High

volatility in employment has always been endured

by nonunion employees with comparatively few

skills. Temporary employment, however, has become common even for individuals with basic skills.

Most of the burden of adjustment seems to be born

by people with comparatively poor educations (see

figure 1-23). College graduates weather recessions

with comparatively low rates of unemployment,

while unemployment for high school drop-outs went

over 20 percent in the early 1980s. Annual turnover

rates for blue-collar occupations may be as high as

20 percent.

While there appears to be some growth in the

number of firms attempting to stabilize employment

by encouraging wage flexibility through profit-sharing and other means, firms have consistently achieved

flexibility in the United States through new hires and

lay-offs. This is particularly tempting when firms employ older, comparatively expensive workers with

obsolescent skills, while new production systems

place a premium on credentials and basic skills that

these older workers may lack. It is difficult for a firm

Figure 1-23.-Who Bears the Burden of

Change? (unemployment and education)

Percent unemployed

25

20

15

10

5

0

1970 1972 1974 1976 1978 1980 1982 1984

-:ol~;ore years of IZZ 1-3 years of college

m~c;::~s of high = less than 4 years of

high school

How To Read This Figure: In 1985, 16°/0 of people with less

than 4 years of high school were unemployed but only 2.6°/0

of people with four or more years of college were unemployed.

SOURCE: U.S. Department of Education, Center for Education Statistics, The Corrdition of Education (Washington, DC: U.S. Government Printing Office,

1986), table 2-3 (see discussion in ch. 11).
39

to justify retraining when workers with adequate

training are looking for work, and when the costs

of training can be lost if an employee leaves a job

to work elsewhere.

The shifts in occupation by industry are painfully

visible in statistics on experienced workers who lost

their jobs between 1981 and 1986 because of plant

closings or lay-offs. Of the 5 million people unemployed due to these factors, half had worked in manufacturing, where nearly 1 job in 8 was eliminated.

The service industries were virtually untouched. In

spite of the severe recession of the early 1980s, only

2 percent of people working in finance, insurance,

and real estate, and only 4 percent of the workers

in business services, were displaced. These businesses added jobs throughout the 1980s.

Workers displaced by economic restructuring faced

a difficult period of adjustment. Of those displaced

between 1981 and 1986, less than one-third were

reemployed with salaries equal to or greater than

their previous jobs. Nearly half failed to find full-time

employment. Displacement hit older workers with

particular force; less than half of displaced workers

over the age of 55 had any kind of employment in

1986.

(d) However important, there is plainly no good

index for non-cash rewards of working life. As earlier

discussions indicate, there appears to be an enormous range of possibilities in the character of the

jobs created by emerging production networks. It is

clearly possible that mechanical tasks can be largely

eliminated, freeing workers for tasks they find personally more rewarding. It is also possible that they

will find jobs more narrowly defined and monitored.

The rapid shift away from jobs in mining, agriculture, and heavy manufacturing has helped create a steady decline in rates of occupational injuries

and deaths. Accident rates for manufacturing, for example, are five times higher than those in transactional activities. New jobs, however, present risks

that may be difficult to detect. Stress, sometimes induced by job insecurity, may be the most common

health problem of high-pressure jobs demanding

responsiveness in unusual situations. Rapid changes

in production techniques may mean that by the time

the health problems of a process are established, the

process will be long obsolete.

Strategic Choices.—The challenge of policy designed to influence the way people are used in production recipes is to find a way to encourage supplies of people empowered by their education and

experience to assume more attractive positions in

the work force, and to encourage employers to build

productive systems that create attractive jobs.

A specific challenge is avoiding a potential mismatch between the skills offered by young workers

who may have been poorly served by the Nation’s

educational system, and an economy that increasingly links jobs to education and intellectual skills.

A second goal is to ensure that the costs and benefits of needed business flexibility are equitably

shared. Alternatives must be found to flexibility built

around lay-offs of people least able to bear the

burden.

The following specific programs deserve consideration:

●

●

●

●

●

●

Encouraging profit-sharing, in which the consequences of poor economic performance of a

firm would be shared by employees in an equitable way rather than being, in effect, passed

on to those individuals with the least potential

for reemployment.

Establishment of a Learning Research Institute,

designed to provide local school systems, universities, and corporate training and retraining

programs with an expanded set of tools for increasing the productivity of teaching and learning. The institute would conduct basic and applied research on the use of advanced learning

technology, and on the new strategies of pedagogy required to make use of this technology.

Encouraging, or requiring, universally retainable pensions and health insurance.

Subsidies for education beyond high school,

based on a flexible system of loans and vouchers

that could be used to supplement corporate

training funds.

Welfare programs designed to provide incentives for education, training, and reemployment.

A program designed to ensure that the emergence of flexible production networks often built

around comparatively small firms or establishments does not undermine provisions ensuring employee safety, freedom from unnecessary

stress, and privacy.
40

Structural Change in the Eight Major

Amenity Networks of the American

Economy (Chs. 3, 6, 9, and 12)

The previous discussion focused on a nationwide

view of structural change. Many of the most important features of this change, however, cannot be understood without a careful look at the way production networks are being defined to deliver specific

amenities. Virtually every production network is either in the midst of a basic change or may be entering one. They share many of the themes already

identified: expanded consumer choice and fragmentation of markets, complex production networks,

growing involvement in international production,

and a profound redefinition of the nature of work.

The quality of amenity consumers receive, and the

kinds of jobs created to produce this amenity, may

change in basic ways. The following section can provide only the most cursory sketch of the complex

changes underway in each amenity group.

In some ways the structure of the amenity networks are becoming more similar in the way they

are managed, in the quality of the jobs they create,

in the way they conduct research, and in the way

they are involved in international trade. The unique

features of each network, however, merit unique approaches to public policy. Strategies for improving

the performance of each network will clearly work

best if they are undertaken with a clear grasp of the

changes taking place throughout the economy. Similarly, programs designed to improve prospects for

growth in the economy as a whole are unlikely to

succeed unless they are tested in the way they affect the performance of individual sectors. While the

objectives of policy may be read from the following

discussion of trends and the potential for change in

each major network, no attempt is made to define

alternative courses of action.

Food (15 percent of personal and

government spending)

The Food amenity can be measured by the quality, variety, and convenience of food products purchased by people in different income groups, and

by the extent to which eating habits contribute to

good health. The two measures can, of course, give

contradictory results.

Better information about the connection between

diet and health, changes in taste, and a variety of

other factors have reshaped American consumption

recipes for Food over the past few years. For example:

●

●

●

an increased number of working women and

more hurried lifestyles have led to growth in

restaurant eating, even for breakfast;

greater concern for health has led to a decline

in consumption of red meats and other sources

of cholesterol, and to an increase in consumption of fish, poultry, low-fat milk, fruits, and

vegetables; and

there has been an emergence of more varied

tastes both in restaurant and stores.

While most Americans enjoy an increasingly varied

and healthy diet, poor nutrition continues to be a

problem for the elderly, the homeless, poor pregnant women, and other groups.

The network of businesses that bring food to

American forks looks increasingly like the networks

that bring other retail products to market—similar

in the sophistication of their management, in the intensity with which they employ research, in the way

manufacturing and business services are integrated

into production networks, in the way they are linked

to international markets, and in the education and

training of the people they employ. Food production remains a major part of the economy, but the

productivity of farming has grown so quickly that

farming now provides only 3 percent of all jobs. The

number of farmers may continue to decline since

productivity growth is likely to remain high in most

farming activities. There is some concern, however,

that inadequate attention has been paid to the problem of increasing efficiency in products other than

wheat, corn, and other bulk commodities.

The pizza parable discussed earlier provides some

clues about places where productivity growth can

be expected. New information technology, improved

packaging, and a variety of other technologies can

allow a greater variety of fresh products to be available at comparatively low cost. There are some

clouds on the horizon. Increases in the scale of firms,

from farms to grocery chains, could decrease competition. Foreign firms could continue to capture do

mestic markets in processed foods and other highvalue food products.
41

The following trends can be identified:

Consolidation of farm ownership and ownership

of food processing and retail operations is likely

to continue. By the year 2000, the 14 percent

of farms with annual sales of more than $250,000

are likely to be taking 80 to 90 percent of cash

receipts. Farms are operated increasingly like

businesses in other sectors. The share of managers and professionals in farming has doubled

since 1976.

Net imports of high-value processed foods since

1979 have grown so fast that their value nearly

equals the U.S. trade advantage in bulk commodities. Foreign producers are also gaining

markets in some food processing technology.

Grocery stores are getting bigger and offering

a greater variety of products. Some stores offer

20,000 products and cover 200,000 square feet.

These “superstores” account for 28 percent of

all grocery sales. Convenience stores, typically

franchise chains, have grown rapidly to fill market needs not met by these super-stores. They

are also major financial centers. Supermarkets

cash one-third of all non-government checks.

Restaurants and other food service firms now

account for over 5 percent of all U.S. employment. Fast-food, typically in franchises or subsidiaries of large firms, has rapidly gained share.

The fast-food format and a variety of technologies like microwaves and deep-fat fryers increased productivity until the mid 1970s, but

productivity has not grown significantly since.

Productivity gains in food manufacturing will

continue, but research levels may be inadequate

to the challenge. Packaging technology seems

particularly critical both to improve quality and

to reduce costs—packaging costs more than the

contents for a growing number of products ranging from beer to breakfast cereal.

Perhaps most critically, information technologies

have the potential to improve the performance and

reshape relationships throughout the Food system.

Data entered automatically through the scanners that

price more than half of all groceries purchased today

can improve the productivity of check-out clerks.

More importantly, the data entered drives an information system capable of reducing paperwork and

improving the efficiency of activities throughout the

system. It allows rapid price changes, measurement

of consumer response to advertising, closer inventory control, precise dispatch orders for trucking, improved coupon management ($2 billion in coupons

were redeemed in 1983) and reduced error rates in

billing, ordering, and pricing.

Jobs throughout the Food system are already in

flux. Automation is replacing much labor in food

preparation and is demanding new sets of skills. Consolidation of wholesale and retail chains, coupled

with automated equipment, has eliminated many

jobs and has resulted in the substitution of part-time

for full-time work. The elimination of skilled jobs in

grocery stores (meat-cutting in particular) has reduced employee leverage in bargaining for wages.

In spite of the tradition of independence in American farming, the government is heavily involved

in the enterprise. Major Federal programs support

prices, regulate international trade, and subsidize research. Farm production commands a significant

amount of basic research, a large fraction of which

is supported by public funds. The research program

has an exceptionally fine record in moving ideas

from the laboratory to productive practice.

Government involvement also shapes the geography of Food production. Subsidies for water supplies and price supports have allowed production

of commodities like wheat and corn to be profitable

in parts of the country that might not otherwise support such production.

Health (11 percent of personal and

government spending)

Consumption recipes for good health involve increasingly complex decisions about investments in

health promotion (e.g., appropriate exercise), disease

prevention (e.g., changing smoking and drinking

habits, controlling hypertension), public and private

investments in environmental controls and safety

devices, and investments in clinical treatment of

medical problems. In 1983, approximately $350 billion was paid to health enterprises; $17 billion was

spent for self-care medication, fitness equipment, and

nutrition aids; and $50 billion for environmental

controls.

It seems possible to improve national health status without significant increases in spending given
42

a way that provides a better match between spending and amenity measured in terms of improved

health and longevity. Calculations presented in chapter 3 show that average life expectancy in the United

States could well reach 80 years without extraordinary breakthroughs in medical technology. This

would almost require greater incentives for individuals and households to take responsibility for their

own health. Smoking habits, seat belt use, modest

attention to diet, prenatal care, the strength of a person’s social contacts, and other aspects of lifestyle

have a major effect on life expectancy. Improved

health would also require strong incentives for research, development, and innovation.

It is also possible to imagine a system choking on

regulations and red tape, a system bureaucratized

to the point where patient care was compromised

in the interest of avoiding litigation or following rigid

guidelines. Pressure to reduce health care costs when

an aging population needs more health care services could lead to a real decline in health status and

increasing inequality among different segments of

the population.

It proves difficult to draw a clear line between consumption and production recipes for Health. It is

clear that both are changing. A better understanding of the connections between diet, smoking, and

other aspects of lifestyle and good health seems to

have altered many American habits. The high cost

and sophistication of medical technology have made

management, research, productivity, paperwork, litigation, finance, and even advertising an important

part of a business once dominated by independent

private practitioners. These new tasks, coupled with

new alternatives for women once willing to work

at low wages as nurses, are reshaping the nature of

work in Health professions,

New technology, better consumer information, and

improved management of health resources have improved the health status of Americans during the

past few decades. Life expectancy in the United States

has increased 6.5 years since 1950 (the penalty for

living longer is that each person spends more time

in some state of ill health).

These averages belie great inequalities. Life expectancy in Hawaii is higher than in Sweden or Japan, while life expectancy in Louisiana is lower than

in Singapore. Infant mortality rates in Washington,

DC are close to those of the poorest developing countries. The differences are due partly to inadequate

access to health care, and partly to the fact that differences in lifestyles contribute to differences in health.

The comparatively poor U.S. health statistics occur

in spite of the high quality of U.S. medicine because

of defects in other parts of the American recipe for

Health. The health status of the poor is often limited

by a variety of social and environmental conditions

beyond the reach of traditional health-related spending. A large number of households are not covered

by any health insurance program, public or private.

This group may grow as the work force turns to

greater use of temporary and part-time workers.

These people tend to be much sicker by the time

they enter the health care system. American mortality statistics are, therefore, not necessarily a good

measure of the quality of the U.S. medical facilities.

They may instead be a measure of the availability

of insurance coverage, inequality in income, racial

discrimination, and other social phenomena beyond

the reach of medical enterprises.

Technology has obviously made a significant contribution to the quality of American health care. Surgical techniques continue to improve. Biotechnologies promise both new diagnostics and, hopefully,

new treatments for a variety of conditions. Engineering advances permit prosthetics, artificial organs, and

greater assistance for the visually and hearing handicapped.

Expensive new technologies like Magnetic Resonance Imagery and Computer Assisted Tomography

have centralized some activities into “tertiary” hospital centers. Other technologies have permitted

treatments once requiring extensive hospitalization

to be conducted in smaller clinics or on an “outpatient” basis, and have permitted home treatment

to replace some hospital care. Implantable pumps,

for example, allow controlled dosage of a variety of

drugs outside of hospital settings.

Information equipment may affect health care

costs, health care quality, and the structure of Health

businesses as profoundly as any of the technologies

just listed. More sophisticated management systems,

growing complexity of procedures, and an avalanche

of paperwork connected with cost-containment and

(increasingly) legal issues have made information

management a major part of the health care busi-
43

ness. Computer-based record management has improved efficiency and reduced costs in everything

from patient billing to inventory control. It is now

possible to store high-resolution photographs of

specimens and other records electronically. Information equipment permits small home care firms to

manage complex paperwork. New technology can

permit rapid communication between specialists in

different parts of a city, or indeed different parts of

the country. It can permit telemetry to monitor patients being treated at home.

The challenge of better integration of health treatment can be seen in the baffling statistics on use

of different therapeutic techniques. The probability

that a women will have a hysterectomy, for example, is 20 percent in some markets and 70 percent

in others. At least one (possibly both) of these regional practices must be wrong. Information equipment should be able to permit more precise sharing

and analysis of procedures. In some cases, information equipment can even provide a “second opinion” for a physician otherwise forced to rely on his

or her own memory about techniques.

The effects of these and other changes have already transformed the structure of “production” in

health enterprises. Once dominated by general practitioners who would occasionally refer a patient to

a hospital, the business of medicine now integrates

individual practitioners, group practices, and tightly

managed hospital corporations, as well as a growing array of satellite institutions: testing laboratories,

out-patient clinics, hospices, nursing homes, homecare specialists, and even “doc in a box” emergency

care facilities in shopping centers. The number of

people receiving medical care from a health maintenance organization (HMO), as opposed to a privately practicing physician, nearly doubled from

1981 to 1985. Using modern management techniques, hospitals and other health organizations are

beginning to behave like other service organizations.

Enormous investments in environmental protection

have created wholly new business opportunities.

Cleaning hazardous waste sites alone promises to

generate a significant amount of future business.

The changes just discussed are also transforming

the nature of health as a profession. Physicians are

frequently hired on fixed salaries much as any other

technical professional. A shortage of nurses is developing as women realize that other occupations

result in greater returns for equivalent levels of experience and education, and typically offer less erratic hours.

The cost of new technology, coupled with rapid

growth of the elderly population and expanded pub

lic insurance programs, have also led to explosive

growth in health care costs and have spawned a

number of regulatory remedies to control costs.

While it may well be that Americans would freely

choose to spend an increasing share of their incomes

on Health, the question of whether spending levels

are or are not appropriate cannot be resolved by a

simple appeal to market forces. The task of designing a financing system that provides incentives to

maximize the quality of health outcomes while minimizing costs has proved to be vexing for both public and private insurance programs.

By the early 1980s, there was general agreement

that the incentive and regulatory systems in the

health industry needed revision. Both private and

public insurers moved away from “fee for service”

reimbursement. The challenge has been to find a

substitute that does not collapse under ever more

invasive regulation. Government and private insurance regulations have attempted to force greater attention to the costs and benefits of different treatments. As a result there has been some reduction

in patient use of hospitals and physicians. Hospitalization rates for prepaid plans, where hospitals have

a strong incentive to minimize costs, are 10 to 40

percent lower than those for people with insurance

that pay fees for services. Physician visits per person have fallen since 1976.

Housing (20 percent of personal and

government spending)

Owning a detached home remains a firm part of

nearly every American’s vision of a good life. Decent housing is largely a matter of taste, but it surely

includes security, a pleasant landscape, low maintenance, and low operating costs. It also means a

pleasant home with access to jobs (frequently jobs

for several members of the household), shopping,

schools, and day care facilities.

Changes in taste and demographics also redefine

definitions of housing quality. The rapid growth of

the elderly population, for example, creates new
44

housing needs. Fully 40 percent of Americans aged

65 to 74 have some kind of disability that limits their

activity, and 63 percent of those over 75 have some

disability. Shrinking leisure time has made the

amenities of a comfortable home substitute for other

forms of recreational spending. Homes have also become centers for home health care, and even places

of part-time work.

Housing is, of course, an investment in addition

to an amenity. Home ownership differentiates those

with assets from those that lack them in contemporary America. The net worth of households owning homes is nine times higher than the net worth

of renters and home equity represents two-thirds of

the net worth of home owners. The high mobility

of Americans reinforces the tendency to consider a

home a temporary investment, with purchasers paying as much attention to the hypothetical desires of

the next buyer as to their own.

On average, the quality of American housing is

improving. The average home has more rooms per

person, and is more likely to have air-conditioning,

a full garage, and a well-equipped kitchen, than ever

before. On the other hand, home ownership has

moved beyond the means of many young Americans, particularly those moving to areas where employment is expanding rapidly. The fraction of median household income needed to purchase a new

home is more than 50 percent above what it was

in 1968. Housing costs are also an increasing burden for poor families, particularly homes with a single wage earner. The cost of buying the average new

house would require 75 percent of the average income of single women. One result of these trends

has been an increase in renting. The extreme symptom is growing homelessness.

Many households have found affordable housing

only at considerable distances from their jobs—a major problem for households with two earners. In effect, housing costs are traded against the cost of time

spent commuting. Only half of the people in the San

Francisco area now work and live in the same town.

Since men commute 35 percent more miles and

spend 15 percent more time commuting than women,

it appears that women may be taking jobs closer to

home, possibly sacrificing income in order to combine lives as a homemaker and paid employee.

The high cost of housing results from several

factors:

●

●

●

●

Land costs have soared, particularly in rapidly

growing urban areas. Growth constraints have

exaggerated the problem in many areas.

Changes in regulations have forced purchasers

of home mortgages into competition with wider

financial markets. Financing expenses remain

a dominant housing cost.

Productivity has fallen in construction.

Rising energy prices have increased the price

of home operations.

The costs associated with land prices are obviously

not touched by changes in the production recipe just

described. They require changes in the efficiency of

transportation, changes in tax laws that may encourage speculation, and policies that may affect the

location of jobs, retail facilities, recreational facilities,

and other destinations.

The recipe by which houses are produced has not

changed significantly in some time, In spite of forecasts about factory-built housing dating to the early

1930s, little has actually happened. Radical swings

in demand for new housing, and a history of fragmentation in home construction businesses, has kept

research and capital investment in this industry far

below that of most manufacturing firms. There are

reasons to believe, however, that significant change

is not only possible but necessary.

The U.S. housing industry could follow the trends

of the industry in Sweden and Japan, moving construction away from highly fragmented small firms

with few investments in capital equipment or trained

employees, and toward production networks that

more closely resemble other manufacturing operations. The result would be a profound change in the

nature of the institutions supplying Housing in the

United States, as well as a change in the quality of

the product:

● The house itself could be designed on the basis of more systematic research. At present, most

innovations come from component suppliers,

with little research directed at the integrated performance of the structure itself. There is compelling evidence that simple, inexpensive changes

in home design make new homes not only more
45

●

●

●

●

comfortable but less expensive to operate.

Factory construction could lead to both greater

reliability and energy efficiency. Houses could

be “brand name” products with multi-year

guarantees of reliability.

Productivity of home manufacturing could benefit from greater capital investment in production facilities and the use of advanced assembly

techniques. The home building industry invests

little in improving production technology.

Homes could be assembled by firms specializing in site preparation and rapid site assembly

of factory components. These firms could either

be independent or franchises of larger firms (as

they are in Sweden).

Homes could be marketed from showrooms,

where prospective clients can design floor plans

and explore alternative exterior and interior

finishings on computer screens. The Japanese

claim to be able to convert designs into finished

houses in 3 weeks.

Changes of the sort just described could radically

change the nature of construction work. The construction industry has always achieved a high degree of flexibility by using temporary work teams.

It has an extraordinary ability to assemble many disciplines quickly. Changes in production recipe could

make construction work more closely resemble jobs

in other manufacturing industries. (Of course, it is

also likely that manufacturing enterprises will change

in ways that may make them more closely resemble construction in the way work teams are assembled on short notice.)

If the construction industry began to resemble the

organizational structure of manufacturing, a large

number of design, research, and customer support

jobs would be created. Sales operations would combine design, finance, and marketing. Production

work would involve programming equipment to produce unique products, maintaining sophisticated

equipment, and learning to operate new tools.

The changes in construction networks could, however, also be used to replace skilled construction jobs

with low-paid, low-skilled employees in production

facilities. Many “factory” construction facilities in the

United States use temporary labor.

The U.S. home building industry has largely been

shielded from foreign competition but the situation

has changed rapidly. Foreign appliances, fittings, and

other components are entering U.S. markets rapidly.

There is a real risk that without some significant

change in the productivity of U.S. construction techniques, U.S. firms could become little more than assemblers of foreign products using foreign-made

tools.

Without some change in housing technology or

policy, a growing number of Americans may find

themselves faced with painful choices between

cramped quarters and long commutes. It is possible that productivity would continue to decline, and

U.S. home owners may be burdened with continuing increases in home prices, and with inefficient

structures in which operating costs could rise sharply

if energy prices increase.

Since residences consume nearly 30 percent of all

electricity generated by U.S. utilities, and are largely

responsible for the peak demands that motivate new

plant construction, there is a critical need to communicate accurate costs to residential customers.

Residences also consume approximately 20 percent

of U.S. oil and gas. It should be possible to cut energy

consumption of new homes in half with improved

windows, lighting, appliances, better heating and airconditioning controls, and advanced materials. More

over, communications technologies are being tested

that can help households adjust electricity use to

minimize cost both for themselves and the utilities.

This will require pricing electricity not as a commodity but as a product whose value depends on

the season and the time of day.

Transportation (11 percent of personal and

government spending)

The amenity of Transportation is measurable by

the extent to which people can go where they want,

when they want. This has become almost synonymous with travel by automobile; 86 percent of all

work trips in cars were made alone in 1983, and

the driver was alone in a car for 60 percent of all

vehicle miles traveled. In spite of massive public investments, travel on public transit continues to decline. The comparatively low densities of most U.S.

living and working areas makes transit a poor alternative for all but the most densely populated urban

centers, such as New York, Chicago, Boston, or Philadelphia. Mass transit is often used only as a last

resort. One-third of mass transit passengers live in
46

households that do not own cars. The central challenge of personal transport in the United States remains one of preserving the amenity inherent in a

personal vehicle while providing needed mobility

for those unable to drive.

Complex networks of production have altered demand for business transportation services (typically

demanding more reliable and timely deliveries), and

have changed the geography of production and the

location of jobs. Demographic changes and changes

in housing costs have shifted the location of housing. The result is new patterns of demand for both

personal and business transportation.

In 1980, 60 percent of the 31 million commuters

in the Nation’s 25 largest urban areas lived in suburban areas and traveled to jobs outside the central

business district. There is now one car for every

licensed driver. Public transport is increasingly dominated by air travel, which has appeared as a substitute for long bus and train trips.

There has been little net improvement in the real

efficiency of auto travel. The real costs of driving a

mile have not changed significantly in 15 years.

Imports of inexpensive and durable cars increased

competition for domestic markets and placed new

emphasis on quality and fuel economy. These improvements have largely offset the higher cost of fuel.

On the other hand, travel times to work and shopping remain comparatively unchanged because of

a combination of congestion and decentralization.

Little can or will change without both private efforts

to improve personal vehicles and a public effort to

provide improved highways. The recipe for Transportation plainly involves a coordination of public

and private investment.

Transportation provides an enormous variety of

jobs, ranging from high-skill/high-wage positions for

airline pilots to minimum wage jobs in gasoline stations. Since personal transportation is by private automobile, Transportation provides as many jobs in

manufacturing as it does for paid vehicle operators.

It should be possible to make the Nation’s Transportation system faster, more flexible, less costly, and

safer by increasing the variety and capabilities of personal vehicles. High-performance, two-passenger vehicles could be given privileged commuter lanes and

parking. Low-speed vehicles with minimal licensing

requirements could provide mobility for the elderly

or young teenagers in communities. Improvements

are also possible in the coordination of traffic signals, and better information on congestion and road

conditions can be transmitted to individual vehicles—

again, a combination of private and public equipment.

Improved communication systems may permit

more people to work at home, but it appears unlikely that this will significantly reduce transport

needs. On the contrary, communications technology may increase travel, by making more people

aware of opportunities for business, shopping, and

recreation. Cellular telephones can even make cars

double as offices.

The near doubling of fuel economy of automobiles

played a major role in reducing U.S. and world petroleum imports. It is possible to achieve another

doubling or even tripling in fuel economy without

significant sacrifices in vehicle performance. A coordinated movement to a fuel other than gasoline

would also ease pressure on the system. This, too,

is likely to require public as well as private investment if such a transition is to occur before a crisis

strikes.

Without some imagination to break the current

stagnation in the performance of the personal transportation system, it is possible to imagine a system

that not only fails to improve but that offers declining levels of amenity. The system could become increasingly congested and poorly matched to the diverse needs of a complex society. It could also fail

to serve the needs of production systems dependent

on fast, reliable, flexible transport systems. Without

adequate investment, the existing Transportation infrastructure could deteriorate, and congestion along

existing highways could increase. A system heavily

dependent on oil could be very vulnerable to the

availability and price of foreign oil.

Clothing and Personal Care (7 percent of

personal and government spending)

Americans are clearly impressed by the symbolism

of clothing, and clothing purchases rise sharply with

income. Americans consume twice as many square

yards of cloth per person as the average French or

German consumer.
47

The technology of production in textiles and apparel is going through revolutionary changes. Computer-driven shuttleless looms and cutting machines

now dominate the market. Apparel assembly, which

the industrial revolution seems to have bypassed,

may soon be automated using robotic sewing equipment now entering the market.

Perhaps more importantly, the network connecting producers together appears to be on the brink

of a major change. The change is forced both by new

technology and the pressure of imported products

that have devastated markets for domestic producers in a growing number of products. The industry

is moving quickly to integrate operations from fiber

production to retail outlets. The goal is to make a

radical reduction in the 65 weeks now required to

move fiber to a retail store in the form of finished

apparel. This is done through adoption of standardization, responsive transportation systems, and production equipment that allows high productivity in

comparatively small batch production. These responsive systems allow retail outlets to carry more products in more sizes without increasing inventories.

The cost of producing products tailored to a person’s

unique measurements may soon be little more than

the cost of mass-produced garments. If this occurs,

the industry will have come full circle from tailoring to commodities and back to tailoring in a hundred years. Ironically, the productivity of individual

steps in this network (e.g., trucking or weaving) may

decrease while the productivity of the system taken

as a whole may increase.

Given the intense nature of foreign competition,

it seems apparent that the network delivering apparel to U.S. consumers will either have to undergo

major improvements in productivity or become little more than a vendor for foreign products. On the

other hand, it is entirely possible that a flexible and

responsive domestic system can provide customers

with fashions and service impossible to provide from

foreign suppliers.

Whether reshaped by trade or by new technology

and management systems, employment in the collection of enterprises just described will change. The

trend is already evident. Between 1977 and the end

of 1987, employment in the apparel industry fell 16

percent and textile employment fell 18 percent.

Heavy investment in modern production equipment

has eliminated many jobs in fiber production and

textiles. Automation will also reduce jobs in apparel

assembly. The jobs eliminated will largely be those

held by people with comparatively low skills. Many

of them are minorities with few resources for other

jobs. The jobs created will require skill in managing orders, maintaining and programming sophisticated equipment, and other functions likely to require a significant amount of specialized training.

Some effort will be needed to provide people now

employed by the industry with the new skills needed.

Job loss in textile and apparel production is partly

offset by rapid growth in apparel retailing. Retail apparel and accessory stores provide jobs for nearly

1 million people, and over 2 million people are employed by department stores.

In spite of the importance of this sector of the economy, the U.S. Government spends few resources on

research and development work for textile or apparel

technology.

Education (7 percent of personal and

government spending)

Education is both an end and a means to an end.

It provides tools critical for finding rewarding employment in a complex economy. Education also

proves to be strongly correlated with health, and with

an ability to recover from such personal disasters

as illness, divorce, or a job loss. It opens doors to

cultural opportunities that are otherwise inaccessible.

Education is also one of the Nation’s largest enterprises, Between $300 and $500 billion are spent

on Education each year (the range results from an

inability to count corporate investments in Education). The total investment in learning exceeds the

$240 billion annual private investment in buildings

and structures. About one American in three is enrolled in some kind of educational program during

the year.

The Nation’s educational system may be on the

brink of a major change. This results both from a

fundamental change in the demand for educational

services and from the fact that new technology

makes it possible to consider real improvements in

the productivity of both teaching and learning. Taken

together, these forces could change what is taught,

when it is taught, where it is taught, and the nature
48

of teaching as a profession. There are some stark

alternatives:

●

●

The system could change in a way that makes

learning more productive and fun while allowing teachers more time to spend with individuals as coaches or tutors. It could put more

power in the hands of the learner, tailor instruction to each person’s level of understanding and

learning speed and technique, and make it easier for an individual to learn when instruction

is most needed.

The system could create rigid centralization of

course design, mechanical-and impersonal instruction, national regulation, and a contraction

of choice for both students and instructors. Adult

training programs could widen the gap between

those with good educational skills and those

lacking them.

The difference between the two depends heavily on

public choice.

Demand for Education has changed both in qualitative and quantitative terms. Demand for formal

educational services (K-12 and college education) de

clined with the graduation of the baby boom generation, while demand for adult training has increased.

Not only do the emerging jobs require a higher level

of educational skills, but jobs are changing in ways

that require a continuous renewal of skills. The kinds

of basic skills required of entry-level employees are

reshaped by these new demands. Skills in working

with people in groups, in self-education, in coping

with ambiguity, and in coping with too much or too

little information become requirements as important

as any specialized training.

The real costs of employee training are almost impossible to measure. Formal training can be tracked,

but the costs of informal training and of problems

created by inadequate training (e.g., Three Mile Island) are more ambiguous. They are obviously very

large. It appears, however, that people most likely

to benefit from formal and informal on-the-job training are those who come to the position with a good

basic education. If anything, retraining appears to

be widening, not reducing, the gap separating highly

skilled from unskilled employees.

The basic characteristics of America’s educational

system have not changed significantly in a century,

and each student continues to have unique learning styles and interests. The existing educational system appears to be highly personal and differentiated.

However, the isolation of individual instructors may

have the opposite effect. Studies indicate that a typical student in primary or secondary school (grades

K-12) receives less than 1 minute per day of individual attention. Teachers throughout the country

teach nearly the same course from similar texts, and

spend large fractions of their time repeating standard lectures or performing routine administrative

functions. Apart from buildings, desks, and blackboards, virtually no capital equipment is used in this,

the Nation’s largest information enterprise. Television has not proved to be a major asset.

Over the next two decades, capital equipment

could improve the productivity of Education at all

levels given adequate research and capital investment. New information technologies allow active response to students not possible with television—a

critical distinction. Existing “computer-based instruction” systems are often disappointing, primarily because of the limitations of existing software. But there

is reason for considerable optimism.

Artificial intelligence techniques could help diagnose defects in what a student understands, while

less exotic software could help with needed drill and

practice. Simulations that use images, sounds, and

text can lend realism, and can remove the barriers

of abstraction that so often impose themselves between formal education and practical mastery of a

subject. Indeed, since the working life of many graduates will increasingly be spent viewing reality

through computer screens—whether they are operating nuclear powerplants or analyzing a commercial

insurance policy—the distinction between simulation and reality can be extremely small. Communication systems could forge links between teachers

working in similar areas, permitting specialization

not possible in comparatively small schools. They

could also allow students to work more easily with

each other, and could help tie homework to school

work.

Significant changes are likely in the nature of

teaching as a profession even if technology is not

widely introduced. There are new demands for instructional quality and efficiency. At the same time,

women who might once have entered teaching be-
49

cause they had no other professional opportunities

are now being drawn into a variety of other occupations. Introduction of more capital equipment and

expansion of teaching beyond traditional school settings will lead to much greater differentiation in an

occupation now called “teachers.” Tasks involving

software development, equipment maintenance,

holding tutorials, working with students around the

country in a highly specialized area, identifying learning pathology, and a range of other areas will lead

to jobs for a variety of specialists, and doubtlessly

a variety of pay scales.

Firms ranging from insurance underwriters to producers of metal parts have found that the potential

efficiency gains from new information technology

cannot be captured without a profound change in

management strategies. Education will be no different. Management reforms are, however, notoriously

difficult in Education because of the sector’s fragmented nature. Hundreds of State and local governments manage K-12 instruction. This has a healthy

effect by allowing teachers considerable power in

resisting grand schemes unlikely to further instruction. In some cases, however, the extreme fragmentation can frustrate progress. Corporations and the

Armed Forces have moved most rapidly to exploit

the advantages of new instructional technology. This

is due in part to a different style of management,

and in part to the fact that since these organizations

pay salaries of both students and teachers, they are

as interested in the productivity of a student’s time

as the productivity of the teacher’s time.

As in many other sectors examined here, making full use of the potential of emerging technology

requires a major investment in research. At present

there is no national center for focusing research on

education equivalent to the National Institutes of

Health or the Agricultural Research Center. By far

the bulk of research on educational technology supported by the Federal Government is undertaken by

the Department of Defense. While a private information company typically spends several percent of

gross revenue on research, virtually nothing is allocated for research directed at the real problems of

teaching and learning. If the fraction of gross expenditures invested in research were the same for Education as for the average privately owned business

in the United States, about $9 billion a year would

be spent for Education research. This is 60

times more than the present allocation.

Personal Business and Communication

(6 percent of personal and government

spending)

to 90

Astonishingly little is known about the volume or

the function of information entering or leaving U.S.

homes. By far the greatest volume of information

is broadcast to homes through television, radio, and

direct mail. Large amounts of information enter

through selective purchases or rentals of video tapes,

magazines, books, newspapers, and cable television.

Two~way “point-to-point” communication, involving

telephone conversations and correspondence, is responsible for a comparatively small fraction of the

volume of information, though this activity traditionally receives much more attention.

Most of this information is used for entertainment.

The economics of information are curious, since

much of it is subsidized by advertisers. Advertising

pays for nearly all broadcast costs, and 50 to 75 percent of the cost of newspapers and magazines. The

costs paid by individual consumers come entirely

in what they pay for receivers, and in the time spent

watching advertising messages.

Apart from entertainment, information is used

largely for personal business-primarily for retail purchasing, but also for financial transactions and bill

paying. Keeping in touch with friends and even gossiping represent other critical markets.

Direct marketing has enjoyed an expanded business, using television and direct mail to communicate from businesses to homes, as well as 800-

number telephone systems and credit cards to communicate from homes to businesses. In the future,

some of this electronic shopping will certainly become part of computer-based systems. One key barrier to computer-based systems is the lack of serendipity: when people enter files looking for something

in particular, spontaneous response to products is

not possible. Cable television has introduced a novel

way to bypass this problem, by holding what amounts

to a continuous sale where proprietors take telephone orders for products shown.

How should amenity be measured in this case?

By analogy to Transportation, improvements in in-
50

formation resources depend on a person’s ability to

get the information he wants when he wants it (leaving a little room for serendipity). It seems that this

system is moving rapidly toward one with greater

consumer choice, more control over the information

that enters the home, and more direct payments for

services actually used. VCRs, cable television, and

the explosion of specialized magazines have all allowed special tastes to flourish where broadcast television and general interest magazines once dominated markets. Similarly, the once undifferentiated

telephone has been replaced by a variety of specialized products, ranging from $6 disposable phones

to ports of entry into sophisticated data management

services. Advanced communications to homes can

also mean more control over electricity bills, better

home health care services, and greater opportunities for education, while cellular communications can

extend such freedoms to private vehicles. Many more

services are likely to be available as the struggle over

regulation of telephone services is resolved.

The deregulation of banking, coupled with sharp

increases in the incomes of many households, has

generated a boom in individualized financial services. A growing fraction of all households use tax

accountants and financial advisors to provide specialized services. Few now buy “whole life” policies

that combine savings with insurance.

While deregulation has spawned an explosion of

competition, it has not had the effect of creating

much real diversity in most markets. AT&T, for example, retains 90 percent of the long-distance market. Local telephone companies maintain regulated

monopoly control over local telephone services, and

are gradually being allowed to compete with other

firms for lucrative advanced communications services. There is a possibility that these firms could expand on their regulated business to become regional

monopolists in a variety of unregulated areas.

The businesses in this group provide jobs dominated by clerical and information management occupations. The complex pattern of change possible

in these occupations has already been discussed. In

some cases, modern communication equipment has

fragmented jobs into narrow functions that can be

carefully monitored by electronic means. This has

been true for telephone operators or clerks working on routine insurance accounts. In others, clerical tasks have been upgraded and combined with

quasi-managerial tasks. This is particularly the case

when products cannot be handled using mass production techniques (e.g., commercial insurance). Between 1983 and 1986, employment growth in clerical and other administrative support personnel

slowed in finance, insurance, and real estate businesses, while jobs for people classified as managers,

professionals, and sales workers increased rapidly.

There is much uncertainty about the future of employment in these occupations, and much room for

choice.

Recreation and Leisure (9 percent of

personal and government spending)

Of all the sectors examined in this analysis, the

amenity of Recreation and Leisure is most difficult

to measure objectively or even define precisely. How

can the recreational value of dining be separated

from biological necessity? How much of a purchase

of a home or a car can be considered recreational?

Obviously, both time and money are critical when

considering this amenity.

Free time available to Americans has been shrinking for at least a decade and, as a result, spending

for Recreation and Leisure has typically become

more intense (more spending per unit of time but

less time). Moreover, Americans earn far fewer vacation days than their counterparts in Europe. U.S.

manufacturing employees averaged 29 days of paid

vacation and holidays in 1982, while the West Germans took 41 days and the French 35.

Outdoor recreation and travel command a firm

share of U.S. leisure time in spite of advances in

home electronics. In fact, home electronics may have

expanded interest in travel and in a greater variety

of away-from-home activities. Time constraints remain a bigger problem than money for many families. Vacations tend to be short and intense, and

many households now look for short trips close to

home in lieu of the traditional “two weeks at the

beach” vacation. There is little sign that national

tastes in recreation are becoming more homogeneous. Business is booming for everything from theme

parks to National Barbecue cooking contests to Mississippi Catfish Festivals. Hotels and motels cater to

specific client groups, such as older couples or families with children.
51

In the future, technical capabilities of home electronics should continue to expand quickly. investments in home capital equipment now include video

equipment (where high-definition TV can greatly improve picture and sound quality) and sophisticated

audio equipment (digital disks and tapes offer remarkable improvements). New information technologies also promise to expand opportunities for travel.

Airlines were among the first to use sophisticated

national reservation systems. Travel agencies (an industry that has been growing rapidly in recent years)

offer growing variety of information services. Reservation services can be provided for hotels and

motels, automobile rentals, sports and theater events,

and a variety of other activities. Some agencies are

introducing expert systems to help match unique interests to travel reservations. In the near future, reservation systems will permit a video tour of prospective destinations, hotels, and even individual rooms.

Prototypes are already in place.

It should be possible to enrich opportunities for

using leisure time through the use of advanced technologies, which can bring a greater variety of entertainment, education, and shopping services to

individual households and improve access to recreation and entertainment facilities away from home.

On the other hand, recreation and entertainment opportunities could be curtailed for all but the affluent,

given a decline in advertiser-supported TV and newspapers or a decline in public support for parks, town

centers (as opposed to privately managed shopping

malls), and cultural facilities and activities.

Many outdoor recreation activities involve an integration of publicly supported infrastructures, such

as parks, beaches, civic centers, and sports stadiums,

and private investment, such as hotels, travel agencies, and theme parks. Many businesses depend on

public investment in these infrastructures, and on

public efforts to maintain the quality of the environment in parks and other recreation areas. There may

also be a role for public information services such

as the city of Baltimore, Maryland’s INFOTOUCH.

Not counting jobs in transportation services or jobs

in restaurants, the Recreation and Leisure industries

are responsible for 8 percent of American jobs. Many,

like those for hotel employees or employees in theme

parks, are comparatively low paid and are in occupations where productivity increases are difficult to

envision. In fact, hotels appear to be becoming more,

and not less, labor-intensive. On the other hand, the

production and distribution of consumer electronics

and the software used on these systems can create

many rewarding jobs. American production of many

consumer electronics products has all but disappeared in the face of foreign production, Foreign producers have used their command of manufacturing

the current generation of consumer electronics products to fund the development of a continuing series

of innovations. U.S. firms will need to move aggressively to recapture these promising new markets.

Pulling the Pieces Together

(Ch. 13)

The kinds of change discussed so far will have far-

-reaching effects on the future of the U.S. economy.

Unfortunately, none of these effects can be confidently forecast because virtually none depends on

immutable natural forces. On the contrary, the Nation’s economic future depends as never before on

choices made by households, producers, workers,

and the government. These choices will, of course,

also be shaped by the regulations and incentives the

government oversees, and by the skill with which

the government manages international affairs.

Forecasts where so much depends on choice are

absurd. What can be done, however, is to sketch

out self-consistent descriptions of the different kinds

of economic structure that could emerge in the

United States during the next two decades. The implications of public and private choices become

clearer when displayed in this way.

Four scenarios are used in this report to explore

the implications of alternative futures for the U.S.

economy. These postulate:

1

2

3

4

continuation of present trends,

a recovery of the manufacturing sector,

a stagnating economy, and

a transformed economy making optimum use

of new technology.

The results range from cases where GNP grows

slowly (1.5 percent per year) and unemployment

reaches 23 percent (measured in conventional terms)

to one where GNP grows rapidly (3 percent per year)

with possible labor shortages. While there seems to
52

be no question that the second case is preferred, this

quick judgment should perhaps be suspended while

some of the fine print is examined. A case could be

made that GNP growth does not necessarily provide

a good guide to progress. Indeed, the scenarios reveal that the choices made by consumers can greatly

affect the level of amenity they achieve, particularly

in areas such as Health, mobility, and Housing, even

if their incomes do not rise. Improved amenity

achieved with a working week of 35 hours (which

would drastically reduce unemployment) may look

better than 3 percent GNP growth that fails to raise

living standards equitably. With careful management, however, it should be possible to have both

rapid growth and improved amenity.

Changes in personal and government consumption recipes, and in income distribution, have a surprisingly small impact on the economy in terms of

the share of value-added or jobs in manufacturing

or other sectors—although individual enterprises

would obviously be affected much more strongly.

The different scenarios also reveal interesting information about the future of natural resources and

energy consumption. Changes in household and government spending recipes can have a significant impact on national use of energy. The combination of

greater attention to energy efficiency by consumers,

and production recipes that demand less energy and

material inputs, can lead to a significant decline in

national use of resources. Optimal use of new technology could result in a 40 to 60 percent decline in

use of natural resources, even when there is rapid

(3 percent) economic growth.

Since air and water pollution, and the generation

of hazardous waste, scale roughly with demand for

energy and material resources, these differences obviously translate into large differences in future environmental quality. The scenarios thus demonstrate

that it is possible to have vigorous economic growth

while reducing demands on the natural environment. Indeed, most innovative production schemes

result in a decline in environmental releases simply because most new technologies are intrinsically

more efficient.

The impact of trade depends both on whether

trade volume continues to grow as a fraction of GNP

(in constant dollars) and on the nature of U.S. exports and imports. High levels of trade can lead to

a net increase in employment since in many cases

the number of jobs generated per dollar of exports

exceeds the number of jobs lost per dollar of imports.

Employment in manufacturing and agriculture is particularly vulnerable to different patterns of trade.

Changes in production recipes, and assumptions

about productivity in each industry, have the largest

effect on the industries likely to produce jobs in the

future. Changes in the type of occupations required

in individual industries, however, have an even

more profound effect on the number of jobs created

in each occupation (see figure 1-24).

All the scenarios share some characteristics. Employment in manufacturing during the next two decFigure 1-24.-Why Occupation Shares May Change

Managers -

Technical Professionals -

Educational Professionals -

Other Professionals

Tech nicians

Sales Workers

Other Customer Contact

Information

Data Entry

Food and Beverage

Other Service

Precision Craft

Machine Operators

Transportation

Handlers & Laborers

Farming & Forestry
53

ades will not decline as rapidly as it has in the past

20 years. Manufacturing employment seems likely

to fall from about 20 percent of all jobs to between

16 and 18 percent in 2005. Measured as a (constant

dollar) percentage of GNP, manufacturing may fall

by only 1 to 2 percentage points, with declines occurring primarily in manufacturing sectors that now pay

comparatively high wages. Also breaking a trend,

jobs in transactional activities (such as banking, insurance, law, and business services) seem unlikely

to grow substantially as a fraction of all jobs. This

results in part from the fact that productivity may

grow sharply in “paper pushing” activities, thereby

reducing the work force required.

The characteristics of employment possible in the

future differ most strikingly when measured by the

type of job created. An economy that manages to

build growth primarily around a revitalization of

traditional manufacturing produces many more craft

workers, precision production operators, and other

“hands-on” manufacturing occupations. An economy

moving sharply to new production networks generates many fewer jobs of this type, twice as many jobs

for technical professionals (compared with an economy following 1984 staffing patterns), nearly 25 percent more managers and management support personnel, and 30 to 40 percent more sales workers.

There would also be a 30 percent decline in jobs

involving routine data entry and manipulation, and

fewer jobs for the most low-paid occupations (food

preparation, low-paid service workers, laborers, and

farm labor).

The transformation scenarios have the effect of reducing employment in categories that traditionally

pay low wages (the fraction of all workers now in

occupations paying less than two-thirds of median

wages could fall by 40 percent) while increasing employment in traditionally well-paid jobs (the fraction

of all workers in occupations now paying more than

33 percent above the median wage could grow 50

to 60 percent). Of course, nearly all these occupations would be redefined if such a transformation

took place. Many managers are likely to have more

routine jobs than today’s managers. Sales workers

in the future could have more demanding jobs if they

were more tightly integrated into inventory control

and production networks, and given greater control

over the design and tailoring of products sold.

The statistics say little about the quality of the

working environment, an employee’s control over

working life, or satisfaction with what is accomplished. It does appear, however, that a restructured

economy could generate large numbers of interesting and rewarding jobs, ranging from interesting

“face-to-face” sales positions, to technicians installing and repairing a continuing series of new hardware and software, to managers wrestling to build

new teams for specialized projects. These jobs will

be in occupations that currently require a high level

of education. The educational attainment level experiencing the fastest increase in its share of jobs,

both currently and under the Transformation and

Trend scenarios, is the highest—four or more years

of college (see figure 1-25).

On the other hand, it is also possible to produce

jobs that allow individual employees few initiatives

and monitor performance with Or well ean precision

using advanced communication networks. The combination of technology and large numbers of entrylevel people with poor basic education could force

(or tempt) employers to produce large numbers of

jobs requiring minimal training for people considered interchangeable and disposable.

Figure 1-25.-Educational Requirements of

Future Scenarios

10 15 20 25 30 35 40 45

Percent of all jobs

- 1984 ~ Manufacturing

= Trend m Transformation

------------Scenar ids ---------- -

How To Read This Figure: College graduates held about 21 0/0

of all jobs in 1984 but would hold nearly 28°/0 of all jobs under the assumptions of the Transformation scenarios.

SOURCE Office of Technology Assessment (see figure 13-2 of ch. 13)
54

A Concluding Note jor types of businesses, the relative position of the

The calculations just presented, coupled with the United States in the world economy, and the nature

and rewards of jobs available. The range of possi- more qualitative descriptions that preceded them,

describe starkly contrasting futures for the U.S. econ- bilities is shown not as forecasts but as possibilities—

possibilities that illustrate the power of and the need omy. They paint very different pictures of the future for careful choice in the construction of public policy. of critical amenities, the potential for growth in ma-
Part I

The Networks of Consumption

While many of the most basic aspects of economic

structure are in flux, human needs and desires provide a fixed point of reference. Whatever happens

in the future, the output of the U.S. economy must

ultimately be measured by the extent to which it allows Americans to achieve “amenity”: to be in good

health, to have a varied and healthy diet, to be well

clothed, to live in attractive housing, to receive a

useful and interesting education, to expand options

for personal communication, to travel, and to enjoy

leisure time. Together with national defense and

other functions necessarily provided by collective

rather than individual purchasing, these amenities

represent the real output of an economic system. The

net productivity of the U.S. economy must be measured by the efficiency with which human time and

talent are applied to their achievement.

The next two chapters define methods for measuring growth in amenity, and describe the “consumption recipes” used by Americans to achieve

these amenities. These “consumption recipes” combine household purchases of goods and services, investment of unpaid time by household members,

and public spending. The chapters provide a basis

for describing possible changes in purchasing which,

in turn, affect the structure of the producing sectors

of U.S. economy, and ultimately the jobs that the

economy creates.

It is not possible to develop a rigid definition of

quality in any of the major classes of amenity. Concepts of quality are often readily understood—freedom of choice, good health, or happiness—but may

be impossible to quantify. Some purchases are based

on need, and some on choice. Some are spontaneous while others are induced by advertising. Many

are shaped (or misshaped) by regulation, instinct,

ignorance, or hasty decisions. Even if it were possible to develop a perfect way to measure amenity for

an individual, it would be impossible to develop a

perfect formula describing amenity for society as a

whole. ] Once incomes are adequate to provide for

‘Kenneth Arrow argues that even if a function could be written to

describe the way each individual would rank the value of different patterns of expenditure, it would be impossible to combine these functions to develop a method for ranking expenditure patterns for the group

taken as a whole. K. Arrow, Social Choice and lndividua] Values (New

Haven, CT. Yale University Press, 1963).

basic necessities, the extent to which spending buys

satisfaction depends heavily on expectations. The

quality of amenities available to a person considered

wealthy at the turn of the century is below the expectations of even the poorest family today. On the

other hand, the well-educated baby boom generation may have expectations that will be difficult for

the economy to meet.2

The problem of defining and measuring amenity

can, of course, be avoided if growth in national income can be used as a proxy for economic progress.

Given this assumption, productivity can be measured by the efficiency with which labor and other

inputs are converted into measurable quantities like

CAT scanners, and not by the facility with which

resources achieve longer lives or greater freedom

in personal transport. Yet while such an approach

solves many analytical problems, it is insufficient for

the purposes of the analysis that follows for two critical

●

reasons:

Measures of amenity that are independent of

spending levels are needed to consider public

policy choices affecting the way consumers combine goods and services. There are obviously

many cases where income measures of economic

welfare are not adequate. Defects in public regulation or inappropriate public spending can be

responsible for inefficiencies in the way consumers convert money to amenity. The quality

of life in a community can decline while incomes increase if environmental quality deteriorates or social unrest undermines security.

There may actually be a negative correlation

between spending for health care and life expectancy, or between spending for burglar

alarms and security. Policies designed to facilitate private choice can only be assessed given

a clear understanding of the performance of

networks that connect spending with amenity

measured in human terms.

2A straightfo~ard calculation shows that if the baby boom generation is to be paid as much as the previous generation on the basis of

age and education, the U.S. gross national product (GNP) would need

to grow at 2.5 percent per year. This rate of growth is needed if the

baby boom generation is to fulfill its expectations for their investment

in education. W.H. Esselman and OS. Yu, “Economic Growth to Meet

Income Expectations,” Journal olfoky Artafvsis and Management, vol.

2, No, 1, fall 1982, pp. 111-118.

55
56

● Analysis of trends in spending patterns may not

provide a good basis for anticipating spending

patterns over the next two decades. Technology can create: new products and services, radical declines in the prices of existing products,

an increased ability to tailor products to individual needs, new sources of information about

products, new retailing methods, changes in

time available for making purchases, changed

tastes, and new government regulations affecting both price and quality. There is no obvious

way to estimate consumer response. It is also

difficult to anticipate changes in public expenditures—nearly one-quarter of all personal and

government spending combined. Defining the

choices Americans have about the future is necessarily an inexact process. It is essential to begin with hypotheses about how public choices

could affect the structure of future consumption

recipes.

The next two chapters combine a formal analysis

of trends in U.S. consumption over the last two decades with an assessment of choices about the direction of future spending, which is necessarily much

less rigorous, While generalizations are difficult, the

discussion traces a number of themes affecting the

recipe for consumption. All stem from a growth of

choice made possible by increased national income,

new technologies (particularly those that improve

communication and those that reduce the price

difference between mass-produced items and items

tailored to narrow markets), and an increase in international and domestic competition. The themes

include:

the growing complexity of consumption recipes

and the increased demand for sophisticated consumer decisions;

the fragmentation of some markets into a series of niches and the integration of others into

undifferentiated commodities;

advances in communication, marketing, and

retailing technologies, which can improve the

match between specialized products and specialized tastes;

the growing desire for quality in both products

and services;

the rising importance of purchased services,

partly associated with an increased interest in

specialized products;

●

●

●

a shift of activity formerly undertaken in the

home to the marketplace, such as child care,

coupled with substitution of household time for

services formerly provided in the market, such

as VCRs for movies and home health care for

hospital care;

the growing importance of time—as opposed to

money—as a constraint on the achievement of

amenity for many groups; and

persistent signs that large groups of the population fall far below standard norms in a wide

range of amenities, including health, housing,

transportation, and even basic nutrition.

Chapter 2 begins by defining the eight categories

of amenity that, taken together, constitute most of

the output of the U.S. economy. It describes recent

trends in private and public spending and personal

time investments used to achieve each amenity, and

the major forces behind these trends: income, income distribution, demographics, prices, new technologies, new patterns of regulation, and changes

in taste. The chapter examines spending at the level

of the economy as a whole, focusing on the major

factors that influence consumer purchasing and applying standard methods to estimate how consumption may change. Among other things, it demonstrates how demand could change as a result of

changed demographics, income and income distribution, and product prices, given consumer spending that follows trends established during the past

two decades.

Chapter 3 leaves the comparatively safe world of

macroeconomic statistics and plunges into the admittedly qualitative issues—whether amenities such

as health care, housing, and recreation are improving

for Americans, and whether they are likely to improve in the future. In each of the eight amenity categories, the discussion in chapter 3 proposes a way

to measure change in the basic amenity (e.g., life

expectancy, morbidity rates, and infant mortality in

the case of health care), and then describes the way

the quality of the amenity has changed for different

groups during the past few decades. It pays special

attention to groups most disadvantaged by the existing distribution of resources.

Finally, building on the base established in chapter 2, chapter 3 develops “Alternative” scenarios for

each amenity. These alternatives are explicitly de-
5 7

—

signed to improve the quality of the amenity deliv- ulation. It should be noted that the Alternative

ered within fixed financial constraints. Economic fac-scenarios are speculative, and necessarily reflect

tors are combined with factors that could not be some of the values of the people constructing them.

predicted by extrapolation alone, such as shifts in Nonetheless, they may not be any less accurate than

government policy and radically new technologies. an assumption that trends in consumer behavior can

Significant improvements in amenity appear to be be confidently extrapolated to describe the structure

possible in virtually every case, given the develop- of demand over the next two decades.

ment of key technologies or changes in public reg- 
Chapter 2

Defining the Consumption Recipe
CONTENTS

Defining Categories of Amenity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Trends in the Consumption Recipe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consumer and Government Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Qualitative Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Forces Affecting the Consumption Recipe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income . . . . . . . . . .. .. .. .. .. .. .. .. . . $ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Demographics, Income, and Price: The Combined Effect . . . . . . . . . . . . . . . . . . . . . . . .

Alternatives for the Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Constructing Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Summarizing the Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

61

63

63

66

70

71

71

73

80

80

80

80

82
Chapter 2

Defining the Consumption Recipe

Americans achieve amenity through the “consumption recipe”—combining household spending

for goods and services, investments of time by house

hold members (for which no compensation is received), and government spending.1 These recipes

I]n most Caxs, the “consumption recipes” considered here can be

considered equivalent to the “utility functions” used in most analyses

of demand. Moreover, a number of authors have shown how time can

are in constant flux, influenced by changes in house

hold income, in the price of goods and services, and

in demographics, as well as changes in technology

that can result in new products, can affect the ways

producers communicate with customers, and can

even influence tastes and values. Changes in values

are reflected directly through new patterns of consumer purchasing, and indirectly through new patterns of public spending and regulations designed

be included in the utility equation. See, for example, G.R. Ghez and to guide private spending. This chapter reviews how G.S. Becker, “The Allocation of Time and Goods Over the Life Cycle,” these forces have shaped and may continue to shape working paper, National Bureau of Economic Research, New York, NY

1975. U.S. consumption recipes.

DEFINING CATEGORIES OF AMENITY

For the purposes of the analysis that follows, all

final household and government purchases are assigned to one of ten amenity categories (see box 2-A).

The selection was necessarily somewhat arbitrary.

Any classification scheme helps to illustrate some

features of economic structure and obscure others.

The categories were chosen because they cluster networks of spending where the underlying purpose

is comparatively easy to describe. Chapter 3 will undertake the task of describing these purposes in ways

that permit a working definition of progress in each

of the first eight areas. The category of “recreation

and leisure” proves to be the most difficult to define, since there is plainly an element of recreation

involved with spending in all other categories. Is a

walk in the park an investment in health or an investment in recreation? What about a car that is fun

to drive, a home with a pleasant yard, a meal eaten

in a good restaurant? The present study takes the

restrictive definition of recreation used in the National Income and Product Accounts.*

The spending shown in box 2-A includes only personal and government spending that goes directly

for the purchase of amenity. The total does not include investment and savings. In 1985, consumption categories accounted for about 85 percent of the

‘U.S. Department of Commerce, Bureau of Economic Analysis, 4’National fncome and Product Accounts,” Survey of Current Business, July

1987. table 2.4.

U.S. gross national product (GNP).

mainder represents investment.

The national statistical accounts,

Most of the rewhich serve as

the base for of most of the data in this study, have

several peculiar features that are necessarily reflected

in the analysis presented here.3 One peculiarity is

the distinction made between consumption and investment. In general, anything with value after a year

is considered to be a form of savings and not consumption. As applied, however, this results in a situation where spending on a gold-tiled bathroom is

considered to be an investment, while money spent

on education is considered consumption. Similarly,

all government spending is considered to be consumption. Government purchases of research and

development, roads, dams, and education are not

considered a form of national investment.

National accounts are also schizophrenic in the

way they treat the nonwash economy. Nearly 8 percent of GNP reported by the U.S. Department of

Commerce results from the “imputed” value of services that involve no real market transaction. This

value includes the imputed income that homeowners

receive by “renting” houses from themselves, in itself equal to nearly 6 percent of GNP; the imputed

3A formal technique to remedy some of the problems described is

proposed by Robert Eisner in “The Total Incomes System of Accounts,”

Survey o/Current Business, U.S. Department of Commerce, Bureau of

Economic Analysis, January 1985, pp. 24-48.

61
62

Box 2-A.—The 10 Basic Amenity Groups

(and as a percent of all personal and government spending on goods and services in 1985)1

Percent of personal and

Definition government spending

1. The FOOD category includes food and alcohol consumed in restaurants and purchased

from stores. Government contributions include agricultural research and a variety of support programs for farmers. 15.1 %

2. The HOUSING category includes everything needed for the operation of a purchased or

rented home, including rent and mortgage payments, and purchases of fuel, electricity,

furniture, china, draperies, housecleaning, and other goods and services used to maintain a home. Government spending goes for both housing redevelopment programs and

spending for infrastructure like water and sewer systems. 19.7%2

3. Personal spending for TRANSPORTATION includes all spending for mobility, including

purchases of automobiles and other personal vehicles, vehicle maintenance, gasoline,

and oil; and purchases of public transportation services (air, rail, bus, and taxi). Public

spending includes highway construction attributable to personal travel, and maintenance

and operation of air and rail facilities. 11 .4%

4. Personal consumption in the HEALTH category includes purchases of drugs, physicians’

fees, hospital costs (including payments made by Medicare and Medicaid), and spending

for health insurance. Public spending includes hospital construction and operation, and

community health services. 11 .4%

5. Expenditures on CLOTHING AND PERSONAL CARE go for products and services ranging from apparel and footwear to toiletries and beauty salons. Clothing is by far the largest

item in this category, accounting for more than 80 percent of the total. There are no direct government purchases of clothing and personal care as defined here. 6.7%

6. Personal EDUCATION spending includes payments to private schools and colleges. Government spending includes the operation of public school systems and libraries, subsidies for colleges, and worker training programs.3

7.2%

7. PERSONAL BUSINESS AND COMMUNICATION includes personal communication by tele

phone and writing, as well as personal financial, legal, and insurance activities. 6.4%

8, The category of RECREATION AND LEISURE is particularly difficult to define. It is clear

that eating out, living in a comfortable home, and transportation are to some extent recreational activities. The more restrictive definition used here includes foreign travel, hotel

accommodations, social and religious activities, and purchases of books, magazines, toys,

home electronics, movies, and admissions. Government contributions include the operation of parks and recreation areas. 8.9%

9. The category DEFENSE AND SPACE includes only Federal Government purchases of goods

and services for military and space. 7.7%

10. GOVERNMENT NOT ELSEWHERE CLASSIFIED (NEC) includes government purchases

of goods and services other than defense. Activities include the operating costs of government not directly attributable to a specific amenity group (operation of the Congress and

State legislatures); transportation spending not attributable to personal travel; the court

system; police, fire, and correctional institutions; and the work of authors of this study. 5.6%

Iln standard accounts, the “gross national product” is conventionally divided into the following components: Personal Consumption Expenditures, Government Purchases of Goods and Services, Net Exports, Gross Private Domestic Investment (consisting mostly of personal purchases of housing and business purchases of products with an expected life of more than 1 year), and an adjustment for changes in inventories. Government purchases of goods and services

do rrof include transfer payments such as social security. Spending resulting from transfer payments is counted under Personal Consumption Expenditures.

The spending shown in this table includes only personal consumption and government purchases. See the appendix for a detailed table showing how standard

categories are mapped into the amenity categories shown here.

‘The spending on housing shown here does not include any payments that result in an increase in the value of the U.S. housing stock from new construction

or major renovation. Construction spending of this kind is considered “savings” and not consumption in conventional accounts. If purchases of new housing

are included in the accounts, housing would be responsible for approximately 24 percent of the total.

3The accounts treat both private and public spending for education as consumption and not as a form of savings. Corporate training costs are not included.

SOURCES: Consumer purchases in these amenity categories are derived from the “Personal Consumption Expenditure” (PCE) categories used in the “National

Income and Product Accounts” (NIPA), U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Curren( Business, July 1987, table

2.4, A precise map connecting these PCE categories to amenities is shown in the appendix. Categories of government purchases of goods and services

are derived from tables 3.15 and 3.16 of the “National Income and Product Accounts.” The map connecting spending categories in these tables

with the amenity groups is also shown in the appendix.
63

rent paid by non-profit organizations that own their national accounts do not, however, impute the value

own buildings; the imputed value of liquidity in bank of housework, education provided at home, or time

accounts and insurance funds; and the imputed invested by standing in line at fast food restaurants.

value of food produced and eaten on farms.4 The

4See U.S. Department of Commerce, Bureau of Economic Analysis,

“National Income and Product Accounts, ” Survey o/Current Business,

July 1987, table 8,9.

TRENDS IN THE CONSUMPTION RECIPE

Before proceeding to examine the forces driving

the change, it is worth taking a brief look at recent

changes in the way Americans construct recipes to

achieve amenity. These trends are described in three

ways: by examining changes in overall patterns of

spending for the amenities, by exploring trends in

the way time was spent, and by reviewing qualitative features of spending patterns that are not adequately reflected in statistics on how Americans

spend their time and money.

Consumer and Government Spending

Share of Total Expenditures

The history of household and government spending during the past three decades is traced in figures

2-la, 2-lb, and 2-lc. Looking at trends in expenditures on each of the different amenity groups, perhaps the most striking feature of the statistics is the

Figure 2-la. -Spending by Amenity Type (percent

- of all consumer and government spending)

Percent of current dollars

25 I 1

20-‘

-------- -----------

----------------

15-

1

l o -

5-

— Foo d

-

‘- - Housin g

— Transpor t

— Healt h

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” historical diskettes, tables 2.4,3.15,

3.16.

Figure 2-lb.-Spending by Amenity Type (percent

of all consumer and government spending)

Percent of current dollars

“~——-

121 I

l o -

8 -

. .

6- ---- /----

---- -

, 1 I

2 ! I 1 , I I 1 , ! 1 I , , ( ( I , , r I , , , ( ,

1955 1960 1965 1970 1975 1980 1985

— Clothlng 8 Pers Care -

--- Education

~ Pers Busi /3 Comm. — Recreation 8 Leisure

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” historical diskettes, tables 2.4,3.15,

3.16.

Figure 2-le.-Spending by Amenity Type (percent

of all consumer and government spending)

Percent of current dollars

14 I I

8 -

-.

. ,-----

. -.

--- .-

6 -

4-

, 1 , 1 , 2-I I 1 1 1 I I 1 1 I I 1 I , 1 1 I I I , 1 , 1 1 I 1 1

1955 1960 1965 1970 1975 1980 1985

— Government n e c. ---- Defense

SOURCE: U.S. Depafiment of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” historical diskettes, tables 2.4,3.15,

3.16.
64

continued high level of personal consumption expenditure (PCE) on the most basic of amenities.

Housing, Transportation, Food, Health, and Clothing and Personal Care accounted for roughly twothirds of U.S. consumer spending in 1985, changing

●

●

●

●

●

little since 1950. The figures show:

a rapid and consistent decline in the percent

of income spent for Food, which has been

almost precisely offset by a rapid and continuous growth of Health spending (Food lost and

Health care gained about 8 percent of total

spending between 1955 and 1985);

a sharp rise of spending on education followed

by declines after 1975 as the baby boom generation passed through the system;

continuous growth of spending in Personal Business (primarily financial services) and Communication, which appears to have accelerated

since 1981;

a steady decrease in the share of spending going for Clothing and Personal Care; and

a decline in Defense spending as a proportion

of all spending, which reversed in 1979.

Spending for Housing and Transportation, two of

the largest categories, has remained surprisingly constant since World War II—despite large changes in

the prices of energy, automobiles, and housing; in

the size and characteristics of households; and in

real per capita spending, which has doubled in the

last 40 years. Whenever Housing costs go above 21

percent of spending, or Transportation costs go above

12 percent, a subtle alarm seems to sound. This results from a combination of factors, including historically “fixed” formulas for the percentage of gross

income that borrowers can expect for mortgage or

car payments.

People have apparently used discretionary income

to increase the quality and variety of purchases in

amenity areas like Food (through more varied eating), Transportation (through higher quality cars and

more cars per family), and Clothing and Personal

Care, rather than spending new income on Recreation. As a fraction of all spending, Recreation and

Leisure seems to have gone through a one-time jump

between 1961 and 1972, with slow subsequent increases.

Dollars and Value.-The previous discussion

showed how Americans spent their income in any

given year in “current dollars’ ’—values measured

in the currency of the year in which the data was

collected. The statistics say little about either the

quality or the quantity of the products and services

purchased, since many relative prices changed rapidly during the period shown. Legal services that cost

$1,000 in 1955 might still be considered worth the

price in 1987, but a computer equivalent to one that

cost $1,000 in 1955 would be worth very little in

1987. The effects of inflation can, in principle, be

removed from product prices by converting spending to “constant dollars.” Converting current into

constant dollars involves the vexing problem of developing a consistent set of prices for goods and services of constant quality. This process becomes more

difficult during periods of rapid technological change.

It can also become more difficult as a greater fraction of economic activity involves activities like legal services, where quality is inherently more difficult to measure (see discussion in ch. 5).

Most of the qualitative features of figures 2-la to

2-lc remain when spending is converted into constant dollars (see figure 2-2), with one important exception: in constant dollars, spending on Clothing

and Personal Care has risen sharply since the mid

1970s. Constant dollar spending by government for

amenities cannot easily be estimated, since data is

not collected on “constant quality” government services in much details

Another way to view the changes in average prices

that have occurred during the past three decades,

compared to changes in average incomes, is to see

how long it has taken an average full-time worker

in America to earn enough to buy items of comparable quality during the past few decades. In this respect, most manufactured goods have become a bargain while the real price of most services has

changed little (see table 2-l). A television set that

could be bought for 1 day’s work in 1972 needed

over 4 days’ work in 1950 and only 4 hours’ work

in 1986. Clothing, new cars, and communication

services showed strong declines. On the other hand,

most forms of medical services now require more

work to purchase than was the case in 1950.

5Fo~ years in which data is avai]able, constant dollar estimates of government spending can be computed by converting government spending in each category to spending in commodity categories for which

output deflators are available. This could not be done for most of the

period shown in figure 2-2.
65

Figure 2-2a. -Constant Dollar Shares of

Consumer Spending on Health, Housing,

Clothing & Personal Care, and Education

Percent of all consumer expenditures

30

25

20

j

15

-----

l o -,

-----------

-------

------

-------------

5 -

1950 1955 1960 1965 1970 1975 1980 1985

‘ --- Healt h

— Housin g

— Clothing & Pers Care — EducatIon

SOURCE: U.S. Department of Commerce, Bureau of Economic Anatysis, “National Income and Product Accounts, ” historical diskettes, table 2.5.

Figure 2-2 b.-Constant Dollar Shares of

Consumer Spending for Food, Personal

& Business Communication, Transportation,

and Recreation & Leisure

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” historical diskettes, table 2.5.

Patterns of price reduction have also changed over

time. Between 1950 and 1970, there was a significant decline in the amount of work needed by the

average worker to make all purchases. Of the items

listed in table 2-1, only mass transit required more

labor to buy in 1970 than in 1950. Since 1970, however, many items require more work to purchase.

Spending on Services. -Attempts to separate

“services” from “goods” have never been completely

satisfactory. The category “services” combines housecleaning, brain surgery, banking, and car repair.

Most amenities are satisfied by a complex combination of purchased goods and services. Later chapters will show the extent to which even manufactured products embody non-manufacturing “service”

activities. However defined, services represent an

increasing fraction of consumer expenditures. The

price of manufactured goods has declined much

faster than that of services (table 2-l), while demand

for services appears to have increased rapidly with

rising incomes.

The curious pattern of decline and growth in demand for services between 1930 and 1986 is charted

in figure 2-3. Rising from a low of less than one-third

of all constant dollar spending at the end of World

War II, services now command more than 40 percent-even given a comparatively narrow definition.

Most recent growth in demand has not resulted from

purchases of personal services like housekeeping,

but rather from purchases of medical care, education, and professional services like banking, law, and

insurance.

Savings and Investment.-In recent years, personal and government consumption has grown as

net savings have declined. Figure 2-4 illustrates the

decline in national savings rates during the past decade or so, measured as a percentage of GNP. A slight

increase in rates of business savings, taken as retained earnings and in other ways, has been more

than offset by a sharp decline in net government

savings—the budget deficit—and by the drop in personal savings. Gross savings fell from over 18 percent of GNP in 1979 to about 13.5 percent in 1986.

As will be outlined in chapter 8, this savings shortfall has been offset by large foreign investments in

the United States.

The Private/Public Mix

The mix of public and private spending used to

purchase amenity differs greatly from one part of the

economy to another (see table 2-2). Taken together,

public spending categories together have held a surprisingly constant share of total spending for three

decades. The combination of spending directly related to the first eight amenity groups, Defense, and

Government spending not elsewhere classified has

remained near 23 percent of all spending since 1955,

with a brief excursion to 26 percent during the VietNam War. Defense purchases fell steadily as a fraction of all current dollar spending toward the end
66

Table 2-1 .—Change in Time Needed by the Averagea American To Purchase Goods and Services

(time worked to buy item in 1972=1.0)

Item purchased 1950 1960 1970 1980 1986

Radio and television receivers . . . . . . . . . . . . .

Women’s and children’s clothing . . . . . . . . . . .

Shoes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Telephone and telegraph . . . . . . . . . . . . . . . . . .

Durable goods (average) . . . . . . . . . . . . . . . . . . .

Recreation (BEA definition) . . . . . . . . . . . . . . . .

New autos . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Admissions to spectator events . . . . . . . . . . . .

Nondurable goods (average) . . . . . . . . . . . . . . .

Food (grocery)b 

. . . . . . . . . . . . . . . . . . . . . . . . . .

Average personal consumption. . . . . . . . . . .

Transportation c 

. . . . . . . . . . . . . . . . . . . . . . . . . .

Homeowning d

. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Transit systems . . . . . . . . . . . . . . . . . . . . . . . . . .

Home renting.. . . . . . . . . . . . . . . . . . . . . . . . . . .

Drug preparations and sundries . . . . . . . . . . . .

Food (restaurants)e 

. . . . . . . . . . . . . . . . . . . . . . .

Gasoline and oil. . . . . . . . . . . . . . . . . . . . . . . . . .

Health insurance . . . . . . . . . . . . . . . . . . . . . . . . .

Airline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Personal business’ . . . . . . . . . . . . . . . . . . . . . . .

Medical care (all private) . . . . . . . . . . . . . . . . . .

Privately controlled hospitals . . . . . . . . . . . . . .

Household electricity . . . . . . . . . . . . . . . . . . . . .

Physicians . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Household gas. . . . . . . . . . . . . . . . . . . . . . . . . . .

4.09

2.02

1.47

2.21

2.42

1.37

2.18

1.19

1.80

1.80

1.75

1.39

1.72

0.85

1.72

2.40

1.25

1.98

1.28

1.82

1.28

1.15

1.11

2.22

1.13

1.73

2.20

1.36

1,24

1.63

1.66

1.21

1.72

0.99

1.34

1.35

1.35

1.20

1.40

0.94

1.40

1.80

1.02

1.54

0.91

1.34

1.09

1.05

1.06

1.53

1.05

1.46

1.13

1.07

1.07

1.03

1.09

1.06

1.10

1.05

1.06

1.06

1.05

0.99

1.05

1.02

1.05

1.11

1.01

1.11

0.90

1.03

1.02

1.02

1.04

1.02

1.03

1.01

0.63

0.71

0.85

0.66

0.88

0.86

0.90

0.87

1.04

1,06

1.00

1.02

0.94

0.81

0.94

0.89

1.01

1.89

0.72

1.23

1.09

1.08

1.13

1.19

1.12

1.66

0.39

0.55

0.68

0.72

0.75

0.80

0.81

0.87

0.90

0.94

0.96

0.99

1.01

1.02

1.03

1.04

1.07

1.08

1.08

1.17

1.20

1.21

1.23

1.25

1.28

1.82

How To Read This Table: The fraction of television and radio receivers that could have been purchased for 1 day of workin

1972 would have required 4.09 days of workto purchase in1950and 0.39 days of work to purchase inl986.-

NOTE: Thecategorles are arepresentatlve sample andnota complete set. They are ranked by growth In the ratio between 1972and 1988. For details, see table 2.4

of the National Income and Product Accounts.

ao4Average” defined by average wage and salary earnings per fulhtimeequivdent emPloYee.

bF~purchmed for off.premise consumption.

cNot including vehicle purchases.

dMofigagepayment$ Iesspayment for equity.

eFood purchse$d for on-premise consumption.

fB~kse~~ce charges, Insurance (non-health), brokers.

SOURCE: Based on U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” Survey of Currerrt Business, historical

diskettes, tablea 6.8b and 7.10, July 1987.

of the Viet Nam War (figure 2-lc) while civilian

spending increased. The trend was reversed in 1979

but Defense spending remains below the share it

held during the 1955-68 period.

In most cases, patterns of purchasing have been

comparatively stable. By long tradition, for example, government pays for roughly 85 percent of all

Education; privately supported education has not

made serious inroads. There have, however, been

some changes in the mix of public and private spending. In Transportation, though most highways and

some other transportation infrastructure are purchased publicly, many private developers have recently been required to build roads, sewers, parks,

water supplies, sidewalks, and other infrastructure

formerly provided at public expense. Table 2-2 indicates a sharp decline in government spending on

highway construction and other infrastructure. It also

shows the effect of declines in support for Housing

and parks (in the Recreation and Leisure category)

that occurred in 1980.

Time

Incomes can increase due to productivity, but time

available to spend that income remains fixed unless

the economy moves to shorter work weeks and

longer vacations. If anything, however, Americans

are working harder and longer than they have in

the recent past. Increased female participation in the

work force has meant that many chores once purchased through unpaid “housewife” time (child care,
6 7

Figure 2-3.-Share of Consumer Spending

on Services

Percent of all consumer spending (constant 1982$)

1

50

45

40

35

30

25

7r?

‘i930 1940 1950 1960 1970 1980

SOURCE: US. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts, ” historical diskettes, table 2.5,

Figure 2-4.-Savings and Investment by Type

20~

Percent of GNP

5 -‘ ~

. .

1, .-.

1 1 1 1 I 1 I

-5 ‘1 , , 1 7 , 1 r , 1 , 1 , r 1 , I 1 1 1 1 , 1 1 , r ,

1955 1960 1965 1970 1975 1980 1985

— Personal Saving s

— Business Saving s

.- Government Savings = Foreign Investment

How To Read This Table: In 1986, personal savings (investments in savings accounts, stocks, etc.) fell to 3V0 of GNP.

The U.S. economy received more investment money from

foreigners (nearfy 4°/0 of GNP in 1966). Because of the government deficit, government savings were a negative 3°/0 of GNP.

Net business savings (retained earnings, depreciation, etc.)

rose to 16°/0 of GNP.

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts)” historical diskettes, table 5,1,

care for the elderly, and even cooking) are now

bought in the market.

Technology has made it possible to move many

activities formerly available only through the marketplace into the home. The private automobile continues to replace purchased transit. The video cassette recorder and other home electronic equipment

are substituting for entertainment purchased away

from home and seem to have had an impact on

many of the social clubs and organizations that once

occupied a significant amount of American time. Cost

containment in health care, combined with the

emergence of elaborate home care equipment, has

forced many kinds of health delivery out of the hospital and into the home. Interest in self-administered

health promotion, such as diet and exercise programs, has grown. Direct marketing–using 800-

numbers, credit cards, home shopping networks, and

the United Parcel Service-has risen dramatically.

In effect, technology has “capitalized” household

time to make it more productive. But while this has

increased the productivity and decreased the burden

of housework in principle, real savings are difficult

to finds

Personal investment in self-training appears to

have increased as well, in areas related to both employment and recreation. Home information is one of

the most curious examples. In the past, information

acquired from radio and television broadcasting was

purchased primarily through unpaid investment of

a consumer’s time—waiting through commercials.

The consumer bought only the receiver. Purchases

of information in the form of cable television and

video cassettes (including rentals), however, are beginning to approach the total value of equipment

sales.

Trading Time and Money

A number of attempts have been made to understand how individuals trade personal time against

time spent in the marketplace.7 Will an individual

choose to work fewer hours and enjoy more leisure

as a result of higher wages, and is it institutionally

possible to do so? Alternatively, will a person with

a higher income feel that the effective cost of leisure

time is also high and prefer to work longer? The

choice requires an understanding of the way individuals substitute leisure time for goods, but theory

does not pretend to predict an answer and available

6J. Vanek, “Time Spent in Housework, “ Scientific American, vol. 231,

1974, pp. 116-120.

TSee J.D. Owen, Working Lives (Lexington, MA: Lexington Books,

1979); G.R. Ghez and G.S. Becker, op. cit., footnote 1. Early work on

trade-offs between leisure time and work time can be found in Lionel

Robbins, “On the Elasticity of Income in Terms of Effort,” Econornica,

No. 10, pp. 123-29, 1930. Also see discussion in ch. 11 tying income

to the desire for more or less work.
68

Table 2-2.—Government Spending as a Percent of Final Consumption in Each Amenity Group

(current dollars, in percent)

Amenity 1955 1965 1975 1985

Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 % 0.7% 1.4% 3.8%

Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 2.5 2.9 2.0

Transportation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3 13.1 11.8 9.1

Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.0 19.7 22.1 17.5

Clothing and Personal Care . . . . . . . . . . . . . . . . . . 0.0 0.0 0.0

Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82.5 84.0 85.2 82.7

Personal Business and Communication . . . . . . . . 0.0 0.0 0.0 0.0

Recreation and Leisure . . . . . . . . . . . . . . . . . . . . . . 2.2 2.9 4.2 3.3

Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0

Government n.e.c. . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0

Total (GNP). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.4 23.7 24.6 23.5

How To Reed ThlsTable: !rt1955,2.6 percent of aff final consumption of Food resulted from Federal, State, or local government purchases of goods and services related to this amenity.

NOTE: The large lncreaaa in government spendingforthe Health amanity batwean 1955andl~resultad from aradefinition ofthls category betwean 1956and 1959.

SOURCE: Based on U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” Survey of Current Bush?ess, tables 2.4,

3.15, and 3.16, July 1987.

behavioral evidence is ambiguous. An obvious shortcoming of conventional approaches to the issue is

that they assume workers do not derive any satisfaction from their jobs 8 (see ch. 11 for a discussion

of these issues).

Trenda in Time Use

There have been many changes in how time is

divided between work, including housework, and

leisure. Comparisons between time use surveys conducted in the 1930s and the 1960s, for example,

show considerable increases in work time and decreases in free time. One of the major areas of growth

in work time was housework, in particular the time

spent shopping and traveling on household errands.

It appears that the impact of the deluge of time- and

labor-saving home appliances during this period was

to lengthen rather than shorten the amount of time

spent on housework.9

Between 1965 and 1975, however, Americans experienced considerable gains in free time and declines in the amount of time spent both working for

pay and working in the home. More women were

Tibor Scitovsky, The Joyless Economy (Oxford: Oxford University

Press, 1976).

The impact of new home technologies on time use is complicated.

C.L. Long, Labor Force Under Changing Income and Employment

(Princeton, NJ: Princeton University Press, 1958), argued that improved

household technologies made women more productive in the home

and increased female leisure, thereby freeing them for more market

work. However J. Vanek, in “Time Spent in Housework,” op. cit., footnote 6, refuted the notion of increased household productivity.

working for pay, but on average they were working

considerably fewer hours than before.10 Time spent

on housework also declined considerably, by 20 percent overall. The combined decline in labor market time of about 40 minutes per day and in housework of about 14 minutes per day resulted in a 10-

percent increase in leisure time.

What were Americans doing with their increased

free time during this period? Primarily, they were

watching television. On average, TV viewing time

in 1975 totaled about 14.7 hours per week, the

equivalent of all time spent on housework and 1.5

times as much as time spent eating. TV viewing constituted 50 percent of all leisure, and more than 60

percent of all time spent on “passive leisure.”

More recent time use data, collected in 1985, suggest that over the past decade the use of time has

changed once again (see table 2-3).1 1 A sharp increase

in work time, largely the result of women working

longer hours, is mirrored by a decline in free time.12

— — IOJOhn P RObin~n, “changes in Americans’ Use Of Time: 1!%5-1975:

A Progress Report,” Communications Research Center, Cleveland State

University, August 1977.

I IJOhn p. Robinson, “Trends in Americans’ Use of Time: some PreIiminafy 1975-85 Comparisons,” Survey Research Center, University

of Maryland, December 1986.

12Data provided by the U.S. Bureau of Labor Statistics indicate that

the number of hours worked per adult grew at a slower rate than that

captured in the survey discussed here, due largely to earlier retirement

among older men, which has tended to offset the entry of women into

the U.S. work force (see discussion in ch. 11). This time use survey

however, does not capture the offsetting effects of earlier retirement,

primarily because the number of men surveyed who were over age

55 did not constitute a statistically significant sample.
69

Table 2-3.—WeekIy Time Budgets: Men and Women, 1975 and 1985 (in hours)

1975 1985 Change in hours 1975 v. 1985

Men Women Average Men Women Average Men Women Average

Contracted time . . . . . . . . . . 32.9 14.5 23.7 33.2 21.3 27.3 0.3 6.8 3.5

work . . . . . . . . . . . . . . . . . . 30.0 13.4 21.7 29.6 19.3 24.5 –0.4 5.9 2.7

travel to work . . . . . . . . . . 2.9 1.1 2.0 3.6 2.0 2.8 0.7 0.9 0.8

Committed time . . . . . . . . . . 15.6 33.1 24.3 16.6 28.6 22.6 1.0 –4.5 – 1.7

housework. . . . . . . . . . . . . 8.1 21.6 14.8 9.4 17.7 13.5 1.3 –3.9 – 1.3

child care. . . . . . . . . . . . . . 1.0 3.6 2.3 0.8 3.0 1.9 –0.2 –0.6 –0.4

shopping . . . . . . . . . . . . . . 2.7 4.1 3.4 2.8 4.1 3.5 0.1 0.0 0.1

family travel . . . . . . . . . . . 3.8 3.8 3.8 3.6 3.8 3.7 –0.2 0.0 –0.1

Personal time . . . . . . . . . . . . 75.3 78.6 76.9 75.9 79.6 77.7 1.0 0.8

eat at home. . . . . . . . . . . . 6.6 6.6 6.6 6.3 5.8 6.1 –0.3 –0.8 –0.5

eat out . . . . . . . . . . . . . . . . 3.0 1.9 2.4 2.0 –0.7 0.1 –0.3

personal care . . . . . . . . . . 65.7 70.1 67.9 67.3 71.8 69.5 1.6 1.7 1.6

Free time. . . . . . . . . . . . . . . . 44.2 41.6 42.9 42.1 38.3 40.2 –2.1 –3.3 –2.7

education . . . . . . . . . . . . . . 3.0 1.8 2.4 2.6 1.7

organization . . . . . . . . . . . 1.4

2.1 –0.4 –0.1 –0.3

2.4 1.9 1.4 1.7 1.5 0.0 –0.7 –0.4

social . . . . . . . . . . . . . . . . . 6.9 7.0 6.9 5.5 4.7 5.1 – 1.4 – 2.3 – 1.8

recreation . . . . . . . . . . . . . 4.7 4.5 4.6 5.0 4.1 4.5 0.3 –0.4 –0.1

electronic med . . . . . . . . . 18.4 15.9 17.1 17.2 15.6 16.4 –1 .2 –0.3 –0.7

other media . . . . . . . . . . . . 6.6 7.5 7.1 6.6 7.8 7.2 0.0 0.3 0.1

Ieisure travel . . . . . . . . . . . 3.2 2.5 2.9 3.8 2.7 3.3 0.6 0.2 0.4

SOURCE: John P. Robinson, “Trends in Americans’ Use of Time: Some Preliminary 1975-85 Comparisons,” Survey Research Canter, University of Maryland, December

19s6, p. 34.

All age groups of women have increased their hours

of paid work by about 6 hours a week, while there

has been relatively little change in the numbers of

hours of paid work for men. The increase among

women was offset to some extent by a decline in

hours of housework, but there was also an average

loss of more than 3 hours per week in women’s leisure time. In fact, women in most age groups have

5 to 6 hours less leisure time per week than men.

The exception is the 35 to 54 age group, where men

and women appear to have the same amount of leisure time. Ten years ago, women had more leisure

time than men in this age group.

There have also been changes in how leisure time

is used. The two largest uses of leisure time are social activities and electronic media. Time spent in

sociaI activities declined by 26 percent between 1975

and 1985. Television viewing, expressed in the table as part of “electronic media,” also declined by

varying amounts among the different age groups.

At the same time, a sharp increase in time spent in

telephone conversations was recorded. For example, time spent on the telephone doubled for men

aged 25 to 44, and increased by 10 percent for men

over 65. Although there has traditionally been a gender gap in the use of the telephone, by 1981 this

difference disappeared in the youngest age cohort.

Allowing for statistical vagaries, Americans seem

to spend more days and more hours on the job per

day than is the norm for industrialized nations. Between 1953 and 1983, average weekly hours worked

by U.S. production workers remained virtually constant, moving from 40.7 to 40.1 with only minor fluctuations. During the same period, however, hours

in other industrial countries decreased, often markedly.

Canadian workers averaged 40.1 hours in the mid

1950s against 37.1 in 1982, during which time the

Italians declined from 44.7 to 37.7 hours and Belgian averages fell from 41.6 to 31.7. Between 1965

and 1983, the French average declined from 45.8

to 39.3. The West Germans, Dutch, and British workers now work more hours than their U.S. counterparts (40.3 to 40.6 hours in 1983). The Japanese

worked 41.1 hours.13

Long commutes also constrict American leisure.

The United States shares with Australia the second

lowest percentage of people commuting to work 15

minutes or less (36 percent), exceeding only the

Netherlands (21 percent) .14

Vacation time and paid leave offer other indications of the character of Americans as workers. The

United States has, with the enactment of Martin

Luther King Day, nine national holidays, with addi-
70

tional holidays particular to some States such as

Patriots’ Day in New England. This is lower than

all but 2 of 14 OECD (Organization for Economic

Cooperation and Development) nations surveyed. ]5

Unlike most of OECD, the United States does not

impose a legal minimum of compensated leave.

Time and Consumer Decisions

The amount of free time available also affects the

quality of purchasing decisions made by Americans.

lG Conflicting forces are again at work. On the

one hand, future consumers are likely to be better

educated than those of earlier generations, and will

have a wide range of new technologies available for

gaining access to information. On the other hand,

consumers are likely to have less time to analyze

information and make major decisions. Increased incomes, dual earner households, and the growing

complexity of choice resulting from diversified product offerings means that decisions are becoming

more frequent and more difficult while less time is

available to make them.17 In fact, many retailers find

that major purchasing decisions are being made by

teenagers whose parents may have little time to

shop. ’s

While imperfect consumer decisions that result

from minimizing the time spent collecting and

analyzing information may be a rational response

by individuals, society as a whole may pay a much

greater price.19 This raises a number of real challenges for those wishing to forecast the future of consumer spending,

Qualitative Factors

The data just cited provide a crude guide to

changes in the ways Americans spend their income

——.-—.

‘sIbid., p. 89.

IWne of the Centra] axumptions in much economic analysis is that

consumers are perfectly informed and rational in the way they make

decisions, that this information is free, and that any defects in decisionmaking will continue into the future. There is now a considerable

literature discussing defects in this assumption. The defects are not particularly important if the degree or the significance of misinformation

do not change significantly over time. The discussion in ch. 3, however, shows many places where significant changes may occur in the

way consumers obtain and use information.

17S. B. Linder, The Harried Leisure C/ass (New York, NY: Columbia

University Press, 1970).

IEC. RIJS@], “The New Homemakers,” American Demo~raphks, OCtober 1985, p. 23.

l~ibor Scitovsky, op. cit., footnote 8.

and time—changes whose influence on the structure of the economy as a whole will be illustrated

in later chapters. As spending has moved further

from needs and necessities to decisions reflecting a

range of tastes and choice, it has generally been distributed in familiar ways. Americans spent about one

dollar in five on Housing in 1950 and the same fraction in 1986, in spite of the fact that real per capita

income more than doubled during the period.

Many factors in the structure of household and

government demand that affect the quality of

amenity achieved, as well as the structure of producing enterprises, are not well reflected in these

statistics. They include such things as changes in the

quality of the houses purchased, the type of food

Americans eat, and the kinds of cars they drive.

These issues are discussed at much greater length

in chapter 3, One general observation, however,

deserves attention. Many markets formerly dominated by a comparatively small number of relatively

homogeneous products are becoming “boutique”

markets, combining a wide range of specialties.

There are, of course, markets for low-priced

commodities—but the “low cost, vanilla-flavored

product” is now itself a kind of niche.

Chapter 3 will demonstrate that specialization is

replacing commodity-like products in a remarkable

variety of markets—and will suggest a number of

areas where specialization is likely to grow rapidly.

Financial packages in areas such as insurance and

investment can be designed and analyzed rapidly

by trained people working with a computer terminal. The mass media are becoming differentiated,

as specialized magazines replace such publications

as the Saturday Evening Post. An industry directory

indicates that there were 11,000 periodical titles in

1986, an increase of 60 percent from 1985.20 Broadcast television has had its market fragmented by

cable TV and video cassette recorders. Eating habits

have diversified, as both restaurants and larger groceries cater to a wider variety of tastes.

This product differentiation is driven by a variety

of factors, including the growing diversity of Amerz~he directory inc]udes titles like: Walking, Running, wildfowl @Ving, Gambling Times, Vegetarian Times, North Texas Golfer, Croquet

Today, and The Quarterly Magazine of The Rocky Mountain Elk Foundation. See S. Fatsis, “A New Leaf: Magazine Industry Flourishing,” Asse

ciated Press, Oct. 11, 1987.
71

ican households, the movement of comparatively

well-educated baby boomers into their peak earning years, and technology that allows both production of specialized products without an enormous

price premium and highly targeted advertising.21

However, it proves difficult to disentangle cause and

effect. It is likely, for example, that the demand for

tailored products was always latent but difficult to

express because of the large cost premiums involved.

Changes in taste also play a role, but are far harder

to document.

It does little good to produce for a specialized market if it is impossible to market the product within

that niche. New technology, however, has also

changed the way that producers can reach specialized markets. Printing and mailing catalogs to spe-

——Zlsee a]~ Aimee L, Stern, “The Baby Boomers Are Richer and Older,”

Business Month, October 1987, pp. 24-28.

cialty lists has become an enormously sophisticated

enterprise. The Montgomery Ward catalog has given

way to a plethora of specialized pamphlets. Active

consumer participation in the design of products, including information products, is another likely development. Homes can be designed, with the assistance of a skilled salesman, on a computer in

showrooms. Even clothing may soon be tailored at

an affordable price using robotic sewing equipment.

As later chapters will show, the shift to specialized

goods and services is having a profound impact on

the structure of the business networks that produce

amenities. In particular, technologies that appear to

have economies of scale in a situation where demand

is predictable may perform poorly in a rapidly changing market. A flexible production system may use

equipment with comparatively inexpensive “set-up”

times and small truck deliveries instead of bulk

freight, even though these systems appear to be less

productive than those they replace.

FORCES AFFECTING THE CONSUMPTION RECIPE

The changes in spending patterns just described

have been driven by a variety of forces that will continue to play a powerful role in shaping future recipes

of consumption. Demographic factors, such as

changes in the number and type of American households, the aging of the baby boom generation, and

the growing number of elderly people, will affect

spending patterns, as will changes in household income, income distribution, and prices.

The following discussion examines these forces

in some detail, in order to develop a portrait of how

Americans may spend their money in the future—

assuming that such an estimate can be derived from

data on demographics, income, and prices. This allows for the creation of “Trend” scenarios, using

standard extrapolative techniques to project spending patterns. These Trend cases will also serve as

the basis for the “Alternative” scenarios, which will

be described at some length in chapter 3. The Alternatives make assumptions about the role of new

products, new regulations, new values, and other

factors that may not be captured in standard statistical series—however clever the extrapolation technique.

Households

National averages can provide a grossly misleading view of national living standards. Every American household has its own needs and resources, and

its own recipe for happiness. Depending on its nature, economic growth can benefit some groups but

not others. One way of looking below the veil imposed by averages is to examine spending patterns

by household type and household income.22 Household analysis is also needed to understand how well

the economy is meeting the needs of a diverse population, and how it is serving those most likely to

be disadvantaged.

Trends in the Formation of Households

Characteristics of households have changed rapidly over the past two decades, following changes

Zzsee, for example, Roberta Barnes and Robert Gillingham, “Demo

graphic Effects in Demand Analysis: Estimation of the Quadratic Expenditure System Using Microdata,” The Review o/ Econornks and Stafjsfks, No. 591, 1984; and Robert Gillingham, “Measuring the Cost of

Shelter for Homeowners: Theoretical and Empirical Considerations,”

Revjew of Economjcs and Statjstjcs, vol. LXV, No. 2, 1983.
72

in both the age structure and lifestyle of the population. The average American household shrank from

3.33 people in 1960 to 2.65 in 1983 and has continued to decline, largely as a result of the striking

increase in the number of people living alone. The

number of all single households has nearly doubled

since 1960 and amounted to nearly one-quarter of

all such American households in 1983; the share of

young singles grew over 60 percent between 1972

and 1983 (see table 2-4). One in every eleven Americans now lives alone. Since the average size of a

household is shrinking, the total number of households has grown more rapidly than the U.S. population in recent decades.

At the same time, significant changes in lifestyle

have taken place. The post-war era has seen more

women join the work force, incomes rise, a growth

in divorce rates, and an increase in the number of

young Americans who have decided to live away

from home. These factors are giving a new look to

the American household. Only about one-fifth of

American households now include a working father,

Table 2-4.—The Composition of Consumer

Households: 1972, 1983, and Estimates for 2005

(In percent)

Percent of total

Household (HH) type 1972a

1983 2005

Singles . . . . . . . . . . . . . . . . . . . . 11.5%

Age 15-34 . . . . . . . . . . . . . . . . 4.2

Age 35-64 . . . . . . . . . . . . . . . . 7.4

Elderly (65+) . . . . . . . . . . . . . . . 19.2

Single . . . . . . . . . . . . . . . . . . . 8.3

Couples . . . . . . . . . . . . . . . . . 10.9

Couples . . . . . . . . . . . . . . . . . . . 58.0

No children . . . . . . . . . . . . . . 16.9

Child <6 years old . . . . . . . . 9.2

Child 6-17 years old . . . . . . . 20.8

Child >17 years old . . . . . . . 11.1

Single parent . . . . . . . . . . . . . . . 5.1

Other. . . . . . . . . . . . . . . . . . . . . . 6.2

Unrelated adults . . . . . . . . . . 1.5

Other. . . . . . . . . . . . . . . . . . . . 4.7

Total (percent) . . . . . . . . . . 100.0

Total (millions of HH) . . . 69.3

15.2%

6.9

8.3

20.3

8.9

11.4

47.4

14.0

7.4

16.0

10.0

6.6

10.5

4.0

6.5

100.0

88.8

14.7%

4.9

9.8

20.7

9.1

11.6

48.4

14.5

5.8

16.3

11.8

5.9

10.3

3.3

7.0

100.0

118.6

alg72 shu~ co~spond to “families,” as defined by the U.S. BUreSU of the census’ “Consumer Population Survey.” For the 11 household types, the differences

In 1983 share between “’families” and “consumer households” were ail less than

1 percent.

NOTE: Totals may not equal 100 due to rounding.

SOURCES: 1972 figures taken from U.S. Bureau of the Census, “Consumer Population Survey;” 1983 and 2005 figures taken from “Household Formation Program,” working paper prepared for the Office of

Technology Assessment, Washington, OC, May 1986.

a housewife, and children,23 down from nearly onethird in 1972. As table 2-4 indicates, all categories

of married couples under age 65 have declined in

share since 1972—when the oldest members of the

baby boom were 26, an age after which the traditional expectation would bean increase in the share

of married couples.

Indeed, the baby boom generation, born just after World War 11, has played a major role in reshaping American demographics, and its weight will continue to be felt as its ranks pass through different

age cohorts. In 1960, 41 percent of the population

was under the age of 21. By 1982, this figure had

fallen to 34 percent. Other age groups have become

more populous as the median age of the population

has risen.

The demographic model used for this analysis24

indicates that during the next 20 years the number

of U.S. “consumer households”25 will increase by

— — w. Rusge]], op. cit., footnote 18.

24’’ Household Formation Program,” working paper prepared for the

Office of Technology Assessment, Washington, DC, May 1986. See box

2-B and the appendix for more detail. For other projections of household composition, see U.S. Bureau of the Census, Current Population

Reports, Series P-25, No. 986, “Projections in the Number of Households and Families: 1986-2000” (Washington, DC: U.S. Government

Printing Office, 1986); John R. Pitkin and George S. Masnik, “Households and Housing Composition in the United States, 1985 to 2000: Pro

jections by a Cohort Method,” Joint Center for Housing Studies of MIT

and Harvard University, Research Report Rf8&l, Cambridge, MA, 1986;

and Patricia H. Hendershott, “Household Formation and Home Ownership: The Impact of Demographics and Taxes,” National Bureau of Economic Research, Working Paper No. 2375, Cambridge, MA, September 1987.

zSThe term “consumer household” in this analysis is used in phiCe

of the term “consumer unit” used by the U.S. Bureau of Labor Statistics. A “consumer household” is “a single person or group of persons

in a sample household related by blood, marriage, or adoption or other

legal arrangement, or who share responsibility for at least two out of

three major types of expenses-food, housing, and other expenses.”

Consumer households are divided into 11 “household types,” for which

trends and scenarios on composition and spending are developed. See

“Household Formation Program,” working paper prepared for the Office of Technology Assessment, Washington, DC, May 1986. The term

“consumer household” is used in this discussion to differentiate it from

the generic term “household,” used in other parts of ch, 2.

Consumer households (or consuming units) should not be confused

with other precise definitions of “households” or “families.” As defined

by the U.S. Bureau of the Census, “Current Population Survey” (CPS),

Technical Documentation, March 1984, a “household” is as follows:

“A household consists of all the persons who occupy a house, an apartment, or other group of rooms, or a room, which constitutes a housing

unit. A group of rooms or a single room is regarded as a housing unit

when it is occupied as separate living quarters; that is, when the occupants do not live and eat with any other person in the structure, and

when there is direct access from the outside or through a common hall”

(this does not include “group quarters” like rooming houses, military

barracks, or institutions).
73

about one-third—an average annual increase of 1.3

percent (again see table 2-4). This is a higher rate

of increase than that of total population because of

an expected continuing decline in household size.

The distribution of major consumer household categories should remain fairly stable, with the largest

change on the order of 1 percent (married couples

under age 65). The distribution of types within categories, however, will shift somewhat, due to the

aging of the baby boomers. Single consumer households age 35 to 64 and married couples with children over 17—the two groups in which baby boomers will be counted most frequently in 2005—will

increase more than any other type; at the same time,

young singles and couples with children under 6 will

lose share.2G

Spending by Type of Consumer Household

Data describing expenditure by type of consumer

household are sparse. The primary source is the U.S.

Bureau of Labor Statistics’ “Consumer Expenditure

Survey” (CES), which uses only a small sample and

suffers from a number of other drawbacks—there

was no survey taken between 1972/73 and 1982/83.

If the CES data are used in an aggregated form, however, they give reasonable results, and the 1982/83

survey is used as the basic household database in

this study .27

Table 2-5 shows how different consumer households spent their money in 1972/73 and 1982/83.

Housing costs represent a significant fraction of the

spending of couples with young children, singles,

and single parents; housing captured the highest fraction of spending among single elderly households.

Not surprisingly, smaller households spend more per

capita on housing than their larger counterparts. The

share of spending devoted to housing has increased

The consumer household is also distinct from the CPS “family,” which

is defined as “a group of two persons or more (one of whom is the house

holder) residing together and related by birth, marriage, or adoption.”

There may be several families in a single household.

ZG]t should be noted that the number 6f elderly households will begin to increase rapidly after 2011, 6 years beyond the scope of the

scenarios used in this analysis.

ZTExpenditurecategori~ for consumer households are taken from the

“Consumer Expenditure Survey,” and are not an exact match with the

amenity categories outlined earlier in this chapter. See “Consumer Expenditure Demand Projection Program,” working paper prepared for

the Office of Technology Assessment, April 1986. For more detail, see

the appendix.

since the 1972/73 CES survey for all but two consumer household types.

Per-person expenditures on food are high in single consumer households, which do not benefit from

economies of scale in food preparation. Within the

food category, young singles and childless couples

both spend far more on food away from home than

their larger and/or older counterparts, although all

households spend a smaller fraction of their incomes

eating out than cooking at home. Still, in households

headed by someone 34 years of age or less, almost

half of all expenditures on food are away from home,

compared with 27 percent in the over 65 group. Similarly, per capita spending for away-from-home entertainment is higher for younger singles and childless couples than for the elderly. On the other hand,

spending on air fares, hotels and motels, home electronic and other devices, and alcohol increased for

every household type.

Out-of-pocket medical expenses increased sharply

for the elderly during the 1970s and early 1980s,

and remain much higher than for other cohorts;

health care also became a greater burden for single

parents. Out-of-pocket spending for education increased for most consumer household types; the increases were particularly dramatic for young singles

and single parents, while parents with children of

college age continued to spend more on education

than any other group. All household types increased

the percentage of spending on personal business and

communication, while the converse was true for

spending for clothing and personal care.

The proportionately greater spending that the single elderly devote to housing and medical care reduces the money they can spend elsewhere. Not

surprisingly, the single elderly, a group with comparatively little mobility, devote fewer resources to

transportation and recreation and leisure than other

groups, while the share going to personal business—

largely time spent on the telephone—is greater than

that of any other.

Income

Household income affects not only the level but

also the type of expenditures made by Americans.

As incomes increase, families typically spend a

smaller proportion of their income on food—though
74

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .
75

in absolute terms, the highest income group spends

twice as much per family member for groceries as

the lowest, and eight times more for meals at restaurants.28 Wealthier families also devote more of their

resources to clothing, education, and recreation,

while lower income groups spend comparatively

more on health care. Such differences reflect the fact

that as incomes fall, basic expenditures must be

maintained while such “luxuries” as new clothes and

recreation are cut back.

Tracing spending patterns by income and income

cohort is needed to understand how changes in national income may affect spending, and also to understand the fate of low income families who may

be hurt by changes in income distribution. It is difficult, however, to disentangle the effects of social

class and fashion on spending from the effects of income. Given the lack of data, a snapshot of spending in one year (cross-sectional data) must often be

used to anticipate future changes over time—an admittedly perilous assumption for extrapolation. It is

not obvious, for example, that if future economic

growth gave middle class families purchasing power

equivalent to that of wealthy households today, they

would spend the income in the same way as today’s

rich.

Trends in Income and Income Distribution

The long upward trend in median family income

per family member stopped in the late 1960s (see

figure 2-5). While the income available for spending

has remained roughly constant, there has been a

striking change in the distribution of income among

families since the mid 1970s. The average incomes

of all but the wealthiest families fell between 1977

and 1984, while those of families in the very highest income groups increased sharply (see table 2-6).

Indeed, only the wealthiest 10 percent of American

families enjoyed any growth in average income between 1977 and 1984. In effect, the wealthiest 10

zsThis study divides the 11 consumer household types introduced

in the previous discussion into 7 income cohorts. The cohorts are selected

by first ranking all consumer households by “income per consumer

household member” (e.g., a family of four with a household income

of $20,000 would have an “income per consumer household member”

of $5,000); this ranked set is then divided into 7 groups consisting of

equal numbers of consumer households. Expenditure categories are

taken from the “Consumer Expenditure Survey,” developed by the Bureau of Labor Statistics at the U.S. Department of Labor. See “Consumer

Expenditure Demand Projection Program,” ibid.

12

1

0.8

0.6

Figure 2-5.-Changes in Family Income

(in 1984$)

Index where 1972 = 10

1

— Median Family Income -

--- Median Family Income

($27,599 in 1972) Per Family Member

($7,818 in 1972)

How To Read This Table: Median family income (half of all

families earn more and half earn less than the “median” income) and median family income per family member (median

income divided by the number of people in each family) both

approximately doubled between 1950 to 1972, when growth

stopped abruptly. In spite of growth in the 1960s, median income returned to 1972 levels only in 1986.

SOURCE: U.S. Bureau of the Census, Current Population Reports, Series P60,

No. 150, Money Income of Households, Families, and Persons in the

UnRed States: 7$k75 (Washington, DC: U.S. Government Printing Office,

1986).

percent of U.S. families enjoyed all of the increase

in economic output of this period. The U.S. Congressional Budget Office (CBO) forecast shown in table

2-6 anticipates real income growth for nearly all family groups between 1984 and 1988, though the rate

of growth will be greatest within the wealthiest

decile.29

The sharp differences in rates of income growth

mean that the wealthiest families are capturing a

growing share of all income available for personal

spending. The wealthiest 20 percent of all families

now command 50 percent of U.S. after-tax family

income. Assuming that this trend continues, half the

work of anticipating how Americans will spend their

money during the next few decades involves anticipating the spending habits of this wealthiest quintile. The share of all national income earned by the

wealthiest 1 percent of all households increased 4

percentage points between 1977 and 1984 (see figure 2-6); the share of the wealthiest groups is expected to increase through 1988, even after accounting for the effects of 1986 tax reform.30

NU.S. congressional Budget Office, The Changing Distribution Of Ftieraf Taxes: ]975-1990 (Washington, DC: U.S. Government Printing Office, October 1987).

30(J.5. Congressional Budget Office, ibid., P. TO.
76

tober 1987).

1

:

4

;

;

9

10

ToP 5%

Top 1%

Figure 2-6.-Distribution of Family

Income After Taxes

t

J

I

J

J

1 Income decile I

1

Upper income cohorts

O 5 10 15 20 25 80 85 40

Percent of all family income

m 1977 = 1988

How To Read This Table: In 1977, the average family in the

1 % of families with the highest incomes received about 7°/0

of all family income, while in 1988 these families are expected

to receive 11 % of all family income. On the other hand, there

was no significant change in the share of income received

by the families in the eighth income decile, which remained

close to 10°/0 of all family income. Families are placed in

“deciles” as follows: all families are ranked by their total income; the bottom 10°/0 are in the first decile, the next 10°/0

are in the second decile, etc. (the incomes reported assume

that corporate taxes are allocated to capital and not labor

income).

SOURCE: U.S. Congress, Congressional Budget Off Ice, “The Changing Dlstribu.

tion of Federal Taxes: 1975-1990,” Washington, DC, October 1987.

Diverging paths of income growth represents a

reversal of an earlier trend. Between 1950 and 1967,

for example, the wealthiest 20 percent of American

families actually lost their share of total U.S. personal

income, dropping from 42.7 to 40.4 percent, while

the shares of all other income groups—particularly

those of the lowest 40 percent-increased. Since that

time, the trend has been toward increased share

among the upper income groups and a decline elsewhere; the pace of this movement doubled during

the 1979-84 period.31

Changes in the distribution of family incomes depend on changes in several different areas (discussed

below):32

● the distribution of individual wage and salary

earnings,

sl~~ard S. mIouS, Linda H. ffirande, and Brian W. Cashell, “Middle

Class Erosion and Growing Income Inequality: Fact or Fiction?” U.S.

Congressional Research Service, Library of Congress Report No. 85-203

E, Nov. 28, 1985. Trends in income distribution between 1979 and 1984

must be treated with caution since they represent different points in

the business cycle. See also the discussion on page 376.

32AII of these factors are discussed at greater length in ch. II.
77

● the number of wage earners in each family (a

family may have a high income by combining

a number of low wages),

● the distribution of capital earnings, and

● the distribution of transfer payments and other

earnings.

While a considerable amount of work has been and

is being done to disentangle these factors, much remains unknown.33 Given available data, it appears

that growing inequality of family incomes is driven

primarily by shifting demographics and inequality

in capital income, rather than by inequality in wage

and salary earnings of workers (see figure 2-7).34 The

“Gini” coefficient that measures wage inequality indicates little change since 1967, while inequality in

—..——

ssNumerous studies argue that the distribution of American income

is becoming less equal, propelled by the arguments made in Barry Bluestone and Bennett Harrison, The Deirrdustriaiization of America (New

York, NY: Basic Books, 1982). Recent discussions include, among others,

Lester C. Thurow, “A Surge in Inequality,” Scientific American, vol.

256, No. 5, May 1987, pp. 30-37; Gary Burtless, “Inequality in America: Where Do We Stand?” The Brookings Review, summer 1987, pp.

9-16; Kathryn L. Bradbury, “The Shrinking Middle Class,” New England Economic Review, Federal Reserve Bank of Boston, September/October 1986; and J. Rose, The American Profile Paster (New York,

NY: Pantheon Books, 1986).

Others argue that such conclusions should not be drawn so quickly.

Neal H. Rosenthal, in “The Shrinking Middle Class: Myth or Reality?”

Month/y Labor Review, March 1985, pp. 3-10, indicated that trends in

weekly wage and earnings (as distinct from income) measured by occupation point to movement away from both lower and middle wage

groups and into the upper third. Other studies finding that income distribution is not growing less equal include Marvin H. Kosters and Murray Ross, “Deficits, Taxes, and Economic Adjustments,” in American

Enterprise Institute, Contemporary Economic Problems, Philip Cagan

(cd.), Washington, DC, 1987; Sar. A. Levitan and Peter E. Carlson, “Middle Class Shrinkage?” Across the Board, October 1984, pp. 55-59; and

Robert J. samuelson, “Middle-Class Media Myth,” Nadonal.fournal, Dec.

31, 1983, Pp. 2673-2678.

Attempts have been made to reconcile these conflicting views. Robert

Z. Lawrence, in “Sectoral Shifts and the Size of the Middle Class,” The

Brookirrgs Review, fall 1984, pp. 3-11, argued that growing unequal

distribution of income between 1969 and 1983 was real, but was due

to the demographic effects of young baby boomers entering the work

force and not to the wage effects of an employment shift to lower paying industries. Patrick J. Mchfahon and John H. Tschetter, in “The Declining Middle Class: A Further Analysis,” Month/y Labor Review, September

1986, pp. 22-27, found that while the proportion of all jobs in highwage occupations (again, as distinct from income) increased during the

1973-82 period, the earnings distribution within those occupations grew

somewhat poorer.

For more on this subject, see U.S. Congressional Research Service,

“Middle Class Decline? Bibliography-in-Brief, 1983-1986,” No. 87-68 L,

Washington, DC, January 1987.

JiMcKin]ey L. B]ackburn and David E. Bloom, “The Effects of Technological Change on Earnings and Income Inequality in the United

States,” National Bureau of Economic Research, working paper No. 2337,

Cambridge, MA, August 1987.

Figure 2-7.-income Distribution from

Three Different Perspectives

048 - Earnings of Individual workers

0,46-~

0,44 j

I

0,42 - Total family income (from ali sources)

0 <4 - 1

0,38 -

[

036-

Totai family Income (all sources) per adult famiiy member

0!34 -

1 , I

0,32 ! 1 1 T I I 1 I 1 1 I 1 I 1 I 1 1

1967 1972 1977 1982

SOURCE: McKinley L. Blackburn and David E. Bloom, “The Effects of Technological Change on Earnings and Income Inequality in the United

States,” Nationai Bureau of Economic Research, working paper No.

2337, Cambridge, MA, August 1987.

family income (which includes capital income) has

increased sharply since 1980.35

These findings are based on data from the U.S.

Bureau of the Census that brings with it a limitation in analysis of income distribution: the actual income of the wealthiest families is not reported.

Wealthy families report only that their incomes are

above some threshold level, or “top code”-a level

that has increased at irregular intervals over the last

decade. Since much income growth has occurred in

the wealthiest families, it is obvious that the Census

data introduces some distortion.

Using data which avoids the “threshold” difficulty,

the CBO analysis discussed above suggests that between 1977 and 1984, the Gini coefficients for aftertax income increased from 0.42 to 0.47; before taxes,

the coefficients were 0.45 in 1977 and 0.48 in 1984.3

6

sSThe Gini coefficient measures inequality. A coefficient Of O meZNIS

perfect equality, a coefficient of 1 would mean that all earnings or income is received by one family.

JGU.S. Congre s sional] Budget Office, op. cit., footnote 29. The pre-tax

Gini coefficients assume that corporate income taxis allocated to capital earnings.
78

The inclusion of the income of wealthier families

leads to a coefficient considerably higher than those

shown in figure 2-7,

Wage and Salary Earnings of Individuals.—

Technical change, shifts in industry structure, changing trade patterns, changing management strategies,

an increase in part-time work, and a variety of other

factors all play a role in determining individual wage

and salary earnings; the issue is examined more

thoroughly in chapter 11. In brief, there appears to

be no net change in the earnings of individuals (see

the top line in figure 2-7). This results in part because the convergence of male and female wages

has removed a major source of inequality .37

The CBO data, which include the distribution of

wages and salaries among high-income groups, indicates that high-income families are increasing their

total share of all wage income as well as their share

of total income. The wealthiest 10 percent of families increased their share of all labor income from

29 percent in 1977 to 32 percent in 1984.38 Unfortunately, it is impossible to use the data to separate

differences in labor earnings per family from differences in earnings by each family member.

Family Composition.—Changes in the composition of families have had a major effect on the distribution of family income. Families with only one

earner, particularly those headed by women with

children, have significantly lower incomes than those

with multiple earners.39 This alone contributes to

family income inequality, Indeed, the shrinking size

of households has produced a decline in the number of earners per household in recent years. The

average household had 1.16 earners in 1979, but

only 0.94 earners in 1984.40 Inequality is further increased by a strong correlation between the wages

earned by individuals in the same family. A man

earning the minimum wage is most likely to be married to a person earning the minimum wage, while

virtually no men earning more than $75,000 in 1984

were married to working women making less than

$10,000 a year.41

Taken together, demographic factors had the effect of increasing inequality in family income since

1980, even while there was no greater inequality in

the earnings of individuals (the middle line in figure 2-7). When family income is expressed as income

per family member, inequality has grown even more

rapidly (the bottom line in figure 2-7).

Capital Income.—Income from capital sources is

distributed much less equally than income from labor. Not only is capital (or “unearned”) income becoming a larger share of all family income, but the

way this income is allocated among families is becoming less equal (see figure 2-8). In 1984, the

wealthiest 10 percent of all families had 63 percent

of all income from capital, and the wealthiest 1 percent of families had 37 percent.42 Similarly, ranked

by net worth, the bottom 26 percent of American

households owned only 10 percent of total net worth

in 1984, while the top 12 percent of households

owned 38 percent of total net worth. 43

4ZU.S, congressjona] Budget Office, op. cit., footnote 29.

43u.s. f)epartrnent of Commerce, Bureau of the Census, “Household

Weafth and Asset Ownership: 1984,” Current Population Reports, Household Economic Studies, series P-70, No. 7.

Figure 2-8.-Change in the Share of

Family Income: 1977 to 1988 (change in

percentage share of all personal income)

How To Read This Table: The share of all income earned by

families in the 10th income decile increased over 4 percentage points between 1977 and 1966. The share of families in

the 6th income decile fell by about 1/2 of a percentage point.

The incomes reported assume that corporate taxes are

allocated to capital and not labor income.

SOURCE: U.S. Congress, Congressional Budget Off Ice, ‘“The Changing Dlstrfbutlon of Federal Taxes: 1975-1990,” Washington, DC, October 1987.
79

The Influence of Income Distribution

on National Spending

The impact that changing income distribution

could have on expenditures is shown in table 2-7.

Two alternatives are explored: one, called the “middle” case, in which it is assumed that in 2005 all

consumer households are in the middle income cohort; and another, the “extremes” case, in which consumer households are divided equally between the

two highest and two lowest income cohorts, with

none in the middle.44

440f the 7 income cohorts introduced earlier in this chapter, sdected

by ranking all consumer households by “income per consumer household member” and dividing the ranked set into 7 heptiles consisting

of equal numbers of consumer households, the fourth heptile is the

“middle.” Expenditure categories are taken from the “Consumer Expenditure Survey, ” developed by the Bureau of Labor Statistics at the

U.S. Department of Labor. See “Consumer Expenditure Demand Projection Program,” op. cit., footnote 27.

The results suggest that if equality in income distribution is increased, more would be spent on food,

housing (mostly home maintenance), transportation

(mostly auto-related), and recreation (goods). Less

would be spent on clothing and personal care (with

the exception of non-apparel services like health

clubs and beauty parlors) and personal business

(other than phone use). Of the amenities listed here,

only spending on personal business would change

significantly.

If there were less equality—the extreme case—

proportionally more would be spent on clothing and

personal care and recreation (mostly services), and

less on transportation (especially new cars, though

air fares would also grow). There would be little

difference among the other amenity categories,

though increased spending on household maintenance services and appliances would be offset by

Table 2.7.—The Potential Impact of Changing Income Distribution on Personal Consumer Expenditures

in the Year 2005 (assuming 3 percent annual economic growth, no change indexed to 100.0)

Change in spending on Change in spending on

selected amenities or items selected amenities or items

Amenity or item purchased Middle b Extremesc Amenity or item purchased Middle b Extremesc

Food . . . . . . . . . . . . . . . . . . . . . . . . 104.0 98.7 Clothing and Personal Care . . . . 94.2 106.9

Food and beverages at home. 105.4 98.7

Food and beverages away

from home . . . . . . . . . . . . . . . 102.3 98.6

Tobacco . . . . . . . . . . . . . . . . . . . 98.5 99.1

Housing . . . . . . . . . . . . . . . . . . . . . 101.9 100.9

Owner occupied . . . . . . . . . . . . 104.2 93.2

Renters. . . . . . . . . . . . . . . . . . . . 87.3 106.3

Maintenance services . . . . . . . 112.7 154.8

Maintenance commodities . . .

Tenants’ insurance. . . . . . . . . .

House furnishings . . . . . . . . . .

House appliances. . . . . . . . . . .

Water and sewer . . . . . . . . . . .

Transportation. . . . . . . . . . . . . . . .

New vehicles. . . . . . . . . . . . . . .

Used vehicles . . . . . . . . . . . . . .

Vehicle maintenance . . . . . . . .

Other private transportation . .

Air fare . . . . . . . . . . . . . . . . . . . .

Other public transportation . .

111.8

105.0

107.9

97.0

101.3

104.1

103.8

113.1

110.6

113.0

91.3

84.7

86.6

99.8

98.4

132.8

112.6

90.0

73.8

90.7

89.3

108.5

95.8

Personal care commodities . . 92.9 109.8

Personal care services . . . . . . 113.5 107.2

Men’s and boys’ clothing . . . . 86.8 105.8

Women’s and girls’

clothing . . . . . . . . . . . . . . . . . 98.4 105.1

Other (including jewelry). . . . . 82.9 106.1

Footwear . . . . . . . . . . . . . . . . . . 94.2 114.1

Apparel services. . . . . . . . . . . . 93.7 108.9

Personal Business and

Communication . . . . . . . . . . .

Telephone . . . . . . . . . . . . . . . . .

Personal business . . . . . . . . . .

Recreation and Leisure . . . . . . . .

Entertainment services . . . . . .

Entertainment

commodities . . . . . . . . . . . . .

TV and sound . . . . . . . . . . . . . .

Lodging . . . . . . . . . . . . . . . . . . .

83.8

103.7

77.5

104.0

91.9

117.3

110.7

98.0

100.4

100.3

100.4

103.2

120.3

88.9

105.1

96.6

How To Read This Table: Assuming 3 percent annual economic growth through 2005, in an economy where all households

earned an income in the “middle” cohort (#4 of 7, where 7 cohort ranges are divided into equal numbers of households),

the spending index for food would be 104.O—in other words, Americans would purchase 4 percent more food than would

be the case with no change in income distribution. If all households were divided between the two lowest and two highest

cohorts (“extremes”), the spending index on food would be 98.7, or 1.3 percent less than the “no change” scenario.

~he totals for PCE on amenity groups include certain items which have not been listed separately because the 2005 scenarios assume that expenditures on them

would remain constant even with changing income distribution. See the appendix for details.

bAss ume s all households In the middle inCOI?W cohort (#a of 7).

cAssumes households evenly distributed between two low and two high hICOITIe cohorts (#l, 2, & 7, of 7).

SOURCE: U.S. Congress, Office of Technology Assessment, “Consumer Expenditure Demand Projection Program,” April 1966, based on data provided by the U.S. Department of Labr, Bureau of Labor Statistics; the U.S. Department of Commerce, Bureaus of Census and of Economic Analysis; and the U.S. Department of

Health and Human Services, Social Security Administration.
80

declines in maintenance commodities and new

homes.

Comparing the middle case with the extremes, an

economy consisting entirely of middle income consumer households would spend more on home purchasing, food (particularly food at restaurants), vehicles, and entertainment commodities. Households

would also enjoy more of their entertainment at

home.

Prices

The response of consumers to changes in price

has received considerable theoretical attention, but

applications of the theory are often frustrated by the

scarcity of data. Complex interactive relationships

(cross elasticities) make the problem difficult–consumption of beef may decline even when beef prices

remain constant if chicken prices fall. Looking to the

future, price effects pose an even greater dilemma,

due to both the great difficulty of forecasting relative prices and the need to consider such issues as:

will spending for travel decline if the price of communications falls?

In practical terms, these issues can only be handled by examining particular amenity networks in

detail—a task undertaken in chapter 3. For present

purposes, however, it is useful to have a feeling for

the influence that a continuation of recent price

trends might have on spending patterns. A complete

set of recent price elasticities, constructed in a way

that accounts for demographic effects, provides the

basis of this analysis (again see the appendix).45

45P, Devine, “FOreCasting Personal Consumption Expenditures From

Cross-Section and Time-Series Data,” Ph.D. Dissertation, University of

Maryland, 1983.

Demographics, Income, and Price:

The Combined Effect

The possible effects of changes in household structure, income, and prices on household expenditure

are shown in table 2-8. The table shows relative

changes, not absolute ones. Overall, Americans would

spend more on two-thirds of the items identified.

The figures assume annual 3 percent growth in

GNP over the next 20 years, and that future household spending patterns can be estimated from current ones. Because incomes would increase rapidly

in a high-growth economy, most of the changes presented in the table are caused by income effects

rather than demographic ones (changes in population and household structure). If economic growth

were slower, demographic effects would become

more important.

The biggest change in share of spending comes

in the food amenity, which loses 5,26 percentage

points as a share of national spending. Most of this

results from declines in grocery eating; eating out

holds a virtually constant share. Under the assumptions of these calculations, spending on recreation

would capture a growing fraction of all consumer

spending because of both price and income effects.

Changes in household types would result in some

increase in housing expenditures, but the overall effect would be more than compensated for by changes

in income. Income increases would also lead to sharp

growth in demand for restaurant eating, air travel,

clothing, personal business, and entertainment services, while Americans would spend proportionally

less on apartment rentals, smoking, and time spent

on the telephone.

ALTERNATIVES FOR THE FUTURE

Constructing Scenarios households, income, and prices can simply be extrapolated into the future-the “Trend” scenarios (see

The remainder of this chapter describes alterna- te appendix). Under these assumptions, spending

tive hypotheses about the ways consumers might for 2005 can account for an aging population by asspend their money (and instruct their governments suming that the aging baby boomers in a given into spend money in their name) in 2005. One such come class will spend money in the same way as

hypothesis is that things will continue much as they similar groups spend money today. There is, howare now, and that the statistics already compiled on ever, a qualification: the older baby boomers will
81

Table 2-8.-The Effects of Demographic Change, Income Growth, and Price Change

on U.S. Personal Consumption in 2005 (changes in percent of all spending)

Percent change from 1983 due to various factors

Amenity or item purchased All Demographic Income Price Interactive

Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Food and beverages at home . . . . . . . . . . . .

Food and beverages away from home . . . . .

Tobacco. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Owner occupied. . . . . . . . . . . . . . . . . . . . . . . .

Renters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Maintenance services . . . . . . . . . . . . . . . . . . .

Maintenance commodities . . . . . . . . . . . . . . .

Tenants insurance ..,. . . . . . . . . . . . . . . . . . .

House furnishings . . . . . . . . . . . . . . . . . . . . . .

House appliances . . . . . . . . . . . . . . . . . . . . . .

Water and sewer . . . . . . . . . . . . . . . . . . . . . . .

Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . .

New vehicles . . . . . . . . . . . . . . . . . . . . . . . . . .

Used vehicles . . . . . . . . . . . . . . . . . . . . . . . . . .

Vehicle maintenance. . . . . . . . . . . . . . . . . . . .

Other private transportation. . . . . . . . . . . . . .

Airfare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other public transportation . . . . . . . . . . . . . .

Clothing and Personal Care . . . . . . . . . . . . . . . .

Personal care commodities . . . . . . . . . . . . . .

Personal care services . . . . . . . . . . . . . . . . . .

Men’s and boys’ clothing . . . . . . . . . . . . . . . .

Women’s and girls’ clothing . . . . . . . . . . . . .

Other (including jewelry) . . . . . . . . . . . . . . . .

Footwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Apparel services . . . . . . . . . . . . . . . . . . . . . . .

Personal Business and Communication . . . . .

Telephone . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Personal business . . . . . . . . . . . . . . . . . . . . . .

Recreation and Leisure . . . . . . . . . . . . . . . . . . . .

Entertainment services . . . . . . . . . . . . . . . . . .

Entertainment commodities . . . . . . . . . . . . . .

TV and sound . . . . . . . . . . . . . . . . . . . . . . . . . .

Lodging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

–5.26 0.07

–4,41 0.04

–0.15 0.03

–0.70 0.00

–0.48 0.40

0.28 0.19

–1,91 0.32

0.01 0.01

–0.49 0.02

–0,02 0.04

0.95 0.03

0.71 0.01

–0.01 0.01

–0.51 0.06

–0.33 0.03

–0.24 0.01

–0.13 0.04

–0.02 0.00

0.37 0.00

–0.17 0.00

1.84 0.10

0.06 0.00

0.11 0.01

0.39 0.02

0.94 0.06

0.24 0.01

0.03 0.01

0.06 0.00

0.95 0.07

0.17 0.02

0.78 0.09

3.47 0.10

1.26 0.06

0.89 0.02

0.83 0.00

0.49 0.02

—

–3.3 7

–4.0 5

1.31

–0.6 3

–1.9 1

0.00

–1.81

0.10

–0.30

0.02

0.06

0.17

–0.15

0.38

–0.00

0.05

–0.06

–0.01

0.37

0.02

1.63

0.06

–0.02

0.38

0.87

0.25

0.02

0.06

1.26

–0.35

1.61

2.02

1.43

0.20

0.11

0.28

–1.8 7

–0.4 5

–1.3 0

–0.1 1

1.72

0.47

0.19

–0.0 7

–0.2 4

–0.0 9

0.84

0.47

0.16

–0.9 6

–0.3 3

–0.2 9

–0.1 4

–0.0 1

–0.0 1

–0.1 8

0.01

–0.0 0

0.11

–0.0 2

–0.0 5

–0.0 1

–0.0 1

–0.0 0

–0.1 6

0.61

–0.7 7

1.26

–0.2 1

0.64

0.68

0.14

–0.10

0.06

–0.19

0.04

0.11

0.00

0.03

–0.01

0.03

0.01

0.02

0.06

–0.03

0.02

–0.02

0.01

0.04

0.00

–0.00

–0.00

0.10

0.00

0.01

0.01

0.05

0.01

0.01

0.00

–0.23

–0.08

–0.15

0.09

–0.02

0.03

0.03

0.06

How To Read This Table: Assuming 3 percent annual economic growth through 2005,2005 household distribution, and prices

and incomes adjusted to this growth, the percentage of American spending on food eaten at home (as a share of the items

Iisted here-roughly three-quarters of all personal spending) would decline by 4.41 percentage points. Changing incomes

would account for a drop of 4.05 points and changing prices would account for a 0.45 point drop, while demographic changes

would exert a slight positive trend of O.04 percentage points; the effect of interaction between these factors would be a

rise of O.06.

NOTES This table estimates how U.S. consumer spending on selected items and amenities could change, and attempts to isolate what factors may contribute to that

change. The “All’ column assumes 30/0 annual economic growth through 2005, 2005 household structure as developed earlier in this chapter, and a set of possible price changes for these items in 2Q05 as outlined in the appendix. Incomes are then raised by 35.50/., the level at which Americans will have enough purchasing power to satisfy the estimate of personal spending in 2005 (also developed in the appendix).

For individual components of change”

● For demographic changes in 2005: see table 2-4; price and income held at 1983 levels.

● For income changes In 2005: incomes raised by 35.5 percent; demographics and prices held at 1983 levels.

● For price changes in 2G05: see the appendix; demographics and income held at 1963 levels.

The effects of these three components that cannot be traced individually but are rather the result of a combination of factors are captured in the “Interactive’ ’column

SOURCE U S Congress, Office of Technology Assessment, “Consumer Expenditure Demand Projection Program,” April 1986, based on data provided by the U.S. Department of Labor, Bureau of Labor Statistics; the U.S. Department of Commerce, Bureaus of Census and of Economic Analysis; and the US Department of

Health and Human Services, Social Security Administration
82

have had life-histories significantly different from

older Americans today. They will be better educated

and healthier, and will have a far higher share of

women retired from work than is currently the case.

It is extremely difficult to predict whether this effect

will result in new spending patterns.4G Similarly,

America’s ethnic composition will change. Between

now and 2000, roughly one-half of the increase in

the U.S. population will be from minority ethnic

groups.47 These developments pose problems for

analyzing future spending patterns, because it is

nearly impossible to allow for the effects of changing ethnic composition.

For these and many other reasons already discussed, trends can be misleading during periods of

fundamental change. The new environment in

which the economy operates allows for a number

of major shifts in the way households elect to achieve

amenity through private and public choice. Given

the wide array of possible choices, and the enormous

range of uncertainties about the cost and capability

of emerging technology, there is no completely satisfactory method for outlining the possibilities, nor any

mathematical technique for producing them.

Potential changes are represented though an illustrative set of “Alternative” scenarios, which will

be developed further in chapter 3. These scenarios

were designed with the help of individuals familiar

with the operation of the eight major amenity categories (Food, Health, Education, etc.), who were

charged with describing a way that new technology

could lead to a significant increase in productivity

during the next 20 years given appropriate changes

in regulation, information flows, and other factors.

Along with the Trend scenarios, the Alternatives

share common assumptions about such factors as

population growth, rates of consumer household formation, and rates of income and GNP growth (see

box 2-B and the appendix for details).

dGWilliam &er and Eric H. Shaw, “How Older Americans Spend Their

Money,” American Demographics, September 1987, p. 41.

47 U.S. Bureau of the Census, Statistic/Abstract of the United States:

1987 (107th cd.), Washington, DC, 1986. Changing ethnic composition,

of course, has occurred for some time; the U.S. Bureau of the Census

has recently reported that the U.S. Hispanic population has increased

by 30 percent since 1980, as opposed to a 6-percent increase in the

non-Hispanic population. See U.S. Bureau of the Census, “The Hispanic

Population in the United States: March 1986 and 1987,” Current Population Reports, Series P-20, No. 416, Washington, DC, August 1987.

Given these scenarios, two patterns of national income growth are examined: a pessimistic assumption, represented by 1.5 percent annual growth in

GNP (as in the late 1970s and early 1980s); and an

optimistic assumption, represented by 3 percent per

year GNP growth. This range is plainly not meant

to be a forecast, but rather is designed to bracket

a wide yet reasonable range of possibilities.

In principle, it is possible to develop a closed, internally consistent model that can accommodate

these connections. It proves extremely difficult to use

such models in practice when exploring the possibility of significant changes in technology or in private and public management during a period of 20

years. While the analysis presented throughout this

work is consistent in that the income generated by

output is equal to the money spent on final and intermediate products, it is not based on a closed

model of the economy.48

Summarizing the Results

The scenarios are summarized in table 2-9; chapter 3 and the appendix provide further detail. The

proportion of expenditure on Food goes down no

matter what growth rate or assumption about technology is used—as does, to a lesser extent, that spent

on Transportation. On the other hand, more is spent

on Recreation and Leisure in all cases, and both

Clothing and Personal Care (mostly clothing) and

Personal Business and Communication gain in all

but the 1.5 percent Trend scenario (in which they

hold the same share as 1983).

Considering first the 3 percent scenarios, Food purchases are expected to decline as a fraction of all

spending, though more slowly than in the past

largely because of an increase in the proportion of

more expensive food eaten away from home. The

Trend and Alternative scenarios differ considerably

in estimates of future Health spending. The Trend

assessment shows spending for Health reaching 14

percent of the total in 2005 while the Alternative scenario suggests 11 percent, due to greater reliance

on preventative (as opposed to curative) techniques.

d~onslstent Sets of forecasts were developed by beginning with rough

estimates of structural change in production and productivity, using the

resulting GNP growth to estimate purchasing, and then using this purchasing to estimate production and GNP. The estimates are combined

explicitly in ch. 13.
83

Box 2-B.—Basic Strategies in Developing Scenarios

1. Demographics

Population was forecast using a version of the projection model used by the U.S. Social Security Administration,

] modified for use on a personal computer.z The projection includes an allowance for illegal immigration

somewhat higher than that used by the U.S. Bureau of Census’ “middle series. “3 For more detail, see the appendix.

Estimates of the number of people in each age group can be converted to estimates of household types given

assumptions about future marriage and divorce rates. Annual marriage rates have remained within ranges of

9.9 to 10.9 per thousand since 1968, and of 10.2 to 10.6 since 1978. Annual divorce rates, after rising consistently between 1960 and 1979, have since remained fairly constant at around 5.0 per thousand. The hypothesis

used here is that these recent steady rates will continue into the foreseeable future. Assuming that the likelihood

that a person of a given age and sex becomes a member of any one type of household is the same in the year

2005 as it was in 1984, the number and type of future households can then be calculated (see table 2-4).4

2. GNP Growth

Two rates of gross national product (GNP) growth are considered, one based on the optimistic assumption

that rates of productivity growth characterizing the years 1965 to 1975 can be recovered, and one based on the

assumption that productivity would grow at the much slower 1975 to 1985 rates. Together with assumptions

about size of the work force and other factors (discussed in more detail in ch. 13), these result in GNP growth

rates of approximately 1.5 and 3 percent per year.

3. Allocating GNP to Consumption

All the cases considered in this analysis share the assumption that the sum of personal consumption and

government spending will remain at a constant share of 85 percent of GNP. This ratio has not varied by more

than 3 percentage points for nearly 30 years. Personal consumption expenses have fluctuated in recent years

from a low of 61.5 percent of GNP in 1973 to a high of 65.5 percent in 1983, and have since remained around

65 percent. The analysis also assumes that defense will maintain its present 7 percent share of GNP.5

5. Prices

Relative prices are assumed to change at roughly the rate of the past two decades, with exceptions based

on changes in trade and production technology discussed in the appendix. The set is made consistent in the

sense that a shift to the new price set would not change total spending.

6. Allocating Consumption by Product Type

With the exceptions discussed in the text, money available for consumption is assumed to be allocated given

estimates of price, income, and household size using the methods described to produce table 2-9. The calculations are based on an analysis of spending by income cohort and household type.G They are not based on an

assumption that spending rises or falls exponentially with income, but allow for more complex relationships.

For example, spending on used cars first rises and then falls as incomes increase.7

IThe assumptions on life expectancy and fertility used here have been selected from the ranges developed by the Social S@curity Administration (SSA);

see (J S Department of Health and Human Services, S~ial Security Administration, “Social Security Area Population Projections, 1984,” Actuarial Study No

92, Washington, DC, May 1984

‘<’Modified Social Security Population Projection Program,” working paper prepared for the Office of Technology Assessment, November 1985,

3Frank D Bean, et al,, “Projections of Net Legal and Illegal Immigration to the United States,” contract paper prepared for the Office of Technology Assessment by the Population Research Center, University of Texas, Austin, TX, August 1984.

dThe model from which these results were obtained used the Current Population Survey for 1984, and weights assigned to indiwduals of each age and

sex cohort for each of 17 household types. See “Household Formation Program, ” working paper prepared for the Office of Technology Assessment, Washington,

DC, May 1986. The 17 household types were then aggregated into the 11 categories presented in tables 2-4 and 2-5.

5As a fraction of GNP, Federal defense spending has followed a down-and-up curve over the past 25 years—falling steadily (with the exception of the Viet

Nam War years of 1965 to 1968) from 9.7 percent in 1960 to 4.9 percent in 1979, only to rise rapidly through 1983 to a level of nearly 7 percent, where it

has remained since. This analysis therefore assumes that a 7 percent average, which is both close to the present fi~re and the approximate mid-point in the

historical trend, WIII hold over the next two decades. For an annual series of defense spending as a fraction of GNp, see U.S. Bureau of the Census, .Stafistica/

Abstract of the Urri6ed States” 1986 (I06th ed ), Washington, DC, 1985, table 540.

bsee “consumer Expenditure Demand Projection Program,” working paptr prepared for the Office of Technology Assessment, April 1986.

TThe equation linking spending to income is quadratic.
84

Table 2-9.—Spending on the Amenities: 1983 and the Scenarios

(in percent of personal and total spending in 1983 dollars)

year 2005

1983 Trend 3 % Trend 1.5°/0 ALT 3 % ALT 1.50/0

PCE Total PCE Total PCE Total PCE Total PCE Total

Food . . . . . . . . . . . . . . . . . 200/0 16% 16% 13%0 19% 15% 16% 12% 16% 13%

Housing . . . . . . . . . . . . . . 26 20 25 19 27 21 23 18 23 18

Transportation . . . . . . . . 13 12 11 10 11 11 10 10 11 11

Health . . . . . . . . . . . . . . . 12 11 15 14 14 13 12 11 13 13

Clothing and Personal

Care . . . . . . . . . . . . . . . 9 7 11 8 9 7 12 9 11 8

Education . . . . . . . . . . . . 2 7 1 5 1 6 1 6 2 7

Personal Business and

Communication . . . . . 8 6 9 7 8 6 11 8 10 7

Recreation and Leisure. 10 8 13 10 11 9 15 12 14 11

Defense . . . . . . . . . . . . . . 0 7 0 7 0 7 0 7 0 7

Other Government

Expenditure . . . . . . . . . 0 5 0 7 0 6 0 6 0 4

Total (percent) . . . . . . 100 100 100 100 100 100

($1983 billion) . ....2,229

100 100 100 100

2,905 4,270 5,565 3,093 4,031 4,270 5,565 3,093 4,031

NOTE: Total Includes all government purchases of goods and services. ALT - Alternatives (see text for deflnltlons). Totals may not add to 100 due to rounding,

SOURCE: 1983 statistics from U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” Survey of Current Business,

table 2.4; Trend projections drawn from U.S. Congress, Office of Technology Assessment, “Consumer Expenditure Demand Projection Program,” April 1986,

based on data provided in the “Consumer Expenditure Survey,” U.S. Department of Labor, Bureau of Labor Statistics (see the appendix for details): Alternatives

from the Office of Technology Assessment.

The share of Housing also differs between the two

3 percent scenarios, being 1 percent lower in the

Alternative than in the Trend. This is due to the assumed sharp fall in the cost of household energy utilities, and to an assumption that real shelter costs

can be kept at 1970 levels using technical improvements in the production and operation of homes.

The shares of income spent for Personal Business

and Communication, Recreation and Leisure, and

Clothing and Personal Care are all higher in the

Alternative scenario. In the case of Personal Business and Communication, the difference is created

by greater use of both the telephone and services

outside the house, Similarly, the Alternative assumes

that technology allows for an expansion of recreational telephone use, and of the information, educational, and entertainment resources available in the

home through television and computers. The Alternative case also envisions a 15 percent drop in the

real price of clothing, which boosts spending considerably. Overall, as might be expected, the 3 percent Alternative case differs most from 1983 in terms

of distribution of personal spending, since high economic growth is combined with liberal assumptions

about the impact of technology on purchasing

patterns.

. .

In the low growth (1.5 percent) scenarios, the

Trend patterns are quite similar to those of 1983.

Food expenditures are lower in the Alternative case

than in the Trend, despite generous assumptions

about family diet. The share of Housing falls even

more sharply in the Alternative, largely due to the

reasons given for the 3 percent cases. On the other

hand, expenditures on Recreation and Leisure are

distinctly higher in the Alternative, in which new

technologies allow for an expansion of entertainment

products and services at lower prices—making a

wide range of entertainment resources available to

all. Government spending as a whole (counting all

public expenditures on the amenities) increases

somewhat more rapidly in the Alternative case than

the Trend, primarily because of assumed increases

in spending on education.

The statistics just discussed do not directly address

some of the most critical questions. What, for example, will happen to the real quality of housing,

to the flexibility and convenience of transportation,

or to the state of American health in these scenarios?

To what extent will future changes in consumer demand bring real improvements in amenity to the

lives of Americans? Such questions cannot be answered with precision. To the extent that it is possi-
85

ble to talk in terms of quality as well as quantity, progress be clearly linked to an improvement in

the discussion of changes in amenity will be ap- amenity provides a focus for the abstract calculus

preached on a sector-by-sector basis in chapter 3. of productivity and technology that is the subject of

If nothing else, a patient insistence that economic much of this report.
Chapter 3

Eight Amenity Groups
CONTENTS

Page

Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

Quality and Variety. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

Nutritional Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

Choices and Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

Society’s Recipe for Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

The Record . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

Choices and Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..........103

Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....................105

The Housing Recipe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..............105

Trends in U.S. Housing Quality and Affordabihty. . ..........................107

Choices and Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............113

Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....................114

Trends in Personal Transport . . . . . . . . . . . . . . . . . . . . . . . .....................116

Looking to the Future. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .................119

Choices and Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............121

Clothing and Personal Care. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .........125

Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......................126

Defining Demand for Education . . . . . . . . . . . . . . . . . . . . . . ....................126

Trends in lnputs and Outputs . . . . . . . . . . . . . . . .............................127

Choices and-Consequences . . . . . . . . . . . . . . . . . . . . . .........................130

Personal Business and Communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...132

Demand for Communications and Information . .............................133

I)emand for Business Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...135

Choices and Consequences . . . . . . . . . . . . . . . . . . . . . .................,.......136

Recreation and Leisure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....................137

Recent Trends.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...................137

Choices and Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Chapter 3

Eight Amenity Groups

This chapter examines characteristics of eight major household amenity groups and explores options

for the next two decades. It does not cover national

defense or government activities not directly associated with a household amenity. The discussions

form a diverse set but are all designed around the

following plan. They begin with a description of the

way amenity might be measured—a description of

the units that might be used to gauge progress even

if measurement is difficult because of the absence

of good data. Second, they show how themes raised

in the previous chapter apply in each amenity group.

The themes include trade-offs between time, consumer spending, and government spending; growth

in specialized markets; and changes in regulations

that affect consumer purchasing. They end with a

brief description of hypothetical patterns of future

spending, These descriptions are used later in this

volume to explore the potential impact of future consumption patterns on economic structure and on

jobs. ]

IA reader interested in tracing the performance of a specific amenity

network from consumption recipe to job generation can read appropriate sections from chs. 3,6,9 and 12.

FOOD

There are two criteria against which to measure

changes in the price, quality, information, and other

factors that influence a nation’s diet:

1. do the changes improve the quality, variety, and

convenience of the food purchased and

2. has the new diet improved health?

Growth in choice available to most American

households does not necessarily translate into a diet

more likely to promote health. Indeed, higher incomes may lead to diets that are less healthy if consumption of fats and alcohol increases while consumption of bulk fiber declines.z An unhealthy diet

may be purchased as a result of an informed decision to ignore the advice of physicians, ignorance

of established links between diet and health (or lack

of information about product contents), or the absence of credible information linking diet and health.

The relative role of these factors, and therefore the

influence of programs designed to facilitate consumer

choice, remains ambiguous. These issues are also

relevant in the section on spending for health that

follows.

Quality and Variety

While people still go hungry in the United States,

the quality and variety of the food eaten by most

ZL, A, Cohen, “Diet and cancer, ” Scie~t;k American, VOI. 257, No.

5, November 1987, pp. 42-48.

Americans have improved considerably. Many foods

have become cheaper, production and packaging

technologies have improved, the health implications

of different diets are more widely understood, increased trade has brought a wider variety of foods

to the U.S. consumer, and more meals are eaten outside the home, partly because more women are in

the work force.

Net Food Purchases

The total quantity of food purchased per person

increased by only 5.5 percent between 1965 and

1985 (largely the result of demographic factors), but

food quality and diversity appears to have increased

substantially. A variety of large and small grocery

stores have emerged. The typical new supermarket

may sell 15,000 to 20,000 separate products, and

large stores may sell many more types.

Red meat consumption per capita peaked in the

mid-1970s (red meat prices increased substantially

during the late 1970s as lucrative grain exports increased feed prices), but per capita consumption of

fish and poultry increased 34 and 69 percent respectively between 1965 and 1985.3 During the same two

decades, per capita purchases of fresh fruits increased

12 percent, with declines in staples such as oranges

SK.L. Bunch, “Food consumption, Prices and Expenditures” U.S. Department of Agriculture, Economic Research Service, Statistical Bulletin 749, Washington, DC, January 1987,

8 9
90

and grapefruit offset by large increases in demand

for more exotic fruits; per capita consumption of fresh

vegetables grew 30 percent while that of frozen

vegetables grew 50 percent. Increased variety in

American cooking is measured in part by the near

doubling in per capita consumption of spices over

the period. There was also a 30-percent increase

in per capita consumption of sugars and other

sweeteners.

A survey by the U.S. Department of Agriculture

(USDA) in 1978 showed that the average respondent ate 25 to 28 different types of food over a 3-day

period, although the range was from 4 to 63 unique

food items.4 Total consumption varied greatly with

age and sex; males older than 23 appear to eat more

than the average number of foods, and females aged

15 to 22 consume less than the averages

Eating Away From Home

A system for tracking food expenditures developed

by USDA suggests that by 1983, some 40.9 percent

of all money spent on food was eaten away from

home.G Only about 20 percent of the quantity of food

and beverages consumed are eaten away from home;

3,7 out of 21 meals are eaten away from home.7 By

the turn of the century, the average American may

spend half of every food dollar away from home.

The choice of eating place depends heavily on

household type and income (see table 3-l). The addition of a family member over the age of 65 typically

increases household spending in cafeterias by 9 percent. The addition of a child of age 12 or younger

reduces overall spending in all food service estab-

——4J Krebs.smith, et al., “Variety in Foods, ” What /S America Eating?

(New York, NY: National Academy Press, 1986).

‘Ibid.

filJ s f)epartment of Agriculture, Economic Research Service, U.S.

Food Expenditures, 1954-78: New Measuresat Point of Sale and by Type

of Purchaser, AER-431, Washington, DC. The USDA statistic is considerably higher than that reported by the U.S. Bureau of Labor Statistics.

[n that survey, eating away from home represented 28 percent of all

personal consumption expenditures for food by 1983, an increase from

24 percent 10 years earlier. The USDA series includes expenditures

for foods in places where food sales are not the main enterprise (such

as hotels and motels, airlines, recreation places, military installations,

and retail stores) and also includes the value of government food subsidies (such as the school lunch program). It is difficult to determine

whether differences in definitions can account for the magnitude of the

difference.

TJohn M. Con nor, et al., The Food Manufacturing Industries (LeXIWkm, MA: D.C. Heath & Co., 1985), pp. 24-25.

lishments by 7 percent, but increases spending in

fast food restaurants by 26 percent and in take-out

restaurants by 16 percents Single-person households, whether young or old, spend a large share

of their food budget away from home—typically 45

percent.g Families with working wives spend 28 percent more on food away from home than comparable families with housewives, although the increase

drops to 7 percent after controlling for income;l” most

of the rise goes to specialty restaurants. In contrast,

elderly households spend more in cafeterias and less

in specialty restaurants.

It is apparent that the food purchased in fast food

restaurants has become more diverse. In addition

to the traditional hamburgers, french fries, soft

drinks, sweets, and pizza, fast food now embraces

seafood, chicken, sandwiches, breakfast items, baked

potatoes, and salad. The number of cuisines available as fast food has also increased, and now includes

Mexican, Chinese, Indian, and other types. However,

since fast food outlets have often expanded their markets at the expense of family-run restaurants, often

serving regional menus, it is not obvious that real

diversity has increased.11

Growth in other segments of the food service sector, particularly in more expensive restaurants, has

introduced many Americans to varied cuisines. The

“upgrading” of food purchasing patterns—resulting

in higher prices per amount of food consumed—

has been expressed most recently in the growth of

the “up-market hamburger restaurants,” which not

only offer a more diverse and expensive menu but

also sell alcohol. Traditional restaurants still claimed

51 percent of all sales in “separate eating places”

in 1982, but fast food was a close second with 44

percent. 12 Of franchised restaurants, 42 percent serve

hamburgers, 17.5 percent pizza, 12.4 percent chicken,

fJUs Department of Agriculture, Economic Research Service, “Food

Consumption, Prices and Expenditures 1963-83,” Statistical Bulletin No.

713, Washington, DC, 1984.

9A. Arbe], “Higher Energy Cost and the Demand for Restaurant

Services—A Time-Series Analysis,” lrrternational Journal of Hospitality Management, vol. 2, No. 2, 1983, pp. 83-87.

10.f, Kin~y, “Food Away From Home Expenditures by source of HOUS

hold Income, ” paper presented at the annual meeting of Agricultural

Economics Association, Clemson, South Carolina, 1981.

I IJohn M. Connor, review comment, Department of Agricultural ECOnomics, Purdue University, 1987.

ITUs f)epaflmentof commerce, Bureau of Economic Analysis, “Franchising” in the Economy, 1982-1 984,” report, Washington, DC, 1984.
91

—

Table 3-1 .—Dining Out, 1985

Proportion Average number

Restaurant type of occasions of meals per week

A. Diners’ Preferences

Quick-service (primarily fast-food) . . . . . . . . .

Hamburger . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Pizza . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chicken . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Ice cream . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sandwich . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Donut . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mexican . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fish/seafood . . . . . . . . . . . . . . . . . . . . . . . . . . .

Oriental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Midscale (table service, Iimited alcohol). . . .

Varied menu . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Family style . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cafeteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Family steak . . . . . . . . . . . . . . . . . . . . . . . . . . .

Oriental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fish/seafood . . . . . . . . . . . . . . . . . . . . . . . . . . .

Italian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mexican . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Upscale (full-service) . . . . . . . . . . . . . . . . . . . .

Varied menu . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Hotel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fish/seafood . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mexican . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Oriental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Italian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Steak . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

64.l%

24.7

10.8

5.3

4.4

3.5

2.1

1.9

0.6

9.4

27.1%

9.7

4.0

3.1

2.2

0.9

0.6

0.6

0.6

5.4

8.8%

4.2

1.2

0.8

0.8

0.7

0.4

0.4

0.3

B. Who Dines Out

All individuals . . . . . . . . . . . . . . . . . . . . . . . . . .

Men . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Women . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Household size:

One member . . . . . . . . . . . . . . . . . . . . . . . . . . .

Two members . . . . . . . . . . . . . . . . . . . . . . . . . .

Three members . . . . . . . . . . . . . . . . . . . . . . . . .

Four members. . . . . . . . . . . . . . . . . . . . . . . . . .

Five or more members . . . . . . . . . . . . . . . . . . .

Household income:

Under $l0,000 . . . . . . . . . . . . . . . . . . . . . . . . . .

$10,000-14,999 . . . . . . . . . . . . . . . . . . . . . . . . . .

$15,000-19,999 . . . . . . . . . . . . . . . . . . . . . . . . . .

$20,000-24,999 . . . . . . . . . . . . . . . . . . . . . . . . . .

$25,000-34,999 . . . . . . . . . . . . . . . . . . . . . . . . . .

$35,000-49,999 . . . . . . . . . . . . . . . . . . . . . . . . . .

$50,000 and over . . . . . . . . . . . . . . . . . . . . . . . .

3.7

4.2

3.4

4.3

3.1

3.9

4.1

3.7

2.8

3.2

3.6

3.7

3.8

4.5

4.6

Percent of food

dollar spent away

C. Dining Dollars from home

1955 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.00/6

1967 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29.2

1972 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33.6

1977 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.4

1982 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38.2

1983 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39.5

1985 (est) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40.0

SOURCE National Restaurant Association, 1985, cited in ‘Leisure Lifestyles,” The Wa//Street Jourrra/, Apr.21, 1988, p. 180.

4.9 percent Mexican food, 4.5 percent seafood, and

2.4 percent pancakes.

Nutritional Consequences

General Trends

Has all this led to a more healthy diet? The question is vexing because of uncertainties about the links

between diet and health. Nutritional factors have

been linked to a number of chronic diseases, such

as cancer, diabetes, heart disease, and osteoporosis. Researchers are generally agreed that over-consumption of foods high in fat, salt, or cholesterol significantly increases the risk of heart disease. Some

researchers have estimated that 30 to 60 percent of

cancers stem from dietary factors.]3 Cancer appears

to need both an agent that creates a mutation in DNA

l)N~t]Ona] ACademv Of Sciences, National Research Council, DieL Nutritiorr, and C’ancer (Washington, DCNationalAcademy Press, 1982~

pp. 1-14.

and a ’’promoter” agent that leads to tumor growth.

Some foods may actually be “antipromoters’’and inhibit tumor formation.14 But since it is difficult to link

the disease with specific diets or foods, nutritionists

remain tentative in recommending preventive steps.

The risk of giving misleading information must be

weighed against the likelihood that the information

can help improve people’s health.l5

The risks of contamination in food from pesticides

and other sources remain controversial. Standards

for processed and fresh foods differ greatly. Many

foods have naturally occurring chemicals that are

1lIA. coher-1, op. cit., footnote 2.

IsThe National Research Counci]’s Committee on Diet, Nutrition, and

Cancer concludedin 1982 that ”cancers of most major sites are influenced by dietar-ypatterns.” But the committee further concluded that

“the data are not sufficient to quantify the contribution of diet to the

overall cancer risk or to determine the percent reduction in risk that

might be achieved by dietary modifications.’’ See Jean-Pierre Habicht,

“The Role of Nutrition Research in Policy and Program Planning,”in

What Is America Eating? op. cit. footnote4, pp. 144-147.
92

highly carcinogenic. Net risk proves difficult to establish.l6

Adherence to emerging dietary guidelines designed

to lower the risk of specific diseases may lead to nutrient intakes below the Recommended Daily Allowances (RDAs) established by the National Research Council’s Food and Nutrition Board for the

nutrient needs of healthy individuals in the United

States. Which guideline is then correct? One expert

has observed that:

. . . lowering of recommended total fat and salt intakes for disease prevention is almost always incompatible with American palates and pocketbooks if the

diet must also fulfill all the RDAs. If one also wants

to consume a diet with fewer potential carcinogens

and more protective factors against cancer, attaining

the RDAs is jeopardized even more.17

Conversely, adherence to some diets that satisfy the

RDAs could increase health risks.18

Increasing variety of foods can also improve diet.

Consumption of a greater variety of foods has been

associated with a higher degree of compliance with

established dietary guidelines; greater variety has

been positively correlated to higher intakes of each

of 11 nutrients.lg

Americans have enjoyed a steady increase in average per capita consumption of virtually all critical

minerals and nutrients. In recent years, consumption of products high in saturated fat and cholesterol

has declined–animal fats by 20 percent, eggs by 19

percent, and whole milk by 58 percent. Consumption of “other milk beverages,” which include lowfat and skim milk, increased a spectacular 300 percent in 20 years.20 Consumption of cholesterol declined from a peak of 570 mg/capita in the late 1950s

to 480 mg/capita in 1985 (there has been no measISf)uring 1987, two studies conducted by the U.S. General Accounting Office found that less than 0.1 percent of imported food was checked

for illegal pesticides or high levels of legal chemicals like lead. Two

studies by the National Academy of Sciences criticized the U.S. Department of Agriculture’s poultry inspection and techniques for determining carcinogens in tomatoes, potatoes, oranges, apples, pork, and a variety of other common products. Cited in Keith Schneider, “Congress

Looks to the American Table Amid Questions on Food Safety,” The

New York Times, Jan. 22, 1987, p, A14.

17J. p, f-fabicht, op. cit., footnote 15.

ISJohanna T. Dwyer, “Nutrition Education, ” What/s America Eating?

op. cit., footnote 4; see also J.P. Habicht, op. cit., footnote 15.

19J. Kreb~Smith, et al., op. cit., footnote 4, pp. 126-140.

ZOfU. Bunch, op. cit., footnote 3.

urable decline since 1975). The American Heart

Association diet recommends 300 mg/day of cholesterol—200 mg/day for those with elevated cholesterol levels in their blood.2l A recent study indicates that 81 percent of Americans knew about the

health effects of cholesterol in 1986; the same survey found that while only 23 percent claim to have

actually changed their eating habits as a result of

this information, this percentage is nearly double that

of 1983.22

High fat diets have been linked with breast cancers,

and there is weaker evidence linking high fat/Iow

fiber diets to cancers of the colon, pancreas, ovaries, and prostate. The fact that different kinds of fats

and fibers appear to have different effects has greatly

complicated efforts to construct links. For example,

Eskimos in Greenland and people living in Greece

and Spain have comparatively low levels of breast

cancer even though they have high fat intake—

possibly because the fat was derived from fish and

olive oil.23 While per capita consumption of animal

and vegetable fats rose rapidly between 1900 and

the 1960s, between 1965 and 1985 per capita consumption of animal fats declined 20 percent while

consumption of vegetable fats and oils increased 60

percent. 24

As refrigeration replaced salting, pickling, and

smoking as a form of food preservation, deaths from

gastric cancer fell sharply. The Japanese, who still

eat a significant amount of food preserved in traditional ways, suffer far higher rates of stomach cancer.

After increasing 56 percent between 1965 and

1981, alcohol consumption per capita has since fallen

steadily, declining 8.6 percent between 1981 and

1985. Beer consumption also began declining in

1981, falling to 34.5 gallons per person per year in

1985, as has consumption of distilled spirits. Wine

consumption has increased steadily since 1965 (to

3.8 gallons per person per year in 1985). In 1985,

more than 14 percent of the total consumption of

ZID M f-fegsted and R.J. Nicolosi, “Individual Variation in Serum Chc- . .

Iesterol Levels,” Proceedings of the /Vationaf Academy of Sciences , vol.

84, No. 17, Sept. 2, 1987, p. 6259; L. Roberts, “Measuring Cholesterol

Is As Tricky As Lowering It,’’ Science, vol. 238, No. 4826, Oct. 23, 1987,

pp. 482-83.

‘

z

’’ Cholesterol Awareness Survey,” The National Heart, Lung and

Blood Institute of the National Institute of Health, Bethesda, MD, Dec.

4, 1986.

Z3L.A. Cohen, op. cit., footnote 2, P. 46.

Z4K. L. Bunch, op. cit., footnote 3, p. 39.
93

wine was in the form of “coolers,” a mixture of wine

and fruit juice.25

Averages, of course, can hide a number of ills. Serious defects in diets remain for special populations

such as the elderly, the homeless, the poor, migrant

laborers, female-headed households, pregnant women,

and psychologically debilitated people.

Unfortunately, there is no reliable information on

the diets and nutritional status of the population at

risk.2G There are other important gaps in our knowledge because existing surveys are not comprehensive or are out of date. By one estimate, however,

there may be as many as 12 million children and

8 million adults who are chronically short of nutrients necessary for growth and good health. The National Household Food Consumption Survey of 1982

found that more than 80 percent of households

where spending on food was similar to that of food

stamp-recipients failed to obtain the RDAs.27 An examination of households at risk of poor nutrition indicates that in 1977, 12 percent of Americans were

not getting enough food energy and nearly onequarter failed to get enough vitamin B-6 (see table

3-2). Given a continuation of present trends, the analysis suggests that the dietary status of the population will actually worsen in terms of five out of six

components examined. About one-quarter of U.S.

households would continue to have availability levels

of calcium and vitamin B-6 below 75 percent of the

RDA in 1995. The GNP would have to increase much

faster than 3 percent annually to make a marked

improvement on the dietary availability of some nutrients for the groups receiving inadequate nutrition.

Claims that Americans are going hungry have

been disputed using statistics showing no increase

in childhood anemia. Given the poverty of data it

is difficult to resolve the issue with precision. For

example, not much is known about the relationship

between the supply of food and its utilization by specific individuals and various types of households. The

per capita food consumption series maintained by

USDA provides only crude consumption estimates

for the “average” American. Only one national survey, the 1977 to 1978 National Food Consumption

Survey (NFCS), is currently available for assessing

major variations in food consumption among individuals and households within the U.S. population.

Limited annual surveys initiated by USDA in 1985

(Continuing Survey of Food Intakes by Individuals)

will improve this database.

Even assuming that data on nutritional status were

much improved, scientific understanding of the

health consequences of diet remains tentative in

many respects. Probably the most salient example

concerns the RDAs. Simply put, the specific health

risks associated with nutrient intakes below the

RDAs remain largely unknown.28

Eating Away From Home

The increase in eating out is complicating dietary

assessments. According to one estimate, the 16 percent of all eating and drinking occasions that occur

away from home supply 18 percent of total food

energy and about 16 percent of most vitamins and

minerals. Men and children consume more of their

food away from home than do women, and so obtain more of their food energy and nutrients from

those occasions.29

‘

s

Ibid., p. 5.

ZbJ,p, Habicht, op. cit., footnote 15.

Z7J, L, Brown, “HUr-lger in the U.S.,” Scientific American, vol. 2S3, No.

2, February 1987, pp. 37-41.

Table 3-2.—Percentage of Households With Selected

Dietary Availability Levels Below 75 Percent of

the Recommended Daily Allowance (1977/78 and 1995,

assuming 3 percent annual growth in GNP)

Year Food energy Calcium Iron Magnesium Vitamin A Vitamin B-6

1977 , 11.9 24.4 8. 0 13.6 16.7 23.4

1995. . 12.6 25.2 8. 4 14.0 15.8 24.0

SOURCE: “Future Food Patterns of the U.S. Population,” cooperative agreement

between the University of Missouri at Columbia and the Office of Technology Assessment, No. 433-7130.0, October 1985.

One recent study of snacking and away-from-home

eating indicated that “where and when foods were

consumed had very limited impact on their nutritional status.” The researchers noted, however, that

future investigations might profitably focus on those

28 Betty B. Peterkin, “Assessment of Diet Quality and the U.S. Department of Agriculture’s Nutrition Policy and Research,” What/s America

Eating? op. cit., footnote 4.

29 Robert B. Reese and Sharon J. Mickle, “Where to Eat—At Home

or Away?” 1982 Yearbook of Agriculture (Washington DC: U.S. Government Printing Office, 1983).

sOKaren J. Morgan and Basile Goungetas, “Snacking and Eating Away

from Home,” What IS America Eating? op. cit., footnote 4, p. 123.
94

who are nutritionally at risk. Furthermore, the away

from home share of food expenditures has increased

since 1977 and will probably continue to do so over

the next decade. The nutritional consequences of

this important trend warrant more attention.

Choices and Consequences

The Trend scenarios for expenditure on the Food

amenity (as defined in ch. 2) are based on present

patterns of household expenditure, and no significant changes in regulatory programs affecting food

prices. The Alternative scenarios differ in that they

assume that all Americans have access to a healthy

diet and that all income groups pay more attention

to the health consequences of their diet. Figure 3-1

indicates the changes that would occur in American

eating habits if the recommendations of the National

Research Council and other recent studies of diet

and health were followed.

While they do not correspond precisely to the recommendations shown in figure 3-1, USDA has developed estimates of “nutritious” diets that could be

purchased by households with different incomes.

These diets contain recommended intake of calories

and nutrients and would reduce fat, cholesterol,

sweeteners, and sodium below current levels. They

contain more grain products, vegetables, and fruits,

and less cheese, eggs, fats, oils, sugar, and soft drinks,

than are now eaten in most U.S. households. These

diets were used to explore the implications of a shift

to a different pattern of food consumption in America. The “liberal” USDA diet was used as an estimate of the way Americans might eat if the U.S. gross

national product (GNP) grew 3 percent per year and

the “moderate cost” diet was used for the 1.5 percent case. These plans are based on the eating habits

of the upper half of all households ranked by expenditure on food.

Food expenditures at home and away from home

for the different scenarios are given in table 3-3. The

total value of purchases of the Food amenity (including alcohol) is actually lower in the Alternatives than

in the Trend cases, even though they explicitly provide healthy, balanced diets for all Americans and

assume a continued increase in purchases of food

away from home.

The Alternative cases assume that expenditures

on cigarettes and alcohol fall below the Trend cases.

These estimates are based on a continuation of past

trends in per capita consumption expenditures—

roughly, a 1.6 percent annual increase in alcohol

consumption between 1960 and 1983, and a —0.9

percent decrease in tobacco between 1973 and 1983.

Figure 3-1.-Current and Recommended Diet

400

300

200

100

n

~

Grams per person per day

Fat Carbohydrate Protein Fiber

~ Current Diet m Recommended Diet

SOURCE: L.A. Cohen, “Diet and Cancer,” Sclerrtiflc American, November 1987,

p. 48; and National Cancer Institute, Division of Cancer Prevention and

Control, “Annual Cancer Statistics Review, ” January 1988.

HEALTH

Society’s Recipe for Health ●

The debate over the proper recipe for good health

must be one of mankind’s oldest. Although health

and life expectancy depend partially on hereditary

factors, many aspects of health can be influenced

or controlled by individual or social actions. These

include the following: ●

Time and energy spent in promoting one’s own

health or avoiding illness, including the time

needed to remain informed about appropriate

health strategies and any loss of amenity associated with changes in lifestyle required to promote good health (e.g., avoiding fast driving,

smoking, drinking, and inappropriate diets).

Disease prevention through vaccination and
95

Table 3-3.—Consumption Scenarios for Food (billions of 1983 dollars)

2005

1983 Trend 3 % a Trend 1.5%a ALT 3%bc c ALT 1.5% c

Food and alcohol

At home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....298.4 433.0 402.0 387.0 321.0

Away from home . . . . . . . . . . . . . . . . . . . . . ..................123.6 235.0 146.8 259.0 164.0

Tobacco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.0 31.2 35.5 22.0 25.0

Total Food in personal consumption expenditures . . . ... ... ...450.O 699.2 584.3 668.0 510.0

Government purchases of food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 3.3 2.4 3.3 2.4

Liberal Moderate

Single member family 34.6 28.1

2 member family . . . . . . . . . 60.8 50.3

4 member family . . . . ... 90.7 80.3

The resulting totals are then calculated on an annual basis. The annual totals, which are based on the assumption that all meals are taken at home, are then adjusted

to take into account meals outside the home.

It is assumed that in the moderate cost plan, one meal in five is taken out of the home. One-fifth of the estimated Food expenditure is therefore deducted from

the total and doubled in value (approximately 20% of all Food and 40°/0 of all spending for food was away from home in 1983-see text). In the liberal food plan it

is assumed that one meal in four is taken away from home.

Alcohol is estimated independently, and then divided between food at home and food away from home categories at the 1983 levels (60 and 40°A respectively).

For 30/. case, (real) per capita expenditure on alcohol is increased by annual average of 1.60/0 (as during 1960-83 period, multiplied by 2005 population). For 1.5%. case,

consumption is assumed to be one-half of 30/. ALT.

Per capita tobacco consumption in the 3°/0 growth case is assumed to decline 22°/0, roughly following 1973-83 trends projected to 2005. Consumption in the ALT

1.5% case is reduced by the ratio between low growth and high growth tobacco consumption computed for the trend cases.

SOURCE Office of Technology Assessment, 1988.

●

●

●

●

early detection of disease, by routine testing for

such things as high blood pressure and cancer.

Public investments in such things as air and

water pollution abatement (public spending for

pollution control and other health and safety

objectives increased from approximately $7 billion in 1972 to a peak of $9.7 billion in 1978,

then fell to $8 billion in 1983).31

Investments in occupational health and safety.

Aspects of home- or work-life that contribute

to stress.

Purchases of treatment to remedy problems

once they have occurred.

In principle, it should be possible to compare the

relative benefits of investments in each of these categories. 32 Given current state of knowledge about

~lAndrew Maflin, “public Health and Safety, ” contract repOIl prepared

for the Office of Technology Assessment, 1985.

~zA formal ~heoW of the “production function” of health is suggested

in several sources, See, for example, Michael Grossman, The Demand

/or Hea/th (New York, NY National Bureau of Economic Research, 1972);

H.L. Blum, P)arming for l-/ea/th (New York, NY: Human Sciences Press,

1974); and Jack Hadley, More Medical Care, Better Health? (Washington, DC: Urban Institute Press, 1982).

the determinants of health, this proves impossible

in practice. The situation is made all the more confusing by the rules governing health spending. Only

the patient has a clear incentive to optimize spending to maximize real health, yet the patient may not

be well informed of alternatives, and may not be in

control of the choices made in her name.

The economics of health involve a complex combination of public funding, public regulation, and private decisionmaking. Health markets differ from ordinary markets in several important ways:

1. The flow of information between provider and

client in the market for health services is unlike that in other markets, depending more

heavily on trust among the clients and professional integrity among the providers. Furthermore, the parties are frequently on an unequal

footing.33 There are even cases where it may

jsFrances H, Mi]ler, “secondary Income From Recommended Treatment: Should Fiduciary Principles Constrain Physician Behavior, ” in

Bradford H. Gray (cd.), The New Hea/(h Care for Profit (Washington,

DC: National Academy Press, 1983),
be ethically (and legally) possible to withhold

information from the individual being treated.

2. Many kinds of competitive behavior that would

be celebrated in ordinary commercial competition cannot be permitted in the practice of

medicine. While it is difficult to raise complaints

about an enterprise that manages to sell individuals more shoes than they need (indeed,

much of the U.S. economy depends on consumption that goes beyond need), there is general consensus that it is unethical to encourage

a patient to purchase more medical treatment

than is needed. The medical community now

accepts the patenting of drugs, devices, and

techniques, 34 but controversy continues over

whether it is appropriate for physicians to sell

drugs and other products directly to patients.

3. Perhaps most importantly, health care involves

a complex mixture of personal, corporate, and

government decisions. In 1950, two-thirds of

medical spending came directly from patients.

By 1983, 73 percent of all medical spending

came from insurance companies or government

programs such as Medicare and Medicaid.35

The Record

American spending on health has grown rapidly

since the 1970s, because of the availability of new

and increasingly expensive technology, public programs providing the elderly and the poor with greater

access to health care, the difficulty of increasing

productivity in a business dominated by personnel

costs, and a variety of other factors. Health care costs

have risen at an average rate of 1.75 percent faster

than all personal expenditure costs since the 1950s,

and in spite of efforts to contain costs, health care

costs increased more than 2.5 percent a year between

1980 and 1986.36 These statistics must be treated

with considerable caution since our ability to meas-

~Robert M. Veatch, “EthiCd Dilemma of For-Profit Enterprise in Health

Care,” B.H. Gray, op. cit., footnote 33.

MU.S. Department of Health and Human Services, ~ea~(h, United

States: 1985 (Washington, DC: U.S. Government Printing Office, December 1985).

sGMore precisely, the ratio of the deflator for “medical care” tO the

deflator for all “personal consumption expenditures” increased by 1.75

percent per year from 1955 to 1986, based on a regression of data pro

vialed in U.S. Department of Commerce, Bureau of Economic Analysis,

“National Income and Product Accounts,” historical diskettes, Survey

O( Current Business, table ?.10.

ure inflation in health care in a period of rapid

change is plainly limited. For example, an appendectomy conducted in 1986 may appear identical

to one performed in 1972, but advances in medical

practice are likely to make the 1986 procedure safer.

While the relative role of the different factors contributing to health costs proves difficult to disentangle (a modest effort is made inch. 6), the result has

been a spectacular growth in per capita health care

spending. Figure 3-2 shows changes in per capita

spending for health care. Real per capita spending

(that is spending adjusted for inflation) increased an

average of 5 percent per year between 1972 and

1986. The growth in spending is much higher than

would be expected by the aging of the U.S. population.

Explaining the links between spending and expected outcomes in U.S. health care is a treacherous undertaking. It proves virtually impossible to use

available statistics to disentangle decisions made in

response to competent medical advice (e.g., decisions

to smoke, drive without seat belts, and engage in

lifestyles likely to decrease health status), decisions

made in ignorance of the proper way to use the medical enterprise, and decisions made in ignorance

about the health implications of behavior. The problem is made all the more difficult by the extent to

which a unique set of regulations strongly affects the

way consumer desires for good health translate into

market incentives in the business community. CirFigure 3-2.-Per Capita Spending for

Medical Care

Constant 1982$ per capita (thousands) t

1955 1960 1965 1970 1975 1980 1985

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “Nation.

al Income and Product Accounts,” historical diskettes, table 2.5.
97

cumstantial evidence suggests, however, that the performance of the U.S. health care system could be

dramatically improved without any changes in medical technology.

Recent Trends

While it is difficult to determine which factor

deserves credit, the health status of the average

American has clearly improved during the past few

decades. An individual born in the United States in

1984 could expect to live 74.7 years—6.5 years

longer than an individual born in 1950. Someone

aged 65 in 1950 could expect to live an additional

13.9 years, while a person reaching 65 in 1984 could

expect to live an additional 16.8 years.37 Infant mortality rates fell from 29.2 per thousand in 195038 to

11.2 per thousand in 1983 (rates of improvement

have fallen somewhat since 1981).

Average improvements in life expectancy have not

eliminated the striking difference between life expectancies of different American social groups. Age

adjusted death rates for black males, for example,

were nearly 50 percent higher than those of white

males in 1983.39

As figure 3-3 indicates, improved rates of infant

mortality may be the most important factor behind

increases in average life expectancies; the figure suggests that a decline in deaths at an early age has

played a comparatively larger role in lengthening

average U.S. life spans than has the fact that older

people are living longer.

The factors leading to the improvements in health

status are extremely difficult to disentangle. It does

appear that as a result both of improved clinical techniques and increased funding of health care for the

poor, death from diseases where medical treatment

can save lives declined sharply between 1968 and

1980. Deaths from childbirth declined 72 percent,

from influenza and pneumonia 53 percent, from

tuberculosis 52 percent, and from diabetes 31 perWJ.s. f)epartrnent of Health and Human Services, ~ea]th, Un;ted

States, 1984 (Washington, DC: U.S. Government Printing Office, December 1984).

3SU.S Department of Health, Education, and Welfare, Public Health

Service, Health Status of Minorities and Low-income Groups (Washington, DC: U.S. Government Printing Office, 1979).

39uS. Center for Hea]th statistics, Vita/ ,$tatjstjcs of (he united States,

cited in U.S. Bureau of the Census, Statistical Abstract of the United

States: 1987 (107th cd.), Washington, DC, 1986.

Figure 3-3.-Changes in Patterns of

Mortality

8 0 -

6 0 -

1900 ~

40-

20-

0 1 , I

0 2 10 20 30 40 50 60 70 80 90 100110 120

Age (In years)

How to Read This Figure: Given the mortality rates of 1900,

54°/0 of all people would reach age 60. Using mortality rates

of 1950, 75°/0 of all people reach age 60.

SOURCE: U.S. Department of Health and Human Services, Social Security Administration, “Life Tables for the United States, 1900-2050, ” Actuarial

Study No. 89, Baltimore, MD, December 1983.

cent.40 Death rates from heart disease and stroke

have been declining since 1940. Between 1970 and

1983, age-adjusted death rates from heart disease

fell 26% while death rates from stroke were cut in

half. There is some evidence that this fall is associated with a decline in cigarette smoking, high serum cholesterol, elevated blood pressure, and lack

of exercise. Improvements in medical care have also

played an important role.41 It proves to be nearly

impossible, however, to allocate credit for reduced

heart disease directly .42

In contrast, death rates from the other major killer,

cancer, have risen slightly, growing from 157 deaths

per 100,000 in 1950 to 171 per 100,000 in 1985. This

is largely because of increasing incidence of lung cancer resulting from smoking. Death rates from stom401-J.s, Center for Health Statistics, unpublished data for 1982, cited

in D.E. Rogers, R.J. Blendon, and T.W. Moloney, “Who Needs Medicaid?” New Eng/and ./ourna/ of Medicine, vol. 307, No. 1, July 1, 1982,

pp. 13-18.

41U.S. f)epartment of Health, Education, and Welfare, Public Health

Service, “Healthy People: The Surgeon General’s Report on Health Promotion and Disease Prevention,” DHEW (PHS) Publication No. 79-55071,

1979; U.S. Department of Health, Education, and Welfare, Public Health

Service, Proceedings of the Conference on the Decline in Coronary Heart

Disease Mortality, National Heart, Lung, and Blood institute, National

Institutes of Health, NIH Publication No. 79-1610, 1979.

4z.s, pelt and W.E. Fayerweather, “Trends in the Incidence of Myocardial Infarction and in Associated Mortality and Morbidity in a Large

Employed Population, 1957-1983,” New Eng/and Journa/ of Medicine,

vol. 312, No. 16, Apr. 18, 1985, pp. 1005-1011.
9 8

ach, uterine, and some other cancers have declined

slightly during the past 20 years. Deaths from all

cancers except lung cancer fell from 144 per 100,000

in 1950 to 125 per 100,000 in 1985.43

Risk factors in the development of other cancers

include: alcohol, smoking, certain viral infections,

and exposure to cancer-causing substances in the

workplace, in the general environment, or in food

and drugs. Research is underway to determine whether

high fat/low fiber diets also contribute. Heredity may

also play a role. While remarkable advances in treatment for certain types of cancer have occurred, it

is not clear that the increase in survival for the more

common cancers is due to improved medical care.44

As life expectancy rates increase, other health indicators appear to be changing as well. Since 1973,

the percentage of the population reporting some limitation of activity has remained essentially the same,

while the average number of restricted-activity days

per person per year increased from 14.6 days in 1970

to a peak of 19.1 in 1980 and 1981 and fell to 14.5

days in 1983. Blacks have more restricted-activity

than whites (16.6 v. 14.3 in 1983). Bed-disability days

remained roughly constant for people under 65 (5.3

days/year in 1970 v. 5.4 days/year in 1983) but rose

steadily for those over 65 (13.8 days/year v. 16.7

days/year in 1983).45

The changes (particularly the reversal of reported

disability since 1981) are difficult to interpret. The

number of days each American is likely to spend

in poor health is in part symptomatic of improved

medical technology, such as the development of diagnostic techniques resulting in earlier awareness of

disease. Changing public attitudes toward disability,

improved social supports for the disabled, and changes

in employer-granted sick leave may also increase the

reporting of disability. The changing figures may also

be a result of medical progress, which is able to save

4SU,S. Department of Health and Human Services, National Cancer

Institute, “Annual Cancer Statistics Review,” summary, Washington,

DC, January 1988.

up M Boffey, 

. .

“cancer progress: Are the Statistics Telling the Truth?”

The New York Times, Sept. 18, 1984; A.R. Feinstein, D.M. Sosin, and

C.K. Wells, “The Will Rogers Phenomenon: Stage Migration and New

Diagnostic Techniques as a Source of Misleading Statistics for Survival

in Cancer,” New England Journal of Medicine, vol. 312, No. 25, June

20, 1985, pp. 1604-1608.

45us. Center for Health Statistics, Vita/ and Hea/(h Sta/jstjcS, Series

10, cited in Statktka/ Abstract of the United States: 1987, op. cit., footnote 39, Table 160.

lives but not necessarily prevent lengthy periods of

illness.4G

Factors Influencing American Health

The United States spends as much or more for

health care per person than any nation in the world,

yet U.S. life expectancy rates are lower and infant

mortality rates higher than they are in many other

advanced economies. Moreover, different States

within the United States exhibit a range of life expectancies that have little obvious relation to spending on health care. Average male life expectancy in

Hawaii, for example, was higher than that recorded

by any nation in the world in 1981, while life expectancy in Louisiana was lower than that in Cuba,

Singapore, and Bulgaria.47

The life expectancy of Seventh Day Adventists living in California is more than 11 years longer than

the U.S. average. U.S. life expectancy could increase

by 0.7 years if rates of mortality in 1984 were equal

to that of the white population in the United States,

and 5.1 years longer if average U.S. mortality rates

were raised to that of the healthiest geographic regions in the United States. This exceeds the 4.4 year

gain in life expectancy achievable by eliminating cancer.

48 Achieving these gains would require both

changes in access to high quality medical care and

changes in the social conditions and lifestyles that

may create higher incidence of disease in the least

healthy population groups.

While there are many unanswered questions, differences in health status are obviously linked to the

following factors:

●

●

●

●

●

hereditary factors;

diet, driving habits, stress, and other aspects of

lifestyle;

preventive medicine;

access to health care for treatment of illness and

appropriate use of health care; and

the quality of the care delivered, including technical advances.

WL M . . Verbrugge, “Longer Life but Worsening Health?: Trends in

Health and Mortality of Middle-aged and Older Persons,” Milbank

Memorial Fund Quarterly, Health and%ciety, vol. 62, 1984, pp. 475-519.

tTThe Japanese, one of the world’s longest-lived peoples, take far less

interest in smoking cessation than does the United States.

og~ U.S. Congres, Office of Technology Assessment, “Health, ” sector

study, Washington, DC, 1987.
99

Social class, measured by levels of education, income, or occupation, affect many of these variables

and correlate strongly with mortality and morbidity

rates. 49 Even psychological illnesses, like depression

and schizophrenia, are strongly linked to social class.50

It is, of course, often difficult to distinguish cause from

effect when examining correlations, since poor health

is often a direct cause of low income.

Education seems to be strongly correlated with

good health if only because education is correlated

with income.5

1 Education appears to be connected

with knowledge about health effects of lifestyles and

the way health care facilities can be used. Figure 3-

4, for example, shows the strong connections between use of seat belts and education. Similarly, the

mortality rates of well educated white males aged

25-63 are significantly lower than those in the same

group with comparatively poor educations.52 Women

with low levels of education have a much higher

number of babies with low birthweights.53

WE, M. Kitegawa and P.M. Hauser, Differential Mortality In the united

States (Cambridge, MA: Harvard University Press, 1973).

S5L, Syme and L,F, Berkman, “Social Class, Susceptibility and Sickness” American Journal of Epidemiology, vol. 104, No. 1, July 1976,

pp. 1-8.

SIBased on data by region in the 1970 U.S. Census, cited in J. HadIey, op. cit., footnote 32, pp. 59-61.

5WM. Kitegawa and P.M. Hauser, op. cit., fOOtnOte 49.

Sj[nstitute of Medicine, Preventing LOW Birth weight (Washington DC:

National Academy Press, 1985). See also U.S. Congress, Office of Technology Assessment, Neonatal Intensive Care for Low Birthweight infants: Costs and Effectiveness, Health Technology Case Study 38 (Washington, DC: Government Printing Office, December 1987).

Figure 3-4.-Seat Belt Use in 1983

No H S Degree

H S Graduate

College Graduate

Graduate School

under $10,000

$10-20,000

$20-30,000

$30-40,000

over $40,000

Strong social ties, measured by numbers of social

contacts, church membership, and membership in

social organizations, appear to be correlated with low

mortality rates.54 Evidence of the strong correlations

between behavior and health is also evidenced by

the fact that marriage is strongly correlated with

longer life expectancy. Men appear to benefit more

from marriage than women.55

Hereditary Factors.—Hereditary factors may explain some of the differences in health status of nations and States that appear to have access to identical medical technology. Japanese living in America

assume most American patterns of disease, and black

Americans have patterns of disease that more closely

resemble those of Caucasians than those of West

Africa. sG In fact, Japanese living in California considered “acculturated” to American lifestyles had

coronary heart diseased 2.5 to 5 times higher than

a group that lived in California but had not adopted

Western lifestyles.57

Environmental and Lifestyle Factors.-The potential benefits of some measures to prevent disease

and promote good health are well established. Smoking, failure to wear seat belts, alcohol abuse, improper diet, dangerous working conditions, stress
100

resulting from unemployment or other causes, exposure to air or water pollution, and a variety of other

factors contribute to poor health status. There is reason to believe that most of the improvements in life

expectancy achieved between 1900 and 1970 resulted from improved income and living conditions

rather than improvements in clinical medicine.58

It is estimated, for example, that 25 to 40 percent

of cancer deaths result from smoking and 10 to 70

percent from diet.sg A significant part of the credit

for the reduction in mortality due to cardiovascular

disease during the 1970s resulted from changes in

diet, exercise habits, and other factors independent

of clinical medicine. Control of hypertension through

therapeutic pharmaceuticals obviously played a major role in addition to advances in heart surgery and

other spectacular therapeutic improvements that

occurred during the same period.60

Infant mortality and birth defects are strongly

linked to prenatal care for the mothers. Two-thirds

of all infant deaths occur when the baby is born

weighing less than 5.5 pounds.G1 Poor nutrition,

smoking, exposure to toxic substances, alcoholism,

and a variety of other conditions contribute to low

birthweights and a variety of medical conditions before and after birth.G2

Accidents, which account for 6.5 percent of all

deaths and are the leading cause of death for those

below the age of 44, provide a further illustration

of lifestyle effects. Over half of all accidental deaths

are due to motor vehicle accidents, and alcohol abuse

is the predominant risk factor in these accidents.63

Other factors influencing the accidental death rate

WJ. B. fyfcKeoWin and S.M. McKinlay, “The Questionable Contribution of Medical Measure to the Decline of Mortality in the United States

in the Twentieth Century,” ffealth and Society, summer 1977, pp. 405-

428; T. McKeown, The Role of Medicine: Dream, Mirage or Nemesis

(London: Nuffield Provincial Hospital Trust, 1976)

SgDo]] and peto, op. cit., footnote 56, P. 1256.

60R.F Gil]um, et a]., “sudden Death and Acute Myocardial Infraction

in a Metropolitan Area, 1970-1980,” New Eng/and Journa/ of Medicine,

vol. 309, No. 22, Dec. 1, 1983, pp. 1353-1358; U.S. Department of Health

and Human Services, Public Health Service, “Smoking and Cardiovascular Disease,” Morbidity and Mortality Weekly Report, No. 32, 1984,

pp. 677-679; S. Pelt and W.E. Fayerweather, op. cit., footnote 42.

GIS. Shapiro, M.c. tvf&Ormkk, M.C. Starfield, et al., “Relevance of

Correlates of Infant Deaths for Significant Morbidity at 1 Year of Age,”

American .lournaf of Obstetrics and Gynecology, vol. 136, No. 3, Feb.

1, 1980, pp. 363-373.

Gz]nstitute of Medicine, op. cit., foOtnOte 53.

GSH.J. Malin, et a]., “Alcohol-Related Highway Fatalities Among Young

Drivers–United States,” Morbidity and Mortality Weekly Report, No.

31, 1982, ~P. 641-644.

include road conditions, vehicle safety design, and

the use of safety devices such as seat belts, air bags,

and child safety seats.64

Improvements in the speed with which casualties

can be treated, the emergence of hospital-based casualty centers, and better rehabilitation programs are

also important in reducing mortality and injury rates

resulting from accidents.65 Nearly 60 percent of accidental deaths can be prevented by adequate and

timely medical care. The remaining 40 percent, however, occur immediately after the accident. The only

way to reduce the mortality rate in these situations

is by preventing the accident.66

U.S. medicine tends to leave the often complex

problem of prevention in the hands of individuals,

providing only the techniques for fixing problems

once they occur. Hurried physicians, for example,

may be more likely to prescribe drugs to control high

levels of blood cholesterol than to undertake the

time-consuming and difficult task of counseling

changes in a patient’s diet.67

In principle, some of the new mechanisms for

financing clinical medicine, such as the self-insuring

health maintenance organizations (HMOS), can go

part of the way toward reconciling the two kinds of

health investment. To date, however, the HMOS do

not appear to have taken steps to encourage prevention that are consistently different from those

taken by other medical practices.

The United States has made enormous investments to improve or at least slow the deterioration

of air and water quality. Unfortunately, little is known

about total exposure to potentially hazardous substances or substances that may have beneficial effects. It proves extremely difficult to link environmental hazard to specific health effects even when

good data are available, because so many variables

are involved. Numerous investigations have resulted

in few clear correlations between typical exposure

to pollutants and health effects.G8 Some studies sugSds.p. Baker, B. O’Neil, and R.S. Karpf, The Injury Fact Book (LeXington, MA: Lexington Books, 1984).

GsNationa] Research Council and the Institute of Medicine, injury in

America (Washington, DC: National Academy Press, 1985).

GGDD, Trunkey, “’rrauma,” scientific American, VOI. 249, No. z, August 1983, pp. 28-35.

NL.A. Cohen, op. cit., foOtnote 2.

~For a review of these studies, see A.M. Freeman Ill, Air and Water

Po//ution Contro/ (New York, NY: J. Wiley & Sons, 1982).
101

gest that a 1 percent reduction in pollution from “stationary source air pollution” (pollution from sources

other than cars and trucks) results in a 0.1 percent

reduction in mortality rates and 0.1 to 0.4 percent

reduction in illness. While 1 to 3 percent of the Nation’s groundwater may be polluted by hazardous

waste dumps, pesticide and fertilizer runoff, and

other materials,G9 little is known about long-term

health effects. Improvements in drinking water at

the turn of the century played a decisive role in improving health, and outbreaks of disease are only

occasionally traced to poor water supplies today. It

is possible, however, that low-level exposure to

heavy metals and other contaminants in water has

long-term health effects not easily measured.70

While data on outdoor pollution are reasonably

complete, data are extremely poor on exposures received indoors where people spend 90 percent of

their time. Indoor concentrations of radon, formaldehyde, tobacco smoke, asbestos, carbon monoxide,

and nitrogen dioxide are almost always greater than

outdoor concentrations.7] Pollution from office machines, household chemicals, and a host of other

sources usually makes interior air much less safe

than external air.

Preventive Medicine.-A variety of medical technologies have the potential to reduce mortality and

sickness by early detection of disease, or by treating conditions like high blood pressure that are

linked with disease. These measures, however, can

be costly. There is considerable disagreement about

how best to compare the costs and benefits of prevention and cure.72 The fundamental dilemma is determining how much it is worth to prolong life, and

whether different values should be attached to the

quality of the life preserved. One method for resolving this issue involves the use of “discounted years

IWU. S. Congress, Office of Technology Assessment, Protect@ the Nation Groundwater from Contamination (Washington, DC: U.S. Government Printing Office, 1984).

ToAmerican Medica] Association, “Drinking Water and Human Health,”

Chicago, IL, 1984.

TINatjona] Academy of Sciences, Indoor Polutants (Washington, DC:

National Academy Press, 1981); H. Levin, “Indoor Air Pollution Research

and Its Applications in Office Building Development and Operation, ”

The Changing Off;ce Workplace, J. T. Black, et al. (eds.) (Washington,

DC: The Urban Land Institute, 1986).

7ZL. B. Russel, /S Preventjm Better Than Cure? (Washington, DC: The

Brookings Institution, 1986).

of healthy life. ”73 In this approach, costs include the

costs of all preventive measures and any side effects

less the savings from treatment costs avoided. The

costs of medical care used in survivors’ longer expected life have sometimes been included but are

more controversial. Benefits include discounted years

of added life adjusted to reflect the quality of the added years of life. (e.g., Are the years spent in pain

or activity severely limited by the methods used to

prolong life?)74

Using such measures, it has been shown that the

cost of a “discounted year of healthy life saved” due

to hypertension screening ranges from $3,300 (1975

dollars) for 20-year-old men to $16,300 for 60-yearold men. Costs would average $7,000 per year of

life saved if the costs of a national screening program to detect hypertensives were included.75 A

study conducted on the effectiveness of Pap tests recommended one test every 3 years instead of one test

every year.

7G

Clinical Treatment.–A spectacular variety of

new and often expensive technologies have reduced

suffering and prolonged life in the past few decades.

The impact of these technologies, and the way they

have reshaped the structure of the Nation’s health

delivery system, are discussed in chapter 6. Technical progress has been so dramatic and changes in

management and regulations so rapid that it is difficult—often impossible—even for experts to provide

statistically sound analyses of costs and outcomes.

The obvious links between access to care and good

health are clouded not only by the difficulty of separating environmental and behavioral factors from

the income available for clinical medicine, but also

by the facility by which available resources are al73 MC, Weinstein and W.B. Stason, “Foundations of Cost Effectiveness Analysis for Health and Medical Practices, ” New Eng/and .fourna/

of Medicine, vol. 296, No. 13, Mar. 31, 1977, pp. 716-721.

T4L.B. Russel, op. cit., footnote 72, pp. 71-72.

TS~e M.C. Weinstein and W.B. Stason, Hypertension, A Policy perspective (Cambridge, MA: Harvard University Press, 1976). The hypertension study reveals some of the painful choices that must be made.

The discounting technique estimated that a 50-year-old man would be

paying $6,900 for each discounted year of life saved ($2,300 if he is

lucky enough to have complete success with the treatment). is this too

much for society to spend extending the man’s life by about four years

when these additional years will occur when the individual is no longer

in the work force?

76D, M. Eddy, “The Economics Of Cancer prevention and Detection:

Getting More for Less,” Cancer, Mar. 1, 1981, p. 1200.
102

located and the way they are allocated. An attempt

to disentangle data from the 1970 census showed

a strong positive return to investments in clinical

medicine. A 10-percent increase in medicaid spending per enrollee, for example, was found to decrease

mortality by 1.6 percent.77

Adequate use of the health care system is, of

course, not simply a matter of providing adequate

funding. There remains the question of how patients

choose to use the care. It appears, for example, that

50 percent of patients in the United States do not

take prescribed medications in accordance with instructions, and some 20 to 40 percent of recommended immunizations are not obtained.78 Scheduled appointments for treatments are missed 20 to

TTJ. Had]ey, op. cit., footnote 32, PP. 5$M1.

713D.L. Sackett, “The M~nitude of Compliance and Noncompliance,”

D.L. Sackett and B.B. Haynes, eds., Compliance with Therapeutic Regimens (Baltimore, MD: Johns Hopkins University, 1976), p. 16.

50 percent of the time.79 Again, it is not obvious

whether these responses reflect informed market

choices or other factors. Explanations include ignorance, fear, distraction, and many others factors, in

addition to an inability to afford the treatment.

Many nations with comparatively advanced economies (Sweden, the United Kingdom, Japan, Canada, and West Germany) have achieved comparable or even better national health status than the

United States while devoting a smaller percentage

of their GNP to health (see table 3-4). These nations

all have more ambitious programs for providing

universal health care coverage than the United

States. Sweden and Japan, the two countries with

the best health records, provide both universal health

‘wJ. p. Kirscht and I.M. Rosenstock, “Patient’s Problems in Following

Recommendations of Health Experts,” G.C. Stone, et al. (eds.), Health

Psychology: A Handbook (San Francisco, CA: Jossey-Bass, 1979), pp.

189-215, cited op. cit., footnote 50.

Table 3-4.—international Comparisons

U s . Canada U.K. Sweden Japan

1) Life expectancy at birth (1981):

Male. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70.4 70. 8

a 71. 2 73.1 73.8

Female . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,8 78. 3

a 77. 2 79.1 79.1

2) Life expectancy at age 65 (1980):

Male. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.1 14. 4

a 13. 1 14,4 14.6b

Female . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.3 18. 7

a 17. 2 18.2 17.7b

3) Infant mortality rate (1981) deaths per 1,000 live births . . . . . . . . . . . . . . . . . . . . 11.9 9,6 11.1 6.8 C 7.1

4) Health care spending as percent of gross national product . . . . . . . . . . . . . . . . 10.7 8.4 5.3 10 5.2

5) Population (1982) (in millions). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232 25 56 8 118

6) Percent of population 65 years and older (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2 9.7 15.3 16.5 9.3

7) Crude birth rate per 1,000 population (1982) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 15 13 11 13

8) National per capita income (U.S.$) (1981) . . . . . . . . . . . . . . . . . . . . . ...........10,094 9,133 8,222 13,146 7,672

9) Physicians per 100,000 population (1980) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 182 154 204 128

10) Hospital beds per 100,000 population (1980) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 629 877 1,136 l,49 2

d 1,06 4

aData from 1978.

bData from 1961.

cData from 1962.

dFigure includes nursing home beds.

SOURCES: 1) U.S. data from Health, UrrMd States: 1985 (Washington, DC: U.S. Government Printing Office, December 1965). Canadian data from R. Wilkins and O,B.

Adams, “Health Expectancy in Canada, Late 1970s: Demographic, Regional, and Social Dimensions,” American Journal of Public Health, vol. 73, No.

9, September 1963, p. 1077. Data for U.K. from “World Health Statistics Annual,” 1983, World Health Organization, Geneva, Switzerland. Data for Japan

and Sweden from Hea/tlr, Urrlted States: 1985, op. cit.

2) U.S. data from Health, Urr/ted States: 1985, op. cit. Canadian data from Wildins and Adams, op. cit. Data for Sweden and U.K. from “World Health Statistics Annual,” 1963, op. cit. Japanese data furnished by Ministry of Health and Welfare, Embassy of Japan, Washington, DC.

3) U.S. data from Health, Un/@d States: 1985, op. cit. Data from Canada, Japan, and Sweden from Demographic yearbook, 1982, United Nations, N.Y. U.K.

data from “World Health Statistics Annual,” 1863, op. cit.

4) 1962 data for Japan from “Health and Welfare Statistics in Japan,” Health and Welfare Statistics Association, Japan, 1965.1963 data for Sweden from

“Fact Sheets on Sweden: The Health Care System in Sweden,” The Swedish Institute, FS 761Vpb, Sweden, 1963. U.S. 1963 data is from Hea/th, United

States: 198S, U.S. DHHS Pub No. 68-1232, 1965. Data from the United Kingdom for 1960 from “International Financial Statistics Yearbook, 1961 ,“ international Monetary Fund, 1861. Data for Canada (1962) from the Canadian Embassy, Washington, DC, personal communication, April 1966.

5) World Deve/oprnent Repoti, The World Bank, Washington, DC, 1964.

6) “World Health Statistics Annual,” op. cit., 1963 and 1964. Data for the U.S. is from “Sociai Security Area Population Projections,” 1963, U.S. Department

of Health and Human Sewices, SSA Publication No. 11-11535, 1963.

7) Wortd Development Report, op. cit.

8) Stat/st/cu/ Yearbook, 1981, United Nations, New York, 1983.

9) Estimates from Wor/d Development Report, op. cit.

10) Data from 1960 World Health Organization Statistics reported in “World Health Systems: Lessons for the United States,” report presented by the Chairman of the Select Committee on Aging, U.S. House of Representatives (Washington, DC: U.S. Government Printing Office, 1964).
103

insurance. The United States, which provides neither comprehensive health insurance nor guaranteed access, has the lowest health status. (See box

3-A for a discussion of the limits of existing U.S. funding programs.) The United Kingdom and Canada,

with comprehensive health insurance but varying

degrees of access, have life expectancies and infant

mortality rates in the intermediate range.

These facts may suggest that health care strategies exist in other countries that are economically

preferable to the U.S. model. They may also simply

mean that Americans are prepared to sacrifice 5 to

10 years of life in order to enjoy aspects of U.S. culture not enjoyed by other cultures that produce less

disease. If nothing else, they suggest that significant

changes in the cost and success of the U.S. health

care system are possible during the next two decades.

Choices and Consequences

Estimates of the future performance of the Nation’s

medical system require answers to the following

types of questions of health care finance and management:

●

●

●

●

●

●

Will systems be developed that provide employers of all kinds a greater incentive to provide employees with health programs that include prevention and adequate care?

Will systems be developed that provide access

to high-quality health care for those lacking access to well-managed corporate or government

health programs? Will there continue to be large

differences in the medical benefits received by

people in different income groups?

Will health-related information available to consumers be improved? Will consumers change

their behavior as a result?

Can the incentive systems of the health industry be changed to give patients and providers

similar interests in the support of cost-effective

health care that balances prevention, health promotion, and other forms of health care?

Will medical consensus converge at the lower

end of the range of health care utilization (implying at least a 40-percent reduction in hospital costs), or will the lower rates prove to be ill

advised?

Will social policy (and private insurance programs) set standards demanding comparatively

large numbers of years saved per dollar spent

on health care?

Box 3-A.—Medical Coverage for the Poor

America’s lower income groups are poorly served

by the health care system:

c Medicaid provides coverage to a decreasing

number of the poor. In 1985, Title X1X served

only 40 percent of the population with incomes

below the poverty line; in 1976, it served 65

percent. ]

● Many States have not adjusted Aid to Families

with Dependent Children (AFDC) income levels

to account for inflation. From 1970 to 1984,

State AFDC benefit levels for a family of four,

in constant dollars, failed to keep up with inflation in all but two States–Wisconsin and

California; across the country, the median decline in benefit levels, adjusted for inflation,

was 33 percent. A study by the U.S. General

Accounting Office estimated that 493,000 families lost their AFDC coverage as a result of

changes brought about by the Omnibus Budget Reconciliation Act. In 1981, 1 million families had at least 1 member who needed medical care during the year but did not receive it

for financial reasons.2

● Among the under-65 population, the percentage that is uninsured grew from 14.4 percent

in March 1980 to 16.0 percent in March 1983.

Between 1981 and 1982, the number of uninsured adults living with an employed, insured

spouse almost doubled. Three-fourths of the

35 to 37 million uninsured are either employed

or dependents of employed persons.3

● As many as 35 million people (17 percent of

the population) were uninsured in 1984, including 12 million persons with income below the

poverty level who did not qualify for Medicaid.4

● About one-third of all uninsured individuals

are under the age of eighteen. s

IJim Sarsgard, Actuary, Division of Medicaid Cost Estimates, Office of

the Actuary, Department of Health and Human Serwces, based on Census

Bureau Statistics and the Current Population Survey

2M, E, Lewin, “Financing Care for the Pm and Underinsured An Overview, ” in ME. Lewin (cd.), The Health Policy Agenda Some C’n”t/ca/ Questions (Washington, DC: American Enterprise Institute, 1985)

~M, E. Lewin and Lawrence Lewin, “Financing Charity Care in an Era

of Competition,” Hea/th Affairs, spring 1987, p. 51

4

Jim Sarsgard, op. cit.

5Uwe Reinhardt, “Health Insurance for the Nation’s Poor, ” Health Affairs, spring 1987, p. 101
104

● Will large medical systems such as integrated

hospital systems be able to manage significant

savings?

Other issues include:

Will cures be found for major illnesses such as

heart disease, cancer, and senile dementia? If

so, will they be cheap (i.e., vaccination), or will

they require lengthy and expensive treatment?

Will acquired immunodeficiency syndrome

(AIDS) or a health menace of equivalent proportions impose new burdens on the system?

Will government support of medical education

and medical research be vigorous? Will public

and private regulation of the quality of health

care prove adequate?

Considering the Possibilities

Any one of the factors listed above could lead to

considerable changes in both the cost of national

health care and health of the average American. Few

of the factors can be predicted simply by looking at

trends—many are matters of public and private

choice. Table 3-5 explores some alternatives in quanTable 3-5.—Hypothetical Scenarios

titative terms. It is based on a 1980 survey linking

spending on health care to a patient’s age and the

condition for which treatment was received.80 The

increase in spending shown in table 3-5 assumes that

the cost of intervention remains unchanged. Changes

result entirely from assumptions about the success

of the intervention. The basic assumption of the calculations is that a person whose death has been

avoided by an assumed improvement in some kind

of treatment (e.g., a cure for cancer) would have the

same risk of dying of other kinds of disease in later

years as the average person of the same sex and age.

The results of a calculation like the one displayed

in table 3-5 can be difficult to interpret since it includes a variety of offsetting factors. The analysis is

not intended to provide a precise forecast, but rather

to exhibit the striking range of costs and health out-

~he National Medical Care Utilization and Expenditure Survey, conducted by the National Center for Health Statistics. Corrections for underreporting were made following the suggestions of a study of this data

conducted by J.M Anderson and E. Thorn, “Estimates of Aggregate Personal Health Care Expenditures in 1980,” ICF, 1985. See D. Gillman,

“Documentation on the Population Projection Program (PROPOP),” paper prepared for the Office of Technology Assessment, 1985.

for the U.S. Health Care System

Lifetime National

Life expectancy disability health care

(years at birth) days (1983= 100) costs

Year Male Female Male Female (1983= 100)

1983 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70.8 78.0 100 100 100

2005:

AIDS epidemica . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70.7 78.0 126 100 140

1983 mortality rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70.8 78.0 126 100 133

Half infant mortality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71.8 79.2 91 89 134

Social Security Administration pessimistic scenarioc. . . . . . 73.1 80.5 125 100 137

No smokingd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74.3 81.4 108 85 119

Social Security Administration baseline scenarioc ., . . . . . . 75.3 82.9 137 110 142

Cancer curee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75.8 83.0 136 104 135

Modest prevention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76.0 84.2 105 82 116

Cure heart diseaseg. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77.0 84.0 148 117 144

Extensive prevention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78.4 84.5 111 86 115

Social Security Administration optimistic scenarioc . . . . . . . 78.6 66.4 156 125 146

optimistic prevention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78.7 64.8 91 89 135

aAIDs (acquired immun~eficiency Syndrome) case aaumes no change from 1963 mortality patterns except that death frOm “other CaU9eS” inrXeSSes 21 0/0.

bcuts moflality and morbidity for infant mortality and congenital diseases in half.

cMofiality ~sumptions used by the Office of the Actuary, U.S. Social Security Administration in their forecast of U.S. population growth. See U.S. Social Security

Administration, Population Projections 1963; Wodd Development Repoti, The World Bank, Washington, DC, 1964.

dAssumes that cigarette smoking is responsible for 150/0 of head diseaae deaths, 32Y0 of cancer deaths, 100/. of deaths from vascular disease, 43~0 Of deaths frOm

chronic obstructive lung disease, 160/0 of deaths from diseases of the digestive system, and 16°A of deaths from all other causes.

ecancer moflality and morbidity falls to zero in lm.

fNo Smokingj 50./0 reduction in accident rate from iowered alcohol use and Seat belts and workplace safetY.

gReduces heart disease mortality to zero and heart-related illness by 300/. starting in 1990.

hsame as (e) except that improved diets are assumed to reduce cancer deaths an additional 67Y0 and deaths frOm digestive diseases 50°/0.

isame as (h) only cuts mortality and morbidity for diseases of infancy and c0n9enital diseases in half.

For more details, see U.S. Congress, Office of Technology Assessment, “Health,” sector study, 1987; and D. Gillman, “Health Cost Forecasting for the U.S.,” working

paper prepared for the Office of Technology Assessment, 1985.
105

comes possible given a plausible set of assumptions.

Total national health care costs hinge on whether

comparatively expensive or comparatively inexpensive causes of illness and death are reduced. The

costs in the year 2005 depend on the population in

that year. This is in part a function of mortality patterns prior to 2005. A comparatively inexpensive

“magic bullet” cure for cancer in the year 2000 (the

equivalent of a vaccine or penicillin) would reduce

costs in 2005, but would increase them in later years

because the individuals living longer as a result of

the cure would begin to incur other health care costs.

The costs are also extremely sensitive to whether

the factors that decrease mortality also lead to a corresponding decline in sickness requiring medical attention. The large range of variation in days of disability translate into differences in national health

care costs.

Constructing Scenarios

The hypotheses just generated can be combined

with assumptions about growth in the intensity of

treatment, and from these combinations can be developed scenarios of spending on the Health amenity.

In all cases it is assumed that the relationship of government purchases to consumer spending remains

the same. The results are summarized in table 3-6.

In the 3 percent Trend scenario, these assumptions

imply that government purchases of Health as a

share of all government purchases rise substantially.

The rise is less pronounced in the 3 percent Alternative scenario, following the lower cost “prevent”

scenario. However, the share rises 1.5 percent under the Alternative scenario, due to the assumed provision of comprehensive medical care even at low

rates of economic growth.

The Trend scenarios are based on an assumption

that growth in health care spending will follow 1960-

Table 3-6.–Consumption Scenarios for Health

(billions of 1983 dollars)

2005

1983 Trend 3%a Trend 1.5%b ALT 3%C ALT 1.5%d

Household

spending ., 268 650 420 500 418

Government

spending . . . 60 147 95 113 94

Total, . . . . . . 328 797 515 613 512

Percent share

of GNP . . . . . 9.6 12.2 10.9 9.4 10.9

ABBREVIATIONS: ALT = alternative scenarios, GNP = gross national product

aAssumes U.S. Social Security Administration (SSA) baseline scenario

hypotheses illustrated in table 3-5, and Der-caDita intensitv increases at 2.5°/0/

year—roughly half the average rate of \he 1972-66 period.

bSSA “pessimistic” scenario from table 3-5, and an intensity growth of 0.60/. Per

year.

c’(Extensive prevention” case from table 3-5, and intensity grows at 116 historic

rates.

df4Modest prevention” case from table 3.5, and intensity grows at 1/6 historic

rates,

SOURCE: Office of Technology Assessment, 1966

83 patterns, and increase 38 percent faster than total personal consumption expenditures (PCE). This

implies that PCE Health expenditures will increase

by just over 4 percent annually in the 3 percent

growth case, and by about 2.1 percent annually in

the 1.5 percent growth scenario.8]

The Alternative scenarios are based on the “modest” and “extensive” “prevention” scenarios shown

in table 3-5, and on an assumption that health care

is more equitably allocated among income groups.

It is assumed that the rate of growth in intensity of

care (in this case measured in constant dollar spending per treatment) is approximately one-sixth the

1972-86 rates because a better match between health

care spending and outcome is achieved.

ElThis expenditure trajectory is consistent with projections fOr 1990;

Ross H. Arnett Ill, et al., “Health Spending Trends in the 1980s: Adjusting to Financial Incentives,” Health Care Financing Review, vol. 6,

No. 3, spring 1985.

HOUSING

The Housing Recipe

Unlike health, it is difficult to develop

tricity, and other fuels. “Other” includes spending for home furnishings, cookware, water and sewer, and the other products associated

statistics with household operation. It does not include products associated with

giving an unambiguous measure of housing as an personal business or entertainment such as telephone, stationary, and

home electronics. Spending for new housing units is not counted as

amenity .82 For most, the “American Dream” house a “personal consumption expenditure” in the National Income and Prod-
106

apparently remains a detached residence, with pleasant grounds, security, and a comfortable interior. A

general definition of “quality” in housing includes

minimal maintenance (e.g., plumbing that works,

roofs that don’t leak, and windows that open), good

lighting, and a heating and cooling system that provides desired levels of comfort. Recent discoveries

about the quality of indoor air are now making clean

and safe air a part of “quality” in homes, as well.

A good location is also an important, if somewhat

ambiguous concept. Definitions of desirable locations

include assets such as physical attractiveness, safety,

and good public schools; and convenient access to

jobs, shopping, and recreational areas. This is becoming an increasingly challenging problem as both

husbands and wives commute to work.

Changes in tastes and demographics have a powerful effect on demand for housing. For example, the

growth of the elderly population and increases in

home health care place new demands on housing

for people with mobility limitations. Nearly 40 percent of all persons aged 65 to 74 have some activity

limitation, and 63.2 percent of individuals over the

age of 74 have some limitation.83 More than five percent of the total population are blind or visually

handicapped, 7.4 percent are deaf or hearing impaired, 3.2 percent have some form of lower extremity impairment, and 1.2 percent have upper extremity impairment.84

The growth of single-person households and the

“other” household categories translates into complex

patterns of demand for housing. The decline in leisure time caused by an increase in work-related activities translates not only into demands for shorter, more

“intense” vacations (see discussion of recreation and

leisure later in this chapter), but also into greater

demand for recreational amenities within a house.85

New technologies are redefining the definition of interior amenity. Home entertainment involves an increasingly elaborate and powerful array of video and

sound equipment, for example. Home offices are becoming common for professionals and there has been

SW.S congress, Office of Technology Assessment, Technoioaafld

Aging in America, OTA-BA-264 (Washington, DC: U.S. Government

Printing Office, June 1985), pp. 291-292.

~U.S Congress, office of Technology Assessment, TeChr?Oio~ and

Handicapped Peopie, OTA-H-179 (Washington, DC: U.S. Government

Printing Office, May 1982), p. 22.

SSC. Vogel, “clustered for Leisure: The Changing Home, ” New York

Times Magazine, June 28, 1987, p. 13.

a small (but limited) increase in home-based work.

Broadband communications wiring in houses is

likely to be as common as telephone wiring today.

The continuing mobility of Americans means that

for many people housing is not a permanent investment. 8G Many make purchases with no intention of

sinking deep roots in a community. In 1985, only

58 percent of Americans lived in their 1980 residence. Movers were about equally divided between

those moving to a new house in the same county,

many of whom were undoubtedly “trading up” to

improved residences,87 and those moving out of the

county. While two-thirds of the residents of the northeast remained in their 1980 homes, in the west

movers outnumbered nonmovers. Nearly one-quarter

of the people living in the west moved outside their

county and 15 percent moved from another State

or another country. Two-thirds of all young adults

(age 20 to 34) moved during the first half of the

1980s; nearly one-third moved out of the county.

While many elderly persons may move from their

residences to retirement communities, 84 percent

did not move at all and only 7 percent moved out

of the county where they lived in 1980 (see table

3-7).88

SGSee the last section of ch. 5 for a discussion of the ways changing

economic structure are moving jobs around urban areas and among

regions.

INH.J. Brown and J. Yinger, Horneownership and Housing Alfordabi/itYin the United States: 1963-1985 (Cambridge, MA: Joint Center for

Ho&ing Studies, 1986).

‘U.S. Bureau of Census, Current Population Survey, Series P-20, 1985.

Table 3-7.—Mobility of the U.S. Population

Asked in 1985 where they lived in 1980, the responses were as follows:

Now live in Lived in a

the same unit different unit Lived in another

they occupied in same county county or abroad

in 1980 in 1980 in 1980

Total . . . . . . . . . . 58.3 22.1 19.6

By age:

Age 5-19 . . . . . . . 57.0 24.1 18.9

Age 20-34 .., . . . 35.3 33.5 31.2

Age 35-64 ....., 68.9 16.2 15.0

Age 65+ . . . . . . 83.5 9.2 7.3

By 1985 location:

Northeast . . . . . . 66.9 18.8 14.3

Midwest . . . . . . . 60.9 22.9 16.2

South , . . . . . . . . 56.0 21.5 22.5

West . . . . . . . . . . 49.6 26.0 24.4

NOTE: Does not include members of the armed forces except those living off

post or with their families on post.

SOURCE: U.S. Department of Commerce, Bureau of Census, CPS Series P-20,

1985.
107

While much of the discussion in this chapter focuses on the ability of new production technology

to tailor products to niche markets and changing

tastes, housing will be an exception. The mobility

of the U.S. population means that housing is seldom

tailored to the tastes of individuals but rather to a

homogeneous “resale market.”

The fact that homeowning has been a lucrative

form of savings for many makes it difficult to link

spending patterns with levels of amenity achieved.

Programs designed to make housing affordable to

the middle class have had the effect of making it an

attractive investment. Housing investments are

unique because the owner is free from tax on the

effective income enjoyed by renting a property to

himself. Many households are, as a result, “overhoused,” in the sense that their spending on housing exceeds the spending that would have occurred

in the absence of this investment incentive.89 Equity in homes represents 64 percent of the median

net worth of homeowners today.go

Since 1950 there has been a significant increase

in the share of spending for housing that goes to financial institutions, landlords, and insurance companies (see figure 3-5). In contrast, the fraction that

goes to an increase in net equity in housing (the

WU,S, Congress, Congressional Research Service, “Housing programs

Affecting the Elderly: A History and Alternatives for the Future,” Report No. 82-1 19E, Washington, DC, June 1982.

90U,S, Bureau of the Census, Current population Reports, Series P70. No. 7.

Figure 3-5.-Spending on Housing

by Major Category

Percent of all spending on housing

50 , 1

I

/.’ .

. . / ‘ .-. .

/

40 ‘. . ~.. . , ----

------ ---- . . . -, ----------

..- 1

304 I

2 0 -

, I , , 10 I 1 I 1 I I T 1 , 1 I 1 1 1 1 I 1 1 1 1 1 1 1 1 I 1 1 1 T

1955 1960 1965 1970 1975 1980 1985

— Energ y-

--- Rent 8 Interest

— New Constructio n

— Othe r

SOURCE: US. Department of Commerce, Bureau of Economic Analysis, ‘(Nation.

al Income and Product Accounts,” historical diskettes, table 2.5.

“new construction” portion shown in figure 3-5), has

fallen steadily since 1950, and has become much

more cyclical. The increase in other housing costs

has been so great that they make the dramatic increase in energy prices during the 1970s all but invisible. Lower prices for home furnishings (“other”

in the figure), and perhaps some saturation in demand for such goods, have resulted in a steady but

slow decline in the fraction of spending devoted to

this area.

A variety of costs are not directly reflected in the

statistics of figure 3-5. For example, residential electricity and gas customers often do not pay their real

share of costs because regulatory commissions elect

to subsidize residences by charging higher rates to

commercial and industrial customers. Few rates reflect the marginal cost of producing energy from new

sources. Water and sewerage lead to enormous costs

which are typically hidden because much of the cost

is provided through the tax base rather than through

direct user charges. A survey in Irvine, CA, conducted by its “funding task force,” found that the

cost of providing streets, parks, schools, flood control, civic and performing arts buildings, and libraries

was between $16,500 and $23,800 per dwelling.

Trends in U.S. Housing Quality

and Affordability

There is reason to believe that on average American housing has improved in virtually all of the

areas mentioned. The average housing unit is larger

than it was a decade ago even though household

sizes are smaller.g] The number of units with more

than one person per room fell from 3.8 percent of

all units to 2.6 percent.92 There has been a significant increase in the number of units equipped with

such amenities as air conditioning, garages, and full

city water and plumbing,93 Correspondingly, a smaller

glln I g68, the median size of new privately owned singlefamily homes

completed in the United States was 1,385 square feet. In 1980, it was

1,595 sq. ft., and in 1985, it was 1,785 sq. ft. See Statistical Abstract

of the United States 1987, op. cit., footnote 39, p. 706.

gz[rendia lrby, Housing Problems in the United States, U.S. Department of Housing and Urban Development, Division of Housing and

Demographic Analysis (Washington, DC: U.S. Government Printing Office, June 1985).

gzstatjstlcaj Abstract of the United States 1987, op. cit., foOtnOte 39,

p, 710.
108

gqBetween ]975 and 1985, the percentage of all units defined to be

“inadequate” (e.g., they lacked or shared some or all plumbing, lacked

or shared some or all kitchen facilities, were inadequately maintained,

or had public hall deficiencies, inadequate heating equipment, electrical defects, or inadequate or broken sewer) fell from 10.6 percent to

8.9 percent. Those judged to be “severely inadequate” fell from 4.3 percent to 2.6 percent. See Irendia Irby, op. cit., footnote 92.

gsstat;st;calAbstract of the United States 1987, op. cit., footnote 39,

p. 451.

Figure 3-6.-Cost of Home Purchasing

for New Homeowners and Families Who

Purchased a Home in 1968

Percent of median Income

0 4

Purchased a Home In the Year Indicated Below

035 -

0 3 -

025 -

0.2-

0.15- Purchased a Home in 1968

-

I I , , 1 0 1I

, , r I I 1 I , {

1971 1973 1975 1977 1979 1981 1983 1985

How To Read This Figure: In 1985, a family earning the median

income that purchased a home in 1968 would be paying about

13 percent of its income for housing (limited hereto mortgage

payments, maintenance, and energy). The same family would

be paying about 33°/0 of its income for housing if it purchased

a house in 1985. Some of the difference results from closing and costs associated with new home purchasing. Onethird of these costs are assumed to be paid in the first year

of home ownership,

SOURCE: H. James Brown and John Yinger, “Home Ownership and Housing Affordability in the United States: 1983-1985,” report for the Joint Center

for Housing Studies of the Massachusetts Institute of Technology and

Harvard University, Cambridge, MA, 1988.

graphic groups. Families with only a single wage

earner face the most pressing difficulties except

where the single earner is in a high-income occupation (e.g., a manager or professional; see table 3-

8). A new home is far beyond the reach of most

female-headed households.

Table 3.8.—After Tax Cash Costs of a New Home

Purchased in 1985 (as a percent of annual incomea)

SOURCES: Housing costs taken from “Home Ownership and Housing Afforda.

bility in the United States: 1983-1985,” Joint Center for Housing

Studies of the Massachusetts Institute of Technology and Harvard

University, Cambridge, MA, 1988. Income data from U.S. Department

of Labor, Bureau of Labor Statistics, Emp/oyrnent and Earnings, 1988,
109

How can the fraction of income spent on housing

remain constant (again see figure 3-5) while housing stretches the resources of the median household?

How can the increase in the size of new housing

units be consistent with the shrinking fraction of the

population able to afford housing? The answer is a

growing gap between haves and have nets in housing. Figure 3-6 compares the cost burden of a new

homebuyer with the price paid by a household still

living in a home purchased in 1968. Housing actually consumes a declining share of the income of

the 1968 purchaser in spite of the rapid increase in

energy costs that has occurred since 1968.

Accounting for Changing Costs

Three factors account for the sharp rise in housing costs documented in figure 3-6:

1. increasing land costs near areas of employment

growth (spurred in part by restrictive zoning and

other local policies for limiting growth),96

2. increased cost of financing for housing (resulting directly from deregulation in thrift institutions), and

3. rising energy costs.

While there has been some increase in the cost

of construction materials and labor, and some decline in the productivity of labor in residential construction, these do not appear to have had a dominant effect on overall housing costs. Between 1970

and 1980, the cost of a new single-family home actually fell 16 percent in constant dollars while the

cost of the materials and labor in the home fell 30

to 40 percent. During the same period the cost of

financing increased nearly 80 percent.97Given that

many developers make most of their money from

financing and land development, it is easy to see

how they are likely to add amenities and a few hundred square feet to a property if this will give them

a competitive edge.

Between 1975 and 1985, the real cost of a 10,000

square foot lot of improved land increased in price

by 66 percent; the price of an unimproved lot increased by 78 percent. Prices were particularly high

‘R. Babcock, The Zoning Game (Madison, Wl: The University of Wisconsin, 1964).

97’’ Report of the President’s Commission on Housing,” Washington,

DC, 1982. Figures cited converted to constant dollars using the consumer price index.

in areas of high growth like California and Florida.

While a 10,000 square foot lot cost $2,500 in Chattanooga in 1980, it cost $187,000 in San Jose, CA.98

Some of this was the result of scarcity in growing

areas, some from speculation based on high inflation rates, and some resulted from extensive growth

in restrictive zoning.99 Several parts of the San Francisco Bay area have instituted regulations that have

increased housing prices by at least 20 to 30 percent. 100

Many other cities have taken measures to limit

growth, including Montgomery County, MD and Fairfax County, VA in the Washington, DC area; and

Fairfield County, CT, and White Plains, NY in the

New York City area. Fairfield County and many other

areas have adopted ordinances designed to limit both

residential and commercial construction. Zoning in

over one-third of 75 municipalities covered in a 1976

New Jersey survey required minimum lot sizes

greater than 1 acre. Most communities squeeze

“manufactured housing” into disadvantaged locations; many do not permit such units at all. ]o] Apart

from driving up property values, one curious feature of these policies is to decrease population density. This results from the fact that housing density

remains fixed in heavily regulated areas while household size declines.102

The rapid increase in financing costs was due to

a combination of general inflation with regulatory

changes in the banking industry undertaken when

short-term rates rose rapidly during the 1970s. investors turned increasingly to money market and

other instruments instead of traditional “thrift institutions.” In effect, homebuyers are competing for

gsResjdentja/ Land Price Inflation Survey (Washington, DC: The urban Land Institute, 1986).

~Robert Cewero, “Jobs-Housing Imbalances in Suburban Employment Markets: An Empirical Investigation,” Department of City and Regional Planning, University of California at Berkeley, May 1987.

IOOD, Dowa]], The Suburban Squeeze (Berkeley, CA: University Of California, 1985).

IOISWs. Seidel, f-fousjn~ Costs and Regulations: Confronting the Regulatory Maze (New Brunswick, NJ: Center for Urban Policy Research,

1978), p. 174; and the ‘(Report of the President’s Commission on Housing,” op. cit., footnote 97.

lmM, Gellen, Accessory Apartments in Sing&’amijy Housing (piSCataway, NJ: Center for Urban Policy Research, 1985); D. Schoup, Curb Parking as a Commons Prob/em (Los Angeles, CA: University of California,

Graduate School of Architecture and Urban Planning, 1983).
110

money with other borrowers throughout the economy. ’03

The 1986 changes in tax law affect housing costs

in complex ways.104 The number of new rental units

is likely to continue the decline that began before

the law was changed, partially offset by “non-new”

units converted from nonresidential use.

Reacting to Higher Costs

Buyers reacted to the rising cost of housing in a

variety of ways. Lending rules were stretched to permit buyers to take higher risks. But there is plainly

a limit. The increased cost of housing has led to a

decline in ownership rates, particularly for younger

families most likely to need new housing (see table

3-9). The need for mobility on the part of younger

individuals also contributes to their housing dilemma.

Declines in home ownership are naturally matched

by increases in the number of individuals renting.

In 1987,55 percent of young adults (aged 25 to 34)

lived in rental units–up from 48 percent in 1974.

In 1983, 62.5 percent of female single parents were

in rental units; the figure was 88.7 percent if they

had a child younger than 6. Both statistics represent

I03A, DOwnes, The Revolution in Real Estate Finance (Washington,

DC: The Brookings Institution, 1985).

‘

04’’ Description of Provisions of the Tax Reform Act of 1986 Relating

to Housing,” paper prepared by the National Association of

Homebuilders, Government Affairs Division, September 1986.

Table 3.9.–Household Ownership by Age, 1980=87

Percentage owning Increase/decrease

their own homes in percent

Age 1987 1980-87

Under 25 . . . . . . . . 16.1 –5.2

25-29 . . . . . . . . . . . . 35.9 –7.4

30-34 . . . . . . . . . . . . 53.2 –7.9

35-39 . . . . . . . . . . . . 63.8 –7.0

40-44 . . . . . . . . . . . . 70.6 –3.6

45-54 . . . . . . . . . . . . 75.8 – 1.9

55-64 . . . . . . . . . . . . 80.8 1.5

65-74 . . . . . . . . . . . . 78.1 2.9

Over 75 . . . . . . . . . 70.7 2.9

Total . . . . . . . . . . 64.0 – 1.6

SOURCE: WC. Apgar, Jr. and H.J. Brown, “The Slate of the Nation’s Housing

1988,” Joint Center for Housing Studies of Harvard University, Cambridge, MA, 1988, p. 12.

an increase from 1974. Renters avoided the high cost

of home purchasing but were still affected by growing housing costs. In 1987, contract rents averaged

25.5 percent of the income of renting families, up

from 20.5 percent in 1974. In 1983, 55 percent of

households earning less than 50 percent of the median household income paid more than 30 percent

(up from 48 percent in 1974).105

Some renters have accepted a decline in housing

quality. While the percentage of rented units with

defects has declined, the 19-percent increase in the

total number of rented units meant that there was

a 7-percent increase in the number of families living in inadequate rented housing. Single adults and

individuals between the age of 25 and 35 were most

likely to live in inadequate rental units. One index

of housing inadequacy indicates that inadequate

housing declined from 15.5 to 12.8 percent between

1974 and 1983.106

Other responses to increased housing costs include

living with relatives, forming households of unrelated

individuals, or taking in borders. Between 1980 and

1986, the number of total U.S. households increased

9.5 percent. During the same period, the number

of households comprised of related subfamilies increased 96 percent, unrelated subfamilies increased

40.3 percent, and unrelated individuals increased

19.2 percent. Single females with children clearly

faced the greatest problem finding housing; the number of mother-child families living with relatives increased 173 percent between 1980 and 1986.107

For those on the bottom of the ladder, housing

has become a disaster. The Nation’s mayors report

that demand for emergency shelter increased by an

average of 20 percent in 25 major U.S. cities during

1986. ]08

While changes in cost burdens are relatively visible, other changes in housing quality are more difficult to measure. There is compelling evidence that

other amenities have been sacrificed in order to keep

housing costs acceptable. One traditional cure for

high land prices is making a trade-off between com1051, [rby, op. cit., footnote 9Z.

IOGH..I. Brown and J. Yinger, op. cit., footnote 87.

IOTCurrenl population Reports, op. cit., footnote 88, No. 412.

1°8’’The Continued Growth of Hunger, Hopelessness and Poverty in

America’s Cities: 1986,” The U.S. Conference of Mayors, Washington

DC, 1986.
111

muting time and housing costs in suburban and exurban regions. ]o9 The trade-off has become much

more complex as jobs begin to drift toward suburban locations and as husband and wife must compromise on commuting time. Twenty percent of all

trips to work are now from suburbs into central cities. The share of people who both live and work in

suburbs has risen from 30.5 percent in 1960 to 41.9

percent in 1980. It is 60 percent in greater Boston,

Detroit, St. Louis, and Pittsburgh.l10

While middle class families may have paid a price

to combine job access and housing amenity, low income groups, particularly blacks, paid an even

greater price since their mobility was highly constrained. Ironically, subsidized low income housing

may have the effect of anchoring low income groups

to declining areas. i ] ]

Zoning, housing costs, and multiple-worker families mean that a shrinking fraction of individuals

can live in the same community where they work.

Only half of the people in the San Francisco area

work in the community where they live. There were

only 35 jobs for every 100 people housed in “bedroom” communities like Daly City. San Jose, Fremont,

Concord, and Alameda averaged 50 to 67 jobs per

100 residents. In other areas, high property costs

make residence virtually impossible for middle income families. As a result, there were 203 jobs for

every 100 residents of Palo Alto, 172 for every 100

residents in Santa Clara (“Silicon Valley”), 150 per

100 for Sunnyvale, and 132 per 100 for Mountainview .

The effect of sprawl, coupled with the separation

of work and housing, has meant that commuting

time has increased for many. While there is considIOgFor more on this subject, see W. Alonso, Location and Land Use

(Cambridge, MA: Harvard University Press, 1964); J.D. Carroll, “The

Relation of Home to Work Places and the Spatial Patterns of Cities,”

Social Forces, vol. 30, No. 1052, pp. 271-282; H.J. Brown, “Changes

in Workplace and Residential Locations, ” Journal of the American institute of Planners, No. 41, 1975, pp. 32-39; W.A.V. Clark and J.E. Burt,

“The Impact of Workplace on Residential Location,” Armafs of the Association o/American Geographers, vol. 70, No. 1, Mar. 1980, pp. 59-67;

L. Orr, /ncome, Employment and Urban Residential Location (New York,

NY: Academic Press, 1975); and J. Quiggley and D. Weinberg, ‘ilntraurban Residential Mobility: A Review and Synthesis,” /nterr?aticma/ Regional Science Review, vol. 2, No. 1, Fall 1977, pp. 41-66.

I IORobert Cervero, op. Cit., fOOtnO[e 99.

I I IJ. D. Kasardij and J. Friedrichs, “Comparative Demographic Employment Mismatches in U.S. and West German Cities, ” Research in

the Sociology of Work, No, 3, 1985, pp. 1-30.

I IZR. Cervero, 1987, op. cit., footnote 99.

erable variation, travel distance has increased while

travel time has reportedly declined (implying an increase in commuting speed). Curiously, it is the upper income managers who have elected to travel further to achieve their housing amenity (see table 3-10),

in spite of the fact that their time is presumably more

valuable. Also, since men commute longer distances

than women it appears that women may be taking

jobs closer to home, possibly sacrificing income in

order to combine lives as a homemaker and paid

employee.

Construction Technology

New building technologies (discussed inch. 6) and

new materials can reduce the cost and improve the

quality of housing. Factory construction can permit

reliability and brand-name guarantees for major

building components and entire structures because

sections are produced consistently under factory conditions. And where markets exist, it should be possible for customers to design houses to their unique

needs.1]3 It may even be possible to construct homes

from modular units that permit relatively easy

changes of floor plans. This possibility might permit more flexibility in the design of structures that

are purchased both as an amenity and for their po113u.s. congress, Office of Technology Assessment, 7’echnolo~’, Trade

and the U.S. Residential Construction Industry-Special Report, OTATET-315 (Washington, DC: U.S. Government Printing Office, September 1986).

Table 3-10.—Commuting Distances and Times

1983 1969

Men Women Total Total

Trip length (miles) . ..................11.2 8.3 9.9 9.7

Trip time (minutes) . .................21.6 18,8 20,4 23.1

Average speed (mph) ., . ..............31.1 26,5 29,1 25,2

By occupation:

Distance (miles) Time (minutes)

Commute Increase from Commute Increase from

1983 1977 to 1983 1983 1977 to 1983

Professionals . . . . 9.8 –0.9 20,0 – 1.8

Managers . 12.5 2.4 24,2 3.5

Clerks. . . . 9.1 1.0 19.8 0.8

Laborers . . 11,8 0.3 22,8 1.0

Unskille d 11.0 1,0 21.4 1.1

Services . . . . . . . . . . 6.7 0.2 16.1 0.0

Tota l 9.9 0.6 20.4 0.6

SOURCE U S Department of Transpodation, Federal Highway Admmistratlon, 1983-1984 Nakmvide Personal TrampoflaOon Sfudy, volume 1, Washington, OC, August 1986. pp

7-6 tO 7-10
112

tential resale value. A variety of gadgets ranging from

microwave ovens to improved security systems are

available and may add to the value of housing in

the future.

New materials, clever use of microelectronic control technologies, and application of competent architectural and engineering in housing design are

becoming more common and can reduce energy

consumption in homes by factors of two or more.

The efficiency of most home appliances can be more

than doubled using technology already on the market or under advanced development (see table 3-1 1).

Advances in lighting technology permit graceful integration of day lighting and artificial lighting, better color quality and lack of flicker with high frequency fluorescent, and 200- to 500-percent reduction

in energy use by lighting. ’ 14 Even the window is undergoing radical changes in design. It is possible to

develop windows with thermal insulation equivalent to 3 inches of fiberglass.lls Other designs enviI14s. ~rman, “Energy and Lighting,” D. Hafemeister, H. Kelly and

B. Levi (eds.), EnergySources: Conservation and Renewabks (New York,

NY: American Institute of Physics, 1985).

I15s. Selkowi&, “window Performance and Building Energy Use: some

Technical Options for Increasing Energy Efficiency,” D. Hafemeister,

et al., op. cit., footnote 114.

sion windows whose transparency can be altered under direct control, to let solar energy pass in the

winter, and to reflect heat in the summer.

The combination of enlightened energy pricing

policy with new communications technologies can

also help. A 200-house experiment in Roswell, Georgia, uses new “packet switching” technology, along

with a small computer in each house, to run air conditioning in a way that minimizes energy costs. The

customer simply selects the room temperature desired

when electricity rates reach different levels; she may

decide, for example, that during the 4 hours a day

when prices reach 25 cents/kWh, temperatures

should remain at 85 degrees, but during the long

periods when electricity costs 2 cents/kWh, temperatures of 65 degrees are preferable. The thermostat

adjusts automatically, using signals received through

standard telephone lines. The customer is free to

override the utility setting at any time, but must pay

the going rate for electricity for the privilege. The

system saves the utility enough for it to finance the

full cost of the system.

A number of studies have tried to determine the

number of these technologies likely to make economic sense given perfectly rational decisionmaking by consumers, and the probable investments that

will be made under markets likely to exist in the

Table 3-il.—Energy Consumption and Conservation Potential With Residential Appliances

(KWh/yr or therms/yr)

Fraction of Advanced

Primary energy residential 1985 stock 1985 new 1985 best technology

use (Q)a

total (0/0) UECb UECC UECd

for 1990s*

Refrigerator . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,17 7.1 1,500 1,100 750

Freezer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.44 2.7 1,100 800 500

Electric space heating . . . . . . . . . . . . . . . . . . . 1.58 9.6

Central air conditioning. . . . . . . . . . . . . . . . . .

— —

1.47 9.0 3,600 2,900 1,800

Room air conditioning . . . . . . . . . . . . . . . . . . . 0,38 2.3 900 750 500

Electric water heating . . . . . . . . . . . . . . . . . . . 1.35 8.2 4,000 3,500 1600

Electric range . . . . . . . . . . . . . . . . . . . . ., . . . . 0.54 3.3 800 750 700

Electric clothes dryer. . . . . . . . . . . . . . . . . . . . 0.45 2.7 1,000 900 800

Lighting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.00 6.1 1,000 1,000 650

Electric other. . . . . . . . . . . . . . . . . . . . . . . . . . . 0.87 5.3

Gas space heating . . . . . . . . . . . . . . . . . . . . . .

— — —

3.36 20.5 730 620 500

Gas water heating . . . . . . . . . . . . . . . . . . . . . . 0.85 5.2 270 250 200

Gas range . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.31 1.9 70 50 40

Gas clothes dryer. , . . . . . . . . . . . . . . . . . . . . . 0.07 0.4 50 40 35

Gas other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.41 2.5 — — —

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.25 86.8

NOTES:

aApplies to 1980.

b unit energy consumption per installation in the 1985 housing stock.

c unit energy consumption for the typical model sold in 1985.

d unit energy consumption for the best available modei sold in 1985

e unit energy consumption possible in new models by the mid-1990's if further cost-effective advances in energy efficiency are made,

200-400

150-250

—

900-1,200

300-400

1,000-1,500

400-500

250-500

350-500—

300-500

100-150

25-30

30-35—

SOURCE: Howard Geiler, American Councii for an Energy-Efficient Economy, January 1986.
113

United States during the next two decades.llG While

techniques differ, all show the potential for reducing energy use in housing by large factors. Studies

conducted in 1987 provide an example. A recent

study conducted by the State of Michigan indicated

that residential electricity use could be cut in half

by the year 2005 even accounting for expected

growth in the housing stock.117 An analysis of the

technical potential of housing design and equipment

available on the U.S. market (and the international

market) in 1982 suggested that energy use could be

one-fifth of the energy used by an average U.S. house

in 1980. ]18

Choices and Consequences

Housing costs in the future will hinge critically on

the following factors:

I ISJ.H. cibbons and W.U. Chandler, Energy.’ The Conservation Revolution (New York, NY: Plenum Press, 1981); Solar Energy Research

Institute, A New Prosperity, Building a Sustainable Energy Future (Andover, MA: Brickhouse, 1981); M.H. Ross and R.H. Williams, Our Energy:

Regaining Contro/ (New York, NY: McGraw Hill, 1980); National Audubon Society, The Audubon Energy Plan 1984 (New York, NY: National Audubon Society, 1984); A. Meyer, J. Wright, and A.H. Rosenfeld, Supplying Energy Through Greater Efficiency (Berkeley, CA:

University of California Press, 1983); E. Hirst, et al., Energy Efficiency

in Bui/dings: Progress& Promise (Washington, DC: American Council

for and Energy Efficient Economy, 1986); J. Goldenberg, et al., Ener~

for Development (Washington, DC: World Resources Institute, 1987).

]

 17 State of Michigan, “Michigan Energy Options Study,” 1987. The

study defined “technical potential” to be investments that competed

with the short-run marginal costs of existing Michigan electric generation—3.27 cents per kWh—assuming a 3 percent discount rate on incremental capital. The reductions consisted entirely of improved efficiency in air conditioning, lighting, water and space heating equipment,

refrigerators and freezers. llscoldenberg, et d., op. cit., footnote 116, p. 59.

●

●

●

●

●

●

It

policy affecting speculation in real estate (principally tax policy);

changes in the geography of economic development, which either encourage geographic

concentration (thereby increasing competition

for scarce land resources) or result in greater

decentralization;

policy affecting the cost of mortgage financing;

technical improvements in structures that reduce maintenance and operating costs (principally energy costs);

policy affecting the housing available for those

lacking adequate income; and

technical improvements in the construction

process that reduce construction costs (improvements that could be made more rapid by increased investment in research).

is impossible to adequately reflect all of these . .,

variables ‘in the scenarios- selected. An attempt has

been made to show what might happen to aggregate

demand if no major changes are made in the way

Americans invest in housing, and what might happen if policies succeed in arresting the rapid growth

in spending in this area. The Trend scenarios, shown

in table 3-12, 119 are based on the extrapolation techniques described in chapter 2, which link spending

to demographic factors, prices, and income. Independent estimates were made for household utilities to incorporate improvements in efficiency (see

I lgThree components of household expenditures are distinguished:

1) rents, which includes not only rents paid but also imputed rents received by ownemccupiers; 2) household operations, which include such

items as insurance, furnishings, and appliances; and 3) utilities, which

include expenditures on energy and water.

Table 3-12.—Consumption Scenarios for Housing (billions of 1983 dollars)

2005

Mortgages & rentsa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .331 4 6 5

b

5 6 5

C

4 2 9

d

Household operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 307b 221b 3 0 2

f

2ol f

Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 1 6 4 1 3 8 9 5 8 0

All PCE housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 581 1,05 8 8 2 4 9 6 2 7 1 0

Residential structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 2 2 4 2 0 2 2 2 4 2 0 2

Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......14 2 6 1 9 2 6 * 19e

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747 1,33 6 1,06 3 1,24 0 9 4 9

Percent share of GNP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.9 20.5 22.5 19.0 20.1

ABBREVIATIONS: PCE = personal consumption expenditure, ALT = alternative scenario, GNp = gross national product

aDoe~ not include increase in houg~ng equity, Real increasesin total U.S.housing appears in the rr)w labeled “residential Structures”.

bc~culated using extrapolative techniques described in ch. 2.

CASSumes that the growth in mofigages and rents as a fract[on of all consumption can be reversed and the ratio of spending in this CategOfy to tOtal PCE spending

falls to 1970 levels.

dsame as (c) except that the ratio remains frozen at 1983 ievels.

elncludes maintenance se~ices and commodities, tenant’s insurance, house furnishings, and appliances.

fsame as spending in the Trend cases with an increase for assumed additional spending fOr high efficiency aPPlianCe5 (5W table 3-13).

glJtilities include natural gas, electricity, household fuels, and water and sewer.

hsee discussion of spending for gross private fixed investment.

SOURCE: Office of Technology Assessment, 1987.
114

table 3-1 3). The Trend projections for energy use are The Alternative scenarios assume rapid adoption of

based on a U.S. Department of Energy forecast.120 technology in building design and appliance design.

IZOu.s. Department of Energy, Nationa/ Energy Policy Pfan projection 2010 (Washington, DC: U.S. Government Printing Office, 1985).

Table 3-13.—Consumption Scenarios for

Household Utilities

2005

1983 Trend 3% Trend 1.5% ALT 3% ALT 1.5%

Electricity 51 87a69 b

44e

36f

Natural Gas . . 29 26a26C14e

1lf

Other Fuels . . 18 26a

18C14e

8

f

Water & Sewer. 13 25 d

23 d25 d25 d

Total ., ., .,111 164 136 97 81

ABBREVIATIONS: ALT = alternative scenario

a Based on National Energy Policy Plan Projections to 2010, U.S. Department of

Energy (DOE), Washington, DC, 1985. Midrange forecast for the year 2005 increased to reflect the higher GNP growth rates used In the 30/0 Trend scenario.

Electricity consumption was increased by 30/. to allow for an assumed increase

in the size of housing units and an increase In appliance purchases and fuel

switching.

bl~ consumption increased in proportion to 2005/1983 increase in consumer

units. Electric use Der household assumed to decline by 8°A as the result of

efficiency improvements (far below optimal levels given availabie technology).

Electricity use increases because of an assumed shift from “other fuels.” See

next note.

cl~ natural ga9 and “other fuel” use increased by 2005/1983 increSSe in number of consumer units. No efficiency improvements assumed. 25V0 of “other

fuel” use shifted to electricity.

dprojected using CES consumption data (see ch. 2).

elge3 consumption SCSIad by growth in consumer units. Efficiency improvements

computed separately for units in 2005 that were standing in 1983 and units built

between 1983 and 2005. The proportion of new and old units is calculated using the assumption that 1.5% of the 1983 stock is removed annually (following

recent trends). For existing units, It is assumed that fuel use per unit can be

reduced by 35°/0 (primarily through appliance replacement). A combination of

improved construction and better appliances is assumed to reduce consumption per new unit by 500/..

fsame a9 (e) except that new units are assumed to have consumption reduced

to.3 average 1983 levels and existing units 0.58. It Is further assumed that 25°/0

of the “other fuel” consumption is shifted to electricic demand with a net improvement of 0.75.

SOURCE: Office of Technology Assessment, 1987.

TRANSPORTATION

America’s need for transportation is as diverse as

the U.S. population. There can be no objective meas- ●

ures of progress in transportation, but most Americans are likely to agree that a successful system is

one

●

●

●

that:

provides as much freedom of movement as ●

possible—allowing individuals to go where they

want, when they want, at the lowest possible

cost in time and money;

provides mobility to the widest possible range

of individuals—including the young, the elderly,

services consumed by households;

increases the number of attractive areas for locating homes and businesses, thereby reducing

pressures to increase the price of scarce land

while increasing access to needed outdoor recreation areas; and

has few unattractive “externalities,” such as

making the Nation vulnerable to foreign oil suppliers, degrading air quality, contributing to

deaths and injuries, or creating unattractive

landscapes.

and the physically handicapped; For three generations, American criteria for qualenables efficient supply of the varied goods and ity transportation have translated into a love affair
115

with the automobile. In 1983, 94 percent of all personal spending for transportation and 87 percent of

all government spending for transportation was spent

on automobile travel and highways. About 77 percent of all trips (and person-miles) are taken in automobiles or light trucks.12] An ability to drive is as

necessary for a comfortable life in most suburban

areas as an ability to walk. Women, particularly those

needing to work, are now comparable to men in the

proportion of licensed drivers. While only 74 percent of working women had licenses in 1969, 91 percent had them in 1983 (see table 3-14).

The spending estimates actually underestimate the

real cost of automobiles, if only because the opportunity cost of extensive “free” parking spaces provided by businesses is not counted in this total; nor

are the costs of garages that are included in home

prices. In some areas, these parking costs may be

nearly as high as the total cost of purchasing automobiles.

Transportation “needs” are dictated by neighborhood and city design, and by the physical relationships between residential areas, areas of employment, schools, and shopping areas—as well as by

the details of transportation hardware. A well-designed community may provide access to a multitude of goods and services with few or no vehicle

IZI u s Energy Information Administration, Residential Transportation Energy Consumption Survey, “Consumption Patterns of Household

Vehicles. 1983, ”

Table 3-14.–Personal Transportation, 1969.83

Categories 1969 1977 1983

Licensed drivers/persorr . . . . . . 0.52

Licensed drivers/employed adults:

Females ., . . . . 0.741

Male s 0.935

Licensed drivers/unernployed adults’:

Females ., . . 0.549

Males, : : : : . . . . 0.648

Miles driven per driver (thousands of

milw/year)

Females . 5.41

Males. ., ., : : : : : 11.35

Vehicles/licensed driver 0.70

Vehicles/person 0.37

Person-trips/person 740.00

Person-miles/person (000s) 7,12

Miles/trip ., : : 9,67

0.60 0.64

0.875 0.911

0.954 0.958

0.629 0.642

0.736 0.760

5.94 6.38

13.40 13.96

0.94 0.98

0.56 0.63

990.00 980.00

8.82 8.48

8.87 8.68

SOURCE: U.S Department of Transportation, Federal Highway Administration,

1983-1984 Personal Transporlatiort Study Nationwide, Volume 1, August

19aa, p 11

trips. Yet it is obvious that the great appeal of the

American system of transportation is that it allows

an individual mobility even if she lives in such a

community. Attempts to develop self-contained,

planned communities lacking this type of freedom

and mobility are not likely to do well in American

markets. Retirement communities are an exception

created by necessity. One of the challenges of transportation technology should be to find a way to maintain the greatest possible freedom of mobility for the

elderly and other disadvantaged groups.

The Nation’s personal transportation system is mature and surprisingly stable. In spite of radical swings

in the price of gasoline, the real cost of operating

an automobile has not changed significantly in a

generation. At the same time, increased vehicle

ownership has meant that auto travel has captured

a growing fraction of personal income. The system

obviously serves the country well.

There have, of course, been many improvements.

Compared with the system that operated in the

1950s, the existing automobile fleet is more differentiated, more reliable, more efficient, and safer. While

emissions per vehicle have been reduced by law,

the rapid growth in driving has made it difficult for

many regions to meet goals established for air quality. Sharp increases in the percentage of adults

licensed to drive, and in the number of vehicles per

driver (the ratio is now 98 vehicles per 100 drivers)

have allowed Americans enormous freedom in personal movement—used to adapt to changing job and

housing locations. The “personalization” of transport services has increased to a point where twothirds of all trips (and 86 percent of all commuting

trips) are made alone.

Many of the externalities associated with conventional automobile transportation remain unresolved.

A system so completely dominated by automobile

travel can leave the elderly, the handicapped, and

other groups without acceptable transportation alternatives. More than 13 percent of all U.S. households

still own no personal vehicle, greatly limiting their

access to an economy dependent on automobile

transport.

Heavy dependence on petroleum could place the

entire economy at risk in the mid- 1990s and beyond.

In spite of the fact that the energy efficiency of transport has increased sharply since the early 1970s,
116

other parts of the economy have either done a better job of improving efficiency or have managed to

shift to other energy sources. Transport consumed

about half of all petroleum used in the United States

in 1960. In 1986, transportation used 63 percent of

all U.S. petroleum consumed—more oil than the

United States produced in that year. Automobiles and

light trucks alone are responsible for 40 percent of

U.S. petroleum consumption.122

Without some fundamental change in automobile

petroleum use, demand can be met only by increasing imports to levels higher than they were during

the peak period of the 1970s, at a time when Middle East producers will have a much higher fraction

of all producing capacity than they did when OPEC

(Organization of Petroleum Exporting Countries) was

formed. Progress will need to begin soon if any reform is to have an effect in 15 years.

Apart from dangerous dependence on foreign oil

imports, transportation presents the economy with

a series of problems that have proven difficult to resolve. In most areas, automobiles and other vehicles are responsible for the bulk of air quality problems, At least 30 major cities are not likely to meet

1988 air quality goals established in a 1977 congressional amendment to the Clean Air Act.

Fatalities and injuries resulting from automobile

and other forms of transport have fallen, but not as

rapidly as other forms of-accidental death. Motor vehicle accidents accounted for more than 45,000 fatalities in 1985, and are the third largest cause of

death in the United States and the leading cause of

death for young males. The greater differentiation

of vehicles on the road may have contributed to the

problem of safety. Rule changes permit increasingly

large trucks on public highways at the same time

that automobiles are decreasing in size.

Trends in Personal Transport

The average American (man, woman, and child)

now travels about 13,500 miles a year (see table 3-

15). The average adult male spends 90 minutes a

day traveling and women spend more than an hour

a day (see table 3-16). The amount of travel depends

IZZp.D. patterwn, “Ana]ysis of Future Transportation Petroleum Demand and Efficiency Improvements,” paper delivered at the IEA Energy

Demand Analysis Symposium, Paris, Oct. 12-14, 1987.

Table 3.15.—U.S. Per Capita Passenger Travel in 1984

Mode/vehicle type Miles per person

All modes . . . . . . . . . . . . . . . . . . . . . ......13,566

Personal transport . . . . . . . . . . . . . . . .....10,815

Automobiles . . . . . . . . . . . . . . . . . . . . . . . 8,884

Motorcycles . . . . . . . . . . . . . . . . . . . . . . . 58

Personal light trucks . . . . . . . . . . . . . . . . 1,873

Buses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 517

Transit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Intercity . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

School . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325

Air. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,065

Certified route air carrier . . . . . . . . . . . . 1,013

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Rail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

lntercity . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Transit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

SOURCE: Calculated from U.S. Department of Energy, Office of Transportation

Systems, Tfanspcmatlon Energy Data 8ook, Oak Ridge National Laboratory, ORNL%325, edition, April 1967, table 1.16.

Table 3-16.-Minutes Per Day Spent in Travel

Men Women

1975 1985 1975 1985

Work Travel . . . . . . . . . . . . . . . . . . 25 31 9 17

Family Travel . . . . . . . . . . . . . . . . . 33 31 33 33

Leisure Travel . . . . . . . . . . . . . . . . 27 33 21 23

Total . . . . . . . . . . . . . . . . . . . . . . 85 94 63 73

SOURCE: John P. Robinson, “Trends in Americans’ Use of Time: Some Prelimi.

nary 1975.1965 Comparisons,” Survey Research Center, University of

Maryland, December 1966.

on the region and the type of household. Distances

and time in travel are increasing slowly.123 Measured

as a percentage of nondefense purchases, public and

private spending for transportation has remained surprisingly constant for more than a generation. The

mix of spending for transportation services has, however, changed slowly over time (see table 3-17). A

slow increase in spending for personal transport has

offset a decline in government spending resulting

primarily from the steady drop in new State and local highway construction.

But do these changes indicate progress or the lack

there of? While transport can be an end in itself, it

is mostly a means to an end. Does increasing per

capita spending for transportation mean that additional or qualitatively new services are being provided and that Americans are enjoying more mobility, or does it mean that more time and money

are being spent to procure the same set of transportation services?

123 L.11. Burns, Transportation, Temporal, and Spatial Components o~

Accessibility (Lexington, MA: Lexington Books, 1979).
117

Changing demographics, such as the decline in

family size, the growth of multiple-worker families,

the suburbanization of job location, and changing

lifestyles all translate into different transportation

Table 3-17.—U.S. Consumption of Transportation

(in biiiions of current doiiars)

Type of purchase 1955 1965 1985

Personai transport . . . . . . . . . . .

Household spending . . . . . . .

New autos . . . . . . . . . . . . . .

Used autos . . . . . . . . . . . . .

Other motor vehicles. . . . .

Tires, accessories . . . . . . .

Repair, washing . . . . . . . . .

Gas and oil . . . . . . . . . . . . .

Bridge, tunnel fees . . . . . .

Insurance . . . . . . . . . . . . . . .

Public spending . . . . . . . . . . .

Highways a 

. . . . . . . . . . . . . .

Urban public transport . . . . . . .

Household spending . . . . . . .

Transit . . . . . . . . . . . . . . . . .

Taxicab. . . . . . . . . . . . . . . . .

Commuter rail . . . . . . . . . . .

Public spending . . . . . . . . . . .

Transit . . . . . . . . . . . . . . . . .

Other transport. . . . . . . . . . . . . .

Household spending . . . . . . .

Other rail . . . . . . . . . . . . . . .

Bus . . . . . . . . . . . . . . . . . . . .

Airline . . . . . . . . . . . . . . . . . .

Travel agents, airport, bus,

etc. . . . . . . . . . . . . . . . . . .

Public spending . . . . . . . . . . .

Water & aira

. . . . . . . . . . . . .

Rail a 

. . . . . . . . . . . . . . . . . . .

Total transportation . . . . . . . . . .

Household . . . . . . . . . . . . . . . .

Public . . . . . . . . . . . . . . . . . . . .

35.8

31.9

13.8

1.9

0.5

1.6

3.9

8.6

0.2

1.4

3.9

3.9

1.9

1.9

1.3

0.5

0.1

0.0

0.0

1.1

1.0

0.4

0.3

0.3

0.0

0.1

0.1

38.9

34.8

4.1

Percentage distribution of spending:

Personal transport . . . . . . . . . . . 92.O%

Household . . . . . . . . . . . . . . . . 82.0

Public . . . . . . . . . . . . . . . . . . . . 10.0

Urban public transport . . . . . . . 4.9

Household . . . . . . . . . . . . . . . . 4.9

Public . . . . . . . . . . . . . . . . . . . . 0.0

Other transport . . . . . . . . . . . . . . 2.8

Household . . . . . . . . . . . . . . . . 2.6

Public . . . . . . . . . . . . . . . . . . . . 0.2

Total . . . . . . . . . . . . . . . . . . . 100.0

62.8

55.3

21.4

3.8

1.3

3.5

7.6

14.8

0.5

2.4

7.5

7.5

2.1

2.0

1.3

0,6

0.1

0.1

0.1

2.5

2.0

0.3

0.4

1.3

0.1

0.5

0.5

0.0

67.4

59.3

8.1

93.2%

82.0

11.1

3.1

3.0

0.1

3.7

3.0

0.7

100.0

357.7

329.8

86.9

34.5

31.3

25.0

48.3

92.6

1.3

9.9

27.9

27.9

8.7

7.1

3.5

3.1

0.5

1.6

1.6

26.2

20.1

0.6

1.2

18.3

1.9

6.1

5.9

0.2

392.6

357.0

35.6

91.l%

84.0

2.2

1.8

0.4

6.7

5.1

1.6

100.0

aSWnding in theWcategofles haabeenallocatad batween flnaIdemand(shown

here)andspendlng bygovernment that supports lntermediateuse oftransportation. The support of intermediate transportation iacounted in the “governmerit not elsewhere cleasified’’ amenity category.Spending Is partitioned by

the ratlobetween finalcommodlty demandandtotal commodity output shown

foralr,water, and rail in the 1977input/output tables (U.S. DeparfrnentofCommerce, Bureauof Economic Analysis). Highway spending attributed toflnal demandwaa calculated by taldng total highway spending and multiplying bythe

ratio between user fees collected from private automobiles to all highway user

fees,

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” Survey of Current Business, histor.

Icai diskettes, tables 2.4, 3.15 and 3.16.

needs. Shrinking household sizes and an increase

in the percentage of women in the work force (women

tend to work closer to their homes than men) has

actually led to a decline in miles of commuting per

household (see table 3-18).

The harried life of many families is reflected in

changed use of personal transportation. Table 3-18

shows a sharp increase in family travel for shopping

and other purposes and a decline in recreational

travel distances.

Continued suburban development also shapes

travel needs. Even in 1970, less than 4 percent of

all commuting went from suburban areas to the central business district.124 By 1980, 60 percent of the

31 million commuters in the Nation’s 25 largest urban areas lived in suburban areas and traveled to

jobs outside the central business district. About half

of all commutes in other metropolitan areas involved

such trips. There are, of course, significant regional

differences. While older cities such as San Francisco

and Minneapolis still have vigorous downtown areas,

many cities that have expanded rapidly in the past

decade have several centers rather than one.

lZ4Urban Mass Transportation Administration Technical Assistance

Program, Joint Center for Policy Studies, Demographic Change and Recent Work(rip Travel Trends (UMTA-DC4Y3-7009), Washington, DC, Feb

ruary 1985.

Table 3-18.—Vehicle Miles of Travel Per Household in

Personal Vehicles

Miles

traveled

in 1983 Percent of Percent change

(thousands) 1983 total 1969-1983

Work. ... . . . . . . . . . . . . . 4.03 34,4

To or from work . . . 3.54 30.1

Work related business . . . . . 0.50 4.2

Family and personal . 3.56 30.3

Shopping . ., 1.57 13.3

Other. ., . 1.99 16.9

Civic, educational, and

religious . . . . . . . . . . . . . . . . 0.48 4,1

Social and recreational. . . . . . . 3.53 30.1

Vacation . . . . . . . . 0.25 2.1

Visit friends/relatives. 1.59 13.5

Pleasure driving . . . . . . . . . 0.13 1.1

Other. . . . . . 1.56 13.3

Other . . . . . . . . . . 0.14 1.2

Total . . . . . . . . . . . . . . . . . 11.74 100.0

–22,0

–15.4

–49.8

47.9

68.7

34.9

–20,9

– 13.7

–22.1

6.1

–65.4

– 17,4

–8. 7

–5. 5

SOURCE: U.S. Department of Transportation, Federal Highway Administration,

1983-1964 Nationwide Personal Transpocfatlon Study, vol. 1, Washing.

ton, DC, August 1966, table 5-2.
118

Table 3-19 shows how different commuting needs

translate into commuting times. The time people are

willing to invest in commuting seems to have changed

relatively little in a hundred years. Commuters appear to put a comparatively low value on commuting time for the first 20 minutes and approach psychological limits after 45 minutes. The availability

of car telephones, sound equipment, and other

amenities in vehicles does not appear to have changed

the basic formula. In 1980, only 10 percent of all

workers commuted more than 44 minutes. 125 Ironically, higher income workers have slightly greater

average commuting times and travel longer distances

to work.

On average, commuting distances have increased

somewhat, while commuting times have decreased.

Severe congestion problems plague many major cities. Commuting times increased in metropolitan

areas with populations over 3 million between 1969

and 1983. Congestion was identified as a major problem by residents polled in San Francisco, Atlanta,

Phoenix, Washington, DC, and a dozen other urbanized areas.l26 Undoubtedly, some of the difficulty

results from the growing reluctance of Federal or

State governments to pay for highway improvements.

125u.s. Departments of Commerce and of Housing and Urban Development, Annual Housing Survey: 1980, Part F—Energy Related Housing Characteristics (Washington, DC: U.S. Government Printing Office,

1983), p. 76, in Anthony Downs, “Impacts of Rising Traffic Congestion

on the Location of Activities within Metropolitan Areas, ” April 1985.

IZSR. Cewero, Op. cit., footnote 99; Robert Dunphy, “Urban Traffic

Congestion: A National Crisis?” Urban Land, vol. 44, No. 10, 1985, pp.

2-7.

Table 3-19.—Commuting Times by Home and

Job Location in 1980

Average travel

Type of trip time (minutes) —

Living in a central city and commuting to:

CBD a of central city . . . . . . . . . . . . . . . . . 24.9

Central city outside the CBD . . . . . ., ... 20,0

Outside central city . . . . . . . . . ., . . . . . . . . . . . . . 26.4

Living in the urban fringe and commuting to:

CBD of central city. . . . . . . ., ... ., 35.1

Central city outside the CBD ... .., ..., ,., 27.2

Outside central city . . . . . . ., . . . . 18,8

a CBD-Central Business District,

SOURCE: U.S. Department of Transportatlon, Urban Mass Transportation Administration, Demographic Change and Recent Worktrip Travel Trends

(UMTA-DC-09-7009), Washington, DC, February, 1985, p. 36.

New freeway construction has all but disappeared.

User fees no longer cover highway construction and

maintenance costs. 127 Between 1930 and 1950, the

length of paved highways per person in the United

States climbed from 30 feet to 70 feet, but highway

length has scarcely matched population growth since

the 1960s.128 Between 1970 and 1985, the number

of automobiles in the United States increased 54 percent but the number of miles of roads and highways

increased only 4 percent.129

Not surprisingly, the longest commutes were made

by those living in an urban fringe and working in

a central business district (35.1 minutes in 1980)

while the shortest trips involved the growing number of individuals living in the urban fringe and commuting outside a central city (see again see table 3-

19). The longer trips associated with shopping and

other personal business (again see figure 3-18) are

undoubtedly also traceable to the longer trips required for such purposes in suburban areas. Denver, for example, has six shopping centers that have

more retail sales than the downtown area.

Commuting patterns are also becoming complex

as women enter the work force. Many of the differences between male and female driving habits are

beginning to disappear. Women, particularly younger women, are getting driver’s licenses in nearly

the same percentages as men (again see table 3-14)

and are driving greater distances. Working women

make “chained” trips, involving a trip to a child care

center and perhaps a shopping area before and after work.130 Women who both work and live in

suburbs have a 75 percent higher probability of handling shopping and child care than men. In spite of

the increased travel for working women, women still

drive half as many miles as men.

‘

27’’ Automobile Facts and Figures,” in U.S. Congress, Office of Technology Assessment, “Transportation, ” sector study, Washington, DC,

1987.

IWJalculated from data in the U.S. Bureau of the Census, Hisforicai

Statistics of the United States, 1776-1976 and the Statistical Abstract of

the United States 1987, op. cit., footnote 39.

IzgStafistica/ Absfract of the United States 1987, op. cit., footnote 39.

Isowi]]iam M. Miche]son, “The impact of Changing Women’s Roles

on Translation Needs and Usage,” prepared for the U.S. Department

of Transportation, Washington, DC, September 1983; Julio Perez-Cerezo,

Women Commuting to Work in the Suburbs (Berkeley, CA: University

of California, Department of City and Regional Planning, 1985).
119

With the need for individual transport increasing,

the number of cars added in the United States has

far exceeded population growth for nearly a generation. There is nearly one personal vehicle for every

licensed driver in the United States, and 0.63 personal vehicles for every American. The average

American goes on nearly 1,000 trips and travels

8,480 miles in some kind of personal vehicle each

year. There does, however, seem to be some saturation. Between 1969 and 1977, trips became somewhat shorter even though both trips per person and

miles per person increased. Some of this was attributable to an increase in the number of vehicles

available to each family. Since 1977, however, there

has not been a significant increase in either trips or

miles traveled per person.

The preeminence of the automobile is challenged

only by air travel for very long trips; interestingly,

however, trips by air have grown largely as a substitute for rail and bus journeys. Nearly 84 percent

of all trips longer than 100 miles were still made in

cars in 1982—down surprisingly little from a 90 percent share in 1960.

Air travel (including business as well as private

passenger travel) has grown steadily, from about 4

percent of all miles traveled in 1960 to nearly 15

percent in 1984.131 The growth in share of trips has

come largely at the expense of trips made by rail,

bus, and other forms of public transport. The share

of land-based public transport for inter-city and intracity trips has declined steadily in recent decades; in

some cases, travel by these modes has declined in

absolute terms. Deregulation of air travel has reduced

services to many smaller towns and cities, with the

effect that some trips by air are now taken by other

means or, at a minimum, involve a highway trip to

a neighboring airport. The effect is important since

many of these relatively small centers have experienced rapid population growth in recent years. Future growth in air travel may depend on techniques

to reduce total travel time, including the time needed

to reach the airport.

While air travel costs have declined and productivity has increased, the air transport system also appears to be headed for stagnation. The performance

of the air transport system cannot be decoupled from

131 u ,.s, BUreaU of the Census, Statistic/ Abstract of the United States

1986 (106th cd.), Washington, DC, pp. 26 and 591.

that of the highway system, since the efficiency of

air travel is reduced significantly by delays and congestion encountered reaching an airport by automobile or other means. Including travel time to an airport, travel time between cities less than 500 miles

apart has not changed significantly in a generation.

Travel time between New York and Philadelphia,

for example, required an hour and fifty minutes by

train and an hour and thirty minutes by air in 1986

(including travel time to the airport).

Studies indicate that 6 to 10 major U.S. airports

either already face severe bottlenecks due to lack

of “curbside” for connecting highway to air travel

networks, or will face such problems in the future.

This lack of progress is ironic, given the extremely

high value that air travelers apparently place on

their time. Other reports suggest that a large group

of air travelers are willing to pay $30 to $60 per hour

of time saved in bus travel to or from an airport. 132

Looking to the Future

Virtually all attempts to make improvements in

the performance of the transportation system have

met with failure. Public transportation has lost

ground in spite of massive subsidies and a growth

of urban workers during the past decade.

New technologies can help in a variety of ways.

The near doubling of automobile fuel economy between 1974 and 1984 had a major effect on world

oil markets. With fuel economy at 1974 levels, the

United States would now be importing approximately

$40 billion more oil each year. Innovations in vehicle designs could triple fuel economy by the end of

the century.

A variety of other technologies could work to improve real system performance. Methanol, made

from natural gas, coal, urban waste, or biological materials, could provide an acceptable substitute for petroleum by the next century if steps to plan for the

conversion are taken in the near future.

Significant improvements in the net performance

of the system, however, require attention not just

to the technology of vehicles but to the entire transportation network. Fuel efficiency improvements can

ljzGreg W. Harvey, “A Study of Airport Access Mode Choice,” .lourna/ of Transportation Engineering, vol. 112, No. 5, September 1986,

pp. 525-545.
720

easily be offset by heavy congestion and long commutes. New vehicles may require new kinds of

guideways. Real productivity changes in transportation may require zoning permits and other mechanisms influencing the design of communities. Communication technologies could provide better traffic

control, and possibly give drivers better guidance

about which routes are least congested. Progress in

these areas depends on a skillful mix of public and

private decisions.

Conventional public transit systems do not appear

to offer much hope as an alternative to private vehicles. Even in the best of circumstances, the systems work well only during periods when there is

a high demand for movement along a well defined

corridor. But with the complex patterns of living and

working emerging in today’s suburban society, such

corridors are increasingly rare. Uncertainty about patterns of economic growth increases the risk of investments in relatively inflexible systems along fixed

routes.

The American distaste for the comparative inflexibilities and inconveniences of public transit is obvious. Between 1970 and 1980, real family income

declined, the number of workers living in urban

areas increased by 15 million, large new public transit investments were made in Washington DC, Atlanta, and San Francisco, and large operating subsidies meant that cost of public transit rose only 44

percent while the cost of owning and operating an

auto increased 250 percent (gasoline prices tripled).

Nonetheless, public transit ridership fell from 8.9 percent to 6.4 percent of journey to work, while the use

of personal vehicles for the journey to work increased

from 80.2 to 85.7 percent.

With the exception of systems like BART (the Bay

Area Rapid Transit system in and around San Francisco), designed primarily to relieve congestion in

areas where incomes are high, mass transit remains

the option of last resort, and its use is virtually a

measure of the extent to which groups are disadvantaged by the U.S. transportation system. The exceptions are those using the system to commute to a

central business district, and people living in areas

of the northeast (particularly New York) traditionally served with good transit. The average one-way

travel time for workers using public transportation

(42.2 minutes in 1980) was more than twice that of

workers using automobiles (20.8 minutes). Nationwide, in 1980:

●

●

●

●

●

36 percent of transit riders lived in households

with no auto available;

blacks were three times as likely as whites to

use public transit;

31 percent commuted into a central business

district;

25 percent of workers living in a building with

50 or more housing units used public transport,

while only 7,1 percent of workers living in detached single-family dwellings used public transport; and

minorities, older workers, women, and the

working poor were more likely to use public

transit than other groups.

People with other options leave the transit system

rapidly. Ridership has fallen as even the poor are

able to purchase vehicles. The number of households

with no vehicles fell from 20.6 to 13.5 percent between 1969 and 1983 (see table 3-20). Teenagers

(sometimes considered a group disadvantaged by the

auto-based transport system) actually reduced usage

of public transport between 1970 and 1980.

Moreover, the labor problems associated with

operating a system with morning and evening peaks,

separated by very low densities, makes traditional

transit systems uneconomical in many areas—particularly those experiencing the most rapid growth. Between 1960 and 1983, private spending on public

transport other than air travel actually fell by 1.3 percent per year. Government spending for public transportation projects, however, increased rapidly during the period, even though the use of most public

transit systems declined,

In many areas the bulk of these subsidies have

benefited middle and upper income groups rather

than the poor, though the poor tend to pay a greater

Table 3-20. -Vehicie Ownership by Households

Percent owning: 1969 1983 Percent Change

No vehicle. . . . . . . ., . ........20.6 13.5 –34. 5

One vehicle . . . . . . . . . . . . . . . . .48.4 33.7 –30. 3

Two vehicles. . . . . . ., ., .. ..26.4 33.5 26.9

Three or more vehicles. . . . . . . . . . 4.6 19.3 319.5

SOURCE: “AutomobNe Facts and Figures,” U.S. Congress, Office of Technology Assessment, “Transportation,” sector study, Washington, DC, 1987.
121

fraction of their incomes to subsidize the systems

since most systems are paid for through non-progressive taxes.133 Subsidies for transit systems have been

justified by a desire to generate growth at suburban

sub-centers. While this has worked in some areas,

in others desired growth either has not occurred or

has actually been opposed by local residents.134

There has, however, been a dramatic if poorly documented increase in alternative forms of public transport. Some are private systems serving specialized

markets, such as limousines and vans serving hotels

and airports. Others are supported at public expense.

The State of California provides coupons to lowincome and elderly people that can be used to purchase trips to shopping areas or health centers in

their community; taxi companies offer the State volume discounts. It must be recognized, of course, that

one of the advantages of para-transit alternatives to

conventional public systems is the difference in wage

rates. Traditional bus and transit jobs, at least in

larger cities, tend to be unionized and pay an average of $11 to $13 per hour ($18,000 to $25,000 per

year). Para-transit operators average $4 to $6 per

hour ($12,000 to $15,000 per year).135

Choices and Consequences

Is it then possible to envision a transport system,

based primarily on personal vehicles, that could offer greater flexibility, diversity, and freedom of choice

to the American public? The answer appears to be

“yes, but . . . .“ Changes permitting real improvement in mobility through greater differentiation, cost

reduction, or speed will require basic changes in the

design of guideways, control systems, and parking

strategies. Where feasible, they may require new

strategies of community design to minimize travel

needs and integrate pedestrian and non-pedestrian

travel.

The emergence of such systems will obviously require a mixture of public and private investments.

They will also require coordinated planning and a

ISSM, Weber, “The BART Experience—What Have We Learned, ”

Monograph No. 26, Institute of Urban and Regional Development,

University of California, Berkeley, CA, 1976.

1341bid,

‘35(’Top Hourly Wage Rate Summaries Update,” American Public Transit Association, various years; reports of various State public utilities

commissions.

long time to implement. Highway and air travel are

particularly dependent on Federal, State, and local

investments in infrastructure, signaling and traffic

control, and terminals; fundamental change can be

undertaken only through a combination of public

and private decisions.

The future seems to belong to a personal transportation system capable of providing the personal

and flexible service demanded by a rapidly shifting

economy. Table 3-21 illustrates the difference between car ownership and car usage patterns. While

there has been some differentiation in car size in

recent years, a large mismatch between vehicle capacity and vehicle use remains. Less than 3 percent

of all cars on the road are designed for two passengers (mostly Corvettes, Fieros, and other sports cars).

More than 96 percent of all work trips, 87 percent

of car trips of all kinds, and 83 percent of all vehicle miles traveled could have been taken in a twopassenger vehicle in 1983. Six-passenger cars are

full on 0.5 percent of all trips. The increased individual mobility resulting from greater vehicle ownership has lead to a steady decline in vehicle ocTable 3-21 .—Use and Ownership Patterns of Personal

Vehicles in the U.S. Fleet, 1983 (in percent)

Vehicle miles

Number of trips traveled

Number of Earning a living All purposes All purposes

occupants 1977 1983 1977 1983 1977 1983

One ., 81 .2% 86.4% 59.6% 65.7% 51 .7% 57.4%

TwO. . . . . . . . 94.6 96.2 84.3 8 7 2 79.4 83.1

Three ., . . . . 98.0 98,8 92.6 94.6 89.1 91.4

Four 99.2 99.5 97.0 98.0 95.3 96.6

Five. . . . . . . 99.6 99.7 98.8 99.2 98.1 98.7

Six & up. .. .100,0 100.0 100.0 100.0 100.0 100,0

How to Read the Above: Of all U.S. automobile trips to work made in 1977,

81.2 percent were made with one person in the car, 94.6 percent were

made with two people, etc. In the same year, 51.7 percent of all vehicle

miles traveled were made with one person in the car.

Size of U.S. automobiles by size (in percent):

1985 1985 1986

Size class stock sales sales

Two-seater . . . . . . . . . . . . . . . . . . . . . 2.1 % 3.3% 2.5%

Minicompact . . . . . . . . . . . . . . . . . . . . . . . . 4.8 1.0 1.7

Subcompact . . . . . . . . . . . . . . . . . . . . .. ...22.7 22,0 22.4

Compact . . . . . . . . . . . . . . . . . . . . . . ...........17.1 32.7 33.2

Midsize. . . . . . . . . . . . . . . . . . . . . . .. ..28.4 28.0 26.9

Large ., . . . . . . . . . . . . . . . . . . . . .. .24.8 13.0 13.2

SOURCE: For type of trip, see U.S. Congress, Office of Technology Assessment,

“Transportation, ” sector study, Washington, DC, 1987. For stock and

sales, see U.S. Department of Energy, Office of Transportation Systems, Trartspoflatlon Energy Data Book, Oak Ridge National Laboratory (ORNL-6325), edition 9, April 1987, pp. xvii and 2-29.

52-635 0 - 88 - 5
122

cupancy. On average, more than two people ride in

vehicles only for trips longer than 20 miles, when

families with two adults and young children travel

for religious, social, or recreational purposes, for families with young children, or for family business. ’36

There appears to be a large potential market for

vehicles designed to serve the needs of those traveling alone or in pairs. Actual purchasing decisions,

of course, are based on the assumption that the vehicle may need to be used occasionally to carry large

luggage loads or a large number of people. With

many cars available, however, large families use

large cars primarily for “surge” capacity. Given alternatives, or faced with problems resulting from fuel

costs or congestion, many individuals might elect

to purchase vehicles better matched to their dominant transportation needs and simply rent trucks or

larger automobiles for the rare occasions when they

are needed.

Travel in pick-up trucks is an extreme example

of poor capacity utilization, since most are driven

as personal vehicles with no loads. Pick-ups accounted for 14 percent of all personal vehicles in

1983 and slightly more than 14 percent of all vehicle miles.137 Nearly 57 percent of the 33.8 million

trucks on the road in 1982 were used principally for

personal trips.138 Measured in vehicle miles traveled,

use of light trucks is growing 3.4 times faster than

use of automobiles.lsg

Considering the Possibilities

Scenarios for the future presented here are all built

on the assumption that autos will continue to dominate personal transportation markets in the United

States. The Trend scenarios differ from the Alternative scenarios principally by assuming that in the

Alternatives, there will be greater product differentiation and higher fuel efficiencies, and there will

be a rationalization of the location of airports and

systems for transferring from aircraft to other forms

of transport.

Automobile travel today depends exclusively on

a large, general purpose vehicle operated on high-

‘3s’’Transportation,” op. cit., footnote 127.

ltTlbid. pickups traveled an average of 10,550 miles per year, while

automobiles average 10,055 miles per year.

WY.J.S. Depa~ment of Commerce, Bureau of the Census, 1982 Census

of Transportation, “Truck Inventory and Use Survey.”

Itgpatterson, op. cit., footnote 122.

way lanes up to 12 feet in width and requiring parking spaces sized to the vehicle at all destinations.

A future system might seek to tailor vehicles more

closely to trip functions. Work trips could be undertaken in a small, high velocity vehicle designed for

one person but with room for one other person or

some baggage. The vehicle could be inexpensive (as

little as $2,000), run at 100 miles per gallon, and

be parked in a small space. The vehicle could be

designed to have good ride characteristics and handling. General Motors has such a vehicle in an advanced stage of development and several foreign producers are considering alternatives.

While the vehicle could operate on standard highways with special lanes and parking spaces carved

out of existing facilities—increasing capacity because

of the smaller vehicle size—it would be preferable

to develop special roads for these small vehicles. Separate lanes and fly-overs could be much less expensive to construct than standard highways, since the

lanes could be half the width of lanes built for conventional traffic and would require significantly less

structural strength if they did not need to carry heavy

trucks.

Even with the conventional car fleet, fuel efficiency

can be improved substantially within acceptable cost

ranges if a market for efficiency develops. Table 3-

22 indicates the kinds of vehicles in testing. Fuel

economies as high as 98 miles per gallon are possible even for comparatively roomy vehicles capable

of carrying 4 to 5 passengers. ’40

A “neighborhood car” with associated infrastructure could be developed for trips that did not require

high speed travel. An inexpensive vehicle, designed

for low-speed operation over relatively short distances, could improve the attractiveness of neighborhoods and could significantly increase the mobility of the elderly, the very young, and households

not able to afford a conventional vehicle. Protected

operating environments could be fitted into local

street networks to permit safe operation. The vehicles could be highly efficient, use a variety of nonpetroleum based fuels, and be relatively non-polluting.

An illustration of some alternatives for future car

transport is given in table 3-23. This table explores

lIOsee DebbY BleViS, Preparing for the 1990s: The Worfd Automotive Industry and Prospects for Future Fuel Economy Innovation in Light

Vehicles j Federation of American Scientists, January 1987,
123

Table 3=22.—Fuel Economy of Test and

Prototype Vehicles

Maximum Curb

Fuel economy power weight Capacity

(miles/gallon) (HP) (pounds) (persons)

Commercial:

1986 Honda CRX 54 60 1,700 2

1986 Chevy/Suzuki

Sprint . . . . . . . . . . . . . . 57 48 1,500 4

1985 Ford Escortd 55 52 2,100 5

Prototype:

VW Auto 2,000 d..... 6 6 60 1,700 4-5

Volvo LCP 2,000M

69 60/90 1,600 2-4

Renault EVEd

. . . . 70 50 1,900 4-5

Toyota Compactd 98 56 1,400 4-5

NOTES: For U.S. vehicles, efficiencies use EPA combined fuel economy. European and Japanese prototype data were converted to EPA test values

using conversion factors recommended by the International Energy

Agency. Unless otherwise indicated, the vehicles use gasoline as a fuel,

(D) indicates a diesel vehicle, (M) indicates a multi-fuel vehicle.

SOURCE: Robert H. Williams, “A Major Role for Developing Countries in Promoting Super Efficient Cars,” paper presented at San Palo Workshop,

November 1985.

the cost implications of different types of car fleets

and car ownership rates, and the implications for

gasoline consumption.

Alternatives to conventional public transit can be

developed that are more suited to the practicalities

of modern commuting, and that provide improved

mobility for transportation of the handicapped. It is

likely that many of these alternatives would require

lower social subsidies than systems built along traditional rail and bus systems. A key to the system

would be the use of modern communication systems

to dispatch a variety of vehicles to neighborhood

stops, homes, or businesses on demand. Customers could choose from a variety of vehicles, ranging

from demand-responsive taxis to para-transit services. Some of these options would offer subsidized

fares to those needing assistance.

Jet aircraft are not well designed for short flights,

and service for long-haul flights is becoming increasingly concentrated at hubs not easily accessible to

many towns. Systemic performance could be improved with a better system of hubs, designed to provide service to a wide region through improved land

vehicle and high-speed rail links as well as shorthaul aircraft. The system’s performance can be optimized only by considering all elements of the transportation link.

While these strategies could radically improve the

performance of the transportation system, few of

them depend on the development of radically new

technologies. However, their introduction requires

solutions to political and institutional problems that

can be much more difficult to resolve than sophistiTable 3-23.—Background Assumptions for

Transportation Scenarios

A. Use and Distribution of Vehicles

Two Four Six Cars per Miles per

person person person adulta

adult

1983 . . . . . . . . . 2 38 60 0.65 8.6

2005:

Baseline c . . . . . 2 38 60 0.65 l0.0 b

Case #ld . . . . . 18 32 50 0.65 8*6C

Case #2e . . . . . 44 28 28 o.75f 10.09

Case #3h . . . . . 35 25 40 0.85i

10.0

B. Cost of Vehicles

Total Average Total

vehicle price/ spending

purchases vehicle on new vehicles

(millions) ($1,000) (1983=1)

1983 . . . . . . . . . . . 7.4 9.6 1.00

2005:

Baseline . . . . . . . 11 .3j 14. 6

k

2.32

Case #l . . . . . . . . 8.51

8 . 5

m

1.02

Case #2 . . . . . . . . 10.81

9 . 8

m

1.49

Case #3 . . . . . . . . 17. 0 7 . 4

k

1.77

C. Fuel Efficiency of Vehicles

Total Average

vehicle miles Spending

miles per on gasoline

(billions) gallon” (1983= 1)

1983 . . . . . . . . . . . 1,465 16.5 1.00

2005:

Baseline . . . . . . . 2,140 26.7 0.90

Case #1 . . . . . . . . 1,840 44 0.47

Case #2 . . . . . . . . 2,140 59 0.40

Case #3 . . . . . . . . 2,140 53 0.45

aFOr these calculations, an adult is a person aged 16 to 75.

bAss umes that car miles per adult will increase at the rate prevailing from 1%0

to 1984.

cunchanged from 1983.

dMix changed to reflect the “extensive downsizing” case used by Melvyn Ches.

low, The Effect of Changing Household Composition on the Size Mix of New Automobile Sales: 1979-2LW0, Evaluation Research Corp., Vienna, VA, May 1980.

eFollowing Chestow, it is assumed that half of all single-person households and

half of all children of driving age living at home use two-passenger cars, while

the rest drive four-passenger cars.

fAs~umes that cars per adult will increase at half the average rate of the period

1960 through 1975.

gAssumes that car miles per adult will increase at the rate prevailing from 1960

to 1984.

hsame mix assumptions as case #1, but assumes that 30 percent of households

will also purchase a two-passenger car.

iAssumes that cars per adult will increase at the rate of the lg60s.

jcalculated assuming cars per adult shown above, and using mid-range forecast

showing 214 adults and a 7 percent annual scrap rate per year.

kAssumes that new car prices increase at about 1970-1980 rate (recent priCO increases have been much higher).

‘calculated as in (j) above, only using a 5 percent scrap rate.

m&.sumes that the real price of four- and six-passenger CarS do not chan9e, and

that a two-passenger car can be purchased for S3,000.

nAssumes that a two-passenger Car can be built to acll~ew ~ mpg, a fOUrpassenger car to achieve 40 mpg, and a six-passenger car to achieve 30 mpg

SOURCE: Office of Technology Assessment.
124

cated technical problems. Admittedly, building any

of these systems would require fundamental changes

in traditional design protocols and standards as well

as extensive public investment.

New technologies could make significant contributions to conventional transportation systems, as

well as facilitate the emergence of changes in transport strategies such as those outlined above. Information technology could play a critical role by optimizing the routing and dispatch of aircraft, public

vehicles, and perhaps even personal vehicles, and

by optimizing the performance of the vehicles themselves. Advanced control technologies could contrib

ute to improved intercity automobile transportation,

and many of the monotonous tasks of driving could

thereby be simplified. The driver could be given information on speed limits, distances to exit ramps,

and details about road conditions. Car status systems

could warn the driver when there are problems in

the car that need attention. Electronic safety systems

could include night vision equipment, automatic

braking, and collision avoidance systems.

Traffic data systems could provide information on

traffic situations such as construction and accidents.

Local highway departments could also benefit from

such services since they could anticipate traffic patterns and demand. The data could be used to improve traffic signaling, and to suggest alternate

routes that would distribute traffic more evenly. More

effective integration of vehicles and the roadway

would make driving easier and safer, and would also

reduce travel times and costs. Technology could also

play a key role by improving the energy efficiency

of vehicles, increasing the safety of vehicles of all

sizes, facilitating the development of low-cost and

reliable sources of methanol or other non-petroleum

fuels, and reducing emissions,

Constructing Scenarios

Expenditures on the Transportation amenity for

several different scenarios are illustrated in table

3-24. In most cases, the Trends are derived using

methods described in the previous chapter.

A departure from the projection of existing patterns is made for gasoline expenditures, to take into

account the increasing share of the post-1973 higher

fuel efficiency automobiles in the total vehicle fleet.

For the 3 percent Trend scenario (the 2005 baseline

Table 3-24.—Consumption Scenarios for

Transportation (billions of 1983 dollars)

2005

1983 Trend 3% Trend 1,5% ALT 3% ALT 1.5%

Vehicles . .......109 192a

14oa 192° 162f

Vehicle

maintenance . . 72 134a

98a135b114b

Gas and oil ... . . 90 81C75d

418

361

Air fares . . . . . . . 15 42a22a 52g 23g

Other public

transport 9 13a

10a

10h 7

h

Total . ........295 462 346 430 346

Government

purchases . . . . . 48 91 66 130 94

Total . ........343 553 412 560 440

Percent share

of GNP. . . . . . . . 10.1 8.5 8.7 8.6 9.3

ABBREVIATIONS: ALT = alternative scenarlo, GNP - gross national product

a computed using extrapolative techniques described In ch. 2.

b scaled to vehicle purchase amount using the ratios calculated for the Trend

case.

c Baseline cage in table 3-23

dBmellne efficiency from table 3-23 with an assumption that ITIlleS/@ult lncreSSes

at half the rate shown in the case where economic growth doubled.

eBased on case #3 in table 3-23

fBm~ on cue #2 in table 3-23

gAssumed increase In expenditure due to a If) percent fall in alrl[ne prices, in

contraat to stable prices assumed for Trend scenarios.

h Expendit ure on public transport arbitrarily reduced by 10 Percent because of

greater private mobility.

iAgsumed to k 10 percent of total government purchases fOllOwing trend of P~t

decade.

SOURCE: Off Ice of Technology Assessment, 1987.

case), it was assumed that miles per gallon rose to

27 compared with 17 in 1983, and that miles driven

per adult rose by 16 percent over 1983 levels—

roughly a continuation of an historical trend. The

same fuel efficiencies are assumed for the 1.5 percent Trend case. Because of the lower growth rate,

miles per adult are assumed to remain at the 1983

level.

The main difference between the Alternative high

and low growth scenarios is the extent to which personal vehicles are purchased as a replacement for

existing vehicles or in addition to them. These two

scenarios are constructed from cases 2 and 3 of table 3-23, respectively. That is, the 3 percent Alternative scenario provides for a higher vehicle ownership, a car fleet with more large cars, and rather

lower fuel efficiencies than the 1.5 percent case. Vehicle miles are similar in both cases. A comparison

between the Trend and the Alternative scenarios suggests that increased mobility could be achieved in

both the 1.5 and 3 percent cases at a minimal increase in vehicle expenditure and a reduction in gasoline costs.
125

For air fares, it is assumed in the Alternative case

that fares decline by 10 percent in real terms instead

of staying constant as in the Trend scenarios, and

that expenditures on air travel consequently increase. This higher level of expenditure in the 3 percent Alternative case is in line with historical trends.

The relatively small expenditure on “other public

transport” is assumed to be 10 percent lower in the

Alternative case, in recognition of the greater private mobility that this scenario envisages. Government purchases of transport—roads, waterways,

etc.—are assumed to rise in all cases due to the need

to provide infrastructure for increased mobility. The

increase in the Alternative cases is sharper, as special

guideways for the new vehicles would be needed.

Total expenditures on Transportation under the

3 percent Alternative would therefore be about the

same as in the 3 percent Trend scenario, but the

Alternative allows for increased mobility. Greater m~

bility is also incorporated in the 1.5 percent Alternative case, but here expenditure would be some

7 percent higher than in the 1.5 percent Trend scenario. The income distribution scenarios suggest that

people place a high priority on increased mobility

as incomes rise.

CLOTHING AND PERSONAL CARE

The category “Clothing and Personal Care” includes clothing and shoes, jewelry and toiletries, and

the services associated with these commodities. This

section focuses primarily on apparel, which represents roughly three-quarters of consumer expenditures in this area.

Both men and women demonstrate strong interest in the communicative quality of their clothing,

and its ability to influence image, career advancement, and self-esteem. Personal spending on highpriced fashion products—which generally remain

popular for only ten weeks before being replaced

by another style—is increasing rapidly. }4]

Apparel retailers face the challenging opportunity

of the coming of age of those born during the baby

boom. With the oldest of this group now approaching 40 and the youngest just leaving college, this generation is entering its prime years of earning and

spending, and it will have an enormous influence

on apparel markets for the next 20 to 40 years.142

Households headed by individuals between the ages

of 35 and 54 have, on average, the highest household income, and spend more on apparel (and textiles) as a percentage of total expenditures than other

households. As figure 3-7 demonstrates, the portion

Figure 3-7.-Apparel Consumption

Percent of all consumption by household

6

‘~

i

5 5

{

I

5

4 5

4 L

1 2 3 4 5 6 7

Household income cohort

SOURCE: U.S. Department of Labor, Bureau of Labor Statistics, “’Consumer Expenditure Survey, 1982/83,” unpublished data, 1988.

of household spending that goes to apparel increases

with rising household income.143

In constructing the different scenarios, two developments were taken into account. The first is price.

Past prices fell in real terms, largely due to competition from low-cost producers abroad. Thus, import

penetration ratios144 rose from 8 to 14 percent between 1974 and 1982. If this trend continues, prices

can be expected to remain low. If, on the other hand,

141u.s. Congress, Office of Technology Assessment, The U.S. Textile

and Apparel Industry: A Revolution in Progress—Special Report, OTATET-332 (Washington, DC: U.S. Government Printing Office, April 1987),

p. 16.

14zu,s. Bureau d the Census, Current Population Reports, Series p25, No. 986, Projections of the Number of Households and Families:

1986 to 2000 (Washington, DC: U.S. Government Printing Office, 1986),

Table 2, Series B.

WOTA, collected from “Consumer Expenditure Survey, 1982/83, ”

U.S. Department of Labor, Bureau of Labor Statistics, unpublished data,

1986.

lddThe ratio of imports to new supply (domestic product shipments

plus imports); Statistical Abstract of the United States 1987, op. cit., footnote 39, Table 1350.
126

additional protection measures are introduced, a

powerful stimulus to low prices will be removed.

The second development is technology, which

could a have significant impact on clothing in two

ways (see ch. 6 for more on this subject):

1.

2.

Information technologies in the clothing distribution chain could lower costs by reducing inventories and paperwork, improving productivity of the retail end and cutting the time from

order to delivery. This is particularly relevant

for domestic producers, whose comparative

advantage lies in rapid responsiveness to market changes.

Production technologies—including computercontrolled apparel assembly, computer-assisted

design and manufacturing techniques, and auto

mated transfer of fabrics—could improve quality, provide a wider range of choice in fabrics

and sizes at no extra cost, and enhance flexibility in response to consumer demand. It may

soon be possible to use computer-generated images of customers wearing a wide variety of

styles and fabrics and have the article made to

exact individual measurements (in effect a return to individual tailoring) without a significant

increase in cost or production time.

Table 3-25.—Consumption Scenarios for Clothing and

Personal Care (billions of 1983 dollars)

2005

Clothing . .......167.4 378.9 238.7 446.0 281.0

Personal care

commodities and

services. . . . . . . 34.4 72.2 51.5 72.0 52.0

Total . . . . ..201,8 451. 1 290.2 518.0 333.0

Percent share

of GNP . . . . . . 5.9 6.9 6.2 8.0 7.1

ABBREVIATIONS: ALT = Alternative scenario, GNP = gross national product.

NOTES: Trend scenarios use extrapolative techniques described in ch. 2. In the

alternative scenarios, personal care goods and services are as in the

Trend scenarios; for clothing, an increase in expenditure is assumed due

to declining prices of about 15 percent.

SOURCE: Office of Technology Assessment, 1987.

Defining Demand for Education

1983 Trend 3% Trend 1.5% ALT 3% ALT 1.5%

For these reasons, there is considerable uncertainty about future trends in prices. Scenarios are

described in table 3-25. In the Trend scenarios,

spending was assumed to follow extrapolative techniques discussed in the previous chapter. In the

Alternative scenarios, it is assumed that prices fall

by about 15 percent, which is still less than in the

past. As a result, expenditures on clothing rise substantially above the trend levels. Total Clothing and

Personal Care expenditures in the Alternatives would

reach 7 and 8 percent of GNP, compared with 6 and

7 percent in the Trend scenarios.

EDUCATION

If there is anything certain about the future of the

U.S. economy, it is that the demands on the Nation’s

educational system will increase. While it is flatly

impossible to predict precisely which skills will be

needed in a successful future economy, all evidence

suggests that a nation whose wealth depends increasingly on the ability to develop and exploit technical

innovations, and on its ability to respond quickly

to changing market conditions, will need a workforce that is itself adaptable and flexible. This flexibility requires workers capable of identifying what

it is that they need to know in confusing circumstances, and quickly teaching themselves what needs

to be learned. Continuous learning is already a major part of the job description of many Americans,

and the demand for learning can only increase. Ironically, increased use of information technology is also

likely to increase rather than decrease the need for

people that can work as a member of a team assembled from individuals with diverse backgrounds and

skills.

A system of education designed to provide the

economy with the skills needed to prosper in the

emerging world economy can be perfectly consistent with a broader set of objectives for the Nation’s

educational system: the development of a system that

could allow all citizens to discover and enjoy the potential of their own intelligence, to have practical

access to all knowledge, and to understand and celebrate the accomplishments of the human mind and

spirit. This means much more than being able to

design a better robot. It means being able to learn

about how things work. It means being able to have
127

fun with the wit, the music, the images, or the ideas

of people they will never meet. It means having an

opportunity to understand the struggles and the compromises that produce free governments. It means

increasing each person’s freedom and capacity to

grow and change. It means increasing each person’s

capacity for enjoying leisure and retirement.

The correlation between education and an ability to prosper in modern American society go far beyond an ability to get a good job. The strong correlation between education and measures taken to

promote good health was noted earlier. Education

is strongly correlated with an ability to avoid personal disasters (such as divorce, major unemployment, disability, eviction, or a sharp decline in family

income) and an ability to recover from disasters once

they occur. The effect is measurable even when adjustments are made to account for the effects of income, IQ, age, region, and race.145

America has, of course, always understood the

links between education and national wealth and

security. Concern about the quality of public education has always been a key part of the long-standing consensus about equal opportunity. Education

translates an individual’s theoretical right to political and economic freedom into practical powers.

Changes in the structure of the national economy

are likely to increase the burden on the Nation’s

educational system for all of these purposes. The

burst of industrial expansion following the Civil War

was paralleled by unprecedented national legislation

establishing the Land Grant College system and setting aside “school sections” for homesteaders. In the

1950s, the Nation responded to the growing technological prowess of the Soviet Union with a massive National Defense Education program. The challenge faced today may be no less critical. The terms

of international trade hinge increasingly on an ability to generate and capitalize on ideas, and on a work

force trained well enough to adapt quickly to new

requirements.

A fundamental difficulty in measuring progress—

or the lack of progress—in education is the extraordinary difficulty of measuring the output in any

useful way. The complex list of objectives stated

above defy precise measurement. If anything, the

14sG.J, Duncan, years of poverty Years of Plenty (Ann Arbor, Ml: institute for Social Research, The University of Michigan, 1984), p. 26.

problem is compounded as the kinds of skills required by the workforce become more abstract. A

“skill” today means an ability to translate complex

problems into solvable ones, an ability to find out

what needs to be learned and to learn it, and an ability to absorb complex and often inconsistent information quickly. These skills are much more difficult to measure than basic bookkeeping, arithmetic,

or memory skills. The perpetual problem of management in education is that the system tends to reward results that can be measured (and therefore

make progress in what can be measured) while the

most important products may go unmeasured. Developing adequate measurement techniques therefore becomes a critical priority for making progress

in an educational system.

Developing a consensus on priorities is a difficult

process and will require care and leadership. At

present, there appears to be a significant gap between

the expectations of the teaching profession and that

of their clients. Schoois are expected to cure social

problems ranging from drug abuse to the shortage

of babysitters—roles that professional educators do

not always find comfortable. Statistics reveal a sharp

increase in student interest in practical, job-related

skills, and a declining interest in training not directly

related to employment objectives. Job-related bachelor’s degrees increased from 50 percent of all degrees

granted in 1970/71 to 64 percent of degrees granted

in 1982/83, while there were sharp declines in

degrees granted in the humanities and basic physical and biological sciences.14G Only 6 percent of the

elementary and secondary teachers polled in 1984

thought that helping “students get good\ high-paying

jobs” deserved the highest rating when given a list

of objectives for education, while 46 percent of parents surveyed gave it the highest rating. ’47

Trends in Inputs and Outputs

In 1985, the United States spent between 8 percent of its GNP on education (13 percent if corporate

training costs are included). One American in three

engaged in some kind of training or educational ex14GU.S. f)epartmentOf Education, Center for Education Statistics, Digesl of Education StatMcs 1987 (Washington, DC: U.S. Government

Printing Office, May 1987).

147phi Delta Kappan, “The Gallup Poll of Teachers’ Attitudes Toward

the Public Schools” cited in U.S. Department of Education, The Condition of Education (Washington, DC: U.S. Government Printing Office,

1986).
128

perience during the year (see table 3-26). Education

is not considered to be a form of investment or savings, yet it plainly serves a role as important as investment in plant and equipment. Table 3-26 also

shows that spending for education may represent

40 to 80 percent of gross national investment in new

plant and equipment, and perhaps twice an large

an investment after depreciation (it is difficult to

know how to depreciate an investment in education).

Spending patterns in education have shifted rapidly during the past few decades. A large increase

in public spending for education during the 1960s

and early 1970s was reversed in the mid 1970s as

the baby boom generation left public schools. While

statistics are poor, it appears that expenditure on

other forms of education increased rapidly.148 Approximately 23 million people over the age of 17,

or 13.5 percent of all adults, took some kind of parttime adult education in 1983—nearly double the rate

reported in 1957, Sixty percent of the courses were

related to employment. Most adult students were

relatively affluent, white-collar workers who had already received a good education. Adult education

is paid for by individuals, the Federal Government,

and private industry; government and industry expenditures could rise significantly, since more Americans will need to be retrained as new technologies

enter the marketplace.

Despite these large expenditures, the record of the

U.S. educational system is mixed. While it is undoubtedly possible to obtain a better education in

the United States than virtually any other place in

the world, the United States appears to let a larger

fraction of its population fall through cracks in the

system than many of its key trading partners. There

are three different ways of measuring progress.

The first involves examining changes in achievement over time. The past 20 years have witnessed

a steady increase in time spent in school. Thus the

Ids%, for example, ch. 6 of U.S. Congress, Office of Technology ASSESment, Information Technology and Its Impact on American Education,

OTA-CIT-187 (Washington, DC: U.S. Government Printing Office, NO

vember 1982).

ldgln 1980, On]y ] 7 percent of Americans 65-70 years of age had completed a year of college, compared with nearly 45 percent of the 25-29

year olds. The increased numbers participating in higher education in

recent years is, however, the result of a rapid growth in the numbers

of people entering tw~year (rather than four-year) courses of study, with

the aim of upgrading job skills rather than receiving a broad liberal

education.

fraction of the school age population that received

a high school degree grew steadily during the 1970s,

and the number of people seeking higher education

also grew quite rapidly. 149 With the decline in available financial support, the correlation between income and education is likely to grow. The percentage of young blacks enrolling in institutions of higher

education actually fell between 1984 and 1985.150

It is much more difficult to measure the qualify

of the education provided by the American system.

Scores in the Scholastic Aptitude Test, designed to

predict performance in college, suggest a decline in

the educational achievement of high school graduates. Verbal scores fell steadily from 478 in 1963 to

a low of 424 in 1981, but rose to 431 in 1985. Mathematical scores fell from 502 in 1963 to 466 in 1981,

and are now at 475.151 Part of the decline and subsequent increase in test scores may be due to changes

in the number and type of students taking the tests.

Attempts to measure the quality of “literacy” among

U.S. graduates has constantly been frustrated by an

inability to define the term with any precision. The

number of illiterate Americans is estimated to be between 20 and 60 million. This number increases by

1 to 2 million per year. }52 The growth results primarily from people dropping out of school (15 percent of Americans aged 20 to 24 had not completed

high school in 1985), and from large numbers of immigrants. A recent survey of 3,600 young American

adults aged 21 to 25 showed a striking range of practical competence (see table 3-27). Approximately 80

percent of all whites and 40 percent of all blacks were

abIe to do simple sums if the problem was presented

in a form familiar from school arithmetic tests. Only

about 30 of the whites and 2 percent of the blacks

taking the test, however, succeeded in solving problems that required taking a simple percentage. Very

few people were able to translate a practical problem into quantitative terms.
129

Another sign of defects in literacy can be found 1983 to 1984, remedial math courses were taken by

in the growing need for remedial programs con- 25 percent of all students entering colleges and uniducted both by employers and by universities. In versities, remedial writing by 21 percent, and remeTable 3-26.—The U.S. Education System in 1985

Spending Enrollment

(billions) (millions)

Primary & secondary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 46.6b

Household . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Government. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

Higher education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 12.3b

Household . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 23.0’

Personal spending on education & research . . . . . . . . . . . . . . . . . 14

Public libraries & other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Labor training & services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Department of Defensed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 8

e

Business & government trainingf . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30-210

Formal government training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Formal corporate training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259

Informal training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50-180 h

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293-472

Household . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232-254

Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66-175

For comparison:

Gross national product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,010

Gross private domestic investment . . . . . . . . . . . . . . . . . . . . . . . . . . 642

Net private domestic investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205

U.S. population . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239

aU.S.Department of Commerce, Bureau of Economic Analysis,“Nationallncome and Product Accounts,” Surveyot Currerrt

Busirress, JulY 1987.

bU.S. Depaflment of Education, Center for Education Statistics, Di9est of Educatiorr Statistics 1967 (Washington, DC: US

Government Printing Office, May 1987).

cEnrollment statistics for primary, secondary, and higher education fromadulttrainlng Participation from Office of Educational Research and improvement, U.S. Census Bureau, cited in U.S. Congress, Office of Technology Assessment, Technology

and Struclura/ Urremp/oyrnent-Rf3emPbYin9 DlsplacedAdults, OTA-lTE-250 (Waahlngton, DC: U.S.Government Printing Office,

Februa~ 1986) See also Training Maga.zlne, October 1984. The figure includes corporate training. There are probably 8milIion studentsin formal Iearning programs incorporations; see N.P. Eurich, Corporate Classrooms (New York, NY:The Carnegie Foundation for the Advancement of Teaching, 1985).

‘Counted as defense spending in the amenity accounts used in this analysis.

eThe statistic shown here, b~ed on Orlansky (see beiow), is higher than the$14 billion shown in the National Income and

Product Accounts presumably because OrlanskywasabletO include training costs otherwise hlddenin otherDoDaccounts.

Orlansky’sdatafor 1985 show 469,000 recruitsin initial training ($l.7billionh 1.4 million students obtaining specialized skills

including flight training (S6.7 billion, of which flight training Is $2.3 billion), and 69,000 assmiated with officer acquisition

and professional development ($1.3 billion); support and other costs account for most of the remaining costs. J. Orlansky,

“The Cost Effectiveness of Military Training,” Proceedings of the Symposium on the A.Wtary Value and Cost% ffecfiveness

of Training (DS/A/DR(85)167), Brusseis, Belgium, NATO headquarters, Defense Research Group on the Defense Applications

of Research, January 1985, p. 4.

‘Education and training costs in these categories include tralnlng of government and private employees undertaken at the

employer’s expense. They include formal classroom instruction and informai training that is often difficult to disentangle

from routine work—i.e., learning a new word-processing software, or learning a new bureaucratic protocol. They are not considered as a part of “final demand” because they are treated as a part of government spending in other areas, or because

they are purchased by private businesses and therefore considered to be “intermediate input. ” Data in this large and important part of education and training are very poor.

gR, L, Craig and C. Evers, “Employers as Educators: The Shedow Education System,” G. Gold, cd., Business and Higher Education: Toward New Alliances (San Francisco, CA: Jossey-Bass, 1981). The S30 billion estimate for formal trainin9 iS approximately the same as that derived by applying a cost model to the Survey of Participation in Adult Education or SPAE (US

Census), adjusting the results for underreporting that can be estimated when the SPAE participation rates for enrollment

are compared with known enrollment statistics in institutions where enrollment is well known (e.9., universities). See A.P.

Carnevale and H. Goldstein, “Employee Training: its Changing Role and An Anaiysis of New Data,” American Society for

Training and Development Press, Washington, DC, 1963, in A.P. Carnevaie, testimony before the Subcommittee on Taxation

and Debt Management of the U.S. Senate Finance Committee, Washington, DC, Nov. 30, 1987. Eurlch (see note C) suggests

that formai corporate training costs at least $40 blilion. A more recent estimate places the corPorate trainino budget in the

range of $50-70 billion (R. Neff, “Videos are Starring in More and More Training,” Business Week, Sept. 7, 1987, p. 110.

hThe amount paid for training that does not occur in a formal setting kI Simpty not known. Even definitions are difficult ‘ince

it is often difficult to distinguish between work and iearning. (See Carnevale testimony, cited in above note). In 1985, U.S.

employers paid approximately $2.5 trillion for employee compensation. Anecdotal evidence suggests that 2-4°/0 of an average employee’s time is devoted to some kind of informai learning. This would yield $50-100 billion in informal training costs.

Government and corporate shares of total spending in this category are allocated in proportion to spending to formal training.

2.0e

81.9
130

Table 3=27.—Percent of Young U.S. Adults Able to Perform Tasks Requiring

Different Levels of Literacy

Percent a Prose tasks Document tasks Quantitative tasks

90-100 Locate information in a Enter date on a deposit Total bank deposit entry

sports article slip

50-75 Locate information in a Follow directions to trav- Enter and calculate

news article el from one location to checkbook balance

another using a map

20-30 State in writing b Determine tip given as

argument made in 10% of bill

lengthy news article

5-15 Generate unfamiliar Use bus schedule to Estimate cost using

theme from a short select appropriate bus grocery unit price

poem for given departures & labels

arrivals

How To Read This Table: Only 10°/0 of the young adults (aged 21-25) taking the test were able

to generate an unfamiliar theme from a short poem. 90°/0 were able to total a bank deposit entry.

a See the source for precise percentages.

b No document task had a % in this range.

SOURCE: National Assessment of Educational Progress, “Literacy: Profiles of America’s Young Adults, ” Educational Testing

Service, Princeton NJ, 1986.

dial reading by 16 percent; 82 percent of all colleges

and universities are forced to offer such courses. 153

It is reasonable to ask why such resources could not

have been spent teaching the students better in the

first place.

Another way of gauging quality in American education is to compare U.S. and foreign systems. The

U.S. education system no longer has a clear lead over

systems elsewhere in the world. The quality of the

K-12 education received in the United States may

be lower than that delivered by some of our major

trading partners. ’54 The United States of course has

a much more heterogeneous population than most

nations, U.S. primary and secondary students regularly score below average in standardized tests. But

even U.S. elementary students in a middle class suburb of Minneapolis scored far lower on standardized

tests than comparable classes in Japan and Taiwan.155

The United States does remain ahead of most nations in the fraction of its population receiving some

college education.

Still another way to measure quality is to see how

efficiently the traditional educational system provides

the skills needed for a growing and changing econISsDigest of Education Statistics, op. cit., footnote 146, P. 48.

lS4The Condit;on 01 Education, op. cit., footnote 151, 1985 edition;

Digest 01 Educatjonaj Statistics, op. cit., footnote 146, p. 303.

lssHaro\d W. Stevenson, Shin-ying Lee, James W. Stigier, “Mathematics

Achievement of Chinese, Japanese, and American Children,” Science,

vol. 231, No. 4739, Feb. 14, 1986, p. 693.

omy. It is not clear that the priorities of the primary

and secondary school system are well tuned to the

needs of U.S. businesses. While school officials have

often cited vocational skills as the most important

factor in youth employability, the business view has

been that if the schools provided adequately educated youth, business would provide—indeed, overwhelmingly does provide—technical training. What

business decidedly indicated it did not want to do,

but is in fact doing, is to educate its employees in

ninth and tenth grade skills. Of greater importance,

there are a number of reports that suggest that the

educational system is not geared to producing the

skills that will be needed in the future if the Nation

is to become fully competitive in a “new-technology”

world. ]5G In sum, what is known about the productivity of the traditional education system is not reassuring.

Choices and Consequences

Spending levels for education hinge on a variety

of factors:

● the number of people in “school age” population groups,

● the fraction of these people who will be enrolled,

● the fraction of the adult population requiring

retraining,

ISGRepOTt of conference on Potential Funders of Education in Mathematics, Science and Technology, Carnegie Corporation, New York, 1985.
131

●

●

the fraction of adult training that will be purchased by individuals and government agencies and the fraction that will be purchased by

private businesses (and therefore not counted

as “final consumption” using standard accounting procedures), and

the techniques employed in teaching at different levels.

The last question is clearly critical. The discussions

presented in chapter 6 suggest that it is possible to

use innovations in pedagogy, innovations in instructional technology, and improved management to enhance the rate of learning and to make learning more

useful and fun. There are two principle innovations:

1. tailoring instruction to the learning styles, interests, and abilities of individuals rather than

attempting to force a comparatively homogeneous system on a diverse population, and

2. freeing teachers of routine work so that they can

spend more time with individuals.

It is also possible, of course, that pressures to reduce costs will result in more uniform curricula and

reduced student access to instructors. The contrasts

are stark.

The demographic model described earlier indicates that in the year 2005, the population aged 5

to 24 will be roughly the same as it is today. Many

more Americans will be middle-aged by the year

2005, and these individuals are likely to demand

more of the Nations’s educational system than middle-aged peopIe today. Table 3-28 provides some

basic statistics on the number of people in each age

group participating in education (not including those

engaged in trade schools or correspondence courses).

Rates increased for both the youngest and the oldest age groups during the period from 1965 to 1985.

A hypothesis about future participation rates is also

shown.

Estimates of the number of people requiring education and training are combined with estimates of

teaching methods (measured by “intensity” or spending per student) in table 3-29. The assumptions are

shown in the notes to the table. The Trend case assumes that teacher salaries will be increased and that

increased training will be provided for older age

groups. It also assumes that teaching methods remain comparatively unchanged. The Alternative

cases, on the other hand, are built around an assumption that teaching strategies are changed in fundamental ways. In K-12 teaching, instruction is

divided into three kinds of activities:

1.

2.

3.

working with computers and other new technology in away that requires a minimum amount

of direct teacher supervision,

participating in tutorial sessions where a single teacher works full time with a small number of students, and

standard lectures in which students would listen to an instructor talk and lead group discussions.

Table 3=28.-Factors Affecting Enrollment in Schools

Pormulation (in millions) by age cohort

Year o-4 5-17 18-21 22-24 25-29 30-34 35-44

1983 . . . . . . . . . . . . . . . . . .........18.3 45.4 16.7 13.6 21.7 19.6 30.1

1985 . . . . . . . . . . . . . . . . . .........18.6 45.4 15.9 13.0 22.5 20.6 32.9

2005 . . . . . . . . . . . . . . . . . .........18.7 49.9 16.2 12.2 19.1 19.4 43.9

Percent change (1983-2005) . . . . . . 2.2 9.9 –3.1 – 10.3 –11.9 – 1.0 45.8

Participation rates by age cohort

Year 3&4 5-6 7-13 14-17 18-19 20-21 22-24 25-29 30-44

1965 . . . . . . . . . . . . . . . . . . ..0.106 0.849 0.994 0.932 0.463 0.276 0.132 0.061

1985 . . . . . . . . . . . . . . . . . . ..0.389 0.961 0.992 0.949 0.516 0.353 0.169 0.092 0.025

2005 . . . . . . . . . . . . . . . . . . ..0.389 0.961’ 0.992 0.949 0.543 0.391 0.188 0.130 0.100

SOURCE: Participation rates for 1985 and 1985 from U.S. Department of Education, Center for Education Statistics, Digest

of Education StafkWcs 1987 (Washington, DC: U.S. Government Printing Office, May 1987), p. 12; population computed from demographic model described inch. 2 using Social Security Administration midrange assumptions—for

ages 3-17 participation rates are assumed to be the same in the year 2W5 as they were in 1985, for ages 17-24 participation rates grow at approximately half historic rates (with some adjustments), and assumptions for older age groups

are speculations based on a rapid growth in demand for retraining.
132

Table 3-29.—Consumption Scenarios for Education

(billions of 1983 dollars, except where noted)

2005

1963 Trend 3% Trend 1.5% ALT 3% ALT 1.5 %

Primary & secondary . . . . . . . . . . . . . . . 134 1 6 4

a

1 5 5

a

2 0 6

f

206 f

Private . . . . . . . . . . . . . . . . . . . . . . . . . 12 14b 14b 1 8

b

1 8

b

Government . . . . . . . . . . . . . . . . . . . . . 123 150b 1 4 2

b

188b 188b

$/student . . . . . . . . . . . . . . . . . . . . .. .2,963 3,31 1 3,13 2 4,15 0 4,15 0

Higher education . . . . . . . . . . . . . . . . . . 56 5 9

C

5 9

C 68g 5 g 9

Private . . . . . . . . . . . . . . . . . . . . . . . . . 13 14b 14b 1 6

b

1 4

b

Government . . . . . . . . . . . . . . . . . . . . . 42 4 5 b 4 5 b 5 2

b

4 5 b

$/student . ......................4,46 1 5,13 1 4,66 4 5,13 1 4,46 1

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4 2 3 2 5 2 3 7

Private education & research . . . . . . 11 14d 1 5

C

14d 1 5

C

Public libraries & other.. . . . . . . . . . 8 1 5

C

1 l C 15C 1 l C

Labor training & services . . . . . . . . . 4 1 3

e

6

C

2 3

h

l l

h

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 265 246 326 302

Private . . . . . . . . . . . . . . . . . . . . . . . . . 36 43 43 49 47

Government . . . . . . . . . . . . . . . . . . . . . 177 222 203 277 255

Percent share of gross national

Product . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 4.1 5.2 5.0 7.1

ABBREVIATIONS: ALT - alternative scenario, GNP - gross national product aAssumesnOchange in enrol[mentrate9 fOragess.lTanda16°/0 Increase lnthe “intensity’’ofeducation which could result

from a23%lncreese In teechlngsalarles (salaries are47% of total costs) The populatlonln age cohort 5-17 years old lncreaeesby 9.9% between lSS3and 2005.

bAssumes prlvatelpubllc ratios remain unchanged following Iong-standing trends.

cAssumes n. changes in pafllclpatlon rates frx cohorts aged 18-2$. Spending assumed to change inProportion to enrolled

students aged 16-28 (a decllne of 0.750A) with Intensity Increased 15°/0.

dA99ume9 no decline (equivalent to an asaumptlon that spending in this area increases as the paIliCipatin9 school Population

aged 16-30 increases, offset by a 1OO/. increase in intensity).

eAss umes new participation rates for cohorts aged 30-44. Spending is assumed proportional to enrolied Population with a

15?/0 increase in intensity.

fAssumes a 9.90/0 growth ~cause of increase in schooi age population. intensity Increases to 4,000 per student. This could

be achieved with a S50tYyear per student charge for capital equipment, a student teacher ratio of 30 and students spending

25% of their time on computers or other equipment. It could aiso be achieved with a student teacher ratio of 20 and students

spending 50°A of their time on computers or other equipment. See U.S. Congress, Office of Technology Assessment, “Education,” sector study, 1967.

gspending scales with population aged 16-29 with assumption of higher participation rates. lntenSity inCreSSeS ls~o as the

resuit of growing use of computer beeed equipment in the 3% growth case but doas not increase in the case of 1.5°/0 growth.

hA99um~ t. Scaie with population aged 30-44 with high participation rates. kr the 3V0 growth case, intensity is assumed

to doubie.

SOURCES: 1963 data on spending In major categories from U.S. department of Commerce, Bureau of Economic Anaiysis, “National income and Product Accounts,” Survey of Current Bus/ness, Juiy 1967; teaching costs for 1963 are computed by dividing the totei expenditures for 1963 shown in the National income end Product Accounts by total enrollment

in elementary and secondary schoois and higher education provided by the Office of Educational Research and

improvement, U.S. Department of Education, in D/gest of Education Statistics 1987, Washington DC, 1987.

In addition to these three categories of instructional

staff, there is a group of teachers who at present specialize in various activities such as teaching the handicapped, or providing special tutoring in music, art,

or library assistance, perhaps in one school but sometimes in a number. These specialized teachers would

be integrated in the above categories. It is assumed

that information technology can be made available

at an amortized cost of $500 per year per work station.157 Obviously, there area large number of ways

to allocate student and teacher time given the alternatives suggested here. These new strategies are consistent with a significant increase in staff salaries.

(see the appendix for details).

ISTThiS estimate is derived from the informal consensus of the group

participating in OTA’s workshop; see /n/ormation Technology and /ts

hnpact on American Education, op. cit., footnote 148.

PERSONAL BUSINESS AND COMMUNICATION

The category “Personal Business and Communication” combines two related activities. The first,

communication, involves the transfer of messages

now accomplished through telephone and mail. The

second, personal business, covers insurance, legal

assistance, banking, and a variety of other activities

that rely heavily on these message services. Both

activities center on the processing of information,
133

and improvements in information technology are

having a profound effect on both.

Demand for Communications and

Information

In general, new communication technologies like

the telephone have come in addition to, and not as

substitutes for, existing communication channels.

News and information received on television complements rather than replaces information in magazines and newspapers. New technologies, however,

are confusing the situation by creating a number of

intermediate steps between “broadcasting” a message to a broad audience, and communicating a specially tailored message “point-to-point.”

Anticipating the way consumers will react to the

myriad of new communication products and services likely to be offered during the next few years

is virtually impossible, if only because very little is

actually known about what individuals need information for or how much they are willing to pay for

it. This is partly because much of the information

available to individuals is provided by advertisers

at little or no monetary cost, although the cost in

terms of the time needed to absorb such information can be high. The uncertainties have led some

very sophisticated companies into some disastrous

investments. The following paragraphs sketch out

a few basic facts about residential information

markets.

Table 3-30, for example, shows how first class mail

is used. Of all 1986-87 first class mail received by

households, 80 percent involved a transaction of

some kind, and nearly 50 percent involved bills, invoices, and payments. The remaining 20 percent involved personal correspondence. First class mail is

responsible for roughly two-thirds of U.S. Post Office revenues.

Demand for first class mail is quite inelastic. A 10

percent price increase in the first class rate is likely

to have a negligible effect on volume, and therefore

is likely to produce a 10 percent increase in revenue. The other mail classes, even though subsidized

by first class, are subject to competition and sensitive to price increases.

Telephone prices have fallen in real terms for more

than 30 years. Between 1950 and 1982, for examTable 3.30.—The Distribution of First Class Mail,

1986-87 (received by households)

Mail by type Percent

Personal correspondence from a friend or

relative. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.9

Personal letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6.3)

Holiday/season’s greeting card . . . . . . . . . . . . . . . (6.5)

Other greeting card, invitation, announcement . . (5.2)

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80.9

Bills, invoices, receipts. . . . . . . . . . . . . . . . . . . . . . (46.4)

Advertisement, notices, etc. . . . . . . . . . . . . . . . . . (18.1)

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16.4)

Don’t know/no answer . . . . . . . . . . . . . . . . . . . . . . . . 1.2

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0

NOTE: The category of “other” includes such items received from private businesses, government, or social, charitable, political, or nonprofit groups

that are not elsewhere classified (as well as educational acceptances and

report cards). Annual totals compiled by adding totals for the first three

quarters of postal year 1986/87, and approximating data from the fourth

quarter (6/8/87-9/28487) by doubling the totals of the third (3/16/67-617/87).

Sample size over three quarters-20,713 weighted pieces.

SOURCE: US. Postal Service, Demand Research Division, September 1967, unpublished.

pie, the cost of telephone and telegraph services

measured in current dollars increased by 213 percent while the cost of all products in the economy

increased by more than 350 percent. There is no

reason to expect that this pattern will be broken,

since a variety of new technologies are available for

reducing communication costs. And because the

elasticity of demand for telephone service is high,

new technologies can be expected to lead to significant increases in the volume of telephone traffic. Enhanced services, however, are likely to change the

nature of telephone service in qualitative ways, and

prices may increase to cover these enhancements.

The question of whether the cost of the basic service will also increase depends on the extent to which

regulatory authorities permit regional holding companies to include the cost of enhanced service in

their basic rates.

Market fragmentation is clearly having a major effect on telephone service. At the end of the 1970s,

virtually every household in the country had the

same “plain old telephone service” (known as POTS).

Today there is a proliferation of home telephone devices and a slowly growing range of services (most

now marketed to the home through 900- or 979-

services, providing everything from stock market information to dirty jokes). Portable telephones, redial

features, and cellular telephones are entering markets once limited to the standard handsets available

from AT&T. At least 10 percent of American homes
134

now have answering machines, sales of which increased at a compound rate of 34 percent between

1980 and 1984. 158

Future competition for the point-to-point message

service is likely to be dominated more by improvements in quality than by reduction in the price of

basic services. There is no good vocabulary for measuring the “quality” of communication, but at least

four categories suggest themselves: timeliness, accessibility and convenience, presence, and the maintenance of an archival record.

The situation will become more complex as the

new technologies introduce a range of intermediate

services between “point-to-point” communication

and broadcasting. Consumers are already being besieged by computer-generated “broadcast” telephone

calls. Catalogues and even the editorial content of

magazines are being tailored to specific regions, demographic groups, and marketing groups. Many businesses and universities are experimenting with “narrowcasting” training sessions, announcements about

policy changes, and other business communications.

Cable television and VCR rentals are fragmenting

the broadcast of television programming, allowing

access to more specialized and narrower markets.

Countering this trend toward geographic and demographic targeting is the growth of “national” newspapers. The Wall Street Journal and Gannett’s USA

Today, transmitted by satellite to distribution points

throughout the country, reached a circulation of two

million in 1985. 159 Direct marketing is thriving on

a system in which data about products is broadcast

through television, and catalogues are sent by third

class mail with customers making purchases through

800-number telephone calls. Rather than broadcast

data through publications, database systems permit

users access to highly specific data.

There are a large number of potential applications

for new kinds of point-to~point communication services. However, few of them can be realized with the

existing state of technology available in the home,

and few can by themselves justify the introduction

ISspacific Te]esis Group Voice Storage and Retrieval (VSR) hformation Services, July 11, 1986, cited in P.W. Huber, ‘l’he Geodesic Network (Washington, DC: U.S. Government Printing Office, 1987).

ISgArlene K. F]eming and Robert S. November of LINK, Inc., “The

Impact of Technology on Home Information, Transactions, and Entertainment,” contract report prepared for the Office of Technology Assessment, June 1985.

of advanced technology-although increased use of

home satellite dishes and cellular telephones has in

part resulted from demand for such services. Highspeed communications will continue to enter individual residences because of a market for broadcast

or narrowcast entertainment and news programming.

If a significant fraction of the cost of the system

can be attributed to this function, point-to~point services available to the home can be delivered at a lower

marginal cost than that of services of equivalent quality, and growing markets can be discovered. Financial, technical, regulatory, and marketing problems

have prevented these systems from offering anything

but the most basic re-broadcast services, and it is

unlikely that existing cable networks can evolve into

a multi-purpose information system capable of delivering point-to~point communication services in the

form of voice or data communications.

Sophisticated residential communication services

will almost certainly be provided by an organization

associated with existing telephone companies. Applications might include:

●

●

Home Banking and Bill Paying. To date,

there has been more talk than action in home

banking. At the end of 1986, there were about

100,000 home banking installations. Most of

them are operated by individuals who have already invested the time and money needed to

become familiar with home computers, and who

are willing to pay $5 to $20 a month for the privilege of instant access to transactions. But demand could increase rapidly. In addition to simple checkbook accounting, the systems could

be given a variety of features such as sorting

and documentation for home records and tax

purposes. Still more sophisticated systems could

offer complex financial services and ready access to financial information. A recent survey

by the insurance industry concluded that most

households would be pleased to order insurance

at home over computer lines and to make claims

through electronic mechanisms, instead of filling out tedious forms.

Home Health Care. Increasing pressures to

get patients out of hospitals lead to a growing

need for communication between homes and

health care facilities. Microprocessors can provide assistance in scheduling the administration
135

of drugs at home, and can also monitor dosage

to eliminate undesired combinations of medication. Physicians, acting with the assistance of

visiting nurses, nursing home staff, and the patients themselves, can use equipment located

in a patient’s home and even devices implanted

in the patient’s body, such as pacemakers and

implantable pumps, to monitor the progress of

a patient.

● Residential Controls. Home energy systems

capable of scheduling residential electric demands to minimize system costs have already

been described. Other systems that could be

coupled with the network include security systems, pay-per-view television ordering, and

other applications.

● Information Services. Systems creating an

easily accessible, nationwide database have already been instituted in France, Japan, and several other nations. The absence of a government

supported program, coupled with a ban preventing the Bell Operating companies from offering

information services, is at least partly responsible for the fact that home information systems

have moved much more slowly in U.S. markets

than they have elsewhere.

● Home Shopping Services. The growing volume of catalogue shopping resulting in part from

a decline in available time, suggests that a market may exist for electronic shopping at home.

A variety of projects are under consideration including the ambitious Trintex system conducted

as a consortium of Sears, CBS, and IBM.

The French national telephone company appears

to have succeeded in introducing a nationwide information network in that country by distributing

inexpensive terminals to their customers. The system provides access to the 23 million listings of the

French telephone system as well as more than 4,000

privately offered information services billed through

the telephone system.lGO Services include an electronic newspaper, classified ads, bulletin boards,

home shopping, a dating service, etc. About half of

the subscribers reportedly use home banking and

24 percent use the home shopping service on a regular basis.lGl The information services are billed at

l~OTe/e~a(j~ue News, Paris, spring 1987.

I~Ip,w, Huber, The Geodesic fVetwork, report prepared for the U.S.

Department of Justice, Antitrust Division (Washington, DC: U.S. Government Printing Office, January 1987).

rates varying from 5 to 10 cents per minute of use.

There were 2.24 million “Minitel” terminals operating at the end of 1986, with an average rate of use

of 97 minutes per year per terminal.1G2 The total

number of terminals has doubled in the past year.

The French claim that the system is now profitable. Telephone information services provide approximately 17 percent of total revenue. The remainder

coming from private service firms using the Minitel

system as a vehicle for reaching residences.

Japan, Germany, Canada, and England have had

similar experiments with much less spectacular results. The Japanese are experimenting with a 3.5-

inch floppy disc now available with the entire fourvolume Tokyo telephone directory. In one second,

this disc can provide listings for 9,170 sushi restaurants in Tokyo, and can then narrow the choice based

on geographic vicinity.

Keytron, Viewtron, and other efforts to introduce

videotext services in American markets resulted in

expensive failures. In contrast to the centrally planned

experiences abroad, however, the regionalization of

American industry makes it likely that locally arranged formulas, which accord to the specifics of local markets, could be more successful than a single

national program.

Demand for Business Services

Demand for personal business services is being

reshaped by increasing consumer sophistication and

a rapidly changing regulatory environment. Demand

is becoming more fragmented as technology and affluence permit greater choice; it is also becoming

more homogeneous in areas where technology permits economies of scale in the sale of standardized

products. Changes under way in life insurance provide a vivid example.

Traditional whole life polices combined three

kinds of products: investment, risk coverage, and

financial service. In the parlance of the industry,

these products have become “unbundled.” Higherincome individuals interested in investments now

look to other financial instruments, which offer

greater liquidity, more flexibility, and higher returns.

They also look elsewhere for more comprehensive

162J, Grenier and G, Nahon. “France Wins Big With h Minitel Videotext

System,” i“e/ephony, July 27, 1987, pp. 46-49.
136

financial services. Low- and middle-income individuals interested primarily in risk coverage now look

increasingly to standardized, simple, and inexpensive insurance that provides no “thrift” or savings

value.

As a result of these changes, premiums for whole

life policies fell from 76 percent of all premiums in

1950 to 42 percent in 1982, while cheaper term insurance, providing no savings, grew from 41 percent of all life purchases in 1960 to 59 percent in

1981.163 Comparatively inexpensive group products,

which represented 30 percent of insurance in force

in 1960, grew to 46 percent by 1982. Consumer savings have moved sharply away from life insurance,

commanding only 3.4 percent of individual assets

in 1980 as opposed to 5.9 percent in 1960.164

Demand for property/casualty insurance grows

roughly in proportion to the number of things to be

covered—primarily houses and automobiles. These

businesses have become highly competitive and offer

highly standardized products inexpensively. Some

are sold through “financial supermarkets,” offered

by companies as diverse as Citicorp and Sears. The

IFS American counci] of Life Insurance, “Life Insurance Fact Book, ”

1983.

‘Wbid.

conversion of a product to a commodity does not

necessarily reduce the quality of services offered.

Clerks in local offices now have access to semiautomatic underwriting and claim review systems,

allowing them to enter information directly from a

local office or even the field, where a portable computer can be used in claims examination. The time

required to process applications and process claims

can be greatly reduced. The price of policies can be

expected to decrease as automation substitutes for

the current inefficiencies of the insurance system,

which are being eliminated rapidly as intense competition forces an unprecedented examination of

costs.

Choices and Consequences

Spending on communications for home use will

be highly sensitive to technical developments throughout the economy and to programs designed to facilitate high-quality communication to the home. Table 3-31 explores some scenarios. The Alternatives

assume a continuation of the rapid decline in prices

and improvements in the range of service quality

and variety.

Table 3-31.—Consumption Scenarios for Personal Business and Communication

(billions of 1983 dollars)

2005

1983 Trend 3% Trend 1.5°/0 ALT 3°/0 ALT 1.5 %

Telephone . . . . . . . . . . . . . . . . . . . . . . . . 37.9 78. 7

a

66. 2

a

111b 9 2

b

Stationery . . . . . . . . . . . . . . . . . . . . . . . . 5.8 1I.l c 8 . 0

C

1 Ic8

C

Personal Business . ................132. 5 282. 9

a

171 .3a333d 20l d

Total PCE . . . . . . . . . . . . . . . . . . . . .. ..176.2 372, 7 245. 5 4 5 5 301

Government. . . . . . . . . . . . . . . . . . . . . . . 0.7 1 . 3 1 . 0 1.3b l b

Total . . . . . . . . . . . . . . . . . . . . . ......176.9 374.0 246.5 456 302.0

Percent Share of gross national

product . . . . . . . . . . . . . . . . . . . . . . . . 5.2 5.7 5.2 7.0 6.4

ABBREVIATIONS: ALT = alternative scenario, PCE = personal consumption expenditure

a Follows extrapolative technique described in Chapter 2.

hhe trend scenario assumed a 20% decline in the real cost of telephone communication and a price elasticity of -1.12. The

ALT 30/0 case assumes a 40°/0 decline in costs following a trend in communication equipment. N is also taken to be the reduction

in cost of Information processing equipment likely to constitute a major part of spending in the “telephone” category during

the next 20 years.

cAssumes that s~nding in this category is the same proportion of totaJ Personal Ckmsumptlon SS it wSS in 1~ for ~1 scenarios.

dArb]tradly incresged by 150/o to include charges of a variety of home information and business Services rangin9 from consumer marketing to financial services.

SOURCE: Office of Technology Assessment, 1988.
137

RECREATION AND LEISURE

Increased household income, coupled with decreasing amounts of free time, have reshaped American leisure habits. Many of the changes are difficult to document with precision. For the purposes

of this discussion, recreational and leisure spending include:

1. use of the media (now largely within the home)

—this includes reading books, newspapers, and

magazines; listening to the radio, records, and

tapes; and watching television;

2. participatory sports, spectator sports, and club

functions (including welfare and religious activities), which usually take place away from home;

3. traveling for pleasure and vacations–spending

for domestic transportation is included in the

transportation amenity discussion, but all other

expenses (such as hotels and amusements) as

well as foreign travel are included in these accounts.

The definitions are thus guided by expenditure categories. But it is obviously a mistake to conclude

that demand for recreation can be reduced to spending on related products and services. Recreation and

Leisure also includes considerable non-market activity—participation in certain religious, professional,

political, or athletic activities, for example, and informal social visiting among family and friends.

Changes in the way Americans use their leisure time

were discussed in the previous chapter. Having more

money to spend on recreational activities does not

necessarily mean that free time is being better used;

and it certainly does not mean that there is more

free time available.

Recent Trend#

A number of often paradoxical trends are notable in this complex economic sector, one in which

changing demographic factors and social trends

makes the past an unreliable guide to the future.

These include:

● a squeeze between decreasing usable leisure

time and increasing costs of recreational activities;

●

●

●

●

●

●

●

●

●

partial displacement of mass-production leisure

products and services by more differentiated

(and more expensive) specialized ones, resulting in parallel mass and differentiated economies in some fields;

a lack of clear movement from outdoor to indoor recreation; in fact, media and participatory

activities in some ways reinforce each other as

well as competing for time and money;

a growing diversity of activities with a high degree of specialization, each involving its own

media, equipment, clothing, and social organizations;

burgeoning demand for convenient, close-tohome, or short-term recreations, which fit into

increasingly complex personal schedules;

growing competition for mass media as targeted

advertising and pay-per-view media drain revenues that currently subsidize inexpensive or

“free” media like newspapers and broadcast

television—alternatively, the “new” media could

complement the old in another parallel mass/

differentiated dichotomy;

a potential split between overcrowded, deteriorating public recreational facilities and expensive, specialized private ones. (The pressure for

“user fees” to replace public funding of facilities—including parks and public libraries—

could widen the existing economic/educational

gaps in enjoyment of recreational variety.);

keen competition in some recreational fields,

producing superior products and service with

better employment opportunities at only slightly

increased cost to the consumer—for instance,

formerly exotic cuisines are increasingly available to all, just as more customized travel opportunities abound;

growth in recreational businesses catering largely

to childless couples and young singles as well

as to seniors who are healthier, more affluent,

and more knowledgeable than in the past, and

fuller participation by minorities and handicapped Americans in the whole range of recreation available;

the difficulty of single-parent families and less
138

educated people to have full access to recreational opportunities. The entry of more and

more women into the labor market particularly

alters the nature of recreational demand;

a need for greater “leisure literacy” to enable

the whole population to take best advantage of

multiplying opportunities the way many of the

most affluent and educated do now, in spite of

tightly scheduled personal lives; and

opportunities for the United States to exploit its

domestic advantage in the Recreation and Leisure sector while increasing its export revenues.

There has been a rapid increase-more than 5 percent per annum—in spending on Recreation and Leisure over the past 23 years. This general rise conceals several contrasting developments. Expenditure

on books, newspapers and magazines, and spectator amusements (such as the movies, theater, and

sports events) rose moderately (between 1 and 2 percent a year), while expenditures on sports equipment

and other entertainment services (such as sports

clubs and golf courses) rose rapidly (between 6 and

7 percent annually). There was a particularly sharp

rise in purchases of radio, television, and other electronic devices (more than 10 percent), whereas expenditures on repairs rose slowly—testifying to improved quality and reliability. The two vacation

items—hotels and overseas travel—rose at 4 percent

annually, faster than total personal consumption expenditures but not so fast as some other elements

of Recreation and Leisure (see figure 3-8 for more

detail on these trends).

The trends suggest that demand in this sector is

primarily for goods rather than services, Americans

are devoting more of their Recreation and Leisure

dollars to new media technologies. Much of this development has been driven by electronics technology. To the degree that most Americans enjoy spectator sports, theater, concerts, and other forms of art

and entertainment, they are increasingly able to do

so by means of the mass media.

This is confirmed by patterns of expenditures on

spectator amusements. The share of these amusements in the total, while never large, dropped from

10 percent in 1960 to about 4 percent in 1983. Expenditures on movie theaters actually declined in

certain years, reaching a low in 1975 that was 65

percent of the 1960 level. While there has been some

later recovery-many movie theaters have adapted

to rapidly changing consumer demand by increasing the number of films shown at any one time or

serving refreshments at one’s seat—spending at

movie theaters grew a miniscule 5.1 percent between

1960 and 1983.

In contrast, there has been spectacular growth in

spending on television and home electronics. According to one survey, the percentage of consumer

media spending allocated to new electronic media—

cable and pay TV, video cassette recorders (VCRs),

video games, and home computers—rose from 7.5

percent in 1978 to 30.8 percent in 1982.165 In the

late 1970s, growth was concentrated in cable television; by 1984, cable television revenues had

reached $7.5 billion.166

The early 1980s were also the era of the video

game. In 1981, video game arcade users spent $5

billion—equal to the combined revenues of the Las

Vegas gambling industry and the U.S. film industry, or the total television revenues and gate receipts

of major league baseball, football, and basketball. 167

In 1982, this figure rose to $7 billion—greater than

the combined revenues of the movie and record industries. Demand for video games began to slacken

in 1983, but electronic media spending was buoyed

by yet another enormously popular product—the

VCR.

So far, the VCR has followed the classic growth

curve of innovative home electronic products; the

first eight years of VCR sales parallel almost exactly

the growth years of color television.168 In 1985, consumers spent between $2.3 and $4.5 billion to rent

and purchase video tapes.169 By 1986, movie industry

revenues from video-cassette sales equaled revenues

165 Ronald Rice, “Development of New Media Research, ” in Ronald

Rice and Associates, The New Media: Communication, Research, and

Technology (Beverly Hills, CA: Sage Publications, 1984), p. 16.

lbsRushworth M. Kidder, “Videoculture: TV-for Better or Worse, a

Window on the World,” Christian Science Monitor, June 10, 1985, p. 20.

ldTRona]d Rice, “New Media Technolo~: Growth and Integration, ”

in Rice and Associates, op. cit., footnote 165, p. 66.

l~David Lachenbruch, “Home Video: Home IS Where the Action 15, ”

Channels of Communjcatjon—1984 Field Guide To the Electronic Media, p. 42.

lb9A]jean Harme[z, “studios Woo Cassette Mass Market, ” New york

Times, Feb. 27, 1986, p. C26.
139

40 ‘“

1

38 J

3 6 -

3 4 -

3 2

-

30 1

Figure 3-8.-The Leisure Industry, 1986

Recreational Book Spending

1982$ Per capita

/-

1974 1976 1978

I

I

1980 1982 1984

Market Share of Music Storage

Technologies

Percent of sales in current dollars

75%

50%

25%

nw

“m 1975

L

1980 1981 1982 1983 1984 1985 1986

= LPs = Singles n 8-Track

m Cassette ~ CD S

Motion Picture Audiences

Index where 1980=100

120

115-

110-

105-

\

\

95-

‘..

‘ .

‘ .

.

90 r ( r F r 1

1980 1981 1982 1983 1984 1985 1986 1987

— Admission s

-

--- Revenues (1982$)

Per-Capita Consumption of Alcohol

1982$ dollars per person

150 \

125-

100-

-----

----

7 5 -

---------- /~-----

‘ .-. ---- -_---~- -----

---- ‘ . -

50 ! 1

1 1 I 1 ( 1

r t , 1 r r 1 , r , I I f 1 I I 1 , , I 1 1 T 1

1955 1960 1965 1970 1975 1980 1985

— Off Premise s-

--- On Premises

NOTE: Deflator for “’admissions to specified spectator events” used to convert motion picture admissions to $1982.

SOURCES: U.S. Bureau of the Census, Statlstlcal Abstract of the Urrlted States.’ 1987 (107th edition), Washington, DC, 1988, tables 388 (recreational books) and 372

(music technologies); U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” historical diskettes, tables

2.4 (motion picture revenues) and 2.5 (alcohol consumption); Motion Picture Association of America, New York, NY for admissions. Motion Picture revenues

and recreational book spending converted to 1982 dollars using table 7.10 of the “National Income and Product Accounts. ” Categorization based on “Leisure

Statistics,” The Wa// Street Journal, Apr. 21, 1988, p. 13D.

from box office movie sales. Approximately one-third for part of the particularly rapid increase in purchases

of American households already own a VCR, and of these items.

estimates suggest that VCR penetration will reach

50 percent by 1990.

These developments owe much to increases in income coupled with falling prices. Over the past 23

years, prices for television and audio entertainment

have declined 60 percent in constant dollars. Moreover, the most recent forms of electronic equipment

have entered the market at relatively low prices, ensuring rapid market penetration. Prices of sporting

equipment have also declined sharply, accounting

Changes in disposable time have interacted with

these developments. Studies of the way people use

their time show a sharp decline in the amount of

free time available, especially in the past 10 years.

This places a premium on home entertainment, such

as running a movie on the VCR or seeing a sporting event on a large screen, rather than on spending extra hours in transportation to entertainment

centers outside the home. This, in turn, further diversifies demand for recreational activities that can serve
140

the particular tastes and needs of individual consumers—activities being improved by technologies that

permit greater flexibility in response to consumer

demand.

Choices and Consequences

In the area of electronic entertainment, there seems

every reason to believe that market penetration by

some of the more recent technologies, such as compact discs, cable television, and VCRs, will continue.

The development of such new technologies as video

discs and high-definition television will also improve

the quality and range of entertainment (and other

information activities) within the home. New developments will combine the telephone and personal

computer—at present, mainly designed for social

contact and personal business—to provide a variety of information and entertainment services. The

development of such new technologies as video discs

and high-definition television will also improve the

quality and range of entertainment (and other information activities) within the home entertainment

centers; there is every reason to believe that these

innovations will eventually become available to consumers at reasonable cost. The French ‘( Minitel”

hookup, originally designed to give consumers more

efficient telephone service and buy them time through

efficient transaction of business, has won widespread

acceptance through its adaptation as a recreational

device. Despite regulatory differences, an American

system or systems could take advantage of similar

consumer demand.

A substantial part of Recreation and Leisure activities, such as ski centers, golf courses, sightseeing

buses, and hotels are still labor intensive. This fact

has accounted for a past increase in relative costs.

If new information technologies permit improvements in labor productivity, these costs could decline in the future. Yet demand for better services

could produce a generation of recreation or hospitality professionals to enhance the consumer’s experience.

Two related factors, demographic trends and available time, will also influence expenditure. The ability to enjoy leisure and recreation needs a combination of time and money. If time is in short supply,

leisure may be curtailed regardless of money, or at

least recreation expenditures may be channeled into

directions that save time. The growing complexity

of family schedules fuels demand for convenient,

close-to-home recreation and shorter—though perhaps more frequent—vacations.

The time budget data referred to in chapter 2 serve

as a basis for a rough estimate of future trends in

leisure time. It is first assumed that disposition of

time for both men and women in 2005 will be the

same as in 1985. In this case, free time—time which

is not spent on work, traveling to work, housework,

personal care, and eating—will increase by about

25 percent between 1985 and 2005. The largest portion of this increase, 21 percent, is due to the rise

in population, and the balance to an older population that will include a greater share of retired people. Individuals, however, may find themselves more

pressed for time than ever.

On the other hand, there may be changes in the

way time is spent. Time budgets of 2005 may well

be different than those of 1986. A IO-percent reduction in the work week occasioned by improved technology could increase the hours of free time available by 6 percent, while a halving of the time devoted

to shopping due to improved information technology could increase free time by 5 percent. If, in contrast, the rising participation in the labor force—

which caused the reduction in leisure time between

1975 to 1985—continued, the amount of time available for leisure and recreation would fall.

Household formation is also of importance. The

share of young single people, who spend more of

their income (and higher absolute amounts) on recreation, will decline, thus tending to depress Recreation and Leisure expenditures. A countervailing factor, however, is the expected increase in childless

households, traditionally high spenders on recreation. Furthermore, the “new” elderly, a rising share

of the population, may spend more on Recreation

and Leisure than their present day equivalent.

The future, therefore, offers mixed prospects, On

the one hand, the abundance of leisure activities and

cultural opportunities potentially available is the

greatest in history. There will be an unprecedented

selection of destinations, books, entertainment,

sports, media, and cuisine. As new technologies enhance flexibility in consumer choice while helping

to reduce prices, the information necessary to per-
141

sonalize fulfillment of leisure needs and opportuni- for example, spend virtually nothing on travel or enties may soon be within the reach of all. tertainment. Emerging fee-for-service media may

On the other hand, not all Americans maybe able drain advertising revenue from traditional publishto share in these riches. Household expenditure data ing and broadcasting, depriving the less affluent of

suggest that there are many families too poor to take much affordable or free information and entertainment.

advantage of recreational activities. Single parents, Scenarios are described in table 3-32.

Table 3.32.—Consumption Scenarios for Recreation and Leisure (billions of 1983 dollars)

2005

1983 Trend 3% Trend 1.5°/0 ALT 3°10 ALT 1.5°/ 0

Entertainment services . . . . . . . . . . . . . 58.2 1 54.3a

81.1a183b 97b

Entertainment commodities . . . . . . . . . 62.4 149.8a

104.9a

165b115b

TV and sound . . . . . . . . . . . . . . . . . . . . . 31.4 87.6a

61a106b78b

Lodging and foreign travelc . . . . . . . . . 22.2 64.9 37.7 84b 51b

Religious and welfared . . . . . . . . . . . . . 47.6 91.2 65 119 86

Total PCE on recreation and

leisure . . . . . . . . . . . . . . . . . . . . . ....221.8 547.8 349.7 657 427

Government purchases of recreation

and Ieisuree

. . . . . . . . . . . . . . . . . . . . . 8.6 16.5 11.9 20 13

Total . . . . . . . . . . . . . . . . . . . . . ......230.4 564.3 361.6 677.0 440.0

Percent share of GNP . . . . . . . . . . . . . . 6.8 8.7 7.7 10.4 8.3

ABBREVIATIONS: ALT = alternative scenario, GNP = gross national product, PCE = personal consumption expenditure

aFollows Extrapolative technique described in ch. 2.

bAlternative estimates of demand for enteflainment services, entefiainment commodities, and tv and sound eqUipment are

above those computed in the trend analysis for reasons discussed in the text. The increases are constructed by assuming

a price reduction in the items that is more rapid than the one used in the trend case. The price of entertainment services

is assumed to fall 150/., entertainment commodities 300A, and TV and sound equipment 400/..

Cln the period 1980.72 real expenditures on foreign travel incre~ed 480/0 f@er than all PCE. After 1972 there were wide variations in spending reflecting swings in exchange rates. Extrapolation is clearly difficult. In the estimates shown it has been

assumed that foreign travel will continue to grow at roughly the 1980-72 rates. It has therefore been assumed that spending

in this category would increase 4.44°/Olyear if GNP grows 3°/Olyear and that spending would increase 2.2°/Olyear if GNP grows

1 .5 V01year.

dAs sume s that spendingin thiscategory ISthesame proporflon of total PCE ss it was in 1983 for all Scenarios,

eGovernment purchases assumed to be in proportion to personal consumption.

SOURCE: Office of Technology Assessment, 1987
Part 11

The Networks of Production

Understanding how changing patterns of consumer and government purchases translate into demand for output from specific businesses is a heroic

challenge in a modern economy. Products once

brought to consumers through direct and obvious

channels are now provided through networks of

extraordinary complexity. In the 19th century many

Americans lived on the farm. They produced most

of their own food and, with the exception of an

occasional purchase from a blacksmith, were essentially self-sufficient. Today, not only have farms become specialized, highly capitalized, and technologically sophisticated, they have become comparatively

minor elements in a sophisticated network of businesses delivering the “Food” amenity to consumers.

This section describes the operation and performance of these production systems in a modern economy, and speculates about how they may change

in the future.

The growth of linkages connecting diverse parts

of the economy helps explain the explosive growth

of sectors other than traditional manufacturing. A

packaged frozen pizza may combine produce picked

and processed in California, sophisticated packaging materials made in Michigan, and a paper label

manufactured in Washington and printed in Illinois,

as well as financing from Chicago, advertising and

legal services from New York, trucking from independent truckers throughout the Nation, inventory

control and billing software from Palo Alto, and communication systems from New Jersey. The “service”

businesses play a growing role in getting pizzas to

American plates. Among other things, such businesses facilitate the billions of transactions that

connect elements of production networks, make it

possible for firms to redesign their operations quickly

in response to new market opportunities and changes,

and allow production networks to make and deliver

products and services more precisely targeted for the

increasingly diverse markets described in Part I.

Increasingly, networks of production also involve

foreign producers and consumers (the topic of Part

111). Tightly integrated networks create a situation

where the effects of international trade are felt far

beyond the sectors actually engaged in trade. Imports that displace U.S. manufacturing output, for

example, also reduce output in a constellation of nonmanufacturing enterprises linked to manufacturing

—such as banking, insurance, and business services.

The complex networks that connect producers to

consumers in the American economy have become

so elaborate that it is difficult even to determine how

and where value is added in the process of delivering useful products and services to final consumers.

Yet most of the important changes taking place in

the American economy can only be understood by

observing the integrated performance of these networks operating as a whole. In such a situation it

is easy to be misled by asking the wrong questions.

It is entirely possible, for example, that firms appearing to enjoy productivity gains may perform poorly

within a dynamic and flexible network. A firm that

depends on mass production and great certainty

about future markets to ensure low costs may have

difficulty in a world where products and production

strategies are in constant flux. Certainly, any attempt

to improve network performance through public policy now requires a system-wide perspective to ensure that changes actually help, rather than frustrate,

the emergence of efficient networks.

Driven by new technologies, the pressures of foreign trade, new patterns of demand, and a changed

regulatory environment, profound changes are

sweeping through virtually every major business network. Even those that have resisted change, such

as residential construction and education, may be

on the brink of major change. The next three chapters provide a description of trends in the performance of the eight major networks that deliver amenities to final consumers and suggest possibilities for

future patterns of change. Chapter 4 provides some

basic tools for describing the integrated performance

of these networks. Chapter 5 uses these tools to examine recent patterns of change. Three kinds of

change are examined:

1. Changes in the “production recipe,” or

the mix of goods and services a business

uses to make its product. Virtually every

such recipe involves proportionately less natural resources and more “transactional” serv143
144

ices like banking and legal help. And nearly

all production recipes are growing in complexity, increasing the links connecting one part of

the economy with another.

2. Changes in the internal management of

busine~, and in the way businesses

connect to form production networks.

Generalizations are difficult. It appears that

highly fragmented structures (elements like

small farms, homebuilders, or family physicians) are increasingly becoming parts of larger

enterprises, while firms that had concentrated

production in a few establishments are turning

to smaller facilities and purchasing more inputs

from other businesses. In an increasing number of cases, a few dominant firms set de-facto

standards and serve, indirectly, to organize

activity.

3. Changes in the geography of production.

The growth of activity outside of traditional

manufacturing and the vast increase in communications technology offers the potential to

decentralize production in ways never before

considered possible. In general, however, this

potential has not been realized, and economic

activity increasingly accumulates in and around

major urban centers—particularly those on the

east and west coasts.

Finally, chapter 6 pursues these themes through

the eight major amenity networks discussed in chapter 3. Each, of course, has a unique story to tell.

Taken together, they can provide a perspective on

structural change in production that cannot be obtained from an examination of economy-wide statistics.
m

(l)

‘d
CONTENTS

Page

Defining a Ten-Sector Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ..148

Margins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........................150

The Production Recipe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .........151

Intermediate Inputs and Direct Linkages . . . . . . . . . . . . . . . . . . . . . . .............154

Indirect Linkages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................155

Networks That Provide Amenities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....,......159

A Concluding Note . . . . . . . . . . . . . . . . . . . . . . . . ...............................161
Chapter 4

Defining the Production Recipe

The first chapter of this volume proposed a strategy for understanding how complex networks of

activity in a modern economy connect work with

amenity. The first step in this process (undertaken

in Part 1) was to convert demand for amenity into

demand for output from specific industries. The second step (the task of the present chapter) is to describe the “production recipe” that U.S. businesses

use to create these goods and services. The accounting method employed to perform this calculation is

commonly called “input/output” analysis. Part IV

will examine how these outputs translate into jobs.

A concrete example can help to introduce the basic

concept and the somewhat baroque vocabulary used

in the accounts. One way to begin is by asking where

a customer’s money goes when he buys a frozen

pizza. The pizza was made in a factory that ships

products to a grocery outlet through a series of intermediaries. The sales price can be divided into two

categories: one that generates business for the pizza

factory; and another that goes to pay for the insurance, transportation, wholesale, and retail businesses

involved in getting the pizza from the factory to the

grocery store shelf. These latter costs are called

“margin s.”

The question then becomes one of determining

the business recipes used by the pizza factory and

by the enterprises that provide the “margins.” These

recipes consist of two parts: intermediate inputs and

value-added. The “intermediate inputs” are purchased by a firm from other businesses. For the pizza

company this might include ingredients like flour

and tomatoes, as well as the advertising, accounting, and legal services needed to conduct business.

The difference between the revenue received by selling pizzas and the cost of the intermediate inputs

is the “value-added” generated by the pizza firm.

This value-added consists of salaries paid to employees, “indirect business taxes” (like sales taxes), and

profits.1 A business recipe of this sort can be constructed for the grocery store where the pizza was

] More precisely, “value-added” shown on the input/output tables includes the following categories: employee compensation (a category that

includes wages, salaries, and employer contributions for such purposes

as pensions and health plans), property type income, and indirect busipurchased, the wholesale operations that supplied

the store, and the insurance company and trucking

firms that provided other needed services.

This is, however, not the end of the story. The

“intermediate inputs” purchased by the pizza firm

in turn generate demand for other products. Purchased flour, for example, generates demand for farm

production. Farming generates demand for fertilizer.

The purchase of a pizza therefore generates “indirect” demand for the products of the chemical firms

that produce fertilizer. Since both the farms and the

chemical fertilizer firms have “intermediate input”

expenses as well, they retain only a portion of the

consumer’s dollar as value-added. The challenge,

then, is to trace the consumer’s dollar through this

elaborate network of activities in a way that avoids

double-counting. A $5 frozen pizza can only generate 5 dollars’ worth of value-added in the economy.

A complete set of production recipes (one that covers all parts of the economy) can be used to estimate

the output in each business created by different patterns of consumer and government purchasing using

“input/output” analysis (see box 4-A).

The remainder of this chapter uses this method

to show how consumer purchases result in activity

throughout the U.S. economy. It proceeds in the following steps. First, it assigns each business operation to one of 10 “production sectors. ” This is done

so that broad shifts in production recipes can be illustrated. Second, it shows how consumer purchases

in different amenity categories translate into demand

for different types of business activity (including an

estimate of the margins). It then turns to a discussion of the production recipe for each major business type and explores recent trends in the “intermediate inputs” required. Finally, it uses input/

output methods to calculate the direct and indirect

consequences of different types of purchasing. The

techniques can be used to show how spending for

each amenity category generates value-added directly

and indirectly in all areas of the economy, and how

the economy is becoming increasingly interconnected.

ness taxes (a category that does not include corporate income tax). For

more detail on employee compensation, see ch. 11.

747
148

Box 4=A.–Input-Output Analysis

The logic of input-output accounts has been recognized since 1758, when they were published as a “Tableau

Economique” by Francois Quesnay, the French economist. Refined and applied to the U.S. economy by Wassily

Leontief in the late 1930s, input-output accounts (1-O) form the foundation of most modern econometric models.

Leontief was later awarded the Nobel prize in economics. Input-output accounts are used by approximately 70

countries. They incorporate data from all Federal industry censuses and nearly 100 other data sources.1

I-0 accounts are not economic models in the common sense of the term. Rather, they provide a mechanism

for displaying and manipulating a large amount of data that has been forced into a consistent format. The central

feature of the accounts is a table in which each column represents the production recipe for an industry. In effect,

this table represents a series of linear equations that can be solved simultaneously to convert a pattern of final

demand to industry output.

While I-O accounts have the invaluable feature of making the technology of production an explicit part of

an analysis, they do suffer from a number of limitations. Because the model is based on observed data, there

tends to be a long lag time between the collection of data and the availability of I-O tables. A “benchmark” table

for 537 business categories is published following publication of the industrial censuses, which are conducted

every 5 years. The benchmark table for the 19771-0 tables became available only in 1985. A 1980 summary

and “revision” of this benchmark, published for 85 business categories and available from the U.S. Department

of Commerce, is used throughout this analysis.2

Fortunately, later discussions will indicate that with very few exceptions, the interindustry relationships change

extremely slowly. Factors that change more rapidly, such as patterns of consumer and government demand,

imports, exports, and investments, are updated each year, and are incorporated in the analysis presented here.

I-O data are much more detailed for manufacturing than for service industries, which tend to be lumped

into highly aggregated categories. At the detail published in the 1980 I-O accounts there is a separate category

for the manufacture of metal boxes, while health, education, and social services are lumped into a single category.

The most important assumption made in I-O analysis is that of “linear,” or constant, economies of scale.

Unlike the myriad of assumptions implicit in elaborate econometric analyses, this assumption has the virtue

of being simple and clear. Since 1-0 essentially represents an accounting technique, the I-O accounts force the

user to construct “dynamic” characteristics of the economy-assumptions about how production recipes will respond to price changes, to new technologies, and to changes in the scale and scope of industrial organization.

The burden of making changes, such as those that will appear chapter 13, thus falls squarely on the user. The

links between I-O accounts and the primary data are transparent.

‘See W. Leontief, /nput-Output Economics (New York: Oxford University Press, 1966); and R.E. Miller and P.D. Blair, /rrpuf-Output Anafysis: Foundations

and Extensions (Englewood Cliffs, NJ: Prentic&Hall, Inc., 1985). For a description of data sources, see “Definitions and Conventions of the 1972 Input-output

Study,” Bureau of Economic Analysis, U.S. Department of Commerce, pp. B3-B7.

‘U.S. Department of Commerce, Bureau of Economic Analysis, Input-output Tables, 1980, unpublished. A 1981 matrix was released in the Survey of Current

Business of January 1987, See Appendix for the algebra of input-output analysis.

DEFINING A TEN-SECTOR ECONOMY

The analysis used throughout Part 11 can be ear- ful for keeping broad patterns of change in view.

ried out by grouping industries into as many or few These 10 sectors have been selected as ones likely

sectors as needed. The original data that forms the to be affected in similar ways by changes in techbasis of this report actually used 85 sectors (see the nology, trade patterns, and regulation. The 10 secappendix), but only 9 or 10 will be displayed in the tors, and their relative shares of the U.S. gross naexamples that follow. Summary categories are use- tional product (GNP), are shown in box 4-B.
149

Box 4-B.—The 10 Production Sectors

% share

Description of GNP1

1.

2.

3-5

3.

4.

5.

6.

7.

8.

9.

10.

Natural Resources includes the production of raw materials and energy of all kinds, including the generation

of electricity. These industries were singled out to measure the impact of different kinds of economic activity

on depletable natural resources, many of which are imported, and at the same time to trace the impact of substitutes for strategic raw materials.

Construction is given its own category because of the unique nature and large size of construction activities,

and in view of the critical role construction plays in renewing infrastructure and improving productivity throughout

the economy. The highly cyclical nature of construction activities also sets this category aside from other business activities.

Manufacturing activities have been selected because of growing concern about the future role of these industries

in the U.S. economy. Significant direct and indirect linkages exist between manufacturing and the other parts

of the economy. Manufacturing has traditionally been the major source of U.S. productivity growth, increasing

at twice the rate of the economy as a whole between 1960 and 1983. It is also likely that wage increases in

other industries can be traced to productivity growth in manufacturing.

Activities within manufacturing have been subdivided into low, medium, and high wage sectors, based on

the average level of annual compensation per full-time equivalent employee in 1984. This was done due to concern for the quality of jobs offered by growing and shrinking enterprises; more trade, for example, is attractive

if the transactions result in the net substitution of high wage employment for low wage employment. The division by wage levels also provides groupings roughly commensurate with other areas of policy interest.

Low Wage Manufacturing is clustered in the traditional apparel, footwear, and furniture industries.

Medium Wage Manufacturing contains most enterprises recently tagged as “high technology,” because these

firms conduct significant amounts of research and employ relatively larger numbers of engineers and scientists.

It includes industries such as electrical equipment, communications equipment, scientific instruments, and computers, and less technology-intensive industries such as food & kindred products.

High Wage Manufacturing is dominated by traditional “smokestack” industries, such as those that produce motor vehicles, iron and steel, construction machinery, and glass. However, the high wage category also includes

such technologically sophisticated industries as chemical production and aircraft manufacturing.

Transportation & Trade are clustered because together they form much of the overhead associated with the physical

movement of products. These activities are increasingly tied to manufacturing through sophisticated inventory

control and dispatching networks. New technologies in transportation will be essential to system-wide improvements in efficiency—not so much from innovations in specific kinds of transportation or retailing equipment,

but through advances in information flows that connect production with the marketplace more closely. While

many of these technologies are difficult to trace, it appears that dramatic changes may occur in the near future.

Transactional Activities deliver financial and information services to businesses. In 1984, the sector generated

more value-added than the whole of manufacturing. The activities are clustered because, taken together, they

are the most rapidly growing sector in the U.S. economy in terms of output and employment, and are associated

with activities in which productivity improvements due to new information technologies could be enormous.

Persona/ Services are selected because, with the exception of retailing, they contain most activities traditionally

associated with the “service sector” of the economy: hotels, beauty parlors, and dry cleaning, for example. They

also contain most activities associated with recreation and leisure—a sector that has grown rapidly in response

to rising affluence among many consumers.

Social Services follow a unique logic because of the involvement of government. With the exception of government “overhead” functions—the sector includes the salaries of both the President of the United States and the

authors of this document-most of the activities in this sector, such as public and private health care and education, are delivered directly to consumers. In effect, social services support a human infrastructure.

National Defense was separated from the “social services” of government because it is plainly affected by a unique

set of factors.

9%

6%

22%

3%

10%

9%

19%

23%

4%

14%

2%

NOTES: The divisions of service functions are modifications of the categories used in J. Singlemann, “The %ctoraf Transformation of the Labor Force in

%ven Industrialized Countries, 192@1970,” American Journal 01 Sociology, vol. 83, No. 3, 1978, pp. 1224-1234. See also the discussion of alternative taxonomies in J 1, Gershuny and I.D Miles, The New Service Economy (New York: Praeger, 1983). The appendix shows the industrial composition of each of these

sectors in greater detail.

‘The percentages represent the fraction of all value-added in the economy generated by the sector in 1984. They are calculated in 1980 dollars.
Finding a taxonomy that reveals rather than obscures deep structural change proves to be a significant challenge. Perceptions of change are often

guided by what one chooses to measure. Take the

distinction between “services” and “manufacturing.”

The printing & publishing industry is conventionally counted as a manufacturing enterprise, while

television & radio broadcasting is not (presumably

because this industry does not produce anything tangible). An individual writing news is considered a

manufacturing employee if employed by a newspaper, but is not a manufacturing employee if employed by a television station.

Technology has begun to blur many traditional

distinctions. Ten years ago, four-fifths of the value

of a computer was embodied in its hardware, the

remainder being associated with the software. Today,

these ratios are reversed.2 Complex patterns of

merger and acquisition have further confused the

situation. General Motors earned more than onequarter of its profits in 1985 from its finance division, GMAC, the Nation’s single largest holder of consumer debt. Does that make GM a service industry?3

Chapter 6 will provide many other examples.

Zoffice of the U.S. Trzide Representative, “U.S. National Study on Trade

in Services,” Washington, DC, December 1983.

3JameS B. Quinn and Christopher E. &@lOn, “will ~rvices Follow’

Manufacturing into Decline?” I-larvard Business Review, November/December 1986, p. 101.

MARGINS

The cost of wholesale and retail trade, transportation, and insurance can add a significant amount

to prices paid by consumers. In some areas, such

as clothing, such margins can reach more than 50

percent of the total consumer priced Moreover, technology may rapidly change the role played by margins. Later discussions will show how new technologies and management systems are reshaping the

connections between producers and retail outlets.

Not only will changing patterns of consumer purchasing reshape the nature of demand for services

provided by retail trade, wholesale trade, and transportation, but the net productivity of these systems

may change radically. Meeting demand for a series

of niche markets expected to change quickly, for example, clearly requires a different retail and delivery network than a system designed to meet demand

for a comparatively undifferentiated product competing entirely on the basis of prices

4Based on the 1977 margins published in U.S. Department of

Commerce, Bureau of Economic Analysis, Survey o/Current Business,

vol. 64, No. 5, May 1984, p. 46.

SFor [he purposes of the analysis presented throughout this document,

consumer purchases expressed in the categories of the “National income and Product Accounts” of the U.S. Department of Commerce, Bureau of Economic Analysis (historic diskettes), are converted to demand

expressed in input~utput categories through use of a “bridge” provided

by the U.S. Bureau of Economic Analysis (“The 1977 Input-Output Structure of the United States,” Survey of Current Business, vol. 64, No. 5,

May 1984, pp. 46-49). A similar bridge between government purchases

and input-output categories was also made available by the Bureau of

Economic Analysis.

Table 4-1 indicates the changes in margins that

occurred between 1972 and 1984 for the amenity

“Food.” In 1972, for example, groceries (food purchased for off-premise consumption) required a commodity mix with more transportation & warehousing and food & kindred products, but less wholesale

& retail trade than it did in 1984.6

The conversion from goods and services needed

to satisfy an amenity to commodities results in a rearrangement of the consumption recipe into a consistent set of consumer demands to which industries

can respond. Commonly referred to as final demand,

this demand stimulates a second round of interindustry intermediate demand for various commodities needed as inputs in the production process. The

inputs, which consist of physical materials, services,

and the capital and labor required to produce output, are referred to here as the production recipe.

6 The 1984 commodi~ mix is based on the “1977 hIPUt-OUtPUt COITlmodity Composition of Personal Consumer Expenditure,” published in

the Survey of Current Business, vol. 64, No. 5, May 1984.
151

Table 4-1.—The Commodity Mix for Food in 1972 and 1984’ (current dollars, in percent)

Food purchased

for off-premise Purchased meals Other consumer

consumption & beverages food purchases Total

Industry 1972 1984 1972 1984 1972 1984 1972 1984

Transportation & warehousing . . . . . 3.60/o 2.40/o 0.0% 0.1 %0 0.90/0 0.7% 2.60/o 1.7%

Wholesale & retail trade . . . . . . . . . . 29.5 32.7 0.0 0.0 41.3 40.6 23.9 25.1

Finance & insurance . . . . . . . . . . . . . 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Livestock and livestock products . . 0.9 1.1 0.0 0.0 1.3 1.2 0.8 0.8

Other agricultural products. . . . . . . . 3.1 3.3 0.0 0.0 2.0 1.4 2.3 2.3

Food & kindred products . . . . . . . . . 62.1 60.1 0.0 0.0 13.9 17.4 43.8 41.6

Tobacco manufacturers. . . . . . . . . . . 0.0 0.0 0.0 0.0 40.6 38.7 3.6 3.1

Eating & drinking places . . . . . . . . . . 0.0 0.0 100.0 98.4 0.0 0.0 22.4 24.7

Amusements . . . . . . . . . . . . . . . . . . . . 0.0 0.0 0.0 1.4 0.0 0.0 0.0 0.4

Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 0.8 0.4 0.0 0.0 0.0 0.0 0.5 0.3

Total . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Total (billions of dollars) . . . . . . . . . . 115 183 37 69 15 22 167 273

HOW TO Read This Table: On average, $100 in groceries purchased in 1984 (“food purchased for off-Premise consumption”)

was allocated as follows: $2.40 went to transportation and warehousing businesses, $32.70 went to grocery stores and other

wholesale and retail businesses, and $60.10 went to firms that supply food to the system. A significant fraction of the $60.10

received by these firms, of course, went to pay their suppliers. For an estimate of these “intermediate inputs, ” see table 4-2.

NOTES: Totals may not equal 100 percent due to rounding.

aThe 1~ Commodity Mix is estimated usingthe1977 composition Updatecl with 1984 demand fOr these products.

SOURCE” U.S. Department of Commerce, Bureau of Economic Analysis, “The Input-Output Structure of the U.S. Economy,” Survey of Current Business, April 1979

for 1972 data, and May 1984 for 1977 data; “National Income and Product Accounts,” Survey of Current Business, table 2.4, July 1987.

THE PRODUCTION RECIPE

The production recipes for 9 of the 10 sectors listed

earlier are summarized in table 4-2 for the years 1972

and 1980. The table indicates that the 1980 recipe

for making $100 of output in the Construction sector involved:

● total intermediate input purchases of $56.80:

$1.20 in products from the Natural Resource industries, $0.10 from other Construction businesses, $7.30 from manufacturing enterprises

paying low wages, $20.40 from Medium Wage

Manufacturing businesses, etc.; and

● $43.20 in the form of wages paid and returns

to capital in the Construction sector.

Table 4-2 exposes expected differences in the production recipes of different business categories. The

value-added generated by manufacturing firms in

1980 accounted for between 29.6 and 36.5 percent

of total manufacturing output, while intermediate

purchases-those goods and services purchased from

other businesses that become part of a final manufactured product—account for the rest. On the other

hand, in the relatively labor-intensive fields of Transportation & Trade, Transactional Activities, and Personal Services, value-added accounts for 59.0 to 72.8

percent of total sectoral output.

Table 4-2 includes only direct intermediate purchases with expected lifetimes of less than a year.

It does not include purchases of buildings or capital

equipment needed to expand operations or replace

old machinery.7 But capital equipment is clearly an

essential ingredient in any production recipe. The

National Accounts refer to items that last more than

a year as Gross Private Fixed Investment (GPFI). This

category includes purchases of residential and nonresidential structures, and of capital equipment such

as machine tools, computers, and tractors. Components of GPFI include accounts for items bought as

both replacements for older equipment and equipment purchased for expansion.

Purchases of producers’ durable equipment (PDE)

are nearly half of the 1984 GPFI total.8 The remainder consists primarily of non-residential and

residential structures, which each represent about

7 A more detailed examination of the role of capital flows in a dynamic model of the economy has been developed. See W. Leontief and

F. Duchin, “The Impacts of Automation on Employment, 1963-2000,”

Contract #PRA-801 2844 to the National Science Foundation, Washington, DC, April 1984, p. 2.1.

8 Unless otherwise noted, data about PDE comes from table 5.7, “Private Purchases of Producer’s Durable Equipment by Type in Constant

Dollars,” in “National Income and Product Accounts,” op. cit., footnote

5.
Table 4-2.—Recipes for the Production Sectors I

Natural Low Wage Medium Wage High Wage Transport Transactional Personal Social

Production sector Resources Construction Manufacturing Manufacturing Manufacturing & Trade Activities Services Services

The 1980 Direct Requirements Table

Natural Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.2% 1 .2% 4.4% 12.6% 20.4% 2.4% 1 .2% 3.4% 2.6%

Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 0.1 0.5 0.6 0.7 1.2 3.6 1.4 2.2

Low Wage Manufacturing . . . . . . . . . . . . . . . . . . . . . . . 0.4 7.3 27,3 2.0 2.3 0.7 0.2 1.9 0.7

Medium Wage Manufacturing . . . . . . . . . . . . . . . . . . . . 3.9 20.4 2.8 18.6 5.9 5.1 1.6 5.0 2.6

High Wage Manufacturing . . . . . . . . . . . . . . . . . . . . . . 8.8 6.8 15.4 15.0 29.0 5.5 1.1 6.7 3.2

Transportation & Trade . . . . . . . . . . . . . . . . . . . . . . . . . 4,1 10.5 7.5 8.6 7.7 8.8 2.0 7.1 2.5

Transactional Activities . . . . . . . . . . 5.7 9.9 4,6 5.2 3.7 12.6 15.6 10.1 5.9

Personal Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 0.5 0.6 0.7 0.5 2.2 1.1 4.8 0.8

Social Services . . . . . . . . . . . . . . . . . 0.3 0.1 0.4 0.4 0.2 0.5 0.9 0.6 1.2

Total intermediate inputs... . . . . . . . . . . . . . . . . 53.3 56.8 63.5 63.7 70.4 39.2 27.2 41.0 21.7

+

Value-added . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46.7 43.2 36.5 36.3 29.6 60.8 72.8 59.0 78.3

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

The 1972 Direct Requirements Table

(1972 I-0 in 1980 dollar in percent)

Natural Resources . . . . . . . . . . . . . . . . . . . . . . . 26.l% 1.1% 6.0% 14.2% 18.2% 2.9% 1.4% 2.9% 2.5%

Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 0.0 0.3 0.3 0.5 1,2 4.2 1.1 1.8

Low Wage Manufacturing . . . . . . . . . . . . . . . . . . . 0.4 6.8 30.4 1.9 2.4 0.5 0.4 2.9 0.5

Medium Wage Manufacturing . . . . . . . . . . . . . 3.0 19.3 3.7 16.7 6.2 5.5 1.6 4.7 1.5

High Wage Manufacturing . . . . . . . . . . . . . . . . 6.4 10.8 15.2 17.0 26.8 5.4 2.1 11.2 2.1

Transportation&Trade . . . . . . . . . . . . . . . . 2.4 8.9 6.9 6.5 5.4 6.9 2.2 4.5 1.7

Transactional Activities . . . . . . . . . . . . 4.8 5.2 4.4 4.9 3.5 10.2 16.1 10.1 4.4

Personal Services . . . . . . . . . . . . . . 0.3 0.4 0.7 0.8 0.5 2,1 1.6 4.6 0.6

Social Services . . . . . . . . . . . . . . . . . . . . . . 0.2 0.1 0.4 0.4 0.2 0.6 1.1 0.3 0.8

Total intermediate input . . . . . . . . . . . . 45.3 52.5 68.1 62.6 63.6 35.4 30.6 42.2 16.0

+

Value-added . . . . . . . . . . . . . . . . . . . . . . . . . . . 54.7 47.5 31.9 37.4 36.4 64.6 69.4 57.8 84.0

Total . ., . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

How To Read This Table:On average, each $100 in sales made by a Natural Resource business in 1980 resulted in $46.70 paid as compensation to employees

in Natural Resource businesses or payments to the owners of these businesses, or indirect business taxes paid by these businesses, collectively called

“value-added.” The remainder of the $100 in sales went to pay firms that directly supplied Natural Resource industries. $2.50 went to purchase goods and

services from construction firms, $0.40 went for purchases from Low Wage Manufacturing firms, $3.90 from Medium Wage Manufacturing, etc. These estimates reflect only the direct inputs, not the secondary or indirect contributions which are estimated in table 4-4.

NOTE: Totals may not equal 100 percent due to rounding.

SOURCE: Office of Technology Assessment, from data provided by the U.S. Department of Commerce, Bureau of Economic Analysis, “The Input-Output Structure of the U.S. Economy,” 1972, Survey of Current

Business, April 1979 and Input-Output Tables, 1980, unpublished; U.S. Department of Labor, Bureau of Labor Statistics, “Time Series Data Base for Input-Output Industries,” unpublished.
153

one-quarter of GPFI. Residential structures are not

considered to be part of the production recipe and

expenditures on non-residential structures have remained relatively constant, leaving PDE as the component of capital investment that has experienced

the most change. Most of this change has been in

the form of purchases of information processing

equipment, which increased from 6 percent of PDE

in 1950 to over 40 percent of all such investment

in 1986, with most of the growth occurring since

1973 (see figure 4-l). Two-thirds of the increase was

attributable to two categories of equipment: office,

computing, & accounting machines; and communications equipment. Of the growth in office, computing, & accounting machines, 93 percent occurred

during the last 10 years. Recent estimates attribute

77 percent of all of the office, computing, & accounting machines and 95 percent of the communication

equipment expenditures to purchases made by the

service sector.g

The other components of PDE—industriaI, transportation, and other equipment—are of roughly

‘Stephen S. Roach, “The Information Economy Comes of Age,” /formation Management Review, vol. 1, No. 1, summer 1985.

Figure 4-1.-Share of Producers’ Durable Equipment

(constant 1982 dollars)

Percent

50 ] 1

40

30

20

10

— Information Equip

- -‘- Industrial Equip

— Transportation Equip — Other Equipment

How To Read This Figurs: Information equipment (computers,

photocopiers, communication equipment, instruments, and

related equipment) were only 6°/0 of all business investment

in producers’ durable equipment in 1950, but were 40°/0 in

1986. The percentages are computed after converting all

spending to constant dollars. Producer durables were almost

exactly half of all private investment in 1986, with the remaini ng investment going to buildings and other structures.

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts, ” historical diskettes, table 5,7.

equal size and all have lost about the same share

of total expenditures, falling from about one-third

in 1950 to about 22 percent in 1985.

In standard accounts, GPFI is treated in the same

manner as consumer purchases. Unless otherwise

stated, however, the calculations presented in this

analysis will treat both durable and non-durable elements of production as being part of the production

recipe, Purchases of residential structures were examined in chapter 2 and are not included in the production recipe because they are not considered an

input to production.

There are, of course, powerful links that cannot

be exhibited in a table such as 4-2. The health of

U.S. research and development efforts, for example,

may be badly hurt if manufacturing capacity in an

industry moves offshore, since there is evidence that

commercially useful research thrives when it is integrally connected with practical manufacturing prob

lems.l” Likewise, every business relies on educated

workers as an “input,” but schools are not formally

linked as an input in the production process. Such

connections must be recognized using tools other

than the ones presented here.

The table also reports all value-added as a single

statistic, lumping labor costs of managers, production workers, and scientists together with the cost

of capital. In fact, some of the most interesting

changes in production recipes are occurring within

these value-added categories. Chapter 10 will explore

the value-added recipe in much greater detail.

As prices, technologies, regulations, and other factors change, so will the recipe used for production.

Generally, the process of changing this recipe is slow

and gradual; even a large shock such as the quadrupling of oil prices between 1972 and 1980 had a

long lag period before an adjustment was incorporated into the production process.l] Nevertheless,

comparing the 1972 production recipes with those

of 1980 reveals that in almost every sector, the level

10 For a di~ussion of this link, see Stephen S. Cohen and John ZYSman, “The Myth of a Post-Industrial Economy, ” Technology Review,

February/March 1987; or Charles F. Sabel, et al., “How To Keep Mature Industries Innovative,” 7%chno~ogy Review, April 1987.

I Isee Anne Carter, “changes in Input-Output Structure Since 1972,”

Interindush-y Review, Data Resources Inc., summer 1980, p. 1.16; and

Stanley J. Feldman and Karen Palmer, “Structural Change in the United

States: Changing Input-Output Coefficients,” Business Economics, January 1985, p. 39.
154

of inputs—particularly service sector products—

increased between 1972 and 1980.

Chapter 6 provides a detailed discussion of the

ways production recipes are changing. Major changes

can

For

●

●

●

●

be found in virtually every business network.

example:

Heating oil dealers have been able to cut down

on the number of trucks and drivers, and on

their inventories, by maintaining data on the

capacity of customers’ tanks, consumption rates,

and the weather. The recipe has been changed,

substituting information for vehicles, people,

and storage facilities.

Levi Strauss & Co. uses 3-D computer imaging

equipment to simulate how different fabrics and

styles will look and wear, instead of producing

samples. Software and computers have replaced

sewing machines and material.

Advances in polymer technology and a desire

to boost fuel efficiency have altered the recipe

for producing a car, as high strength plastics and

aluminum are substituted for iron and steel.

Computer-Aided-Design and robotics have optimized designs so that less steel is used.

Banks have used automated tellers and communication networks to substitute for many

hand operations.

In all of these cases, changes in the recipe of production, whether as a result of price changes or technological innovation, have altered the respective positions of industries in the U.S. economy.l2

Intermediate Inputs and Direct

Linkages

As table 4-2 indicates, the manufacturing sectors

make comparatively heavy use of intermediate inputs purchased from other businesses. Roughly twothirds of the value of manufacturing sales must go

to pay for intermediate inputs supplied by other sectors, while the three sectors retain significantly less

than half of the sales price of their goods. In comparative terms, the Social Services sector is only

weakly linked to other parts of the economy. Of the

price of Social Services sold, 78.3 percent results in

direct value-added (returns to capital and labor) to

the Social Service industries themselves; not much

“leaks out” to the other sectors of the economy. Indeed, this insular quality holds true for all the sectors that are characterized as services.

Taken as a whole, the economy became more interconnected between 1972 and 1980, as the share

of goods and services produced for use as intermediate inputs rose by 1.2 percent. This translates into

more than $60 billion (1980 dollars) if applied to the

1980 economy, or more than all the value-added

generated by the eating& drinking industry in that

year.

13

Some sectors became much more highly linked

during the 1972-1980 period. The Natural Resource

and High Wage Manufacturing sectors made much

heavier use of intermediate inputs, increasing their

intermediate inputs by 8 and 7 percentage points,

respectively. The bulk of the increase for both of

these sectors occurred between 1972 and 1977, and

was in the form of energy-related commodities: crude

& refined petroleum, chemicals, and electric, gas,

and water services (utilities). Nevertheless, the single biggest increase in an input for the High Wage

Manufacturing sector was the service provided by

the wholesale & retail trade industry.

The change in use of intermediate inputs is not

uniform. For example, the Natural Resource sector

greatly reduced inputs of livestock and agricultural

products inputs while High Wage Manufacturing reduced its purchases of iron ore, steel products, and

metal containers.

Transactional Activities and Low Wage Manufacturing actually reduced their intermediate inputs between 1972 and 1980, becoming less tightly linked

to the rest of the economy. In the case of Low Wage

Manufacturing, the bulk of the decrease was attributable to a decline in textile and apparel inputs;

for Transactional Activities, the decrease was more

evenly spread between paper products, real estate,

and maintenance & repair construction.

In many cases, relatively small total changes mask

significant offsetting changes in production recipes.

Izsince many Of the sectors reflect the combination of many industrial processes, changes in demand, which necessarily change the share

of a particular product or industry within the broader sector, may appear to be a change in recipe at this higher level of aggregation.

lsThiS is ().()12 times $5,210 billion (total gross output in 1980 in 1980

dollars).
155

For example, intermediate inputs for Construction

grew only 4 percentage points. Construction, however, greatly increased its purchases of business service inputs while reducing demand for refined petroleum. The Transportation & Trade sector also

increased its use of business services, as well as communication services. Overall, Medium Wage Manufacturing increased its use of inputs only slightly,

but its inputs of wholesale& retail trade, electronic

components, and office & computer equipment increased dramatically, while its use of primary iron

& steel, livestock products, and food& kindred products decreased.

When these sectors are combined and their relative size is taken into account, it becomes clear that

the Nation’s production recipe has undergone a significant realignment, using more service inputs and

fewer raw or semi-finished materials.14 Table 4-3 lists

the 10 industries which contributed most to an increase in intermediate inputs and the 10 that contributed most to declines between 1972 and 1980.

llsee Andrew G. C]em and William P. Thomas, “New Weight StrUcture Being Used in Producer Price Index,” Monfh/y Labor Review, August 1987, pp. 12-21 for a similar analysis.

Table 4-3.—Changes in Production Recipe Inputs

From 1972 to 1980 (ranked by greatest gain and loss)

Industries gaining share

1, Wholesale & retail trade

2. Business services

3. Communications

4. Electronic components &

accessories

5. Maintenance & repair

construction

6. Electric, gas, water, & sanitary

services

7. Transportation & warehousing

8. Plastic & synthetic materials

9. Office, computing, &

accounting machines

10. Finance & insurance

Industries losing share

Primary iron & steel

manufacturing

Livestock & livestock products

Other agricultural products

Primary nonferrous metals

manufacturing

Motor vehicles & equipment

Stone & clay products

Forestry & fishery products

Paper & allied products

Lumber & wood products

Broad & narrow fabrics

How To Read This Table: Intermediate inputs from wholesale

and retail trade were responsible for the largest share of the

total increase in intermediate inputs occurring between 1972

and 1980. Changes in intermediate inputs of primary iron &

steel manufacturing contributed most to counteract this increase.

SOURCE: US. Department of Commerce, Bureau of Economic Analysis, “The

Input-Output Structure of the U S. Economy, ” 1972, Survey of Current

Business, April 1979 and Input-Output Tab[es, 1980, unpublished; converted to a constant dollar basis using Bureau of Labor Statistics Output Deflators, unpublished; U.S. Department of Labor, Bureau of Labor

Statistics, “Time Series Data Base for Input-Output Industries,” unpublished

The overall increase in the use of intermediate inputs and the pronounced rise of service sector inputs suggests that the economy has become more

specialized. ’5 This specialization is apparent in the

fact that more interindustry transactions are taking

place, requiring significant increases in wholesale

& retail trade inputs as well as inputs that tend to

facilitate transactions: communications and business

services.

Much of this specialization is fueled by technological developments and competitive pressures that

make it nearly impossible, both technically and

financially, for any one firm to conduct all facets of

production. Specialized contractors fill this void, providing the contracting firm with additional flexibility because costs are shared, but also making the

firm more dependent because of the strategic position of the contractor in the production process.

Chrysler cites a 50-percent decrease in engineering

costs to its increased use of suppliers. ]G

Much of the increase in interindustry connections

is also due to new technologies, particularly information processing technologies, that allow coordination of complex production processes which increasingly span the globe. As a result of this growth

in subcontracting, and the wider geographical dispersion it entails, service sector businesses have

thrived because of the increased need for legal contracts, consulting services, transportation, communication, and wholesale & retail trade.17

Indirect Linkages

Although the analysis of direct input requirements

shows how recipes have changed, it does not include

the indirect economic activity generated by an industry’s output. As in the frozen pizza example, grain

is needed to make flour, fertilizer is used to produce

grain, chemicals are needed to make fertilizers, and

so on. Numerous “upstream” and “downstream”

linkages are associated with almost every commodity, although some are more tightly linked than

ls~e Anne cafler, s~rUC~U~a/ Change in the American J%or?orny (cMIIbridge, MA: Harvard University Press, 1970), for a more detailed analysis of specialization.

lcElizabeth A. Haas, “Breakthrough Manufacturing, ” ~arvard ~USjrres.s Review, March/April 1987, p. 79.

lTChar]es F. Sabe], et al., op. cit., footnote 10, p. 32; and Richard

McKenzie, “The Emergence of a Service Economy: Fact or Artifact?”

Policy Analysis No. 93, Cato Institute, Washington, DC, October 1987.
156

others. By tracking these connections, the impact

of buying a new domestically produced car on the auto

industry’s suppliers (like the steel industry) becomes

apparent, as does the secondary impact of those increased steel purchases on the steel industry’s suppliers (like coal). The indirect connections between

different parts of the economy, implicit in table 4-2,

can be illustrated using mathematical techniques described in the appendix to estimate how $1 of output in one industry sector generates value-added in

other sectors, incorporating both direct and indirect

effects.

Table 4-4 reconfirms that the Social Services sector is the most “insular,” even when indirect effects

are taken into consideration. Of the total value-added

generated throughout the U.S. economy by demand

for Social Services, 77 percent is retained within the

Social Service sector-only 23 percent spills over into

the rest of the economy (e.g., for purchase of hospital or school supplies).

As was the case when only direct effects were examined, this insular quality holds true for all the sectors characterized as services when indirect effects

are included. On average, almost two-thirds of the

value-added generated from demand for services

stays in the service sectors. Their linkage to other

sectors is relatively weak; of every $1 of value-added

generated by demand for services, only around 15

cents ends up in manufacturing. The biggest spillover to manufacturing, more than 16 cents on each

dollar, comes from demand for Personal Services;

the smallest, 8 cents, comes from demand for Social Services.

A very different situation prevails in manufacturing, where the three sectors—as before—reap under half of the value-added generated from the sale

of their goods, passing the other half on to other sectors of the economy. Low Wage Manufacturing is the

most insular of the three, but even in this case, nearly

one-quarter of every dollar spent on goods produced

by the Low Wage sector, such as apparel, ends up

in the coffers of a service industry-especially Transportation & Trade (12 cents per dollar) and Transactional Activities (9 cents).

This strong link to services is also evident in the

Medium Wage sector; about one-quarter of the value

added generated by demand for the products of

Medium Wage Manufacturing is captured by services. But in contrast to the Low Wage sector, the demand for $1 of Medium Wage products, such as electronics or processed food, also translates into 12 cents

of value-added for the Natural Resource sector. The

other major link to Natural Resource industries—

other than the Natural Resource sector itself—is High

Wage Manufacturing. Only about 43 cents of every

dollar of value-added resulting from demand for High

Wage manufactured goods is retained by the High

Wage sector. The bulk of the remaining 57 cents is

divided between Natural Resources, reaping 17

cents, and Medium Wage Manufacturing, Transportation & Trade, and Transactional Activities, each

gaining more than 8 cents worth of value-added.

The Natural Resource and Construction sectors are

the least insular of all. Only 36 cents of $1 in value-

-added generated by demand for Construction goes

to construction firms, while five of the eight other

sectors gain at least a nickel in value-added from

such purchases. About one-quarter of the value-

-added that is not retained by Construction from demand for its own products is split between Transportation & Trade and Transactional Activities—1 4

and 12 cents, respectively. The Natural Resource sector is the least insular sector, reaping only 25 cents

of the dollar of value-added that results from purchases of Natural Resources. Major beneficiaries from

demand for this sector’s products are Transportation

& Trade (16 cents) and Transactional Activities(11

cents).

Table 4-5 provides a summary view of the way

that each of the sectors is linked to the rest of the

economy. The table estimates the total industry output resulting from $1 of demand in each of the 10

sectors. This statistic is conventionally called the

“output multiplier.”18

laone do]]ar of sales can, by definition, generate oniy $1 of value-

-added. If an industry purchases no items from other industries, there

would be no direct or indirect links to the rest of the economy, and

$1 of its output would generate only $1 of total output (namely its own).

All value-added would be captured by the producing enterprise. If a

large portion of the value in an industry’s sales represents the cost of

goods and services purchased from other enterprises, only a fraction

of the total value-added in the economy generated by the value of its

sales will remain in the industry itself. The total output generated by

$1 of the industry’s output will be larger than 1.0 because the intermediate outputs are counted at least twice (once as a part of the output

of the industry itself, and once as the output of the supplying industries). A chain of connections thus leads to multiple counting when an

industry is not completely insular. The extent of this multiple counting

provides a good measure of the degree to which the industry is linked
Table 4-4.—Sectoral Linkages: Value-Added Derived by Production Sector From the Purchase of $100 of a Sector’s Producta

(1980 dollars, in percent)

Natural Low Wage Medium Wage High Wage Transport Transactional Personal Social

Production sector Resources Construction Manufacturing Manufacturing Manufacturing &Trade Activities Services Services

Natural Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.3% 6.1% 6.8% 11.8% 16.9% 5.6% 3.6% 4.9% 2.5%

Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5 35.9 3.3 3.9 4.3 3.8 12.7 3.9 2.7

Low Wage Manufacturing . . . . . . . . . . . . . . . . . . . . . . . 2.3 4.7 47.6 2.4 2.7 1.6 2.1 2.5 1.0

Medium Wage Manufacturing . . . . . . . . . . . . . . . . . . . . 13.2 14.8 7.7 44.5 12.2 6.9 8.9 7.4 4.2

High Wage Manufacturing . . . . . . . . . . . . . . . . . . . . . . . 12.9 10.5 11.8 12.4 43.4 5.7 5.3 6.5 3.0

Transportation&Trade . . . . . . . . . . . . . . . . . . . . . . . . . 15.9 13.8 11.6 13.2 10.3 62.1 7.4 8.8 3.8

Transactional Activities . . . . . . . . . . . . . . . . . . . . . . . 11.4 12.2 8.8 9.4 8.2 11.0 57.5 9,7 5.3

Personal Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 1.1 1.1 1.3 1.0 1.7 1.0 55.0 0.7

Social Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 0.9 1.2 1.2 0.9 1.6 1.4 1.3 76.9

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

How To Read This Table: Following all the direct and indirect effects, $lOO of products purchased from Natural Resource businesses in 1980 created $25.30

invalue-added in the Natural Resource businesses themselves, $10.50 in Value-added for the Construction industry,etc. The $loo purchase can only generate

$l00 in value-added throughout the econorny. it can, however create much more than $100 in output. Table 4-2 looked at direct effects of $100 in output

produced by the Natural Resource industries. Table 4-4 looks at the chain of events created by $100 in final demand for commodities produced by Natural

Resource industries.

aBased on the distribution of demand as it existed in 19S4, includes 1977 capital flows table updated to 1984 levels.

NOTE: Totals may not equal 100 percent due to rounding.

SOURCE: Office of Technology Assessment, from data provided by the U.S. Department of Commerce, Input-Output Tables, 1980, unpublished, Bureau of Labor Statistics, “Time Series Data Base for lnputOutput Industries,” unpublished, and 1977 Capital Flows Table.
158

Table 4-5.—Changing Sectoral Linkage:

Output Multipliers for 1972 and 1980

(includes capital equipment)

Production sector 1972 1980

High Wage Manufacturing . . . . . . . . . . . . . . . . . . 2.6 3.0

Natural Resources . . . . . . . . . . . . . . . . . . . . . . . . 2.3 2.8

Low Wage Manufacturing . .................2.9 2.8

Medium Wage Manufacturing . . . . . . . . . . . . . . .2.6 2.8

Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 2.6

Transportation&Trade . ...................2.0 2. 1

Personal Services . . . . . . . . . . . . . . . . . . . . . . . .. 2.3 2.1

Transactional Activities . . . . . . . . . . . . . . . . . . . . 1.8 1.7

social Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 1.6

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 2.4

How To Read This Table: In 1972, $100 in final demand for

commodities produced by Natural Resource industries created $260 in total output throughout the economy. This had

risen to $300 in 1980 because the sector had become more

highly linked with the rest of the economy. A completely insular business purchasing nothing from the outside would

create $100 in output and $100 in value-added for $100 in

sales. A highly linked business might buy a $90 product from

suppliers and sell it for $100. This creates at least $190 in

total output for the economy. Adding output inherently involves double-counting because each output contains the

value of intermediate inputs.

SOURCE: Office of Technology Assessment, from data provided by the U.S.

Department of Commerce, Bureau of Economic Analysis, “The lnputOutput Structure of the U.S. Economy,” 1972, Survey of Current Business, April 1979 and Input-Output Tables, 1980, unpublished; U.S.

Department of Labor, Bureau of Labor Statistics, ‘f

Time Series Data

Base for Input-Output Industries)” unpublished, 1972 and 1977 Capi.

tal Flows Table.

It is again evident that service enterprises are comparatively independent of the rest of the economy,

while the Natural Resource and manufacturing sectors are highly linked. The changes in output multipliers between 1972 and 1980 tend to parallel the

changes in production recipe: Natural Resources and

High Wage Manufacturing had the largest increases,

while Low Wage Manufacturing, Transactional Activities, and Personal Services experienced a decrease.

In other words, Transactional Activities has altered

its operations so that this sector had less interaction

with other sectors in 1980 than in 1972.

Presumably, industries becoming more tightly

linked with the rest of the economy require more

connections to other business or more expensive inputs. They may also be contracting for work or buying inputs that were previously generated “incontinued from previous page

directly and indirectly to other enterprises. See J.M. Szyrmer, “Measuring Connectedness of Input-Output Models: Survey of Measures, ” Erwiror?ment and P/arming, vol. 17, 1985, pp. 1591-1612, for a discussion

of the use of this measure.

house,”l9 The analysis of High Wage Manufacturing’s production recipe indicates that the bulk of

these additional links are with trade- and energyintensive sectors, suggesting that the increase in connectivity is due to the higher cost of energy and the

increased number of transactions needed for production—possibly due to the use of imported inputs.2o

Table 4-5 also shows that the output multiplier for

the whole economy increased between 1972 and

1980, The U.S. economy has become more interconnected in spite of the fact that sharp growth has

been experienced in service sectors, which exhibit

comparatively weak links to the rest of the economy.

These seemingly contradictory findings are explained

by the fact that businesses are increasingly using

services as an input into their production recipes,

both directly and indirectly—thus increasing services’ role in the economy and creating a higher level

of interindustry linkage.

Increased linkages have both attractive and unattractive effects. A more tightly linked economy allows a greater degree of specialization, flexibility, and

efficiency. Nevertheless, interdependent sectors also

mean that an economic downturn in one sector will

quickly spread to other sectors of the economy. Unlike the situation in manufacturing, where growth

in demand for its products has also meant growth

in the Natural Resource and service sectors, the

growth of services-especially that of Transactional

Activities—results in little growth outside transactional businesses. On the other hand, the health of

transactional service businesses may depend heavily on a healthy manufacturing sector.z

’

The concept of linkage takes on greater importance

when viewed in terms of international trade, an issue that will be addressed in chapter 8. Trade has

a major effect on manufacturing, which is highly

linked to the rest of the economy. Therefore, trade

problems in manufacturing ripple throughout the

U.S. economy.

IgSee John Tschetter, “Producer Services Industries: Why Are They

Growing So Rapidly?” U.S. Bureau of Labor Statistics, Monthfy Labor

I?eview, December 1987, pp. 31-41.

ZOFor example, the “big three” U.S. auto companies now draw a Significant amount of their parts from foreign producers. See Kevin Flaherty, “Foreign Sourcing by the U.S. Automobile Industry,” U.S. Congressional Research Service, Nov. 8, 1985.

Z] Stephen S. Cohen and John Zysman, “The Myth of a Post-Industrial

Economy,” op. cit., footnote 10.
159

NETWORKS THAT PROVIDE AMENITIES

The methods just described can be used to show

how the set of consumer and government purchases

needed to satisfy specific amenities described in Part

I connect to direct and indirect demand for industry output. The chain of analysis proceeds as follows:

1. consumers purchase a variety of goods and services to achieve an amenity,

2. these purchases translate into direct demand

for output from a variety of different industries

(including businesses providing “margins” such

as transportation, insurance, and trade), and

3. the value of the products and services sold to

consumers is distributed across a complex network of businesses because of direct and indirect connections.

It is possible, therefore, to connect purchases for

an amenity such as Food with economic activity distributed throughout the U.S. economy. The distribution of value-added generated in each industry by

purchases needed to serve 11 major amenity groups

are summarized in table 4-6 for 1984 and 1972. This

table shows how all value-added flowed through the

economy from producing sectors to amenity categories in each of the 2 years. The sum of all value-

-added in each year is the entire U.S. gross national

product.

Table 4-6 indicates, for example, that including

all direct and indirect effects, approximately 15 percent of the U.S. Food bill goes to purchase value-

-added from farms and other Natural Resource operations—down from 17.6 percent in 1972. Similar decreases in share came from the Medium Wage and

High Wage Manufacturing sectors. The bulk of the

value-added required for the Food amenity, increasingly true since 1972, comes from the Transportation & Trade sector.

Although Natural Resource inputs were above

average for the Housing, Transportation, and Export

amenities both in 1972 and 1984, the share of value-

-added contributed by the Natural Resource sector

has declined in 9 of the 11 amenities since 1972.

Interestingly, the largest share of value-added required for Housing, both in 1972 and 1984, does not

go to the Construction sector. Rather, Transactional

Activities accounts for nearly 45 percent, due to the

enormous impact of the real estate industry on

homebuying. 22 This is up dramatically from 1972.

Exports also require a larger share of inputs from

the Transactional sector as does Personal Business

and Communication. Between 1972 and 1984, the

increased spending for Personal Business and Communication translated directly into value-added for

Transactional Activities, while every other production sector lost share—particularly Construction and

High Wage Manufacturing. Indeed, the importance

of Transactional Activities has increased sharply

since 1972 for every amenity except Defense, which

is sensitive to the choice of 1972 as an endpoint due

to the influence of the Viet Nam War.

Not surprisingly, value~added from the Social Service sector plays a large role in creating the Health,

Education, Government, and Defense amenities, and

this role has increased in size compared to 1972.

All amenity groups except Defense and Personal

Business and Communication registered increased

demand for inputs from Transportation & Trade.

The Food, Transportation, Clothing and Personal

Care, Recreation and Leisure, Federal Defense, and

Export amenities make the heaviest use of manufactured inputs. With the exception of Defense, however, the share of value-added contributed by manufacturing declined significantly between 1972 and

1984. Purchases from High Wage Manufacturing fell

sharply, especially for Transportation, Clothing and

Personal Care, and Exports.

IZThe Nationa] Income and Product Accounts also impute a rentalequivalence value for homeowners, which is allocated to the real estate industry.
Table 4-6–Networks That Provide Amenity: Contributions From Sectors Needed To Satisfy Amenity categories, 1964 and 1972

(1960 dollars, in percent)

Amenity categories

Personal

Clothing and Business and Recreation Government Federal

Production sectors Food Housing Transportation Health Personal Care Education Communication & Leisure n .e.c. Defense Exports Total

1984~

Natural Resources . . . . . . . . . . . . 15.0% 9.7% 14.5% 4.3% 4,9% 4.0% 2.6% 6.0% 5.2% 4.4% 16.4% 9.1 %

Construction . . . . . . . . . . . . . . . . . . 3.3 12.9 6.1 3.7 2.4 5.2 2.8 3.7 11.0 3.8 3.4 6.2

Low Wage Manufacturing . . . . . . . 1.5 3.2 2.7 1.5 17.0 1.2 1.1 3.5 1.9 1.4 3.8 3.2

Medium Wage Manufacturing . . . 16.8 6.8 7.8 6.6 5.2 4.8 6.7 12.1 6.1 10.9 19.4 9.7

High Wage Manufacturing . . . . . . . 8.1 5.7 16.1 5.9 7.6 3.3 2.9 7.1 5.0 17.6 19.5 8.7

Transportation & Trade ., . . . . . . 39.1 12.8 30.1 10.3 39.1 4.1 6.0 21.7 8.0 8.1 18.8 19.3

Transactional Activities . . . . . . . . 12.7 44.7 12.3 15.6 12.8 7.0 70.9 15.4 12.4 9.0 16.1 23.5

Personal Services. . . . . . . . . . . . . . 1.6 2.3 8.0 1.4 10.0 0.6 3.2 14.4 1.4 1.2 1,5 3.7

Social Services. . . . . . . . . . . . . 1.8 2.0 2.3 50.8 1.1 69.9 3.7 16.2 49.1 43.4 1.1 16.4

Total . . . . . . . . . . . . . . . . . . . . .. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Total (billions of 1980$) . . . . . . . . 428 672 264 285 171 180 161 200 120 173 238 2,892

1972b

Natural Resources . . . . . . . . . . . . . 17.6% 13.8% 13.1 % 5.2% 5.7% 6.1 % 3.7% 6.7% 7,4% 20.1 % 15.9% 12.5%

Construction . . . . . . . . . . . . . . . . . . 3.7 12.2 7.1 5.6 4.1 6.1 5.1 5.5 12.8 9.8 3.9 7.6

Low Wage Manufacturing . . . . . . . 1.5 3.8 2.9 1.7 18.3 1,3 1.6 4.1 2.0 3.5 4.1 3.8

Medium Wage Manufacturing . . . 19.8 7.0 8.0 6.3 5.5 4.8 8.1 12.3 6.6 10.2 17.2 10.0

High Wage Manufacturing . . . . . . . 10,7 8.4 22.7 8.0 11.3 5.1 5.4 9.6 8.0 14.6 27.9 12.0

Transportation & Trade . . . . . . . . . 34.4 12.1 27.0 10.1 33.9 3.8 6.7 21.2 7.3 14.4 17.0 18.3

Transactional Activities . . . . . . . . . 9.6 37.8 10.2 13.9 10.3 5.7 61.6 11.7 11.0 11.7 11.6 18.1

Personal Services. . . . . . . . . . . . . . 1.2 2.9 6.3 1.2 9.8 0.5 4.0 12.4 1.3 2.0 1.3 3.5

Social Services, . . . . . . . . . . . 1.5 2.1 2.6 48.1 1.1 66.5 3.8 16.3 43.6 13.8 1.1 14.3

Total . . . . . ., . .............100.0 100.0 100,0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Total (billions of 1980$) . . . . . . . . 374 509 263 191 161 168 104 160 126 377 131 2,564
161

A CONCLUDING NOTE

This chapter provides a set of tools for viewing years, and are the basis for speculating about future

the economy as a series of interconnected networks, changes. This will be the task of chapter 5. The tools

where the product of one sector works in conjunc- also provide a way of describing the operation of

tion with the products of another sector to satis~ complex networks of business activities that must

the needs of a consumer—whether that consumer combine operations to deliver goods and services

is a person, a business, or a government agency. that consumers require for different amenities. This

These tools can be used to explore many of the will be the task of chapter 6.

structural changes that have occurred in the past few
Chapter 5

Three Perspectives

on Structural Change
Constant

Selecting

Sectoral Contributions to GNP. . . . . . . . .

and Current Dollars . . . . . . .

the Categories ‘-- “

----”-

’

--

Recent Trends in Sector

Explaining the Changes

Tracing the Significance

for Measuring

Shares. . . . . .

. . . . . . . . . . . .

. . . . . . .

Sectoral

. . . . . .

. . . . . .

of Structural Change

Changes in Scale and Scope . . . . . . . . . . . . . . . .

Describing Changes in Scale and Scope . . . . .

Forces of Change . . . . . . . . . . . . . . . . . . . . . . .

Measuring Changes in Scale and Scope . . . . .

.

.

.

.

.

.

.

Consequences of Changes in Scale and Scope.

The Geography of Economic Activity . . . . . . . . . .

Regional Movements. . . . . . . . . . . . . . . . . . . . . .

The Move to the Urban Fringes . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Share . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

65

66

67

68

72

,77

.77

.79

80

82

186

:90

,91

96
Chapter 5

Three Perspectives on Structural Change

Structural changes in the U.S. economy fall into

three major categories:

1. changes in the contribution that each major

business sector makes to the total value added

in the economy, or the gross national product

(GNP);

2. changes in the organization of firms measured

in terms of their scale of operation and scope

of production; and

3. and changes in the location of production.

Changes in these three areas have been underway for some time. Structural change is a dynamic

process which reflects the interaction of many

forces—primarily new technologies, shifts in consumer demand, the way producers satisfy that demand, increasing competition in international trade,

and the introduction of new rules and regulations

that govern business enterprises. The discussion that

follows attempts to isolate the effects of these principle forces.

Understanding changes in the structure of the U.S.

economy is critical for understanding changes in job

generation, pay, and regional growth, and for estimating the likely direction of the economy in the

future. The dynamics of an economy heavily dependent on natural resources are likely to be very different from one primarily dependent on intellectual resources. An economy consisting of tightly integrated

networks of small establishments will behave differently in response to shifting domestic and international markets than one characterized by large, centralized establishments and firms. An economic

structure that spreads wealth unevenly around the

country, or that places the burden of structural adjustment primarily on a few regions, presents a

unique set of problems. In all three cases, policies

designed to facilitate growth and mitigate the pain

of structural change depend on a clear grasp of the

patterns of change and the forces shaping them.

SECTORAL CONTRIBUTIONS TO GNP

Structural change is measured first by the relative

contribution each major business sector makes to

GNP.l Since the 1950s, Natural Resource industries,

Construction, and manufacturing (particularly High

Wage Manufacturing), have contributed less to GNP,

while Transportation & Trade and Transactional

Activities have increased their relative contributions.

Taken as a whole, the share of service businesses

increased from 52 percent of GNP in 1950 to 63 percent in 1984; at the same time, the share of goods—

defined as all manufacturing, Natural Resources, and

Construction—fell from 48 to 37 percent. The rising share of the service sectors has been due to the

strong growth in demand for services and, in the

case of Transactional Activities (the fastest growing

sector), a sharp increase in the use of this sector’s

‘Unless otherwise noted, all measurements of sectoral share are in

constant 1980 dollars.

products as inputs in the production recipe.2 The opposite holds true for the manufacturing sectors,

where demand has risen relatively slowly and production recipes have called for reduced use of manufactured products. Trade has tended to reinforce

these trends.

Many of these patterns have been underway for

some time. There has been considerable debate over

whether the U.S. economy is “deindustrializing” and

how such a phenomenon would be defined and

2For a discussion of the impact of technology and the growing complexity of production in the increased use of services, see James B. Quinn

and Christopher E. Gagnon, “Will Services Follow Manufacturing Into

Decline?” Harvard Business Review, November-December 1986: for a

description of the role of tastes, incomes, and economic growth in

promoting the growth of the service sector, see Robert Lawrence, Can

America Compete? (Washington, DC: The Brookings institution, 1984).

165
166

measured.3 Some evidence suggests that rates of decline in some manufacturing industries have accelerated since 1972,4 and that some of this accelerated

structural change can be attributed to slower economic growths Whether or not rates of change have

increased, there is little doubt that the cumulative

effect of change over the past two decades has been

the creation of an economy where the origins of

value are different—in some cases dramatically

different—than they were two decades earlier. In the

midst of such a process it is difficult to point to a

particular moment when a sudden change in structure took place; such things are easier to see in retrospect.

Any attempt to measure changes in the origin of

value by business type faces two major dilemmas.

First, how should a sector’s share be measured—in

“constant” dollars—a proxy for share of physical

output—or in “current” dollars—the amount of

money in which the economic activity actually

occurred? Second, do the sectors selected for analysis accurately measure changes in the underlying

structure of production, or is change masked by the

categories chosen?

Constant and Current Dollars

The distinction between the type of measure used

is critical, since measurement in constant dollars indicates that manufacturing’s share of value-added

qThe dec]ine in the current dollar share of manufacturing has M to

a controversy over whether the United States is deindustrializing. Bennett Harrison of the Massachusetts Institute of Technology and Barry

Bluestone of Boston College, who popularized the term “deindustrialization,” argue that the manufacturing sectors in the United States are

in decline; see The Deindustrialization of America (Boston, MA: Basic

Books, 1982). Charles Schultze and Robert Lawrence of The Brookings

Institution argue that deindustrialization has not occurred (see Robert

Lawrence, op. cit., footnote 2, and also Robert Lawrence,’The Myth of

Deindustrialization,” Chaf/errge, November/December 1983). For a review of the subject, see R.D. Norton, “Industrial Policy and American

Renewal,” Journaf of Economic Literature, vol. XXIV, March 1986, pp.

1-40.

dFOr an ana]ysis which supports this conclusion, SEW Nicholas S. Pertla,

“The Shift from Manufacturing to Services: A Concerned View,” New

Eng/and Economic Review, January/February 1987; for an opposing

view, see U.S. Department of Commerce, Office of Economic Affairs,

“Changes in the Structure of the U.S. Economy Since 1960: A Primer,”

working paper, Washington, DC, January 1986.

5Jarn~ l-f. crossing and Arye L. Hillman, “Shifting Comparative Advantage and Senescent Industry Collapse,” The American Economic Review, June 1986, p. 516; and Ronald E. Kutscher and Valerie A. Personick, “Deindustrialization and the Shift to Services, ” Monthly Labor

Review, vol. 109, No. 6, June 1986, p. 10.

has remained relatively constant for many years

while this sector’s current dollar share has fallen

sharply (see figure 5-l). Both current and constant

dollar measures provide useful views of the changes

underway. The difference is largely due to productivity increases, which allow the same amount of

goods and services to be produced for a relatively

lower price (see box 5-A).

Measurement of output in current dollars, or the

dollars of the day, has strong intuitive appeal, since

Figure 5-1.-Manufacturing’s Share of GNP

and Jobs (current and constant 1982

dollars and persons)

Percent

3 0 -

2 5 - ‘--’’ ”---’ ---- ’----- ‘ -- -

--- --- -

20-

-..

1 1 1 1 1 1 15 ! I 1 1 I 1 1 1 I I I 1 I 1 1 r I I I 1 1 1 I 1 1 /

1955 1960 1965 1970 1975 1980 1985

‘ --- Job s

— Current dollar s

— Constant 1982 dollars

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts. ” historical diskettes. tables 6,1,6.2,

and 6.10.

t Box 5-A.—Productivity and Constant Dollars

Imagine an island that produced only pizzas and

poems and sold equal numbers of both. Suppose

that in 1950, 2 minutes of work were needed to produce either a pizza or a poem and that each cost

$2. Suppose that thanks to surging innovation in

pizza production, by 1980 poems still took 2 minutes of work and cost $2 dollars but pizza required

only 1 minute and sold for $1 because prices were

set in highly competitive markets.

If demand did not change with price, and if the

capital investments needed to increase pizza productivity were negligible, the constant dollar percentage of production in the island would remain

the same at 50-50, but the current dollar share of

poetry would increase from one-half to two-thirds

of the island’s GNP.
167

it uses the prices at which transactions take place.G

Measured in current dollars, manufacturing’s share

of GNP fell from one-third in 1950 to less than onequarter in 1984. The constant dollar measure reflected in the U.S. Department of Commerce’s “Gross

National Product by Industry” data series, however,

reveals no discernible trend—indeed, it indicates a

relatively stable share at about 22 percent of total

output.7 Manufacturing’s share of GNP measured in

current dollars has fallen largely because productivity

increases in this sector have been passed on to consumers in the form of comparatively lower prices

and demand has not risen enough to offset the price

decline. Because increases in productivity frequently

result in lower labor requirements, the current dollar measure tends to track employment in an industry (again see figure 5-l), making this a useful tool

in analyzing policy considerations focusing on labor.

Constant dollar measures attempt to remove

changes attributable to prices, by tracking actual

changes in quantities. In theory, this measure provides a more accurate indication of contributions to

GNP and thus structural change.8 In practice, the

process hinges on the arcane business of creating

“deflators,” which convert current dollars to the dollars of a particular year–constant dollars. This task

has become increasingly difficult as the economy

generates more value in specialized high-technology

products and in services. It is particularly difficult

during periods of high inflation like the late 1970s.

Accurate conversion from current to constant dollars is only possible where indexes can be based on

measurable, fungible commodities like steel and oil.g

SFO~ ~ description of structural change using a current dollar measure, see U.S. Congressional Budget Office, The lndustria~Poficy Debate,

Washington, DC, December 1983, p. 11; and Nicholas S. Perna, op.

cit., footnote 4.

TAna]ysts using different data series and methodologies, including the

one presented later in this section, find results which conflict with the

finding that the manufacturing sector retains a stable share of GNP when

measured in constant dollars. See Larry Mishel, “Trends in Manufacturing’s Level and Share of Output,” Economic Policy Institute, Washington, DC, November 1987, unpublished.

8For a more detailed examination of how to define and measure structural change, the strengths and weaknesses of constant versus current

measurement, and what role employment measures can or cannot play,

see “Changes in the Structure of the U.S. Economy Since 1960: A

Primer,” op. cit., footnote 4, or Nicholas S. Perna, op. cit., footnote 4.

‘%%s A.G. Clem and W.D, Thomas, “New Weight Structure Being Used

in Producer Price Index, ” Monthly Labor Review, vol. 110, No. 8, August 1987, pp. 12-21, for a description of how a new price basis is estab

lished.

But the bulk of GNP is composed of goods and services whose various characteristics and specifications

do not stay constant over time, making direct comparisons without some type of quality adjustment

inappropriate. The question of adjusting for quality

becomes extraordinarily complex when diverse products are entering the market and many products are

new. Is a computer purchased in 1988 so radically

different from one bought in 1960 that it is effectively

a different product? This problem is magnified in the

case of services, which are in many cases even

harder to quantify. Heart surgery might be more expensive today than it was 10 years ago, but the probability of surviving may be much higher.

Even in places where it is possible to develop a

good estimate of the constant doIlar value of an industry’s product (e.g., a deflator for automobiles), developing a deflator for the value-added portion of

that product proves to be difficult. Since value-added

is primarily composed of compensation paid to workers and income retained by the business, there is

no clear and intuitive interpretation for a value-added

deflator. A discussion of various techniques used to

deflate value-added appears in box 5-B. Given the

limitations outlined in the box, it is clear that constant dollar value-added estimates should be interpreted with care.

Selecting the Categories for Measuring

Sectoral Share

Chapter 4 pointed to the difficulty of selecting business sectors in a way that revealed rather than obscured the structural shifts underway in the U.S.

economy. This problem haunts all attempts to express structural change in a limited number of categories. Observed shifts of economic activity from one

sector to another can merely be an artifact of the

measurement process, and not a true change. Spurious change can occur because different business

types are combined in a single category, definitions

have changed, or the measurement process has improved. This problem applies not just to the 9 business categories used here to summarize structural

change; it can also apply to the 85 industries that

were combined to make the 9.]0 For example, the

IOMore than 500 sectors appear in the U.S. Department of Commerce’s

input/output tables available for the benchmark years. Unfortunately,

the most recent year for which data at this level exists is 1977.
168

Box 5-B.–Deflating Value-Added

Under ideal circumstances, deflators for value- Figure 5-B.-Price Deflators for Various

added inputs are calculated using input-output tech- Sectors (1982=1.0)

niques. The inputs purchased by each business are 1,2

deflated separately and the total is subtracted from a -----

deflated level of industry sales (total output), creating

----

1-

a residual which is deflated value-added. This technique, called “double-deflation,” is recognized as a pre~ 0.8-

ferred method by the Commerce Department because 0.6~

of its use of a consistent set of price indexes. However, )

double deflation is only used on the 29 percent of the 0.4,:-- :- 1 , 1 I , ,

, 1986 GNP generated by the manufacturing, farm, and 1972 1974 1976 1978 1980 1982 1984 1986

construction sectors; a variety of scaling techniques

and other methods are used for the rest of the econ- ‘ --- 

G N P

— Manufacturin g

omy.1 But even the preferred method is subject to se- ‘

— 

Machinery-non ele c

vere problems which limit its usefulness. Errors in the SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “Naconstruction of the deflators or the calculation of the tional Income and Product Accounts,” historical diskettes, tables

6.1 and 6.2.

inputs or outputs appear in the remainder, which is

value-added. tifact of deflation techniques—not real structural change

The problems encountered in creating a constant in the economy.

dollar value-added series, even in manufacturing, are The rise of imports as intermediary inputs in the

made obvious by figure 5-B, where data are particularly good. The figure shows the deflator for the

production process presents another problem, since

most deflation techniques use domestically based deflanonelectrical machinery industry (an industty categoty tors.3 For example, suppose that General Motors buys

that includes computers), the deflator series for all its steel for autos from South Korea in both 1972 and

manufacturing industries, and the deflator for GNP. 1980. If the price of imported steel grew more slowly

It is apparent that a new deflator for computers was than the price of domestic steel, a calculation of the

introduced in 1982.2 Without this change, manufac- growth in auto value-added using domestic deflators

turing deflators would have increased between 1982 would overestimate real growth in value-added.

and 1986. With the change, there was no significant

difference. Changes in constant dollar manufacturing The importance of these factors increased during

output for manufacturing are, therefore, partly an ar- the 1970s and early 1980s, a period of rising imports,

huge increases in the price of oil coupled with tremendous decreases in the prices of computers, and sharp

growth in services-an activity which is inherently difficult to deflate.

] Milo Peterson, “(loss Product by Industry, ” Survey of Current Business,

VOI 67, No. 4, April 1987, 3A.G, Clem and W.D. Thomas, “New Weight Structure Being Used in

‘See David W. Cartwright, “Improved Deflation of Purchases of Com- the Producer Price Index, ” Morrfh/y Labor Review, vol. 110, No. 8, August

puters,” Survey of Currenf Business, vol. 66, No. 3, March 1986 1987, pp. 12-21.

mix of businesses clustered as the “steel industry” merely be due to changes in the industrial compomay change as small “mini-mills” producing spe- sition of a broadly defined sector.

cialty products increase and the traditional large-scale

.

mills producing bulk products decline. Recent Trends in Sector Shares

Figures 5-2a&b, 5-3a&b, and 5-4a&b summarize

Aggregation can also affect the analysis of what changes in relative shares of GNP held by the profactors cause a shift in the share of a sector. Shifts duction sectors that have occurred in the U.S. econthat appear to result from changes in the produc- omy over the past 35 years. A discussion of trends

tion recipe induced by technological innovation may appears in box 5-C.
169

Figure 5-2a. -Current Dollar Shares of

GNP for Natural Resources, Construction,

and Transportation & Trade

0!lt:[[l~lll~l ‘:’’’’~’’’’~’’”~~

1950 1955 1960 1965 1970 1975 1980 1985

— Natural Resources — Constructio n

. . -- Trans & Trade

SOURCE: U.S. Department of Commerce, Bureau of Economic Analyses, “National Income and Product Accounts, ” historical diskettes, table 6.1.

Figure 5-3a. -Current Dollar Shares of

GNP for Low Wage, Medium Wage, and

High Wage Manufacturing

Percent of GNP

2 0 ~

15J

1 0 -

-.-.-------. -

5

1950 1955 1960 1965 1970 1975 1980 1985

— Low Wage Manuf -

--- Medium Wage Manuf.

— High Wage Manuf

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” historical diskettes, table 6.1.

Figure 5-4a. -Current Dollar Shares of

GNP for Transactional Activities,

Personal Services, and Social Services

Percent of GNP

3 0 -

2 5 -

2 0 -

15-

l 0 -

5 ,

, I , 1 1 1 1 0 1 1 1 1 I 1 r I 1 I 1 1 I 1 1 T I I I [ 1 1 I I 1 I 1 1 I 1

1950 1955 1960 1965 1970 1975 1980 1985

— Transactiona l— Personal Service s

--- - Social Services

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” historical diskettes, table 6.1.

Figure 5-2 b.-Constant Dollar Shares of

GNP for Natural Resources, Construction,

and Transportation & Trade

Percent of GNP

3 0 -

2 5 -

2 0 -‘

-----

- _ -------------,--------- -------------------------

15-

l 0 -

5 -

,

— Natural Resources — Constructio n

‘ --- Trans, & Trade

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” historical diskettes, table 6,2,

Figure 5-3 b.-Constant Dollar Shares of

GNP for Low Wage, Medium Wage, and

High Wage Manufacturing

Percent of GNP

15-

l 0 - ~

---

--------

------------------------- -

5 -

0LT1lIIIII:IIIT: 1~1’’l~’’~”’”f]

1950 1955 1960 1965 1970 1975 1980 1985

— Low Wage Manu f ‘ -- - Medium Wage Manuf

— High Wage Manuf

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts, ” historical diskettes, table 6.2.

Figure 5-4 b.-Constant Dollar Shares of

GNP for Transactional Activities,

Personal Services, and Social Services

Percent of GNP

 25 -

20-

15- ~

1 0 -

5 “ ,

, , 1 I 1 0 1 1 1 I I 1 1 1 1 1 1 1 1 1 1 I 1 I 1 1 I 1 1 1 1 1 1 1 1 1 1 1 1 1

( 1950 1955 1960 1965 1970 1975 1980 1985

— Transactiona l — Personal Services

‘ --- Social Services

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” historical diskettes, table 6.2.
170

Box 5-C–Shifting Shares of Value-Added in the U.S. Economy

Natural Resource Industries

One of the clearest structural trends in the U.S. economy has been the relative decline of the Natural Resource sector. This decline is reflected in both current

and constant dollar shares of GNP.

The current dollar share has fallen from more than

12 percent to less than 9 percent—a 29 percent loss

since 1950 (see figure 5-2a). This loss would probably

have been much greater had oil and gas prices not

quadrupled in the 1970s. The constant dollar share

also declined steadily. Over three-quarters of the loss

from 1950 to 1984 is attributable to the farm industry. Between 1972 and 1984, however, the constant

dollar share of the farm industry remained unchanged;

nearly 90 percent of the sectoral loss was due to declines in crude petroleum & natural gas and electric,

gas, water, & sanitary services, reflecting the conservation and substitution of energy products.

Construction

The constant dollar share of Construction increased

slightly more than 1 percent during the 1950s (see figure 5-2 b). Because this was matched by gains in productivity, the current dollar share held steady. Since

the mid 1960s, productivity growth has been small,

and in some cases even negative. As a result, the current share has remained relatively stable while the constant share has declined, mainly in line with recent

economic downturns; about one-fifth of the 30-year de

crease occurred from 1973 to 1975, and another quarter occurred from 1979 to 1982.

Low Wage Manufacturing

Low Wage Manufacturing held a relatively stable

share in constant dollars between 1950 and 1984, but

lost half its share in current dollars (see figures 5-3a

and 5-3 b). The difference between constant and current share is attributable to the fact that Low Wage

Manufacturing had strong productivity gains—gains

driven in part by intense foreign competition.

Between 1972 and 1984, Low Wage Manufacturing’s

share of constant dollar GNP remained largely unchanged because of offsetting trends in different industries. Footwear and miscellaneous manufacturing

(mainly composed of the jewelry and toy industries)

declined, while lumber & wood products and apparel

grew. The relatively large rubber & plastics and furniture & fixture industries kept a constant share.

Medium Wage Manufacturing

Medium Wage Manufacturing has lost nearly a quarter of its share measured in current dollars since 1950,

but gained over a quarter in constant dollars (see figures

5-3a and 5-3b). As with the low wage sector, this discrepancy is due to steady gains in productivity. The

three leading industries of this sector-non-electrical

machinery, electric industrial equipment, and food &

kindred products—experienced respective price increases that were 10, 28, and 27 percent below the 1970

to 1983 U.S. average. ]

During the 1972-84 period, the increase in the constant dollar share of this sector resulted from industries characterized as “high-tech”: electronic components, optical equipment, scientific instruments, and

office, computing, & accounting machines. These four

accounted for 73 percent of the growth of all industries in this sector that rose in share; office, computing, & accounting enterprises increased their share by

a factor of almost 6 over the 12-year time period.

High Wage Manufacturing

The fate of High Wage Manufacturing is particularly

important for the U.S. economy since, as the name

suggests, it has long been a source of well-paid jobs.

Its importance also lies in its strong links to the rest

of the economy (see ch. 4). Nevertheless, the sector

lost both constant and current dollar share of GNP (see

figures 5-3a and 5-3 b). The bulk of High Wage Manufacturing’s loss in constant dollars occurred during the

1970s, a period of weak productivity growth for this

sector and of increasing competition from foreign firms.

The petroleum refining, primary iron & steel manufacturing, and motor vehicle industries were the major sources of this decline. Of the 20 industries included

in this sector, only one, drugs, cleaning, & toilet preparations, witnessed any substantial growth, with most

of that occurring between 1972 and 1977. Productivity

in many high wage sectors has increased in the past

few years, but average growth during the 1972-1984

period was sIoW.

2 The discrepancy between the shares

reported in figure 5-3b and the share shifts calculated

using the input/output methods described in chapter

4 is particularly great for this sector.

‘U.S. Bureau of the Census, Statistical Abstract of United States, 1985 (106th

cd.), Washington, OC, 1984, table 783.

Z lbid.
171

Transportation & Trade

Transportation & Trade is one of the largest sectors

in the economy, responsible for approximately onefifth of the Nation’s GNP over the past 35 years. The

sector’s current dollar share has declined gradually

since the mid 1950s, while the constant share has

tended to rise (see figures 5-2a and 5-2 b).

Individual industries, however, have experienced

significant changes. Of the sector’s 5-percent gross decline in current dollar share from 1950 to 1984, more

than half was attributable to railroad transportation enterprises. On the other hand, air transportation enterprises were responsible for half of the gross increase.

From 1972 to 1984 there was little change, although

nearly all of this sector’s growth in constant dollar

share has come from the wholesale & retail trade industry. Wholesale & retail trade’s contribution to GNP

has historically been the largest of any industry; by

1984, its share was more than that of all industries

contained in the Low and High Wage Manufacturing

sectors combined.

Transactional Activities

No other sector has experienced the dramatic growth

generated by the group of industries characterized as

“transactional. ” The growth of this sector has been

rapid and continuous since 1950, with both the current and constant share rising in unison until 1980

(see figures 5-4a and 5-4 b). After 1980, however, the

constant share leveled off while the current share continued to climb. This has probably been due to the

escalation in real estate prices since 1979.3

Since 1972, the dominant growth industry within

this sector has been business services, responsible for

more than 40 percent of the increase in sectoral share.

Real estate & rental also grew, contributing more than

one-quarter of the constant share increase; this development made real estate the second largest industry,

after wholesale & retail trade, in the 1984 U.S.

economy.

4

Personal Services

Losing share in both constant and current dollar

terms, Personal Services are the exception to an otherwise dramatic shift towards a service-oriented economy (see figures 5-4a and 5-4 b). The largest decline

is located in the household services industry (domestic services), much of which has fallen prey to the introduction of labor-saving household appliances.5

Since 1972, the sector has maintained a stable constant dollar share. This balance was achieved through

gains in the automobile repair& services and amusements industries, offsetting a continued decline in

household services.

Social Services

The Social Service sector is comprised of the public

and private health and education industries, as well

as Federal and State government. This sector has

grown dramatically over the past 35 years; in fact, it

has the fastest current dollar growth rate of any sector, increasing by 70 percent between 1950 and 1984

(see figure 5-4a). State and local government enterprises were the main contributors to this current dollar growth, generating about half of the increase since

1950. The constant dollar share, however, only grew

at the same rate as the economy. Part of this dichotomy

can be attributed to weak gains in productivity; only

the Personal Services and Construction sectors have

shown less productivity growth than Social Services.

The other factor involved is a sharp increase in prices.

Between 1972 to 1984, the combination of Federal,

State, and local government decreased their share in

constant dollars. Most of this loss was compensated

for by a gain in share from private health, education,

& social services.

tlbid,, table 790.

4The National Income Accounts also impute a rental-equivalence value for

home owners that is allocated to the real estate industry. 5

Joe Schwartz, “The @ods Life,” Amt+can Demographics, December 1987

can be isolated from other factors, by using 1980 pro- technology of production. Table 5-2 details these

duction recipes to estimate industry output given pat- changes.

terns of final demand occurring in 1972, 1977, 1980,

and 1984. In other words, the effects of final demand Changes in the composition of final demand from

can be separated from those brought about by new 1972 to 1984 had a significant impact on the output

recipe patterns, which tend to reflect changes in the produced by industries in several sectors, especially
172

The changes may seem small at first. The share

of Natural Resources, for example, fell from 13 percent in 1950 to about 9 percent in 1984—hardly a

dramatic decline. It must be recognized, however,

that given the size of the U.S. economy, even a one

percent shift in GNP share is significant. In 1984,

a 1 percent change in share meant $38 billion gained

or lost. For comparison, the total compensation paid

to al] of the employees of the motor vehicle industry was $35 billion, and businesses spent $34 billion on computers, in 1984.11

Explaining the Changes

Which of the factors listed at the beginning of this

chapter were responsible for the sectoral shifts described in figures 5-2, 5-3, and 5-4? Methods introduced in chapter 4 can be used to distinguish between changes resulting from new patterns of

demand, new production recipes, and new patterns

of international trade.12

In brief, changes in demand, both domestic and

international, and changes in production recipes

have had almost equal effects on the overall shift

in share during the past decade, but the impact on

individual sectors and industries varies widely. Not

surprisingly, demand changes tend to have their

greatest effect on industries that sell final, finished

products, such as motor vehicles and real estate. Recipe changes affect industries such as oil, steel, chemicals, and business services, which typically supply

goods or services that are then used as ingredients

in a finished product. International trade has reinforced the changes generated by domestic demand

and production recipes, but its effects were not pronounced until after 1980.

The period 1972 to 1984 was chosen for in-depth

analysis. This is the most recent time frame for which

I IU.S. f)epafirnent of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” Survey of Currerrt Business, vol.

67, No. 7, July 1987, tables 5.6 and 6.4B.

‘2 “Demand” refers to final demand, or the purchase of goods and

services for final consumption (see chs. 2 and 3). “Recipe” represents

the intermediate demand for goods and services (“ingredients”) that

will be combined to create a final product (see ch. 4). For examples

of using demand as a factor of change, see Robert Lawrence, Can America Compete? op. cit., footnote 2, and U.S. Department of Commerce,

Office of Economic Affairs, “Trade Ripples Across U.S. Industries,” Washington, DC, 1986. For analyses that focus on the role of “recipe,” or

technical coefficients in the process of structural change, see Anne Carter,

Structura/ Change in the American Economy (Cambridge, MA: Harvard

University Press, 1970) and Wassily Leontief and Faye Duchin, “The

Impacts of Automation on Employment, 1963-2000,” contract report

for the National Science Foundation, Washington, DC, April 1984.

consistent and detailed information could be assembled. It was an interesting period, characterized by

major structural movements. Between 1972 and

1984, for example, oil and gas prices more than tripled, steel production fell by 30 percent, information processing equipment grew from 13 percent to

over 40 percent of all durable equipment expenditures, and the ratio of imports and exports (gross)

to GNP nearly doubled.

Table 5-1 summarizes the analysis of shifts in the

share of constant dollar value-added contributed by

ten sectors between 1972 and 1984, showing the extent to which the shifts were attributable to changes

in production recipes as opposed to foreign and domestic demand.13 The table is not intended to describe exact movements between sectors resulting

from different factors, but to exhibit the relative magnitude of the different factors as part of sectoral

change. In this sense, the table provides a sensitivity analysis and not a precise mapping of cause and

effect.

Of the 8.9 percentage points of GNP that was exchanged between sectors gaining share and sectors

losing share from 1972 to 1984, roughly half was

attributable to changes in the production recipe and

half was connected to changes in final demand.

Within the broad category of final demand, the impact of domestic demand on changes in economic

structure was-for the economy as a whole—more

than twice as large as the impact of trade. Nevertheless, the impact of trade was still impressive, because most trade effects occurred over a relatively

brief period-after 1980—while the effects of domestic demand have been relatively constant since 1972.

The Impact of Trade and Domestic Demand

on Economic Structure

The effects of changing patterns of final demand

on the changing shares of different business sectors

ItThe selection of any one year for a comparison point is fraught with

the peculiarities of that particular year. This analysis uses 1972 and

1984 because they offer the widest time range given the available data,

and because they are close to being the end points of their respective

business cycles, effectively eliminating cyclical factors. Different endpoints can yield different effects attributable to “demand” and “recipe.”

See Stanley J. Feldman, David McClain, and Karen Palmer, “Sources

of Structural Change in the United States, 1963-1978: An Input-Output

Perspective,” The Review o/Economics and Statkks, 1987. The 1984

endpoint uses 1984 demand in conjunction with the 1980 Input-output

tables, and therefore does not completely reflect the 1984 economy.
.Table 5.1 .—The Sources of

Change in Percentage of Constant Dollar Share of

Structural Change:

GNP From 1972 to 1984 by Sector (1980$)

(numbers will not necessarily add due to rounding and interactive effects)

Natural Low Wage Medium Wage High Wage TransportIon Transactional Personal Social Federal

Resources ConstructIon Manufacturing Manufacturing Manufacturing & Trade Actlvltles Services Services Defense Other a

All –2.3 –1 3 0.2 06 –3.3 2.0 55 0.1 0.4 –0.9 –1 1

Production reclpeb –o 9 –o 5 04 03 –2.3 06 26 0.2 –0.4 –0.0 0.0

Final demand – 1,4 –o 7 –0.3 05 –o 9 12 2.9 –0, 1 0.8 –0.9 –1,1

Domestic demandc–1,1 –0.8 0.1 0.7 –0.5 0.7 24 –0.2 0.6 –0.9 –1 o

Tradec

– 0 4 01 –0,4 –0.3 –0.4 0.5 0.5 00 0.3 0 0 0 0

Interactive –0.0 01 –0.0 0.2 0.1 –0.2 –0.0 –0.0 –0.1 0.0 0.0

How To Read This Table: Between 1972 and 1984, the percentage of all value-added in the economy generated by Natural Resource businesses fell 2.3 percentage points. This

is equivalent to saying that Natural Resource contribution to GNP fell 2.3 percentage points. The decline resulted from new patterns of domestic demand (responsible for a 1.1

percentage point decline in the Natural Resource share), trade (0.4 percentage point), and production recipes (0.9 percentage point).

a Includes non-production, accounting industries such as non-comparable imports, scrap, rest of the world industry, and inventory valuation adjustment.

b Production recipe refers only to 1972 to 1980 change.

c Estimated from the 1984 National Income and Product Accounts (U.S. Department of Commerce)

d 1984 Trade data are estimated and rebased into 1980 dollars from data provided by the U.S. Bureau of Labor Statistics.

NOTE: All = Recipe + Final Demand + Interactive: Final Demand = Domestic Demand + Trade

SOURCE Office of Technology Assessment. 1988
174

Table 5-2.—U.S. Structural Change Resulting

From Changes in Final Demand

(constant dollar GNP”share for selected years of final demand;

value-added shown by production sector and

calculated using the 1980 1.0)

Production sectors 1972 1977 1980 1984’

Natural Resources . . 10.7 9.4 8.8 9.3

Construction . . . . . . . 6.9 6.4 5.9 6.2

Low Wage

Manufacturing . . . . 3.6 4.2 3.4 3.3

Medium Wage

Manufacturing . . . . 9.5 10.0 9.8 10.0

High Wage

Manufacturing . . . . 9.9 9.9 9.3 9.0

Transportation &

Trade . . . . . . . . . . . . 18.2 18.9 19.5 19.4

Transactional

Activities . . . . . . . . 20.7 23.1 23.3 23.6

Personal Services . . . 3.8 4.0 3.7 3.7

Social Services . . . . . 13.5 15.0 14.5 14.2

Federal Defense . . . . 3.0 2.3 1.9 2.1

Other. . . . . . . . . . . . . . 0.2 –3.2 0.0 –0.9

Total 100.0 100.0 100.0 100.0

%lutput derived from demand estimated from the National Income and Product

Accounts

NOTE: Totals may not add to 100 due to rounding.

SOURCE Office of Technology Assessment, 1988.

Natural Resources, High Wage Manufacturing, and

Transactional Activities.

In the case of the Natural Resource sector, most

of the shift due to final demand occurred between

1972 and 1977. Not surprisingly, the two industries

affected were crude petroleum & natural gas and

electric, gas, water, & sanitary services. For crude

petroleum, most of the decrease was attributable to

trade as imported oil replaced the output originating from domestic companies. In the case of electric, gas, & water services, nearly all the decrease

was traced to lower domestic demand from domestic consumers.

The High Wage Manufacturing sector also experienced a significant reduction in share due to final

demand. Half of this sector’s loss in GNP share due

to shifts in final demand came from the motor vehicle, iron & steel, and petroleum refining industries.

The motor vehicle industry didn’t start to lose share

until after 1977, at which point the decline was primarily due to slack domestic demand from consumers and business. Trade was a relatively small factor for this industry until after 1980, when its

negative effect almost eliminated what could have

been a relatively large gain in share achieved

through strong domestic demand. The iron & steel

industry has suffered a fate similar to that of motor

vehicles: the decline in share from 1977 to 1980 was

of domestic origin; after 1980, domestic demand

would have slightly increased this industry’s share

of GNP if not for a detrimental trade balance.

Although these are the major declining sectors,

another sector, Low Wage Manufacturing, registered

a small decline and is of interest because of the dominant effect trade has had on this sector. In a notrade environment, five out of the twelve Low Wage

Manufacturing industries would have gained in GNP

share, resulting in a net gain for the sector over the

period from 1972 to 1984. But the addition of trade

reverses the trend, resulting in a decline in GNP for

three-quarters of the industries. The industries that

experienced the most dramatic turnaround in share

due to trade were fabrics, textile goods, apparel, footwear, and miscellaneous manufacturing (which includes the production of jewelry, toys, and writing

implements). By and large, these trade impacts have

been felt since 1972, but they are most pronounced

in the period from 1980 to 1984.

Construction’s share of GNP fell over the 1972-

84 period, due to declines in domestic demand for

new construction. The defense sector also lost GNP

share between 1972 and 1977, in part because of

the end of the Viet Nam war. (The “value-added”

in defense consists entirely of compensation paid to

military employees.)

Balancing the decline of these sectors are four sectors that gained in GNP share as a result of changes

in final demand: Transactional Activities, Transportation & Trade, Social Services, and Medium Wage

Manufacturing. Of the four, Transactional Activities

was responsible for gaining over 50 percent of the

total share that shifted between 1972 and 1984 due

to final demand. Four-fifths of this sector’s gain can

be credited to domestic demand, primarily consumer

demand, the bulk of which has been fueled by consumer demand for the products of the real estate &

rental and finance & insurance industries.l4

Transactional Activities also benefited the most

from international trade; about one-fifth of the sector’s total gain due to demand came from trade. The

industries that increased their GNP share because

of trade were similar to the industries that benefited

14The rea] estate & rental industry includes a Commerce Department

imputation for owner-occupied housing.
175

from domestic demand: real estate & rental and business services.

The Transportation & Trade sector gained share

because of both trade and comparatively rapid

growth in domestic demand. The wholesale & retail trade industry was responsible for most of the

growth. Within this sector, eating & drinking places

increased share particularly rapidly, primarily because of rapid growth in final demand.

Social Services also gained share because of

changes in final demand. Most of the increase resulted from growing demand for the health, education, & social services industry. These increases offset a large decline in demand for the services of

Federal, State, and local activities that occurred between 1972 and 1984. Ninety percent of this loss

occurred after 1980.

Most of Medium Wage Manufacturing’s increase

derived from final demand came from industries that

can be characterized as high technology: office, computing, & accounting machines; radio, TV, & communication equipment; and optical, ophthalmic, &

photographic equipment. Domestic demand for these

products, particularly from the business sector, was

strong, but the negative effect of trade dampened

what could have been impressive gains. Trade also

contributed to a loss in GNP share for less technologically oriented industries like metalworking machinery and electronic components. Nearly all of this

loss of GNP share due to trade occurred between

1980 and 1984, reversing a positive impact from

trade achieved from 1972 to 1977.

The Impact of Production Recipes

on Economic Structure

If changes in demand, including trade, account for

roughly half of the total structural change in the economy, the other half can presumably be explained

by changes in intermediate demand—the demand

for goods and services used as ingredients in making a product for final consumption, a major component in the production recipe. Chapter 4 explained

how this recipe changed between 1972 and 1980,

revealing that service sector inputs had increased

while inputs from the natural resource and manufacturing sectors decreased. How has this change in

recipe affected GNP share?

The impact of changes in the production process

can be seen by estimating how the output from different industries would change when production

recipes vary-using those of 1972, 1977, and 1980—

but leaving demand as it was in 1984. What would

GNP look like if the production recipe of 1972 were

used to satisfy demand for a car, compared to the

recipe used in 1980? It must be recognized, of course,

that the process of producing 1984 demand using

a 1972 production recipe is highly artificial. For example, most industries would have used a dramatically different amount of oil in 1972 if the the price

of oil in 1972 was as high as in 1980.

The procedure reveals that the impact of recipe

on structural change was roughly the same as that

of demand.l5 As table 5-3 shows, three of the five

sectors with increasing share due to changes in recipe were the same three sectors that benefited from

changes in demand—Transactional Activities, Transportation & Trade, and Medium Wage Manufacturing—although within these sectors, the individual

industries that benefited differed widely from those

gaining share due to final demand. Sectors losing

share due to changes in both recipe and demand

were High Wage Manufacturing, Natural Resources,

and Construction. Most changes were therefore reinforcing rather than offsetting, although Low Wage

Manufacturing and Personal Services proved to be

exceptions; these sectors experienced a gain in share

due to recipe, but lost as a result of demand. Social

15 The time span is restricted to an 8-year period, 1972 to 1980, because of the availability of data.

Table 5.3.—U.S. Structural Change Resulting

From Changes in the Production Recipe

(constant dollar GNP share derived from 1984 total final

demand; by production sectors, using the 1972, 1977

and 19801-0 adjusted to 1980$)

Production sectors 1972 1977 1980

Natural Resources . . . . . . . . . . . . . 10.1 9.7

Construction . . . . . . . . . . . . . . . . . . 6.8 6.6

Low Wage Manufacturing. . . . . . . 2.9 3.3

Medium Wage Manufacturing . . . 9.7 10.0

High Wage Manufacturing . . . . . . 11.3 9.7

Transportation & Trade . . . . . . . . . 18.8 19.4

Transactional Activities . . . . . . . . 21.0 22.0

Personal Services . . . . . . . . . . . . . 3.5 3.6

Social Services. , . . . . . . . . . . . . . . 14.7 14,4

Federal Defense . . . . . . . . . . . . . . . 2.1 2.1

Other . . . . . . . . . . . . . . . . . . . . . . . . –0.9 –0.9

Total . . . . . . . . . . . . . . . . . . . . .. .100.0 100.0

9.3

6.2

3.3

10.0

9.0

19.4

23.6

3.7

14,2

–0.9

100.0

NOTE: Totals may not add to 100 due to rounding.

SOURCE: Office of Technology Assessment, 1988.
176

Services lost share because of recipe shifts, but

gained share because of demand.

The sector which lost the most due to changes in

recipe was High Wage Manufacturing, Approximately

70 percent of the decline occurred between 1972 and

1977, and can be traced to three industries: petroleum refining, chemicals, and primary iron & steel

manufacturing. These industries account for more

than four-fifths of the 1972 to 1980 drop in High

Wage Manufacturing’s GNP share due to recipe

changes. Unlike the situation resulting from changing demand, the motor vehicle industry experienced

only a small reduction in share because of changing production recipes.

The changes in High Wage Manufacturing’s share

of GNP seem to have resulted from the increased

availability of new materials, such as plastics, which

can act as substitutes for steel; 16 the sharp increase

in crude oil prices, which pushed up the price of

chemicals and refined petroleum products and thus

forced a recipe change; and the influx of foreign intermediate inputs as ingredients in the production

recipe.

The share lost by High Wage Manufacturing due

to recipe changes was primarily absorbed by Transactional Activities. The Transactional sector picked

up nearly two-thirds of the shift in share that

occurred between 1972 and 1980 due to recipe

change. Growth was strong from 1972 to 1977, but

even stronger from 1977 to 1980; presumably, a

1984 recipe would indicate that this sector gained

even more. The business services industry, which

includes activities such as advertising, legal services,

and computer and data processing services, was responsible for nearly 70 percent of the sectoral increase;

17 the finance & insurance industry came in

a distant second.

Production recipe changes resulted in a sharp increase in demand for Transactional Activities—

business services in particular. As discussed in chapIsStan]ey J. F&fman and Karen Palmer, “Structural Change in the

United States: Changing Input-Output Coefficients,” Business Economics,

January 1985, p. 43.

ITFor a more detailed analysis of the changing role of the business

services industry in the recipe of production, see Feldman and Palmer,

op. cit., footnote 13; Bobbie H. McCrackin, “Why Are Business and

Professional Services Growing so Rapidly?” Economic Review, Federal

Reserve Bank of Atlanta, August 1985; and John Tschetter, “Producer

Services: Why Are They Growing So Rapidly?” A40nthly Labor Review,

vol. 110, No. 12, December 1987, pp. 31-41.

ter 4, more complex business networks seem to require larger numbers of transactions, resulting in

more demand for services like those provided by

lawyers and consultants. Decisions to contract out

services that were previously done “in-house” and

increasing geographic dispersion of production also

result in an increase in Transactional Activities.l8 For

example, many manufacturing firms now contract

out for janitorial services that had been performed

internally. Although the actual amount of this work

has not necessarily increased, it appears to grow because it is now counted as an “arms-length” market transaction.l9

The impact of changed production recipes on sectors other than High Wage Manufacturing and Transactional Activities is rather small. Most of the decline

among Natural Resource industries was located in

agricultural products (non-livestock), and in electric,

gas, water, & sanitary services. Changes in recipe

also had a negative effect on the share of Construction, particularly in the new construction industry.

The last sector to experience a loss of share due to

recipe changes was Social Services, with most of the

loss attributable to the health, education, & social

service industry.

After Transactional Activities, the sector that

gained the most in terms of share due to recipe

changes was Transportation.& Trade. The wholesale & retail trade industry was responsible for most

of the increase gained by this sector. This is not surprising, considering the increased role that marketing now plays in the delivery of a product, and the

fact that constant dollar per capita retail sales grew

by 23 percent between 1972 and 1984.20

Unlike the situation in High Wage Manufacturing,

both Low and Medium Wage Manufacturing benefited from changes in the recipe of production. In

the low wage sector, the industries devoted to apparel and lumber & wood products achieved the

greatest gains. For Medium Wage Manufacturing, the

principle industries behind the gain in sectoral share

were office, computing, & accounting machine~ and

electronic components (mostly semiconductors).

lgM&rackin, op. cit., footnote 17, and Tschetter, op. cit., footnote 17.

lgRichard B. M~enzie, “The Emergence of the Service Economy: Fact

or Artifact?” policy analysis No. 93, Cato Institute, Washington, DC, Oct.

27, 1987.

20U.S, Bureau of the Census, statjs~jca] Abstract of the United States,

1986 (106th cd.), Washington, DC, 1985, table 1388.
177

In the case of computers and electronic components, the reasons for an increase in share due to

recipe change are apparent. During the 1970s, the

computer became an accepted element in the production process; as time goes on, adoption, adaptation, and implementation of computer technologies

in the workplace is certain to increase. The reason

behind the growth of apparel as an intermediate input is less obvious, except perhaps for the fact that

the Multifiber Arrangement, which allows for trade

agreements that restricted fiber imports into the

United States (and other developed nations), took

effect in 1974; some researchers have found that

these trade restrictions had a positive effect on domestic output.21 The increase in the output of the

lumber industry is probably due to the role lumber

plays as an input in housing production, and the fact

that new housing starts for the 1972-84 period peaked

in 1972-73 and 1977-78.22

Tracing the Significance of

Structural Change

It is difficult to pass judgement about whether

changes in sectoral share of GNP are desirable or

21 U.S. Congressional Budget office, Has Trade Protection Revitalized

Domestic Industries? (Washington, DC: U.S. Government Printing Office, November 1986), p. 32.

22 Statistical Abstract of the United States 1986, op. cit., footnote 20,

table 1297.

undesirable. Much of the remainder of this document

is devoted to tracing the way shifting production

recipes effect U.S. responses to trade, opportunities

for employment, and the net productivity with which

the economy delivers amenity to consumers. Chapter

7 traces the relationship between trade and sector

contributions. Chapter 10 shows how changing production recipes affect demand for different kinds of

jobs.

Patterns of change in sector shares (including the

surprisingly constant share of manufacturing) have

not changed radically for many decades. On the

other hand, a prolonged period of slow change can

have a major cumulative effect. After reaching a

threshold, what seemed like a gradual process may

suddenly be seen as a transition. This threshold is

more likely to be perceived in periods of slow economic growth than in periods of strong growth,

where downward fluctuations are masked by general prosperity .23

The issue is not whether structural change is occurring at any greater or lesser rate that it has in the

past. In some areas it has and in others it has not.

The critical point is that the collective effect of three

decades of change has left the United States with

a much different economy.

23 James H. Crossing and Arye L. Hillman, Op. cit., footnote 5.

CHANGES IN SCALE AND SCOPE

The second kind of structural change to be examined involves the way business networks are owned

and managed, in terms of the size, or scale, and the

product mix, or scope, of their operations. This analysis is critical because different patterns of scale and

scope shape the ability of a business to compete in

international markets, dictate the quality and stability

of the jobs offered, and determine the success with

which new technologies can be exploited.

One of the difficulties in any discussion of this kind

is that there is no good vocabulary for describing

the variety of ways that business networks in an economic sector are organized. One source of confusion is the distinction between an “establishment”

and an “enterprise.” The word enterprise (sometimes

also called a firm) indicates an independently owned

corporate entity. An establishment is a specific plant,

branch, or subsidiary within an enterprise. A large

enterprise may consist of many small establishments.

Beyond this distinction, there are a variety of patterns in which business networks can be organized.

The following is a partial list:

● Sectors dominated by a small number of large

firms that either:

—concentrate their activities in a single plant

or a comparatively small number of plants

(e.g., the old Ford Motor Co. Rouge River

Plant);

—maintain tightly managed subsidiaries and

branch offices, where managers of distinct

components are not given appreciable flexibility (e.g., branches of major insurance companies); or
178

—have the dominant form of organization

through loosely controlled establishments,

subsidiaries, or franchises, in which the establishment’s management is given considerable autonomy and is compensated primarily on the basis of decisions made as an

independent agent (e.g., a branch bank manager with freedom to establish his or her own

loan criteria).

● Sectors dominated by one or more large firms

that effectively regulate a market for a large collection of small, independent firms (e.g., IBM

sets de-facto standards for a wide variety of personal computer equipment and software systems produced by many different firms; similarly, the firms formerly part of the old Bell

system set standards for a host of other communications suppliers).

● Sectors dominated by small firms operating independently, which are either:

—nominally independent, but constrained by

their product or by a lack of research to behave as though they were producing massproduced commodities (e.g., farms, teaching,

and home construction); or

—independent entrepreneurs, providing imaginative responses to new markets and new

production technologies. Such firms may pool

research or marketing through trade associations (an example might be the semiconductor industry in Silicon Valley).

Given the difficulty of developing an acceptable

taxonomy, there is no easy way to trace patterns of

change. Moreover, firms in traditionally fragmented

sectors (e.g., farms, physicians, and home builders)

are amalgamating into larger units, while sectors that

were traditionally highly concentrated (e.g., automobile production) are turning to networks of small and

medium-size suppliers for a greater share of parts

and engineering services.24

It appears extremely unlikely that the new form

of industrial organization will bear much resemblance to the “new industrial state” that seemed so

inevitable a generation earlier.25 While small firms

Z4Michae] S. flynn, “out-sourcing Rediscovered,” L!XESpectrum, vol.

24, No. 10, October 1987, pp. 46-49.

zs~e John Kenneth Ga]braith, The New /ndustria/ State (New York,

NY: New American Library, 1971).

may provide invaluable sources of innovation, it appears equally unlikely that significant growth will

originate from small firms unless they are able to

work together in a way that at least approximates

the economies of larger enterprises-small firms now

command a declining share of output in virtually

every sector of the economy. However, they play

an important role by providing employment when

few other alternatives are available, and provide a

large share of jobs added during economic recessions

(e.g., as carpenters and machinists become selfemployed repairmen or work in retail stores).26

Under current circumstances, small firms are able

to provide growing employment opportunities by

offering comparatively low wages, few if any nonwage benefits, comparatively poor working conditions, and weak job security. While parts of Italy and

West Germany may have created an environment

where networks of small firms can avoid many of

these liabilities, the growing share of U.S. employment in smaller businesses, coupled with a shrinking share of assets, profits, and sales, may lead to

the growth of a two-tier system in the United States.

Workers finding stable employment in comparatively

productive large firms may do increasingly well,

while their counterparts in small firms do increasingly poorly.

Economic success now appears to depend increasingly on technical innovation, but little is known

about how the scale and scope of businesses influence rates of innovation. Entrepreneurs may alone

be able to grasp a truly revolutionary concept; the

merits of semiconductors were almost universally

ignored by firms with a large stake in the manufacture of vacuum tubes, and the merits of microcomputers were not initially recognized by firms with

large interests in mainframes. But groups of entrepreneurs are able to manage large markets only

in exceptional cases. In the semiconductor and

microcomputer “shake-out,” survivors have typically

grown to become large enterprises or have been absorbed by large firms.

Industrial structure in major sectors clearly results

from private management decisions, but these deZsB~ce E. Kirchhoff and Bruce D. Phillips, “Examining Entrepreneurship’s Role in Economic Growth,” paper delivered at the Seventh Annual Babson Entrepreneurship Research Conference, Malibu, CA, April

30, 1987.
179

cisions are strongly influenced by public policy and

in many cases are the conscious result of public policy. Private decisions about mergers, pooling of research, foreign marketing, adoption of communications and other standards, contributions to retraining

programs, and other actions that shape the way large

business networks are managed, are all strongly

influenced by Federal and State policy—directly

through formal regulation, and indirectly through

tax laws and other macroeconomic decisions.

Describing Changes in Scale and Scope

Changes in scale and scope affect both individual

firms and the establishments of which they are composed. For example, insurance firms are delegating

more authority to small sales offices located throughout a region, while they are consolidating record

keeping and other functions. Large construction firms

are combining property development, mortgage

financing, factory construction of components, and

site erection. General Motors has a finance division,

GMAC, that provides loans for buyers of GM cars.

Even though the creation of this division is an expansion of scope, because it is directly tied to new

car sales, it does little to insulate GM from falling

sales. To counter this problem, GM has proposed

another expansion of scope by which it will begin

to offer home equity loans—a business divorced from

cars. This diversification of products can lower costs,

as fixed investments are amortized over a broader

base of products.

There is clear evidence that the growth of large

firms is increasingly built around the aggregation of

many comparatively specialized small establishments. As a result of these developments, many large

firms claim that they are reorganizing operations to

encourage more entrepreneurial behavior on the part

of individuals and establishments. Techniques range

from large rewards for inventors and patents (IBM

can award $10,000 or more for an important innovation) to the AT&T system for encouraging venture

business, in which employees can earn both salary

and profits from new projects and can even invest

personal funds or defer part of salaries. The firm

reports that it has already received 2,000 proposals.27

ZTR.M, Kanter, “The Attack on Pay, ” Harvard Business Review, vol.

65, No. 2, March-April 1987, pp. 60-67.

Obviously, a radical change in corporate philosophy is needed before established, hierarchical firms

will be willing to tolerate real entrepreneurial behavior. While GM claims to have encouraged its production establishments to shop for price and quality, in practice the assembly operations appear to

be forced to give preference to Central Foundry Division for castings, Rochester Products Division for

fuel systems, and Delco Moraine Division for brakes.

These GM subsidiaries regularly win long-term contracts because they are allowed to bid without including overhead, capital, and other fixed expenses.

GM’s inability to escape rigid vertical integration, and

the comparative flexibility of Ford and Chrysler, has

been cited as an explanation for GM’s recent loss

of market share.28

A large firm, or a set of firms, can also provide

a de facto set of standards and regulations to organize

the activity of a large number of smaller “satellite”

enterprises. 29 The dominating firm can operate at

a variety of places in the system, tying resources to

final markets, and can be a producer, such as IBM,

a retailer, such as Safeway, or a mixture of both, such

as health maintenance organizations. Other examples include large hospital chains and group practices, which are capturing markets once enjoyed by

fragmented private practices and local unaffiliated

hospitals; these firms are often innovators in medical practices designed to reduce costs. Small community banks, caught in a changing regulatory environment that has spurred the need to broaden their

product mix and enhance their technical expertise,

are forming partnerships with larger regional

banks. 30

Small, independently owned firms can form effective networks through a series of free market contracts, but their performance can often be enhanced

by cooperating in areas of mutual interest such as

research and development, training, and overseas

marketing. The ability to create some of these consortia is difficult for U.S. firms because of antitrust

laws and entrenched business cultures, but they have

ZEW. f-farnplon and J.R. Norman, “General Motors: What Went Wrong,”

Business Week, No. 2990, Mar. 16, 1987, p. 102.

ZgThe term is used by Michael Piore and Charles Sable, The Second

Industrial Divide (New York, NY: Basic Books, 1984).

30 Dwight B. Crane and Robert C. Eccles, “Commercial Banks: Taking Shape for Turbulent Times,” Harvard Business Review, vol. 65, No.

6, November/December 1987, pp. 94-100.
180

been used effectively in Japan, West Germany, and

Northern Italy.

31

The problem of defining “large” and “small” firms

or “concentrated” and “competitive” sectors has become increasingly difficult given the growth of national and international production networks. While

antitrust considerations were formerly needed to consider whether a firm monopolized regional markets,

should they now consider the scale of firms with respect to international markets?

Forces of Change

Changes in scale and scope are driven by the same

four forces that lead to changes in sectoral contributions to GNP: technology, rules and regulations,

patterns of domestic demand, and international competition.

Technology

Changes in industrial organization are made possible by radical improvements in the way information can be communicated among firms and establishments, and by changes in technology that greatly

reduce the size at which economies of scale become

important. The availability of inexpensive computerassisted design (CAD) and computer-assisted manufacturing (CAM) technologies operating on personal

computers has allowed even small machine shops

to adopt these innovations, reducing waste, errors,

and down time. The time to convert a customer’s

drawing to a cutting die, for example, has fallen by

a factor of seven.32 Even small metal fabrication

facilities can make use of technologies such as Flexible Manufacturing Systems, which operate at a

minimum scale of six machines and a half dozen

people. 33 Large data entry and typing pools are disappearing as data entry is integrated into other functions distributed throughout the firm.

Communications technologies have rewritten

many rules, providing unprecedented opportunities

31 Danie]le M~onjs and Marjo Pjanta, “An innovation strategy fOr

Traditional Industries,” draft report prepared for the industrial association of Prado, Italy, September 1986.

sZMechanica/ Engineering, January 1987, P. 6.

wsee R. Jajkumar, “Postindustrial Manufacturing,” Harvard Business

Review, vol. 64, No. 6, November/December 1986, p. 76; and Mechanical Engineering, op. cit., footnote 32. This issue is discussed at greater

length in the manufacturing section of ch. 6.

for uniting small enterprises into a dynamic framework.34 Production technologies capable of tailoring

products to specialized markets without a significant

sacrifice in productivity or increase in cost can vastly

diminish the value of economies of scale.35 Of course,

small subsidiaries of large firms may still be favored

over independent firms that lack access to sophisticated communication networks. But there are instances where smaller enterprises, tied to an independently operated information network, can enjoy

new life because of a close relationship with national

and international markets. A national data network,

for example, may help small-scale U.S. farmers who

produce high value products, such as fruits or specialized vegetables, to bid on the international market. Advances in telecommunications allow companies like American Airlines to take advantage of

cheap labor in Barbados for data entry, saving the

company about $3.5 million per year.36

Regulation

Formal changes in regulations have had a profound effect on patterns of business organization

throughout the economy, particularly in transportation, health, and communications. Changed regulation

in transportation created an explosion (possibly of

short duration) of independent owner-operators, as

well as the formation of integrated transportation

firms such as Federal Express—which combines

truck pickup and delivery, air freight, and telecommunications. Health regulations have encouraged the

formation of health maintenance organizations and

consortia of physicians. The breakup of AT&T has,

of course, fragmented a sector once organized exclusively under a regulated monopoly.

The interpretation of antitrust regulation (the Sherman Act, the Clayton Act, and the Federal Trade

Commission Act) is also in flux (see box 5-D). These

rulings plainly have a strong influence on business

structure. Rapid growth in conglomerate as opposed

to horizontal mergers undoubtedly resulted in part

34 Werner Neu, Karl-Heinze Neuman, and Thomas Schnoring, “Trade

Patterns, Industry Structure, and Industrial Policy in Telecommunications,” Telecommunications Policy, March 1987.

35 The advent of “mini-mills” in the steel industry is a good eXa3T3ple

of this phenomenon. See Bela Cold, “Technological Change and Vertical Integration,” Manageria/ and Decision Economics, vol. 7, 1986.

3bBruce Stokes, “Beaming Jobs Overseas,” Nationa/ ~OUrfld, vol. 17,

No. 30, July 27, 1985, p. 1726.
181

Box 5-D.–Anti-Trust Regulation Affecting

Mergers and Acquisitions

“That no person engaged in commerce or any

activity affecting commerce shall acquire, directly

or indirectly, the whole or any part of the stock or

other share capital [where] . . . the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.”

The Clayton Act, Sec. 7 (15 U. S. C., Sec. 18 (1980))

“Every contract, combination in the form of trust

or otherwise, or conspiracy in restraint of trade or

commerce among the several states, or with foreign

nations, is hereby declared to be illegal. ”

The Sherman Act, Sec. 1 (15 U. S. C., Sec. 1 (1975))

“Unfair methods of competition in or affecting

commerce, and unfair or deceptive acts or practices

in or affecting commerce are hereby declared

illegal. ”

Federal Trade Commission Act, Sec. 5 (15. U.S. C., Sec. 435 (1982))

SOURCE: Compiled in W. D. Appler, “Mergers m the Food Industry The impact on

FTC Regulation, ” paper delivered at the The Food Update Conference of

the Food and Drug Law Institute, “Mega-Mergers The Impact of Consolidation Tampa FL, April 1987

from the Cellar-Kefauver Act.37 Antitrust law has

been amended to permit research consortia designed

to promote U.S. competitiveness, though the act has

failed to stimulate much real collaborative research.

Liberal interpretations of anti-trust statutes have

virtually eliminated formal barriers to mergers during the Reagan administration. In 1986, for example, 2,406 pre-merger filings were made pursuant

to the Hart-Scott-Rodino (HSR) Act, three times the

rate of applications in 1979. Of these, 2,108 were

approved without further inquiry by granting requests for early termination of the statutory waiting

period, The rest were issued letters requesting further information, and 25 HSR filings were made. The

Federal Trade Commission filed court papers in only

three cases between 1979 and 1985—Pepsico’s proposed acquisition of Seven-Up, Kidde’s proposed acquisition of Horneschfeger (mobile hydrolic cranes),

and Conoco’s proposed acquisition of Asamera. And

37John M. Connor, “Mergers in the Food Industry: Trends, Effects,

and Policies, ” staff paper No. 87-9, Department of Agricultural Economies, Purdue University, March 1987, p. 2.

in one of these cases, a consent order settled the

issue before a suit was filed.38

Demand

If changes in scale and scope are made possible

by new regulations and new technologies, they have

also been made necessary by both dramatic changes

in domestic demand and a massive invasion of imported products. There may once have been a period

when large U.S. manufacturers could in effect ignore

market dynamics by creating markets for their products, through advertising in a product market (like

automobiles) dominated by a small number of domestic firms. This pattern of performance was encouraged by a long period of post-war business successes and government programs designed to create

a climate favorable for growth built around oligopolistic activity. To some extent, the emergence of large

manufacturing firms meeting relatively homogeneous markets resulted from the limitations of production technology; they may also have been encouraged by a political process that equated this form

of industrial organization with progress and growth.39

Organized labor shared this vision, since large, centrally managed firms and predictable markets provided a sound basis for stable employment. However, high levels of concentration can be justified

by the economies of scale derived from large-scale

operations in only a few industries.40

Times have changed. Growing affluence and new

technologies make it necessary to substitute niche

markets for relatively homogeneous ones for products ranging from automobiles to health care (see

ch. 3). Firms that ignore how their products connect

with the consumer are increasingly at peril. If nothing else, the demand for dynamic performance (an

ability to react quickly to both opportunity and disaster) has outstripped the importance of static performance (low cost in a predictable environment) .41

3

8W.D. Appler, “Mergers in the Food Industry: The Impact on FTC

Regulation,” paper delivered at the The Food Update Conference of

the Food and Drug Law Institute, "Mega-Mergers. The Impact of Consolidation,” Tampa, FL, April 1987.

39 Piore and Sable, op. cit., footnote 29.

q~Bruce E. Kaufman, “scale of Plant Relative to Market Size in U.S.

Manufacturing,” Southern Economics Journal, October 1979, vol. 46,

No. 2.

dlBurton Klein equates dynamic productivity with an ability to take

advantage of good luck and recover from bad luck. See Burton Klein,

Dynamic Economics (Cambridge, MA: Harvard University Press, 1977).
182

Radically changed perceptions about the desirable scale of electric power-generating facilities provides a particularly clear example. Large 1,000-MWe

plants may have been able to produce power less

expensively when they were commissioned in the

1970s, but their economic success depended critically on levels of demand for electricity projected

over a 20-year period. Massive mistakes in estimates

have left many regions with large, unused generating capacity. Few utilities are now willing to gamble on 20-year forecasts, and are willing to pay a

premium for small units that can be added to as

needed. At the same time, advances in electric generating technology like steam-injected gas turbines

may make it possible for 100- to 200-MWe plants

to compete with larger plants without incurring the

risks associated with uncertainty.42

Foreign firms have called into question traditional

patterns of domestic business management never

seriously questioned by domestic competition. Dynamic, entrepreneurial firms making semiconductors in California’s “Silicon Valley” find themselves

overwhelmed by oligopolies managed by greying

bureaucrats in Japan. Large U.S. manufacturers of

automobiles find themselves with lower productivity

than Japanese production facilities one-third their

size. Large U.S. textile machinery firms find their

markets picked to pieces by an invasion of aggressive producers from West Germany that work harder

to identify market niches. US. farmers find their export surplus overwhelmed by imports of such products as Italian tomatoes and Brazilian orange juice.

With the exception of declines in farming (a sector dominated by small businesses) each of the forces

at work would tend to increase the role of comparatively small establishments if past trends continue.

There are now more points of entry for smaller, specialized enterprises; small firms have moved alertly

into businesses such as software development, maintenance and repair of communication and computational equipment, and computer-generated graphic

design. Such firms traditionally flourish during

periods of rapid transition, since the bureaucratic inertia of large firms may blind them to opportunities

qZEric D. ~rson and Robert H. Williams, “Steam-Injected @ Turbines,” Journal of Engineering for Gas Turbines and Power, January

1987; Eric D. Larson and Robert H. Williams, “Steam-Injected Gas Turbines and Electric Utility Planning,” Technology and Society, March

1986.

in places where none were expected. Who could

have imagined a business built around graphics for

personal computers a decade ago? The rules of the

game are changing rapidly.

Measuring Changes in Scale and Scope

Scale

Small employers appear to be providing an increasing fraction of jobs but a declining fraction of

output.43 The largest firms, however, appear to be

expanding mainly by aggregating large numbers of

comparatively small branches, or subsidiaries, which

are typically involved in different kinds of businesses,

Small businesses, defined here as employing 100

people or less, accounted for 98 percent of all U.S.

business enterprises and 34 percent of all employment in 1984.44 The average firm size dropped from

26.2 employees in 1976 to 21.7 in 1982. Although

large firms created 1 million more jobs than small

firms between 1976 and 1984, table 5-4 indicates

that in relative terms most growth occurred in midsize firms, those employing between 20 and 500 people. The smallest firms (less than 20 employees)

maintained their share of U.S. employment while

the largest firms (more than 500 employees) lost

share.

The role of small business depends heavily on the

sector examined. An auto plant employing only several hundred workers would be considered small,

whereas several hundred lawyers would represent

43 Measuring the scale of a firm involves relying on empirical measures like jobs, assets, or output—all of which are very sensitive to definitions of “small” or “large,” the data source used and its coverage,

and the methodology employed. In particular, some controversy has

arisen over the role small business plays in the job generation process

and the accurate classification of a business as a small establishment

or a small enterprise. See Catherine Armington and Marjorie Odle,

“Sources of Job Growth: A New Look at the Small Business Role,” Economic Development Commentary vol. 6, No. 3, fall 1982; David L. Birch,

“The Job Generation Process,” MIT Program on Neighborhoal and Regional Change, Cambridge, MA, 1979; Candee S. Harris, “Small Business and Job Generation: A Changing Economy or Differing Methodologies,” working paper prepared for the Brookings Institution, February

1983; Sue Birley, “Finding the New Firm,” 1984 Proceedings of the Academy of Management, Boston, MA, August 1984; A.L. Walton, “How Small

Businesses Contribute to Job Generation–The Pitfalls of a Seemingly

Simple Question,” paper presented at the 1983 Conference on Industrial Science and Technological Innovation, Evanston, IL, May 1983.

44 Nearly all of the data in this discussion come from various editions

of U.S. Small Business Administration, The State of Small Business

(Washington, DC: U.S. Government Printing Office, 1984 and 1986

editions).
183

Table 5-4.—U.S. Employment by Firm Size: 1975-84 (percent of all jobs)

Firm size (number employed) 1975 1978 1980 1982 1984

Under 20....... . . . . . . . . . . . . 27.l% 26.6% 26.0% 26.8% 27.1%

20 - 99 . . . . . . . . . . . . . . . . . . . . . 26.9 27.9 28.3 28.5 28.8

100 - 499 . . . . . . . . . . . . . . . . . . . 22.6 23.2 23.8 23.5 23.5

500 - 999 . . . . . . . . . . . . . . . . . . . 8.0 7.9 7.6 7.3 7.2

Over 1,000 . . . . . . . . . . . . . . . . . 15.4 14.4 14.3 14.0 13.4

Total . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0 100.0

Number of jobs . . . . . . . . . . . 60,565 70,289 74,836 74,297 77,996a

NOTE: Totals may not add to 100 due to rounding.

SOURCE: U.S. Bureau of the Census, Statistical Abstract of the United States, 1987 (107thed), Washington, DC, 1986, table 858.

a very large law firm. Figure 5-5 indicates, for example, that manufacturing and transportation industries have a comparatively large share of firms with

more than 500 employees while natural resource

businesses, retail &wholesale trade, and “other services” have a comparatively large share of business

with fewer than 20 employees.

With the exception of the retail industry, the rate

of job growth in firms with fewer than 20 workers

was faster than average during the period when the

economy was entering the recession of the early

1980s, while growth was slower in firms with more

than 500 (see table 5-5). Indeed, 56 percent of all

manufacturing jobs added between 1976 and 1982

were found in firms with fewer than 20 workers,

even though such firms represented only 7 percent

of all employment in 1976 (the average number of

employees per establishment, however, remained

roughly the same for all sizes). And more than 46

percent of jobs added in the finance industry were

Figure 5-5.-Employment by Establishment

Size and Industry in 1984

All Industries 1

Natural Resource 1

Manufacturing

Transportation

Trade

Other Services

0 .20 40 60 80 100

Percent of employment

NOTE: Natural Resources includes Construction.

SOURCE: U.S. Bureau of the Census, Statistical Abstract of the United States:

1987 (107th ed.), Washington, DC, 1986, table 859.

in firms with less than 20 employees, despite the

fact that these firms represented only 19 percent of

all employees in 1976.

There were two important exceptions. The market share of builders with volumes greater than 100

housing units per year grew from 6.9 percent in 1959

to 67 percent in 1986, while the share of builders

with volumes less than 25 units per year fell from

70 to 11 percent during the same period.45 Similarly,

more than 50 percent of all jobs added in retailing

between 1976 and 1982 appeared in firms with more

than 500 employees, even though such firms employed less than one-third of all retail employees in

1976.

Changes in patterns of self-employment also illustrate the changing scale of American enterprises. Table 5-6 documents a steady decline in self-employment, with the most significant changes occurring

between 1950 and 1970. This drop was led by sharp

losses in self-employment in retail trade. Selfemployment in agriculture remains relatively high,

but is steadily declining. The creation of owneroperator trucking and bus companies, made possible by deregulation, has presumably been responsible for the recent increases in self-employed transportation workers. The decline of self-employment

in business and social services seems to have halted,

but recent gains must be viewed with caution since

they may represent a response to the most recent

business cycle and not a long-term trend. Surprisingly, self-employment has increased in manufacturing since 1970, although the share of selfemployed persons in manufacturing remains low.

In terms of assets, sales, and creation of GNP, large

businesses continue to dominate and gain share. In

45 National Association of Home Builders, Profile of the Budder, Washington, DC, 1979; and “Housing Focus, ” November 1987.
184

Table 5-5.—Percent Change in U.S. Employment (by size of firm, 1976.82)

Change by number employed:

Total

change 1-19 20-99 100-499 500 +

Agriculture, Forestry, & Fishing . . . . . . . . . . . . 4.9%0 21 .80/0 –7.70/0 – 10.90/0 – 13.80/o

Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.6 72.1 52.3 59.2 24.1

Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.9 24.8 –2.1 – 14.1 – 1.4

Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 42.7 10.7 2.1 1.1

Transport, Communication & Utilities . . . . . . . 13.0 33,9 11.4 8.1 10.3

Wholesale trade . . . . . . . . . . . . . . . . . . . . . . . . . . 15.2 28.8 8.2 12.7 4.7

Retail trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.6 9.5 10.7 20.4 24.6

Finance, Insurance & Real Estate. . . . . . . . . . . 19.3 46.6 14.3 7.6 13.9

Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29.3 52.6 26.2 19.6 26.2

All Industries . . . . . . . . . . . . . . . . . . . . . . . . . . 15.6 29.3 13.1 10.7 12.2

SOURCE: U.S. Small Business Administration, The State of Small Business (Washington, DC: U.S. Government Printing Office, 1985), table Al .21.

Table 5-6.—U.S. Self-Employment by Industry (percent of all full-time equivalent employment in that Industry)

Industry 1950 1960 1970 1975 1980 1986

Agriculture, Forestry, & Fishing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67.7 61.3 58.9 54.9 52.4 50.1

Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 4.0 2.2 2.1 2.7 3.3

Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29.4 19.7 16.7 19.9 22.0 22.8

Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 1.9 1.4 1.5 1.8 2.0

Durable goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.8 2.0 1.5 1.7 1.8 2.0

Nondurable goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 1.7 1.2 1.4 1.8 2.0

Transport, Communications & Utilities . . . . . . . . . . . . . . . . . . . . . . . . . 4.8 4.5 4.2 5.0 5.5 6.0

Wholesale trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 8.4 6.3 5.8 5.4 5.1

Retail trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.5 21.8 13.3 12.3 11.6 9.2

Finance, Insurance, & Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3 8.8 6.9 7.7 8.4 8.4

Services .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.5 18.5 15.9 14.7 14.0 13.9

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.6 15.3 11.1 11.1 10.9 10.7

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National lncome and Product Accounts;’historical diskettes, tables 6.7b and 6.10b.

1977, firms employing more than 500 people represented only 0.4 percent of all businesses but were

responsible for 53 percent of all value-added in the

economy.

46 In 1985, manufacturing firms with more

than $l billion in assets held nearly 70 percent of

all corporate assets and firms with more than one

billion dollars in annual profits enjoyed nearly 70

percent of all U.S. corporate profits.47 Moreover, the

Nation’s largest businesses had sales that grew faster

than the sales of small businesses between 1976 and

1982 in spite of the increase in small business employment. Firms with more than 10,000 employees

produced sales growth of 16 percent annually from

1976 to 1982,48 while firms with between 10 and 19

employees saw their sales grow an average of14 percent and other businesses with fewer than 500 employees averaged between 4.3 and 9.0 percent sales

46 See “Thecha@ng lndlrstria] and Size Composition of U.S. Business,” The State of Smal/ Bus;ness, op. cit., footnote 44, 1984. p. 118.

iTStatistica] Abstract of the United States 1987, op. cit., footnote ’20.

4gThe State of Small Business, op. cit., footnote 44, 1984, p. 67.

growth, This continued a trend already evident between 1958 and 1977.49

Most of the expansion of large businesses, however, appears to have occurred through net creation

of new establishments rather than expansions of old

ones. Seventy percent of the new jobs emanating

from large businesses originated from net additions

of establishment startups minus closings, and not

from expanding existing establishments.50 From

1976 to 1984, small businesses (under 100 employees), commonly thought of as the source of new establishments, derived only 60 percent of their (net)

new jobs through this source (see figure 5-6).51

Figure 5-7 shows the dramatic growth in the number of establishments owned by large firms. This

49lbid., p. 134,

50 U.S. Smal] Business Administration, Office of Advocacy, Small Business Data Base, USEEM File, table 4, unpublished data, April 1987.

51 Bruce E. Kirchhoff and Bruce D. Phillips, op. cit., footnote 26.
185

addition of establishments corresponds to the fact

that the largest increase in the share of jobs was not

in small establishments owned by small firms, but

in small establishments owned by large firms.52

s@oWth rates were calculated for the 1978 to 1982 time period. The

State of Small Business, op. cit., footnote 44, 1984, p. 15.

Figure 5-6.-Composition of 1976 to 1984

Employment Changes by Type of Change for

Firms With Fewer Than 100 Employees

0 10 20 30 4 0 50

Percent

= <100 employees

How To Read This Figure: Of all the jobs created by new firms

that started businesses between 1976 and 1984, about 40°/0

were created in firms with less than 100 employees.

SOURCE: U.S. Small Business Administration, Office of Advocacy, “Small Business Data Base,” USEEM File, unpublished data, 1987.

Figure 5-7.-Average Number of

Establishments per Firm by Firm Size

Number of establishments

70 4 I

;; -

5 0 “

4 0 -

3 0 -

2 0 -

10-

0

1-19 20-99 100-249 250-499 500+

Number of employees per firm

 195 8 = 1967

m 1972 El 1977 = 1982

How To Read This Figure: In 1958, the average firm with 500

or more employees owned 37 establishments (“firms” indicate ownership, “establishments” are separate plants). By

1972, firms with more than 500 employees owned more than

60 establishments, and owned approximately the same number in 1982.

SOURCE: U.S. Small Business Administration, The State of Small Business: A

Report of the President (Washington, DC: U.S. Government Printing

Office, March 1984), table A2.20.

scope

While large firms may be producing many different products, individual establishments within these

firms, as well as small independent establishments,

appear to be specializing rather than diversifying.

Independent manufacturing establishments showed

particularly strong movement toward specialization.53

It is difficult to determine whether large firms are

assembling specialized operations in order to achieve

economies of scale, for reasons having to do with

the investment interests of owners, or for the way

the component establishments work together. Most

recent mergers in manufacturing and mining are

classified as “conglomerates” (see table 5-7); the heterogeneity of the firms being assembled into large

businesses could suggest that mergers are not being undertaken to improve integrated efficiencies.54

On the other hand, firms might be diversifying into

different components of their respective systems or

networks (buying an airline as well as holding a

rental-car company and a hotel chain) while retaining economies of scale at the establishment level .55

Several manufacturers have begun to sell intermediate products like machine tools and software, in addition to using them in their own operations.

Rather than fitting into the traditional notion of

forward or backward integration, this spinning-off

of new products reflects a diagonal movement that

crosses traditional technological and industry boundaries.56 It has been noted, for example, that “per dollar spent, airlines make more money on reservation

systems than they do on flying passengers.”57 An

analysis of the food industry, which has experienced

more than 5,000 mergers and acquisitions from 1975

to 1985, concluded that most of the mergers were

undertaken to “ . . . market complementary products, create new products from combined know-how,

and distribute the weaker merger partner’s products

through a stronger sales network.”58 Given the com53 Frank M. Gollop and James L. Monohan, “From Homogeneity to

Heterogeneity: A Proper Index of Diversification,” Technicaf Notes, U.S.

Department of Commerce, Bureau of the Census, Washington, DC, October 1986, p. 22.

Wbid., p. 2 .

‘

s

Ibid., p. 29.

sGBela Gold, op. cit., footnote 35.

57 Helen Wheeler, “Air Reservations: New Savvy in the Skies,” High

Technology Business, vol. 7, No. 11, November 1987, pp. 36-40.

58 William D, Appler, op. cit., footnote 38.
186

Table 5.7.–Merger Trends in Manufacturing and Mining, 1948-79

1948-53 1956-63 1963-72 1973-77 1978 1979

Horizontal . . . . . . . . . . . . . . . . 36.8 19,2 12.4 15.1 28.5 2.3

Vertical . . . . . . . . . . . . . . . . . . 12.8 22.2 7.8 5.8 15.1 7.3

Conglomerate. . . . . . . . . . . . . 50.4 58.6 79.8 79.1 56.4 90.4

Total . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0 100.0 100.0

SOURCE: Frank M. Gollop and James L. Monohan, “From Homogeneity to Heterogeneity: A Proper Index of Diversification,” Bureau of Census Technical Notes, U.S.

Department of Commerce, Washington, DC, September 1984.

plex assembly of service and production operations

that must be combined to deliver products to markets, traditional definitions of vertical integration are

difficult to apply and may be inappropriate.

In manufacturing enterprises, it is clear that firms

are diversifying production through holding a more

varied portfolio of establishments that are producing a more homogeneous mix of products. Using an

index that measures the number of different products produced by an establishment, it can be shown

that manufacturing establishment diversification fell

by a factor of nearly 3 from 1963 to 1982.59 The diversity of products made by individual establishments

fell in 17 of 20 major manufacturing categories examined.60 In contrast, diversification of manufacturing enterprises increased during the period in 14 of

20 industries. Since 1963, this level of diversification has increased by 15 percent.61

By 1984, 12 percent of manufacturing employment

was in establishments not classified as manufacturing. These non-manufacturing establishments owned

by manufacturing firms had an employment growth

rate of 6 percent between 1982 and 1984, compared

to a loss of 1 percent in the manufacturing establishments. 62

Consequences of Changes in

Scale and Scope

There is a rich literature describing the relationship between business size, management strategies,

and dynamic performance, and a small theoretical

literature covering economies of scope is beginning

59 Gollop and Monohan, op. cit., footnote 53, P. 29.

60 Ibid., p. 25

61 lbid., pp. 25, 26, 29.

62 Marjorie Odle and Catherine Armington, "is American Manufacturing

Creating Jobs Again?” unpublished working paper, Applied Systems

Institute, p. 3.

to appear.63 Unfortunately, most of this developing

work deals with manufacturing firms, not with enterprises whose primary output is information or

other “non-products.”

The following discussion will concentrate on how

new technologies may act to challenge the rules that

have governed forms of business organization. Three

classes of implications are considered:

●

●

●

Will the emerging structures be more aggressive in their pursuit of invention and innovation, and will they be more likely to adopt innovations when they occur?

Will they be more or less likely to efficiently

match resources to amenity needs?

Will the new systems be more attractive to employees in that they permit greater stability,

higher pay, or more unpaid benefits?

Are Smaller Firms More Inventive?

Are smaller firms more likely to exploit the advantages of innovation and force changes in market structures because larger firms are too sluggish

or are immobilized by institutional inertia and complacent management? Or are large firms more likely

to take advantage, since they are better able to un-

~!jee C. Freeman, J. Clark, and L.L.G. Soete, Unemployment and Technicaf Innovation (Westport ~: Greenwood Press, 1982); J.K. Galbraith,

op. cit., footnote 25; Morton L Kaimen and Nancy L. Schwartz, Market

Sh-ucture and innovation (Cambridge, England: Cambridge University

Press, 1982); F.M. Scherer, “Firm Size, Market Structure, Opportunity,

and the Output of Patented Inventions,” American Economic Review,

vol. 55, No. 5, 1965, p. 1097; and L.L.C. Soete, “Firm Size and Inventive Activity: The Evidence Reconsidered,” European Economic Review,

No. 12, p. 319; Woodward, Lawrence, and Lorsch, Organization and

Environment (Boston, MA: Harvard University Press, 1967); T. Burns

and G.M. Stalker, The Management of Innovation (London: Tavistock,

1961); E.F. Fama, “Agency Problem and the Theory of the Firm,” Journal

of Law and Economics, 1980, vol. 88, pp. 288-307.

A useful review of all this literature is provided by Ronald W. Cotterill, “The Economic Efficiency of Alternative Forms of Business Enterprise,” Storrs Agricultural Experiment Station, Staff Paper No. 85-

10, U.S. Department of Agriculture, 1985.
187

dertake long-term research and transform the payoff from innovation into a cycle that produces more

innovation? Both may be correct. Periods dominated

by entrepreneurial activity may alternate with

periods dominated by large firms.64 It is also possible that both trends occur simultaneously in different parts of the economy. The critical question for

this analysis is whether the U.S. economy is moving into a period where research is unusually beneficial to large, bureaucratic firms, or unusually likely

to depend on and encourage the emergence of small,

innovative ones.

Michael Piore and Charles Sable argue that the

pendulum has swung back to a situation favorable

to the entrepreneurial model.65 This argument suggests that the conventions which formed the basis

for prosperity under the “Fordist” model of industrial structure—and the entire structure of private

and public regulation that supported it—have been

fatally eroded by new technology and the challenge

of foreign trade. As a result, the system must move

either in the direction of smaller, more flexible, more

entrepreneurial institutions that are regulated by the

market, or toward greater international regulation

of concentrated markets. A number of factors can

act as barriers to innovation in large-scale operations:

top management isolation, intolerance of eccentric

ideas, short-time horizons, narrowly defined accounting objectives, and inappropriate incentives.66 Large

U.S. firms have also been accused of lethargy, inattentiveness to the market, and a bureaucratic structure that prevents flexibility and innovation.67

Large firms may go through periods of stagnation

and renewal without the challenge of entrepreneurial firms. The U.S. automobile industry, for example, was challenged not by small entrepreneurial

competitors but by foreign competition. After a

fAA. Phi]]ips, Technology and Market Structure (Lexington, MA: Lexington Books, 1971); Christopher Freeman, The Economics 01 lndustria/ innovation (Cambridge, MA: The MIT Press, 1982), 2d cd., p. 210.

Even schurnpeter seems to have changed his mind on the subject. Drawing on the experience of 19th century capitalists, his 1912 book emphasized the importance of the entrepreneur for bringing inventions

to the market. His revised view published in 1943 emphasized the importance of large firms.

Sspiore and Sable, op. cit., footnote 29.

‘S.lames Brian Quinn, “Managing Innovation,” Harvard Business Review, vol. 63, No. 3, May-June 1985, pp. 76-77.

67 SeeIinterview with Malcolm Baldrige, “Despite Barbs, Baldrige Hopeful on U.S. Business, ” Washington Post, Dec. 7, 1986; Quinn, op. cit.,

footnote 66; and Charles Sabel, “How To Keep Mature industries Innovative,” Technology Review, vol. 90, No. 3, April 1987, pp. 27-35.

period of relative complacency, this industry has recently been forced to re-examine an enormous range

of accepted conventions, and may soon enjoy a

“renaissance” unshaken by domestic competitors.68

Another complication is posed by several qualitative factors that defy precise measurement. Technologies developed by small firms tend to move rapidly into the hands of larger enterprises, whose

ongoing research establishments—and possibly better management, marketing, and production engineering capabilities—are able to translate innovation into business success. And as chapter 9 will

show, many of the large firms capitalizing recently

on the ideas of small, innovative U.S. businesses

have been foreign-owned.

Small companies face particularly serious problems

during periods of generally poor business performance. As Piore and Sable argue, while smaller firms

may be in a better position to respond quickly to

new market conditions by adjusting output and

wages—sometimes because they face little or no

union opposition—they also face formidable obstacles. Small manufacturing firms tend to have relatively high capital costs;69 the U.S. Small Business

Administration estimates that on average, small businesses pay a premium that is 2 to 3 percent higher

than capital rates charged to larger firms.70 Combined

with external debt, high capital costs often make

operating a small enterprise particularly difficult during bad times. Entrepreneurs may be tempted to react by selling intellectual assets, which can constitute the core of their comparative advantage.

As has been noted, a “large firm” covers an enormous variety of management styles and structures.

Some are collections that are in essence financial

portfolios, others are combinations with a functional

theme. Networks of specialized enterprises may provide the basis for real flexibility,71 and enhanced flexibility is a crucial ingredient in fostering innovation.72

68 William Abernathy, Industrial Renaissance: producing a Competitive Future in America (New York, NY: Basic Books, 1983).

69 W. M. Cohen, R.C. Levin, and D.C. Mowery, “Firm Size and R&D

Intensity: A Re-examination,” National Bureau of Economic Research,

Cambridge, MA, working paper No. 2205.

70 The State of Small Business, op. cit., footnote 44, 1986.

71 See Peter B. Doeringer, “Make Way for Mature Industries,” unpublished paper delivered at the 1987 IRRA Spring Meeting; and Quinn,

op. cit., footnote 66, p. 4.

72 L. Balcerowicz, “Organization] Structure of the National Economy

and Technological Innovations,” Acta Oeconomica, No. 24., 1980.
188

On the other hand, a “boutique” structure may prove

too fragmented to be efficient.73

An argument can also be made that the continual

process of reshuffling national assets through mergers can drain talent and capital from more productive investments.74 From 1980 to 1985, the amount

spent on mergers and acquisitions was more than

double the level of industry financed research and

development. In the last 6 years, General Electric

has spent more than $12 billion acquiring 325 new

businesses while divesting itself of 225 businesses

for a sale price of $8 billion.75 There is a danger that

firms with a comparatively long-term planning

horizon—large investments in research and development, and comparatively heavy capital

investment—may be the targets of take-overs by

firms attempting to realize short-term gains. If so,

such mergers could be disastrous to any national

strategy built around long-term commitment to innovation and worker training.76 The key question

is whether the transactional costs associated with

forming new business structures lead to long-term

savings, in the form of both lower transaction costs

as a result of greater economies of scale and scope

and more productive use of capital.

Empirical support for any of these theories has

been difficult to develop. Some data suggest an inverse relationship between innovation and formalization (the number of rules and specified procedures).77 Clearly, larger firms are responsible for the

lion’s share of all research conducted in industrial

nations. Some experts argue that there are “irreversible dynamic scale economies’’—once a technology

begins to return significant income, firms that benefit initially can then re-invest their profits and multiply their initial advantage, set de facto standards,

and effectively dominate the market.78 Nearly 60 percent of all the research reported in the United States

during the 1970s was conducted by the Nation’s 20

largest firms; more than 90 percent was conducted

by firms with more than 5,000 employees.79 On the

other hand, there is only a weak correlation between

research intensity and firm size as measured in employment or sales. Small firms apparently generate

more patents per R&D dollar than larger ones, and

small entrepreneurs are more likely to patent an idea

than large enterprises.80 And a study looking for

correlations between firm size and R&D intensity determined that most differences between firms can

be explained by factors unrelated to size. Some manufacturing sectors pursue research aggressively while

others failed to do so.81

Studies of the correlation between productivity and

firm size yield similarly ambiguous results. An extensive analysis of labor productivity and multi-factor

productivity gains between 1947 and 1972 indicates

that larger firms’ productivity growth has increased

more rapidly that smaller firms.82 Another study concludes that the rate of earnings per dollar of assets

decreases as the size of the firm increases.83 Moreover, empirical explanations of correlations between

firm size, market concentration, and productivity

growth provide few insights into how each of these

variables affects the ability of firms to conduct research, invest in new plant and equipment, and train

employees.

Table 5-8 suggests that if innovation is measured

by the number of new products produced in a specific year per million dollars’ worth of sales or R&D,

then small firms are the most innovative. However,

this measure assumes that all new products are

equally important, and fails to adjust for the fact that

many small business innovations (particularly “hightech” developments) are spin-offs from large businesses.

84 The National Science Foundation states that

the “ . . . popular notion of the solo inventor operating in a basement is largely fiction; ”85 that those

innovations having a significant social impact will

73’’Can America Compete?” Business Week, No. 2995, Apr. 20, 1987.

Ti~e James W. Brock, “Bigness IS the Problem, Not the SOhNiOn,”

Chal/enge, vol. 30, No. 3, July-August 1987, pp. 11-25.

TsTom peters, “Business in the Future Sense,” Washington fosf, Oct.

4, 1987.

76’’13ebate Between T. Boone Pickens and Lester C. Thurow,” The

Energy Journal, vol. 8, No. 2, 1986.

77J, ROthrnan, P/arm@ and Organizing forsociid Change: Action pn”nciples from Social Science Research (New York, NY: Columbia University Press, 1974).

78 Paul David, Presentation at the Symposium on Economics and Technology, Mar. 17-19, National Academy of Sciences, Palo Alto, CA, 1985.

79 Freeman, op. cit., footnote 64, p. 132.

80 Ibid., p. 136.

81 W. M. Cohen, R.C. Levin, and D.C. Mowery, op. cit., footnote 69.

82 Steven Lustgarten, Final Report to U.S. Small Business Administration on Firm Size and Productivity (Washington, DC: U.S. Government

Printing Office, September 1982), pp. 16-17.

83 Stahrl W. Edmunds, “organizational Size and Efficiency in the U.S.,”

The Antitrust Bulletin, fall 1981.

84 L. Tornatzky, et al., The Process of Technological Innovation: Reviewing the Literature (Washington, DC: U.S. Government Printing Office, 1983), p. 178.

85Ibid.
189

Table 5-8.—New Products First Marketed in 1982 by Size of Firm

Firm size Number of products per Number of products -

($ millions of net sales) $ million of net sales $ million of R&D

Less than 100 . . . . . . . . . . . . . . 0.113 3.76

100 - 350. . . . . . . . . . . . . . . . . . . 0.067 2.17

350-1,000 . . . . . . . . . . . . . . . . . 0.027 1.49

1,000 - 4,000 . . . . . . . . . . . . . . . . 0.010 0.66

4,000 and more . . . . . . . . . . . . . 0.007 0.59

All firms . . . . . . . . . . . . . . . . . 0.045 1.75

SOURCE: National Science Foundation, Science Indicators: 1985 (Washington, DC: U.S. Government Printing Office, 1987), p 262

probably require a concentration of experts; and that

the implementation of that technology will require

a centralized means of production.

It is virtually impossible to measure gains resulting from mergers, or to distinguish mergers motivated by tax advantages or managerial hubris from

those designed to provide real gains in productivity

or production flexibility.86 A review of recent literature concluded that there was not sufficient empirical evidence to support or refute the notion that

mergers result in efficiency gains.87 Nevertheless, the

number and value of both friendly and hostile

mergers have increased dramatically in the 1980s

(see figure 1-16 of ch. 1). While the effect of friendly

mergers on employment and wages appears to be

benign, 88 and while mergers can play a useful role

as a catalyst for restructuring an industry, forcing

managers to be responsive to shareholder interests,89

the effect of hostile takeovers can also shift wealth

from stakeholders (communities and employees) to

shareholders with little net gain to society.90

A study of recent takeovers could not demonstrate

that the takeover targets were more likely to be those

with a long-term planning horizon, high cash flows,

or low debt. In fact, the statistics indicated that com86 J.M. Connor, op. cit., footnote 37.

87 David J. Ravenscraft and E.M. Scherer, “Life After Takeover, ” Federal Trade Commission Working Paper No. 139, Washington, DC, February 1986; Julian Allen, “Mergers and Their Impact on Today’s Economy: A Survey, ” U.S. Congressional Research Service, Report No.

82-118E, Washington, DC, 1982; and Julian Allen, ’’Corporate Takeovers:

A Survey of Recent Developments and Issues,” U.S. Congressional Research Service, Report No. 87-726E, Washington, DC, 1987.

*Gail McCallion, “Mergers and Acquisitions: The Impact on Labor,”

U.S. Congressional Research Service, Report No. 87-705E, Washington,

DC, 1987.

BgMichael C. Jensen,“TakeOVerS: Their Causes and Consequences, ”

working paper, Harvard Business School, Cambridge, MA, August 1987.

~Andrei Sh]eifer and Lawrence H. Summers, “Breach of Trust in HOStile Takeovers,” National Bureau of Economic Research, working paper No. 32, Cambridge, MA, August 1987.

pared with average firms, takeover targets had low

investments in R&D, low capital/earnings ratios, and

were virtually indistinguishable from the average

firm in terms of cash flows and debt/equity ratios.91

Meeting Amenities

The relationship between the size and scope of

enterprises in a sector and the facility with which

firms can identify and reach new markets with new

products in some ways mirrors the relationship between structure and innovation. But innovation in

production technology by individual firms neither

guarantees that the firms in a sector will work effectively together in marketing products, nor assures

that they will be effective in discovering new consumer markets. Chapter 6 will address this issue in

detail.

Employment

The discussion of large versus small firms also

overlooks the quality of jobs associated with different levels of scale. Large businesses typically provide better wages, better non-wage compensation,

and greater job stability.92 Sectors characterized by

a few dominant firms supported by a series of satellite firms can achieve great flexibility by forcing

smaller firms to absorb gains and losses. Ways of

achieving flexibility without such a high human cost

are discussed in chapters 11 and 12.

Firms employing more than 500 workers pay 41

percent of their workers $10.00 or more per hour,

compared to the U.S. average of 30 percent and the

91 J. Pound, K. Lehn, and G. Jarrell, “Are Takeovers Hostile to ECOnomic Performance?” Regulation, vol. 10, No. 1, September/October

1986, p. 23.

gzsee Edward M. Miller, “hrge Firms Are Good for Their Workers:

Manufacturing Wages as Function of Firm Size and Concentration, ” The

Antitrust Bulletin, spring 1981.
small business (25 to 99 employees) rate of only 23 large business (more than 500 employees) rate of

percent. 93 In respect to providing health benefits to 85 percent. The probability of a worker becoming

workers, firms with less than 25 workers provided unemployed and remaining unemployed from a

this benefit to only 39 percent of workers, compared small firm (less than 100 employees) is higher than

to the economy-wide average of 67 percent and the that of an employee of a large firm.94

gsThe Stafe Ofsma]j Business, op. cit., footnote 44, 1986, Table C 18,

p. 248. 94Ibid., table C.17, p. 247.

THE GEOGRAPHY OF ECONOMIC ACTIVITY

The growth of complex production networks is

also reshaping the location of America’s economic

activity. In the 1930s, it was still possible to predict

the location of most economic activity by looking

at a map of the United States showing only major

geological and topographic features. Manufacturing

was clustered around sources of raw materials,

energy, and access to heavy transportation. Service

activity was centered at the transfer points connecting transportation systems—river junctions and

ports. Very little economic activity in the United

States is now limited by such constraints.

Improved communications technology and the

declining significance of natural resources increases

options for both manufacturing and service establishments. Instead of spreading wealth and economic

activity more evenly around the country, however,

the changes appear to have resulted in a greater concentration of economic activity. Growth has been particularly rapid in regions immediately surrounding

major coastal cities. Only scattered empirical evidence exists to explain these phenomena. It appears

that

●

●

●

●

concentration results from:

a sustained need for personal (rather than electronic) communication;

relatively rapid transportation within metropolitan areas, and comparatively easy access to

other regions if needed or desired;

a continuing interest in the comparatively good

educational institutions often associated with

major cities; and

the fact that people seem to prefer the cultural

opportunities and variety of living near a major metropolitan center.95

95 M.L. Moss, "TeleCOrnrnUnjcatjonS: Shaping the Future, ” paper prepared for the Conference on America’s New Economic Geography, Washington, DC, Apr. 29-30, 1987.

The forces that would lead to greater concentration in an economy where services play a large role

have been known for some time. Writing in 1960,

Raymond Vernon noticed that:

The most probable outcome of the increased freedom offered by swifter air travel will be the further

concentration of the office elite at a few headquarters cities. This tendency will be fortified by the use

of high-speed electronic data-processing machines.

For these machines will contribute to the centralization of data-processing and decision-making at fewer

points in the structure of the giant company.96

Some service activities, such as health, education,

and food service, are necessarily spread in rough

proportion to population density, though chapter 6

documents a number of cases where even this tradition is changing: health care industries may centralize the sophisticated “tertiary care” hospitals

while decentralizing out-patient services; technology

may also permit greater geographic decentralization

of large university campuses.

Transactional services and manufacturing, however, are now able to become more footloose. Transactional service industries, which provide a growing share of all employment, appear to have used

the potential of communications technology to decentralize most of their activities, giving rise to a complex structure of enterprises. Insurance firms are centralizing functions ranging from record-keeping to

processing such relatively undifferentiated products

as home and auto insurance, but are decentralizing

other work to local sales offices capable of conducting sophisticated analysis and underwriting with

96 Raymond Vernon, Metropolis 1985 (Cambridge, MA: Harvard University Press, 1960), p. 84, cited in M.L. Moss, op. cit., footnote 95. See

also J. Gottman, “Megalopolis and Antipolis: The Telephone and the

Structure of the City,” in Ithia de Sola Pool, (ed.), The Social Impact of

the Telephone (Cambridge, MA: The MIT Press, 1977).
191

computer terminals. The dispatching of trucks may

be centralized, while the ability to serve geographically dispersed freight customers increases.

In manufacturing, the emergence of comparatively

small batch production, just-in-time inventory systems, and a need to participate in tightly linked networks supplying goods for retail outlets may encourage greater decentralization of activity. At the

same time, these factors can lead to more centralized control over production, since sophisticated

communications systems and comparatively lightweight products make it possible to operate a geographically dispersed network with increasing efficiency. The ability of multinational firms to build

responsive production networks around the world

is a case in point. (See discussion in ch. 7.)

Changes in the geography of economic activity

have a number of indirect effects on the operation

of the U.S. economy, including:

●

●

●

●

influencing the price and quality of housing,

since decentralization of employment can lower

the cost of housing within a reasonable commuting range of work;

changing options for improving productivity in

transportation-with few exceptions, job growth

has been highest in suburbs and geographic regions poorly served by public transportation;

affecting opportunities for career growth, to the

extent that “back office” functions are geographically segregated in suburbs while opportunities for advancement are most likely to be

found in central offices located elsewhere; and

undermining job stability and making union

organization-more difficult, as more and more

jobs appear in service and manufacturing firms

able to move locations with comparative ease

in search of attractive labor pools.

Two kinds of change are discussed in the following section: first, relative changes in population, employment, and income growth in different parts of

the country; and second, a continued economic

movement to a constellation of population centers

roughly associated with major cities, though not to

urban centers themselves.

Regional Movements

Defining the Change

Measured in terms of population growth rates,

table 5-9 indicates that cities on or near the east and

west coast and in the southwest dominated U.S. urban growth during the period 1970-86 as well as

1985-86. Indeed, coastal metropolitan areas appear

to be drawing the greatest benefit from the increasing importance of transactional services to total U.S.

output (outlined earlier in this chapter), a development that has been reinforced by the relative rise

of the transactional sector as a source of U.S. jobs

(see ch. 10).97 New York City, for example, continues

to act as an international center for finance,

tising, and the arts, while Los Angeles is also

coming a major center for finance and trade

its easy access to Asia and Latin America.

At the the same time, sharp population decl

continued in the major manufacturing centers o

midwest, particularly those affected by autom

and steel manufacturing. This development m

have been expected since the share of U.S. out

generated by manufacturing industries paying

wages—which contribute a large share of empl

ment throughout the midwest—has dropped co

erably over the past 15 years. (Again, see discu

of changes in value-added share by production

tor earlier in this chapter.)

Looking at developments throughout the Un

States in terms of personal income, the converg

of regional income that characterized the 19

period appears to have stopped, and in some

has been reversed, during the 1980-85 period.

the east and west coasts continue to dominate

jor transactional services, States along the At

coast have regained their advantage in incomes

1980—a reversal of the trend during the prev

decade (see figure 5-8). Moreover, the south Atla

tic region has joined the northeast and Califor

a relative growth region; it appears that the Bo

Washington corridor is spreading south.

Personal income per capita in New England

the middle eastern States—which fell relative to

gTSee discussion of the impact of both trade and transactional services on metropolitan areas in Thierry Noyelle, “A New Economic Order,” Forum for Applied Research and Public Policy, vol. 2, No. 1, winter 1987, pp. 97-105.
192

I

I I

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

.1. . .

5’ .

I

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

:$

:Z

.0

.<

:0

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

,...

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

:4

.Co

.=

s

. . .

. ..$:

:Z:

“J.

:LL:

. . . . . . . a
193

Figure 5-8.-Per Capita Income of

Coastal States (percent above

national average)

Percent

16 I

14

12

10

8

6

4

2

0

1970 1975 1980 1985 1986

~ East coast B West coast

How To Read This Figure: People living in States on

the U.S. east coast in-l 970 averaged nearly 6°/0 more

income than the national average per capita income.

By 1980 per capita income in these States was only

1.8°/0 above the national average, but by 1986 it had

increased so that the east coast averaged 8% more

income per capita than the national average.

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “Regional Economic Information System, ” tables SA1, SA2, and SA3, unpublished, August 1987

national average during the 1970s—rose sharply in

the early 1980s and is now significantly above the

national average (see figure 5-9). The far west has

maintained a comparatively high level of per capita

income through the period. Incomes in the major

manufacturing centers of Ohio, Illinois, Indiana,

Michigan, and Wisconsin (the Great Lakes region),

which were above the national average in 1970, fell

below the national average in 1985 for the first time.

Incomes in Texas, Oklahoma, Arkansas, and Louisiana (the southwest), which had begun to approach

the national average, fell sharply during the 1980s—

largely as a result of the declining fortunes of the

domestic oil industry-while those of Kentucky, Tennessee, Alabama, and Mississippi remain 20 to 25

percent below national averages. The only region

to show continuous growth between 1970 and 1985

is the southeastern coast, stretching from Maryland

to Florida.98

In citing these figures, of course, it should be noted

that personal income as an indicator of economic

98 U.S. Department of Commerce, Bureau of Economic Analysis, “Regional Economic Information System,” tables SA1, SA2, SA3, Washington, DC, unpublished.

125

100

Figure 5-9.-Convergence and Divergence

of Regional Income (per capita personal

income as percent of U.S. average)

Percent of U. S. average

1

----------

+

*

0

U S average w

1925 1935 1945 1955 1965 1975 1985

-

- Mideast + Far West + New England ‘– Great Lakes

— Rocky M l + Plains + Southwest Southeast

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “Regional Differences in Per Capita Personal Income Widen in the 1980s, ” news

release No. BEA 87-39, Washington, DC, Aug. 20, 1987.

vitality can be misleading when separated from other

indicators. Costs of living can vary according to region, and regional aggregations mask important

movements on a local level.99 Nonetheless, the

trends revealed in figures 5-8 and 5-9 are reinforced

by trends in earnings (compensation paid to employees) over the past decade. Earnings in the far west

remain far above the national average, while States

along the Atlantic coast have enjoyed rising relative

earnings. 100 Indeed, the one-third of all 50 States located along both coasts have generated roughly

three-quarters of real U.S. growth in wages and partnership income during the 1980s. 101

Explaining the Change

The changes now underway in the geography of

U.S. economic activity are being driven by several

forces:

● Information and transportation technologies—

ranging from nationwide computer networks to

inexpensive, fast air freight services-allow easier movement of the goods and information

flows needed for efficient management of activ99 Linda LeGrande and Mark Jickling, “Earnings as a Measure of Regional Economic Performance,” U.S. Congressional Research Service,

Report No. 87-377E, Apr. 27, 1987, p. 2.

100 Ibid, p. 8. See also Lynn E. Browne, “Too Much of a Good Thing?

Higher Wages in New England,” New England Economic Review, January/February 1987, pp. 39-51.

101 Daniel Bell, “The World and the United States in 2013,” Daeda-

/us, vol. 16, No. 3, summer 1987, p. 20.
194

ities in diverse areas.

● The growing contribution of transactional service industries, where many activities do not require physical proximity to clients or raw materials, permits a mobility not available in heavy

manufacturing.

● Within manufacturing, growth has been largely

in goods with a high value per unit weight, particularly the products of many of the newer enterprises located in the northeast.102 Such firms

can transfer production facilities more rapidly

than those involved in traditional “heavy” manufacturing, which still provide a comparatively

large share of the economic base in midwestern States.

● Declines in natural resource inputs throughout

the economy increase the comparative importance of market access, transportation networks,

economic base, labor quality and cost, tax environment, and even climate and “quality of life”

in the selection of location.

● Air-conditioning and enlightened governance

in the sun belt (improving schools, roads, and

other infrastructure) have made the region increasingly attractive for retirement, recreation,

and enterprise location. The population shifts

that ensued have carried a second wave of economic activity with them.

● Geographic movement can also be strongly affected by Federal, regional, and State policies.

Subsidized transportation and water helped

accelerate development in many regions. State

efforts to attract industry through attractive tax

or regulatory programs can also play a role.

While they once concentrated on efforts to attract

manufacturing enterprises, States are now competing for transactional service businesses that may be

comparatively footloose, Citicorp, for example,

agreed to build a back office facility in Hagerstown,

Maryland in order to earn the right to enter the

Washington/Baltimore market. Delaware offers attractive locations for data processing and credit card

centers; Marine Midland and Morgan Guaranty have

established computer centers in that State. 103

102 See Daniel Bell, Op. cit., footnote 101; and Benjamin Chinitz, “The

Regional Transformation of the American Economy,” paper delivered

to the American Economic Association, May 1986.

103 M. Moss and A. Danau, “Will the Cities Lose Their Back offices?’”

Real Estate Review, vol. 17, No. 1, spring 1987.

Many States are also attempting to establish environments conducive to high-technology enterprises,

attracting private firms with promises of additional

public assistance; 35 such State efforts were operating in 1985, compared to 4 in 1979.104 A recent program in Pennsylvania involving public allocation of

$26.4 million over a 3-year period is credited with

encouraging 500 business startups and expansions

in that State.105

When all factors are accounted for, however, it appears that a region capable of providing well educated people has an advantage that is difficult to overcome through other incentives.

Southern and western metropolitan areas attracted

many new firms, expansions, and regional transplants during the post-war era. The west continues

to grow, while the southwest has suffered somewhat

due to changing conditions in the oil industry. An

improved interstate highway system, the maturing

of the U.S. trucking industry, and innovations in air

transportation provided new forms of access to regions with lower labor costs, playing a major role

in attracting business to the south and west.106

Rapid business growth in these regions created

jobs that were filled quickly—even in tight labor

markets—as workers from depressed areas took

advantage of faster and cheaper means of transportation in order to arrive at areas with employment

opportunities. Population growth followed. This, in

turn, was followed by yet more employment growth.

To support the larger numbers of enterprises and

workers—as well as the influx of retirees to the southern regions, who were now able to move to warm

climates without breaking ties to their former places

of residence—demand for service industries rose dramatically. 107 Of course, services were also a significant part of the initial movement away from the in104 Edward J. Malecki, “Hope or Hyperbole? High Tech and Economic

Development,” Technology Review, vol. 90, No. 7, October 1987, p. 45.

105 W. John Moore, “High-Tech Hopes,” National Journal, vol. 18, No.

46, NOV. 15, 1986, pp. 2769-2773.

106 Mark Perlman, Patterns of Regional Economic Decline and Growth

(Washington, DC: American Enterprise Institute, 1982). For more on

this subject, see R.D. Norton and J. Rees, “The Product Cycle and the

Spatial Decentralization of American Manufacturing,” Regional Studies,

vol. 13, 1979, pp. 141-151.

IOTSee Lynn E. Browne, op. cit., footnote 100; and Richard J. Rosen,

“Regional Variations in Employment and Unemployment During 1970-

82,” Monthly Labor Review, vol. 107, No. 2, Feuary 1984, pp. 34-35.
195

dustrial north, due to the ability of service enterprises

to transfer operations with comparative ease. 108

The pattern of decline that characterized many

northeastern cities during the 1970s has been slowed

and in some cases reversed, buoyed by sharp growth

in transactional service employment and “high technology” (largely medium-wage) manufacturing. The

northeast, and the middle Atlantic States to a lesser

extent, now enjoy economic growth rates as good

or better than the U.S. average. In some cities, this

has been reflected through recent population gains;

as table 5-9 shows, the Philadelphia area grew by

57,000 people and the New York City area grew by

50,000 between 1985 and 1986, while the Washington, DC area continues to rank among the Nation’s

population growth leaders. On the other hand, job

growth in much of New England has been greater

than the rise in population.109

More than three-quarters of new jobs result not

from moves, but from startups or expansions.110 New

England enjoyed rapid rates of growth of new business and comparatively low rates of business failures

during the 1980s.111 For many companies, the theoretical advantages of moving a facility to a low-wage

region appears to have been offset by the advantages

of a good educational system and other critical infrastructure. New England’s stubborn maintenance

of high-tax and extensive business regulation proved

less of a barrier, given highly rated State and local

educational systems and other infrastructures purchased from these taxes112-as well as highly respected private educational institutions enjoying indirect public support through tax exemptions.

Ironically, the comparative resurgence of northeastern States over the past decade may have been

spurred in part by the recessions of the early

1980s. 113 New England, which had been in relative

decline prior to that time, was affected less severely

than other regions. Moreover, these recessions

brought real interest rates to historically high levels,

leading to a sharp increase in the cost of housing

in the south and west—regions which depended

heavily on new construction and suffered from spiraling land costs.114

Companies making high-technology products, contacted in a 1982 survey, did not feel particularly constrained by access to raw materials, energy, or

climate—none of which are at a premium in the

northeast-in selecting a site (see table 5-10). Access

to raw materials was consistently at the bottom of

the priority list, with only 27.5 percent of the respondents saying that such access was “significant

or very significant” in their choice of a site. Instead,

companies tended to choose locations on the basis

of skills, labor costs, tax climate, costs of living, and

several categories—academic institutions, transportation, and access to markets—generally associated

with metropolitan areas.115

High-technology firms can generally move with

comparative freedom from. one region to another.

Given the greater relative growth of the U.S. east and

west coasts during the 1980s, this has led to a

preponderance of high-technology activity around

urban centers in these regions. Such a trend is reinforced by recent patterns of concentration among

U.S. research and development (R&D) facilities,

which tend to require higher levels of capital investment than do high-technology manufacturing enterprises. 116 Ranking the number of leading R&D

centers by metropolitan area in 1987, one study has

found that only one of the top eight (Chicago, ranked

fifth) was not located on or near either coast. 117 The

same study concludes that “the prominence of the

California and East Coast core areas in R&D facilities was even more pronounced in terms of hightech and microcomputer firms."118

While job-related moves have not been the only

reason for these regional shifts, table 5-11 suggests

that nearly half of all interregional moves are job108R, D. Norton, op. cit., footnote 3.

I@This has led to some concern that New England’s economy maY

soon be constricted by a shortage in the supply of labor. See “New England Warned of a Labor Shortage,” The New York Times, sec. 1, Dec.

2, 1987; and Lynn E. Browne, op. cit., footnote 100.

110 Development Report Card for the States (Washington, DC: Corporation for Economic Development, March 1987).

111 The State of Small Business, op. cit., footnote 44, 1984, PP. 16-17,

20-21.

112 Development Report Card for the States, op. cit., footnote 110.

113 Mark Perlman, op. cit., footnote 106.

1

141 bid., p. 302.

115u.s. congress, Joint Economic Committee, “Location of High Technology Firms and Regional Economic Development, ” Washington, DC,

1982.

llsEdward J. Malecki, op. cit., footnote 104, p. 46.

I ITMichae] ()’ Condor, “Many Prominent R&.D Centers Favored by Facility Planners Continue 25-Year Dominance,” Site Sehdorr Handbook,

vol 32, No. 3, June 1987, pp. 564-572.

118 Ibid.
Table 5-10.—Factors that Influence Location

Decisions of High-Technology Companies

(percent responding that the factor was

“significant” or “very significant”)

Choices among different regions Percent

1.

2.

3.

4.

5.

6.

9.

10.

11.

12.

Labor skills/availability . . . . . . . . . . . . . . . . 89.3

Labor costs. . . . . . . . . . . . . . . . . . . . . . . . . . 72.2

Tax climate in the region . . . . . . . . . . . . . . 67.2

Academic institutions. . . . . . . . . . . . . . . . . 58.7

Cost of living . . . . . . . . . . . . . . . . . . . . . . . . 58.5

Transportation . . . . . . . . . . . . . . . . . . . . . . . 58.4

Access to markets . . . . . . . . . . . . . . . . . . . 58.1

Regional regulatory practices . . . . . . . . . . 49.0

Energy costs/availability. . . . . . . . . . . . . . . 41.4

Cultural amenities . . . . . . . . . . . . . . . . . . . . 36.8

Climate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.8

Access to raw materials. . . . . . . . . . . . . . . 27.6

NOTE: High-technology Industries were taken from the following Standard Industrial Classifications: drugs, ordinance and machine, electrical and electronic

machinery, equipment parts, miscellaneous transportation equipment, and

measuring, analyzing and controlling instrument, photographic, medical,

and optical goods, watches and clocks. Most respondents were semiconductor or telecommunication firms located in Massachusetts and

California.

SOURCE: U.S. Congress, Joint Economic Committee “Location of High Technology Firms and Regional Economic Development,” Washington, DC,

1982.

related; 60 percent are either directly job-related or

are associated with retirement, the armed services,

or education. 119 Within this overall structure, priorities for moving differ widely according to age. Younger people tend to move to attend school or look

for work more than other age groups; middle-age

Americans move as a result of job transfer more than

their younger and older counterparts; and the vast

majority of older people relocate for retirement, climate, or family considerations. It is interesting to note

that this pattern may change somewhat as the babyboom generation moves through middle age. Since

two-earner families are more likely to be found

among baby-boom households, more two-earner

families will move into middle age. Two-earner families are less likely to relocate for employment reasons than other household types,120 suggesting that

the rate of job-related movement among middle-age

Americans may decline

decades.

The Move to the

Defining the Change

over the next several

Urban Fringes

A move of population and employment from central cities to nearby suburbs has been underway for

119 Larry H. Long, Migration and Residential Mobility in the United

States (New York, NY: The Russell Sage Foundation, 1988).

120 "Job Seekers Stay Put,” The New York Times, p. D1, Oct. 4, 1987.

many years. Increasing incomes have allowed

Americans to escape the congestion and high cost

of urban centers and to search for the amenities of

suburban living, while remaining close to the cultural and economic opportunities associated with cities. In the northeast and west, much suburban

growth has occurred in small areas adjacent to large

metropolitan centers, while exurban growth in the

south and north central regions has occurred near

small and intermediate-sized metropolitan areas.121

In the 1960s, all regions exhibited more rapid metropolitan growth than non-metropolitan growth (see

table 5-12), and much of the non-metropolitan movement came from population increases in counties

adjacent to metropolitan areas. The differences narrowed during the 1970s, although non-adjacent

counties still grew less rapidly than adjacent ones.

Nonetheless, non-adjacent counties were growing

more rapidly than urbanized counties for the first

time, in all regions except the south. Indeed, the

1970s saw non-adjacent rural areas of less than 2,500

people grow by 14.6 percent, after such areas had

decreased in population by 4.2 percent during the

1960s.

On a regional basis, these smallest-sized areas

grew more rapidly than did larger non-adjacent counties in the northeast, south, and west. Such a remarkable change in population growth suggested further

non-metropolitan population reconcentration, representing a break with past trends.122

While the population of all central cities grew by

only 0.1 percent during the 1970s, central cities in

SMSAs (standard metropolitan statistical areas) with

populations of less than half a million grew 10.6 percent. Central cities in SMSAs with a population of

more than 1 million declined by 4.2 percent or

more. 

123

IZILarry Long and Diana DeAre, “The Economic Base of Recent population Growth in Nonmetropolitan Settings,” U.S. Department of

Commerce, Bureau of the Census, Washington, DC, 1982.

IZZD. R. vining, Jr. and A. Strauss, “A Demonstration That the Current Reconcentration of Population in the United States is a Clean Break

With the Past,” Environment and P/arming A, vol. 9, 1977, p. 751.

IZsJOhn F. ~ng, “Population Reconcentration in the United States,”

U.S. Department of Commerce, Bureau of the Census, Washington, DC,

1981.
Table 5-11 .—Reasons for Inter-Regional Moving, 1979-1981 (in percent, by age of household reference person)

Age of reference person:

All ages Under 25 25-29 30-34 35-39 -

40-44 45-49 50-54 55-59 60-64 65-69 70+

Job transfer . . . . . . . . . . 22.2% 14.8% 25.0% 28.4% 32.6% 30.2% 24.7% 23.7% 15.4% 9.7% 0.0% O.OO

/O

Look for work . . . . . . . . . 6.3 9.7 5.9 5.6 6.7 4.4 5.0 6.2 6.6 1.5 0.0 2.9

Take new job . . . . . . . . . 18.7 21.8 21.7 21.6 19.3 18.7 19.1 16.0 9.0 6.5 0.5 0.8

Armed Forces. . . . . . . . . 3.4 6.9 5.2 2.5 0.8 3.5 1.1 0.0 0.0 0.0 0.0 0.0

Retirement . . . . . . . . . . . 2.4 0.0 0.0 0.1 1.4 2.9 3.8 2.8 10.7 23.3 14.9 6.2

Attend school . . . . . . . . . 5.6 15.4 6.9 2.9 2.4 0.0 0.6 0.0 0.7 0.0 0.0 0.0

Closer to relatives . . . . . 8.6 4.2 6.9 7.2 6.0 5.7 8.6 12.8 13.7 14.9 21.5 44.7

Change climate . . . . . . . 6.0 2.9 4.7 3.2 5.3 4.6 3.6 13.2 15.0 14.1 30.2 13.4

All other. . . . . . . . . . . . . . 26.8 24.4 23.8 28.5 25.5 30.0 33.5 25.3 29.0 30.0 32.8 32.0

Total (percent) . . . . . . 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Total (000’s). . . . . . . . . 6,250 1,362 1,352 988 694 471 338 252 235 203 143 211

NOTE: Total percent may not add to 100 due to rounding.

SOURCE: Larry H. Long, Migration and Residential Mobility in the United States (New York, NY: The Russell Sage Foundation, 1988), table 7-2.
198

Table 5-12.—Population Growth by Region by Metropolitan and Non-Metropolitan Counties

(1960=70 and 1970-80, in percent)

County population change Total Northeast North-central South West

1980-70:

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4% 9.80/o 9.60/o 14.3% 24.20/o

Metropolitan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.1 10.0 13.1 22.2 28.4

Non-metropolitan

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9 8.4 2.0 2.6 9.0

Adjacent to metro area. . . . . . . . . . . . . . . . . . 6.2 10.0 4.3 13.3

Nonadjacent to metro area . . . . . . . . . . . . . . 1.0 3.5 0.8 5.0

1970-80:

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4 0.2 4.0 20.0 23.9

Metropolitan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.0 – 1.8 2.6 21.5 22.1

Non-metropolitan

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.4 12.8 7.4 17.3 31.6

Adjacent to metro area. . . . . . . . . . . . . . . . . . 16.7 13.1 8.6 19.6 34.4

Not adjacent to metro area . . . . . . . . . . . . . . 13.8 11.8 6.0 14.7 28.8

NOTE: SMSA/NECMA boundaries as of January 1, 1980.

SOURCE: Larry Long and Diana DeAre, “The Economic Base of Recent Population Growth in Nonmetropolitan Settings,” U.S. Bureau of the Census, 1982.

The trend toward suburbanization among U.S.

metropolitan areas as a whole slowed between 1980

and 1984, while central cores actually gained population share.124 Nonetheless, it still appears that urban fringe areas are alive and well, expanding in

every region of the country-from Tyson’s Corner,

Virginia to the South Coast Metro Center in Orange

County, California.125

Jobs have followed the population to the suburbs

and smaller cities. Between 1967 and 1977, suburban employment growth accounted for 81.7 percent

of all job growth in the 50 largest SMSAs, while central city shares of total metropolitan employment in

the 50 largest SMSAs fell from 63.6 to 53.4 percent.126

Total central city employment grew 7 percent over

this period, while suburban employment grew 59.2

percent. And between 1970 and 1980, the most pronounced declines in the number of people commuting from homes in central cities were found in the

25 largest cities (see table 5-13).

In smaller SMSAs, though most suburban growth

rates again exceeded those of central cities, average

IziCharles L. Leven, “Post-Industrialism, Regional Change and the

New Economic Geography,” paper prepared for the Conference on

America’s New Economic Geography, Washington, DC, Apr. 29-30,1987.

IzsWil]iam K. Stevens, “Defining the ‘Outer City’: For NOW, call It a

Hybrid,” The New York Times, sec. 1, Oct. 12, 1987, reporting a conference of the Urban Land Institute,

lzGRobyn S. phi]]ips and Avis C. Vidal, “The Growth and Restructuring of Metropolitan Economies,” Journal of the American Family Planning Association, summer 1983, p. 295.

growth rates were less divergent. Central city employment for 50 selected small and midsized SMSAs

increased by 23.7 percent between 1967 and 1977,

as opposed to the 7 percent growth of the 50 largest

SMSAS. 

127 Moreover, between 1970 and 1980 there

was a sharp increase in the number of people living in suburbs of major cities and commuting to jobs

outside the city center. (Again, see table 5-13; for

more on this subject, see discussion of transportation in ch. 3.)

Metropolitan areas gained much of their job

growth between 1975 and 1979 as a result of increases in service employment (see table 5-14). The

dependency on services was even more pronounced

in the largest metropolitan areas. For those with 3

million or more in population, services accounted

for 41 percent of all jobs generated between 1975

and 1979. While Citicorp moved some of its back

office functions to the Dakotas, this appears to be

an exception rather than a rule. Of the top nine

banks contacted in a regional survey, seven had located operations for high-volume check processing

and credit card operations in suburban or satellite

cities but most were within 60 miles of a city center.128

Securities firms originally concentrated in downtown Manhattan because of the need to physically

1

27Ibid.

128 M. Moss and A. Danau, op. cit., footnote 103.
199

Table 5.13.—Changes in the Location of U.S. Jobs and Homes

Workers living in the Workers living in

largest 25 urbanized areas other urban areas

1970 1980 1970 1980

Living in a central city and working in:

—CBDa 

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6 ”/0 4.7 ”/0 5.60/o 6.50/o

—Non-CBD portion of central city . . . . . . . . . . . . . . . . . . . . . 30.0 24.7 45.9 40.1

—Outside of a central city . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.9 6.8 12.9 10.7

Living in the suburbs and working in:

–CBD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 3.7 1.7 2.8

—Non-CBD portion of central city . . . . . . . . . . . . . . . . . . . . . 13.1 14.3 13.4 16.4

–Outside of a central city . . . . . . . . . . . . . . . . . . . . . . . . . . . 30.0 45.7 20.4 23.4

Total (percent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0

Total (millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.5 30.7 17.0 25.3

aCBD = Central Business District.

SOURCE: U. S. Department of Energy, Urban Mass Transportation Administration, Demographic Change and Recent Worktrip Travel Trends (UMTA-DC-09-7009), Washington,

DC, February, 1985

deliver certificates. Although only one of the Nation’s

top 10 securities firms has back offices and headquarters in same buildings, and only 2 have data

processing in their corporate headquarters complex,

most of these firms are not moving out of the New

York metropolitan area.129 Rather, they are moving

to New Jersey or other close sites in New York metropolitan area—Morgan Stanley moving to Brooklyn, or Paine Webber to Weehauken, New Jersey.

Dean Witter was an exception, moving to Dallas.

Significant differences exist in geographic employment shifts within industries (again see table 5-14).

Much of the decentralization of manufacturing, such

as IBM to rural Vermont, has resulted from decentralized management (described earlier in this chapter). Branch plants are often located in suburban

areas distant from a company’s main plants or headquarters; one study found that most branch plants

were spawned from corporate headquarters in the

manufacturing belt, even in the southwest.130 Thus,

part of non-metropolitan industrial growth seems to

occur with the decentralization of production processes into peripheral areas of the manufacturing

belt.131 Similarly, data-processing and client-aid services, which can be transferred from central offices

in order to save on labor and real estate costs, can

move easily because of advanced telecommunications networks. ’32

129 lbid.

IJORodneV A, Erickson and Thomas R. Leinbach. “Characteristics Of

Branch Plants Attracted to Nonmetropolitan Areas,” Nonmetropolitan

Industrialization, R.E. Lonsdale and H.L, Seyler (eds.) (Washington, DC:

V.H. Winston & Sons, 1579).

131R.D, Norton and J. Rees, op. cit., footnote 106.

13zM, MOSS and ,4. Dtinau, op. cit., footnote 103.

Explaining the Change

At the turn of the century, elevators, telephones,

indoor plumbing, and other technologies made highrise office buildings and apartments possible, thereby

opening possibilities for highly concentrated urban

centers. The national highway system, built during

the 1950s, literally paved the way to suburban development, just as railroads had opened the West

to development two generations earlier. In each case,

regulations and public action played a major role.

Western development was a conscious act of public

policy encouraged by subsidies to transportation systems, free land, rural electrification, and a variety

of other programs. Suburban development was

shaped by highway policy and zoning. Undoubtedly,

the desire to escape the problems of urban centers

also played a major role.

One of the features of the emerging U.S. economy

is that the rules governing the shape of American

cities and towns may be changing. An economy increasingly dependent on transactional services, and

a manufacturing system where rapid growth can occur in relatively small facilities or facilities with relatively modest freight requirements, allows greater

flexibility in locating businesses close to areas where

employees can find attractive housing, schools, and

recreational facilities. (Again, see ch. 3 for a discussion of changing patterns of transportation between

work and living.)

Relocation along these patterns, however, may be

contributing to a dilemma of major proportions (discussed further in ch. 11). Suburban movement can
200

Table 5.14.—Change in Employment for Metropolitan and Non-Metropoiitan Counties

and Types of Non.Metropolitan Settings, 1975.79 (In percent, by major industry group)

Industry Metro Non-metro Non-adjacent Adjacent

Agriculture, forestry, and fisheries . . . . . . . . . . . . . . . 45.7 28.1 35.9 18.5

Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,8 13.5 14.0 13.1

Contract construction . . . . . . . . . . . . . . . . . . . . . . . . . . 34.8 44.2 48.1 40.1

Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.8 20.7 20.1 21.5

Transportation and public utilities . . . . . . . . . . . . . . . 14.5 30.9 31.2 30.5

Wholesale trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.4 21.4 21.0 21.8

Retail trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.2 26.6 26.7 26.6

Finance, insurance, and real estate . . . . . . . . . . . . . . 20.0 29.6 31.0 28.0

Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.9 32.6 33.2 31.9

Total employment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.5 25,2 25.8 25.6

NOTES: SMSA/NEGMA boundaries as of January 1, 1980; employment data from County Business Patterns; non-adjacent means not adjacent to SMSA; adjacent means

adjacent to SMSA.

SOURCE: Larry Long and Diana DeAre, “The Economic Base of Recent Population Growth in Nonmetropolitan Settings,” U.S. Bureau of the Census, 1982.

leave behind the significant share of a region’s population living in central cities, where attaining a job

often requires the mobility provided by a car due

to the limited nature of public transportation from

cities to suburbs. Moreover, in the sense that the new

employment opportunities within coastal cities are

largely related to transactional services, and require

higher levels of education than traditional manufacturing jobs, the comparatively low educational standing of inner-city residents—many of whom are

minorities—may preclude them from these positions. 133

Nonetheless, much suburban activity continues to

be tied to the cultural and economic opportunities

afforded by cities. And it appears that a significant

amount of the movement away from urban centers

has resulted from the increased merger activity discussed earlier in this chapter. Following the opportunities for growth in suburban and exurban areas,

many firms have not only expanded the scale of their

operations and the scope of their products—they

have branched out physically as well.134

Recent patterns of suburban investment may arise

from a variety of other factors:135

●

●

●

●

●

the availability of low-cost labor;

employers’ perceptions that worker productivity

and dependability are greater outside urban

areas;

lower unionization levels, and a perception that

workers are less likely to unionize;

non-economic reasons, such as the simple desire to relocate, that are often given as preferences for less urbanized areas; and

policy decisions—rural areas enjoy a variety of

subsidies relative to more densely populated regions, as highways, telephone service, electric

service, police, fire, and other services in rural

areas are often heavily subsidized; prices would

rise sharply if low-density areas were forced to

pay the real marginal costs of these services.

Itswi]liam J. Wi150n, The Truly Disadvantaged: The Inner City, the

Underclass, and Pubiic Poky (Chicago, IL: University of Chicago Press,

1987). See also Truman A. Hartshorn and Peter O. Muller, “Suburban

Business Centers: Employment Implications,” U.S. Department of

Commerce, Economic Development Administration, Washington, DC,

1987.

ltqMi]ford B. Green, “Corporate-Merger-Defined Core-Periphery Relations for the United States,” Growth and Change, vol. 18, summer

1987, pp. 12-35.

135 Some of these factors are discussed in L.Steven R. Kale and Richard

E. Lonsdale, “Factors Encouraging and Discouraging Plant Location in

Nonmetropolitan Areas,” Nonmetroplitan Industrialization, op. cit. 130.
Chapter 6

The Networks That

Produce Amenity
CONTENTS

Page

Food. . . ........ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....203

prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..........................203

Structure and Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............205

New Technologies and System Integration. . ................................211

Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..............................212

Prospects .. .. .. .. .. .. .. .. .. . $ . . . . . . . . . . . . . . . ..........................212

Structure and Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............212

New Technologies and System Integration . . . . . . . . . . . . . . . . . . . . . .............220

Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....................222

Prospects .. .. .. .. .. .. .. . $ . . . . . . . . . . . . . . . . . ............................222

Structure and Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .........222

New Technologies and System Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..226

Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..................229

Prospects .. .. .. .. .. .. .. .. .. .. .. . $ . . . . . . . . . . ...........................229

Structure and Performance. . . . . . . . . . . . . . . . . . . . . . .........................229

New Technologies and System Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..233

Clothing and Personal Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................236

Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............................236

Structure and Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........237

New Technologies and System Integration. . ................................237

Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............................240

Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............................240

Structure and Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........241

New Technologies and System Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..242

Personal Business and Communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....251

Structure and Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........251

New Technologies and System integration . . . . . . . ...........................263

Recreation and Leisure . . . . . . . . . . . . . . . . . . . . . ..............................264

Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ....264

Structure and Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ....265

Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......................273

Factors Forcing Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................273

Network Components and Productivity Change. . ............................277
Chapter 6

The Networks That Produce Amenity

The previous two chapters described broad patterns of change in the national economy. While there

are themes common to all business networks, each

is changing in unique ways. A close examination

of each network is needed to understand many of

the changes taking place. These examinations provide a basis for hypotheses about the future that

could not be constructed by extrapolation. They also

offer a different perspective on the practical choices

facing public policy makers. In some cases, the discussions reveal the need for reforms that apply only

to specific business sectors. In others, they show how

programs designed to facilitate national economic

growth will help or hinder productive restructuring

in a given sector.

The sector discussions in this chapter test national

themes to see how they apply in practical cases. Each

addresses the following questions:

●

●

●

●

●

How does the network operate as an integrated

system, combining goods and services to connect primary resources to final markets?

How are the roles of the different component

businesses within the network changing? How

are the connections between them changing the

performance of the whole?

How does the scale and scope of enterprises

within the network affect the production

process?

What is the significance of new developments

in the geographic location of production facilities?

What is the relative importance of technology,

trade, regulation, and other forces shaping

change in the networks?

● What shape may these networks take in the

future?

● What practical choices affect the direction the

networks take?

Each discussion represents, in effect, one column

of table 4-6 in chapter 4. Organization of the chapter by amenity group maintains a clear view of the

integrated performance of networks.

Examinations of specific business sectors comprising the larger amenity network appear as follows:

●

●

●

Most amenity networks make heavy use of inputs from one production sector. An analysis

of the current and possible future performance

of such business sectors therefore appears in

the section covering the related amenity group.

The discussions of Health and Education, for

example, cover many issues relevant to the Social Service sector. Transactional Activities are

treated in the discussion of Personal Business

and Communication.

Where appropriate, the amenity discussions also

contain a review of intermediate demand for the

products of the primary business sectors

analyzed.

While manufacturing issues appear throughout

the amenity discussions (e.g., the manufacture

of textiles and apparel is discussed in the Clothing and Personal Care section, and food manufacturing in Food), a final section pulls the

pieces together and provides an overview of

changes in manufacturing.

Prospects fraction of all American spending on the Food

amenity goes to add value after food Products leave

Most farm products are produced by businesses farming operations. This value comes in the form

managed more like manufacturing facilities than the of increased variety in fresh foods as well as varyfarm operations of an earlier generation. A growing ing degrees of processing. Processing alternatives

now include such things as tablecloth restaurants,

IMuCh of this di~ussion is drawn from U.S. COngreSS, Office of Tech fast food, and a range of frozen and fresh entrees

nology Assessment, “Food,” sector study, Washington, DC, 1987. in grocery stores.

203
204

The American food production and distribution

system has been reshaped by changing consumer

incomes and expectations (see ch. 2). Parts of the

industry never before exposed to foreign competition find themselves struggling to maintain market

share. Imports of processed foods (such as confections, alcoholic beverages, and processed foods with

an ethnic appeal) have grown so rapidly that they

now approximately equal U.S. food exports (which

depend almost entirely on bulk commodities and

products like meat and meals that require little

processing—see ch. 9). Imports of food processing

equipment and food processing licenses have also

grown.

Technology has had an uneven effect on the businesses that comprise the food network. Farm productivity and the productivity of many food manufacturing activities has grown rapidly, while productivity

growth in wholesale and retail enterprises has been

sluggish. Technologies likely to have the most profound effect on the operation of the American Food

system may not appear as measured productivity

gains in any component business (as will be the case

with the provision of Clothing and Personal Care).

Information technology can tie retail, wholesale,

transportation, food processing, and farm operations

together in ways that facilitate system-wide flexibility and productivity. New packaging and preservation techniques can improve the quality of products

reaching consumers and can reshape the structure

of the businesses moving farm products to forks.

Several different outcomes are possible during the

next 20 years:

● The food production system could grow in away

that would make it a tightly integrated, hightechnology production network. Improved management systems can be implemented through

information technology and lowered costs made

possible by new, safe packaging and preservation technologies, which allow a greater variety of fresh products to be available at comparatively low costs. Foods can be tailored to regional or ethnic tastes, for special dietary needs

(e.g., low-sodium or low calorie) and for other

specialized markets (e.g., elderly individuals

looking for a high-quality menu that can be prepared at home with little effort)-all without a

significant increase in cost. Competition on the

●

●

●

●

basis of quality could increase consumer knowledge of the health implications of their diets.

The flexibility of the new communication system could allow a variety of comparatively small

producers of farm products and small manufactured food processors to enter networks once

reserved for very large firms. Improved on-farm

technology, coupled with improved packaging,

communication, and transportation networks,

could lead to increased productivity in specialized food products like cultivated fish and many

varieties of fruits and vegetables.

Capital equipment could replace many clerical

and low-skill tasks in retail, and wholesale operations could be automated. With the possible

exception of meat processing, the productivity

of food processing facilities could increase to the

point where dangerous and low paid occupations would be largely replaced by machinery.

Lack of effective competition could decrease

product quality and the potential of new efficiencies may not rebound to the advantage of

consumers. Foreign products could provide

much of the variety available on store shelves.

Large oligopolies, investing little in research or

new equipment, could compete largely on the

basis of advertising rather than product quality. Low-income and rural areas could find

themselves facing a sharp decline in real choice

and an increase in real food prices. Productivity

and food preservation could be achieved by

methods with adverse health effects. Oligopolies in food services could replace regional and

ethnic diversity with homogeneous national

products.

Small farms could be reduced to little more than

hobbies with virtually all food value produced

on very large farms (many of which may be

owned by a single family). The “post-harvest”

businesses could be divided between sophisticated manufacturing enterprises on the one

hand, and meat-packing, wholesale, grocery,

and restaurant operations—which show virtually no productivity gains and provide large

numbers of poorly paid jobs—on the other.

These alternatives are obviously not mutually exclusive. Signs of each can be found in existing trends.

The role of government in the Food network varies

greatly from sector to sector. The farming industry
205

is heavily influenced by government programs—

through both heavy Federal funding of research and

massive price support programs. Federal farm programs totaled $60 billion between 1981 and 1986.2

Federal regulations provide extensive if uneven coverage of food-product safety.

Structure and Performance

The system that brings food to American forks provides business throughout the U.S. economy. Of the

approximately $427 billion of value-added in the

economy generated directly and indirectly by Food

consumption in 1984, nearly 40 percent ended up

in the transportation and wholesaling industry, grocery stores, and restaurants. Approximately 15 percent resulted from farm and other resource inputs.

Food manufacturing contributed approximately 17

percent of value-added. During the past decade,

farming, other natural resource inputs, and manufacturing have lost their share of the American food

dollar (measured in constant dollars), while transportation, trade, and transactional enterprises have

gained (see figure 6-l).

The Farm Sector

Technology and Productivity. -Enormous

productivity gains in farming were among the most

obvious symbols of economic transformation at the

turn of the century. During the past 60 years, the

U.S. agricultural sector has undergone two technological revolutions—the mechanization of farming,

and the widespread use of chemical inputs. Less than

3 percent of the U.S. work force feeds the U.S. population and provides a large surplus for export. A

century ago, the majority of American workers were

employed on farms.

The system is far from running out of ideas. Rates

of productivity growth are expected to be rapid for

the next two decades.3 Agriculture is probably on

the verge of a third technological revolution, stemming from advances in biotechnology, informationprocessing technology, and a variety of other innovations.

2 Economjc Report of the President, 1987 (Washington, DC: U.S. Government Printing Office, 1987), p. 154.

3 U.S. Congress, office of TechnoloW Assessment, Technolo~, Pub-

/ic Policy, and the Changing Structure of American Agriculture, OTAF-285 (Washington, DC: U.S. Government Printing Office, March 1986).

Figure 6-l. -Value-Added To Meet Demand

for Food ($428 billion* in 1984)

Natural Resources

Construction

Low Wage Manuf.

Medium Wage Manuf.

High Wage Manuf.

Transport & Trade

Transactions

Personal Services

Social Services

o 10 20 30 40 50

Percent of $428 billion

● Constant 1980 dollars.

SOURCE: Office of Technology Assessment (see table 4-6 of ch. 4).

A study analyzing the potential impacts of 150

emerging technologies on future agricultural production predicts strong productivity growth throughout

the next two decades.4 In the near term, the largest

increases are forecast for the dairy sector, with milk

productivity projected to increase at an annual rate

of 3.9 percent—compared with 2.6 percent over the

past two decades. The application of biotechnology

to crop production is expected to proceed more

slowly, with widespread adoption forecast after the

year 2000.

Scale and Scope.–It is not surprising that enormous growth in farm productivity led to massive

structural changes in American farming. The new

production systems changed activities on the farm,

requiring sophisticated management practices, new

technical expertise, and heavy investment in capital equipment. They have also reshaped the economics of large and small farming operations. The

question of whether new agricultural technologies

have selectively benefited large or small farms is a

matter of dispute and recent litigations

What cannot be disputed is that the number of

farms in the United States has decreased by nearly

two-thirds since the pre-World War II peak of 6.5

million. Of the 2.3 million farms that remained in

1985, 5 percent—about 100,000 farms—accounted

4 Ibid.

5 Decision of the Superior Court of Alameda County, CA, “California

Agrarian Action Project, Inc. et al., v. Regents of the University of California,” Nov. 17, 1987.
206

for half of the Nation’s agricultural production, up

from 42 percent in 1960. In terms of net farm income, the largest farms—those with annual gross

revenues of more than $500,000, or 1.2 percent of

all farms—claimed two-thirds of total income in 1982.

In contrast, farms with annual revenues of less than

$99,000, which constituted 86.5 percent of all farms

in 1982, accounted for less than 2 percent of net farm

income. Moderate-sized farms—those with annual

sales of between $100,000 and $199,000, and perhaps the closest match to the traditional notion of

the “family farm”-represented 8.1 percent of all

farms in 1982, and claimed a 14.6 percent share of

net farm income.

Consolidation of farm enterprises is expected to

continue through the remainder of the century. By

the year 2000, small and part-time farms with annual sales less than $100,000 are likely to represent

80 percent of all U.S. farms but may earn only 4 percent of cash receipts. Large-scale farms, on the other

hand, with annual sales greater than $250,000–

only 14 percent of all farms—may earn 80 to 90 percent of all cash receipts.6

Geography.-The geography of farm activity is

heavily influenced by public programs. Farm product costs vary widely around the nation. In 1982,

for example, wheat grown in the northeast cost $2.26

per bushel to produce, while producers in the northern Plains States had costs as low as $1.25. Small

farming operations in some areas were able to produce at lower costs than large farms in others.7 It

is possible for farms in several regions to be profitable because public programs regulate prices. Subsidized irrigation and policies allowing the “mining”

of groundwater also have the effect of encouraging

farm activity in areas which would otherwise find

profitable agriculture difficult.

Food Manufacturing

The food manufacturing sector plays a critical role

in the Food system, purchasing 70 percent of U.S.

agricultural production and largely determining the

mix of products available to consumers. It is also the

most concentrated sector in the Food network.

&Technojo~, pub];c Policy, and the Changing Structure of American

Agriculture, op. cit., footnote 3

7 Ibid; and U.S. Congress, Office of Technology Assessment, A Review of U.S. Competitiveness in Agricultural Trade, OTA-TM-TET-29

(Washington, DC: U.S. Government Printing Office, October 1986), p. 46.

Technology and Productivity. -Labor productivity in the food manufacturing business has grown

so rapidly during the past several decades that it has

outstripped demand growth. Employment in the industry actually declined between 1950 and 1985.8

With an appropriate research program in food process engineering, annual productivity increases of 2.5

to 3.5 percent are easily possible in food manufacturing during the next decade.9

Innovations in food manufacturing have had the

effect of reducing a variety of factor costs in addition to improving labor productivity, and are likely

to continue to do so. Table 6-1 summarizes a study

that covered a variety of innovations under development in the food manufacturing industries. Most

of the innovations resulted in a faster process that

made more efficient use of energy and raw materials, and most required more capital equipment.

Almost without exception they resulted in both improved quality and lower costs.

The rapid growth in imports of manufactured food

products and the poor performance of U.S. exports

in this area (see ch. 9) do not result from an imbalance in food processing technology. [n fact, the

productivity of the U.S. industry is probably higher

than that of most U.S. trade competitors—including

those in Western Europe.10

New technologies are expected to have a major

effect on the physical processing of food products

and the way the products are packaged. Most result

from straightforward advances in production engineering. Bioengineering may result in a curious variety of radically new technologies. Artificial citrus

juice, for example, has already been produced in lab

oratories. 11 Intensive efforts are being made to develop calorie-free cake and ice cream.12

8 U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” historical diskettes, Table 6.7b.

9 U.S. Congress, Office of Technology Assessment, Agricultural Postharvest Technology and Marketing Economics Research—A Technical

Memorandum, OTA-TM-F-21 (Washington, DC: U.S. Government Printing Office, April 1983), p. 47.

10 Center on Transnational Corporations, Transnational Corporations

in Food and Beverage Processing (New York: United Nations, 1982),

cited in John M. Connor et al., The Food Manufacturing Industries (Lexington, MA: D.C. Heath & Co., 1985), pp. 22-23.

11 J. Flynn, “Want Some O.J.? It’s Fresh from the Test Tube,” Business Week, No. 2973, Nov. 17, 1986, pp. 160-161.

12 "Will Foods of the Future Be Safe?” The New York Times, Nov. 19,

1986, p. C15.
207

Table 6-1.—The Impact of Innovation in Food Manufacturing

(simple counts of primary and secondary impacts)

Reduced use Increased use of

Impacts on production inputs of factor factor

Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . 325 8

Energy . . . . . . . . . . . . . . . . . . . . . . . . . . 128 9

Packaging materials . . . . . . . . . . . . . . 126 23

Plant time . . . . . . . . . . . . . . . . . . . . . . . 238 10

Transportation . . . . . . . . . . . . . . . . . . . 26 0

Equipment . . . . . . . . . . . . . . . . . . . . . . 96 269

Impacts on product quality Higher quality Same quality Lower quality

Lower price . . . . . . . . . . . . . . . . . . . . . . 28 14 2

Same price . . . . . . . . . . . . . . . . . . . . . . 26 4 0

Higher price . . . . . . . . . . . . . . . . . . . . . 77 5 2

a

aBoth cases occurred in packaged fluid milk production.

SOURCE: John M. ConnoR "Market Structure and Technological Opportunities in the U.S. Food Manufacturing lndustry," contract report prepared for the Office of Technology Assessment, March 1986.

New packaging and preservation techniques present a major opportunity for savings. Losses of fruits

and vegetables during transportation and storage

have been estimated to be as high as 30 percent of

the total supply .13 Packaging may also contribute as

much as 30 percent of the value-added to processed

foods. 14 Packaging costs exceed the cost of food products in beer, soft drinks, breakfast cereals, frozen specialties, canned soups, baby foods, and pet food.15

Packaging weight and bulk contributes significantly

to transportation and warehousing costs. If nothing

else, the lack of standardization in packaging results

in a situation where transportation, wholesaling, and

retailing must handle from 2,500 to 5,000 different

container sizes. 16

A major shift in containers is already underway.

Glass and metal containers contain a shrinking

fraction of the fruit and vegetables purchased by

American shoppers.17 Plastics and other polymeric

materials will continue to displace glass and metal

containers. New technology has the potential to in13 A~r;CultUra] postharvest Technology and Marketing Economics

Research–A Technical Memorandum, op. cit., footnote 9, p. 47.

14 T.W. Dowries et al., “The Impact of New Technologies on the Food

Packaging and Preservation Industries,” contract report prepared for

the Office of Technology Assessment, 1985.

IS John h4. connor et al., op. cit., footnote 10, P. 38.

ISC,W. Abdul]a, “potential Effects of Standardized Packaging $Wterns

on Grocery Manufacturing and Distribution, ” contract report prepared

for the Office of Technology Assessment, 1985, p. 64.

ITcanned fruits ancl vegetables declined from 20 percent of per caPita consumption of 1979 to 18 percent in 1984. Canned fruits (not including juice) declined from 13 percent in 1979 to 11 percent in 1984.

U.S. Department of Commerce, International Trade Administration, 1986

U.S. Industrial OutLook, Washington, DC, January 1986.

crease food quality, prolong shelf-life, and reduce

shipping weight and volume. Multi-layer packaging

can provide long shelf-life without refrigeration for

many products. Aseptic processing and packaging,

which involves fast heating and sealing, is now used

in fruit juice and is being introduced for wines, fruit

purees, dairy products, tomato products, and edible

oils. Packaging with precise mixtures of oxygen and

carbon dioxide can allow fresh fruit to ripen to, but

not beyond, desired levels. A freshness indicator can

provide visible warning to merchants and consumers

when fish products are not safe.

Irradiation of food to preserve freshness has promise in some areas but has encountered consumer resistance. Economies of scale will be pronounced for

relatively small, free-standing irradiation facilities.

Low-unit costs, however, can be realized only with

fairly high processing levels. Consequently, only

large firms may be able to justify investment in irradiation. But jointly owned facilities, centrally located in important agricultural areas, could be an

economic option for small- and medium-sized processors.

18

Many if not most of the innovations that will lead

to productivity growth in food manufacturing are unlikely to be developed by the food manufacturing

industries themselves. The industry spends only

about 0.4 percent of sales on research and development—far lower than the average for all manufac18 R, M, Morrison and T. Roberts, Food irradiation: New f’erSpeCtiVeS

on a Controversial/ Technology, contract report prepared for the Office

of Technology Assessment, December 1985.
208

turing. Between 1969 and 1977, 90 percent of patents applicable to the six major food manufacturing

industries were granted to government laboratories,

educational institutions, individuals, foreign firms,

or domestic companies outside food manufacturing.19

Between 1971 and 1977, only 12 percent of the Putnam awards for innovations that increase efficiency

of food processing were given to U.S. food manufacturers; 45 percent of awards were given to small

firms. A study of these awards shows clearly that

food processing firms use mergers as a substitute for

in-house research—one-quarter of the Putnam awards

went to firms that were acquired shortly before or

after getting the award.20

Scale and Scope.–The number of food manufacturing firms has been decreasing at an average

annual rate of 2.5 percent since 1947. Concentration varies widely. Only 9 makers of chewing gum

exist today, but there are nearly 2,000 wholesale

bakers. 21 Much of the growth of large firms has been

achieved through acquisitions rather than internal

expansion. With $14 billion spent on purchasing,

1985 was a boom year for mergers; tobacco companies began to diversify. R.J. Reynolds spent $5 billion to acquire Nabisco. Phillip Morris acquired General Foods for $5.6 billion. Nestle S.A. purchased

Carnation for $3 billion. Beatrice purchased Esmark

for $2.7 billion in 1984.22

The discussion in chapter 5 showed the difficulty

of linking firm size to rates of innovation. A careful

study of innovation in food processing suggests that

innovation increases with firm size until total assets

reach $125 million to $150 million, when they begin to decline.23 Another study indicates that rates

of innovation also increase with market concentration levels, until four firms have captured 50 to 60

percent of the market, but decline thereafter.24

One concern about concentration in food processing is that firms in food manufacturing invest more

19W. F. Muel]er, J. (’u]be~wn, and B, Pwkham, Market s~ruc~ure a~~

Technological Performance in the Food Manufacturing Industries,

University of Wisconsin, Monograph 11, NC-1 17, Madison, Wl, 1982.

Z“ Ibid.

ZIJ. M. Connor et a]., “The Organization and Performance of the Food

Manufacturing Industries,” in B.W. Marion, cd., The Organizatjon and

Performance of the U.S. Food System (Lexington, MA: D.C. Heath and

Co., 1986), p. 21].

ZZ19g6 U.S. /ndustria/ Outfook, op. cit., footnote 1 T, P. 40-1.

2JMUeller et al., op. cit., fOOtnOte 19.

Z4J. M. connor et al., The Food Manufacturing hrdustries, Op. Cit., fOOtnote 10, pp. 322-323.

heavily in advertising to differentiate products than

in research to produce real innovation. Food manufacturers typically spend at least ten times as much

on advertising as on research and development.25

In 1979, firms in food and tobacco manufacturing

accounted for 32 percent of spending for advertising, but only 12 percent of manufacturing receipts.

The largest four firms accounted for 21 percent of

advertising in 1982.26

The meatpacking industry deserves special attention, since it has been an exception to many trends

in the industry. With the exception of beef, most

meat processing has moved out of the retail stores

and into specialized processing centers. Meatcutters

preparing beef products are the last skilled trade to

have a presence in grocery stores. The prospect of

moving these jobs to factories would complete a separation between retail and food processing businesses (see box 6-A).

Distribution sectors

Wholesale and retail trade in food has grown rapidly. Grocery stores and restaurants gained share of

retail sales between 1975 and 1985, while most other

retail sectors lost share.27 While some productivity

gains have been measured in these businesses, technology plays a comparatively minor direct role. The

indirect effects of the information technology entering these businesses, however, may be large.

Wholesalers have moved slowly to use computers

to control inventories, monitor shipments, schedule

work, plan storage layouts, and dispatch trucks. A

variety of technologies, such as automatic handling

equipment, have the potential to improve productivity of food wholesale operations by as much as

50 percent.28 Explanations for the slow rate of adoption vary. Is it lack of competition, inefficient management, or the shortage of trained personnel in

wholesale firms capable of managing a transition to

new technology? Do the large number of products

and container types make automation impractical?

The debate cannot be resolved easily.

25 Ibid., pp. 23, 87-89.

Zblnterna] Revenue Sewice data, cited in J.M. Connor et al., The Food

Manufacture@ industries, op. cit., footnote 10, p. 81.

zT]9g6 U.S. /ndus/rjal Outlook, op. Cit., footnote 17, p. 57-1.

213G. Grinnell, and L. Friedman, “Productivity Potential in Dry Grocery Centers,” U.S. Department of Agriculture, Economic Research Service, AER 484, Washington, DC, 1982.
209

Box 6-A.–Boxed Beef

In 1920, the four largest beef packers were vertically integrated and commanded 49 percent of all

sales. An anti-trust settlement in 1920 dictated a

long process of change. By 1970, the combined

share of four largest packers fell to 15.8 percent. ’

In the 1950s, improvements in refrigeration technology and other changes led to greater centralization of cattle processing in feedlots. Retailers like

Safeway began consolidating meat cutting into local processing centers. In 1967, the independent

(and non-union) Iowa Beef Packing Co. (now IBP,

Inc.) opened a semi-automated slaughtering and

processing plant in Dakota City, Nebraska.

Boxed beef’s share of total beef production from

all sources is now probably more than 40 percent.

Rapidly expanding fast food chains have provided

eager markets for their products. The number of

meatcutters and butchers employed in retailing has

dropped significantly between 1970 and 1980.2

Largely as a result of centralized facilities which

allowed more sophisticated equipment, meatcutting

productivity nearly tripled between 1950 and 1981,

measured in beef and pork packed per worker. Partial automation reduced skills and heavy lifting, although the tasks were made much more specific.

Injury rates and turnover remain high, while the

industry no longer requires a large pool of skilled

butchers and meatcutters.3

1 J. McCoy, Livestock and Meal Marketing (Westport, CT: AVI Publishing, 1979), p. 180.

‘U S. Department of Labor, Bureau of Labor Statistics, Employment

Projections for 1995, Bulletin 2197, Washington, DC, March 1984, p. 48.

3S.W. Hiemstra, “Technological and Organizational Changes in the U.S.

Beef Packing Industry,” contract report prepared for the Office of Technology Assessment, 1984

Food reaches consumers through two channels:

food retailers (primarily grocery stores), and food

service businesses (restaurants and institutional food

outlets). Concentration is increasing in both sectors.

However, some convergence exists between the sectors as the variety and extent of processing offered

by grocery “superstores” increases. Many of these

stores now offer a variety of prepared salads and entrees ready for eating.

Management changes have played a major role

in the food service industries. Fast food had the effect of substituting customer labor for service jobs.

Technical improvements led to some productivity

gains in restaurants between 1958 and 1976, with

the introduction of microwaves, deep-fat friers, and

other equipment, but productivity has actually fallen

since 1976.29 In food retailing, advanced electronic

cash registers and scanners have improved productivity in check-out, though—as the later discussion

will show—productivity changes are difficult to measure in individual stores.

Scale and Scope.-The number of wholesale establishments was trimmed by nearly half between

1950 and 1982, and consolidation shows no sign of

abating. The eight largest general wholesalers accounted for 26.5 percent of sales in 1982, as compared with 16.2 percent in 1972. Yet the consolidation of warehouse ownership may actually increase

competition if larger, sophisticated firms compete in

the same region. A recent U.S. Department of Agriculture study concluded that “there are more local

suppliers now than in the mid seventies.”30

The total number of grocery stores has fallen after

peaking in the mid 1970s. While conventional supermarkets still claim the majority of grocery sales

(59 percent in 1984), their role is rapidly declining.31

Superstores, which account for only 3.7 percent of

all grocery stores, account for 28 percent of grocery

sales. 32 These stores may have 30,000 to 200,000

square feet of sales area and as much as $1 million

per week in sales. At the other end of the spectrum,

the number of convenience stores, where the average sale is $1 to $3, have tripled between 1963 and

1984, and now account for 12 percent of all grocery

sales. 33 Specialty stores like bakeries have steadily

lost share. In 1982 they commanded only 6 percent

of grocery sales.34 Smaller grocery stores are owned

increasingly by smaller firms rather than national

chains.

Z9R.B. Carries and f-f. Bran, “Productivity and New Technology in Eating and Drinking Places, “ in A BLS Reader on Productivity, U.S. Department of Labor, Bureau of Labor Statistics, Bulletin 2171, June 1983,

pp. 67-72.

30w.B, Epps, IIF~ Who]esaling,” Food Marketing Review, 1985, U.S.

Department of Agriculture, Economic Research Service, AER 549, Washington, DC, March 1986, p. 21.

tlpR Kaufman, “F~ Retailing,” Food Marketing Review, 1985, U.S.

Department of Agriculture, Economic Research Service, AER 549, Washington, DC, March 1986.

tz19g6 Industrial Outlook, op. cit., footnote 17, P. 57-7.

jtKaufman, op. cit., footnote 31, P. 26.

34 B.W. Marion, cd., op. cit., footnote 21, p. 295.
210

The larger stores are located almost exclusively

in suburban areas. Urban and rural areas may suffer declining choices. Inner-city residents often pay

substantially more for similar items than shoppers

in suburban supermarkets. A study in Hartford, Connecticut found that a family of four forced to shop

at local stores paid $1,500 more annually than if they

had gone to suburban markets.35 Many inner city

residents do not have automobiles and are forced

to shop in local stores.

The nature of products provided in new, larger

grocery facilities has changed significantly. Many

have become multi-purpose retail outlets providing

pharmacies, teller machines, and a variety of food

specialties as well as standard grocery products. A

recent survey found that 75 percent of all supermarkets offer health/natural food and gourmet food. At

least one-third have low-calorie selections. There is

sharply declining interest in “price brand” generic

products, the share of which fell from 17 percent

in 1982 to 14.6 percent in 1985.36

The new grocery stores may also serve as local

meeting places and social centers. Many command

customer loyalties if only because the time saved by

going to a convenience store outweighs the savings

that could be achieved by careful shopping. A recent survey indicated that only 1 in 10 consumers

said they would shop at a store other than their principal supermarket to get advertised specials.37

Grocery stores also serve as major financial centers.

Supermarkets cash one-third of all non-government

checks. 38

Food service is an enormous enterprise in the

United States, providing nearly 1 out of 13 U.S. jobs.

The activities fall into the categories shown in table

6-2. Approximately 70 percent of sales are commercial, the rest in institutions. Because of demographics,

there has been a decline in food served in educational facilities and an increase in food sold through

ssHartford Citizen’s Research Educational Network, “The poor pay

More: Food Shopping in Hartford,” Hartford, CT, 1984.

sg]gg6 U.S. Industrial Outlook, op. Cit., footnote 17, P 57-7.

sT~uis Harris and Associates, Inc., “Trends: Consumer Attitudes and

the Supermarket,” survey conducted for the Food Marketing Institute,

Washington DC, 1985.

3SR.E. O’Nei]], “what’s New in ElT,” Progressive Grocer, August 1985,

pp. 59-66.

Table 6-2.—Sales of Meals and Snacks in 1977

and 1982 (percent of all sales in year)

Type of sale 1977 1982

Commercial . . . . . . . . . . . . . . . . . . . 69.1 70.6

Restaurants, lunchrooms . . . . . 30.2 30.7

Fast food . . . . . . . . . . . . . . . . . . . 24.9 26.4

Other . . . . . . . . . . . . . . . . . . . . . . 14.0 13.5

Institutional . . . . . . . . . . . . . . . . . . . 30.9 29.4

Educational institutions & day

care . . . . . . . . . . . . . . . . . . . . . 10.3 8.6

Hospitals & care facilities . . . . 7.7 8.2

Plants, office buildings . . . . . . . 4.4 4.5

Military. . . . . . . . . . . . . . . . . . . . . 2.0 1.7

Vending machines . . . . . . . . . . . 3.1 2.8

Other . . . . . . . . . . . . . . . . . . . . . . 3.4 3.6

SOURCE: Michael Van Dress, U.S. Department of Agriculture, private communication, U.S. Congress, Office of Technology Assessment, “Food, ” sector study, Washington, DC, 1987,

hospitals and long-term care facilities. Fast food is

rapidly gaining share.

Table 6-3 shows that there has also been a strong

movement toward restaurant chains. If anything, the

table understates the power of chains, since many

independently owned establishments are franchises.

Franchises account for 35 percent of all commercial

sales. About two-thirds of these franchises are owned

by individuals.39 As a result, nearly half of the sales

shown for “1-unit” firms in table 6-3 may be sales

by franchised operations. The gap between annual

sales of franchises and annual sales of independent

restaurants is growing rapidly.40

39 U. S. Department of Commerce, Bureau of Industrial Economics,

“Franchising in the Economy 1982 -1984,” Washington, DC, January

1984.

40 J. R. Schmelzer, “The Commercial Foodservice Sector: Trends in

Growth and Market Structures,” Working Paper Series WP-56, Michigan State University, East Lansing, Ml, September 1981.

Table 6-3.—Distribution of Eating Places

(sales, in billions of dollars)

Number

of units 1963 1967 1972 1977 1982

1

a . . . . . . . . . . 80.4 77.4 65.9 59.5 52.3

2-3. . . . . . . . . . . 5.8 5.3 6.3 6.8 7.1

4-10. . . . . . . . . . 2.9 3.7 4.7 6.1 7.2

2-10. . . . . . . . . . 8.7 9.0 11.0 12.9 14.3

11 or more . . . 11.0 13.6 23.2 27.6 33,4

Fast food. . . . . 14.6 19.0 30.3 37.6 39,4

a

lncludes franchises (see text).

SOURCE: J.J. Putnam, H.R. Linstrom, and M.G. Van Dress, “Food Service,” in

Food Marketing Review, 1985, U.S. Department of Agriculture, Economic Research Service, AER 549, Washington, DC, March 1986, p. 44,
211

New Technologies and System

Integration

A variety of new technologies promise to improve

the integrated performance of the American Food

network in ways that are difficult to demonstrate by

examining productivity in individual business sectors (as with Clothing and Personal Care). The two

classes of technologies most likely to affect the integrated performance of the food production and distribution system are new packing and preservation

technologies (already discussed), and the use of modern communications and information processing

systems.

Computers, optical scanners, and other electronic

information technologies are now common, but only

recently have firms directed their attention toward

uses that could pay system-wide benefits. Foodsystem firms were among the first to take a cooperative approach toward extending the applications of

computers. The most visible product of their efforts

is the Uniform Price Code (UPC), the now-ubiquitous

bar code that is “read” by point-of-sale scanners and

portable scanning guns or wands that record incoming shipments and are used to perform shelf inventories.

Retailers, through their new ability to analyze costs

and profits in previously unattainable detail, have

benefited most directly from these innovations. But

the biggest windfall is the large volume of highprecision data it generates, and this information may

serve as the basis for improving the entire food marketing system.

Electronic price scanners using the universal product code were first introduced in 1974. It is likely

that half of all grocery items were scanned in 1986.4]

For

ing

●

●

●

food retailers, the system promises the followtypes of advantages:

direct savings through reduced checkout time

(by 40 percent) and error rates;

an ability to make rapid price changes (some

stores are moving to electronic price indicators

on shelf);

improved coupon management (in 1983 customers redeemed 5.6 billion coupons worth $2

billion; an estimated 20 percent of coupons are

41 P.R. Kaufman, op. cit., footnote 31, pp. 26-27.

processed in error42);

● reduced error rates in billing and ordering (at

$11 to $18 per adjustment, price-related errors

on about half of the invoices issued by food

manufacturers impose annual costs conservatively estimated to total $100 million43); and

● precise identification of the effect of advertising campaigns and changes in store format and

product placement.

The systems may eventually make it easier for

firms to provide the government with requested information. If customers begin to pay for food with

credit cards or direct debit cards, sales can also be

linked with demographic and income characteristics with great (some would say Orwellian) precision.

For food manufacturers, many of whom purchase

scanning data from supermarkets, the information

is used to guide marketing strategies, identify new

market niches, and evaluate potential changes in

products that will boost sales. And for food wholesalers, some of whom use in-house computers to

evaluate the efficiency of their operations, feedback

on storage and distribution costs may spawn measures to improve efficiency.

Perhaps most importantly, the systems allow a

detailed performance evaluation of the thousands

of products on their shelves. These evaluations can

provide estimates on the real cost of selling each

item, preferred stocking patterns, and even information about which warehouse to use as a supplier.

At present, few retailers take advantage of the potential to guide merchandise strategies.44 A more recent development is the Universal Communication

Standard (UCS), with which food marketing firms can

substitute computer-to-computer communication

(“electronic data interchange”) for paper-based exchanges of invoices, purchase orders, and reams of

other information generated throughout the system.

4zf-f. Mona[, “Misredemption of Coupons: A New Solution’, ” Trim, ]nc,

Los Angeles, CA, 1984.

qsRona]d Cotteri][, “Effects of Electronic Information Technology on

Employment in the Food Manufacturing and Food Distribution Industries,” contract report prepared for the Office of Technology Assessment,

1985.

ldFood Marketing ]nstitute, “Retailer Applications of Scanning Dafa, ”

1985, cited in C.E. Morris, “Supermarkets: Super Data,” Food Engineering, May 1986, p. 120; and Food Marketing Institute, “Statement of Food

Marketing Institute before the Bureau of Competition, Federal Trade

Commission.” Milwaukee, WI, Sept. 11, 1984, cited in B. Marion, cd.,

op. cit., footnote 21.
212

Now in the early stages of adoption, the UCS, which

is a set of protocols that allow one firm’s computer

to send information to the computer of another,

should streamline distribution and marketing functions. It should also eliminate redundant clerical

tasks, and some of the duties of the manufacturer’s

sales force.

In all, the communication network is estimated

to offer annual savings of $196 million to $324 million (1979 dollars), assuming the technology is used

by the 10,000 largest firms in the food marketing

system. Most of the savings would result from reductions in clerical staffs, inventories, and waste and

spoilage. Moreover, the network can accelerate

recalls of tainted food items, as firms now have the

capability to track items throughout the marketing

system and, sometimes, back to the farm.

The impact of the communication network on

competition is not clear at present. It is clearly possible that large, sophisticated firms will be able to

make more effective use of the analytical power of

the equipment because of greater access to national

data bases and because they can afford to invest in

market analysis. They could also carefully monitor

regional price competition and quickly cross-subsidize products to beat smaller competitors. Electronic versions of price fixing are possible.

On the other hand, the networks make it possible for large firms to keep track of larger numbers

of products and suppliers. This may make it easier

for small producers to sell through large stores.

HEALTH45

Prospects

The high cost and complexity of new health care

technologies have been largely responsible for the

massive reorganization of the Nation’s health care

network that has occurred since the end of the Second World War. Experiments in management and

cost containment have proliferated. During the next

two decades, the system operating to provide health

care could take any of several different courses. They

include:

. A system where institutional incentives throughout the economy are clearly linked to providing the best possible health outcomes at the

lowest cost. This means a system capable of

making an even-handed assessment of investments in different kinds of measures to promote

health or prevent illness (including investments

in air and water quality and occupational safety,

and advice on diet, exercise, and other aspects

of lifestyle), and clinical treatment of illness

when it occurs.

● A system where a patient’s care is diverse and

flexible, and can be integrated in a way that ensures optimum health care. This involves a mix45 Much of this discussion is drawn from U.S. Congress, Office of Technology Assessment, ‘

( Health,” sector study, Washington, DC, 1987.

●

●

●

ture of home care, treatment by specialized

clinics, and local out-patient services with highly

sophisticated medical centers in a way that is

sensitive to the needs and desires of individual patients.

A system that provides timely and accurate

records on the effectiveness of alternative treatment strategies.

A system which attempts to contain increases

in health costs resulting from a growing elderly

population needing medical care, and a growing array of expensive new medical producures

and equipment with increasingly baroque regulations.

A system that provides an enormous range in

health care quality depending on the patient’s

ability to pay, permitting only the most affluent

to enjoy real choice about courses of treatment.

Again, these alternatives are not mutually exclusive. They depend heavily on public decisions.

Structure and Performance

About 1 dollar in 10 in the U.S. economy is spent

on the Health amenity, either by individuals or the

government. This figure does not include spending

aimed at improving health, such as investment in

environmental protection or safety, healthy food, or
213

fitness. More than half of all value-added in health

care enterprises remains in the hands of the Social

Service sector, with the rest being spent on such

things as hospital construction, purchases of medical equipment, and supplies from High and Medium

Wage Manufacturing firms. Purchased Transactional

Activities (such as insurance and legal fees) account

for nearly 16 percent of Health costs (see figure 6-

2). Within the health care enterprises themselves,

however, production recipes are heavily dependent

on labor; nearly three-quarters of the value of the

output of such firms is derived from value-added,

most of which is in the form of employee compensation.

Factors Forcing Change

Until the 1950s, the structure of the Nation’s health

care system was relatively easy to understand. The

system was highly fragmented, highly individualistic,

and free of anything but self-regulation by professional societies like the American Medical Association (AMA), which guarded their prerogatives jealously.

The courts ruled that anti-trust regulation could not

be applied to these organizations since they were

“professional societies.”46

Individual physicians treated most patients in a

private practice and resorted to relatively small com4Klark Havinghurst, “The Contributions of Antitrust Law to a Procompetitive Health Policy,” in Jack A. Meyer, cd., Market Reforms in ffeafth

Care (Washington, DC: American Enterprise Institute, 1983).

Figure 6-2.-Value-Added To Meet Demand

for Health ($285 billion* in 1984)

Natural Resources

Construction

Low Wage Manuf.

Medium Wage Manuf.

High Wage Manuf

Transport & Trade

Transactions

Personal Services

Social Services

o 10 20 30 40 50 60

Percent of $285 billion

= 1972 ~ 1984

● Constant 1980 dollars

SOURCE: Office of Technology Assessment (see table 4-6 of ch. 4)

munity hospitals (nearly always operated as not-forprofit organizations) for difficult surgery and some

specialized assistance. In extreme cases, they might

have turned to a larger hospital in a major urban

center. The range of treatment was limited; the family physician played a central role. Most people paid

for health care in cash. In 1950, two-thirds of the

bill was paid directly by the recipient of the service.

Explosive growth in the scope and cost of medical services occurred following World War 11, and

a complex tangle of programs was put in place to

regulate them. Rapidly advancing medical technology opened a wide range of therapeutic options with

proven value. The high cost of these opportunities

required new approaches to financing. The HillBurton program initiated in 1946 encouraged hospital construction. Health care for the needy and the

elderly was greatly expanded under the Medicare

and Medicaid Acts of 1965 (although gaping holes

remain in the coverage). Private insurance programs

grew rapidly, encouraged in part by Internal Revenue Service (IRS) rulings that employer contributions

for health insurance were not taxable as employee

income. 47 The public and private insurance systems

operated in a way that almost completely insulated

the payer and provider from estimates of cost, since

they reimbursed the provider for virtually any measure taken. By 1982, 73 percent of all health bills were

paid by government agencies or private insurance

companies. 48

There has also been rapid growth in both the number of cases treated and the intensity of care provided.

Between 1960 and 1982, the number of physicians

per capita grew 46 percent; the annual number of

graduates in medicine grew 128 percent; the annual

number of nurses graduated grew 146 percent; and

the number of community hospital beds per capita

grew 22 percent.49 Hospital costs grew from 25 percent of health expenditures in 1940 to 40 percent

47 Alan Enthoven estimates that revenue loss to government because

of non-taxation of employer contributions to health insurance and medical expense deduction is as large as the Federal contribution to Medicaid and almost half the size of Medicare. See Alexander M. Capron,

“Allocating Finite Resources: Questions of Equity and Access,” in M.E.

Lewin, ed., The Health Policy Agenda: Some Critical Questions, (Washington, DC: American Enterprise Institute, 1985).

48 U.S. Department of Health and Human Services, Health: United

States (Washington, DC: U.S. Government Printing Office, December

1985).

49 Ibid.
214

in 1980. Using a relatively narrow definition of health

care spending, health costs grew from 6.1 percent

of the U.S. gross national product (GNP) in 1965 to

9.8 percent in 1981.

The reasons for this growth are difficult to disentangle. Costs increased both because more people

had access to the health care system and because

advances in medical science increased the range of

treatment. Rapid technical advances continued to

drive the price of “recommended practice” to ever

higher levels. Decisions about “how much is enough

health care” became critical. Professional review

organizations presided over the processes used to

designate treatments as “prevailing professional custom and practice.”50

As the complexity of the system grew, so too did

the range of possible mistakes. Among other things,

it was no longer possible to assume that a physician,

competent at the time of original certification, would

be competent in the revolutionary changes sweeping the medical field.51 Consumers, increasingly

aware of the range of their choices, began to question decisions made in their name. The result was

regulation by tort law in the form of malpractice litigation. The issue of “prevailing professional custom

and practice” came under courtroom examination,

with the perverse effect that physicians were forced

to include costly procedures even when there was

only a small chance that the patient would benefit.

Though the courtroom was a poor place to negotiate the issue of “how much is enough, ” it took on

this role by default. This helped transform a decentralized and diverse system.52

During the 1970s, renewed interest in public

health issues accompanied the explosive growth in

clinical medicine. The National Highway Traffic

Safety Administration and the Environmental Protection Agency began operation in 1970; the Consumer Product Safety Commission in 1972; the Mining Enforcement and Safety Administration, the Drug

50 C. Havinghurst, “Decentralizing Decision Making: Private Contract

vs. Professional Norms,” in Jack A. Meyer, cd., op. cit., footnote 46, p. 24.

51 Regulation of one’s collegues requires enormous fortitude, and there

is every indication that it has not proven very effective. A peer review

undertaken by the American Medical Association indicated that as many

as 10 percent of active physicians were so impaired that they presented

a danger to their patients. See The New York Times, June 4, 1984, p.

A17.

52 C. Havinghurst, op. cit., footnote 50.

Enforcement Administration, and the Occupational

Safety and Health Administration in 1973; and the

Nuclear Regulatory Administration in 1975.53 Capital spending for air and water pollution abatement

rose from $700 million in 1965 (about 1 percent of

total plant and equipment investment) to a peak of

nearly $5 billion in 1975(4 percent of total new plant

and equipment) (all in 1972 dollars). The Surgeon

General’s office became more aggressive in forcing

the country to recognize the dangers of smoking.

As medical costs reached 10 percent of GNP and

health care enterprises grew to the size of major national corporations, it was no longer possible to maintain the fiction that the industry could be governed

by the camaraderie of professional organizations.

Taxpayers complained about the growing costs of

Federal and State programs. Employers found that

their contributions for health insurance co-payments

had risen from 2.2 percent of wages in 1970 to 5.3

percent in 1984.54 There was concern that an inefficient national health system was placing an intolerable burden on the costs of American products.

There was also a reaction to the enormous costs of

pollution abatement.

Attempts to make the health care delivery behave

more like an ordinary market by creating a more

perfect match between the interests of patients and

the interests of privately owned firms in freely operating markets have proven to be extraordinarily difficult. For reasons discussed in the Health section

of chapter 3, individuals face enormous problems

in making informed choices about appropriate levels

of health care. Even experts disagree about appropriate levels. Attempts to introduce greater market

freedom have come to be coupled with extensive

and complex regulations governing both price and

practices. The result has been a system that is at once

more free and more heavily regulated than the one

it replaced. Federal payments, for example, are now

governed by a precise schedule of hospital fees for

“diagnostic groups” and plans are underway to regulate physician fees. Private insurers are negotiating with “preferred providers” for health care. At

the same time, a 1984 survey of 1,115 firms indi53 S. Breyer, Regulation and Its Reform (Cambridge, MA: Harvard

University Press, 1982).

54 Emp]oy& Benefit Research Institute, “Private Expenditures to Contain Health Care Expenditures,” EBRI Issue Brief No. 55, Washington,

DC, June 1986.
215

cated that 97 percent were taking specific steps to

reduce health care costs.55

Network Components

The structure of the health industry has become

increasingly complex in recent years, responding to

the explosion of new technologies, to new professional specialties, and to the radical changes in the

financial rules under which the health system operates. In general, the effect has been a proliferation

of specialized treatment facilities, reduced use of hospitals, and increased use of out-patient treatment.

Use of capital equipment has steadily increased. As

in other service-oriented sectors, however, human

skills are increasingly accompanied by sophisticated

equipment. Figure 6-3 illustrates how labor costs

have declined as a fraction of all hospital costs during the past 15 years. The decline is surprisingly

unaffected by the radical changes in health care

financing.

The drive toward efficiency has forced increases

in the size of both hospital establishments and groups

of physicians surrounded by a complex constellation of supporting organizations like testing laboratories, dialysis centers, hospices, nursing homes, and

home health care providers. Patterns of ownership

are in flux, as some of these specialized facilities are

owned by large firms while many are independent.

55The Wyatt Co., “1984 Group Benefits Survey,” Washington, DC,

1984.

Figure 6-3.-Direct and Indirect Labor

Costs as a Percent of All Community

Hospital Costs

Percent of all costs

6 9 -

6 7 -

6 3 -

-062 percent per year trend

+

6 1 -

+

+ +

+

5 9 -

+

5 7 -

1 1 1 I , , 5 5 1 T r 1 I 1

1972 1974 1976 1978 1980 1982 1984

SOURCE: American Hospital Association, Hospital Statistics, Chicago, IL, 1986

edition.

Changes in the financial system have also resulted

in a movement toward private rather than public

ownership. Even publicly owned facilities are managed more like private firms.

While there are differences in the quality of health

care delivered in different parts of the country, the

opportunities for health care businesses obviously

follow population movements and provide employment and investment opportunities around the country. The rapidly growing areas of the south and west

have furnished particularly attractive opportunities

to health care enterprises well matched to the new

financial rules. The increasing size of hospitals has

reduced easy access to these facilities, but a variety

of outpatient clinics, “urgi-centers,” “doc-in-a-box,”

and other health facilities have proliferated in suburban areas. Rural areas are most likely to suffer a decline in health care access. At issue is whether the

benefits of economies of scale in large facilities outweigh the benefits of short travel times to smaller

facilities.

Although the effect of the changes just described

on the quality of care delivered has proven difficult

to measure over the entire Health network, the following examination of individual components reveals some interesting trends.

Physicians.-Cost containment by insurance programs, an actual decline in use of physician services resulting in part from rising prices,56 and a potential “surplus” of physicians are in the process of

restructuring the series of independent enterprises

that were once at the center of medical practice in

the United States. As a result, competition has begun to play a major role. The AMA’s resistance to

advertising has faded to a prohibition against “deceptive practices” and “creation of unjustified expectations.”57 Physician offices have extended their office hours, and some even make house calls. The

most dramatic effect of competition, however, has

been to force independent physicians into group

56 Between 1976 and 1981, the average number of yearly physician

visits per person declined from 4.9 to 4.6 while physicians in officebased practice rose 33.3 percent. See U.S. Department of Health and

Human Services, National Center for Health Services Research, “Contacts with Physicians in Ambulatory Settings: Rates of Use Expenditures

and Sources of Payment,” Data Preview 16, DHHS Publication PHS 83-

3361, Washington, DC, 1983.

57 Robert M. Veatch, “Ethical Dilemma of For-Profit Enterprises in

Health Care,” in Bradford H. Gray, cd., The New Health Care for Profit

(Washington, DC: National Academy Press, 1983), p. 128.
216

practices. Instead of moving from medical school into

lucrative private practices, an increasing number of

certified physicians are finding that they must accept

corporate employment paying $35,000 to $40,000

per year.

58

Aside from private practice, the different ways that

physicians are now organized include:

● Preferred Provider Organizations (PPOs)

and Individual Group Practices. The PPOs

are loosely knit groups of private practitioners

and hospitals that contract with employers and

insurers to provide care at a discount, ranging

from 5 to 30 percent on physician fees and 7

to 15 percent on hospital fees.59 Physicians are

typically paid on a salary basis. It is difficult to

determine whether cost savings are real,60 but

the introduction of price competition undoubtedly puts pressure on prices. Between December 1984 and June 1985, enrollment in PPOs

was estimated to have increased from 1.3 to 5.8

million. 61

● Health Maintenance Organizations (HMOs).

HMOs began with the encouragement of the

HMO Act of 1973, which required businesses

with 25 or more employees to offer an option

for HMO care. HMOs have managed to replace

professionally dictated standards with their own.

Although Federal subsidies have stopped, HMOs

have grown rapidly. Between 1981 and 1985,

enrollees increased from 10.3 to 18.9 million,

and membership may reach 40 to 50 million

by 1990. The geographic pattern of their growth

has, however, been uneven, and they have begun to dominate the practice of medicine in

some parts of the country-in some large metropolitan areas 75 percent or more of all doctors participate in HMOs. HMOs are most ac58 Eli Ginzberg, “The Destabilization of Health Care, ” New England

Journal of Medicine, vol. 315, No. 12, Sep. 18, 1986, pp. 757-760.

59 D. Ermann and J. Gabel, “Preferred Provider Organizations: performance Problems and Promise,” Health Affairs, vol. 4, No. 1, spring

1985, pp. 24-40.

60U.S. congress, General Accounting Office, “Constraining National

Health Expenditures: Achieving Quality Care at an Affordable Cost,”

GAO/HRD-85-105, Sept. 30, 1985; and U.S. Congress, Office of Technology Assessment, Payment for Physician Services: Strategies for Medicine, OTA-H-294 (Washington, DC: U.S. Government Printing Office,

February 1986).

61 "PPO Enrollment Jumps Dramatically in 1985,” Hospital Week, vol.

21, No. 40, October 1985, p. 1.

tive in urbanized areas of Hawaii, Minnesota,

California, and Oregon, and are least important

in rural areas in Mississippi, Montana, and Wyoming. 62 Most are new; in 1983, only half had

been in business for more than 5 years.63

HMOs are organized using an entirely new

principle in medical finance: they are self insuring. Patients pay a flat fee and rely on the

HMO bureaucracy to provide needed treatment.

This principle, coupled with the fact that the

organizations can employ professional business

managers to replace physician-dominated management of traditional health facilities, allows

them to consider costs and benefits from a

unique perspective. Not only do they create a

unique regulatory environment from which to

view alternative procedures, they create a unique

bureaucratic environment for the physicians

employed. There have been suggestions that

one of the explanations for the lower rates of

aggressive treatment administered at HMOs is

that they do not attract the kind of personalities that practice aggressive medicine, and do

not provide the kind of peer support for such

actions that might be available in other kinds

of practices.64

While data is ambiguous, HMOs appear to be

able to provide health care at lower cost. Estimates indicate that HMOs can offer a wide range

of services at prices 10 to 40 percent lower than

fee-for-service expenses, even though the HMO

patients receive as much ambulatory service

(4.42 physician visits v. 4.19 fee-for-service).65

HMO hospital admission rates were 40 percent

lower than fee-for-service rates, while hospital

stays averaged the same length. In 1981, average number of hospital days per thousand population for all payers was 1,316—for HMO members, it was 458. This could not entirely be

62 Grady Wells, “Healthy Growth for HMOS,” American Demographics,

vol. 6, No. 3, March 1984, pp. 34-37, 46-47.

63 N. Baker, J. McGee, and M. Shadle, “HMO Status Report, 1982-1983,”

Interstudy, Exelsiour, MN, August 1984.

GIC. Havinghurst, op. cit., fOOtnOte 50.

65 Emp]oy& Benefit Research Institute, Op. cit., fOOtnOte 54; H.S. Luft,

“How Do Health Maintenance Organizations Achieve their ‘Savings’?”

New England Journal of Medicine, vol. 298, 1978, pp. 1336-1343; and

W.G. Manning et al., “A Controlled Trial of the Effect of a Prepaid Group

Practice on Use of Services,” New England Journal of Medicine, vol.

310, 1984, pp. 1050-1510.
217

explained by the difference in ages between

HMO enrollees and other patients.66

Not surprisingly, HMOs initially faced great

skepticism from both the public and physicians,

but this resistance appears to be fading in the

face of a growing consensus about the need for

cost containment.67

Hospitals. -Spending for hospital care has increased rapidly, because (1) hospital use was encouraged (sometimes required) by most public and

private insurance programs, and (2) hospital construction was encouraged by the Hill-Burton Act.

There is evidence that these factors led to overuse

of hospitals. For example, a study which reviewed

1,132 records of patients admitted to hospitals concluded that only 60 percent of the admissions were

appropriate; 23 percent were judged to be “inappropriate” in that the examiners could determine

“no positive benefit” from treatment in the hospital

setting, and 17 percent of these could have been

avoided with ambulatory surgery.68 An independent study found that 19 percent of hospital admissions and 27 percent of hospital days were inappropriate. 69 A study of laboratory tests indicated that

47 percent of the tests performed in a teaching hospital could have been eliminated without any apparent loss in the quality of patient care.70

While such conclusions are controversial, cost reduction programs have put unrelenting pressure on

hospital systems to reduce expenses, by increasing

efficiency and—to an extent that is difficult to determine—by eliminating implicit cross-subsidies that

had the effect of supporting teaching, research, and

care for the indigent by overcharging patients able

to pay.

MR.J, Arnold, L.W. Debrock, and J.W. Pollard, “Do HMOS Produce

Specific Services More Efficiently?” Inquiry, No. 21, 1984, pp. 243-253.

GTC. HaVinghUrSt, op. cit., foOtnOte 50, p. 30.

‘A.L. Siu et al., “Inappropriate Use of Hospitals in a Randomized

Trial of Health Insurance Plans,” New England Journal of Medicine,

vol. 315, No. 20, Nov. 13, 1986, pp. 1259-1266. This study examined

records from Seattle, Dayton, Fichburg and Franklin Counties in Massachusetts, and Charleston and Georgetown Counties in South Carolina. Upper income (> $61,000 family income) families and families on

Medicare were excluded.

69 J.D. Restuccia et a]., “The Appropriateness of Hospital Use,” ~ealfh

Affairs, vol. 3, No. 2, summer 1984, pp. 130-138.

70A.R. Maflin et al., “A Trial of Two Strategies to Modify the Test Ordering Behavior of Medical Residents,” New England Journal of Medicine, vol. 303, 1980, pp. 1330-1336.

Recent trends in hospital care include:

●

●

●

The numbers of full-time in-patients, the rate

of hospital admissions, and admission rates for

the elderly all fell sharply in 1985. Average hospital stays were 7.7 days in 1975 and 7.1 days

in 1985;71 hospital occupancy rates fell from 80

percent in 1970 to 69 percent in 1985.72 This

alone led to great pressures to close inefficient

facilities.

Industry studies assert that changes in insurance coverage provided by Deere & Co. of Illinois resulted in a 21 percent decline in hospital days per 1,000 beneficiaries over a period

of 36 months; a major insurance company reported savings of $523 per patient in 1981 all

because of ambulatory surgery and pre-admission

testing. 73

Although in-patient costs are still growing, the

rate of growth has slowed considerably and the

average length of a hospital stay has been reduced. 74 In-patient expenses per capita increased

12.6 percent between 1976 and 1982, but only

4.5 percent per year after 1983.

Competitive pressure has forced hospitals into

horizontal integration (in the form of hospital

chains) and other services, such as clinics, nursing homes, and ambulance companies, into vertical integration. Some have even diversified

into real estate and resort management.75 An

increasing fraction of hospitals are being operated as parts of chains rather than as independent community-based facilities.

Between 1975 and 1982, multi-hospital systems increased their share of all community hospitals from 25 to 33 percent.76 Ownership of

multi-hospital chains is dominated by five large

companies that own 6 percent of all U.S. acutecare beds, and nearly 50 percent of all for-profit

TIAmerican Hospital Association, Hospital Statistics: 1986 (Chicago,

IL: American Hospital Association, 1986), p. xvii. There were actually

8 percent fewer people in hospitals in 1985 than there were in 1975.

72 lbid., p. 2.

73 R. Kauer, “Deer & Company: Utilization Review, ” Health Systems

Management Center, Case Western Reserve University, under contract

with the Business Round Table Health Initiative Task Force, 1983; and

Employee Benefit Research Institute, op. cit., footnote 54.

74’’ Medicare Prospective Payment and the American Health Care System: Report to the Congress,” February 1986.

75 L. Punch, “Contract Management Companies Manage Growth Rate

of 13.3 percent, ” Modern Health Care, vol. 14, August 1984, pp. 45-52.

TGD, Ermann, and J. Gabel, “Multihospital Systems: issues and Empirical Findings,” Health Affairs, vol. 3, No. 1, spring 1984, pp. 50-64.
218

●

●

●

beds. The number of beds owned by these firms

grew from 29,000 in 1976 to 62,000 in 1982.

Their holdings are concentrated in the South

and West, where hospital construction was most

rapid during the past two decades.77

While scale economies have encouraged horizontal integration, there has been some vertical disintegration as hospitals have elected to

contract for specialized services (housekeeping,

food services, emergency services, plant operations and maintenance, records keeping, billing, and collection).78

The average numbers of beds per hospital has

also risen. In some cases this has led to economies of scale. The number of hospitals with

fewer than 100 beds fell 8 percent between 1975

and 1985, while hospitals with more than 300

beds increased their share from 45.8 percent

of all beds to 47.8 percent.79

An increasing number of hospital patients are

now treated privately, and more hospitals are

privately owned. Public facilities faced enormous difficulties because of competitive pressures and the increasing difficulty of obtaining

funding from philanthropic or public funds.80

In many cases, costs may have been difficult

to contain because of the large number of indigent patients. Between 1975 and 1985, the number of beds in investor-owned facilities increased

from 7.7 to 10.3 percent of non-Federal hospitals.81 Even not-for-profit hospitals are hiring private hospital firms to manage their operations,

From 1970 to 1981, hospitals operated under

contract management increased from 14 to

497.82

Cost containment in standard hospitals, coupled

with growing consumer interest, has spawned

rapid growth in specialty hospitals. More than

one-third of all private hospitals now specialize in psychiatric care, alcohol and drug abuse,

physical rehabilitation, or the care of women.83

77 R. B. Siegrist, Jr., “Wall Street and the For-Profit Hospital Management Companies, “ in Bradford H. Gray, cd., op. cit., footnote 57.

Tsln ]983, growth rates in contractual services ranged from 18 to 200

percent. See L. Punch, op. cit., footnote 75. 79HOSpjra] s~a(jsrics: 1986, op. cit., footnote 71, P. xvii.

‘Ibid.

81 Ibid., pp. 3-4.

82J.W, Salmon, “organizing Medical Care for Profit,” in J.B. McKinIay, cd., Issues in the Politica/ Economy of Health Care (New York, NY:

Tavistock Publications, 1984).

83fv1. Freudenheim, “Specialty Health Care Booms, ” The New york

Times, Nov. 25, 1987, p. D1.

Clinics.—Free-standing clinics and sophisticated

services offered in physician group practices are introducing new competition for hospitals. There were

1,800 to 2,000 such centers in 1983,84 approximately

23 percent of which were controlled by three companics. 85 Technology now allows many procedures

to be conducted out of hospitals and many insurers

encourage the use of the less expensive clinics,

where for some procedures rates average 55 percent

less than hospital in-patient rates and 18 percent less

than hospital out-patient rates.86 Many of these

centers are owned by individual physicians or partnerships, but in some cases hospital chains are diversifying to own smaller facilities themselves.

Support Facilities.—Expanded options for care

have produced many specialized organizations designed to serve specific market niches. For example, there are now 1,200 centers that provide dialysis and many clinical laboratories that conduct

medical tests. Because medical science has improved

diagnosis faster than treatment there has been a

growing demand for hospices, where patients with

known but essentially untreatable illnesses can be

made comfortable. There were 1,345 hospices in

1984, increasing at a rate of 1 per day.

Similarly, the rapid growth in the ranks of the

elderly, and the failure of medicine to provide cures

for the chronic illnesses of old age, has led to an

expansion of nursing homes. This trend has been

accentuated by the number of women wishing to

remain in the work force, who are therefore unprepared to care for an aging parent.

The costs of these facilities, about half of which

are paid by Medicaid funds, already represent nearly

10 percent of all health expenditures. This expense

has led a number of States to take draconian actions

to block further cost increases. The number of nursing home beds grew 3.7 percent annually between

1971 and 1976 but growth slowed to an annual rate

of 2.4 percent between 1976 and 1982 in spite of

a 4.5 percent annual increase in the number of persons over 85. By 1984, nine States ordered a halt

to nursing home construction, and others were limit84 G. Richards, “FECs Pose Competition for Hospital EDs,” Hospitals,

Mar. 16, 1984, pp. 72-82; and “National FEC Group Changes Name,”

oct. 1, 1984, p. 22.

8SH.J. Henderson, “surgery Centers Double,” Modern Heahh Care,

vol. 15, June 7, 1985, pp. 148-150.

SW. Ansberry, “outpatient Surgety Rises as Firms Push tO Reduce

Health-Care Costs,” The Wall Street Journal, Feb. 20, 1985.
219

ing approvals to retirement housing and life care.87

Levels of service vary enormously depending on the

policies in individual States. There were 94 nursing

home beds per 1,000 elderly in Wisconsin in 1980,

and 22 per 1,000 in Florida.

Most nursing homes are now in small private

chains of 2 to 7 facilities with interlocking ownerships, but concentration is increasing. The five largest

investor-owned chains increased their share of beds

from 64 to 73 percent between 1982 and 1983.88

While most facilities do not provide much more than

routine convalescent care (two-thirds of all jobs are

for orderlies, therapy assistance, food service, laundry, and housekeeping), a number have begun to

offer a series of diversified services. Some are specializing in areas like physical and respiratory therapy, home health care, adult day care, residential

retirement, and life care.89 All are seeking to increase

service for patients covered by private rather than

public insurance.

Home Health Care.—Home health care has increased dramatically as regulatory programs reduce

the frequency and length of hospital stays, transferring health care costs to the home (usually to women,

see note 111, p. 391). A growing number of home

health care services are now covered under public

and private insurance. Medicare reimbursements for

home health care grew 376 percent between 1976

and 1983.90

In response to growing demand, a variety of new

technologies have been developed that permit an

increasing range of treatment at home. For example, technology now permits oxygen therapy for emphysema and IV-nutritional therapy to be conducted

at home more cheaply than in the hospital. The implantable pump is an example of a highly sophisticated device that, like the implantable heart pacemaker, makes it possible for the patient to carry a

87K.A. f7aCke]mann, “NUrSing f-fome crunch tO f+it Hospitals SOOn,”

Modern Health Care, vol. 14, Nov. 15, 1984, pp. 42-46.

E8B.C. v]ad~k, fJn/ovjng care (New York, NY: Basic Books, 1980),

and L. Punch, “Chains Expand Their Operations, Expecting Prospective Pay Boom, ’’Modern Health Care, vol. 14, May 1984, pp. 131-140.

89 A. Renschler, “Testimony Before the Subcommittee on Aging,” U.S.

Senate, Committee on Labor and Human Resources, pp. 79-86, 1983;

and P.G. Hollie, “Nursing Homes Seek Affluent,” The New York Times,

PP. 31, 33, Sept. 15, 1984.

XIu.s, ~nate, SpWia] CommittW on Aging, “Medicare and the Health

Costs of Older Americans: The Extent and Effects of Cost Sharing,” Washington DC, April 1984.

sophisticated piece of equipment inside the body

cavity and to become completely ambulatory. There

will soon be a version that can be reprogrammed

by a physician, and eventually through sensors in

the body itself. About 15,000 implantable pumps are

now in place, primarily for delivering chemotherapy for liver cancer, morphine for intractable pain,

and insulin for diabetics. The manufacturer estimates

that costs, including the initial cost for surgical implantation, would be $17,000 for one year of treatment with the implantable pump—as opposed to

$65,000 for one year of conventional therapy.91

Technology also makes it possible for comparatively small firms to maintain the sophisticated record keeping needed in modern medicine. Comparatively inexpensive systems can maintain financial

records, personnel and payroll records, records of

billable activities, and the voluminous forms required

by the Health Care Finance Agency .92

Less complex equipment is available without

prescription at retail stores. There has been a sharp

increase in sales of incontinence products, cardiac

monitoring equipment, diabetes therapy products,

home nutrition products, kits for colon disease, and

infections. 93 Monoclinal antibodies have made it possible to offer a wide variety of sophisticated diagnostic

kits to the home market and there is a large market

for herpes virus testing and home screening for pregnancy, ovulation, venereal disease, and strep infections. If they are properly used, these systems can

also reduce health care costs.

A number of small agencies have grown up to

serve the exploding need for home health care services. What was once a not-for-profit service has become a profitable enterprise. Investor-owned agencies increased share of home health care from 5.0

percent in 1978 to 26.7 percent in 1984. Most firms

are small (averaging 45 employees) and depend

heavily on Medicare. Services provided range from

housekeeping to training family members in the

operation of complex home care equipment.

gl’’lmplantable Drug Infusion Pump,” Issues in Health Care Technology, VOI 5, No. 2, pp. 1-3, 1982; and “Johns Hopkins/NASA/IndustryDeveloped Implantable Infusion Pump,” Blue Sheet, Johns Hopkins

University, Baltimore, MD, Mar. 7, 1984.

92M.A. Beach]ei, “what a Computer Can f)o for a Home Health

Agency,” Caring, vol. Vl, No. 6, June 1987, p. 5.

93B. ~mondWn, ‘*The Market for Medic~ self~re,” American Demographics, No. 51, pp. 35-37.
220

Drug stores and other retail outlets have become

more efficient in their ability to serve home health

care needs. There has been rapid growth in overthe-counter sales of drugs (9 percent annually since

1972). Computers operated by retail pharmacists can

now keep track of patients’ records, and help to identify possible adverse drug combinations. Retail operations have also become more efficient in inventory

control, ordering, billing, and invoicing.

Measuring Productivity

How well does each component of the complex

Health network do its job, and how well does the

system operate as a whole? The increasing complexity in the health care system has made the second

question more important than at anytime in the past.

Answering this question involves addressing several

other issues:

●

●

●

What is known about the factors contributing

to the incidence of disease, the methods available for reducing risk factors, and the way investments in prevention compare with investments in treatment?

What is known about the costs and benefits of

alternative methods of delivering medical care?

Is society allocating its resources to different

classes of individuals equitably and in a way

most likely to minimize costs?

The retrospective system of payment that prevailed

in public and private insurance until recently encouraged procedures that exceeded any reasonable

estimate of benefit, and in some cases may actually

have encouraged practices that entailed more risk

than benefit. These procedures continue even under the current payment system, as witnessed by the

case of fetal monitoring—a technique shown to be

of no benefit and some risk in most cases.94

Disagreements, or lack of information about the

relative effectiveness and costs of different courses

of medical treatment, lead to wide variations in the

way medicine is practiced around the country.95 For

example:

94 R. Neutra et af., ‘Effect of FetaJ Monitoring on Neonatal Death Rates,”

New England lournti of Medicine, vol. 299, Aug. 17,1978, pp. 324-326.

95 J. E. Wennberg, J.P. Bunker, and B. Barnes, “The Need for Assessing the Outcome of Common Clinical Practices,” Annual Review of Public

Health, vol. 1, 1980, pp. 277-295.

●

●

In Maine, the probability that a woman has a

hysterectomy is 20 percent in some markets and

70 percent in others.96

Table 6-4 summarizes a recent study that revealed enormous differences in the rates at

which different procedures were performed in

hospitals around the country. The differences

are extremely large even for costly and dangerous procedures, like coronary-artery bypass surgery where rates differed by a factor of 3.1 in

the facilities studied. Unfortunately the authors

of the study had no basis on which to estimate

whether the high rates were too high or the low

rates too low: “the available data do not allow

us to explain the wide variations we have observed. In addition, we cannot establish the ‘correct’ use rates from these data.”97

The rules governing the financing of a health care

organization may influence the kind of care provided. Patients of physicians who owned X-ray equipment, for example, are more likely to receive an Xray and less likely to see a radiologist than those

of physicians who did not.98 In a recent experiment,

a series of case histories involving heart problems

was reviewed by cardiologists with no personal interest in the cases. Physicians in independent feefor-service practices were significantly more likely

to recommend tests and surgery than those working for prepaid group practice.99 However, the rules

governing the allocation of costs between patient and

insurance company do not seem to have a significant effect either on the total cost of health care, or

on the priority with which funds are spent.

New Technologies and System

Integration

Emerging information technologies offer great potential for achieving a new kind of integration in the

96J.E. Wennberg, “variations: A Proposal for Action,” Health Affairs,

pp. 7-32.

97 M.R. Chassin et al., “Variations in the Use of Medical and Surgical

Services by the Medicare Population,” New England Journal of Medicine, vol. 314, 1986, pp. 285-290.

98 A.W. Childs and E.D. Hunter, “Non-medical Factors Influencing the

Use of Diagnostic X-ray by Physicians,” Medical Care, vol. 10, No. 4,

July/August 1972, pp. 323-335.

99 M.A. Hlatky, E. Botvinick, and B. Brundage, “A Controlled Comparison of Cardiac Diagnostic Test Use in a Health Maintenance Organization,” paper presented at annual meeting of the Robert Wood Johnson

Clinical Scholars, San Antonio, TX, Nov. 11-14, 1981.
221

Table 6-4.—Variations in the Use of Medical and Surgical Services

Coefficient Highest/lowest

Procedure of variation rate ratio

Injection of hemorrhoids . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Hip arthroplasty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Destruction of benign skin lesion . . . . . . . . . . . . . . . . . . . . .

Skin biopsy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Humeral fracture repair . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total knee replacement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Lumbar sympathectomy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Coronary-artery bypass surgery . . . . . . . . . . . . . . . . . . . . . . .

Carotid endarterectomy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Hiatus hernia repair . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Excision of malignant skin lesion . . . . . . . . . . . . . . . . . . . . .

Coronary angiography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Excision of benign breast lesion . . . . . . . . . . . . . . . . . . . . . .

Craniotomy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total hip replacement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Arterial grafts of lower extremities . . . . . . . . . . . . . . . . . . . .

Cones’ fracture repair. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Bronchoscopy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Appendectomy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Abdominal aortic aneurysm repair . . . . . . . . . . . . . . . . . . . . .

Mastectomy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diagnostic upper gastrointestinal endoscopy . . . . . . . . . . .

Colectomy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Prostatectomy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Lens extraction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.79

0.69

0.67

0.58

0.51

0.47

0.44

0.41

0.39

0.38

0.37

0.32

0.31

0.31

0.31

0.28

0.25

0,21

0.19

0,19

0.17

0.16

0.15

0.12

0.11

26.0

11.4

8.0

4.8

7.9

6.0

4.0

3.1

4.0

5.9

3.3

2.3

2.2

2.6

3.0

3.5

2.3

2.2

2.2

2.2

2.7

1.6

1.6

1.7

1.5

SOURCE: M.R. Chaasin et. al., ’’Variations in the Use of Medical and Surgical Services by the Medicare Population:" New England

Journal of Medicine, vol. 314, 1988, pp. 285-290.

Nation’s health care system that would reduce costs

and improve the quality of services rendered. In

many cases, new devices can contribute a qualitatively new service; in others, they can so improve

the speed and accuracy of procedures that their costs

maybe reduced to a point where they are offered

routinely. For example, computer aided diagnostic

and treatment systems can provide systematic seeond opinions for complex decisions. Such devices

are already available for general abdominal pain,

lung and thyroid diseases, glaucoma, cancer, and

even neurological and psychiatric problems. These

systems are unlikely to displace a physician’s judgmerit, but at a minimum they can play a role in eliminating simple mistakes.

Computers and communication equipment can

also play a powerful role in rationalizing the management of different parts of the health care system,

as they have in other business enterprises. For hospitals, record keeping is a major expense that has

grown rapidly with the introduction of complex cost

containment reporting requirements. New information technology can have a dramatic impact on the

efficiency with which records are maintained. Automated ordering and invoicing systems can control

overhead while ensuring that adequate supplies of

a large number of items are in stock without maintaining large inventories.

Information technologies can also improve the

quality of clinical medicine by coordinating information about individual cases and maintaining patient records in away that makes it easy to review

alternative programs of therapy. In this way, physicians can benefit from the collective knowledge of

case histories instead of relying on their own experience and that of their immediate colleagues, as is

the case today.

Hospital investment in information-processing

equipment has been spectacular. Information system costs have now grown to 2 percent of the overall hospital budget, second only to investments in

the hospital building itself. At present 60 percent

of system capacity is used for billing and collections,

22 percent for in-patient care, 13 percent for ordering tests and drugs, and 5 percent for management

information. 100 Many more applications are expected

soon and equipment purchases are expected to in-

‘

w

’’HospitalSystems’ Expenditures Skyrocket” Hospitals, April 1,

1984, p.39.
222

crease by a factor of four between 1984 and 1990. thetics (like artificial joints and limbs); improved reaApplications range from improved software for in- ord keeping that may combine efficient bookkeeping

terpreting data from CAT, MRI (magnetic resonance with an intelligence capable of detecting obvious erimaging), X-ray, and other diagnostic equipment; ad- rors; and improved telemetry for connecting homes

vanced systems for designing and operating pros- and ambulances to professional facilities.

HOUSING101

Prospects

The U.S. housing construction industry has been

called the “industry that capitalism forgot.” Compared with other manufacturing enterprises, the industry is fragmented and decentralized, with little

investment in plant improvement, new equipment,

or permanent staffing. It conducts virtually no research on either its products or the techniques by

which products are assembled. Innovation has resulted almost entirely from component and equipment suppliers.

Productivity in the construction industry as a whole

appears to be falling. Few builders have adopted the

optimum engineering techniques, innovations in

basic materials and structural designs, or performance analyses which have been applied to nearly

all major products manufactured by other U.S. industries. A typical home, for example, has about

15,000 parts-approximately the same number as

an automobile—but is assembled almost entirely by

hand at the construction site.

The construction industry may be on the brink

of a major change as modern production technology and the threat of imports force basic changes

in the industry’s products, in its production process,

and in the way its goods are marketed:

. The industry could turn increasingly to factory

assembly of products and components. These

production facilities could be efficient, flexible,

and enjoy the productivity increases that are being obtained in other manufacturing enterprises.

Field assembly could be rapid, with entire homes

assembled in a day. Increased investment in research could lead to major improvements in

housing and other construction products. HouslolMuCh of this discussion is drawn from U.S. Congress, office of Technology Assessment, “Construction,” sector study, 1987.

ing could be made more comfortable and less

expensive to operate, using new technologies

ranging from advanced windows to efficient appliances. Homes could be sold through outlets

that would permit prospective clients to participate in the design of a new house, or to be given

a video tour of existing structures.

The industry could remain largely unchanged,

with productivity declining. ‘Housing prices

could rise with respect to other amenities. The

Nation could be burdened with poorly constructed products that would become an increasing burden if energy prices rise during the next

few decades. Foreign suppliers could provide

increasing amounts of the value-added through

components (e.g., major appliances and fittings),

construction equipment (everything from hand

tools to heavy construction equipment for tunneling), and licenses. Americans could find

themselves assembling foreign products with

foreign tools and adding little value other than

site preparation.

Housing and other types of construction operate

with relatively few direct government regulations,

other than the highly fragmented set of building

codes typically operated at the local level. Compared

with the extensive public support for research in the

farming industries, total public spending on housing research is negligible. With 9 million people,

Sweden supports more research on home construction than the United States; virtually all U.S. housing research is supported by the U.S. Department

of Energy.

Structure and Performance

A diverse collection of enterprises combines to provide Americans with comfortable homes. Of the

funds spent on the Housing amenity, however, onethird of the value-added ends up in the real estate
223

Figure 6-4.-Value-Added To Meet Demand

for Housing ($672 billion* in 1984)

Natural Resources

Construction

Low Wage Manuf

Medium Wage Manuf.

High Wage Manuf

Transport & Trade

Real Estate & Rental

Other Transactional

Personal Services

Social Services

, , I , 1

0 10 20 30 40 50

Percent of $672 billion

m 1972 ~ 1984

● Constant 1980 dollars

SOURCE: Office of Technology Assessment (see table 4-6 of ch. 4).

industry (see figure 6-4), most in the form of direct

returns to capital invested by homeowners or other

investors. Since these costs result from factors largely

unrelated to the structure of production, they are not

examined here. There is little opportunity to change

land costs, or the cost of home financing, through

changes in production recipes in construction. Price

changes in these areas result from a variety of factors discussed at some length in chapter 3.

Approximately 16 percent of the spending for

Housing results in value-added in the manufacturing firms that produce appliances, furniture, and

housing components for housing (as well as value-

-added generated indirectly by suppliers of these

firms; the system for producing these products is discussed more fully in the last section of this chapter). About 10 percent of the value-added in Housing goes for energy or raw materials.

Only about 13 percent of all the value-added in

the U.S. economy resulting from Housing ends up

in the Construction sector. Most of this results directly

from home construction, but some arises from the

need to construct facilities that provide energy for

housing and from other indirect effects. Housing provides by far the largest market for Construction activities, accounting for almost 48 percent of value-added

in that sector.

For convenience, the industry that meets intermediate demands for construction (dams, harbors,

bridges, roads, sewers, hospitals, and office buildings) will also be examined in this section.102 The

network of industries associated with this kind of

construction includes architecture, engineering, field

erection, component production, maintenance, and

repair.

Factors Forcing Change

There are several reasons for the lack of progress

in the U.S. housing construction industry. The most

important is undoubtedly the enormous uncertainty

ties in demand. Demand for construction business

can change by as much as 50 percent in one year.

Most firms achieve the flexibility required under

these circumstances by minimizing use of permanent staff and long-term capital investments. The ratio of capital to labor in construction, after increasing by 4.2 percent per year between 1950 and 1968,

declined by 0.8 percent per year during the early

1970s. 103

The industry is highly fragmented and decentralized. While some vertical integration exists, most

projects involve teams assembled from different parts

of a network. Most construction firms are relatively

small; of the 558,000 U.S. construction firms in 1982,

only 10 percent had more than 19 employees.104

There are few barriers to entry, particularly for

homebuilders. Less than 8 percent of homebuilders

have annual sales of over $1 million.

This fragmentation is encouraged in part by the

fragmented form of regulation governing the industry. The homebuilding industry is regulated almost

entirely at the State and local level. Currently, local

governments apply several thousand major and minor variations of four model codes. There are at least

as many inspection systems, accounting for differences in building code interpretations and varying

degrees of enforcement. The various fire safety codes

102 As defined by the U.S. Office of Management and Budget (OMB),

the construction industry actually consists of many different subindustries: Standard industrial Classification (SIC) code numbers 15, “general building contractors and operative builders”; 16, “heavy construction general contractors”; and 17, “s+wcial trade contractors. ” In addition,

“subdividers and developers,” a subdivision of real estate (SIC code 65),

is included in statistics on the construction industry.

lo3f-f. Kemble Stokes, Jr., “An Examination of Productivity Decline

in the Construction lndust~,” The Review of Economics and Statistics,

vol. 63, No. 4, November 1981, pp. 495-502.

I04(J.s. small BUSineSS Administration, The State of Sfd Business

1985 (Washington, DC: U.S. Government Printing Office, 1985), Table

A1.21.
224

and inspections systems that relate to buildings compound this regulatory complexity. Enforcement systems also vary, both among and within States. This

complex system presents problems for large U.S.

homebuilders. The producer must satisfy hundreds

if not thousands of building codes and inspection

systems in order to serve the national market and

still abide by the law. In addition to creating difficulties for large firms attempting to ship products to

many different locations,105 this array of State and

local building codes and differing inspection practices can present obstacles to technological innovation.

Many of the features that have led to the existing

industrial structure are changing. The construction

industries in Japan and Sweden have moved rapidly to substitute factory construction for on-site hand

labor. In Sweden, over 90 percent of new homes are

made in factories.106 In Japan, homebuilding is moving into the hands of large firms (e.g., Matsushita

and Sekisui Chemicals) with a large capital base and

a large investment in research engineering.107

Factory assembly offers a number of potential advantages. The factory permits greater quality control, greater use of modern fabrication equipment,

and better working conditions. A factory-assembled

home can be erected quickly on a site, minimizing

construction loans and disruptions due to poor

weather and offers the potential for greater flexibility of design. All of these advantages are moot, of

course, if fluctuating demand leaves the equipment

idle.

In the United States there has been a partial movement toward factory construction. Most U.S. factory

construction, however, is essentially hand-assembly

indoors. Very little capital equipment is used. In addition to the problem faced by fluctuating demand,

factory-based homebuilding firms face an important

marketing barrier in the United States. While factory construction is associated with “brand name”

105 U.S. Congress, Office of Technology Assessment, Technology,

Trade, and the U.S. Residential Construction Industry-Special Report,

OTA-TET-315 (Washington, DC: U.S. Government Printing Office, September 1986), p. 70.

IWL. Schipper, A. Meyers, and H. Kelly, Coming in From the Cold:

Energy Ef7icient Housing in Swden (Cabin John, MD: Seven Locks Press,

1986).

lo7Jarnes MCKe]]er, “]nclUStriafized Housing: The Japanese Experience,”

Alberta Department of Housing, Alberta, Canada, December 1985, p. 81.

reliability and quality in places like Japan and Sweden,

it is associated with cheap “pre-fab” and mobile

homes in the United States.

Intermediate Demand for Construction

The rapid growth of service-related industries and

the comparative decline of employment and investment in manufacturing and natural resource activity are both reflected in shifting patterns of intermediate demand for construction. Buildings taken as a

whole have retained a surprisingly constant share

of all investment in structures during the past 35

years, capturing approximately 70 percent of all pub

lic and private investment in structures. The rapid

fluctuations in demand for new residential construction are compensated partly by activity associated

with renovation and remodeling, and partly by the

fact that changing demand for non-residential building construction does not respond as rapidly to the

changes in interest rates and other factors that lead

to collapsing markets for new homes.

There have, however, been significant shifts in the

composition of non-residential building construction.

Rapid growth in service employment has meant that

between 1976 and 1985, commercial building space

and government offices grew from about 56 to 70

percent of all investment in buildings. During the

same period, hospitals and educational facilities fell

from 21 to 12 percent of building investment. Investment in industrial buildings fell from a peak of

nearly 25 percent of all building activity in 1979 to

15 percent in 1985.

There has been a striking decline in the share of

construction work slated for highways, sewers, water

projects, and other infrastructure investments (see

figure 6-5). This decline has continued in spite of

a significant rise in investment in highway construction between 1982 and 1986 (outlined in the Transportation discussion of this chapter). Declining investments in new electric generating facilities, new

pipelines, and other energy-related projects counted

as “structures” led to a sharp decline in energyrelated construction work in the 1980s.

Network Components

Heavy Construction.—Most major civil engineering projects, power plants, and large office complexes are constructed by relatively large builder/
225

Figure 6-5.-lnvestments in

Infrastructure (percent of all

structures in constant 1982 dollars)

Percent of all investment in structures

i /

10

8

6

1955 1960 1965 1970 1975 1980 1985

-

-

-

- Highways, Sewers, — Public Utilities

Water Supply

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” historical diskettes, table 5.S.

developers or general contractors. The top firms generate more than $1 billion in annual revenue and

account for 40 percent of domestic contracts. However, many of these large firms have faced serious

financial difficulties in recent years, due to the decline of large domestic projects; receipts for the

largest companies fell by 30 percent between 1981

and 1983.

Although some firms have offset losses through

foreign contracts, competition has grown for major

international projects. Foreign firms have captured

markets that were once the domain of U.S. giants.

The problems of the U.S. nuclear industry, for example, have eroded the position of such major American companies like Bechtel in international markets. At the same time, Japanese, French, and West

German firms–many of which began with American licenses—capture increasing shares. Many foreign firms offer advantages that the U.S. firms cannot match such as discounts on materials such as

steel and concrete as part of a government-sponsored

package that includes design and engineering.

Home Builders.-The homebuilding industry includes many small firms, but larger companies have

begun to dominate housing output. In 1986, for example, homebuilders with annual volume greater

than 100 units produced 67 percent of domestic

units—up from 7 percent in 1959.108 Moreover, the

108 National Association of Home Builders, “Housing FOCUS, ” news release, Washington, DC, November 1987.

share of major firms has grown over the past two

decades, reflecting trends in the industry as a whole.

Most homebuilding enterprises in the United States

continue to operate on a small scale. A National

Association of Home Builders (NAHB) survey conducted in 1979 showed that 46.7 percent of NAHB’s

member firms were run by either the principal or

the sole owner, while only 8.1 percent had a salaried executive. The average U.S. builder produces

5 to 10 units per year. Most homebuilders serve specific local markets; less than 15 percent of all homebuilders do business outside of their home State. 109

These firms move rapidly into other lines of work

during periods of low housing demand. In the “bad

years” of 1967, 1974, and 1975, nearly 20 percent

of all NAHB members switched to other businesses.

Even the comparatively large firms that build homes

or home components in factories—which average

320 homes per year110—are not large by the standards of most manufacturing facilities.

Subcontracting to specialized firms accounts for

a growing share of construction activity. In 1976, 58

percent of U.S. homebuilders contracted over threequarters of their construction activities, as opposed

to one-third in 1969. Firms reporting that subcontracts accounted for less than one-quarter of their

work fell from 19 to 10 percent during the same

period. Over 90 percent of all industry receipts were

paid to subcontractors in 1977.111

Market concentration has increased in both conventional and factory-based construction. The top

100 production builders now control about 25 percent of the market, up from 17.3 percent in 1978. 112

The top 25 “manufactured” (mobile) home producers controlled 74 percent of the total market in 1983.

Concentration in the metal buildings industry is particularly high, with the top 30 companies controlling over 95 percent of the market.

NWF.T. Ventre, “on the Blackness of Kettles: Inter-Industry Comparisons in Rates of Technological Innovation, ” Policy Sciences, vol. 11,

1980, pp. 309-328.

llORenee MathieU, “me Prefabricated Housing Industries in the United

States, Sweden and Japan,” Construction Review, vol. 33, July-August,

1987, p. 20.

111 U.S. Department of Commerce, Bureau of the Census, 1977 Census

of Construction ]ndustries, Washington, DC, April 1980.

I IZAutomatjon jn Housing and Manufactured Home Dealer, various

issues.
226

Remodelers.—The remodeling and reconstruction industry has even greater diversity and flexibility than producers of new structures. Traditionally, many firms have worked in both areas, partly

to protect themselves against market fluctuations,

Newer firms, however, often specialize in renovation,

even going so far as to specify types of structures.

NAHB finds that the largest and smallest construction firms tend to limit their work to new structures,

while many intermediate size firms engage in both

new construction and remodeling.

The renovation industry is becoming an increasingly distinct business specialty. Over 90 percent of

all NAHB members that do remodeling have ceased

all other operations. The use of specialized subcontractors has also increased, particularly when renovation is undertaken to improve energy efficiency

or safety; this generally involves electrical and plumbing experts. Renovation places a high premium on

worker skills, since unexpected developments often

accompany the opening of older structures for repair.

Investment in building improvements, additions,

alterations, and replacements represent a growing

share of construction activity. A survey by the 600

largest U.S. construction firms put reconstruction at

approximately 40 percent of total construction activity in 1984 and 1985; that figure was 26 percent in

1979. Disagreement about the potential future growth

of the renovation market arises from a poor understanding of its framework. Traditionally, rehabilitation rates have been highest during slack periods

in the new construction market, but this pattern may

be changing.113 Differences between the cost of new

construction and the cost of extensive renovations

have decreased. One cause of high renovation and

rehabilitation costs is the inherent uncertainty in entering an older structure. As a result, most renovation contracts are negotiated, and are not subject to

competitive bidding. This reduces pressure to reduce

costs or improve efficiency.

Accelerated depreciation of new structures often

favors new construction over renovation. Nevertheless, tax credits for historic preservation and other

indirect subsidies for renovation can encourage renovations in certain areas. Renovated commercial properties may rent for less than new structures.

Measuring Productivity

Inadequate funding for construction research and

the inability of industry firms to make permanent

investments in people or equipment explain much

of the stagnant or falling productivity in the U.S. construction industry. A number of other explanations

have been offered as well:

deflators may fail to account for changes in construction quality (like the obvious improvement

in energy efficiency offered by new homes);

repair and maintenance work may be underreported;

off-site assembly of components may shift highproductivity activity into manufacturing industries and out of the construction industry, leaving comparatively unproductive site-work in

construction; and

there has been comparatively rapid growth in

young, non-union construction workers during

the past decade.114

The pace at which innovation is accepted by local codes provides a good measure of rates of change

in the industry. A study of 14 technologies (including non-metalic electric cable and wood roof trusses)

showed that 20 years typically passed between the

time when 10 percent of all codes accepted the

change and 90 percent accepted the change.115

Builders, whose financial position makes it difficult for them to tolerate mistakes, are extremely sensitive to possible negative consumer reaction. Unions have also resisted change; their effect has been

to slow the introduction of innovations.

New Technologies and System

Integration

New construction technologies and higher energy

costs have already had a noticeable effect in changing the nature of the structures themselves—how

buildings are manufactured, and how they may be

adapted for differing conditions and uses. Often

113 Duane ‘r. McGough, “AdditkmS to the Housing SuPPIY by Means

other than New Construction,” U.S. Department of Housing and Urban Development, Office of Policy Development and Research, Washington, DC, December 1982.

114 T~bnO/op, Trade, and the U.S. Residential Construction industry, op. cit., footnote 105, pp. 31-33.

Ilsventre, op. cit., footnote 109, p. 319.
227

buildings can only be made to operate efficiently

when the construction and future operating costs are

considered as an integrated design problem. Institutional problems and the lack of research targeted

at net building design and performance (particularly

for residences) has limited progress. Often the cheapest

way to reduce the heating or air-conditioning costs

of a building involves good basic design.

New computer-based systems can improve the

productivity of building design and analysis in a

number of ways. They can rapidly convert concepts

to drawings, drawings to analysis, and can combine

these steps in order to estimate initial and operating costs. Such systems might be used to prepare

both working sketches and detailed drawings. For

example, a draftsman could call a computer file with

routine building components at a moment’s notice,

thus bypassing the tedious aspects of drafting. Price

lists could be included, allowing for instantaneous

projection of the cost of various design alternatives.

Computer assisted design systems could aid the

designer by removing many of the barriers between

inspiration and execution, and could improve clientdesigner communication, allowing for more design

and investment flexibility.

New information systems can also influence the

relationship between consumers and designers. Advanced systems can allow for a computer-based

“tour” of building interiors and exteriors, serving as

the basis for a computer-based structural analysis,

a study of lighting, or an assessment of energy consumption. Japanese housing producers sell factory

built homes through retail outlets and “show rooms,”

much like automobile dealerships in downtown locations. Some make use of computer assisted displays

that permit customers to design their own products. 116 While there has not been extensive use of

such technology in the United States, important suppliers of housing products have begun to experiment

with new communication technologies. Sears Roebuck &Co. has developed an interactive video system which allows customers to browse through

11,000 types of curtains, blinds, and shutters and

to receive decorating tips.117

11615W 7’~ChnOjO~, Trade, and the IJ.,$. /+sj&ntja/ Construction Industry, op. cit., footnote 105, p. 45.

I17L. Therrjen, “Bifih of a Sa]esman: How Vidm is Rewing Up Retailing,” Business Week, No. 3015, Sept. 7, 1987, p. 109.

New technologies could reduce the cost of modifying designs while preventing errors in areas unaffected by the change. The risks of trying a new

idea would be reduced, because a concept would

be transferred to drawings and analyzed without a

major investment in time or money. Automated design systems coupled with communication systems

could facilitate the performance of geographically dispersed teams, allowing clients, architects, engineers,

and construction firms to cooperate during the entire implementation process. Computer based technologies could also improve the system of competitive bidding; they might quicken the initial bid

application, reduce the uncertainties associated with

bidding, and decrease the burdens associated with

analysis. Design flexibility is not limited to commercial structures. Prospective homebuyers can now plot

their own floor spaces, or compare the appearance

of different interior and exterior wall coverings. 118

If computer assisted design represents the first major revolution in building design, factory production

of structures and components is the first in assembly. History is littered with predictions of an end to

site construction and the development of an industry that would resemble more conventional manufacturing enterprises,119 making it easy to be cynical about new claims. However, there have been

recent gains in factory-based construction of homes

and small commercial structures. Though data sources

differ, it appears that as many as one-half of the

homes built in the United States today involve at

least some factory construction. The other half employ such factory-built components as roof trusses,

pre-hung windows and doors, and “wet-cores” (bathroom and kitchen modules).

Assembly techniques for building components

have also changed. Various new products are used

I16u.s. Congr=, Office of Technolo~ Assessment, “Technolo~ and

the Future of the U.S. Construction Industry-Proceedings of the Panel

on Technicaf Change and the U.S. Building Construction Industry”

(Washington, DC: American Institute of Architects Press, 1986).

119A Ig30S Cornrnissiorl organized for President Roosevelt made this

claim, which led to significant investment in factory-based home construction by a number of steel and aluminum companies; however, these

groups never captured more than 2 percent of the market. President

Truman appointed a “housing expediter,” who was to solve the postwar housing shortage through increased factory production. Only a fraction of the goal was achieved. Under the Johnson Administration, George Romney rekindled the dream with “Operation Breakthrough,” but

this also failed to reach its initial goal. See Technology, Trade, and the

U.S. Residential Construction Indushy, op. cit., footnote 105, pp. 23-26.
228

for insulating materials, floor coverings, exterior wall

surfaces, glazing, and floors. Technology has challenged conventional notions about how to provide

basic structural support, and optimum design engineering has refined conventional designs. Truss systems can vastly reduce the cost of large, unsupported

spans. There is even a possibility that active controls can be installed in structures to adjust for the

dynamics of wind loadings. And new adhesive materials have been introduced to facilitate a wide range

of construction from decorative paneling to exterior

sheathing.

Roofing has always necessitated much site labor,

and most client complaints result from imperfections

in roof assembly. New techniques can produce roofing sections with standing-seam rib panels, joined

mechanically by semi-automated equipment. Some

U.S. firms have developed a self-propelled “roof runner” to do the mechanical crimping. And over 90

percent of all roof trusses are now built in factories;

inexpensive computers can design trusses in all but

the smallest facilities. Software serves most common

applications, allowing for flexibility in design at no

additional cost to the builder.

In addition, concrete structural units can be manufactured in factories and trucked to building sites.

Several firms now sell low-rise office buildings, which

can be erected in a single day, to clients ranging from

retail operations and banks to schools, These structures can be disassembled on the completion of their

useful life.

Structures using metal frames and sheathing offer

clear opportunities for mechanization, since conventional metal fabrication tools can serve this purpose.

Metal-framed housing has never made significant inroads into U.S. markets, due more to market conservatism than to factors of cost or performance.

These structures are designed, engineered, and manufactured under computer control. Computers also

monitor inventories and material flows, which is critical to an industry where success depends on the

ability to deliver products quickly.

Technical change has also affected field erection

techniques, particularly for commercial structures.

Computer assisted operations have been introduced

into equipment for uses ranging from earth-handling

to erection, and fully robotic systems will arrive soon.

Computer assisted equipment serves to replace people in high-risk situations while improving precision.

For example, crane operations account for a significant fraction of all construction accidents. Automated

systems can alleviate this factor. Control equipment

“remembers” both critical lift heights and swing

envelope restrictions.

New technology has not facilitated a large increase

in the productivity of renovation or retrofit operations. This work often involves “gut” renovations,

where interior work resembles new construction and

new materials and assembly techniques. Renovation

costs have been reduced by surface wiring for wall

mounting, flat-wiring that can run under rugs, modular furniture, modular wall partitions, lighting systems attached to movable partitions, and new types

of scaffolding. There is controversy over whether the

result is attractive office space.

Diagnostic equipment has been developed to help

pinpoint defects in older buildings. Infrared cameras

can locate heat leaks, and pressurization devices can

indicate sources of unwanted air infiltration. Because

facades of certain buildings—especially in older cities like Chicago and New York—have fallen to the

street, renovation must now address issues of public health and safety. For example, X-ray, video, and

other diagnostic equipment are employed to spot

defects; nuclear scanning, capacitance testing, and

other techniques are now used to locate sources of

roof cladding defects.

It is entirely possible that the forces that reshaped

the construction industry abroad will also revolutionize the U.S. construction industry. The construction

firm of the future may resemble that of conventional

manufacturing industries in terms of method and application of research, product assembly, and worker

skill levels. Large firms with a high level of technical sophistication are capturing a larger share of markets in areas that were once the domain of smaller

companies, creating an industry with a national

rather than regional scope. And technology can alter

the seasonal nature of construction employment:

“flexible factories” that serve changing markets can

replace a “flexible workforce,”
229

TRANSPORTATION120

Prospects

Emerging production networks and American

lifestyles depend on a flexibile and responsive transportation system, tailored to individuals and comparatively small shipments. These demands have the

potential to reshape the network of businesses that

provides transportation for U.S. consumers and businesses:

● Personal transportation systems could be rebuilt

around personal vehicles, and guideways (highways, and rail lines) could be tailored to provide fast, safe transportation. Pedestrian and

mass transportation systems could play small

but critical roles in high density areas. Freight

movement could exploit the power of new communication systems to ensure fast, reliable delivery of comparatively small shipments.

● Congestion and a deteriorating highway infrastructure could limit growth of mobility and limit

the growth of dynamic production networks

based on “just in time” integration of large and

small producers, in different parts of the country or different parts of a given metropolitan

area. Destructive competition could lead to a

decline in safety.

Public regulation of transportation has sharply declined in the past decade. Government influence over

the future structure of the system can be critical. Public decisions about research priorities, construction

of new highways and other facilities, and regulation

of safety will play a decisive role.

Structure and Performance

The production recipe for the transportation system involves a complex amalgam of private and public spending. With the exception of rail, most guideways are purchased at public expense (primarily

through user fees) while equipment is privately

owned. Moreover, a significant amount of transportation is purchased as an intermediate good by bus120 Much of this section is drawn from U.S. Congress, Office of Technology Assessment, “Transportation, ” sector study, Washington, DC,

1987.

inesses, rather than being purchased directly by

individuals or the government. The purchases involved in transportation include:

●

●

●

●

●

●

●

equipment—automobiles, trucks, railroad rolling stock, and aircraft (the manufacture of vehicles falls almost entirely into the High Wage

Manufacturing sector, and is discussed in the

final section of this chapter);

guideways (the businesses that build these facilities are included with the Construction sector, and are addressed in the Construction analysis of the Housing discussion);

control and communication networks-dispatch

systems and air traffic control (some of these

are discussed in the section on Personal Business and Communication);

terminals and transfer facilities—parking spaces,

airports, rail yards, ports, harbors, and warehouses;

vehicle maintenance facilities;

fuel purchases, insurance, and associated supplies (the production of automobile insurance

is also examined as part of Personal Business

and Communication); and

packaging and containers—standardized bulk

containers for rail and truck or shipping as well

as product packaging (packaging technology is

discussed in the section on Food).

The discussion in this chapter will deal primarily with

the provision of transportation services.

The network of value-added generated by consumer and government purchases directly related

to the Transportation amenity is dominated by transportation services (30 percent), purchases of vehicles (High Wage Manufacturing captures 16 percent),

and Natural Resource enterprises providing energy

for vehicles and materials needed for vehicle and

highway construction (see figure 6-6).

Factors Forcing Change

The Nation’s recipe for delivering transportation

services is comparatively stable, in part because the

enormous capital investment in equipment and guideways makes change difficult. Technology has a com-
230

Figure 6-6.-Value-Added To Meet Demand

for Transportation

($264 biiiion in 1984)

Natural Resources

Construction

Low Wage Manuf.

Medium Wage Manuf.

High Wage Manuf.

Transport & Trade

Transactions

Personal Services

Social Services

0 5 10 15 20 25 30 35

Percent of $264 billion

m 1972 = 198 4

● Constant 1980 dollars.

SOURCE: Office of Technology Assessment (see table 4-6 of ch. 4).

paratively small direct effect on transportation recipes.

Nonetheless, rapid changes in the nature of demand

for personal and business transport, the potential for

rapid increases in fuel prices, and growing congestion in critical bottleneck areas (such as busy airports and crowded suburban highways) have created

significant pressure for change. Public decisions

about highway construction, airports, air-traffic control systems, and the implementation of regulations

will necessarily play a key role in the performance

of the transportation system emerging over the next

two decades.

The Nation’s transportation system depends almost

entirely on liquid fuels—primarily fuels derived from

petroleum. There is almost universal agreement that

the price of petroleum will rise sharply during the

next two decades. Optimists hope that the rise will

be gradual enough to allow private markets to make

a graceful adjustment to a new fuel source. Others

fear that the rise may come rapidly in response to

a crisis in the Middle East or elsewhere.

The price of petroleum in the United States now

reflects the operation of comparatively free world

markets. The United States has opted to use regulations rather than fuel prices as an inducement to increase fuel economy in automobiles. These regulations proved impossible to maintain when low fuel

prices gave consumers a message that fuel was inexpensive and plentiful while regulations demanded

parsimony. Many other developed nations, however,

place a $1 to $2 per-gallon tax on petroleum fuel,

giving consumers a strong incentive to find substitutes. This was originally done because driving was

taxed as a “luxury” like alcohol and cigarettes; it now

reflects the high national cost associated with heavy

petroleum dependence that is not included in market-based fuel prices.

Changing regulations in the past decade have begun to reshape the Nation’s transportation system.

Air, truck, rail, and bus transportation systems were

all once heavily controlled by Federal regulation.

Most of these regulations have been either eliminated

or substantially modified in the past decade. The full

impact of these changes has yet to be felt, but they

appear to have increased the overall efficiency of

transportation in the sense that the new system offers

more choice in quality and cost of service. There

is, of course, continuing controversy about whether

deregulated airlines are safe, whether drivers for

small trucking firms are as safe as those working for

larger firms, and whether consolidation and mergers

occurring throughout the industry will lead to lower

prices and more choice or the converse.

The critical issue of licensing truck drivers remains

one of State discretion. Concern about safety has led

to proposals that more classes of driver licenses be

introduced, and that State licensing be either coordinated or replaced by a national framework in cases

where driver responsibility is critical. Transportation

of hazardous materials is an example.121

One trend that deserves special attention is greater

use of “intermodalism,” in which different transportation modes are combined to provide a transport

(rather than road or rail) service in a way that minimizes costs. Examples are the park-and-ride lots that

allow commuters to transfer from private autos to

a bus or train, joint airfare-car rental discount packages, and the sale of airport-to-downtown limousine

service tickets on the aircraft.

Intermediate Demand for Transportation

Business Travel.—As the number of white collar jobs has increased, business demand for the transportation of people has grown more rapidly than that

for freight. While statistics are poor, it appears that

121 U.S. Congress, office of Technology Assessment, Transportation

of Hazardous Materials, OTA-SET-304 (Washington, DC: U.S. Government Printing Office, July 1986),
231

about one-third of all intra-city travel is for business

and therefore must be considered as “intermediate”

and not final demand.122 There are, of course, many

ambiguities in this accounting since most people pay

for their own trip to work while the employer typically picks up the price of parking (a not inconsiderable expense hidden in the cost of commercial and

industrial structures).

Since the businesses that require significant personal travel are growing rapidly, personal travel

would seem to be a growing part of the “recipe” for

American production. On the other hand, modern

communications can substitute electronic for personal contact. Telephones, computer communications, and eventually high-quality video conferencing could replace much business travel. But will this

occur? The signals are mixed. The introduction of

the telephone put more people in contact with one

another and actually increased, rather than decreased,

the need to travel.123 Newer forms of communication may have the same effect.

Freight.—Changes in economic structure are reshaping demand for freight services in a variety of

ways. Perhaps most fundamentally, the economy is

becoming less intensive in its use of materials. The

consumption of steel, cement, paper, and a variety

of chemicals appears to have peaked. A variety of

factors are involved:

●

●

●

●

●

more efficient use of materials in manufacturing,

a shift toward light-weight materials (e.g., substitution of plastic for steel in automobiles and

of light packaging material for metal cans),

recycling of existing materials,

development of materials with longer useful

lives, and

a movement toward an economy dependent on

high-value information and products-with a high

value per unit weight124

As a result of these changes, freight traffic (measured in tons shipped per dollar of GNP) has fallen

IZZU.S. Depaflment of Commerce, Bureau of Economic Analysis,

“Input-Output accounts,” Survey of Current Business, various issues.

~zJHerbert S. Dordick, “What ‘Home Work’ Means to f.-arge @animations, Home Workers and Home Builders,” Land Development Studies,

vol. 3, 1986; and 1. de Sola Pool (cd.), The Social /rnpact of the Telephone (Cambridge, MA: The MIT Press, 1977).

IZ4R. D. ~rwn, M.H. ROSS, and R.H. Williams, “Beyond the Era of

Materials,” Scientific American, vol. 254, No. 6, June 1986, p. 34.

by 40 percent since 1950. At the same time, however, bulk commodities are being shipped further.

Manufacturing centers appear to have moved away

from sources of raw materials, sources of bulk materials close to population centers have been exhausted, and some regions appear to have specialized in the production of raw materials. More than

20 percent of all domestic U.S. energy resources, for

example, are now shipped from Alaska. Rapid growth

in exports of bulk farm materials and coal have added to demands for long-distance freight movement.

Intercity tonnage increased 60 percent between 1950

and 1983 while intercity ton-miles increased 100

percent—the same rate as GNP—implying an increase in average haul length of over 30 percent.

Increasing interest in better inventory control and

integration of geographically dispersed production

centers has placed a premium on fast, reliable delivery of relatively small shipments. While there may

bean upper limit to the tons of material per person

that an economy needs to move, there is no apparent limit to the amount of value per pound that can

be added by sophisticated production. Increasing the

value per unit weight of goods, coupled with production systems that are paying close attention to

inventory controls, is requiring higher quality from

transportation services.

Demand for freight transport has also changed,

as manufacturing in the United States is becoming

more geographically dispersed and is moving from

urban to suburban and rural areas. Changes in the

location of population centers, retail outlets, and production centers have increased the market for relatively short-haul collector/distributor freight shipments within urban areas.

All these effects translate into a growing demand

for quality—speed, reliability, and security—and for

batch rather than volume shipments. In the past decade, this has resulted in rapid expansion of truck

and air shipments at the expense of rail shipment

and Great Lakes waterways. Trucks appear to be the

vehicle of choice for most high-value shipments,

Trucking accounted for 37 percent of total intercity

tonnage in 1982, up from 26 percent in 1950. Railroads have countered by introducing containers and

vehicles that can operate on both rails and highways,

which offer greater flexibility and reliability. While

only about 4 million tons of material are shipped
232

by air, air freight grew by a factor of 10 between 1950

and 1982.

Measuring Productivity

Given the qualitative changes occurring in the nature of demand for transportation, it is increasingly

difficult to develop an acceptable measure of performance. Measured in terms of the average price

of a ton-mile and a passenger-mile, the Nation’s

transportation system has shown steady improvement. Some of the price reductions may be the result of the changing mix of services demanded, since

the price of public transportation and freight services has grown more rapidly than average. Such price

indices can be misleading, however, because they

span a period when deregulation radically changed

the price structure of many transportation services—

particularly air fares, as survey techniques may not

accurately reflect the real impact of discount fare

structures that have become the norm rather than

the exception.

Price per pound is, however, only one element

of service competition. If efficiency is measured in

terms of average speed, the record is not particularly distinguished. Although highway speed restrictions limit trucking performance, problems of track

quality and yard efficiencies have limited the average speed of the U.S. rail system.

Increased competition has made the U.S. transportation system more flexible and dynamic. Some

of this flexibility has been achieved at the cost of

stable, well paid jobs in the industry (see ch. 12).

At the same time, outmoded work rules continue

to present problems in established industries like railroads. A journey from Chicago to Los Angeles, for

example, can require nearly 20 crew changes. Real

efficiency improvements will require innovations in

labor-management relations as well as new technology.

The indications are that the U.S. freight transportation system can adjust to changing economic conditions, patterns of demand, and input costs more

rapidly than in the past. Some of this new flexibility has been achieved by improved communication

and computation technology, equipment changes,

and new management strategies made possible by

deregulation.

Scale and Scope.-Major changes have occurred

in the way that industry firms are organized. The

deregulation of air travel following the 1978 Airline

Deregulation Act has introduced much confusion as

the industry struggles to rebuild itself around a new

set of rules. There has been much controversy over

the extent to which regulation of safety can be separated from regulation of fares and other features

of air travel. The efficiency of “hub” systems seems

to have been revealed by new regulatory freedom.

The new public rule scheme has also revealed the

subsidies inherent in regulation, resulting in higher

fares to certain locations (typically smaller towns) and

lower fares on heavily traveled routes.

Nonetheless, shadows of former regulations are still

visible in the air transport system:

●

●

●

●

The two airline reservation systems whose development was, in effect, subsidized by regulated fares on all flights are privately owned.

Development of a competing system is virtually impossible.

Many airports are largely owned by one or two

carriers. American Airlines controls 63 percent

of the traffic from Dallas-Fort Worth International Airport. Northwest controls 81 percent of

the flights from Minneapolis-St Paul and 64 percent of the flights leaving Detroit. U.S. Air controls 84 percent of the Pittsburgh market.125

Landing and takeoff rights during peak times

at congested airports are not available on the

open market. They can be bought only by purchasing an entire airline.

A series of mergers and acquisitions has significantly increased the concentration of the airline

industry. In 1986, 12 major carriers controlled

85.5 percent of air travel while in September

1987, 8 airlines account for 94 percent.126

All of this suggests that deregulation may result in

less competition and not more.

Deregulation has had a major impact on the rail

industry as well. Many feel that the rule changes

helped improve efficiency by concentrating traffic

on a smaller number of routes, and by permitting

greater economies of scale in functions such as billIZ5A. Sa]pukas, “Air Fare Increase Worry Regulators,” The Nerw york

Tjmes, Sept. 9, 1987, p. D5.

1261bid.
233

ing, invoicing, and routine management. 127 The Railroad Revitalization and Recovery Act of 1976 and

the Staggers Rail Act of 1980 liberalized merger policy and made it easier for railroads to demonstrate

unprofitability of a line. The result was a dramatic

decrease in the number of miles in the system.

A new element of flexibility in pricing was also

introduced by deregulation. While average annual

rail freight costs outstripped the overall U.S. GNP

price index (or deflator) between 1975 and 1982,

growth in freight costs since that time has been less

than two-thirds that of GNP.128 Special prices can now

be arranged to reduce the need for empty cars in

backshipment. For example, Union Pacific has introduced a reduced rate for hauling fertilizer for Cargill north along the Mississippi in grain cars that

would otherwise have traveled empty. The rates are

designed to be competitive with barges. Such a strategy would have been virtually impossible without

regulatory changes.

The Motor Carrier Act of 1980 greatly eased entry into trucking, and relaxed regulations governing rates and service offerings. The effect on the industry was dramatic. The number of trucking firms

increased from 18,000 in 1980 to nearly 30,000 in

1983. Profit margins and returns on equity have

fallen rapidly; indeed, the rapid rise in the number

of firms has been partially offset by the nearly 6,500

business failures occurring since 1978.129 While average profitability for the industry has fallen below

traditional levels, profits have improved for some

specialized carriers, particularly larger firms.130

The market for trucking seems to be bifurcating.

Economies of scale and scope appear important in

the “less-than-truckload” (LTL) market, and this business is increasingly dominated by comparatively few

carriers—the top 10 LTL shippers control 60 percent

of all U.S. LTL shipments and 90 percent of all LTL

profits. 131 These economies result in part because

firms large enough to operate sophisticated, com127’’ Transportation,” op. cit., footnote 120.

128BU.S. Bureau of the Census, Statistical Abstract of the United States:

1987 (107th cd.), Washington, DC, 1987, table 699, p. 1053.

129 Chris Welles, “Is Deregulation Working?” Business Week, No. 2078,

Dec. 22, 1986, p. 52.

130 W. Legg, F’immia] Analysis of the Motor Carrier Industry, 1985

(Baltimore, MD: Alex Brown, 1986).

IslChris We]les, op. cit., footnote 129.

puter-based communication and dispatch systems

have more flexibility and operate more economically.

On the other hand, there appears to be cut-throat

competition among small shippers and owner-operators

in the truckload market; most of the industry turnover has occurred among truckload shippers.132

A competitive market may favor larger shippers

who have greater market power, higher volume, and

more continuity. Some case studies indicate that

small firms lost ground in service and rates in Minnesota and Florida.133 On the other hand, volume

discounts are generally not large, and can be given

to brokers and shippers’ agents who can pass the

savings through to smaller shippers.

The problem of “captive shippers” also appears

to have grown since deregulation. A growing fraction of bulk shippers are tied to a single railroad for

at least a part of their route. This presents real

dangers of monopoly pricing and reduces incentives

for improvements.134

Geographic Effects.—Small cities with air fares

implicitly subsidized by more lucrative air routes

have faced increasing prices or less frequent air service. Bus service and short-haul air service has filled

many of the gaps.

While statistics are not available to confirm the

point, it appears that deregulation has not led to a

decline in the freight transportation services available for most communities; service from small shippers actually appears to have improved. Competition opened a number of options for remote shippers

and often reduced prices. On the other hand, over

240 locations had their scheduled bus service reduced by more than 50 percent in the three months

following bus deregulation in 1982 (the Bus Regulatory Reform Act).

New Technologies and System

Integration

A number of trends in the Nation’s transportation

system are almost certain to continue for a genera132 I`bid.

133 "Transportation,” op. cit., footnote 120.

134 See Mary H. Cooper, “Economic Deregulation,” Congn%siond Quartedy’s Editoria/ Research Reports, vol. 2, No. 3, July 24, 1987; Theodore Keeler, Railroads, Freight and Public Policy (Washington DC: The

Brookings Institution, 1983).
234

tion. They include:

• increasing geographic integration of production

within the United States;

• increasing demand for fast, reliable shipments

of relatively small batches;

● no significant growth in demand for commodity

shipments; and

• continued increases in energy efficiency and labor productivity in rail and air transport.

Personal Travel

The key question for the future of business travel

is whether new forms of communication will substitute for physical presence. The answer depends

more on psychological attitudes than economics,

since it is less expensive to use the telephone than

to travel. It is difficult to explain why the physical

presence of another individual is felt to be critical

to certain kinds of discussions. The need to read

gestures, expressions, and other nonverbal communications must have deep psychological roots. Activities that require sensitive discussions, such as personnel evaluations, student tutorials, or delicate

contract negotiations, appear to require physical presence while contact such as the exchange of routine

business information, is acceptably conducted by

mail or telephone. There are, on the other hand,

situations where individuals prefer to avoid the “presence” of another individual, prefering the relative

anonymity of mail or a message service.135 The range

of alternatives between meetings and mail will continue to increase-the result of new communication

technologies that can create a series of “niche” markets offering different levels of contact.

Unfortunately, little is known about the demand

for these kinds of services. Such information may

develop only after the technology has been in place

long enough for society to adjust to its capabilities.

It took a generation for individuals to feel comfortable with the telephone.

A number of studies of office location have examined the reasons behind decisions to locate offices

in city centers. 136 According to some observers, the

135 R. Johansen, J. Vallee, and K. Spangler, Electroric Meetings: Technical Alternatives and Social Choices (Reading, MA: Addison Wesley,

1979).

IWS* J. Thomas Black et al. (eds.), The Changing office workplace

(Washington, DC: The Urban Land Institute, 1986).

need for physical presence in communication is highest for headquarters operations and lowest for back

offices that undertake functions like billing and

payroll.

Aircraft efficiency has been improved, through

both increased load factors and the addition of highly

efficient wide-bodied jet aircraft. The gains following energy price increases were dramatic. Commercial aircraft achieved 17 passenger miles per gallon

in 1973 and approximately 30 in 1986.*37 The new

wide-bodied jets are capable of significant improvements; the Boeing 757 averaged 40 passenger miles

per gallon in 1985, and the 767 averaged just over

35 in 1984.138 Improved air traffic control can also

reduce fuel use, by optimizing descent and climbout procedures and by reducing delays. In 1986, the

Airline Transport Association estimated that $2 billion in operating costs were lost due to landing and

take-off delays resulting from air traffic control problems. These costs do not include the value of the

1 million passenger hours per year lost due to the

delays.139

Video conferences have been on the horizon since

the 1960s, but their cost (still about $1,000 per hour

for a coast-to-coast communication) has been prohibitive. In addition, the conferences can usually only

be held in specialized facilities. Few individuals value

the characteristic of talking to a moving image enough

to pay much for the privilege.140 A significant market could appear if the price of video transmission

was drastically reduced and the process made more

convenient; 84 percent of Fortune 500 companies

have either installed a videoconference facility or

plan to do so in the near future. There were 575 installed teleconferencing rooms in place in 1981—

4,000 may now be in place.141

Freight

The costs and system-wide performance of the

transportation system have been improved by a valsTUnpub]ished data provided by the Federal Aviation Administration.

IWbid.

lsgAirline Transport Association, “Discount Fares Save Airline Passengers $3 billion in 1986,” press release, Washington, DC, 1987.

140R. Johansen, J. Vd]ee, and K. Spang]er, op. cit., footnote 138; and

A. Reid, “Comparing Telephone with Face-to-Face Contact,” in 1. de

Sola Pool (cd.), op. cit., footnote 123, pp. 386-415.

141 For more on r~ent developments in teleconferencing by U.S. businesses, see Fortune, Aug. 5, 1985, p. 63, and May 2, 1983, p. 295.
235

riety of new technologies, many of which were encouraged by changes in regulation. Railroads have

been able to achieve significant cost reductions

through the use of integral “unit trains” for coal, farm

products, phosphates, and other chemicals. Performance was further improved using more specialized

cars, consolidated yards, mechanized “hump” yards,

and weigh-in-motion systems. The integral trains can

move more quickly through yards and loading facilities. The “tare,” or empty weight of freight cars,

has been reduced through greater use of aluminum.

A variety of improvements in trucks—center sills,

load dumping systems, drawbars, couplers, wheel

slip controls, and multiple unit controls—have improved system performance. Automated sensors now

inspect for wheel cracks, and car identification is

facilitated with bar-coding. Computer-based dispatching, scheduling, and control systems can improve

reliability and timeliness.

The efficiencies of bulk truck hauling have been

improved largely through a steady increase in the

size and weight of trucks permitted on the highways.

In 1974, Congress raised maximum permissible gross

vehicle weight on the interstate highway system from

73,280 pounds to 80,000 pounds, though States were

allowed to retain lower, “grandfathered” weight

limits. The Surface Transportation Act of 1982 made

Federal standards preempt State limitations on truck

sizes and permitted double trailers on all interstates.

These changes may have increased labor productivity in freight transport along some corridors, but

the trade-offs remain highly controversial.

The efficiency of barge traffic has also improved

due to economies of scale. There has been a steady

growth in the size of barges and Great Lakes freighters,

made possible by lock enlargements funded primarily by the Federal government. Specialized barges

have been introduced that permit high maneuverability in congested areas like the upper Mississippi

River.

Pipelines offer great economies for bulk movement. New, larger diameter pipes are now possible

because of new technologies. The 36 ”-diameter

Alaska oil pipeline is an example. The performance

of pipelines is further improved using better compression systems, pumping systems, and sensors tied

to computers that increase effective capacity.

A variety of innovations has improved the system

for moving standardized containers from ships to

specialized flat-cars and trucks. Entire truck trailers

are also carried on freight cars. The transfer of containers is being steadily improved with specialized

terminals, automated loading systems, and standardization.

Another class of innovation helps different branches

of transportation offer a joint service-intermodalism.

For example, the Railroader and Railmaster systems

use vehicles with both rubber and metal wheels that

can operate on either rails or highways. The vehicles are about 1,500 pounds heavier than standard

truck trailers, but are much lighter than standard

rail cars. The small performance sacrifice in relatively

short highway hauls is more than offset by the advantages offered when these vehicles are used on

rails.

Specialized truck dispatching firms have sprung

up to provide coordination and status information

on material being trucked within the large, fragmented network of intramodel and intermodel carriers. This service would not have been possible without the widespread implementation of computers

necessary for controlling, tracking, and Scheduling.142

Only through such a system can the small truckers

compete on a nationwide basis with the large corporations. Information services have, as a result, become a critical part of the production recipe for

freight transport.

Energy price increases during the 1970s led to a

variety of innovations in the transportation system.

If the transportation system of 1981 had operated

with 1974 energy efficiency, fuel consumption would

have been 15.3 percent higher. But energy efficiency

is affected as much by the choice of transportation

mode and system efficiency as it is by the performance of vehicles. The shift from rail to truck transport, for example, significantly reduced the energy

efficiency of the system, since rail transport is three

to four times more energy efficient than trucking.

A variety of technical improvements can improve

the energy efficiency of freight transport. In trucks,

use of radial tires, aerodynamic body shapes (including the now familiar flanges on the cab roofs of many

142 Thomas S. Gray, “The Effects of Trucking Deregulation on the

U.S. Economy: 1980-1985,” presented at the Third Creativity, Innovation, and Entrepreneurship Symposium, Framington, MA, May 1986.
236

intercity trucks), low-weight materials, and diesel engines can improve energy efficiency. Further improvements include the use of both double-wide tires

and engine additions taking advantage of exhaust

energy. The average efficiency of trucks can probably be improved by at least 30 percent using technology now on the shelf.

It offends common sense to believe that a system

using a single person to move a truck trailer across

the country can compete with a system using two

people to move hundreds of trailers via rail, and rail

enjoys markets for commodity and container shipments greater than 600 miles. Trucks tend to compete in long-haul markets primarily when high quality (e.g., timely) service is required or when rail

service is not otherwise adequate. Some analysts believe that railroads can never cover the real opportunity costs of their real estate and operating costs

carrying anything but commodities hauled on relatively high density routes. It may well be that rail

lines and rail yards are a poor use of a unique resource: long rights of way extending into the hearts

of virtually every major city in the United States.

To some extent, of course, the balance between

rail and trucking will be a public and not a private

decision. Rail lines must be maintained entirely by

private funds, while some of the cost of public highways is subsidized by taxpayers rather than user fees.

CLOTHING AND PERSONAL CARE143

The system of businesses that combine to bring

clothing to American markets provides a particularly

clear example of the way changes in the warp and

the weft of business networks can affect the costs

and quality of products delivered, as well as the fate

of individual industries that form parts of the network. This discussion will cover the network of businesses that convert fiber to finished apparel offered

for retail sale. Clothing and related products represents the bulk of the economic activity in this amenity

group.

Prospects

The apparel production system could follow one

of several radically different paths during the next

two decades:

● The industry could be transformed by technology and innovative management strategies. It

could develop an ability to respond quickly to

emerging tastes and new developments in production. It could rely heavily on skilled labor

and programmable equipment instead of large

numbers of low-paid workers. It could tie producers and retail operations together in a tightly

integrated network. An ability to tailor products

ltsMUCh of this di~ussion is drawn from U.S. Congress, Office of Technology Assessment, The U.S. Textile and Apparel Industry: A Revolution in Progress-Special Report, OTA-TET-332 (Washington, DC: U.S.

Government Printing Office, April 1987).

to specific tastes and sizes without significant

increases in price would, in effect, complete a

cycle that began when the industrial revolution

replaced tailor-made apparel with mass production.

The manufacturing part of the network could

be gutted by imports, leaving a domestic industry consisting primarily of transportation, whole

sale, and retail operations. It is likely that a small

fashion industry would survive and that domestic producers of high volume commodities (like

bed sheets) would continue, although the equipment to produce the materials might be imported. Markets for industrial fabrics could be

tied heavily to the fate of manufacturing elsewhere in the economy. Without enforcement

of wage and hour regulations, there could be

rapid growth of “underground assembly” through

employment of illegal aliens at subminimum

wages.

There may be no middle ground between these

scenarios. Given the pace of change in global textile and apparel production, the direction that the

U.S. industry will take should soon become clear.

At present, signs can be read that point in both directions. The makers of textile machinery in the United

States have failed to keep pace with the world state-of

the-art. Imports are cutting deeply into domestic apparel businesses. A decline in these industries cuts

deeply into prospects for growth in textile and fiber

production.
237

On the other hand, there has been active movement in the development of tightly integrated production networks, use of flexible production equipment by textile firms (though much of it is purchased

from foreign suppliers), and a renaissance in the development of technology for apparel assembly.

With the exception of comparatively heavy trade

protection, the rules governing the domestic operation of textile and apparel production are almost entirely those of freely operating markets. Structural

changes in this ancient business, however, can be

heavily influenced by custom, and tradition. Public

support for research has been minimal, but Federal

regulations may have inadvertently had a major effect on industry structure through rules restricting

worker exposure to fibers that caused “brown lung.”

These rules may have played a critical role in stimulating private investment in new, highly productive textile equipment.144

Many of these basic rules are in a state of flux.

A small Federal investment in new apparel production equipment has proven highly successful. Disparate elements of textile and apparel networks have

formed a new series of trade councils to develop

standards, communication protocols, and universal

product codes.

Structure and Performance

The production and sale of clothing has been dividied into sharply defined operations for generations.

Firms that produce man-made or natural fibers supply material to yarn producers, which in turn sell

to weaving or knitting facilities. There has also been

rapid growth in production of nonwoven fabrics like

felt or medical gowns. Fabric is sold to a finisher and

then to a garment manufacturer. There, jobbers oversee the movement of products from one processor

to another, supplying a finished product to cutters

or retailers and maintaining product supplies for spot

markets.

The cultures of each of these sectors are different,

and almost tribal. Producers of man-made fibers are

typically enormous, sophisticated chemical indus144Ruth Ruttenberg, “compliance with the OSHA Cotton Dust Rule:

The Role of Productivity Improving Technology,” contract report prepared for the Office of Technology Assessment, March 1983.

tries like E.I. du Pont de Nemours & Co. Textile production typically occurs in the southeastern United

States, in comparatively small businesses often owned

by old families. Apparel production is generally an

elaborate network of small businesses in the northeast, and more recently by networks of firms using

inexpensive American and Mexican workers in southern California. Retail merchants are almost a completely independent “tribe.” Many rely heavily on

foreign supply, and their interests may diverge sharply from many domestic manufacturers.

While there has been some horizontal and vertical integration, movement has been slow and uneven. Distinct patterns are difficult to identify. In

some areas, a period of expansion and mergers was

reversed when firms that had diversified returned

to narrower specialties. Some concentration has occured in cotton weaving and man-made fiber weaving—the two largest sectors of the textile industry.

In the early 1950s the leaders of the textile industry, particularly Burlington Industries and Milliken,

moved to vertically integrate the textile product from

fiber to finishing; apparel production, however, remains highly competitive and fragmented. Of the

more than 200 apparel companies in the United

States, less than 1 percent have sales over $100 million per year. While there has been some vertical

integration in apparel retailing, most efforts to combine functions have proven unsuccessful. The 1980s

saw growth in both large “discount” and relatively

small and expensive outlets.

The system that starts with raw materials and ends

with apparel offered for sale in retail stores involves

virtually every part of the economy. In 1984, only

about 17 percent of value-added generated by spending on the Clothing and Personal Care amenity

ended up in businesses directly associated with the

production of cloth or apparel. Nearly 40 percent appeared as value-added in transportation, wholesale,

or retail activity; 13 percent wound up in the hands

of transactional businesses (see figure 6-7).

New Technologies and System

Integration

Technologies are improving both individual steps

in the process used to convert fiber into retail products, and the efficiency of the overall system.
23a

Figure 6-7.-Value-Added To Meet Demand

for Clothing and Personal Care

($171 billion* in 1984)

Natural Resources

Construction

Low Wage Manuf.

Medium Wage Manuf.

High Wage Manuf.

Transport & Trade

Transactions

Personal Services

Social Services

o 10 20 30 40 50

Percent of $171 billion

m 1972 ~ 198 4

● Constant 1980 dollars.

SOURCE: Office of Technology Assessment (see table 4-6 of ch. 4).

Technical improvements in individual processes

include:

●

●

●

●

●

●

the substitution of synthetic for natural fibers,

and an increase in the strength and consistent

quality of yarns of all types;

the introduction of programmable, “shuttle-less”

looms and other devices that improve the efficiency of winding and weaving, and of new

equipment for producing non-woven fabric;

computer-assisted garment design;

numerically directed cutters, including laser cutters, that reduce waste when patterns are cut

from cloth and make it possible to produce comparatively small batches of patterns economically;

automatic sewing systems that can assemble

components (like sleeves or trouser legs) using

robotic handlers;

price code scanners that enable retailers to improve inventory control and reordering.

While each of these innovations can, and have,

increased productivity in individual businesses, their

most important contribution may appear in the way

they can be tied together to build a system for delivering apparel to consumers that is more efficient

taken as a whole.

Improved information flows and responsive batch

production are key to what the industry calls a

“Quick Response” strategy. The key is holding inventories low and avoiding overstocking while still

ensuring that retailers stock what customers want

to buy. Accomplishing this will require fundamental changes in the way information flows between

the different components of the fiber-textile-apparelretail chain, and an associated revolution in the style

of production. In many ways, the institutional difficulties that must be confronted in implementing such

a system pose a greater barrier than the technical

problems.

Efficient transportation will also play a key role.

Currently, it can take up to 2 months for a product

to get from an apparel plant to the sales floor. Initial experiments with Quick Response have shortened this time span considerably, using United Parcel Service for rapid deliveries. 145 Textile suppliers

are now able to communicate with large apparel

companies with such precision that apparel firms can

obtain reliable information about the time and size

of delivery, as well as the color and location of fabric within a truck. This permits apparel producers

to integrate deliveries closely into their plans, and

allows them to avoid costly and lengthy inventories

of materials delivered. The Levi Strauss Co. estimates

that their new communication system by itself saves

as much as 10 cents per square yard of material.146

The system-wide productivity gains made possible by new communication technologies and flexible production technologies are difficult to measure

using conventional methods. There is a certain irony

in this, since the consumer obviously measures the

performance directly in the price and characteristics of products offered for sale. The dilemma of

measurement lies partly in the fact that the productivity of individual businesses may actually appear

to decline while the productivity of the system as

a whole increases. It is possible to describe the areas

where system-wide benefits can be expected even

when it is difficult to develop precise measurements:

● The enormous inventories carried by textile

mills, apparel manufacturers, and retailers can

be reduced. On average, it takes roughly 65

weeks for fiber to move from a manufacturing

plant to the customer’s hand. The material is

in processing for only 15 out of these 65 weeks;

the remaining 50 weeks are spent in inventory.147 The cost of this inventory alone represents

145 Kurt Salmon Associates, Inc., “Crafted With Pride in U.S.A. council, Inc., Quick Response Program Report,” June 11, 1986.

146 R.E. Cotton, “QR’s Bottom Line,” Apparel Industry Magazine, JUIY

1986, pp. 26-31.

147Sig Scheier, IIQR to Consumer Demand Vital, Hinerfeld Warns,”

Daily News Record, Oct. 9, 1985, p. 11.
239

6.4 percent of retail sales. With good management, it should be possible to reduce inventories by 25 to 50 percent.148 Proper inventory

control can increase sales per square foot, ensuring that the assortment on the selling floor

matches proven market demand for styles,

colors, and sizes.

● It should be possible to reduce incidents of

forced markdowns that result from orders for

goods that fail to sell as expected. Forced markdowns have grown by 50 percent during the

past decade, and the National Mass Retail Institute estimates that total losses may be as high

as 15 percent of retail sales.149 Forecasting

failures are due in large part to the long, 65

week cycle (requiring that most initial orders

for seasonal products be placed more than a

year before the products are sold). With Quick

Response it may be possible to reduce initial

order times to 2 or 3 months, and reorder cycle times to a few weeks. Accordingly, the need

for long range, imprecise forecasting is greatly

reduced.

● Tightly integrated networks can result in cost

savings in situations where business is lost because a customer cannot find apparel in the

desired style or size when the store is out of

stock. Quick Response systems permit smaller

initial orders, allowing stores to reorder more

of a product that proves popular. The product

can then be in stock at full price during the selling season.

Estimating the magnitude of “stock out” losses

is a difficult task, since many consumers who

fail to find what they want simply leave a retail

store without registering their disappointment.

Industry estimates suggest that losses from

stockouts are about 8 percent of apparel sales,150

though field experiments with Quick Response

systems suggest that this may be an underestimate. Quick Response reordering systems for

sales of basic men’s slacks have increased inventory turnover at the astonishing rate of 30

percent, with a comparable increase in gross

margins on inventory.151 A stock count in an

’

48 Robert M. Frazier, “Quick Response,” presentation made at

DUPAATCH, Sept. 13, 1985.

149lbid.

150Ibid.

151 "Quick Response Pilot Program Update,” Crafted Wisth Pride, Jan.

1987.

●

●

A

experimental installation indicated that while

29 percent of items checked were out of stock

before the program began, only 17 percent were

out of stock after the Quick Response system

was initiated. Retail stores can offer a greater

variety of products without a significant increase

in inventory through the ability to replenish

stocks quickly.

Responsive networks can also reduce costs and

paperwork associated with such overhead operations as billing, invoicing, and inventory controls.

Improved information flows and standardized

reporting systems can greatly reduce handling

and processing costs, such as quality control audits, hanging and premarking of merchandise,

and time spent handling and counting deliveries. Perhaps most importantly, four networks

that link different parts of the fiber-to-finished

product chain more effectively have been created within the last 2 years: the Fabric and Supplier Linkage Council (FASLINC), the Textile and

Apparel Linkage Council (TALC), the Sundries

and Apparel Findings Council (SAFLINC), and

The Voluntary Interindustry Communications

Standards (WCS).

Finally, productivity gains can be realized within

the apparel production facility through the use

of off-the-shelf equipment, and better management practices can facilitate integration with the

overall system. Moving away from the “progressive bundle” system—a process driven by repetition of standardized tasks, which may have

been cost-effective in an environment where response time and inventory control was not

critical—to a modern “unit production” system

can reduce processing times of 4 to 6 weeks to

1 or 2 days.152 Computer-controlled cutting techniques can reduce material losses by 2 to 3 percent and can take 1 to 2 weeks out of planning,

while reducing the number of parts that are cut

simultaneously by 30 to 50 percent.153

conservative estimate of the savings that can

be realized from a relatively straightforward implementation of Quick Response technologies indicates

that the industry could have saved $12.5 billion in

1984.154 The cost of apparel could be reduced by one152 R.E. Cotton, op. cit., footnote 146.

153 Frazier, op. cit., footnote 148.

154 Peter N. Butenhoff, “U.S. Apparel Competitiveness,” paper Presented to OTA by E.I. du Pont de Nemours & Co., June 1986.
240

eighth. These savings are realized by the system acting as a whole, and would not be possible through

improvements occurring only in component businesses.

Most of the savings result from better matching

of production to patterns of consumer purchasing

because it would allow re-ordering popular items.

Inventory costs could be reduced or merchants could

maintain a wider selection of items by simply keeping fewer of each style and size in stock at any given

time. All of this, of course, depends on close integration of all parts of the design and planning cycle.

It requires flexibility in the production of cloth, flexibility in apparel assembly, and flexibility in the transportation network. It also requires relatively shortbatch runs.

Where could the technology lead? There appears

to be no technical reason why the planning/production cycle could not be reduced to a few days for

a wide range of fabrics and designs. Computer displays capable of combining real images of an individual with a synthetic image of different kinds of

clothing are already in experimental use in expensive retail outlets. In principle, these systems could

be combined with a file maintained on the individual’s measurements, producing clothing tailor-made

to individual specifications. Assuming rapid delivery services, the garment could be available in 2 to

3 days.

Highly responsive networks are likely to be built

largely of comparatively small establishments connected together by a well managed communication

and transportation system. It is not at all obvious

that these systems would operate more or less efficiently given greater horizontal or vertical integration of management. The standards, agreed protocols, and flexible contracting arrangements may

well be preferred to a formal bureaucratic management scheme. A considerable amount of experimentation will be needed before a preferred management

strategy emerges.

EDUCATION155

Prospects

The Nation’s educational enterprises appear to be

on the edge of a major reform. There may be no

area where changing patterns of demand and the

challenges of new technology are creating greater

pressure for change. Real economic growth depends

as never before on the skills of people in a wide

range of occupations. The essential elements of flexibility and adaptability depend not only on knowledge of a particular skill, but on the ability to identify opportunities, to work together, and to acquire

new skills efficiently. At the same time, new technology makes it possible to think about major changes

in the productivity of learning. Technology has created an unprecedented power to bring practical problems into the classroom environment, adapt instruction to individual needs, and integrate teaching and

learning into the work environment so that information and instruction is available when and where

it is most essential.

155 Much of this discussion is drawn from U.S. Congress, Office of

Technology Assessment, “Education,” sector study, Washington, DC,

1987.

Taken together, the need for change and the

power of the new technology can reshape the way

instruction is delivered, where it is delivered, and

when it is delivered in a person’s career. As in all

of the other cases examined in this analysis, the network of activities that produce education in the

United States are unlikely to show real productivity

gains unless basic changes are made in the way the

system operates as a whole.

The choices in education are particularly critical

and

●

●

stark:

A system could be developed that makes learning more efficient and more fun, and that allows teachers to spend more time as tutors and

coaches and less in routine tasks. Education

could be tailored to individual styles of learning and adapted to strengths and weaknesses

in a person’s talents and background. instruction could be available throughout a person’s

career, empowering individuals to adapt and

grow in a dynamic economy.

A system could be developed that would lead

to greater centralization, mechanical and imper-
241

sonal instruction, and uniformity imposed by

a perception of scale economies. National regulations could choke individualism, and the

dominance of a small number of product suppliers could limit real choice and flexibility. Rigid

control could be maintained over a student’s

course of instruction.

Increased use of capital equipment could lead to

major changes in the structure of the Nation’s educational system. The process of education could become separated into more differentiated components,

coming to resemble other information-intensive enterprises. The development and maintenance of

hardware and software for education and training

could become an important specialty, and a variety

of other specialties could develop. The size and location of institutions could change if technology allows

decentralization without sacrificing quality. Instructional activities could be integrated more formally

into all business enterprises.

Unlike many other production networks, the future structure of the Nation’s educational establishment is primarily the responsibility of public decisions. Some way must be found to combine the need

for enterprise and diversity with the need to find resources adequate to the major development efforts

that will be needed.

Structure and Performance

The network of operations leading to educational

services remains astonishingly unchanged by the

forces that have reshaped other parts of the economy engaged in the transfer of information. Personnel costs—primarily for teachers—and the cost of

buying and operating buildings constitute about

three-quarters of all costs related to business activity associated with the Education amenity (see figure 6-8).

Intermediate Demand for Education

The value of a well-educated and well-trained work

force is probably the most important input purchased

by most businesses, but this input is virtually impossible to measure.156 During the 1970s, when com156 Several attempts have been made in this area. Among the first were

T.W. Schultz, Investing in Human Capital (New York, NY: The Free

Press, 1971); G. Becker, Human Capita/ (Chicago, IL: University of Chicago Press, 1975); and T.W. Schultz, Investing in People: The Economics

of Population Quality (Berkeley, CA: University of California Press, 1981).

Figure 6-8.-Value-Added To Meet Demand

for Education ($180 billion* in 1984)

Natural Resources

Construction

Low Wage Manuf.

Medium Wage Manuf,

High Wage Manuf.

Transport & Trade

Transactions

Personal Services

Social Services

O 10 20 30 40 50 60 70 80

Percent of $180 billion

= 1972 = 1984

● Constant 1980 dollars.

SOURCE: Office of Technology Assessment (see table 4-6 of ch. 4).

paratively well educated members of the baby boom

generation were entering the work force and replacing people with lower levels of education, there was

some speculation that America had overinvested in

education. This argument held that education served

primarily to help get preference in hiring but did little

to actually contribute to performance once on the

job.157 Given the problems of measurement, such disputes are difficult to resolve with precision. Recent

data demonstrate strong links between education,

income, and an ability to avoid unemployment (see

ch. 11).

American businesses are making heavy investments in education. The total cost of corporate training is probably in the range of $30 billion to $200

billion (see notes to table 3-26). Precise levels are

impossible to gauge, since the vast majority of employee learning comes from watching peers, reading manuals, and other informal routes.158 Unfortunately, as with investment in research, investment

in training is often reduced when it may be needed

most—when business cycles turn down.159

157 I. Berg, Education and Jobs: The Great Training Robbery (New York,

NY: Prager, 1970); A. Weiss, “A Sorting-Cum Learning Model of Education,” Journal of Political Economy, June 1983, pp. 420-442; and R.B.

Freeman, The Over-Educated American (New York, NY: Academic Press,

1976).

158 one estimate suggests that informal training represents 80 to 90

percent of job related training. See S. Lusterman, Trends in Corporate

Education and Training(New York, NY: The Conference Board, 1985),

159M. MeyerSonand R. Zemsky, Trainin#s Policies: Public and pr;-

vate Reinforcement for the American Economy, (Philadelphia, PA:

University of Pennsylvania Press, 1985), cited in F.D. Fisher, “Redefining Training: An American Perspective,” presented to the “Computer

Assisted Approaches to Training, Foundations of Industry’s Future” conference, May 25, 1987, Lugano, Switzerland.
242

Few firms have any clear view of what their real

training costs are. The costs of staff training maybe

included as general administration expenses, rather

than as “training” or “education.” Even where training costs are identified separately they may include

only teaching and equipment costs, rather than the

costs of an employee’s time and other factors that

may be much greater than training costs measured

directly. The life insurance industry was recently

astonished to find that it costs an average of $125,000

to place an agent in the field—the Massachusetts

Mutual Life Insurance Company for example, pays

trainees during the full 2 to 3 years it took them to

be self-supporting through commissions even though,

on average, only one out of four entrants managed

to become an agent. 160

The Federal government also invests heavily in

training. About 20 percent of the active military is

either being taught or engaged in teaching.161 The

U.S. Department of Defense spent $13.4 billion on

training in 1984, providing the equivalent of 250,000

full-time students. The Office of Personnel Management estimates that more than 500,000 students per

year are trained elsewhere in the Federal government (not a full-time equivalent estimate) at a cost

of about $371 million, excluding the wages of the

employees being instructed.162

While the costs of training are difficult to measure, it is even more difficult to measure the losses

resulting from inadequate training. There is obviously a high social cost when adults are unemployed

or underemployed because of inadequate training.163

Direct costs are also large. Chrysler Corporation estimates that it saved $1.3 million by training workers about the dangers of hazardous substances in

the workplace.164 Poor training may have been a con160 Life insurance Management Research Association, Hartford, CT,

1986, reported by Jane Curtis, Director of Field Development, Massachusetts Mutual Life Insurance Co., private communication, November 1987.

161 Sar A. Levitan and Karen Alderman, Warriors at Work: The Volunteer Armed Forces (Beverly Hills, CA: Sage, 1977).

162 Training Magazine, October 1984.

163 See U.S. Congress, Office of Technology Assessment, Techno~om

and Structural Unemployment: Reemploying Displaced Adults, OTAITE-250 (Washington, DC: U.S. Government Printing Office, February

1986).

164 R. Neff, “Videos are Starring in More and More Training programs,”

Business Week, No. 3015, Sept. 7, 1987, p. 108.

tributing factor in the Three Mile Island disaster.165

Nearly one-quarter of Army and Air Force budgets

go for maintenance. These two services probably

spend as much to maintain as to purchase electronic

equipment. Largely because of poor training, between 9 and 32 percent of all person-hours spent

in maintenance was wasted (depending on the type

of maintenance problem), and between 4 and 43 percent of all parts removed as defective were not defective. 166

An even greater implied cost of poor training, of

course, can result if a company’s employees are not

able to adapt to new production systems or new management strategies. Defining the kinds of skills needed

for this ability poses a tremendous challenge. Without greater effort to define them, however, there is

a danger that the Nation’s educational system will

have difficulty aiming at the proper target. Any system forced to consider productivity gains is guided

in powerful ways by what can be measured. A basic

grasp of skills in language, mathematics, and science

is clearly essential; box 6-B provides a hypothetical

list of other qualitative skills likely to be critical for

future employment opportunities.

New Technologies and System

Integration

A number of new information technologies are being developed with the potential to change the nature of human communication in fundamental ways

by vastly reducing the cost of storing, manipulating,

and communicating information. It may soon be possible to manipulate images and sounds as easily as

the printed word. This means being able to break

some of the barriers of abstraction that separate

“scholarship” from the world people see, hear, and

understand. Modern information technology also has

the power to give participants more active control

and greater choice without necessarily adding significantly to costs.

These innovations can radically change the performance and structure of the educational system.

165 The President’s Commission on the Accident at Three Mile Island,

“The Role of the Managing Utility and its Suppliers,” staff report, Washington, DC, October 1979.

166 J. OrIansky and J. String, “The Performance of Maintenance Technicians on the Job,” IDA paper P-1597, Institute for Defense Analysis,

Alexandria, VA, 1981.
243

Box 6-B.–A New Set of Job Skills

Skills of Problem Recognition and Definition:

—recognizing a problem that is not clearly presented

—defining the problem in a way that permits clear

analysis and action

—tolerating ambiguity

Handling Evidence:

—collecting and evaluating evidence

—working with insufficient information

—working with excessive information

Analytical Skills:

—brainstorming

—hypothesizing counter-arguments

—using analogies

Skills of Implementation:

—recognizing the limitation of available resources

—recognizing the feed-back of a proposed solution

to the system

—the ability to recover from mistakes

Human Relations:

—negotiation and conflict resolution

—colaboration in problem solving

Learning Skills:

—the ability to identify the limits of your own

knowledge

—the ability to ask pertinent questions

—the ability to penetrate poor documentation

—the ability to identify sources of information (documents and people)

SOURCE: Based largely on Francis D. Fisher, “Redefining Training: An

American Perspective,” presented to the ‘Computer Assisted

Approaches to Training, Foundations of Industry’s Future” conference, May 25, 1987, Lugano, Switzerland.

The new generation of technologies, built on relatively inexpensive equipment, are qualitatively different from the film strips, television shows, and other

techniques that have been used in limited ways to

augment instruction in the past. They represent

something fundamentally new. In principle, new information technologies can actively engage students

or groups of students, and can shape instructional

programs to idiosyncratic styles of learning, individual interests, and individual assets and strengths.

The Potential for Change

In order to understand the potential for change

in a sector where productivity and structure have

been static, it is necessary to begin by demonstrating that real change is attainable. The following discussion identifies several areas where progress is

clearly possible.

Improved Understanding of the Learning

Process.-There is much room for improvement in

what we know about how learning takes place and

about the efficiencies of different learning techniques

for different people. This is true both for formal classroom instruction and for skills acquired informally

at home or on the job. Informal learning on the job

can take a variety of forms. It can mean a worker

on a shop floor struggling with the documentation

for a new machine tool, a secretary puzzling over

new word processing software, or an employee in

the “back office” of an insurance firm learning how

to underwrite a new type of policy. Clearly, sailors,

physicians, and carpenters approach problems in

different ways. Each profession, however, combines

formal knowledge and formal reasoning from abstract principles with experience and a reservoir of

anecdotal evidence.

Failure to understand the learning process obviously means that there are few good guidelines for

improving its productivity. Most formal training by

corporations is practically identical to instruction delivered in standard classroom settings. But a sensitive understanding of learning pathologies is required

to teach adults who enter retraining with an enormous variety of backgrounds. The efficiency of instruction is obviously improved where it is possible

to discover what people do not know, and why they

fail to understand important topics.

The new field of “learning pathology” is beginning to discover why students fail to understand

some topics. Analyzing errors made by elementary

school students, John Seeley Brown of Xerox found

150 distinguishable patterns of errors in simple subtraction problems. There is obvious merit in finding a way to focus on a student’s real problem (perhaps a failure to understand the meaning of the

number zero) rather than repeating an entire lesson.

Many basic issues in pedagogy would have needed

to be addressed even if new demands had not been

placed on the Nation’s educational system. New technologies make the issues impossible to avoid.
244

Research on advanced computer designs may provide some serendipitous help. There are powerful

connections between research on human learning

and research on productive designs for information

technology. The study of “artificial intelligence,” for

example, addresses basic problems in inference and

tries to understand how “experts” think about complex problems. The results of such efforts are likely

to influence strategies in teaching before they lead

to significant changes in the design of computers.167

John Henry Martin’s “Writing to Read” program,

developed with IBM support, is a basic innovation

in pedagogy stimulated in part by an analysis of how

best to integrate computers into classrooms.168 The

basic idea is to shrink the distance between the rich

tools of spoken language of pre-school children and

the limits of written language that are available to

students entering kindergarten or first grade. It is

done by teaching students to decode spoken words

using 44 phonemes, and then asking then to use

these codes to write stories that use their entire

vocabulary. The computer helps primarily by making it easier for students to form letters and by making the task more fun.

The Ability To Teach Individuals, Not Aver=

ages.-Earlier discussions have provided examples

of the way modern production equipment makes it

easier to serve niche rather than mass markets. The

American system of education, however, continues

to deliver a relatively uniform level of instruction

with a rigidly proscribed conception of what is to

be learned.

New technology can help teachers design programs of instruction suited to individual tastes and

talents. Some students learn faster from text, some

from lectures, some from repetition, and some from

visualizations or examples drawn from areas of personal interest. Technology would not, of course, sub

stitute for a good teacher—but it could provide an

invaluable tool for helping teachers tailor instruction to the needs and talents of many individual students. This is obviously difficult in a standard classroom setting. It is possible to imagine an “expert sys167 W. K. Estes and A. Newell, Research Briefings, 1983, briefing panel

on Cognitive Science and Artificial Intelligence, Committee on Science,

Engineering and Public Policy, National Academy of Sciences (Washington, DC: National Academy Press, 1983).

168 John Henry Martin, Writing to Read (New York, NY: Warner Books,

1986), Alice Kelly and Sophia Kelly, private communication.

tern” of the kind available to physicians, designed

to diagnose the source of a specific learning problem or to construct a program of instruction most

likely to interest a specific student.

Technology also has the potential to monitor the

progress of individual students in a way that rivals

the attention of an individual tutor. It can ensure

that the pace of instruction does not outpace a student’s understanding. Using a series of built-in tests,

it can ensure that each student has mastered a subject before being forced onward. It can also permit

the student to take “curiosity excursions” into areas

that may not be of general interest. And it can facilitate a detailed diagnosis of the sources of a student’s misunderstanding and habitual errors.

From the student’s perspective, the power inherent in new technology means more control over the

pace of learning and less repetition of things already

understood. It means not being embarrassed to acknowledge what is not understood. It means the freedom to have fun by building a program of instruction around a set of interesting problems. It means

the security of building new knowledge on a base

of information that is familiar.

The Ability To Simulate.—There is also much

to be learned about the role that games play in learning. In traditional societies, where children could see

much of the work done by adults, play mimicked

life. Skills learned in playing at hunting or at household tasks translated gracefully into the practical

world. In contrast, contemporary society places enormous barriers between the world of adults and the

world of children. Few children have a clear sense

of their parent’s work life; classrooms seldom provide good tools for understanding the work environment. In principle, simulations can mix work with

instruction and instruction with play in entirely new

ways. The interest and entertainment of an interactive spy adventure can be used to teach map reading, geometry, or chemistry.

After centuries without practical alternatives, people have become accustomed to think about communication in terms of words and books. New visual

technologies, however, can provide a means of communication that is in many areas more powerful than

language. Leaving aside the question of whether language and grammar are an integral part of human

intelligence, it is obvious that words in a geography
245

text are a poor substitute for a visit to Brazil and that

a flight manual is a poor substitute for a turn at the

controls of an F-16. The emerging generation of information technology has been used to create flight

simulators capable of producing an experience so

faithful to reality that even seasoned pilots are able

to benefit. This power to imitate reality can have a

helpful role in education.

Much of modern history is available to us in the

form of film or television images and sound recordings. These images and sound recordings are arguably responsible for some of our history. The radio

clearly helped Franklin D. Roosevelt gain the presidency and strongly influenced the way he communicated with the public as president. Television

helped Ronald Reagan in much the same way. Yet

the capacity for managing images (particularly moving images) has never been developed with the same

facility as that for sorting and analyzing words on

paper. Pictures are a “second class” resource in any

library. Technology now emerging can change this

status by making it nearly as easy to retrieve, make,

and modify images as words. Simulations can also

help where student motivation depends on a belief

that knowledge will provide power for solving real

problems.

Simulations can take a wide variety of forms:

●

●

●

●

The Defense Department has a long and successful record of using simulations to train pilots,

tank drivers, TOW missile crews, maintenance

personnel, and a variety of other specialists. 169

Goodyear successfully used simulators to train

repair crews in the use of multimeters and oscilloscopes. 170

Simulators have been used to train welders who

use light-pens instead of welding rods. This

equipment can determine such factors as the

beginning and ending points of the weld made

and whether the simulated rod is moved at the

proper rate.

Medical technicians can be trained to identify

169 J. Orlansky, “The Cost Effectiveness of Military Training,” in

Proceedings of the Symposium on the Military Value and CostEffectiveness of Training, NATO headquarters, Defense Research Group

on the Defense Applications of Research (DS/A/DR(85)167), Brussels,

Belgium, January 1985 (evaluations of the program are reported later

in this section).

170S. Holzberger, “Goodyear Tire Compares ITC ACTIV With Traditional Training Methods,” The Videodisc Monitor, March 1987, pp. 14-15.

●

●

●

tumors on displays of actual Magnetic Resonance

Imagery (MRI) or Computer Assisted Tomography (CAT) images, Simulations can reproduce

medical emergencies demanding immediate responses and analysis for physicians in emergency rooms.

Insurance sales personnel can be confronted

with a variety of potential customers using video

representations of consumer types. The agents’

responses are videotaped and played back so

that students can judge their own responses and

ask for expert advice. This experience is so compelling that many students elect to drop out

rather than continue training. There are obvious advantages for both the student and the

company if the student’s incompatibility with

the job is identified early.171

A new data compression technology developed

by the David Sarnoff Laboratory allows a student to simulate a walk through the Mayan city

of Palenque using data stored on a standard 5”

compact disk. The system permits the student

to go virtually anywhere at the site, stop, and

look around a 360 degree vista. It is possible

to take pictures of sites for further study.172

A variety of chemistry laboratory experiments

have been simulated using video representations which could be controlled by computer.173

These simulations are obviously safer than actual experiments.

Communication v. Isolation in the Learning

Process. -In the abstract, computer-based instruction often evokes an image of passive, hollow-eyed

students staring at flickering screens in great windowless halls, or small cubicles. This would be a disastrous outcome given the desirability of allowing

students to learn from each other and work as parts

of dynamic groups. While it is obviously possible to

use computer-based instruction in nightmarish ways,

new instructional technology appears to open opITIJane Cufiis, op. cit., footnote 160.

lT2The system was deve]oped with the assistance of the Bank Street

College. Mike Tinker, David Sarnoff Laboratory, private communication, December 1987.

173 Oone test found no measurable difference between the test results

of students working with the computer system alone and students in

real laboratories. See S.G. Smith, L.L Jones, and M.L Waugh, “Production and Evaluation of Interactive Videodisc Lessons in Laboratory Instruction,” Journal of Cornputer-f?ased Instruction, vol. 13, No. 4, pp.

117-121, autumn 1986.
246

portunities for mixing isolated study with work as

a part of a group. It seems possible to use the equipment to improve communication on many levels:

between teachers and students, among students, between schools and the body of knowledge and specialized expertise outside of the school system, between schools and parents, and among the teachers

within the system.

Giving students an avenue to participate in different kinds of social groups is an important contribution of the school system.174 The ability to collaborate

with individuals having different kinds of skills and

different viewpoints, to perform effectively as part

of a heterogeneous society in a variety of circumstances, and to debate effectively about a disputed

point are all important skills both on and off the job.

The goal may be one of having students “learning

around the computer” as opposed to learning with

the computer: “when several students work together

at a computer display two things happen: learning

becomes more of a social activity than in the usual

school environment and an impressive amount of

peer learning takes place. ’’175

The potential for teaching groups has obvious advantages in corporate and government training programs, but documentation is rare. The U.S. Army

has found that one of the most valuable uses of its

new M-1 tank simulator was the way it permitted

a team of tanks to practice working together in difficult tactical situations. It is critical that members

of a tank battalion learn to work together, to trust

each other, and to adapt quickly in unexpected situations, since group maneuvers are extraordinarily

difficult to undertake in the field.

Informal observation suggests that adults can be

made more comfortable in reentering a classroom

environment if they are paired with another person

of similar skills. The partners can help each other,

and if baffled are less restrained in asking the instructor a question. They assume that if their confusion is shared, they should not be ashamed.176

It is fair to ask whether the new strategies proposed

for “learning around a computer” represent an im174 George Leonard, Education and Ecstasy (Berkeley, CA: North Atlantic, 1987).

175Margaret COX, cited in “)hCiitiOn,” Op. Cit., fOOtnOk 155.

17~i%inia Nelms,IfBM Corp., private communication, December 1987.

provement over the existing system. Appearances

to the contrary, the standard classroom instructional

techniques prove to be highly impersonal. Collaboration is discouraged in virtually all cases-it is often

considered “cheating.” Companies have complained

that formal instruction methods result in students

who want to solve problems in isolation, unable to

benefit from group discussions. 177

One observer has found that “88 percent of all instructional time in the high school involves only two

methods: telling, lecturing, and questioning the total group and monitoring some form of seatwork."178

Similarly, about 70 percent of the student’s time in

elementary school was spent listening to lectures;

the figures were 77 percent in junior high and 76

percent in high school. The lectures in this investigation typically presumed student passivity. Barely

5 percent of instructional time was designed to create student anticipation of a need to respond, and

when a response was required it was often a simple

recall of fact. The overall strategy of interaction was

summarized as follows:

First, the vehicle for teaching and learning is the

total group. Second, the teacher is the strategic, pivotal figure in this group. Third, the norms governing the group derive primarily from what is required

to maintain the teacher’s strategic role. Fourth, the

emotional tone is neither harsh and punitive nor

warm and joyful; it might be described more accurately as flat. ’79

The passivity just described scarcely portrays a situation characterized by a great deal of communication within the schools themselves, either between

students and teachers or among peer groups of students or teachers. There is also is little communication with the world beyond the school door, or between schools and parents. And with the exception

of major universities, most teaching material does

not reflect recent progress in research. Available

mechanisms for upgrading teachers’ skills are seldom adequate; textbooks remain the main source

of substantive communication with external research, yet texts for courses taught in primary and

177 W. Glasser,Control Theory (New York, NY: Harper & ROW, 1985);

and Judith Resnick, “Learning in School and Out,” The Educational

Researcher, vol. 16, No. 9, December 1987.

178 John I. Goodlad, A Place Called School (New York, NY: McGraw

Hill, 1984), p. 12.

179Ibid.
247

secondary schools are infrequently revised. School

texts in Texas, for example, despite being updated

every eight years, have become out-dated in important areas.180 While universities are designed to forge

good links between instructors and advanced research, these links are growing weaker. Some faculty

members are forced to take on heavy teaching loads

in order to keep college costs down, while others

are engaging in proprietary research that cannot be

shared with students.

Improving Productivity

The challenge of measuring productivity in education was discussed at some length in chapter 3.

The difficulty results from both an inability to measure net investments in education from the many contributing sources, and an inability to develop acceptable measures of educational quality. Problems of

measurement are, if anything, becoming more difficult. The flexible skills now needed by the U.S.

work force defy easy documentation.

Many attempts have been made to link student

performance to teaching salaries or per-capita spending. Correlations are difficult to establish when adjustments are made to correct for the income and

educational levels of families.181 Students with strong

family support for education have tended to do well

in virtually all circumstances; 182 strong correlations

have also been found between the performance of

a teacher’s students and subjective evaluations of the

teacher made by supervisors. 183

The failure to find correlations between spending

and progress obviously does not mean that greater

investment cannot lead to greater results. It does suggest that much remains to be learned about the efficiency of different strategies for teaching and learning.

Against this background, estimates of improvements in educational productivity must be treated

with caution. Quantitative estimates of productivity

change resulting from new technology are particu180 See Billy Reagan and Patricia Sturdivant in “Education,” Op. cit.,

footnote 155.

ME. Hanushek, “Throwing Money at Schools,” Journai Of PO@’ Anafysis Management, fall 1981, pp. 19-41.

182 J.S. Coleman et al., Equali& of Education/ Opportunity (Washington, DC: U.S. Government Printing Office, 1966).

183 D. Armor et al., Analysis of the School Preferred Reading program

in Selected Los Angeles Schools (Santa Monica, CA: The Rand Corporation, 1976).

larly difficult to document because of the poverty of

information on experimental programs. Experiments

with documented results have typically used primitive computer-based teaching technologies that were

available only for short periods of time—none involved the kinds of fundamental reform outlined

above. Many systems entering the market have not

been well designed or tested. As a result, it is not

clear whether tests of effectiveness are measuring

the quality of the software or the inherent power of

the new technology.

In spite of these limitations, significant improvements in teaching and learning can be documented.184

An exhaustive survey of Defense Department experience with training is summarized in table 6-5. Information on flight training is well documented because of its long history. The Defense Department

has spent over $1.2 billion on flight trainers; the cost

of operating a trainer ranges from 2 percent of flight

costs for a B-52G to 50 percent for an AH-ls. The

amount of savings depends heavily on what is being learned. For some types of training, simulators

have proven useless or worse. In other cases, an

hour on a trainer was twice as effective as an hour

in actual flight. 185 On average, each hour spent on

a simulator was equal to 0.48 hours of actual flying

experience. The simulator, of course, could provide

experiences that would be dangerous or even impossible to rehearse in a real aircraft.

Extensive studies are also available for computer

assisted training in maintenance. In 12 of 13 examinations, students trained with a simulator achieved

the same or better test scores than those trained with

actual equipment. Students using simulators, however, required 20 to 50 percent less time to learn

their tasks, and 90 percent of the students questioned

preferred simulators to conventional training (instructors gave mixed reviews).186

A key question, of course, is whether the quality

of the training received is as good as conventional

methods. Are the topics learned retained longer? Are

they more easily transferred to practical applications?

Such questions are virtually impossible to address

184 See Technology and Structural Unemployment, op. cit., footnote

163; and Richard E. Clark, “Reconsidering Research on Learning from

Media,” Review of Educational Research, winter 1983, vol. 53, No. 4,

pp. 445-459.

185 J. Orlansky, op. cit., footnote 169, P. 9.

186 Ibid., p. 28.
248

Table 6=5.—Measured Effects of Defense Department Flight Simulators,

Computer-Based Instruction, and Maintenance Simulators

Flight Maintenance Computer-based

Factor simulators simulators instruction

Student time savings. . . . . . . . . . . . . . . . . . . 50 percent 20-50 percent 30 percent

Acquisition cost savings. . . . . . . . . . . . . . . . 30-65 percent 20-60 percent NA

Operating cost savings . . . . . . . . . . . . . . . . . 8 percent 50 percent NA

Life-cycle cost savings . . . . . . . . . . . . . . . . . 65 percent 40 percent NA

Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 2 years 4 years NA

NA = not applicable.

SOURCE: J. Orlansky, "The Cost Effectiveness of Military Train ing,” in Proceedings of the Symposium on the Military Value and Cost-Effectiveness of Training, NATO

headquarters, Defense Research Group on the Defense Applications of Research, (DS/A/DR(65)167), Brussels, Belgium, January 1965.

with existing data. Evaluations conducted in the past

decade necessarily combine results of well designed

and poorly designed programs (by comparison, imagine an evaluation of automobiles conducted in

1910). The available evidence, however, seems to

suggest that computer based instruction is at least

as good, if not slightly better, than conventional

methods ranked on the basis of quality (most evidence is anecdotal, and is limited by the fact that

the state-of-the-art in instructional software and hardware is changing at breathtaking rates):

●

●

●

A review of 24 evaluations of educational technology found that new technologies could cut

learning time by 25 percent, as compared to

conventional instruction; 5 of the 24 were in

basic education and the rest in specialized technical subjects. 187

The Adult Basic Literacy Education (ABLE) in

Central Piedmont Community College in Charlotte, NC, found that the average student needed

only 21 hours to gain one grade level in reading and math, whereas the average time had

been 150 hours.

A review of 28 studies of newly introduced

videodisk training systems used by corporations

and the military found that achievement was

improved in over 60 percent of the cases reported, user attitudes were improved in 56 percent, and training time was reduced in 80 percent (20 percent of the cases reported mixed

results). 188

187 Chen-Lin, C. Kulik, James A. Kulick, and Barbara J. Shwalb, “Effectiveness of Computer-Based Adult Education,” Center for Research

on Learning and Teaching, University of Michigan, presentation to the

American Educational Research Association meeting, Chicago, IL, March

1985.

188 J. Bosco, “An Analysis of Evaluations of Interactive Video,” Educational Technology, May 1986, pp. 7-17.

●

●

IBM’s “Writing to Read” program, described

earlier, has consistently shown an ability to increase learning rates of kindergartners and first

graders. An advanced system designed to teach

literacy skills to adults has consistently shown

an ability to increase measured grade levels by

2 to 3 years during a 20-week course.189

A number of specific applications have proven

highly effective: Federal Express has reported

a 50 percent increase in the learning rates of

agents in training; McDonnell Aircraft has reported a 33 percent increase in efficiency in

teaching computer-aided design drafting; and

the University of West Florida has reported a

24 percent increase in speed in teaching new

health workers.190 The Massachusetts Mutual

Life Insurance Company’s system claims to have

reduced learning time by as much as 50 percent. 191

There is also clear evidence that students enjoy

the experience of working with technology in the

course of learning. For example, in a basic education program in Great Neck, NY, 98 percent of the

students said that they enjoyed studying with a computer and were particularly impressed by the clear

explanations and immediate feedback provided.

Three-quarters said that they would like to spend

more time on a computer while only 5 percent asked

for less.192

189’’ Literacy Program is a Revelation for Non-Reading Adults,” Technological Horizons in Education, vol. 15, No. 2, September 1987. pp.

81-82.

190 J.W. Nelson, “Evaluation Data on Successful Applications of Technology Based Training Systems,” U.S. Department of Commerce, Washington, DC, October 1987.

191 V. Nelms, op. cit., footnote 176.

192 Norman D. Kurland & Associates, “The Role of Technology in the

Education, Training, and Retraining of Adult Workers,” contract report

prepared for the Office of Technology Assessment, Oct. 5, 1984.
249

Structural Effects

Most enterprises where information technology

has the potential to make significant changes in

productivity have found that the potential cannot be

achieved without basic changes in management.

Education is unlikely to be an exception. A real improvement in the productivity of the Nation’s educational system will require asking basic, blunt questions about what is being learned, how it is being

learned, when it is being learned, where it is being

learned, and why it is being learned. There is growing sentiment that a fundamental review is in order

(see box 6-C). At issue is whether institutional mechanisms needed to conduct research and to test results are adequate.

Few educational institutions are organized in a way

that allows real attention to productivity improvement. School decisions are often highly fragmented

and politicized. School systems typically resist proposals

for reform; university instructors are among the most

recalcitrant. This has both healthy and unhealthy

results. Teachers tend rightly to be skeptical about

any new “grand scheme” for reform—particularly

so in reacting to claims that technology can provide

good pedagogy. They require convincing proof that

schemes proposed for using technology can be an

advantage for their students.193 Skepticism is justified since, as might be expected, some of the computer based instruction packages offered initially

were poorly designed.

The incentive systems governing educational investment in private industry are fundamentally different from those governing education in traditional

school settings. In a corporate setting or the military, where students are paid for their time as well

as the teacher, it is obvious that the productivity of

a student’s time is worth more than teacher productivity by a factor roughly equal to the student-teacher

ratio. In most public school settings, however, the

perceived cost of a student’s time is zero. Organizations that pay the salaries of both teachers and students appear to be far more likely to investigate innovations in teaching techniques than those for

whom the cost of a student’s time is zero.

In fact, privately funded training has changed the

structure of education more rapidly than public inBox 6-C.–Some Views on Technology

and Structural Change in Education

“The introduction of a substantial amount of information technology into conventional classrooms

as they operate today will, in my belief, produce

only marginal improvement in educational effectiveness. It will take substantial institutional changes

to bring about the improvement that we are seeking; the school environment must be altered to provide motivation, self-paced progress, and integration of out-of-school learning experiences. It will

also be necessary for parents to develop new expectations for their children’s education.”

Lewis Branscomb

Harvard University

(formerly of IBM)

“1 am persuaded that the existing K-12 school

bureaucracy is having its last hurrah, and that designing new models for education that serve all

Americans is of vital importance. A fundamental

shift in the nature of the education system is not

only possible, but essential. ”

Theodore Sizer

Chairman, Department of Education

Brown University

“If technology cannot be used to bring about a

radical restructuring of how we teach, then its effect will be nil,”

“We should not flinch from the fact that we are

talking about a revolution in education. ”

Richard M. Cyert, President

Carnegie Mellon University

SOURCE: U .% Congress, Office of Technology Assessment, “Education,”

sector study, Washington, DC, 1987

stitutions. Interviews with 218 large U.S. companies

have found that 60 percent of these firms have made

significant changes in training methods and training technology over the past decade.194 They reported extensive use of television, computers, live

videotape playback, and satellite television networks.

One company used satellites to tie 67 of its locations

together so that training in sales and servicing could

take place without extensive travel. The Defense De193 See Education, op. cit., footnote 155. 194 Seymour Lusterman, op. cit., footnote 158, p. v.

52-635 0 - 88 - 9
250

partment has also invested heavily in advanced instructional technology.195

Measured by the zeal with which they are purchasing computers, public school systems appear to

be moving rapidly toward greater use of instructional

technology. While barely 10 percent of U.S. elementary schools had computers in 1981, more than 90

percent had them in 1986. Nearly all American high

schools had computers in 1986. The schools now

average one computer for every 37 students.196

It is more difficult to determine whether the new

information technology is leading to significant

changes in the productivity of learning and teaching. Most equipment appears to be used in relatively

straightforward ways. Less than one-fifth of all applications are used for purposes other than “drill and

practice,” teaching computer programming, or word

processing. 197

Scale and Scope. -Will the increased use of capital equipment make schools and training more like

an undifferentiated commodity, or more closely

adapted to individual needs? Both directions are technically possible. Properly used, the technology could

be used to encourage questioning and to explore

alternatives. A system that frees teachers to spend

more time with individual students could make

teaching and learning less and not more mechanical. The high cost of producing software systems for

new technologies could, however, lead to the replacement of individual authors and teaching styles

with teaching approaches developed by bureaucracies or large teams of people.198 There is also a risk

that inflexible and unimaginative software could

crush the spirit of inquiry and reward unquestioning obedience to the “one right way” accepted by

a machine.

195 See J. Orlansky, op. cit., footnote 169. Defense Department budget documents cited in this report, which appeared in January of 1985,

show $39 million spent for “education and training,” $87 million for

“human factors,” $38 million for “manpower and training,” and $227

million for “simulation and training devices. ”

196 U.S. Congress, Office of Technology Assessment, “Trends and Status of Computers in Schools: Use in Chapter 1 Programs and Use with

Limited English Proficient Students,” staff paper, Washington, DC, Mar.

13, 1987.

1971985 National survey of ]nstructionai Uses of School computers,

Center for the Social Organization of Schools, Johns Hopkins University, cited in Ibid.

l~Arthur Wirth, “The Violation of People at Work in Schools,” working

paper, Department of Education, Washington University, St. Louis, MO,

1987.

Judgments about whether technology will increase or decrease flexibility and change the desirable scale of educational operations are made difficult because so little is known about the flexibility

of the existing system of education. At first blush,

the system appears to be highly decentralized and

capable of tailoring instruction to individual needs.

But closer examination seems to indicate that decentralization has created stunning uniformity. A survey of 1,000 classrooms across the United States

found unexpected uniformity in what was being

taught, in how it was being taught, and in the texts

from which it was taught.199 From most points of

view, there has been relatively little change over time

in the nature or content of instruction in elementary and secondary schools, or in the time spent in

school. This uniformity is encouraged by the use of

textbooks written to satisfy a broad market.

If the decentralized system is to be effective in providing instruction tailored to individuals, teachers

must have some way to keep track of the progress

of individual students, and to identify individual

sources of confusion and individual receptivity to

different pedagogical strategies. Teachers report that

it is virtually impossible to accomplish this for 20

to 40 students at a time in a classroom, or for 100

or more students during a day. The pacing of instruction must be keyed to the teacher’s sense of the average progress of a class—something that is inevitably a crude compromise even for the most talented

instructor. One observer has argued that most

teachers stop when from 30 to 50 percent of a class

understand about 80 percent of what they need to

know to master a subject.200 As a result, few students

completely understand the subject before they are

forced to go forward. Similarly, another study has

indicated that an average of 20 percent of the students experienced difficulty understanding the teacher’s

comments or directions at any given time.201

No comparable study has been conducted in colleges and universities. College and university education in the United States is also highly decentralized, But few institutions give any systematic

thought to the productivity of teaching and learning on their own campuses, and the use of technol199 John I. Goodlad, op. cit., footnote 178, p. 112.

200 Benjamin Bloom, cited in John 1. Goodlad, op. cit., footnote 178.

201 John I. Goodlad, op. cit., footnote 178.
251

ogy is idiosyncratic. Many colleges employ technology not to individualize instruction but to permit

students in “mass” lecture courses to see the instructor.

Geography.—New technology has the potential

to reshape the landscape of education, primarily

combining geographic decentralization with an increase in the scale or scope of management. The effect is more likely to be felt by universities offering

courses for large numbers of students on one campus,

but it could also reduce the size of large high schools

or other facilities in urban areas. The key is an ability to deliver specialized courses without having a

specialized instructor, library, and experimental

apparatus at each location. It is clearly easier for people to continue to receive training and instruction

throughout their careers if they do not need to physically move to where instruction is available.

Closed broadcast technology is already being used

to deliver instruction to people watching in rooms

supplied by their employers. Stanford University has

a program where students in a corporate facility

watch a videotaped lecture in the presence of another

employee of the firm with professional credentials

in the subject area, who answers questions during

and after the viewing. The TAGER system in Dallas/

Fort Worth ties together 17 universities with a closedcircuit network for graduate level engineering business and computer science. Rio Salado Community

College in Phoenix, Arizona has no classrooms; the

college uses public and commercial television, cable television, audio teleconferencing, slow-scan television, and videotape.202

The emerging generation of technology could obviously do more. It might even permit major universities to offer courses and degrees throughout the

Nation, through what amounted to small franchise

operations tied to the central campus by advanced

communication systems.203 While the prestige associated with ivy covered campuses will undoubtedly

always play a major role in helping people make important contacts and obtain attractive jobs, the role

of colleges in delivering practical training may well

change. It is possible that improved teaching will

make it possible to give people what amounts to a

good junior-level training by the time they reach 18.

It is also possible that employers will be increasingly

interested in specialized training, with the understanding that new employees will need to be retrained every few years.

Under these circumstances, is it the role of a university to give the student an initial specialty with

the assumption that subsequent specialties will be

taught by employers? Should universities screen out

individuals likely to fail in different occupations? Is

the university’s central role one of providing students

with basic intellectual tools and a capacity for understanding their culture?

ZOZR.J. Lewis, “Research Questions on the Impact of Computers in

the Classroom,” The Ontario Institute for Studies in Education, University

of Toronto, Toronto, Canada, 1983.

Z03F. D. Fisher, “Higher Education Circa 2005, ” Change, January/Feb

ruary 1987, pp. 40-45.

PERSONAL BUSINESS AND COMMUNICATION204

Structure and Performance wave systems, satellite links, fiber optics, high-speed

The telephone, banking, insurance, legal, accountswitches, the ability to store massive volumes of data

in ways that permit easy access, and a variety of

ing, and other businesses that deliver communication other new kinds of equipment have the potential to

and business services to individuals and businesses fundamentally reshape industries whose primary

are at the core of the much discussed “information function was routine paper-pushing. They also have

economy, ” and are most obviously affected by the the potential to create entirely new lines of business

capabilities of new information technology. Powerful and inexpensive computers, high-speed commuin areas where services need to be tailored to specific applications. Indeed, a rise in consumer, govnication made possible by relatively low-cost micro- ernment, and business demand for these “transactional” products has been responsible for a significant ZOqMUCh of this discussion is drawn from U.S. Congress, Office of Technology Assessment, “Communications and Information,” sector study, share of U.S. economic growth during the past 15

Washington, DC, 1987, years.
252

This technical revolution has, in turn, undermined

(some would say overwhelmed) the regulatory apparatus that evolved over decades around older systems. Such pressures, combined with new attitudes

toward market freedom, have weakened or eliminated many ancient regulatory constraints on telephone services, insurance, and banking. Intense

competition for long-distance telephone service has

replaced the heavily regulated AT&T monopoly. Insurance regulations implemented over generations

for a wide range of purposes (primarily at the State

level) are being reviewed and modified.205 Taken together, changes in technology, demand, and regulation, and the intense competition engendered by

these changes are in the process of revolutionizing

some of the stodgiest enterprises in America—and

some of the Nation’s leading employers.

The rules governing the telecommunications and

broadcasting industries have been radically reshaped

by changes in regulatory policy during the past few

years. The “Carterfone” decision, the “Modification

of Final Judgment” (disbanding the Bell System), the

Federal Communication Commission’s deregulatory

initiatives established in “Computer II,” “Specialized

Common Carrier, “ “Computer III,” and other proceedings, have facilitated competition, innovation,

and entry.

Clearly the cast of characters has expanded considerably. In addition to the components of the old

Bell system, independent telephone companies, and

other common carriers, financial service providers

such as credit card companies, banks, brokerage

firms, and insurance companies have invested heavily in national and international communication systems. Some of these enterprises have expanded their

networks to offer investor and financial information

for remote users. Citicorp is a leader in this kind of

private networking by financial institutions. It uses

two Westar V satellite transponders, is a digital termination system vendor, and plans to offer both information and network services nationally.

Railroads, as well as electric and gas utility companies, have long utilized private microwave facilzOSRegulations in insurance cover consumer protection, licensing Of

companies, restrictions on the types and quality of company investment,

regulation of rates and advertising, limits on grounds for cancellation

and non-renewal, provisions for minimum coverage, regulations on underwriting criteria, cost disclosures, unfair trade practices, and transactions between parent companies and affiliates.

ities for command and control of their network operations. They own or control extensive rights-of-way,

especially railroads with rights-of-way that connect

urban centers and have been active in providing

rights-of-way, by sale or joint venture for the construction of intercity coaxial or fiber optic transmission systems. GTE Sprint, the third largest interexchange common carrier, developed from Southern

Pacific’s private microwave network.

As the information processing and data transmission industries merge, integration by many manufacturers into at least some transmission markets is

taking place. Mitel and American Satellite have

formed a joint venture, EMX Telecom, to provide

end-to-end telecommunications services. Finally

many large firms are assessing the feasibility, for their

private networks, of providing their own (Integrated

Services Digital Network (ISDN) facilities–using T1

carrier circuits obtained from AT&T’s competitors,

satellite transponders, or excess capacity of other

users’ internal networks, rather than leasing lines

from telephone companies.

While growing use of advanced computers and

communication equipment has increased the capital invested by the network of businesses that delivers communication and business services such as

legal help, financial services, insurance, and real estate, these businesses remain comparatively isolated

from the rest of the economy. Of the value-added

generated in serving consumer and government

needs for the Personal Business and Communication amenity, 70 percent remains in the sector classified as Transactional Activities (see figure 6-9).

Information transactions are still dominated by human expenses and not equipment costs. The costs

of a telephone call or a letter are irrelevant compared

with the time spent preparing the material. The cost

of using advanced databases is dominated by the

personal costs needed from the producer to prepare

the information and from the purchaser who retrieves

and interprets it.

Prospects

Will all of the institutional shuffles just described

result in real competition and flexibility in the Nation’s information industry? The answer depends

both on decisions made by regulatory authorities in
253

Figure 6-9.-Value-Added To Meet Demand

for Personal Business and Communication

($161 billion* in 1984)

Natural Resources

Construction

Low Wage Manuf.

Medium Wage Manuf.

High Wage Manuf.

Transport & Trade

Transactions

Personal Services

Social Services

o 20 40 60 80

Percent of $161 billion

● Constant 1980 dollars

SOURCE: Office of Technology Assessment (see table 4-6 of ch. 4)

the near future and on how formerly regulated companies survive the transition to competitive markets.

Competition will also be heavily influenced by the

way explicit and de facto standards are adopted

throughout the industry. An open system, such as

the architecture of the IBM personal computer and

the MS-DOS operating system, clearly led to an explosion of hardware and software developments by

firms of all sizes.

Regulation

Message Service and Information Processing.—The creation and maintenance of communication monopolies “regulated in the public interest”

could be justified by arguing that the economies of

scale possible under monopoly regulation can lead

to prices so much lower than those likely to be available in a competitive environment that they offset

any consumer advantage that may exist under competition. But while regulation can avoid a situation

where a monopoly exploits its privileged position

through excessive prices, it can seldom provide adequate incentives for the adoption of new, cost-saving

products or services.

The logic of telephone regulation was undermined

by technology in two principle ways. First, the clear

“natural monopoly” advantages of economies of

scale were undermined by the explosion of competing technologies for the provision of long-distance

service. Relatively inexpensive microwave and satellite relay systems can now, for example, be operated by a variety of companies at prices competitive with AT&T. For some markets there is a debate

about whether the provision of local area service,

now restricted to the Bell Operating Companies, has

also lost monopoly advantages.

Second, the logic of regulation collapsed because

of the growing overlap between the provision of

standard telephone service and activities involving

the storage and processing of information where regulation was clearly unjustified. It became necessary

to make painful distinctions between different types

of advanced telephone equipment and a variety of

“value-added” services such as computing and data

services, protocol conversion (converting the language of one computer to a form where it can be

interpreted by another), electronic mail, database

services, electronic publishing, voice store and forward (a sophisticated “phone answering machine”

that can store voice messages and permits intended

recipients an opportunity to call into the system at

any time and hear sorted messages), and alarm and

telemetry services. It proved difficult to find a way

to make adequate use of the Bell System Operating

Companies’ (components of the old AT&T system)

enormous sophistication without allowing them to

take unfair advantage of their regulated access to local telephone markets. At present, the Bell operating companies are allowed to provide some kinds

of electronic information services (message storing

and electronic advertising), but are still prevented

from providing most long-distance services and making telephone equipment.206

The series of mergers and acquisitions in telecommunications has resulted in part from the decision

to dismember the Bell system along market lines,

instead of simply separating communication markets into a series of vertically integrated regional

firms. It is possible that the latter choice would have

resulted in more effective competition in end-to-end

services and perhaps better international competition. The point may ultimately be moot, however,

as an increasingly unregulated market moves rapidly to create end-to-end competition despite the

original regulatory intent, and as restrictions on the

Bell Operating Companies are removed.

ZWC. Sims, “Most flegu]atory Curbs on 7 ‘Baby Bells’ Kept, ” The fVew

York Times, Sept. 11, 1987, p. D1.
254

By the end of this decade, the current telecommunications marketplace is likely to consist of select “tiers.” A central sector will consist of fully integrated end-to-end suppliers who primarily employ

their own facilities to offer users a complete “package” of services. Among the firms most likely to be

major players in this sector are AT&T, the seven Bell

Regional Holding Companies, and perhaps some of

their larger competitors (MCI, GTE, United, and Continental). A second tier would consist of equipment

and carriers’ “carriers.” For instance, the fiber optic networks will provide strong competition to AT&T

in the carriers’ carrier sector, while Northern Telecom and IBM/Rolm will be similarly successful in

the network equipment and large private branch exchange (PBX) area. Industry “shakeouts” are currently underway in long-distance markets as well as

in large switching equipment (especially digital),

PBXs, and key sets.

Even within such an oligopolistic market structure,

there will be many opportunities for firms to apply

organizational advantages of large scale production

and vertical integration. However, in each of the supply tiers, there may be problems of discrimination,

cross-subsidy, and access to technical information.

In sub-markets, particularly those of limited population and traffic density, supply will retain many

monopolistic attributes. In central core areas, supply bottlenecks in local exchanges for basic service

will remain and provide the most attractive area for

application of structural separation. In other words,

while the new regulatory environment for communications has opened opportunities for competition

in areas traditionally controlled as “natural monopolies,” it is likely that the industry will continue to

be dominated by enormous firms that yield only a

small fraction of their total business to companies

serving relatively small niche markets.

In spite of rapid automation of many activities, the

costs of human time and talent should continue to

dominate the production recipe in communication

and data processing. Given that a way is found to

restructure management to take advantage of new

information technology and overcome cultural barriers to new communication modes, this blunt fact

will remain a significant economic constraint on the

way new communication technologies are used. For

example, the cost of message delivery primarily involves the time invested by the individuals sending

and receiving the information.207 Labor costs associated with management and the time spent reviewing data, for example, represent nearly 90 percent

of the cost of database services, with capital costs

of communication and computer equipment and the

cost of communication services representing the rest

(see table 6-6).

The cost of preparing a first-class letter in an ordinary business may be on the order of $20 to $30,

while the cost of postage is only 25 cents. The cost

of an average 10-minute long-distance business telephone call is $16.24, of which $8.97 is for communication services and the rest is the result of employee time.

Figure 6-10 illustrates the relationship between

price and demand for different kinds of point-to-point

communication services. Demand for mail has proven

to be extremely inelastic, since mail delivered per

person has continued to increase sharply even

though real prices have increased.208 The elasticity

of demand for telephone service is negative. Long

distance telephone demand appears to increase by

10 percent when prices fall by 10 percent (a price

elasticity of-1 .0), while local telephone usage seems

to increase by only 2 percent when prices fall by

10 percent (a price elasticity of -0.2).209

Broadcasting and Print Media.—Regulation of

broadcasting and print media are discussed in the

next section, which describes the network of busi2071. de Sola Pool et al., “Communications Flows—A Census in the

United States and Japan,” North Holland, Amsterdam, 1984.

208’4Communications and Information,” op. cit., footnote 204.

Z@~ster D. Taylor, Te/ecornrnurrjcations Demand: A Survey afrd a

Critique (Cambridge, MA: Ballinger Publishing), 1980.

Table 6-6.—Production Costs for a Database

Percent

Cost area of costs

Sales, marketing, and administration . . . . . 45

Content acquisition . . . . . . . . . . . . . . . . . . . . 40-45

Data communications equipment, frontend processors, database storage. . . . . . 6

Communication services (local exchange,

long-distance value added net or

public switched) . . . . . . . . . . . . . . . . . . . . . 7-8

SOURCE: Peter W. Huber, The Geodesic Network: 1987 Report on Competition

in the Telephone industry, prepared for the U.S. Department of Justice,

Antitrust Division (Washington, DC: U.S. Government Printing Office,

January 1987), based on Link Resources Corp., “Pricing and Marketing On-line Information Services, ” 1988, pp. 17-18; Dun & Bradstreet;

and other sources.
255

Figure 6-10.-HypotheticaI Relationship

Between Price and Quality of

Message Services (e=price elasticity)

Long Distance

Telephone Service

e=065 to - 1

Local Telephone

Usage

e=-0 2

\

SOURCE: U.S. Congress, Office of Technology Assessment “Communications

and Information,” sector study, Washington, DC, 1987.

ness that provide the Recreation and Leisure amenity

for Americans.

Information Processing. -Telecommunications

and computers have traditionally been considered

separate industries, partly because of legal constraints. AT&T was not permitted to sell or produce

computers for anything other than use within the

Bell system.210 As telecommunications networks are,

in an important sense, computers (or at least a primary example of the application of computers), this

ban did not stop AT&T from emerging as a major

presence in the industry.

The regulation of telecommunications also prevented computer companies from competing in the

telecommunications arena. Nevertheless, the growth

210 This decree was issued in an antitrust case brought by the Justice

Department to constrain this communications giant from dominating

the nascent computer industry.

of distributed processing and computer terminals in

the 1970s made computer communication dependent on facilities supplied by the regulated public

telephone network. Frustration with certain parts of

this system led to the development of alternative special networks for data even as the proliferation of

computers in the office and factory led to the creation, by computer companies and others, of “Local

Area Networks.” Computer and telecommunications

firms began to overlap and compete. There is growing demand for systems that combine voice and data

communication.

The rules have changed. AT&T and IBM will compete in each other’s traditional markets because regulators removed restrictions on AT&T’s computer

activities after the court-ordered Modification of Final Judgment,211 and because several decades of regulatory changes have allowed more competition in

the provision of communications equipment and

services.

Intermediate Demand

Table 6-7 provides a crude review of the relationship between intermediate and final demand for information services in 1977. While the data are old

(1977 was the last year for which detailed statistics

are available on intermediate demand in the categories shown), the table provides some indication

of the relationship between intermediate and final

demand for information.

Some communication services have actually decreased as a fraction of all “intermediate demand”

in the U.S. economy during the past few decades,

in part because prices have fallen in many areas.

Paper and publishing was 5.1 percent of all intermediate inputs in 1963 and 4.1 percent in 1977.

Communication services decreased from 1.8 percent

to 1.6 percent of intermediate demand during the

same period.

Network Components

Insurance.2]2-Three features of the emerging

U.S. insurance system deserve attention:

zllThiS ~CUr~ed as of Jan. 1, 1984, and technically, modified the 1956

Consent Decree.

212Much of this discussion is drawn from Barbara Baran, “Techno.

logical Innovation and Regulation: The Transformation of Regulation

in the Insurance Industry,” contract report prepared for the Office of

Technology Assessment, Washington, DC, January 1985.
256

Table 6=7.—Demand for Information and Data Processing by Major User Group

Percentages

Intermediate Personal Government Total use

demand consumption demand (1977 $ millions)

Communication services:

Communications (except radio and TV

broadcasting). . . . . . . . . . . . . . . . . . . . . . . . 44 42 5 52,868

U.S. Post Office . . . . . . . . . . . . . . . . . . . . . . . 72 21 7 12,935

Data processing servlces:

Computer and data processing services . . 83 0 16 15,394

Information goods:

Printing and publishing. . . . . . . . . . . . . . . . . 52 32 12 31,849

NOTE: Percentages may not add to 100%, since total use also includes inventory changes and consumption of producer durable. These are quite small for the categories

indicated here.

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “1977 Input/Output Tables,” Survey of Current Business, vol. 64, No. 5, May 1964.

1. a radical change in the way work is organized

within the enterprises, which eliminates most

routine clerical tasks and routine professional

tasks (such as standard underwriting decisions);

2. fierce competition in areas traditionally enjoying protection for generations; and

3. a radical change in the geography of production, as some functions (such as central records

keeping) become highly centralized and others

(such as routine underwriting) are decentralized.

The increased range of services made possible by

new technology are forcing consumers to ask penetrating questions about exactly what they are purchasing, and what features of the services they value.

And the technology, combined with the new pressures of competition, is forcing producers to ask unprecedented questions about precisely how these

services are provided. This has resulted in subtle but

fundamental changes in how these enterprises go

about delivering their services and frequently in basic

changes in management practices and job descriptions throughout the enterprise.

Work Organization. —Insurance firms were among

the first companies to make heavy use of computers,

and at one time owned 16 percent of IBM’s installed

capacity. The computers were, however, used almost

entirely to automate “back office” work like record

entry and bookkeeping, and had virtually no influence on the way most work was managed. The industry is now undergoing a second and much more

radical kind of automation, in which basic management strategies are coming under intense scrutiny

and virtually every operation will be redefined. The

primary motivations are product diversification, error reduction, improvements in service quality and

speed, and the quest to be competitive; both the primary and second phases of this process are described

in box 6-D.

There has been enormous institutional resistance

to the implementation of such programs. The link

to sales has proved to be particularly difficult to

automate. Traditionally, most insurance was marketed through one of four mechanisms: independent agents and brokers, exclusive or “captive” agents,

salaried employees or direct writers, or direct mail.

Captive agencies and direct writers have moved to

adopt new technology, while independents are moving comparatively slowly. Competitive pressure may

force independents to move at a faster rate.

Competition. —Changing regulations, growing consumer sophistication, and new technology have combined to introduce ferocious competition in areas

where the word was once considered impolite. Competition has grown around price, product innovation, and service quality. The “bundled” services of

whole life, for example, are rapidly being separated

into components: investment, risk-protection, and

services. Unprecedented competition has emerged

both in the provision of low-cost insurance “commodities,” and in sophisticated financial and investment services. Banks and investment houses now

offer money market funds and other services that

often provide more attractive investment opportunities than life insurance. Between 1976 and 1980

premiums fell more than at any time since the turn

of the century, and processing times have been

greatly reduced.
257

Similar patterns prevail in commercial insurance. of self-insurance or captive insurance companies that

Corporate risk managers have increasingly compared may provide equivalent risk coverage more efficiently.

the merits of commercial insurance with the merits The “bundled” functions of property/casualty insurBox 6-D.—The First Phases of Automation

The first stage: Issuing a check

If a check had to be issued, first it was typed by a typist; then another clerical verified the amount; a third

person audited the claim to insure that the doctor charged appropriately for the service provided; a fourth person

actually “burst” the check [took apart the carbons]; and a fifth then put the check through the signing machine.

Including supervisory oversight, between six and seven people were involved in this one procedure alone. Claims

needed to be typed and retyped. Reports of several kinds needed to be prepared for accounting and management

functions. Multiple copies of records prepared to update several files.

Back office “electronic sweatshops”

Data entry was typically separated in organizational terms, and often geographically, from middle management. Typically working in huge, open offices, workers were grouped by function: underwriters, raters, typists,

file clerks. Clerical work was machine paced, and in some cases lines of text typed per hour were monitored

by machine. Turnover rates for employees was very high. In 1979, a text processing center for Travelers insurance operated around the clock and turned out an average of 6)000 letters each week. It employed 35 typists, 11

of whom transcribed full-time and 27 part-time on a 6 PM to 10 PM shift each night or at peak hours to maintain

a goal of 24 hour turnaround.

The second stage: Group Health underwriting

1. Commodity-like products (standard life insurance policies, group health, automobile and homeowner insurance, etc.) are offered through streamlined channels in which a highly skilled clerical employee or salesperson, 

1 enters data directly into terminals linked to central data-processing facilities via the IIR/ACCORD network,

IBM’s IVANS [Insurance Value Added Network], or some other network. Skilled clericals, rather than professional

claims examiners, are thus able to handle routine claims and order necessary inspection reports. Once entered,

data that formerly needed to be typed and retyped need only be entered once. Information for claims, accounting

and management reports, and other functions can be obtained from centralized data files that are automatically

updated. The new systems are able to identify exceptional cases, presenting them to underwriters and claims

examiners trained to handle cases that fit no standard role. The process is called “underwriting by exception,”

“pigeon-hole underwriting,” or “computer assisted underwriting.” A survey taken in the early 1980s found that

firms making relatively straightforward investments in the automation of agent functions averaged a 70 percent

increase in output in the first two years compared, with only a 17 percent increase in firms not investing in

automation. 2 Regional offices can thereby be reshaped into multi-activity teams that combine typists, raters, and

underwriters. Some 71 percent of property/casualty firms and 44 percent of life companies surveyed indicated

that they instituted this form of organization.

2. Most forms of commercial insurance, and services for high-income individuals interested in sophisticated

financial packages, cannot be automated in this way. Commercial insurance has necessarily continued to emphasize flexibility; highly sophisticated, tailored products; specialized services such as loss control engineering;

and rapid claims handling. Competition in services of this kind requires agents close to the market. Computers

are used to assist highly skilled professionals to tailor products for customers rapidly and to work through a variety of options.

SOURCE: The Office, 1979, cited in Barbara Baran, “Technological Innovation and Regulation: The Transformation of Regulation in the Insurance Industry, ”

contract report prepared for the Office of Technology Assessment, Washington, DC, January 1985.

1

Jobs created in systems like the one described here are so new that they have complex and obviously synthetic titles, like “para-technical, ” “professionalclerical,” “para-professional,” or “skilled clerical."

2National Underwriter, May 13, 1983, pp. 18-22
258

ance (e.g., fire, workmen’s compensation, auto liability, and auto physical damage) became unbundled

and sold separately.

While regulations still place severe limits on interstate bank offerings and bank entry into insurance, the rules are constantly under assault. Many

States now allow life insurers, for example, the option to forgo inefficient subsidiary systems as well

as the freedom to widen their investment portfolios.

Many insurance companies have been acquired outright by industrial or financial institutions such as

ITT and American Express.

Scale and Scope. —Most of these changes work to

the advantage of large firms. This encourages both

horizontal and vertical integration of functions in

firms that can take maximum advantage of the dynamic performance of new automation.

About 4,900 licensed insurance companies were

operating in the United States in 1983, of which 60

percent were in property/casualty and 40 percent

in life insurance. But a wave of mergers and acquisitions that started in the 1960s has begun to consolidate this diverse industry with astonishing speed.

A recent study estimated that within the next two

decades virtually all insurance would end up in the

hands of 10 to 15 percent of companies now operating.213 Large, multinational firms and increased

government health coverage are expected to dominate most of the industry, leaving a modest number of market niches to specialty companies.214 Concentration is likely to be particularly dramatic in the

area of sales, where parent firms will attempt to invoke tighter control over distribution systems. Some

concentration will also take place by integrating insurance and financial services. Citicorp, for example, has set up an insurance operation, and Prudential holdings now include a brokerage house and a

bank.

Geography.–All of these developments have had

contradictory effects on the geography of work. Some

functions, like data storage and large-volume “number crunching,” enjoy economies of scale or require

ZIJLjfe Office Management Association, “Branch Office Clerical Salary Survey, ” and “Management Salary Survey, ” 1982, cited in B. Baran, op. cit., footnote 212.

Z14’’Entering the 21st Century: An Insurance Forecast,” focus on property/casualty, Florida Association of Insurance Agents, p. 161, cited in

B. Baran, op. cit., footnote 212.

integration of data files and are growing increasingly

centralized. Others, typically those that benefit from

rapid and flexible response to consumers, are becoming more decentralized.

In the 1960s, most large insurance organizations

maintained numerous regional and branch offices

as well as a network of field or sales offices. During

the late 1960s and 1970s, many regional network

offices were extended to “get operations closer to

agents and customers.” The second wave of automation technology, however, allowed data entry and

other work to be accomplished efficiently in the field.

This made it possible to return the functions of regional offices to home offices.

Large operations, primarily clerical, can now be

located virtually anywhere. Under the first phase of

automation (again see box 6-D) only highly standardized “back office” functions could be located in

suburbs remote from corporate headquarters. But

with new communication networks, entire integrated

production and service facilities can be “burbed” to

make them more accessible to a desirable labor pool:

suburban housewives.

This centralizing force is offset by technology allowing much data entry, printing, and processing

to be accomplished at the point of data generation—

often in field offices. The portion of centralized data

processing requiring large numbers of entry clerks

and operators accomplishing routine tasks is often

eliminated by work done on field terminals.

Banking.-Banking has undergone a similar

transformation. Regulations that prevent interstate

banking, and in States like Colorado even prevent

branch banking, still impose major barriers to system integration and greatly restrict geographic centralization of operations. There is, however, enough

flexibility in the system to permit a good deal of

change. Pressures are being brought to bear to encourage further loosening of Federal and State controls on banking, while at the same time aggressive

banks like Citicorp are finding increasingly sophisticated methods of exploiting loopholes in existing

statutes. As a result, consumers face more choice,

freedom, and risk than they have in the past.

Banks are making extensive use of electronic fund

transfer systems that substitute for paperwork. The

largest is the Fedwire system, operated by the 12
259

Federal reserve banks, which serves 7,000 institutions. Over $600 billion is transferred over the Fedwire and other systems on an average day. Electronic

fund transfers have certain economies of scale and

have been used primarily by larger banks, but the

availability of low-cost microcomputers now allows

many small banks to participate.

Automation can also make the sales portion of

banking much more efficient. As in the case of insurance, sales appear to be splitting into two parts:

the processing of relatively routine transactions (such

as checking accounts, credit cards), and highly specialized financial services for affluent individuals and

institutions. Automation can both facilitate the handling of the routine “commodity-like” functions and

expand the capability and flexibility of the specialized services.

Automatic teller machines have begun to displace

many routine teller functions. There were 13,000

automatic tellers operating in 1973 and 59,000 in

1985. By 1990, the industry expects to have 100,000

systems in place—some operating as national networks.

Consumer interest in new banking technologies

has been limited. Home banking through personal

computers enjoys only a small fraction of individual banking transactions, and sales have not moved

much beyond the experimental stage. Barriers to further growth include the cost of home terminal equipment, software that is not completely transparent to

non-experts, and relatively inflexible services.215 A

related innovation involves “point-of-sale” systems

that permit retailers to debit a person’s account automatically at the time of sale; a statewide, multi-bank

system with 3,500 terminals is now being tested in

Florida. Point-of-sales systems benefit the retailer by

eliminating bad checks and invalid credit cards, and

by speeding transfer of funds to the retailer’s account.

The advantages to the retailer are so great that it

will probably be necessary to give customers a price

break to encourage the use of point-of-sale systems.

It is not difficult to imagine a system that could

allow an individual to pay bills, provide detailed analyses of an account’s status at any time, sort transactions in ways that facilitate analysis of expenses

like utility bills, or document payments for tax pur215Luci]le .S, Mayne, “Technological Change and competition in American Banking,” Techrrova(ion, vol. 4, 1986, pp. 67-83.

poses. None of these functions would require communication speeds above those available through

standard, unconditioned telephone lines.

Advertising. —The advertising industry occupies

a unique role in the U.S. economy. Advertising is

purchased almost entirely by businesses, and therefore must be considered an “intermediate” product,

even though its primary function is to deliver information to consumers. Measured in direct terms, the

industry contributes about 2 percent of value-added

in the U.S. economy. Its influence over the structure of the U.S. economy is undoubtedly much

greater than this modest figure would imply. Much

of the information reaching consumers about products arrives through advertising. The firms purchasing advertising obviously feel that their money helps

shape public response to their products.

The performance of the advertising industry is crucial to the operation of a dynamic economy. Interviews with producers suggest that an inability to advertise in a limited market is a greater barrier than

an inability to produce a large number of specialized items at a competitive price. In the absence of

specialist advertisers, therefore, there would be a bias

towards mass rather than batch production.

Several recent changes, however, appear responsive to the new interest in identifying and reaching

relatively small niche markets. The first involves the

structure of the advertising industry itself. While recent movement appears to be away from the specialized creative “boutiques” and toward greater integration, the integrated firms operate on a very

different philosophy than that of the “full service”

agencies of the 1950s. The present firms seem to

be largely orchestrating the activities of a number

of subsidiaries that specialize in a narrowly defined

areas. Some of these subsidiaries were profitable enterprises simply purchased by larger firms with a

relatively well-defined shopping list. In other cases,

larger firms explicitly set out to establish creative subsidiaries to meet client needs.

Activities in larger firms include regional and product specialization, and specialization in such strategies as direct marketing, public relations, sales promotion, package design, and corporate presentations.

This range of activities allows them to combine the

advantages of quasi-autonomous subsidiaries with

the economies of “scope” deriving from unified man-
260

agement. In principle, the “flexible oligopoly” that

seems to be emerging permits the industry to bring

a large variety of clients into contact with a large

variety of audiences.

Secondly, changes in technology may make it easier to target relatively small audiences. Cable television, specialized magazines, and other new channels have fragmented advertising markets. Direct

marketing has benefited from widespread use of

credit cards and efficient local trucking.

Advanced printing machines can tailor magazine

advertising to regional and perhaps eventually to individual interests. Envelope-stuffing devices are

driven by computers, and mailings are carefully tailored and targetted to known individual profiles. The

next logical step is finding a way to permit a customer more direct access to product information from

a home information system. Systems like CompuServe, the home and corporate computer network,

have a limited, if not devoted, clientele that consists

largely of relatively affluent computer buffs, but it

is not clear how such a system could be used for

effective advertising. A customer going to a terminal with a particular purchasing decision in mind

is different from one browsing through a magazine

or watching a television show where product information is not the objective of reading or watching.

Geography.—While national agencies are still centered in New York and Los Angeles, there has been

dramatic growth in firms located in such rapidly

growing urban centers as Orlando, Dallas, and Houston. Some are independent, but many are subsidiaries of major firms that offer a full line of support.

They provide intimate relationships with local producers and local markets.

When McCann-Erickson followed Standard Oil of

New Jersey overseas in the 1920s, it was the exception and not the rule. But today, like so many other

activities in the economy, the advertising industry

has become an international enterprise. Advertising firms are playing a critical role in helping U.S.

firms find markets abroad; an ability to maintain an

effective foreign marketing operation has become

almost essential for holding domestic accounts.

Equally, U.S. firms have played a major role in helping foreign producers find a home in the U.S. markets. The sale of skilled services in marketing greatly

facilitates international trade, with all the benefits

and liabilities that this entails.

Understanding international market and having

adequate access to foreign media has often involved

combining forces with foreign firms. Of the 22 largest

advertising agencies in the United States, 17 are multinationals. More than half of the income of several

of the Nation’s largest agencies currently comes from

foreign revenues.

Information Processing and Communication

The patterns of institutional and geographic integration and disintegration described for virtually

every sector of the economy depend critically on low

cost information transmission and processing. It has,

of course, always been difficult to identify the way

information is “used” as an input by businesses,

since information costs are typically buried in other

accounts. But as businesses take more care to examine their consumption of information, it turns out

that the cost of information is large, and consists

mainly of hiring people and purchasing software

rather than hardware costs.

Information-related investments continue to grow

rapidly, if more slowly than computer manufacturers

once anticipated. By 1986, information technology

investments represented more than 30 percent of

all business investment. Investments in information

equipment did not slow significantly during the severe recessions of 1980 and 1982/83, when other

capital spending was sharply reduced. While investments in hardware, such as computers and advanced

telephone systems, are relatively easy to identify as

“information” investments, most firms soon discover

that the real costs of information processing are much

larger than direct hardware costs.

Box 6-E provides a rough taxonomy of the functions provided by communications and information

industries. The clean divisions illustrated in the table are not easy to identify in actual practice. Much

data gathering, for example, now occurs automatically through the use of computers disguised as cash

registers, automatic tellers, and terminals in travel

agencies. Many “information” businesses provide

more than one of these functions (some bundle them

all as a service), but increasingly the traditional information industries are finding themselves suppliers
261

Box 6-E.–Components of the U.S.

Communication Industry:

Common Carriage and Substitute Services

Exchange service providers

● Bell operating companies

• Independent telephone companies

● Other common carriers

—Cellular

—Digital termination service

—Others

Interexchange carriers

● AT&T communications

● Satellite carriers

● International record carriers

● Bell operating companies

● Independent telephone companies

Carriers’ carriers

Resellers, value-added networks, and information service providers

Media entities in common carridge (cable

and broadcast companies)

Private and user-oriented systems

● Private systems

—Local and wide area networks

—Private microwave systems

—PBX systems

—Electronic funds transfer systems, etc.

● Shared Tenant Services

–Smart buildings

—Teleports

SOURCE: U S Congress, Office of Technology Assessment “Communications and Information,” sector study, Washington, DC, 1987.

or components in elaborate networks owned and

operated by businesses that do not consider themselves in the information business—witness the extensive communication networks in firms ranging

from McDonalds to Citicorp to Federal Express.

Until recently, the industry was governed by several

●

●

paradigms:

A clean distinction existed between message

service communications (mail, telephone, and

telegraph), broadcast communications (radio,

television, and publishing), and data processing.

New technologies in communication would add

to rather than substitute for existing channels.

●

●

●

●

●

Point-to-point communication would need to be

regulated because of the “natural monopoly”

of the enterprises.

Regulation would ensure that the telephone

service was inexpensive and almost completely

undifferentiated—the richest and the poorest

Americans would have the same handset and

talk over the same phone lines.

With the exception of publishing, broadcast enterprises would need to be heavily regulated because of the scarcity of available broadcast frequencies.

With the exception of books, broadcast information would be heavily (or entirely) sponsored

by advertising rather than purchased by the ultimate consumer.

Data processing would be a specialized service

delivered primarily to industries with sophisticated information processing requirements.

Today, virtually all of these paradigms are collapsing under the combined pressures of a radically

changed regulatory environment and new technology, which have created competition in price and

quality of service and rapid differentiation of communication services. “Plain Old Telephone Service”

(known in the industry as POTS) is rapidly becoming archaic, as both individual and business consumers are confronted with a variety of long-distance

services (i.e., services offering different qualitative

characteristics for the rate at which data can be transmitted, privately-owned switching systems within

firms, and packet switching that can combine many

relatively low-data rate services). Technology has introduced an enormous range of message delivery

services competing with the market once limited by

POTS, mail, and Telex/telegraph. Express mail, paging services, electronic mail, high-speed facsimile systems, and voice store and forward systems have

opened a range of new market niches at a variety

of prices (see table 6-8). The distinction between message and broadcast systems has become less distinct,

since electronic message and voice forwarding systems can deliver messages from an individual to several different recipients simultaneously.

Acceptance of new technologies has been somewhat slower than expected, in part because the new

communication techniques take time to insinuate

themselves into the conventions of business in tradi-
262

tional organizations. The lack of an agreed communication standard has also presented problems.

Cellular radio and paging services are competing

in markets once limited to mobile telephone, offshore

radio, rural radio service, specialized mobile radio,

air-ground radio telephone, and maritime mobile

services. There were nearly 6 million pagers in use

in 1986 and nationwide paging service is now available.216

Electronic mail is heavily used in manufacturing

enterprises and large firms of all kinds. While only

17 percent of companies with sales less than $1 million used electronic mail, nearly 60 percent of firms

with more than $1 billion in sales use electronic mail.

The technology has the potential to replace much

routine document and message transmission. As

presently used, 55 percent of the information sent

on electronic mail systems substitute for telephone

calls, 10 percent for telex, and only 5 percent for

first class mail, courier services, and other electronic

transmission; 20 percent of the messages sent electronically appear to be new traffic generated by the

technology. 217 Taken together, telex, facsimile, and

electronic mail generated approximately $1.5 billion

in revenues in 1984.218

It is difficult to estimate the extent to which electronic communication will substitute for print. At

present, print is cheap, easy to transport, and offers

the reader unmatched flexibility. But there is a high

probability that some entirely new communication

strategy may emerge. There is a growing market for

electronic database services (e.g., Dow Jones and

LEXIS) that substitute for conventional business information libraries or paper archives. The insurance,

banking, and advertising networks described earlier

maintain their own proprietary data banks. Manufacturing firms as well as architecture and engineering services are making increased use of drawings

and specification files stored in electronic form.

Data communications still accounts for less than

10 percent of telephone company revenues, though

216 Peter w. f-fuber, The Geodesic Network: 1987 Report on COITJpetition in the Telephone Irrdushy, prepared for the U.S. Department of

Justice, Antitrust Division (Washington, DC: U.S. Government Printing Office, January 1987), Table MB.2.

217EMWI Electronic Mail and Micro Systems, vol. 10, No. 5, Mar. 3,

1986, p. 3, cited in P. Huber, op. cit., footnote 216.

218 Robert Moran, The Eletronic Mail Revolution.” h7’I/2fiCatiOnS fOr Users

and Suppliers, Business Communications Co., Inc., No. 63, May 1985.

data transmission is obviously a growing business.

Approximately 13 million pages of information a day

are sent through “packet switching” services that

allow users to reduce telephone costs. The Federal

government generates about 40 percent of this business.

219

High-speed “dial up” packet switching from companies like Telenet, Tymnet, and Uninet has been

available for some time and is used primarily for

computer communications. The ISDN is an emerging concept for providing a standard for data and

signaling over switched telephone circuits, which

would evolve from existing international standards

for digital voice communications. The International

Organization for Standardization (ISO) is coordinating the work of 89 member nations on ISDN, while

in the U.S. standards are being developed by the

Consultative Committee on International Telephone

and Telegraph (CCITT). As in the case of all standards, a premature choice can miss technical opportunities—but the lack of standardization can create

such confusion that markets may materialize much

more slowly than they should. Making no collective

decision about standards does not mean that a standard will not be set. In the absence of a standard, a

large public telephone company in Japan or Europe

or a major corporation like IBM may set de-facto

standards. AT&T, MCI, GTE, and each of the Bell

Regional Holding Companies are presently conducting field trials of ISDN systems.220 Japan and several

European nations also have field trials underway.

Most high-speed channels require a “dedicated

line” between senders and receivers, but advances

in switching technology are now permitting what is

called a “virtual private line” that allows a central

office options for routing signals and can make more

effective use of central office equipment. Advanced

ISDN systems will permit users to select the kind

of service required. They could, for example, purchase a high data rate line when massive data transmission rates are needed, and purchase lower speeds

when these are needed.

219 P. Huber, op. cit., footnote 216.

220JOhn J, Keller,“C@r~ Office Equipment Makers Preparing fOr Big

Push,” Communications Week, Mar. 17, 1986; and National Telecommunications and Information Administration, U.S. Department of

Commerce, “Issues in Domestic Telecommunications: Directions for National Policy,” NTIA Special Publication 85-16, Washington, DC, July

1985.
263

Techniques for purchasing data processing are becoming more complex as data processing costs of

all kinds are dominated by the software and personnel operating the system (see table 6-8). In 1986,

there were estimated to be about 3,000 databases,

1,400 producers, and 450 on-line services.221 Demands for data are dominated by financial and credit

services (see table 6-9).

Intermediate Demand for Information Processing.—Businesses use information services for a

variety of functions, each of which lead to qualitatively different demands for products and services.

• Extremely large “number crunching” systems

are required for an array of functions, including development of high-quality animations for

film production, analysis of aerodynamic designs, weather forecasting, and the design of nuclear weapons. While most of these applications

formerly were conducted in a “batch” mode

submitted by the client to a computer center,

applications are increasingly demanding “on-

‘2ZI Link Resources Corp., “Electronic Information Industry Forecast,”

1983, cited in P. Huber, op. cit., footnote 216, p. 7.1.

Table 6-8.—Cost to User of Message Services

(cents per message, assuming 1,000 messages per month)

Cost area Cents per message

In-house PC-based electronic mail . . . . 5-7

Service bureau. . . . . . . . . . . . . . . . . . . . . . 50-80

Voice storage and retrieval . . . . . . . . . . . 9-20

Telex 350-760, teletex facsimile . . . . . . . 24-143

Overnight courier . . . . . . . . . . . . . . . . . . . 850-1,250

SOURCE: Peter W. Huber, The Geodesic Network: 1987 Report on Competition

in the Telephone Industry, prepared for the U.S. Department of Justice,

Antitrust Division (Washington, DC: U.S. Government Printing Office,

January 1987), Table EM 5.

Table 6-9.—North American Electronic Information

Industry Revenues in 1982 (millions of dollars)

Industry Revenues

Financial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30.0

Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.7

Legal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.0

Economics & Econometrics . . . . . . . . . . . . . 8.6

Scientific & Technical . . . . . . . . . . . . . . . . . . 6.5

News . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4

Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1

SOURCE: Link Resources Corp., “Electronic Information Industry Forecast,” No.

4, 1983, cited in Peter W. Huber, The Geodesic Network: 1987 Report

on Competition in the Telephone Industry, prepared for the U.S. Department of Justice, Antitrust Division (Washington, DC: US. Government

Printing Office, January 1987), Table EM.5.

●

●

●

line” systems where an engineer or animator

can view the results of a simulation immediately

—often through a high-quality graphic representation.

Process control systems, involving the operation of either a large chemical plant or an array of numerical machine tools, require fast

communications and extremely high reliability.

On-line processing for applications like banking, insurance, or airline reservations require

communications, a connection with large blocks

of data, high reliability, and functions like the

blocking of files while updating occurs.

Distributed processing is required for office functions like routine payroll and management information systems, word processing, and modest analytical efforts.

There is no effective way to guage the relative rates

of growth of these functions.

New Technologies and System

Integration

Given the complexity of the changes just described,

it becomes difficult to predict changes in the recipe

for delivering communication and business services

and information processing. One feature of the production recipe is abundantly clear. While technology will vastly increase the productivity of many information processing functions, the personal costs

(and the returns to capital in financial and real estate firms) are always likely to dominate this enterprise. The rising need for specialized services like

communications system installation and maintenance,

software preparation and maintenance, and other

such work will increase inputs from a variety of

information-related businesses. The cost of computers and communication equipment, however, is

unlikely to dominate overall costs.

Some changes in the approach to the production

of communication and information services can be

readily identified:

● The telephone industry is examining the role

of many “middle management” functions in

much the same way as the insurance and banking industries. Services requiring human intervention (information, credit card calls, etc.) are

being automated rapidly, and production meth-
264

ods for headsets and other equipment are being scrutinized.

● The distinction between electronic and standard publishing is narrowing rapidly as much text

preparation, editorial work, layout, and document transmission is being undertaken electronically. Electronically stored data are transferred

directly to printing machines, whose physical

location can be chosen to reduce labor costs and

delivery times.

● Computers have escaped from sanctuaries presided over by specialists and their power has

been distributed widely throughout the businesses they serve, becoming integrated in the

routine of ordinary office life. The spectacular

decline in cost and increase in power of modern computer equipment is widely recognized.

Interestingly, the process by which computer

instructions are created—the production of

“software” —though a costly part of the process,

222 continues to bear greater resemblance

to medieval craft work than to any 20th century form of employment. Attempts to devise

methods for automating the production of software through the use of more transparent programming have proven extraordinarily difficult.

zzz software costs represent 80 percent or more of the cost of computerized equipment in major enterprises like the insurance industry.

The Defense Department spends nearly 80 percent of its data processing budget on software related services; see John W. Verity, “Empowering Programmers,” Datamation, Aug. 8, 1986. Similarly, 42 percent of

a group of experts in insurance indicated that software costs were the

largest single barrier to the diffusion of information equipment in insurance while only 5.5 percent cited hardware costs; See B. Baran, op.

cit., footnote 212, p. 57.

RECREATION AND LEISURE223

Prospects

America’s recreation and leisure sector is one of

enormous diversity. Its six major segments are defined in Box 6-F. The industry is being reshaped by

new home entertainment technologies and changes

in the regulations governing communications. The

overall mix of home and away-from-home entertainment, though, has not changed significantly. If anything, electronic media are serving to stimulate interest in away-from-home activities rather than to

substitute for them. Trade has had a major impact;

foreign suppliers have all but eliminated the U.S. production of home electronic equipment and has made

major inroads into sports equipment, recreational

vehicles, and recreational clothing.

Looking to the future, several kinds of change in

the structure of this system are possible:

● Technology can lead to a network of businesses

that reduce barriers separating creative minds

from interested audiences. This could happen

because of both reductions in the cost of preparing high-quality paper, audio and video

●

zztMuch of this di~ussion is drawn from U.S. Congress, Office of Technology Assessment, “Recreation and Lesiure,” sector study, Washington, DC, 1987.

productions, and multimedia products and expansion in the number of channels through

which such products can be delivered. The quality of illusion could be greatly increased. Information technology could give viewers more

power to choose products tailored to their specific interest. New systems can provide alternatives to passive communication by offering fascinating opportunities for simulations and games.

Improved communication channels can reduce

some of the uncertainties of travel, and can increase interest in travel to more destinations in

both urban areas and rural parks. Greater investment in education on geography, history,

health, and the arts could work in the same

direction.

Foreign producers could increase their hold on

the products used for recreation at home and

away from home. Centralized control over the

most powerful communication media, the convergence of publication and electronic communication, and the substitution of pay-per-view

for regulated common carrier broadcasting

could reduce diversity. High production costs

could reduce real competition. Eroding investment in public recreation and park facilities and

an inefficient transportation system could reduce

choice in recreation for low-income families.
265

Box 6-F.—The Major Segments of the Recreation and Leisure Industries

Media refers to recreation and leisure activities utilizing print, video, and electronic media. The products

and services of the media segment can be divided into “hardware” such as television sets, books, home electronics equipment, and the like, and “software” such as TV programming, videogames, and even telephone conversations. The major providers of this segment are the publishing, television, and telecommunications industries, and home electronics manufacturing firms. One other industry is absolutely crucial to this segment—the

advertising industry (described in the preceding section of this chapter), which is the central financial mechanism for the creation of television programming.

Arts and entertainment includes all away-from-home entertainment and cultural events. The products are

the actual events themselves, as provided by the motion picture, professional sports, music, and other industries.

Obviously, this segment is closely linked to the media segment described above, as these arts and entertainment

activities are a major source of media programming.

Recreation refers to all outdoor leisure activity that requires the direct participation of individuals or groups,

such as camping, sports, and visits to amusement parks. There are two basic categories—the equipment necessary to pursue a particular activity (for example, sporting goods) and the services that make participation possible

(campgrounds, amusement parks, parks and recreation facilities, etc.).

Travel and tourism includes all activities related to leisure travel. Some typical products and services are

lodging, transportation, and travel agent services.

Civic participation includes all religious, political, professional, and other civic activity that constitutes an

important part of an individual’s use of free time, as well as involving expenditures. The major service of this

segment is the establishment of organizations whose purpose is to facilitate civic activity. In this respect, the

key “providers” are membership organizations, such as churches, trade unions, professional associations, and

political parties.

Personal Consumption includes all activities that combine the fulfillment of personal needs—such as shopping or eating—with the pursuit of leisure, which are in some sense also part of the Recreation and Leisure amenity,

The major providers are the food services, industry, and retail trade. This is another segment where the advertising industry, to the degree that it stimulates personal consumption, plays an important role.

Note: Although these categories constitute a broad definition, they do not cover all recreation and leisure

activities, such as the considerable sums spent on illegal substances and activities. Further, some activities, even

though not illegal, simply cannot be traced. Collectors of artifacts undoubtedly spend billions annually pursuing

their hobbies, but as many hobbyists trade rather than sell on the open market; their considerable economic

impact eludes conventional accounting.

Structure and Performance Only 14 percent ends up in the comparatively lowThe present discussion treats only those parts of

paid Personal Services sector.

the Recreation and Leisure amenity included in the

somewhat narrow definition of the sector introduced

in chapter 2, which excluded spending on food and

domestic travel because it was virtually impossible

to distinguish recreational spending from spending

for other purposes in these categories. Even using

this more restrictive definition of the sector, figure

6-11 suggests that the value-added derived from

spending on Recreation and Leisure is spread broadly

across the economy. About one-fifth ends up both

in manufacturing and in Transportation & Trade.

Home Entertainment

The underlying economics of home entertainment

and home information are difficult to reconstruct,

since much of the value of the information received

through television, radio, newspapers, and magazines is paid for by advertisers and not directly by

consumers. Advertising accounts for 50 to 75 percent

of the cost of a delivered newspaper or magazine

and nearly 100 percent of the cost of most commercial radio and television. Consumers pay indirectly
266

Figure 6-11.-Value-Added To Meet Demand

for Recreation and Leisure

($200 billion* in 1984)

Natural Resources

Construction

Low Wage Manuf.

Medium Wage Manuf.

High Wage Manuf.

Transport & Trade

Transactions

Personal Services

Social Services

O 5 10 15 20 25

Percent of $200 billion

= 1972 % 198 4

● Constant 1980 dollars.

SOURCE: Office of Technology Assessment (see table 4-6 of ch. 4).

by the abuse of their patience, and by having advertising costs appear as a part of “transactional”

costs throughout the economy. The equation is

changing, however, as advertising supported television is replaced by a variety of cable-television options (including pay-per-view technologies), video

rentals, and other mechanisms for delivering entertainment software to the home without advertising

support. The impact of this change has yet to be felt;

advertising revenues of broadcast radio and television remain robust.

Historically, broadcasting has been limited by the

availability of usable electromagnetic spectrum.

Rather than a local monopoly, the broadcast sector

is marked by multiple and roughly equivalent suppliers in a given market. The mode of regulation also

differs. Instead of price and rate of return controls,

radio and television regulation aims at ownership,

program content, and operational controls. Licenses

to operate are not granted in perpetuity, but rather

are periodically reviewed against a “public interest”

standard. Although regulation of telephone common

carriage occurs at both the local and Federal level,

only Federal regulation occurs for broadcasting. The

Communications Act of 1934 specifically defines

broadcasting as the “dissemination of radio communications intended to be received by the public,

directly or by the intermediatory of relay stations."224

The Act further distinguishes radio broadcasting as

“not . . . a common carrier” activity,225 and public

224 United states Code, No. 47, Sec. 153 (0), 1976.

225 United States Code, No. 47, Sec. 153 (h), 1976.

policy also separates it from “point-to-point” communications. 226

The Cable Act of 1984 brings cable television under the regulatory auspices of the 1934 Communications Act, while simultaneously relieving the industry of arbitrary franchise, rate, and license renewal

requirements imposed by local authorities.227 One

reason for this landmark legislation was that the technology of cable and its market had long ago outstripped the ad hoc regulatory framework erected

by local, State, and Federal authorities. Among other

things, the Cable Act required that basic cable rates

be deregulated by 1987, channels be set aside for

outright lease to unaffiliated companies, telephone

companies not be allowed to operate systems in their

regions, cable and broadcast cross-ownership in the

same area continue be prohibited, and cable and

newspaper cross-ownership be permitted. State regulation of cable companies as common carriers was

prohibited. 228 These rules opened the industry to further consolidation and protected it from the advances

of stronger telecommunications and broadcast entities seeking to accumulate operating assets across

the whole spectrum of the communications and information industries.

There are no legal or regulatory restrictions on the

vertical integration of systems operators into programming and distribution under the Cable Act (nor

are there restrictions on non-cable entities providing programming services to cable systems, including competitive communications entities). Unlike

broadcasters, multiple system operators (MSOs), can

control both program content and local cable conduits on a national scale. Many of the top 20 cable

origination program suppliers are owned in whole

or in part by one or more MSOs. These programming interests are being traded by MSOs in moves

to consolidate the now-dispersed program supply

within a few entities with financial clout, the cable

system outlets, and the system interconnections—

all in order to improve the quality of programming

and the economic performance of both the programmers and the cable systems.

zzs~e “subscription Television Service, ’’Federal COInI_nunicatiOns

Commission, No. 3, Sec. 2d-1 (9), 1966.

ZLTCab]e Communi@tions Policy Act of 1984, PL 98-549 (1984 Amending Communications Act of 1934, 48 Stat. 1064).

228 "Cable Regulation,” Broadcasting, July 1, 1985, p. 22.
267

Concentration of ownership of cable systems is not

generally subject to any limitation. In 1980, broadcasters owned 33 percent of all cable television systems in spite of the cross-ownership restrictions.

Newspapers and book publishers owned 24 percent

and operated under no ownership regulation; television program producers and distributors owned

18 percent. The broad ban on telephone company

operation of cable systems included in the Cable Act

is an attempt to dampen any anticompetitive practices that could result from a local monopoly telephone company owning a cable television facility

in the same community.229 The telephone company

cross-ownership ban does not, however, prevent telephone companies from owning or operating cable

television service in any area outside local exchange

boundaries.

The bans on network/cable cross-ownership and

local broadcast station/cable cross-ownership are

clearly designed to insure maximum video program

diversity in the local community by limiting the

power of the networks to acquire cable operations,

which by their very nature compete with network

programming and supplement the broadcast of both

network and local programming by cable carriage

of broadcast signals. These bans are continued by

the Cable Act.

As an unregulated industry, printing and publishing has not been affected by the major changes in

the rules governing the organization of other media industries. New printing technologies, however,

such as those involving low-cost “print-on-demand”

techniques and the possible substitution of electronic

media for certain kinds of publications, may lead to

significant shifts in the industry during the next two

decades. These are analyzed in the next section.

The development of standards is critical for moving into advanced communication technologies (see

also previous discussion of Personal Business and

Communication). It has, for example, proven to be

extremely difficult to develop a technology for high-

-definition television that will not render existing

receivers obsolete.

zzgcab]e operators, it should be recalled, control both the conduit of

communication and the content, or programming; telephone companies control only the conduit. Additionally, such cross-ownership would

put the telephone company in a conflict of interest position as it negotiated with the cable company for compensation for carriage of the television cable on local utility poles.

Network Components

The Media.–New electronic technologies have led

to rapid growth in sales of audio and video equipment

for the home, have resulted in many new channels

for delivering software, and have even spawned new

industries (i.e. audio tapes, compact disks, video tapes,

and cable television). Even newspaper and magazine

publications have become more differentiated. On the

other hand, it is not clear that this diversity of products and a change in the mix between spending on

hardware and software has resulted in a significant

change in patterns of ownership.

The film industry illustrates a complex pattern of

transformation. The industry is no longer built around

the vast, vertically-integrated film studio empires of the

“Golden Age” of cinema, but is shifting toward more

flexible networks of activities that are in effect satellites of major firms. At one time, seven major studios

owned their own theater chains, five of which controlled some 70 percent of first-run capacity in the bigcity markets. Each was vertically integrated with their

own facilities not only for production but for distribution of entertainment spectacles; they were models of

standardized industrial mass marketing.230 Divestiture

of the theater chains in an antitrust settlement in 1948,

and a series of changes ranging from the decline of

center cities to the emergence of television, helped

erode the in-house production structure and paved the

way for independent producers.231 Even the belated

effort to acquire TV stations and theaters in the 1980s

in order to regain control over the exhibition of their

increasingly expensive products seems unlikely to reverse the fragmentation of distribution that makes oldstyle studio operations impossible.232 Tasks formerly

performed by the studios themselves became more and

more contract work assigned to specialists. Almost in

spite of itself, the motion picture industry has come

to be a model of “flexible specialization."233

ZsOMichae} Storper and Susan Christopherson, “Flexible .$pecialization and Regional Industrial Agglomerations: The Case of the U.S. Motion Picture Industry,” research monograph, Graduate School of Architecture and Urban Planning, University of California at Los Angeles,

February 1986, p. 7.

z31 MiChaelStor-kr and Susan Christopherson, “Labor in a Post-Mass

Production Industry: The Case of the U.S. Motion Picture Industry,” research monograph, Graduate School of Architecture and Urban Planning, University of California at Los Angeles, 1985.

232Aljean Harmetz, “Hollywood Seeks Control of Outlets,” The New

York Times, Mar. 3, 1986, p. D1.

Zjjsee, for example, U.S. Congressional Clearinghouse on the Future,

“High-Flex Workers: Adapting to a Changing Economy,” in the “Emerging Issues” series, Washington, DC, November 1985.
268

The motion picture industry has been drawn into

the home-media realm, with many productions made

exclusively for television use and all made with television ultimately in mind. Some 69 percent of cable

subscribers and owners go to movie theaters less than

once a month; 234 perhaps half of motion picture revenues now derive from video markets; 235 and VCR rentals may amount to 75 percent of the level of revenues

generated by box office admissions.236 Its new labor

arrangements dictate that many of its personnel and

facilities work interchangeably in television as well.

The three major television networks continue to

dominate national television broadcasting, but changed

regulations have fundamentally altered the nature of

competition in this industry. In many cases new rules

had to be devised to accommodate new forms of broadcast communication, including cable television, multipoint distribution systems, subscription television, direct broadcast satellites, teletext and videotex, and

home video services.

Magazine and Book Publishing. -Publishing, once

dominated by local papers and broad coverage/national-scope magazines is undergoing two kinds of

transformation: newspapers are entering the national

market (i.e., USA Today and The Wall Street Journal), while many cities now lack significant competition in daily papers. On the other hand, “national”

magazines have found their markets disappear in

favor of more than 11,000 highly differentiated and

specialized markets for everything from stamp collecting to yachting.237 Even magazines serving more

generic markets are able to use computer controlled

printing systems to specialize their products for local markets. Business Week, for example, prepares

different editions for different customer classes. Many

of the highly specialized publications are, however,

owned by large concerns like Time-Life, so that the

capacity to mass-market or even reassemble individual general-interest magazines remains more concentrated than a list of titles would lead one to expect.238 The same network of advertisers and readers,

and the same facilities and expertise required to produce any glossy magazine, can be adapted easily to

areas of related interest.

The disintegration of the book publishing industry through fragmented market demands has not proceeded nearly as far. Ten American publishers still

account for 88 percent of sales. The technological

tools now available to publishers—on-line systems,

database management systems, and personal computers with “desktop publishing” capability—are

available to small firms as well as larger ones, thus

checking trends towards consolidation.239 A rough

estimate suggests that the number of book publishers

has doubled over the last generation.240

Home Electronics. —U.S. firms have all but abandoned the manufacture of home electronic equipment. Virtually all major innovations in video and

audio equipment in the past five years (compact

discs, video tape recorders, and inexpensive camrecorders) have been marketed by Japanese or other

Asian producers. Foreign producers have also made

major inroads into the market for professional production equipment (cameras, recorders, editing

equipment, and special effects equipment). Foreign

command of the industry is likely to continue unabated, because of both an impressive reputation for

low cost and high quality and massive investments

in research and development. New digital tape systems for sound and video recording, high definition

television systems, and a variety of other advanced

systems will be produced abroad. Given that capital equipment in the home has come to represent

a large share of all spending on home entertainment,

this is a serious loss.

New Technologies and System Integration.—

Emerging technologies with potential to affect the

recreation and leisure economy include cellular mobile telephones and radio paging, compact disks,

electronic mail, enhanced television, fiber optics,

low-power television, multipoint distribution servZWLINK Resources, “New Media Consumer Survey: Executive Summary” New York, NY, 1984, p. 18, table 13.

ZsSAr]ene K. Fleming and Robert November, The /mPact Of 7’ectrrro/-

ogy on Home Information, Transactions, and Entertainment, contract

report prepared for the Office of Technology Assessment by LINK, a

subsidiary of International Data Corp., June 1985, pp. 11.20-21.

‘3G’’Hollywood Worried by Growing Cassette Rentals,” The New York

Times, Nov. 18, 1985, p. C18.

237 See S. Fatis (note 20, p. 70).

238 Arlene K. Fleming and Robert November, op. cit., footnote 235,

p. 11.47-50.

zw uN~Co, The Future of the Book, Part Ill—New Technologies jfJ

Book Distribution: The United States Experience (Paris: UNESCO, 1984),

pp. 27-29.

240 Dan Lacy, “Publishing Enters the Eighties,” pp. 11-25, in U.S. Library of Congress, The State of the Book World 1980 (Washington, DC:

U.S. Government Printing Office, 1981), p. 11.
269

ices, optical video disks, pay-per-view television,

personal computers, satellite master antenna television, signal compression, teletex, the video cassette recorder, and videotex. All of these have the

potential to enhance and extend leisure activities in

the home. They compete not just with one another

but with established media for the consumer’s

money and time. Some of these technologies are

almost mutually exclusive, in that their overlapping

capabilities make it improbable that all would exist

in any given household. Those that survive will depend not upon their technical feasibility but upon

their capacity to deliver the services most in demand.

(See figure 3-8, p. 139.)

The spectacular failure of the Keytron videotext

venture in Chicago and Viewtron in southern Florida

does not seem to have failed to stem interest in the

new home information technology. The new investors come primarily from information firms like Reuters, Dow Jones, McGraw Hill, and Dun & Bradstreet,

and technology firms like Mead Data Central, Lockheed Corp., CompuServe, and AT&T. These firms

have formed interesting corporate alliances to develop home information services:

● Trintex (designed to provide residential videotext, entertainment, and information) = IBM

+ Sears + CBS;

● Covidea (designed to provide electronic banking and access to public databases) = AT&T

+ Chemical Bank + Bank of America + Time

Inc.;

● IMnet (stock and business data) = IBM + Merrill Lynch; and

● Quotron (stock quotations) = Citicorp.

Away From Home Entertainment

Far from competing with vacation spots, future

home travelogues seem more likely to stimulate the

desire to visit them. The film Deliverance spawned

business for white water raft trips and the television

production Love Boat boosted business for cruise

ships.

The discussions of chapter 3 indicated that the annual two-week domestic family vacation is of declining importance in overall demand for recreation. It

has been replaced by more frequent short trips close

to home, mixed with occasional jaunts abroad or to

distant parts of the country. Variety rather than

serenity may be the new keynote of travel.241

It is not surprising, then, that the President’s Commission on Americans Outdoors discovered demand

for better outdoor recreation opportunities close to

home when it measured public opinion through

polls, position papers, and hearings conducted all

over the country. What did surprise the Commission staff was the extent of this demand: in all sections and demographic groups it was overwhelming.242

People pressed for time necessarily seek diversions

which are close at hand, whether indoor or outdoor,

organized or informal, commercial or public. People who live near bowling alleys are most likely to

learn how to bowl, while those with convenient access to lakes or pools more probably improve their

swimming. To erode dwindling recreation time further in traveling to facilities is vexing to many Americans. Economists estimating the impact of outdoor

recreation have realized that omitting travel time

from the travel cost method creates a “substantial

downward bias” in figuring benefits; a 30 percent

allowance for it is taken to be conservative.243

Network Components

Getting There. —Patterns of change affecting the

entire U.S. travel industry were discussed earlier in

this chapter. The factors reshaping the travel agency

businesses, however, reflect many forces unique to

recreation industries. In the mid-1980s, the 20,000

American travel agencies with their 6,000 branches

constitute an industry growing by about 10 percent

annually. Countering this expansion is a trend toward

consolidation, as smaller agencies merge or are acquired by larger ones enjoying the benefits of mass

Z41An interesting European perspective is that of Markus Schwaninger,

“Forecasting Leisure and Tourism: Scenario Projections for 2000-2010,”

Tourism Management, December 1984, pp. 250-57,

z~zconvemtions with Barry S. Tindall, associate director, and Michael

P. Rogers, staff associate, of the President’s Commission on Americans

Outdoors, autumn 1986. The Commission staff generously allowed OTA

access to its hearing transcripts, literature review papers, and other data;

the conclusions drawn here are, however, those of OTA.

‘243Cindy F, Sorg and John B. Loomis, ,!hpiricai E#imates of Amenity

Forest Values: A Comparative Review, U.S. Department of Agriculture,

Forest Service General Technical Report RM-107, Fort Collins, CO, March

1984, pp. 2-3.
270

discounts and more sophisticated automation.244 The

industry expects to flourish by emphasizing its knowledge resources as opposed to a mere ticket-selling.245

The pressures on the travel agents come from several directions. The fear that consolidation will allow just five or six carriers to control 90 percent of

air travel implies further domination by those carriers of the travel agents who depend on their business. Reduced services and commissions by the airlines are one prospect. Another is that as services

now performed for free become increasingly expensive, their costs will have to passed along to the customer, weakening the economic argument for employing a travel agency. There is also some feeling

that ticketing errors and other common mistakes

must be reduced if a consumer rebellion against

travel agents is to be avoided.

Lodging.—The 1982 Census of the Services Industry by the U.S. Bureau of the Census identified 41,231

establishments in the tourism industry, divided

among hotels, motels, and tourist courts; rooming

and boarding houses; camps and trailering parks;

trailering parks for camp sites for transients; and

organization hotels and lodging houses. These employed over 1.1 million persons with an annual payroll of $9.3 billion and receipts of $33.2 billion;

35,030 of these businesses fell in the hotel-moteltourist category.

The dynamics of change in the “hospitality industry,” as it styles itself, are evident. As a leading industry observer, Albert J. Gomes, concludes, it is

offering an increasingly diversified product even

though the ratio of one hotel room per 100 Americans has been “remarkably constant” for half a century.246 One hint that greater differentiation is taking place is increasing prominence as a source of

revenues of miscellaneous “other” categories, as opposed to room rents and food-anddrink costs. Room

rents accounted for 61.5 percent of hotel revenues

Z44For industry trends, see ‘frave/ Week/y, Louis Harris Study Issue,

1984; and Mary J. Pitzer with Richard W. Anderson, “Mega-Agencies

Are Gobbling Up the Travel Business,” Business Week, No. 2910, Sept.

2, 1985, pp. 56-57.

z4slntemiew conducted for OTA by the Institute for Career and Leisure Development with D. Minic, Director of Public Relations, and

Julianne Johnson, Director of Membership Services, American Society

of Travel Agents, May 2, 1985.

Z4GAIbP-I J. @roes, /fosPjta/@ in Transition: A Retrospective and pro

spective Look at the U.S. Lodging Industry (Washington, DC: American Hotel and Motel Association, 1985), p. 53.

in the 1972 Census of Service Industries, 60.5 percent in 1977, and only 57.8 percent in 1982; food

and drink slipped from 21.7 percent in 1972 to 20.4

percent in 1977 to 18.8 percent in 1982; but “other”

sources of revenue, including entertainment and

amenities of various sorts, swelled from 6.3 percent

in 1972 to 8.6 percent in 1977 to 13.8 percent in

1982. Although some of the reduced food costs represent the inroads independent restaurants have

made in attracting the hotel guest’s business, the

growing importance of other amenities seems clear.

Likewise, the usually cheaper, less differentiated

roadside motels peaked at 62.1 percent of the market in 1972, splitting with hotels after years of steady

increase, and declined to 59.9 percent in 1977. Reflecting the generally lower prices of motels, the decline in their receipts was even more pronounced

during this period, going from 52.5 percent to 44.2

percent.247

Since the 1982 survey, a difficult-to-measure, literally “cottage industry,” the bed-and-breakfast (B&B)

house, has grown phenomenally. It maybe viewed

in the context of consumer desire for differentiated

accommodations. In picturesque tourist destinations,

attractive or historic homes furnished with period

antiques often exceed the rates of nearby hotels; in

large cities, on the other hand, such accommodations

may cost a fraction of the price of a convention hotel. Because these informal, owner-operated establishments rarely belong to trade organizations and

often advertise solely by word-of-mouth, it is difficult to calculate their numbers or economic impact

in the leisure economy; a 1986 directory lists some

200 reservation services representing 15,000 B&Bs

nationwide. 248 Many others doing business largely

or entirely by word-of-mouth probably swell the total. Clearly the 1982 industry census does not reflect the recent B&B phenomenon, which could have

a significant impact throughout the sector.

Specialized packaging of American accommodations,

whether for senior citizens, art lovers, or people traveling with pets or children, could flourish in the

United States; in fact, a proposal to open a resort

perceived as catering to homosexuals has generated

controversy in Las Vegas and Ft. Lauderdale. Realizing that they yield a higher profit margin than group

Z4TSee Gomes, op. cit., footnote 246, pp. 24, 57-58.

248Bernice Ches]er, Bed & llreaklast Coast to Coast (Lexington, MA:

Stephen Greene Press, 1986).
271

guests, the Tokyo-based Hotel New Otani chain

courts individual visitors through a card-holding

membership system that involves amenities like

room discounts and checkout time extensions; 249

American lodgings could eventually reverse their

traditional disincentives to lone travelers on the same

basis. There is already some effort by the larger lodging chains to address market diversification at least

on the economic level; Holiday Inns have inaugurated a line of inexpensive Hampton Inns, evocative of the small, family-run motels of the 1950s and

1960s.250 This response to market segmentation,

called “tiering,” by levels of price and facilities, has

made the new budget motel operations the fastestgrowing segment of the industry; a form of do-ityourself tiering has also occurred, in which two couples will split the costs of the new residential-suite

lodges, with which consumer satisfaction is high.251

The success of a non-smokers’ motel near Texas

Stadium, evocative of the old “temperance hotels”

that once catered to teetotalers, could herald a healthoriented trend among many specialized markets.

Destinations. —Recent predictions of national

homogenization by means of the mass media seem

to be giving way to a tide of celebration of what is

unique in many areas of our land. State and regional

fairs thrive, while the development of local opera

and theater companies produces a measurable increase in attendance at live performances.252 Even

the newfound vitality of museums in America’s cultural life has been attributed to revitalized local institutions. 253 Regionally oriented publishing has come

into its own, while local or regional food events like

Mississippi catfish carnivals or the “Memphis in May”

National Barbecue Festival draw national and even

international participants. For the tourist economy,

the more an area’s particular assets are developed

and publicized, the greater its potential as a desti-

‘2qgMjtwJb;sh;Bank Review, vol. 17, No. 1, October 1986, p. 989.

Zjophil patton, “America’s Home Away From Home kstill a Good

Motel,” Smithsonian, vol. 16, No. 12, March 1986, p. 127 ff.

Zslconsumer Reports, No. 477.

zQ’Linda f)eekard, “Good Year for Fair Industry Despite Economy,

Insurance,” Amusemen( Business, vol. 27, December 1986, p. 1, reports

that the top fifty North American fairs drew 47,204,576 during that year;

information on increased patronage of museums and cultural events

derived from the Statistic/ Abstract of the United States 1987, op. cit.,

footnote 128.

Zss]nteresting perceptions that the “arts have reached mainstream status in communities around the country” appear in Anne E. Abramson,

“Dear Readers,” Museum and Arts Washington, Jan. -Feb. 1987, p. 4.

nation. This new American regionalism may flourish, with benefits to the American tourism economy.

Older resorts cannot depend upon steady business

when new or revitalized competitors lure their business away. Decline can be sudden. In 1982, 67 percent of visitors to Virginia Beach, VA were repeat

vacationers; by 1984 the resort area enjoyed 64 percent repeat business, and by 1986 just 43 percent.

Although the decline is in some degree related to

a dip in tourism in the immediate region, the lack

of a strong, coordinated effort to enhance Virginia

Beach as a vacation spot and the nostalgic reliance

on the old-fashioned, two-week family vacation

seems to mandate quick action if the old resort is

to avoid economic decline.254 This and other older

tourist magnets will have to feature their unique

amenities if they are to draw affluent vacationers.

Intrinsic tensions have always separated groups

interested in the preservation of nature and those

interested in making a profit from outdoor activities.

There are, however, many places where the interests of these groups converge. Preserving America’s

heritage as a travel destination can yield many common benefits.255 For forest-related activities, studies

from several States have been gathered in their discussion of methodology to determine economic benefits. The adjusted values for camping, converted to

1982 dollars, ranged from a low per activity day of

$5.80 to highs of $26.18 and $26.35.256 Cold water

fishing ranged from $8,58 to $67.55, and hiking from

$8.25 to $45.76257 Obviously, the variance of these

diverse estimates owes much to the varying methodology.

Unfortunately for park authorities, the economic

benefits of natural areas are generated indirectly. In

time, pressure on natural resources such as wildlife

refuges to justify themselves in thoroughly inappropriate cost-benefit terms can produce incompatible uses and destructive pressures that damage their

intrinsic value.258

zSqGerri Willis, “Resort at Risk,” Vir~inian-Pi/ot, Aug. 9, 1987, p. El,

offers a model analysis of an aging resort’s problems.

255 The “Focus on Tourism” issue of the National Recreation and Park

Association’s Parks & Recreation vol. 21, No. 10, October 1986, reflects

the trend. zsGsOrg and Loomis, op. cit., footnote 243, P. 8.

2571 bid., pp. 11-15.

258Jinl Doherty, “Refuges on the Rocks,” Audubon, VO]. 85, July 1983,

pp. 74-116.
272

In such an environment, the consumer wins a better product—a better physical environment, a more

comprehensive recreation program, and more effective fitness instruction—at higher cost. In the public sector, there is evidence that Americans are willing to pay a price. The (arguably leading) questions

in the 1982-1983 National Recreation Survey arrived

at conclusions much in keeping with other opinion

surveys in recent years: “a preference for cost sharing of visitor service expenses [between taxes and

user fees] is very widespread among the public. ’’259

Indeed, Americans seem willing to contribute toward

such purposes; for instance, in 1985 recipients of

Michigan State tax refunds checked off $500,000

alone to aid in restoration of nongame wildlife.260

It is likely that this kind of funding will increase.261

In the private sector, a mass economy/individualized economy dichotomy is likely to emerge.

YMCAs, YWCAs and community centers appear to

be in great demand to meet popular desire for physical fitness instruction and facilities, while posh exercise salons or specialized martial arts studios will

cater to those who can afford more personalized attention. Exotic thrill sports, ranging from hang gliding to adult wargaming, constitute a continuing element of the upscale consumption.

Transportation as a Destination. -Those who flock

on board Amtrak’s excursions across the continent

would hardly endure the same journies on board

the slow, jolting, sooty railcars that carried previous

generations of travelers. The Norfolk and Southern

railroad offers air-conditioned luxury cars as well as

old-fashioned ones on its steam train excursions, a

concession to those who temper their nostalgia with

a concern for comfort.

The American cruise industry, ranging from the

steamboat trips down the Mississippi to the islandhopping Caribbean liners popularized by the television series “Love Boat,” appeals to the revived notion of transportation as destination. Few customers have the resources of money and leisure to take

the leisurely world cruises of the past; to appeal to

zsg19&?.19$3 Natjon& Recreation Survey, pp. 43-44, 63-65.

Z~&fiCh@an> Environmen/a/ Quality: 1985 (Lansing, Ml: Michigan

United Conservation Clubs, 1985), p. 5.

261 See Derrick A. Crandall, “Recreation on Public Lands: Should the

User Pay?” American Forests vol. 90, March 1984, p. 10, for important

caveats.

the many who would sample the tranquility of shipboard life, shorter packages have emerged. The logical extreme, “cruises to nowhere, ” where the sensations and amenities are themselves the attraction,

dispense with destination entirely.

New Technology and System Integration.—

Technology poses new challenges for integrating the

diverse set of activities involved in away from home

recreation. The travel industry has taken major steps

to integrate transport and lodging reservations. Airline reservation systems, developed with the help

of regulated air rates, provide a powerful tool for

facilitating air travel. It has proven difficult for any

new system to compete with those already in place

given the economics of an unregulated industry.

Travel agencies have improved their ability to arrange accommodations around the world. New systems would permit a greater variety of small facilities to be a part of such systems. The automated

teller machine systems described in the section on

Personal Business and Communication are being expanded to provide consumer entry points into reservation systems, and to sell tickets for transportation, theater, and sporting events. American Airlines

has 5,000 terminals for dispensing tickets in travel

agencies. Avis handles some rental returns through

terminals. 262 In the future, such systems could let

prospective clients do more “shopping” for destinations of interest through interactive video systems.

The venerable Thomas Cook agency now uses an

“expert system, ” capable of answering “quite complicated questions about how best to achieve certain [travel] objectives, and all large agencies stand

to benefit from the improved reservation systems

present and potential.”263 However, technologies that

can reduce costs and errors for the travel agent may

also be employed directly by the consumer. The

French Minitel system, discussed in the preceding

section of this chapter, allows inhabitants of the most

remote villages not just abundant information about

transportation and lodging throughout the country,

but also the capacity to make and pay for reservations. Likewise, passengers may walk into the railroad station in Lyons and ticket themselves directly

onto the TGV to Paris through an easy-to-use and

polite computer; Amtrak has introduced such vend2S2B. Rosenberg, “Money Machines Outgrow Banking,” High Technology Business, vol. 7, No. 10, October 1987, pp. 34-37.

zssTourism Management, vol 7, No. 1, March 1986, p. 143.
273

ing machines in the United states as well, Thus some

of the routine business of the travel agent is bypassed.

Business already has access to travel information

in a number of ways, including SiteSelex On-Line,

a videotex service offering subscribers information

on 6,000 hotels, resorts, and conference centers.264

More comprehensive services are also emerging with

some access for the general public. The National

Tourism Data Base program, initiated in 1985 by the

U. S. Conference of Mayors, could grow into the basis for improved services by travel agents to their

clients; yet it could grow beyond that level to direct

integration with consumers themselves.265 Already

some 21,000 travel agencies-85 percent of the automated agencies in the country-are able to supply

Data Base information free to their customers. Offices

of the U.S. Travel and Tourism Administration make

the Data Base available to foreign inquirers.

The National Tourism Data Base is not now interactive, and it is too early to tell how successful

Z~Amer/can Printer, November 1986, P. lg.

pssBrochure, u.S. Conference of Mayors, June 1986; American Airlines news release, Apr. 23, 1985; Robert Loomis, “Check Citilog for

‘After Business’ Activities,” Online Today, April 1986, p. 19; conversation and system demonstration with Monica Harvey, National Tourism

Data Base, Nov. 13, 1986.

the effort will be. At present, its strength is specificity; it offers the hours, admission charges, descriptions, and telephone numbers of perennial attractions such as the Washington Monument, and more

importantly the relevant data on ephemeral events,

such as concerts, so that travelers may plan ahead

and arrange for tickets difficult to obtain at the last

minute. Thus a traveler planning to visit a participating city such as Anchorage, Alaska, is better able

to take advantage of current goings-on as well as the

city’s regular attractions.

Automated on-site terminals already provide one

alternative means of informing visitors. For instance,

Baltimore has installed INFOTOUCH, “the new,

touch-screen City Directory System . . . housed in attractive, easily-recognizable kiosks” at seven visitor

sites around the city—”offering a series of menudriven screens, Infotouch highlights all of Baltimore

City’s attractions, events, dining, shops, services, and

more with colorful, exciting, high-resolution

graphics. "

266 Listings are available in various Categories to advertisers for origination fees plus varying monthly rates.

266 Brochure, Info Corporation, Baltimore, MD

MANUFACTURING

Many studies of innovation in manufacturing have

been published during the past few years.267 Many

of the issues have already been discussed in connection with specific amenity networks examined

earlier in this chapter. While it is not useful to repeat these discussions, the following section will

review some common themes: movement toward

smaller, more flexible manufacturing establishments,

reduced use of energy and materials, and increased

use of automated production equipment and intermediate inputs of “services.”

267 The theoretical literature is reviewed in L. Tornatsky et al., The

Process of Technological Innovation: Reviewing the Literature (Washington, DC: National Science Foundation, 1983), Two OTA studies have

also surveyed the literature in technology and manufacturing in some

detail: Computerized Manufacturing Automation, OTA-CIT-235 (Washington, DC: U.S. Government Printing Office, April 1984), and Technology and Structural Unemployment: Reemploying Displaced Adults,

op. cit., footnote 163.

Factors Forcing Change

Manufacturing enterprises in the United States are

comparatively free of government control. Their behavior, therefore, is presumably described relatively

well by macroeconomic analysis. A number of informal institutional constraints, however, often block

effective competition. Some of these involve rigidly

hierarchical and often insular bureaucratic structures

within large organizations. Some involve longstanding ties between vendors and relatively small purchasers of capital goods. Some are purely matters

of personality and “old-boy” networks perpetuated

by regular contacts.

The flow of information and real decision-making

authority through manufacturing systems is poorly

documented and poorly understood. Most decisions

about technology are made in response to advice

from capital goods suppliers, specialty products man-
274

ufacturers, or “turn key” engineering firms. Occasionally, research problems are contracted out to independent research laboratories such as the Battelle

Memorial Research Institute, SRI International, the

Midwest Research Institute, or the Southwest Research Institute.268

Many traditional forms of regulation have come

under intense assault from both foreign competition

and the opportunities created by new technology.

While the quality of management in U.S. manufacturing may not have grown noticeably worse in the

past two decades, U.S. management is being tested

in unprecedented ways. Management structures that

worked well in an era where domestic markets were

highly predictable, or could be manipulated in ways

that would make them predictable, may not be well

suited to an era of uncertainty and a lack of control

over international markets.269

Rigid hierarchical firms, and those governed by

rigid cost-benefit formulae, tend not to make innovations in production techniques. Greater uncertainty

may accentuate the rigidity of these organizations

rather than force them into more creative management practices. For example, a survey of producers

of automobile parts, agricultural machinery, and

pumps and compressors found that the 26 firms

using advanced production equipment tended to

have less centralized management, a general manager with broader authority and more technical background, and a recognized long-term planning program.

270 Financial managers located in distant “front

offices” were viewed as a major barrier to innovation.

The precise costs and benefits of a new technology are virtually impossible to quantify to the satisfaction of most financial analysts, few of whom have

any direct experience in the engineering details of

manufacturing. By the time such numbers can be

developed with precision, the concept has had many

years of reliable field experience and is no longer

an “innovation.” This difficulty is compounded by

Z~Mary M. Watkins (cd.), Research Centers Directo~ (Detroit, Ml: Gle,

8th Edition).

ZS9W.J. Abernathy et al., Industrial Renaissance: Producing a Competitive Future for America (New York, NY: Basic Books, 1983).

z70 carol Parsons et al., “The Development of Programmable Automation Systems in Discreet Parts Manufacturing Industries,” contract

report prepared for the Office of Technology Assessment, Washington,

DC, 1984.

the fact that many of the advantages of new production technology cannot be captured in a simple analysis of internal rates of return, typically designed only

to highlight the advantages of systems for reducing

direct labor costs.

As with all the business networks explored in this

chapter, the full advantages of production technology can seldom be captured without a far-reaching

review of the way production is managed and the

way employees are integrated into the process. A

major automobile manufacturing firm recently discovered that a change in management and incentive systems in an older plant led to rapid growth

in productivity, while a massive investment in new

technology not accompanied by changes in the relationships between workers and line management fell

far short of productivity goals.271

The problem is further exacerbated by the fact that

the production workers and personnel in manufacturing typically do not have much “clout” in the hierarchies of large companies in comparison with

marketing or financial staffs. In extreme cases, a

manager may believe that expensive innovations in

manufacturing technology are simply forbidden by

a rigid and fixed budget to cover replacements of

capital equipment. The survey described above identified several cases where outside consultants were

hired to push a new idea within a firm because outsiders could make a better case to the financial experts in the firm.

Scale and Scope

The impact of tightly integrated production networks, described repeatedly in earlier sections of this

chapter, are having dramatic—although sometimes

contradictory-effects on the structure of U.S. manufacturing enterprises. Demand for timely delivery,

reliable quality, and exacting tolerances are forcing

many production firms to purchase more sophisticated equipment and adopt new techniques of organization. This may make it easier for relatively small

firms to participate in a dynamic production network.272

z71w. Hampton and J.R. Norman, “General Motors: What Went

Wrong,” Business Week, No. 2990, Mar. 16, 1987, p. 102.

272 Michael Piore and Charles Sable, The Second Industrial Divide (New

York, NY: Basic Books, 1984).
275

The widespread application of microchip-based

technology has fundamentally altered previous notions of scale and scope for American businesses.

The availability of inexpensive Computer Assisted

Design (CAD) and Computer Assisted Manufacturing (CAM) technologies that run on personal computers has allowed even small machine shops to

adopt this technology, reducing waste, errors, and

down time. The time required from receiving a customer’s drawing to cutting a die has been reduced

by a factor of seven.273 Metal fabrication facilities that

formerly required large staffs, fixed automation, and

long production runs can now make use of technologies such as flexible manufacturing systems (FMS)

that used to be the sole preserve of large businesses.

Minimum efficiency can now be achieved with six

machines and six people.274

Smaller firms, however, often cannot afford the

more complex automated equipment and the associated personnel needed to meet the demanding tolerances and schedules, and are turning instead to

the highly competitive “aftermarkets.” In the case

of agricultural parts production, computer controlled

equipment allowed at least one major supplier to survive the recession by competing successfully with

highly specialized local producers. The firm relied

on low-cost production using conventional manufacturing technology, in addition to a knowledge of

niche markets and traditional relationships.275

At a broader level, chapter 5 presented data that

indicated that manufacturing firms were increasing

their scope through ownership of a more heterogeneous collection of manufacturing establishments,

but that the establishments themselves were becoming more specialized.

Recipe Changes

While significant progress has been made through

a workman-like accumulation of incremental improvements, the past few years have also witnessed

a series of breakthroughs that change the product

and the production process in fundamental ways.

The manufacture of float-glass is one such example

—it reduced capital, labor, and materials costs simulZT3Mechanjca/ Engineering, January 1987, P. 6.

ZTqRamchandran Jaikumar, “Postindustrial Manufacturing, ” Harvard

Business Review, vol. 86. No. 6, November/December 1986, p, 76.

275 C.Parsons et al., op. cit., footnote 270.

taneously while improving the quality of the product. In the production of metal parts, advances that

reduce the total number of components needing assembly can be as important as techniques for improving the productivity of making each part. In addition, converting to alternative materials (powdered

metals, plastics, or composites) can radically change

the manufacturing process and render traditional

metal forming processes irrelevant.276 There are also

synergistic effects, New components once requiring

the assembly of several parts can be produced in

a single step. Helicopters made from advanced composites, for example, can be assembled from 1,500

parts instead of the 11,000 needed for conventional

manufacture; the number of fasteners is reduced by

90 percent.277

While new manufacturing technologies represent

a diverse collection of innovations, taken together

they appear to offer the following advantages:

●

●

●

●

●

●

●

●

sharply increased labor productivity,

declining economies of scale in production,

increased precision and reliability,

reduced costs in design and setup,

increased ability to substitute materials based

on cost and performance,

more efficient utilization of energy and materials,

more efficient use of manufacturing space, and

reduced inventory.

An ability to adapt quickly to changing domestic

and international market conditions, and to unanticipated changes in the costs of materials, has become critical for many manufacturing firms. Rapid

response and controlled inventory networks emerging throughout the country are demanding such flexibility. Even firms not closely tied to such networks

find that long-term survival depends on adaptability.

New manufacturing equipment, such as numerically controlled machine tools (NCMTs), robotics,

CAD, and automated delivery and transport systems,

play a key role in increasing flexibility and productivity. 278 For example, by coupling several of these

ZTcRObert l-f. Williams, Eric D. Larson, and Marc H. Ross, “Materials,

Affluence, and Industrial Energy Use,” Annual Review o/~nec-, NO.

12, 1987, pp. 99-144.

277R.C. Forney, “Advanced Composites, the Structural Revolution,”

Journa/ of Metals vol. 38, No. 3, pp. 18-20, cited in R.H. Williams et

al., op. cit., footnote 276.

ZTsJohn Ett]ie, “FaCing ttle Factory of the Future,” Industrial Technology Institute Working Paper, unpublished, August 1984, p. 2.
276

technologies together into an FMS, GE has been able

to cut the cycle time of production of locomotives

down from 16 days to 16 hours.279

The potential of these advanced manufacturing

technologies is further enhanced when used in combination with new materials requiring significantly

simpler production strategies. There are indications

that plastic-forming tools can be operated economically with far shorter production runs than typical

steel stamping equipment in the production of products like automobile fenders.280 Through use of advanced manufacturing technologies and new materials, the recipe of production can be radically changed.

The advantages of new, flexible production equipment depend critically on the number of identical

units being produced. If parts must be made in extremely small numbers it is typically cheaper to make

them by hand using conventional machine tools. If

there is a predictable demand for many hundreds

of parts each year (as in automobile production, small

appliances, or telephone handsets), it is usually

desirable to build a plant dedicated to “mass production.” On the other hand, when demand is between 10 and 300 large, complex units (i.e., marine

engines, large electric motors, and tractors), or between 300 and 15,000 simple parts, it is becoming

attractive to use tools that can be flexibly programmed

for limited runs. In 1980, between 60 and 80 percent of the value of all machining operations was

produced in this intermediate range of production

runs.

281 While statistics are poor, anecdotal evidence

suggests that the share of production value in these

intermediate or “batch” production regimes is increasing.

Inventory control and quick response networks

place increasing burdens on producers. The textile

and apparel network (described in the discussion of

the Clothing and Personal Care network earlier in

this chapter) provides a good example.282 The shortening of the cycle time makes the contracting firm

more dependent on suppliers, while simultaneously

making the firm more flexible because it no longer

has to undertake the function performed by the sup27glbid., p. 4.

zwJ. p. Clark and M.C. F]emings, “Advanced Materials and the Economy,” Sciendfic American, vol. 255, No. 4, pp. 51-57.

zalMachine TOOI Task Force, Technology of Machine TOOIS, october

1980.

ZBzRobert M, Frazier, op. cit., footnote 148.

plier. Chrysler attributes this increased use of suppliers as the primary factor behind both quality improvements in production and a 50 percent reduction

in engineering costs.283

Probably the most significant “recipe” change that

must accompany the implementation of these new

procedures and technologies involves changes in the

size, composition, and use of the U.S. work force (a

topic covered in more detail in chs. 10 and 11).

Workers are less likely to be physically manipulating machine operations, and more likely to be monitoring several machines.284 The resultant skills

demanded become more cognitive and conceptual,

rather than perceptual-motor—placing demands on

firms to upgrade employees’ skills and knowledge.

In the few instances where a true FMS has been set

up, the manpower savings have resulted in a realignment of skills: in one instance, production workers

outnumbered engineers by 22 percent under a conventional production process whereas engineers outnumbered production workers by a factor of three

under an FMS configuration.285 This increased dependence on human capital was also reflected in a

survey of the member companies of the National

Electrical Manufacturers Association that identified

“lack of staff knowledge” as the major obstacle to

implementing advanced manufacturing technologies.286

Unlike conventional machine tools, programmable manufacturing equipment cannot simply be purchased and turned on. The sophistication of many

of these advanced manufacturing technologies requires that machines be tailored to a specific process, creating an idiosyncratic and unpredictable implementation procedure that necessitates a high level

of technical expertise. Manufacturers, especially

small- and medium- size ones, frequently lack the

necessary technical resources to adopt and adapt

technology to their needs.287 Thus, even if a company has access to pertinent information, the inforZssE]i~beth A, f-faas, “Br@thrOUgh Manufacturing, ” Harvard BUSlness Review, vol. 87, No. 2, March/April 1987, p. 79.

Z54L. Hirschorn, Beyond Mechanization (Cambridge, MA: The MIT

Press, 1984).

Z8SR, Jaikumar, op. cit., footnote 274, P. 73.

zgGNationa] Electrical Manufacturers Association, “summary Report

for the Automated Systems User Survey of NEMA Membership,” Washington, DC, 1984.

z87 David H. Swanson, “Research Needs of Industry,” Journal of Technology Transfer, vol. 9, No. 1, 1984.
277

mation is largely useless without the capability to

adapt that information to its situation.288

Network Components and Productivity

Change

Energy

New technologies have had the effect of greatly

reducing demand for materials per unit of output in

manufacturing. Higher energy prices led industry to

discover a remarkable series of technologies capable of reducing energy inputs.289 Between 1974 (the

first oil embargo) and 1981, fossil fuel energy used

per unit of output in manufacturing declined 20.5

percent. The rate of improvement in fossil fuel

energy efficiency was twice the rate experienced between 1967 and 1974. Some of the improvement resulted from structural shifts within manufacturing,

which moved the industry away from energy-intensive industries (like steel) and toward products requiring fewer energy inputs per unit of output (like

semiconductors). About 66 percent of the post-embargo

change in the energy/output ratio, however, resulted

from real improvements in production efficiency

within each industry. About 27 percent of the shift

was attributable to a decline in the materials-intensive manufacturing industries.

Trends in the use of electricity are much different. The electricity used per unit of output in manufacturing has actually increased slightly since the

1974 embargo. Sectoral shifts that led to a decline

in industries using a comparatively large amount of

electricity per unit of output were offset by increases

in electricity use in individual industry sectors, This

indicates an overall shift from fuel to electricity as

a manufacturing energy source.290 As electricity represents only about one-third of the primary energy

consumed by U.S. industry, net energy use has fallen

since the embargo.

z~Thomas J. Allen, Managing the Flow of Technology (Cambridge,

MA: The MIT Press, 1977).

zBgRobert H. Williams, Eric D. Larson, and Marc H. ROSS, op. cit, fOOtnote 276.

z90G. Boyd, J.F. McDonald, M. Ross, and D.A. Hanson, “separating

the Changing Composition of U.S. Manufacturing Production from

Energy Efficiency Improvements: A Divisa Index Approach,” The Energy

Journal, vol. 8, No. 2, 1987, pp. 77-96.

Materials

Material usage per unit of output has also fallen

rather steadily. Figure 6-12 indicates that the weight

of material needed per unit of U.S. economic output has fallen substantially since the mid 1970s while

demand per person has remained roughly the same.

Several factors have been suggested to explain this

change: 291

● A Substitution Effect. Development of higher

strength-to-weight plastics, composites, and

other materials allows substitution for steel in

applications ranging from packaging materials

to aircraft parts, and can reduce the weight of

material needed for a variety of functions. The

comparatively high cost per pound of new materials can often be justified by their unique

strength and other properties. For example, a

turbocharger rotor made of ceramics may weigh

only one-third as much as a metal rotor.292 One

estimate suggests that by the year 2000, U.S.

291 E. D. Larson, R.H. Williams, and A. Bienkowski, “Material Consump

tion Patterns and Industrial Energy Demand in Industrialized Countries,” Princeton University, Center for Energy and Environmental

Studies, PU-CEES Report No. 174, Princeton, -NJ, 1984.

29ZR Williams, et a]., op. cit., footnote 276.

Figure 6-12.-Materials Use in the U.S.

Economy (indexed pounds per dollar

of GNP, 1967= 100)*

1967=100

110-

100-

90-

, I I t 80 ! , , 1 r I r 1 1 , 1 r ! , , , 1 ! 1 ! , r r

1960 1965 1970 1975 1980 1985

● Aggregate indexes of materials consumed in the United States. Tonnages of

paper, steel, aluminum, petroleum refinery products, cement, and a combination of 20 large-volume industrial chemicals, weighted by the energy-of-manufacture intensities from the late 1970s.

SOURCE: Robert H. Williams, Eric D. Larson, and Marc H. Ross, “Materials, Affluence, and Industrial Energy Use,” Annual Review of Energy, No. 12,

1987, pp. 99-144.
278

●

●

demand for polymer composites will reach $12

billion. 293

Changes in Product Mix. Manufacturing

growth has tended to emphasize sophisticated

products with relatively high value-added to

weight ratios, such as electronic equipment, instead of products with relatively low value-

-added to weight ratios, such as heavy lifting

equipment. For example, $1 of electronic computing equipment uses one-quarter as much

steel and two-thirds as much aluminum as the

production of $1 worth of machine tools,294

Redesign of Products. The average U. S.-

made car weighed about 3,800 pounds-in 1975

but only 3,230 pounds in 1985; iron and steel

weight dropped from 2,500 to 1,760 pounds during the same period. Industry experts expect the

weight of an average car to fall to 2,350 pounds

by 1992 with total iron and steel weight falling

to less than 1,400 pounds.295

About one-fifth of all the aluminum consumed

in the United States is used in cans. Thinner

sidewalls reduced weight by 22 percent and better top designs reduced the weight of lids by

13 percent during the past two decades.296 Total per capita consumption of metals like copper, lead, zinc, manganese, chromium, nickel,

tin, molybdenum, titanium, and tungsten has

declined in spite of new demands. The decline

results both from reduced demands for steel

(where the metals were used for alloys) and from

better designs in products ranging from batteries to die castings.

In spite of the information and packaging explosion, paper demand per unit of output in the

economy has continued to decrease.

Services

The growing links connecting service and manufacturing firms was described at some length in chapters 4 and 5. This, coupled with the complex patIW-J.S. Congress, C)ffice of Technology Assessment, New Structural

Material Technologies: Opportunities for the Use of Advanced

Ceramics—A Technical Memorandum (Washington, DC: U.S. Government Printing Office, September 1986).

294u.s. ]nput/output tables for 1977, cited in R. Williams et al., oP.

cit., footnote 254.

ZgSE Larson et al., op. cit., footnote 291.

‘

gslbid.

tern of mergers and acquisitions that have taken

place in the industry, makes it difficult even to define a “manufacturing firm.” By 1984, twelve percent of the employment of firms categorized as “manufacturing” was in establishments which were not

classified as manufacturing. Non-manufacturing establishments, owned by manufacturing firms, had

an employment growth rate of six percent between

1982 and 1984, compared to a loss of one percent

in the manufacturing establishments.297

As described in chapter 4, the role of services in

the production recipe of manufacturing has expanded

significantly since 1972. Embedded within many

manufactured products are intermediary service inputs. For example, the Office of the U.S. Trade Representative estimates that 80 percent of the value

embedded in a computer is in fact a service product: software.298 Many of the inputs to the new advanced manufacturing technologies being used to

modernize industry are also service products, such

as CAD software, machine cell design and integration, and data processing services. Many “service”

businesses in the United States depend heavily on

the fate of the U.S. manufacturing sector.299

Net Changes in the Production Recipe300

The changes just described are summarized in Table 6-10 which shows how productivity growth in

manufacturing can be credited to different factors.

Labor productivity led all advances, but its contribution declined considerably during the past 15

years. The productivity with which materials are

used in manufacturing continues to increase, although the rate of improvement has also declined

in recent years. Energy productivity, which had been

ZgTMarjorie Od}e and Catherine Armington, “IS American Manufacturing Creating Jobs Again?” unpublished working paper, Applied Systems Institute, Washington, DC, p. 3.

298(J.S. National Study on Trade in Services, Office of the U.S. Trade

Representative, December 1983.

ZggSteven S. Cohen and John Zysman, “The Myth of a Post-Industrial

Economy,” Technology Review, February/March 1987, p. 33.

300 This analysis is based on the Multifactor Productivity Series, 1949

to 1983, developed by the Bureau of Labor Statistics, U.S. Department

of Labor, unpublished, 1986. See William Gullickson and Michael J.

Harper, “Multifactor Productivity Measurement for Two-Digit Manufacturing Industries,” presented at the Western Economic Association meetings in San Francisco, CA, July 1986, p. 48; and Michael J. Harper and

William Gullickson, “Cost Function Models and Accounting for Growth

in U.S. Manufacturing, 1949-83,” paper presented for the American Economic Association, New Orleans, LA, Dec. 28-30, 1986.
279

Table 6-10.–Contributions to Productivity Change in Manufacturing, 1949-83

Average percent change in single-factor productivity

Factor 1949-65 1965-73 1973-83

Capital . . . . . . . . . . . . . . . . . . . . . . . . . . 0.80 –0.70 –2.90

Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.70 2.70 1.60

Energy . . . . . . . . . . . . . . . . . . . . . . . . . . –1.20 –0.10 1.40

Materials . . . . . . . . . . . . . . . . . . . . . . . . 1.30 0.70 0.40

Services . . . . . . . . . . . . . . . . . . . . . . . . –1.10 –1.30 –1.90

Multi-factor . . . . . . . . . . . . . . . . . . . . . . 2.90 1.90 0.50

Factor shares of gross outputb

1949 1965 1973 1983

Capital . . . . . . . . . . . . . . . . . . . . . . . . . . 0.220 0.232 0.187 0.162

Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.418 0.453 0.468 0.428

Energy . . . . . . . . . . . . . . . . . . . . . . . . . . 0.019 0.020 0.022 0.044

Materials . . . . . . . . . . . . . . . . . . . . . . . . 0.289 0.218 0.233 0.262

Services . . . . . . . . . . . . . . . . . . . . . . . . 0.054 0.076 0.090 0.104

a

“Single.Factor productivity’’ measures the change in dollars of output in an industry resulting from a $1 increase in the factor purchased (capital, labor, energy, materials, services). The statistic shown in the annual percent change is this productivity averaged over the time-periods shown.

b

The "Factor Share of Gross Output” is a measure of the extent to which a change in an input to the production process (Capital, energy, materials, Iabor) contributes

to a change in the value of an industry’s output. For example, in 1983 a 1% increase in services purchased by manufacturing would have resulted in a 0.5% change

in manufacturing output, These factor shares must all add to 1 if, as is usually assumed, the total output of manufacturing businesses would increase by 1°/0 if all

purchased inputs increased by 1%.

SOURCES: William Gullickson and Michael J. Harper, “Cost Function Models and Accounting for Growth in U.S. Manufacturing: 1949-1983,” paper prepared for the

American Economic Association, New Orleans, LA, Dec. 28-30, 1988; U.S. Department of Labor, Bureau of Labor Statistics, unpublished.

falling prior to the oil embargo, has since risen significantly. Capital productivity has fallen sharply, as

has the measured productivity of purchased services. The “multi-factor” productivity measure represents the combined effect of productivity changes

in all the inputs (the “single factor” productivities

weighted by the “factor shares” outlined below and

in the second part of the table).

The changes in rates of productivity improvement

were clearly tied to differences in the relative costs

of the different inputs. The price of labor grew much

faster than any other factor between 1949 and 1973,

while labor prices grew more slowly than energy or

material prices from 1973 to 1983. During the earlier

period, labor price increases were responsible for

two-thirds of the increase in manufacturing input

prices, while they were responsible for only 45 percent during the later period.

The relative importance of inputs combined in the

manufacturing industries is shown in the second part

of table 6-10. It indicates, for example, that purchased

services made twice the contribution to manufacturing in 1983 than they did in 1949. In 1949, a 10 percent increase in the amount of services purchased

by manufacturers would have resulted in a 0.5 percent increase in manufacturing output. In 1983, it

would have increased manufacturing output by 1

percent. The role of energy also increased, while capital inputs become comparatively less important.

The productivity changes of each source are combined to show how they have contributed to labor

productivity. The result, displayed in table 6-11, indicates that the output per hour worked in manufacturing in the 1973-83 period was considerably below that of the 1949-73 period. What is striking is

the sharp decline in the growth rate clearly attributable to technical change (the “multi-factor” productivity) in the recent period, which has occurred despite a significant increase in capital invested per

worker. During the 1973-83 period, increased purchases of services per manufacturing worker and increased purchases of materials per worker were,

taken together, four times as important as increases

in measured multi-factor productivity.

Table 6-11 .—Contributions to Changes in Output per

Hour Worked

Contributing factor 1949-73 1973-83

Output/Hour (O/H) . . . . . . . . . . . . . 2.57 1.51

O/H attributable to growth in

Multi-Factor Productivity. . . . . . 1.34 0.15

O/H attributable to growth in

inputs per hour worked . . . . . . . 1.22 1.36

Capital/Labor. . . . . . . . . . . . . . . . . . 0.47 0.70

Energy/Labor. . . . . . . . . . . . . . . . . . 0.07 0.01

Materials/Labor. . . . . . . . . . . . . . . . 0.41 0.32

Services/Labor . . . . . . . . . . . . . . . . 0.27 0.33

SOURCE: M.J. Harper and W Gullickson, “Cost Function Models and Accounting for Growth in U.S. Manufacturing: 1949-1983, ” paper prepared for

the American Economic Association, New Orleans, LA, Dec. 28-30,

1988.
Part III

The International Connection

The benefits and problems of trade are now felt

in virtually every production network. Even sectors

that now appear to be insulated from trade, such as

residential construction, are likely to find themselves

closely tied to international production systems by

the turn of the century.

In principle, trade can improve the living standards

of Americans and their trading partners. A nation

that is able to profit from ingenuity, invention, and

inspiration in other countries is more likely to

prosper and improve the productivity of its own enterprises than one limited to discoveries and research

within its own borders. Even when the poorest nation trades with the richest, trade should improve

living standards in both nations by making least-cost

products available to both. Trade permits U.S. employment to grow in areas where the United States

is relatively productive and has a competitive advantage, and it provides U.S. consumers with access

to products at the lowest possible price. Political impediments to trade can retard the development of

efficient international production networks by lowering productivity worldwide, and can frustrate development in less affluent nations—robbing US.

producers of potential sales and possibly creating political instability.

In practice, of course. the benefits of trade are unevenly distributed. Trade creates income for certain

businesses, occupations, and regions while reducing income for others. Trade can disrupt lives and

communities on a massive scale. The costs of continual readjustment are difficult to measure, but can

be high. Improperly managed, trade can undermine

the technical leadership of U.S. firms in key areas

and even threaten U.S. security interests. The

challenge of public policy is to find a way to exploit

the clear opportunities of trade while ensuring that

the costs and benefits are equitably managed.

The Organization of Part III

Chapter 7 extends the analysis of Part II to include

international components of production networks.

This discussion shows how trade reshapes domestic production recipes, the scale and scope of domestic business operations, and the geography of

production. Building on methods described in chapter 4, it provides a set of tools for understanding how

exports generate employment throughout the economy, and how imports are integrated into production networks as substitutes for domestic value-added.

The methods can be used to show, for example, how

imports of manufactured products lead not only to

direct declines in the value-added of manufacturing

businesses, but indirectly to declining business for

firms tied to manufacturing in production networks.

Chapter 8 examines national trends in trade

volume and composition during the past several decades, looking closely at changes in the comparative advantage of US. producers. It indicates areas

where the United States is gaining advantage (an odd

assortment, including a variety of services and

products involving heavy use of raw materials) and

areas where the United States appears to be losing

advantage (many involve products with high technology content). It expands on this analysis to show

how trade affects different occupations. Craftsmen,

machine operators, and laborers are particularly affected because so much trade involves manufactured

products. The chapter also shows, for example, that

the United States appears to have become a large

net importer of scientific and engineering talent.

The chapter concludes by constructing three views

of the future of U.S. trade: one built on the presumption that U.S. comparative advantage will continue

to move away from sophisticated manufacturing and

toward products with value dependent on natural

resources; one built on the assumption that the United States can regain its dominance of world trade

in manufactured products of all kinds; and one built

on the assumption that technology may lead to a

decline in the significance of trade in products generally, due to declining economies of scale in production worldwide and to decreased reliance on scarce

materials.

Chapter 9 focuses on the impact of trade on specific sectors of the U.S. economy. Among other topics,

it explores shrinking surpluses in U.S. agricultural

trade, huge fluctuations in world petroleum markets.

and declining U.S. exports in services and “hightechnology” products.

281
Chapter 7

How Trade Enters

U.S. Production Recipes
CONTENTS

Trade and U.S. Business Structure . . . . . . . . . . .

Recipe and Linkages. . . . . . . . . . . . . . . . . . . . .

Changes in Scale and Scope . . . . . . . . . . . . . .

Geography . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Following Trade Through Domestic Production

Direct Effects . . . . . . . . . . . . . . . . . . . . . . . . .

Indirect Effects . . . . . . . . . . . . . . . . . . . . . . . .

Linkages . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Trade and the Amenities . . . . . . . . . . . . . . .

Final Assessment Weighing the Costs and

. .

. .

. .

. .

,... . . . .

. . . . . . . .

. . . . . . . .

. . . . . . . .

Networks

. . . . .

. . . . .

. . . . .

. . . . .

. . .

. . .

. . .

. . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

. . . . .

of Trade

Page

. . . . . . . . . . . . . . . . . 285

... . . . . . . . . . . . . . . 285

. . . . . . . . . . . . . . . . . . 286

. . . . . . . . . . . . . . . . . . 286

... . . . . . . . . . . . . . . 288

. . . . . . . . . . . . . . . . . . 289

. . . . . . . . . . . . . . . . . 289

294 . . . . . . . . . . . . . . . . . . 

. . . . . . . . . . . . . . . . . 296

. . . . . . . . . . . . . . . . . 297
Chapter 7

How Trade Enters U.S. Production Recipes

TRADE AND U.S. BUSINESS STRUCTURE

Trade affects U.S. business structure in all of the

dimensions of change examined in Part 11. Trade

alters the share that different domestic industries contribute to America’s gross national product (GNP),

the scale and scope of enterprises, and the geography of production.

Trade alters America’s production and consumption

●

●

●

●

recipes in many ways:

The forces driving structural change in the domestic economy are magnified by the effects of

international trade. Increased consumer demand for specialized products has opened up

more opportunities for market niche penetration by foreign producers. Niches such as efficient automobiles or video-tape recorders have

often proved to be a crucial entry point into U.S.

markets.

The growing complexity of production networks

has allowed more points of entry for foreign

firms in domestic networks. The complex business networks described in Part 11 have grown

rapidly across international borders. Forces that

decrease economies of scale have made domestic producers vulnerable in areas where foreign

firms have been able to make better use of new

production technology.

The declining significance of natural resources

in emerging production recipes has meant that

foreign producers without access to inexpensive

energy and materials can compete in U.S. markets—often for the first time. U.S. advantages

stemming from vast fertile agricultural lands or

inexpensive mineral and energy resources have

all but vanished. It is possible that the comparatively high transactional costs associated with

U.S. production may place U.S. products at a

comparative disadvantage.

Technology has reduced demands for natural

resources, decreased the scale of efficient plants,

and led to products where the ratio of value to

weight is so high that transportation costs—even

overseas transportation costs—can be a com-

●

paratively small fraction of total costs.l Knowledge and information, perhaps the most important ingredients of successful competition, flow

rapidly across borders. Most of the flow cannot

even be measured. Efficient, reliable, and comparatively inexpensive communications systems

make it easier to coordinate production networks that reach around the globe. All of this

makes it easier to form production networks that

span large regions.

Perhaps most importantly, keen international

competition has made a capacity for making and

marketing products from new technologies critical to survival. Success often hinges on an ability to react quickly, to provide consistent quality, or to tailor products to highly specific

applications.

Recipe and Linkages

The increased complexity of linkages connecting

different parts of the economy has contradictory effects on trade. On the one hand, the separation of

once unified production facilities into networks of

component and service enterprises permits more

points of entry for both domestic and foreign producers. Telephone equipment installed and maintained in Chicago may have been designed in Palo

Alto, California, using parts produced in Japan and

Korea. On the other hand, an increased need for coordination between production, sales, and servicing

operations, and the increased integration of services

and production, can make international coordination cumbersome.

At a minimum, success in international markets

now depends on skillful management of both production and service functions. The Japanese, for example, succeeded in penetrating U.S. automobile

markets in part because of their heavy investment

in U.S. sales and servicing facilities, their skillful use

‘Sam Cole, “The Global Impact of Information Technology, ” World

Development, vol. 14, No. 10/1 1, 1986.

285
286

of advertising, and their patience and perseverance

in learning about U.S. markets. Sales of advanced

PBX (private branch exchange) telephone systems

abroad will clearly require a good infrastructure for

sales and maintenance. Mastery of banking, insurance, advertising, and other service industries abroad

will be of increasing importance for both service exports and exports of manufactured products.2

Changes in Scale and Scope

Trade has an uncertain effect on the scale and

scope of businesses operating in the U.S. economy.

Anecdotes suggest that trade can present problems

in both large, highly concentrated production sectors and sectors characterized by small, entrepreneurial firms.

Competitive problems faced in highly concentrated

sectors, like textile machinery, steel, and automobiles, apparently resulted in part from inadequate

flexibility in the face of unanticipated competition.3

Concentrating on price reductions and efficiency

achievable from mass economies of scale, such producers failed to see the dangers of having aggressive foreign companies invest heavily in new production techniques and search out market niches

world-wide. In time, these niches have grown to encompass large sections of the industry. Foreign firms

have all but eliminated U.S. producers of advanced

textile equipment, and the U.S. steel and auto industries survive in part because of U.S. trade protection policies. Small U.S. farms have difficulty competing with foreign producers in products other than

bulk commodities marketed by major trading companies (in part because foreign governments give major assistance to domestic producers wishing to market a wide variety of products abroad).4

On the other end of the production spectrum, such

highly entrepreneurial enterprises as the U.S. merzus. . Congress, office of Technology Assessment, International COmpetition in Services, OTA-ITE-328 (Washington, DC: U.S. Government

Printing Office, July 1987).

Ssee the thesis of Michae] Piore and Charles Sable, The SecOr?d /ndustrial Divide (New York, NY: Basic Books, 1984).

4U.S. Congress, Office of Technology Assessment, A Review of U.S.

Competitiveness in Agricultural Trade—A Technical Memorandum,

OTA-TM-TET-29 (Washington, DC: U.S. Government Printing Office,

October 1986).

chant semiconductor industry-which lives off venture capital in California’s “Silicon Valley"—and the

U.S. machine tool industry have also faced major

competitive problems. They proved vulnerable to

the patience and planning of large, integrated Japanese firms which demonstrated a superior ability to

transfer learning and resources from one part of their

business to another, and to build loyal teams of

highly skilled employees. In some cases, U.S. industries have also been vulnerable to foreign practices

of limiting access to markets, selling products at “below cost” prices (dumping), and receiving government subsidies.5

Geography

In a sense, trade is an extreme reflection of the

geographic mobility of production described in the

last part of chapter 5. The forces behind shifts in the

international location of production are much the

same as those that led to greater mobility within the

United States. What has changed is that the economic, political, and psychological barriers that once

kept most U.S. firms isolated from the international

marketplace have all but vanished. The change appears to be irreversible. Once a firm has demonstrated that a manufacturing enterprise can operate

successfully from, South Korea, making use of indigenous labor skills, local port facilities and other

physical infrastructure, and enjoying government

support for its profitable operation, it is easier for

the next firm to enter. Once Taiwan established itself as a reliable producer of high-quality, low-cost

components in one field, it could build on that reputation and encourage multinational firms to consider

the country as a site for other production facilities.

The removal of investment uncertainty is thus an

important and usually irreversible process, barring

a major domestic upheaval.

Trade has clearly helped reshape the landscape

of production. As in the case of domestic geographic

movement, however, the theoretical possibility of

locating production facilities more evenly around the

world has not necessarily resulted in even rates of

post-war economic development. Conflicting forces

5For an example, see Andrew S. Grove, “Regain Leadership by Working Together,” The New York Times, Dec. 13, 1987.
287

are at work. Much of the world seems unable to join

what is called the “convergence club”-a group of

nations whose economies have become much more

similar during the past century.6 Members of this

“club” seem to be able to learn from each other.

While relative positions may change, all have enjoyed real growth while the gap separating these nations from the rest of the world has not narrowed.

Technology makes it comparatively easy for businesses to base decisions on factors such as the availability of an educated and trainable work force, the

availability of beneficial tax policies, and other factors that might influence business climate. Indeed,

there is reason to believe that the striking success

enjoyed by the Pacific Rim nations during the last

decade depended heavily on their ability to provide

workers with comparatively good high school training at comparatively low wages.7

Interestingly, the fast-moving production networks

emerging in the world economy may work to increase the advantage of being close to markets, because successful participation in tightly integrated

networks depends heavily on a firm’s ability to respond quickly with new products and production systems.8 Many of the new service professions are necessarily disaggregate, since they depend entirely

on proximity to clients. The maintenance of complex telephone systems, the installation of software,

and the provision of health services all demand close

association with clients. Improved transportation networks and inventory control systems permit retailers

to offer a wider range of products; at the same time,

retailers attempting to keep a large range of products in stock without large inventories need suppliers

Gwi]liam J, Baumo], “productivity Growth, Convergence and welfare:

What the Long Run Data Show,” C.V. Starr Center for Applied Economics, RR#85-27, August 1985.

THaro]d M, Stevenson, “Mathematics Achievement of Chinese, Japanese, and American Children,” Science, vol. 231, No. 4739, Feb. 14,

1986, p. 693.

8 For further elaboration of this point see Peter Drucker, “The Changed

World Economy,” Foreign Affairs, vol. 64, No. 4, pp. 768-791, spring

1986; and James Brian Quinn, “The Impact of Technology in the Services Sector,” Bruce R. Guile and Harvey Brooks (eds.), ‘1’echnofogy and

Global Industry (Washington, DC: National Academy Press, 1987), pp.

119-159.

located where they can deliver quickly and reliably.

Auto assembly relying on “just in time” inventories

similarly benefits from close proximity. Chapter 6

gave several other examples of technology capable

of identifying and reaching niche markets throughout the Nation.

There are other strong links with location, however, that are more difficult to measure in standard

statistical terms. In spite of the theoretical advantages of communication in displacing travel, there

appears to be no good substitute for real physical

proximity in many advanced transactional services.

The expanded legal, accounting, financial, insurance,

and other services gaining a large fraction of national

employment appear to require the undisputed benefits of casual meetings, the reading of a face, or a

handshake. These are businesses where perceptions

are often as important as anything measurable. The

result of this has been significant concentration of

many advanced services in a few centers, such as

New York, Tokyo, London, and Los Angeles.

There has been a marked change in the geography of U.S. trade. A number of Asian nations have

become major markets for U.S. exports and major

suppliers of U.S. imports. In 1975, Asia accounted

for one-quarter of both U.S. imports and exports. By

1984 the Asian share of U.S. exports had risen to

30 percent while 37 percent of all U.S. imports came

from Asia, making it the largest supplier of goods

to the U.S. market. Trade with Asia now accounts

for more than 50 percent of the total U.S. merchandise trade deficit. The countries involved are mainly

Japan, Taiwan, South Korea, Hong Kong, and Singapore.

Table 7-1 shows how rapid change has been during the past decade. In 1975, 50 percent of the net

trade surplus with non-OPEC countries was used to

finance oil imports, resulting in an enormous trade

deficit with the oil producers. By 1986, imports from

OPEC nations accounted for only 6 percent of the

U.S. trade deficit. 0PEC’s share of US. exports fell

from 9 percent in 1975 to 5 percent in 1986. However, the collapse of U.S. exports occurred because

nations that formerly purchased U.S. exports reduced

their purchases in real terms.
288

Table 7.1.—The Geography of U.S. Merchandise Trade (billions of dollars)

1975 1986

Exports Imports Exports Imports

Location (from U.S.) (to U.S.) Balance (from U. S.) (to U.S.) Balance

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107.1 98.2 8.9 221.8 369.5 – 147.7

Western Europe . . . . . . . . . . . . . . . . . . . . . . . . . . 29.9 20.8 9.1 60.7 89.3 –28.6

European Community . . . . . . . . . . . . . . . . . . . 22.9 16.5 6.3 52.2 74.5 –22.3

Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.0 4.3 2.8 8.5 14.8 –6.3

Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.5 21.9 1.7 54.2 70.3 –16.0

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.6 11.3 –1.7 26.4 81.0 –54.6

Australia, New Zealand, South Africa . . . . . . . 3.5 2.2 1.3 7.1 6.0 1.2

Eastern Europe . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 0.7 2.5 2.0 2.0 0.0

Latin America . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.1 16.2 0.9 30.9 41.5 –10.6

Asia& Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.2 25.2 –4.9 40.4 79.4 –39.0

Hong Kong, Singapore, South Korea,

Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. N.A. N.A. 17.3 46.1 –28.8

OPEC a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 14.7 –7.4 6.8 12.7 –5.9

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.9 10.4 2.5 16.3 20.6 –4.3

aOrganization of Petroleum Exporting Countries. Total shown does not include Venezuela, Ecuador

N.A. = not available

SOURCE: U.S. Department of Commerce, Survey of Current Business, vol. 66, No. 6) June 1986, pp. 48-50; vol.67, No.3, March 1987, pp. 45-46.

FOLLOWING TRADE THROUGH DOMESTIC PRODUCTION NETWORKS

Between 1972 and 1984, trade’s effect on the GNP

share of several production sectors was as large as

the effect of domestic demand. One of the difficulties in evaluating the effect of trade on the U.S. economy, however, is that the beneficiaries of trade are

difficult to identify, while those adversely affected

by imports are vigorous in making their presence

known. A plant closed because imported clothing

has underpriced the domestic product is a tragedy

because the pain is concentrated on relatively few

individuals. Consumers as a whole, however, may

benefit from less expensive clothing due to these imports. Taken collectively, the advantages derived

from trade may outweigh the costs, though the costs

and benefits are not distributed equally.

Unfortunately, national statistics are virtually useless in making a detailed calculation of the ways

trade affects U.S. production networks to the benefit of U.S. consumers. There is no way, for example, to look at the National Income and Product Accounts or the input-output accounts to determine

whether the steel purchased by an automobile company is imported or produced by a domestic firm.

Even given this information, it is not easy to determine how the US. economy would operate in the

absence of trade. Many products and services simply cannot be produced domestically at any price,

such as a trip to Paris. There are other areas where

expanding domestic production to replace imports

would be prohibitively expensive—displacing imports, for example, would require doubling domestic petroleum production. Moreover, products are imported with prices and characteristics that cannot

easily be matched by domestic production; if imports

were not available, the prices of many products in

the U.S. economy would be radically changed. Consumption and production recipes would be altered

as a result. It is extraordinary difficult to anticipate

these shifts given available information. At this writing, consistent deflator series are not available for

all imports.

International trade statistics are becoming less

reliable as an indicator of real movement of value.

For example, measuring the value of technology

moving across international borders has always been

difficult, but its significance has grown as its value

has increased. The value of technology that flows

freely in the form of open technical literature, scientific meetings, educational training, and products

undoubtedly dwarfs the recorded flow of patents,

licenses, and the like. Barter-like trade, not easily

included in official estimates, may amount to 30 percent of world trade.9 Official estimates of U.S. servgstephen Cohen and John Zysman, “Countertrade, Offsets, Barter,

and Buy backs,” California Management Review, vol. 28, No, 2, winter

1986, pp. 41-56.
289

ice exports and imports may be 50 to 70 percent too

low.10 In addition, the value of drugs illegally imported to the United States in 1985 could, if measured, increase the U.S. trade deficit by 10 to 50

percent.

Because of these limitations, the discussion that

follows can provide only a very dim light on the way

trade has insinuated itself into U.S. production networks. Even this dim light can be useful.

Direct Effects

It is useful to begin by examing the direct effects

of trade, following the vocabulary of chapter 4. Leaving doubts about the data aside, table 7-2 shows that

nearly one-quarter of merchandise trade appears in

categories not closely linked to U.S. producing sectors. Of the remaining trade in goods and services,

the most dramatic changes are found in manufacturing. Medium Wage Manufacturing shows an increased share of both imports and exports, primarily because of growing trade in electronics, while

IOU,S. congress, Office of Technology Assessment, Trade in Services:

Exports and Foreign Revenues–Sprxial Report, OTA-ITE-316 (Washington, DC: U.S. Government Printing Office, September 1986).

High Wage enterprises fall as a share of both imports and exports in spite of the surge in imports

of steel, automobiles, and other products of High

Wage Manufacturing. In contrast, Transactional

Activities have gained in their share of imports, and

their share of exports rose to 7.6 percent in 1984—

more than a 50 percent increase from 1972.

—

Indirect Effects

Making the assumption that products made for export are produced in the same way as products made

for domestic sales, the methods discussed in chapter 4 can also be used to estimate the domestic business generated by foreign purchases of products and

services. Table 7-3 indicates that in 1984, exports

generated $38 to $49 billion of value-added in each

of the following sectors: Natural Resources, High

Wage Manufacturing, Medium Wage Manufacturing,

Transportation & Trade, and Transactional Activities. In percentage terms, exports gave the greatest

boost to High and Medium Wage Manufacturing and

Natural Resources; value-added was between 14 and

19 percent in all three sectors, demonstrating the

extent to which U.S. enterprises are involved in

Table 7-2.—Composition of Trade in 1972 and 1984 (in 1980 dollars)

Percent of all trade in “producing industries”a

Imports Exports

Production sector 1972 1984b 1972 1984b

Natural Resources. . . . . . . . . . . . . . . . . . . . . . . . 22.30/o 20.50/o 12.80/o 14.90/0

Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 0.0 0.0 0.0

Low Wage Manufacturing . . . . . . . . . . . . . . . . . 14.3 16.4 5.3 4.6

Medium Wage Manufacturing . . . . . . . . . . . . . . 19.3 27.1 21.4 27.7

High Wage Manufacturing . . . . . . . . . . . . . . . . . 46.1 39.7 39.9 31.2

Transportation & Tradec . . . . . . . . . . . . . . . . . . . –2.2 –4.1 14.7 13.4

Transactional Activities . . . . . . . . . . . . . . . . . . . 0.2 0.4 5.0 7.6

Personal Services . . . . . . . . . . . . . . . . . . . . . . . . 0.0 0.0 0.6 0.4

Social Services. . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 0.0 0.3 0.2

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0

In billions of 1980 dollars:

Value of trade in “producing industries”a

, . . . $138.8 $306.5 $117.7 $231.0

Value of trade in “special industries”a 

. . . . . . 59.4 106.1 40.3 83.1

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198.2 412.6 157.9 314.1

a

"Producing" industries differ from “special industries" in that the latter are not linked to the rest Of the economy generating no intermediate inputs and, with minor

exceptions, no domestic jobs. The “special industries” that contribute to trade include scrap, “non-comparable” imports, and “rest of the world” industry. An import

is “noncomparable” if (1) there is no significant domestic production (e.g., bananas); (2) the item is purchased and Wed outside the United States (e.g., foreign travel);

or (3) it is one of several miscellaneous items that are not easily assigned to a U.S. production category (e.g., antiques or fossils). The “rest of the world” trade includes

income on foreign investments, compensation of U.S. residents working abroad, and private payments on foreign assets

bBureau of Labor Statistics estimates rebased into 1980 dollars.

c

lncludes duties on imported products.

NOTE: Totals may not equal 100 due to rounding.

SOURCE: Office of Technology Assessment, based on US. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, “Dollar Value Tables

for the 1972 Input-Output Study,” April 1979; U.S. Department of Labor, Bureau of Labor Statistics, 1984 trade estimates, unpublished.
290

Table 7.3.—Domestic Value-Added Generated by Exports in 1984

Billions of Percent of valueProduction sector 1980 dollars added in sector

Natural Resources. ... , . . . . . . . . . . . . . . . . . . .

Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Low Wage Manufacturing . . . . . . . . . . . . . . . . .

Medium Wage Manufacturing . . . . . . . . . . . . . .

High Wage Manufacturing . . . . . . . . . . . . . . . . .

Transportation & Trade . . . . . . . . . . . . . . . . . . . .

Transactional Activities . . . . . . . . . . . . . . . . . . .

Personal Services . . . . . . . . . . . . . . . . . . . . . . . .

Social Services. . . . . . . . . . . . . . . . . . . . . . . . . . .

$39.2

8.0

9.2

46.6

48.5

45.4

38.5

3.6

2.7

14.60/o

4.4

9.6

16.0

18.5

8.0

5.6

3.3

0.6

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241.8 8.2

NOTE: The value-added includes all transactions associated directly and indirectly with trade, including domestic production

of capital equipment needed to produce exports.

SOURCE: Office of Technology Assessment, based on 1984 U.S. Department of Commerce, Bureau of Economic Analysis,

"National Income and Products Accounts,” historical diskettes with adjustments made to the 1980 Commerce Department Input/Output tables for capital flows and the U.S. Department of Labor, Bureau of Labor Statistics, “Employment Requirements,” unpublished, and 1984 trade estimates rebased into 1980 dollars, unpublished.

world trade. Measured in terms of absolute value

generated by exports, $104 billion ends up as value-

-added in manufacturing sectors (44 percent of the

total) while nearly $84 billion appears as value-added

in Transportation & Trade and Transactional Activities.

The effects of imports are much more difficult to

estimate for reasons already discussed. It is possible to obtain a rough estimate about the effects of

imports, presented in table 7-4, by making three admittedly heroic assumptions:

1. domestically produced commodities can be used

as direct replacements for all “comparable” imports, and can be produced at the same price

as imported products (import price plus tariffs);

2. the ratio of imported commodities to domestically produced commodities consumed is the

same for households, government, and businesses purchasing (“intermediate demand”);

and

3. the ratio of imported commodities to domestically produced commodities consumed is the

same for all businesses (e.g., if imports represent 10 percent of all steel consumed in the

United States, the automobile industry imports

10 percent of the steel it consumes).

Once changes in the output of industries resulting from the direct and indirect effects of trade have

been calculated, the impact of trade on jobs can be

computed with the assumption that employment in

Table 7-4.—Domestic Value-added Theoretically Offset by Imports in 1984

Billions of Percent of valueProduction sector 1980 dollars added in sector

Natural Resources. . . . . . . . . . . . . . . . . . . . . . . . $95.5 35.5 ”/0

Construction. . . . . . . . . . . . . . . . . . . . . ... , . . . . 15.2 8.4

Low Wage Manufacturing . . . . . . . . . . . . . . . . . 34.3 35.9

Medium Wage Manufacturing . . . . . . . . . . . . . . 70.6 24.3

High Wage Manufacturing . . . . . . . . . . . . . . . . . 81.4 31.0

Transportation & Trade. . . . . . . . . . . . . . . . . . . . 34.6 6.1

Transactional Activities . . . . . . . . . . . . . . . . . . . 34.1 5.0

Personal Services . . . . . . . . . . . . . . . . . . . . . . . . 3.7 3.5

Social services . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 0.7

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373.0 12.7

NOTE: The value-added Includes all transactions associated directly and indirectly with trade, including domestic production

of capital equipment needed to Produce exports. Duties collected on imported products have been excluded from the

calculations.

SOURCE: Off Ice of Technology Assessment, baaed on 1984 U.S. Department of Commerce, Bureau of Economic Analysis,

“National Income and Products Accounts,” historical diskettes with adjustments made to the 1980 Commerce Department Input/Output tables for capital flows and the U.S. Department of Labor, Bureau of Labor Statistics, ‘{Employment Requirements,” unpublished, and 1984 trade estimates rebased into 1980 dollars, unpublished.
291

an industry changes in proportion to industry output (see table 7-5). Given the large trade imbalance

of 1984, the methods just described indicate that imports resulted in a loss of over 9 million jobs, while

exports only generated 6.5 million jobs.

As could be expected, jobs in manufacturing were

most heavily affected by both imports and exports.

In percentage terms, the Medium and High Wage

Manufacturing sectors taken together were the most

affected by imports but also benefited the most from

exports. While nearly 13 percent of employment in

the Transactional Activities sector is attributable to

exports (directly from this sector and indirectly from

others), the Personal and Social Services sectors were

not as heavily affected by either imports or exports.

Methods similar to those used to estimate net effects on employment in different businesses can be

used to show how trade influences demand for people with different skills (see tables 7-6 and 7-7). Trade

has clearly benefited some groups at the expense

of others. As expected, export jobs are heavily dominated by manufacturing professions and agriculture.

A large fraction of all technical professionals(14 percent of all engineers, 12 percent of all engineering

technicians, and 8 percent of all scientists) owe their

jobs to exports. Social service occupations (teaching,

health, and other areas) are among those affected

least.

While the calculations about the employment effects of imports lack precision, they do suggest that

trade has deeply penetrated most U.S. production

networks that involve manufactured products, including those that rely heavily on engineering and

scientific personnel. Indeed, technical professions are

among the most heavily affected by both imports

and exports, as are skilled and unskilled employees in manufacturing.

It is possible, of course, that the statistics overstate

the loss of domestic scientific and engineering research. Many foreign designs incorporate U.S. engineering. U.S. research may well continue in spite

of the loss of some domestic production, although

it seems unlikely that U.S. firms can continue to

maintain vigorous research programs without an

ability to recapture the investment through production. On the other hand, the statistics presented later

in this chapter will show that the United States is

importing a great deal of engineering talent. The Japanese appear to expend much more engineering talent in some areas of production than U.S. firms.

Taken as a whole, the United States appears to

export products requiring relatively large amounts

Table 7-5.—The Impact of 1984 Trade on Domestic Employment by Industry Group

Percent of jobs in sector: Jobs in sector as percent of

Production sector Lost to imports Gained from exports all U.S. jobs in 1984

Natural Resources. . . . . . . . . . . . . . . . . . . . . . . . 8.20/o 8.1 0/0 3.50/0

Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9 2.9 4.5

Low Wage Manufacturing . . . . . . . . . . . . . . . . . 16.9 5.6 4.6

Medium Wage Manufacturing . . . . . . . . . . . . . . 25.9 23.7 9.6

High Wage Manufacturing . . . . . . . . . . . . . . . . . 18.6 15.8 5.9

Transportation & Trade . . . . . . . . . . . . . . . . . . . . 15.2 27.6 26.3

Transactional Activities . . . . . . . . . . . . . . . . . . . 8.7 12.9 13.0

Personal Services . . . . . . . . . . . . . . . . . . . . . . . . 1.5 2.1 5.5

Social Services. . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 1.3 27.2

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0

Millions of jobs . . . . . . . . . . . . . . . . . . . . . . . . 9.3 6.5 96.9

How To Read This Table: in 1984, 3.5% of the 96.9 million wage and salary jobs in the U.S. were in Natural Resource industries.

Exports of Natural Resource products accounted for 8.1 0

/0 of the 6.5 million jobs generated by all U.S. exports. Of the 9.3 million jobs hypothetically displaced by imports, 8.2°/0 were in Natural Resource industries.

NOTES:

● Totals may not equal 100 due to rounding.

. Includes both direct and indirect trade effects and the effects on capital purchases.

● Uses 1980 input/output and 1984 occupation by industry matrix.

● Duties collected on imported products have been excluded from the calculations.

● Job totals represent only wage and salary earners i n 1984 (self-employed not included).

SOURCE: Office of Technology Assessment, based on U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, Input-Output Tables’

1980, unpublished; U.S. Department of Labor, Bureau of Labor Statistics, “Employment Requirements, “ unpublished, and 1984 trade estimates rebased into

1980 dollars, unpublished.
292

Table 7-6.—Jobs (Wage and Salary) Lost Directly and Indirectly to Imports of Comparable Products in 1964

(ranked with the occupations iosing most employment at the top)

Jobs lost as percent of all

Occupation category jobs in the occupation in 1984

Extractive and related workers . . . . . . . . . . . . . . . . . . . . . . . .

Hand working occupations . . . . . . . . . . . . . . . . . . . . . . . . . . .

Machine setters, set-up operators, operators. . . . . . . . . . . .

Precision production occupations . . . . . . . . . . . . . . . . . . . . .

Blue collar worker supervisors . . . . . . . . . . . . . . . . . . . . . . . .

Engineers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Engineering and science technicians . . . . . . . . . . . . . . . . . .

Helpers, laborers, and material movers. . . . . . . . . . . . . . . . .

Plant and system occupations . . . . . . . . . . . . . . . . . . . . . . . .

Natural, computer, and mathematical scientists . . . . . . . . .

Material records, scheduling, dispatching . . . . . . . . . . . . . .

Mechanics, installers, and repairers . . . . . . . . . . . . . . . . . . .

Transportation and material moving operators . . . . . . . . . .

Technicians, except health and engineering . . . . . . . . . . . .

Computer operators and peripheral equipment . . . . . . . . . .

Management support occupations. . . . . . . . . . . . . . . . . . . . .

Construction trades . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

53.9

31.9

27.0

22.7

21.8

21.1

17.2

14.5

13.5

12.0

11.9

11.0

10.6

10.6

10.0

9.8

9.8

Jobs lost as percent of aii

jobs lost to imports in 1984

1.0

8.7

15.8

6.4

3.1

3.0

2.4

6.4

0.4

0.8

3.1

4.7

4.9

0.6

0.3

2.3

2.7

Average of all occupations . . . . . . . . . . . . . . . . . . . . . . . . . 9.6 100.0

Agriculture, forestry, fishing . . . . . . . . . . . . . . . . . . . . . . . . . .

Architects and surveyors . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Managerial and administrative occupations . . . . . . . . . . . . .

Financial records processing occupations. . . . . . . . . . . . . .

Duplicating, mail, and other office machines . . . . . . . . . . .

Records processing occupations, except finance. . . . . . . .

Secretaries, stenographers, and typists . . . . . . . . . . . . . . . .

Mail and message distribution workers . . . . . . . . . . . . . . . .

Writers, artists, entertainers, and athletes . . . . . . . . . . . . . .

Marketing and sales occupations. . . . . . . . . . . . . . . . . . . . . .

Communications equipment operators . . . . . . . . . . . . . . . . .

Other clerical and administrative support. . . . . . . . . . . . . . .

Lawyers and judges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cleaning and building service occupations . . . . . . . . . . . . .

All other professional, paraprofessional, and technical . . .

information clerks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

All other service occupations . . . . . . . . . . . . . . . . . . . . . . . . .

Adjusters and investigators. . . . . . . . . . . . . . . . . . . . . . . . . . .

Protective service occupations. . . . . . . . . . . . . . . . . . . . . . . .

Food and beverage preparers . . . . . . . . . . . . . . . . . . . . . . . . .

Personal service occupations . . . . . . . . . . . . . . . . . . . . . . . . .

Social scientists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Health technicians and technologists. . . . . . . . . . . . . . . . . .

Health diagnosing and treating occupations . . . . . . . . . . . .

Health service and related occupations . . . . . . . . . . . . . . . .

Social, recreational, and religious workers. . . . . . . . . . . . . .

Teachers, librarians, and counselors . . . . . . . . . . . . . . . . . . .

Private household workers . . . . . . . . . . . . . . . . . . . . . . . . . . .

9.2

8.5

8.4

8,3

7.7

7.4

7.2

7.2

7.0

6.4

6.3

6.2

6.1

5.3

5.3

5.1

4.7

3.9

3.3

2.8

2.6

2.3

0.4

0.3

0.2

0.0

1.8

0.1

7.1

2.1

0.1

0.7

3.0

0.6

0.6

6.4

0.3

3.8

0.2

0.4

0.4

0.2

0.7

2.0

0.2

0.0

0.1

0.2

0.1

0.0

0.1

0.0

How To Read This Table: Of the 9.3 million jobs replaced by trade in 1984, 8.7°/0 were in “hand working occupations.” imports

substituted for 31.9% of all 1984 hand working jobs.

NOTE: Duties collected on imported products have been excluded from the calculations.

SOURCE: Office of Technology Assessment, based on U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, input-Output Tables:

1980, unpublished; U.S. Department of Labor, Bureau of Labor Statistics, “Employment Requirements,” unpublished,and 1984 trade estimates rebased into

1960 dollars, unpublished.
293

Table 7-7.—Jobs (Wage and Salary) Gained Directly and Indirectly by Exports in 1984

(ranked with the occupations gaining most employment at the top)

Jobs gained as percent of all

Occupation category jobs in the occupation in 1984

Hand working occupations . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.7

Agriculture, forestry, fishing . . . . . . . . . . . . . . . . . . . . . . . . . . 15.8

Engineers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.3

Extractive and related workers . . . . . . . . . . . . . . . . . . . . . . . . 13.0

Precision production occupations . . . . . . . . . . . . . . . . . . . . . 12.4

Blue collar worker supervisors . . . . . . . . . . . . . . . . . . . . . . . . 12.1

Engineering and science technicians and technologists. . 11.8

Machine setters, set-up operators, operators. . . . . . . . . . . . 11.5

Material records, scheduling, dispatching . . . . . . . . . . . . . . 9.2

Transportation and material moving operators . . . . . . . . . . 9.1

Plant and system occupations . . . . . . . . . . . . . . . . . . . . . . . . 8.7

Architects and surveyors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6

Technicians, except health and engineering . . . . . . . . . . . . 8.3

Mechanics, installers, and repairers . . . . . . . . . . . . . . . . . . . 8.1

Natural, computer, and mathematical scientists . . . . . . . . . 7.9

Computer operators and peripheral equipment . . . . . . . . . . 7.7

Management support occupations. . . . . . . . . . . . . . . . . . . . . 7.3

Marketing and sales occupations. . . . . . . . . . . . . . . . . . . . . . 7.1

Writers, artists, entertainers, and athletes . . . . . . . . . . . . . . 6.8

Duplicating, mail, and other office machines . . . . . . . . . . . 6.7

Average of all occupations . . . . . . . . . . . . . . . . . . . . . . . . . 6.7

Financial records processing occupations . . . . . . . . . . . . . .

Managerial and administrative occupations . . . . . . . . . . . . .

Communications equipment operators . . . . . . . . . . . . . . . . .

Mail and message distribution workers . . . . . . . . . . . . . . . .

Lawyers and judges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Records processing occupations, except finance. . . . . . . .

Secretaries, stenographers, and typists . . . . . . . . . . . . . . . .

Construction trades . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other clerical and administrative support. . . . . . . . . . . . . . .

Information clerks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

All other professional, paraprofessional, and technical . . .

Cleaning and building service occupations . . . . . . . . . . . . .

All other service occupations . . . . . . . . . . . . . . . . . . . . . . . . .

Adjusters and investigators. . . . . . . . . . . . . . . . . . . . . . . . . . .

Personal service occupations . . . . . . . . . . . . . . . . . . . . . . . . .

Protective service occupations. . . . . . . . . . . . . . . . . . . . . . . .

Food and beverage preparers and service occupations . . .

Social scientists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Health diagnosing and treating occupations . . . . . . . . . . . .

Health technicians and technologists . . . . . . . . . . . . . . . . . .

Health service and related occupations . . . . . . . . . . . . . . . .

Social, recreational, and religious workers. . . . . . . . . . . . . .

Teachers, librarians, and counselors . . . . . . . . . . . . . . . . . . .

6.5

6.5

6.3

6.3

6.1

5.7

5.6

5.5

5.1

5.1

4.5

4.4

3.9

3.8

3.1

3,1

2.5

2.0

0.9

0.9

0.4

0.3

0.2

Jobs gained as percent

of all jobs gained from

exports in 1984

6.5

4.3

2.9

0.3

5.0

2.5

2.3

9.6

3.4

6.0

0.4

0.1

0.7

4.9

0.8

0.4

2.5

10.1

0.8

0.2

100.0

2.4

7.8

0.5

0.8

0.3

0.8

3.3

2.1

4.5

0.5

0.5

1.9

0.5

0.3

0.4

0.9

2.5

0.1

0.3

0.2

0.1

0.0

0.1

Private household workers . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 0.0

How To Read This Table: Of the jobs gained by exports in 1984, 6.5% were in “hand working occupations.” Exports were responsible for 16.7°/0 of all hand working jobs.

SOURCE: Office of Technology Assessment, based on U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, Input-Output Tables:

1980, unpublished; U.S. Department of Labor, Bureau of Labor Statistics, “Employment Requirements,” unpublished, and 1984 trade estimates rebased into

1980 dollars, unpublished.
294

of labor and relatively small capital inputs compared

to U.S. imports. This paradoxical result, first identified by Wassily Leontief in 1953,11 exhibits relative

stability over time (see table 7-8).12

The higher capital to labor ratio of imports is due

in part to the fact that exports include a significant

amount of sales and related employment not included in import accounts; sales workers represented

7.1 percent of all jobs gained by exports and 6.4 percent of jobs lost to imports. It is also possible that

U.S. exports embody an unusually large amount of

associated service employment when they consist

of relatively advanced products, while U.S. firms

threatened by imports tend to compete with heavy

capitalization to offset higher foreign labor costs. 13

On the other hand, it could also mean that foreign

firms have successfully penetrated the most capitalintensive and productive parts of U.S. manufacturing.

Another way to explore this issue is to examine

the effect of trade on employment using measures

other than occupation descriptions. The result is difficult to interpret. In spite of large differences in the

kinds of jobs created and lost by trade, the average

wages (calculated by weighting average occupation

wages by the number of jobs gained or lost in the

occupation) of jobs gained and lost are virtually iden-

‘ IWassily Leontief, “Domestic Production and Foreign Trade: The

American Capital Position Reexamined,” Proceedings of the American

Philosophical Society, September 1953.

IzWassi[y ~ntief and Faye Duchin, “Automation, the Changing Pattern of U.S. Exports and Imports, and Their Implications for Employment,” Final Report for the National Science Foundation, March 1985,

p. 22.

13 See U.S. Congress, Office of Technology Assessment, Technology

and Structural Unemployment: Reemploying Displaced Adults, OTAITE-250 (Washington, DC: U.S. Government Printing Office, February

1986).

Table 7-8.—Capital/Labor Ratios of U.S. Exports

and Imports (capital per unit of labor in 1979 dollars

per person year of competitive imports and exports)

Export Import Ratio

Year ratio ratio (E/l

1963 . . . . . . . . . 37.5 49.2 0.76

1967 .., . . . . . . 40.7 48.9 0.83

1972 . . . . . . . . . 53.0 59.6 0.89

1977 . . . . . . . . . 56.0 74.6 0.75

NOTE: Technical matrices apply to the year indicated.

SOURCE: W. Leontief and F. Duchin, “Automation, the Changing Pattern of U.S.

Exports and Imports, and their Implications for Employment,” National Science Foundation, (PRA 83-11407), March 1965, pp. 2.26-2.27,

tical (see table 7-9).14 Individuals losing jobs because

of imports are slightly more likely to be males who

are not well educated. Not surprisingly, they are

much more likely to be in an occupation with high

levels of unemployment.

Because of the large trade deficit in 1984, the

United States was actually a net importer of almost

every class of worker in that year. In 1972, a year

in which the value of exports and imports was close

to being in balance, the United States was a net exporter of work by the college-educated in spite of

considerable displacement of technical personnel.

Given balanced trade, the United States would also

be a net exporter of female employment.15

Linkages

While manufactured products represent the bulk

of direct imports (again see table 7-2), imports lead

to significant declines in value-added and employment in non-manufacturing sectors as well because

of the extensive linkages connecting manufacturing

to the rest of the economy. Loss of domestic automobile production translates directly into losses for the

firms that provide marketing, financing, and other

services to domestic automobile producers.

The linkages connecting the fate of different parts

of the economy are shown in particularly vivid terms

when imports substitute for domestic production.

These links are examined directly in table 7-10,

which separates trade into three components: trade

in natural resource and construction goods, trade in

manufactured products, and trade in services. The

table indicates that while 89 percent of all jobs lost

to imports in 1984 resulted from imports of manufactured products, only two-thirds of these lost jobs

were manufacturing jobs. Imports of manufactured

goods resulted indirectly in the loss of over 2 million service jobs, primarily in the Transportation&

Trade and Transactional Activities sectors. In other

words, for every 15 jobs lost due to imported manufactured products, 10 were jobs lost in manufac14Weighting Wages by industry, however, can yield a result where

higher paid jobs are being lost to imports as opposed to those generated by exports. See Lester Thurow, “A Surge in Inequality,” Scientific

American, vol. 256, No, 5, May 1987, pp. 237.

Issee Char]es F. Stone and Isabel V. Sawhill, “Labor Market implication of the Growing Internationalization of the U.S. Economy,” contract

report for the National Commission for Employment Policy, Washington, DC, February 1986.
295

Table 7-9.—Characteristics of Jobs in 1984, Using 1972 and 1984 Trade Patterns

1984 trade patterns 1972 trade patterns

Average Lost to Gained by Average Lost to Gained by

Category (all jobs) imports exports (all jobs) imports exports

Workers (millions) . . . . . . . . 98.7

Weekly earnings . . . . . . . . . $330

% unemployed . . . . . . . . . . 6.6 7.6 7.1 6.6 7.6 7.2

Demographics:

% female . . . . . . . . . . . . . . . 46.0 38.4 40.1 45.8 37.8 40.1

% black . . . . . . . . . . . . . . . . 13.2 12.5 12.4 13.2 12.5 12.4

Education:

% no diploma . . . . . . . . . . . 18.2 22.3 20.5 18.4 22.3 20.5

% high school graduate . . 61.2 63.2 63.2 61.2 63.3 63.3

% college graduate . . . . . . 20.6 14.5 16.3 20.4 14.4 16.2

Age:

% age 16-24 . . . . . . . . . . . . . 20.2 19.6 19.9 20.2 19.7 19.8

% age 25-54 . . . . . . . . . . . . . 69.0 69.7 69.3 69.0 69.5 69.4

% age 55+ . . . . . . . . . . . . . . 10.8 10.8 10.9 10.8 10.8 10.8

NOTE: Job totals do not Include self-employed workers.

SOURCE: Office of Technology Assessment, based on data Provided by the U.S. Department of Commerce, Bureau of Economic Analysis, and the U.S. Department

of Labor, Bureau of Labor Statistics.

turing industries, 4 were in services, and 1 was in were lost in the natural resource and construction

the natural resource sector. sector, 3 service sector jobs were eliminated, and

A similar interdependence between sectors is evi- 2 manufacturing jobs were lost.

dent in the case of natural resource imports. For Service sector imports did not appreciably affect

every 10 jobs lost due to imports of these goods, 5 the other two sectors. Although the absolute loss of

Table 7-10.—The Linkage Effect of Trade on U.S. Employment in 1984

(wage and salary jobs created or lost by production sector, in percent)

Jobs lost by imports of: Jobs gained by exports of:

Production sector NRC Manufact. Services NRC Manufact. Services

Natural Resources and

Construction (NRC). . . . . . 50.5% 6.5% 1.8% 45.7% 6.5% 4.0%

Natural Resources . . . . . . . . 36.9 4.0 0.7 40.2 4.0 1.5

Construction . . . . . . . . . . . . . 13.6 2.5 1.1 5.5 2.5 2.5

Manufacturing . . . . . . . . . . . . 18.9

Low Wage Manufacturing . . 2.7

Medium Wage

Manufacturing . . . . . . . . . . 10.1

High Wage

Manufacturing . . . . . . . . . . 6.1

Services . . . . . . . . . . . . . . . . . 30.6

Transportation & Trade . . . . 17.1

Transactional Activities . . . . 10.8

Personal Services . . . . . . . . . 1.4

Social Services . . . . . . . . . . . 1.3

65.9

18.6

27.4

19.9

27.7

17.2

8.0

1.5

1.0

8.8

1.0

6.2

1.6

89.4

6.3

75.7

5.5

1.9

18.5

2.6

9.1

6.8

35.8

22.3

11.0

1.5

1.0

64.2

7.9

33.7

22.6

29.3

17.9

8.7

1.7

1.0

10.5

1.4

6.0

3.1

85.6

55.3

24.6

3.6

2.0

Total (percent) . . . . . . . . . . 100.0 100.0 100.0 100.0 100.0 100.0

Total (000s of jobs). . . . . . (997.5) (8,290.0) (50.2) 848.3 4,082.1 1,611.4

Read the table as follows: Of the 8.29 million jobs lost due to importing manufacturing products in 1984, 27.7 percent were

lost in service industries through indirect linkages. Of the 848,300 jobs gained due to natural resource and construction exports, 40.2 percent were gained in the Natural Resource sector itself,

NOTES:

● Brackets denote job loss.

● Totals may not equal 100 due to rounding.

SOURCE: Office of Technology Assessment, based on U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, Input-Output Tables”

1980, unpublished; U.S. Department of Labor, Bureau of Labor Statistics, ‘(Employment Requirements,”

1980 dollars, unpublished.

unpublished, and 19S4 trade estimates rebased in
jobs attributed to service imports was small, over 89

percent of the losses were contained to the service

sectors—76 percent in the Transactional Activities

sector alone. The largest non-service impact was felt

in Medium Wage Manufacturing, presumably because it produces service industry equipment like

computers, photocopiers, and typewriters.

While linkages spread the losses resulting from

imports, they also spread the wealth resulting from

exports. In 1984, the export of manufactured goods

was responsible for 62 percent of all jobs created by

exports. Services played a much larger role on the

export side than was the case with imports, generating 1.6 million jobs—nearly one-quarter of all the

jobs created by exports. Nevertheless, of all the service sector jobs created through exports, over a million jobs (41 percent) were attributable to manufacturing exports. Ten percent resulted from natural resource and construction exports. As was the case

in imports, the export of service products generates

few jobs outside the service sector.

Although these calculations are based on limited

data, they can provide a rough idea of the relative

impact of trade and how it ripples through the economy. It underscores the interdependence of the U.S.

production sectors, revealing that the health of one

industry is dependent on the success of the others.

This is especially true for trade-related service sector jobs, which are tightly connected to the manufacturing sector.

The calculations, of course, may not show some

of the most important aspects of trade linkages.16 Domestic production may be essential for earning profits

needed to maintain the momentum of research.

Proximity to production facilities maybe needed to

manage an effective research and development program. Research and development teams that are

widely separated from production systems, or located

in firms no longer producing products, appear less

likely to keep abreast of the most relevant engineering products and less likely to find inspiration in the

practical difficulties of the work place.17

IGStephen Cohen and John Zysman, Manufacturing Matters: The Myth

of a Post-/ndustriai Economy (New York, NY: Basic Bmks, 1987).

ITOTA is currently studying this issue in greater depth. See Technology, innovation, and U.S. Trade, forthcoming.

Trade and the Amenities

Using the techniques just described, it is also possible to trace the effect of trade through both consumption and production networks to show how the

provision of different amenities (as outlined in Part

I) is affected by trade. Table 7-11 shows to what degree Americans depend on imported products for

different amenities, The U.S. Transportation system

benefits heavily from imports, both because of heavy

imports of fuel needed to power vehicles and because a large proportion of the vehicles themselves

are imported. Heavy dependence on imports can,

of course, be a mixed blessing. It is an indication

that consumers may be enjoying lower prices or

more choice in goods and services as a result of

trade, but it can also mean that the amenity based

on the imported commodity is vulnerable to manipulation by foreign producers.

Clothing and Personal Care is heavily affected by

trade, primarily because of rapidly growing imports

of labor-intensive clothing. Imports represented 12

percent of Recreation and Leisure spending even

though the accounts shown do not include foreign

travel (a “non-comparable” item). Purchases of imported home electronics, foreign recreational vehicles, toys, and other items have obviously improved

Table 7.11 .—Imports as a Percent of Domestic

Spending by Amenity in 1984a

Amenity Percent

Transportation. . . . . . . . . . . . . . . . . . . . . . . . .

Clothing and Personal Care . . . . . . . . . . . . .

Federal Defense . . . . . . . . . . . . . . . . . . . . . . .

Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Recreation and Leisure . . . . . . . . . . . . . . . . .

Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Government (N. E. C.) . . . . . . . . . . . . . . . . . . .

Health. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Personal Business and Communication. . .

Education ... , . . . . . . . . . . . . . . . . . . . . . . . .

National average. . . . . . . . . . . . . . . . . . . . .

21.2

18.7

12.5

12.2

11.6

9.6

8.1

7.0

6.3

6.2

4.9

10.7

aDoes not include noncomparable imports.

N.E.C. = Not elsewhere classified.

NOTE: These estimates include all direct and indirect imports required to meet

each class of amenity. They include imports of capital goods needed for

domestic producers to satisfy the amenity. They also Include transportation, trade, and transaction costs associated with imports, less costs that

would have been incurred whether or not the item was imported. This

means that only the incremental cost of transportation and handling is

associated with an import.

SOURCE: Office of Technology Assessment, based on U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business,

Input-Output Tables: 1980, unpublished; U.S. Department of Labor,

Bureau of Labor Statistics, “Employment Requirements,” unpublished,

and 1984 trade estimates rebased into 1980 dollars, unpublished.
297

the quality of leisure for many Americans. Virtually

all Food imports involve what agricultural traders

call “high-value” products—those other than bulk

grains. Imports of fruits, vegetables, and foods that

reflect foreign tastes (i.e., Italian tomatoes or Dutch

beer) have grown so large that they equal U.S. exports of grains.18

In Housing, direct imports are largely limited to

purchased energy (primarily oil) needed for heating,

a large variety of home appliances, and building components. In the future, however, it is possible that

imports will grow to include a much wider variety

of housing components—possibly entire house sections. These issues are discussed in greater detail

in chapter 9.

Table 7-11 also includes the indirect effects of imports, such as the sophisticated machines that produce domestic fabrics (virtually all imported), food

processing equipment (heavily imported), machine

tools that increase the productivity of domestic automobile manufacturing, and other items in the complex production networks serving U.S. consumers.

IJ3A Revjew of U.S. corn~t;tjveness in Agricultural Trade—A Technical Memorandum, op. cit., footnote 4.

Under the assumptions made here, even 12.5 percent of Federal Defense spending results directly or

indirectly from imported items. This may overstate

vulnerability since DoD tries to select “domestic”

products but many “domestic” products have foreign components. A recent Defense Science Board

analysis found that defense purchases are often faced

with a choice between buying the best item and buying a domestically produced item. 19

The growth of production networks across international borders is apparent from the fact that fully

12 percent of the value of U.S. exports results from

imported products. If nothing else, the competitive

position of U.S. exported products is heavily dependent on the price and availability of imported products. Connections become apparent during events

such as the recent attempt to block Japanese semiconductor imports through high tariffs. One immediate result was concern about an increase in the

cost of U.S. products containing imported semiconductors.

19 Defense Science Board, “Task Force on Defense Semiconductor Dependency,” Washington, DC, December 1986.

A FINAL ASSESSMENT: WEIGHING THE COSTS AND BENEFITS OF TRADE

Given the complex way that trade has insinuated

itself into the Nation’s production networks, its net

effect is obviously difficult to measure with precision.

While the advantages of trade can be clearly demonstrated in a world where prices and products are

comparatively predictable, it is possible that trade

can lead to real hardship during periods of rapid

change. Comparative advantage in today’s international markets depends heavily on a producer’s ability to capture the “rents” of innovation when marketing products that embody new technology, in order

to recover investment in research and development.

It is entirely possible that if foreign firms prove

more adroit in exploiting technical opportunities, and

if this results in a situation where industries with

the potential for rapid productivity growth fail in the

United States, the United States could find itself

specializing in comparatively poorly paid industries

while importing technically sophisticated products

from abroad. The comparative position of the U.S.

economy could fall if the United States fails to manage trade effectively in a dynamic environment. It

is even possible that the absolute level of U.S. living standards could decline if trade, in effect,

reversed the comparative positions of the United

States and trading partners that were formerly less

affluent.

Rapid loss of markets in a fast-moving area like

consumer electronics can rob a firm of profits needed

for research and new investment. Even worse, it can

break critical links in the chain connecting production and engineering innovation. American companies that maintained comparative advantage in

highly productive manufacturing sectors may be

forced out of the market altogether.

The converse of this argument is the difficulty of

building comparative advantage in a new area when

the pressure of trade makes it difficult for investors
298

to take a chance on an “infant” enterprise. This has

been a point of contention in U.S. policy since Alexander Hamilton made the case in his Report on the

Subject of Manufactures.

It certainly appears that Japan and other nations

have been able to make skillful use of trade protection in an overt policy designed to create areas where

they will have comparative advantage. The question

at issue is whether they could have done better using

other means to stimulate development. A critical

problem is determining when an enterprise no

longer requires protection from trade, since politics

invariably plays a large role in creating the answer.

The issue would be largely irrelevant if the United

States had succeeded in maintaining a position of

leadership in the product cycle. It gains importance

when the United States must regain lost markets.

The problem becomes all the more vexing in an

environment where virtually every enterprise has

become an infant in terms of continual rebuilding

through innovation. The discussion of Part 11 suggests that successful enterprises in the emerging

economy will, in essence, be perpetual “infants” in

the sense that their products and production are in

the process of almost continuous change. Even a mature business sector like apparel may be about to

embark on a bold venture into new technology.

Their case for protection from international competition and trade may be at least as valid as the case

made by producers of advanced electronics.

Currency issues present a separate problem. In

principle, market forces can lead to adjustments in

world wage rates and currency exchange rates over

the long term; however, many factors prevent these

adjustments from being made rapidly. A nation with

rapidly rising productivity, for example, is likely to

have a work force whose wages have not risen as

rapidly as productivity either because workers fail

to capture the higher wages that they might eventually be able to command as a result of productivity

growth, or because domestic policies block wage increases as a conscious element of growth policy. During the time it takes for local wages to catch up with

productivity growth, the nation can have an important, albeit perhaps only temporary, comparative

advantage in crucial areas of production.

Employees of U.S. firms that suddenly find themselves at a comparative disadvantage in international

markets can face massive problems of adjustment.

Constant turmoil can lead not only to personal hardship but lead to enormous inefficiencies. Trade has

left entire communities in areas of the rust belt and

textile production regions of the South with no major employer and little time to adjust. Adjustment

costs can be so large that they overwhelm the longterm benefits.

While the costs of rapid transformation do not undermine the clear benefits of expanding trade, they

do provide a justification for developing a trade policy

that can ensure a graceful transformation. investments in retraining, and other programs designed

to give individuals and communities an opportunity

to benefit from transformation, can play a key role

in ensuring that the theoretical benefits of expanded

trade become real benefits.

Rapidly expanding trade can lead to a variety of

other problems not easily measured in economic

terms:

● Loss of Control Over the Domestic Economy. The sheer volume of U.S. trade in relation to the size of the domestic economy severely constrains the ability of the United States

to use standard macroeconomic tools unilaterally to manage the economy. Attempts to stimulate growth through domestic spending may

serve only to stimulate imports. Unilateral efforts to change or to control the exchange rate

are also extremely difficult. The extent to which

this loss of control translates into disruption depends heavily on the degree of cooperation

among major trading partners, or lack thereof.

In an economy without foreign trade, increased domestic spending can only be met

through expanded domestic production. The

regulating system is automatic: consumption increases until labor shortages drive up prices.

The government can intervene to “fine tune”

the economy by adjusting its spending. In an

open international economy, however, increased spending can be achieved through increased imports. The regulating system becomes

international in scope and options for unilateral

government control become much more

limited.

The volume of international commerce in

fields like banking and telecommunications
299

mean that decisions that were once made primarily for domestic reasons here and abroad

now have a significant influence on international trade. With billions of dollars flowing daily

through international financial markets, inappropriate coordination of international regulation can be dangerous as well as inefficient.

The limits of unilateral control may be particularly great in times of crisis, as the international stock market crash of October 1987

proved with disturbing clarity. Such factors as

a sudden loss of confidence in the U.S. economy leading to capital flight, a precipitous decline in the value of the dollar, or sudden

changes in a major nation’s attitude toward free

trade could precipitate an acrimonious chain reaction of retaliation and panic unless sound

measures are in place to coordinate domestic

reactions.

● Problems of Equity. For reasons just discussed, it is entirely possible that while trade

could increase average wealth in the United

States, it can have a strong effect on the distribution of wealth and income. Evidence presented in chapter 8 suggests, for example, that

in recent years trade has disadvantaged male

workers with craft skills, while advantaging

managers and scientists.

● National Security. A productive and innovative domestic economy is essential for the maintenance of American defenses. Recent evidence

of declining U.S. capabilities in microelectronics,

advanced materials, and other strategic areas

calls into question America’s ability to rely on

domestic suppliers for state-of-the-art technology. Military procurement is forced to make the

difficult choice between buying an American

product or buying the best product. Decisions

of this kind also cast doubt on U.S. ability to

use technology to offset East Block advantages

in manpower and other resources. (Comfort perhaps can be taken from the fact that the East

is probably even less efficient than the United

States in exploiting new technology, but this is

scarcely a sound basis for security.) This issue

is explored in greater detail in chapter 14.

Trade may also affect security by creating

such high levels of dependence on foreign suppliers that overall U.S. flexibility in foreign affairs can be compromised. U.S. dependence on

imported oil proved disastrous this past decade,

and could well be disastrous again. A $50 billion increase in oil imports (measured in constant 1982 dollars) is likely by the turn of the

century. A case can be made that loss of domestic capacity in steel and other materials can

also lead to difficulties in periods of high international stress.

It is necessary to distinguish problems actually

caused by imperfect trade policy from problems simply revealed by free trade. A nation unable to discipline domestic consumption, or losing the ability

to innovate because of excessive shortsightedness

and self-interest, is unlikely to find its problems easily

corrected by changes in exchange rates or explicit

manipulation of imports. Indeed, sheltered from the

pressures of trade, a nation losing its ability to innovate may simply find itself falling more rapidly

behind the world state-of-the-art.

There is no simple formula for ensuring that free

trade works to the advantage of the United States,

while avoiding the many problems that trade can

create. Fiscal policy and strategies for supporting research may affect trading patterns as powerfully as

measures affecting trade more directly. Chapter 14

explores options in a variety of different areas.
Chapter 8

The Framework of U.S. Trade
CONTENTS

Page

Trade Balances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....................303

Basic Equations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...............305

Capital Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................-....305

Trade Composition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...................306

Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......306

Changing Comparative Advantage . . . . . . . . . . . . . . . . . . . . . ...................308

Long-Term Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......................313

The Convergence Club. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .........313

Why Leaders Falter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..................313

Four Hypotheses About the Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........315
Chapter 8

The Framework of U.S. Trade

The previous chapter looked closely at how new

forces have linked trade into domestic production

recipes. The present discussion takes the analysis

a step further by tracing national trends in the volume and composition of trade. Trends point to a potentially serious decline in the ability of the United

States to compete in the export of highly sophisticated manufactured products.

Both U.S. imports and U.S. exports have grown

dramatically during the past 15 years. The oil price

shocks, which nearly doubled the value of U.S. imports during the 1970s, simply accelerated a trend

that began in the late 1960s and continued after oil

prices fell. In 1960, the combined value of imports

and exports accounted for 10 percent of the U.S.

gross national product (GNP). By 1984, this had risen

to 22 percent. Since imports have grown much faster

than exports since 1980, the United States now experiences its largest trade deficit since systematic

Figure 8-1.-Trade Balance in Industrial

Goods (current dollars in billions)

Billions of dollars

20-

o“

I

-20-

-40 -

-60 -

-80 -

I i 1 t -100 ! I 1 , 1 1 [ 1 1 1 ! 1 1

1970 1973 1976 1979 1982 1985

— O i l Capital Goods

. . . . Industrial Supplies — Food & Fee d

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts, ” historical diskettes, table 4,3.

records began in 1929. The Nation consumed 2.7

percent more than it produced in 1987.

Figures 8-1 and 8-2 indicate that this deterioration

is not limited to a single sector of the economy. The

problem affects both consumer and industrial goods.

In the category of industrial goods, the only improvement in the trade balance is in oil, There has been

a trade deficit in oil since the early 1970s, but the

value of oil imports declined because of falling oil

prices. In the other sectors (capital goods, industrial

supplies, and food & feed), healthy trade balances

of the 1970s have been sharply eroded since 1980.

Similar trends are noticeable in trade in consumer

goods. The small deficits of the 1960s in automobiles and other consumer goods have deteriorated

into large deficits. A small trade surplus in services

reduces, but far from eliminates, the large merchandise trade deficit.

Figure 8-2.-Trade Balance in Consumer

Goods (current dollars in billions)

Billions of dollars

-10- . . . . . . . . . . . .

-20-

-30- 1

-40 -

-50-

-60-

, , , -70 I I I r 1 I 1 I I 1 I 1 1 1 I

1970 1973 1976 1979 1982 1985

— Auto s

. . - Consumer Durables

— Cons. Non-durables

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts, ” historical diskettes, table 43,

TRADE BALANCES

In principle, economic forces demand that trade practical world of trade, however, remains domibetween nations be in balance over the long term. nated by stubborn forces of nationalism, political inAn efficient and free system of barter would adjust stability, and wildly varying programs for managexchange rates, domestic wages, and/or interest ing domestic economies and international trade.

rates to compensate for asymmetric trade flows. The Simple arithmetic shows that if the U.S. Government

303
304

spends more than it takes in as taxes or U.S. firms

invest more than they can acquire from U.S. savings—in other words, if U.S. consumption exceeds

U.S. production–the difference must be made up

by borrowing from abroad (as shown in table 8-1).1

A nation must either have a current trade account

in approximate balance over the long run or find

a way to live on perpetually expanding credit.

Heavy U.S. reliance on foreign capital is unexpected given the history of other economic leaders.

For example, when England became a “service”

economy during the latter part of the 19th century,

it did so primarily by lending money to American

businesses and other foreign firms rather than by

borrowing from the rest of the world.

The United States has been a net debtor to the

rest of the world since the spring of 1984, and by

1985 became one of the world’s largest borrowers,

owing nearly $110 billion. By the end of 1986, the

United States owed $263.5 billion.2 The debt is now

increasing at approximately $150 billion per year.

By the end of the 1980s, the United States is likely

to owe at least $600 billion—a sum larger than all

non-defense government expenditures made in

1987. Finding a way to slow the growth of foreign

debt, and perhaps even to repay some of the principle, will be a formidable challenge in a period

when:

●

●

●

the United States faces increasing competition

in technologically sophisticated products and

raw materials (like agricultural products) that

once easily earned foreign currency;

declines in U.S. and non-OPEC (Organization

of Petroleum Exporting Countries) petroleum

production will require significant increases in

the share of petroleum imports from Arab OPEC

nations;

as much as $35 billion per year must be spent

simply to repay the interest on foreign capital

investment; 3

1 In formal terms:

[Exports – Imports] = [Production – Consumption]

= [Taxes – Government Spending]

+ [Savings – Investment]

ZRUS4 B. Scholl, "The lnternational Investment position Of the United

States in 1986,” Survey of Current Business, vol. 67, No. 3, June 1987,

pp. 38-45.

3 Stuart Auerbach, “U.S. Foreign Debt Skyrockets to $263 Billion,”

The Washington Post, June 24, 1987, p. B2.

Table 8-1.—U.S. Trade Balances and Foreign

Investment in the United States, 1986

(billions of dollars)

Total payments to foreigners . . . . . . . . . . . –143.9

Net imports of goods and services. – 105.5

–Imports. . . . . . . . . . . . . . . . ., –481 .7

–Exports . . . . . . . . . . . . . . . . . . . . . . 376.2

Of which, net factor incomea is: 33.8

–Imports . . . . . . . . . . . . . . –52.3

–Exports . . . . . . . . . . . . . . . . . . . . . 86.1

Other payments to foreigners . . . . . . . . –38.3

–Transfer payments (net) . . . . . . . –15.7

–Interest paid by government ., . . . . –22.6

Net Foreign Investment in the

United States . . . . . . . . . . . . . . . . . . . . . 143.9

(domestic spending less

domestic production)

Government deficit . . . . . . . . . . . . . . . 147.8

Private domestic savings less

investment ... . . . . . . . . ... –8.8

Of which:

–Gross private savings . . . . . . . . –679.8

–Gross private domestic

investment . . . . . . . . . . . 671.0

Statistical discrepancy ., . . . . . . . . . . . . 4.9

aDirect Investment income, interest income, dividend income, labor income (not

including U.S. Government interest payments to foreigners).

NOTE: Numbers may not add due to rounding.

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” Survey of Current Business, July

1987, Tables 4.1 and 5.1.

●

●

the widespread availability of advanced agricultural technology is reducing world demand for

U.S. agricultural products, and many former U.S.

customers in developing nations are facing staggering debt problems of their own; and

key parts of America’s production base are increasingly owned by foreign management.

Why is America able to continue borrowing under these conditions? The answer is political as well

as economic. Affluent classes in Hong Kong or Latin

America choose U.S. investments because of concern about the long-term security of wealth kept at

home. The Japanese invest in U.S. manufacturing

to escape current and anticipated trade sanctions.

Unlike shifts in the underlying sources of competitive advantage in international product markets, capital flows can change as rapidly as acts of political

will. With politics rather than economics at work,

self-correcting forces may not operate. A collapse of

confidence in the United States as a debtor, for example, could trigger panic in world markets and lead

to a catastrophic adjustment rather than a graceful

one.
305

If U.S. foreign debt expands too rapidly, the logic

of investment in the United States must fail. Unless

the Nation finds a way to export on the basis of high

productivity and innovative products, however, the

remedies available (significant increases in interest

rates, a continued drop in the value of the dollar,

declining U.S. wage rates, or a large reduction in imports) will involve a significant decline in U.S. living standards. Even this course can create problems

–barring unexpected growth in world markets, the

United States can only restore balanced trade by

recapturing markets for manufactured products in

areas now held by Japan, West Germany, and even

some developing nations. Combined with reduced

U.S. imports, this could create economic instability

abroad and frustrate development plans at home.4

Basic Equations

The value that flows across international borders

can be divided into three categories:

1. the “current account,” which includes trade in

goods and services from “producing industries”

and returns on foreign investment (the “invisible” flow of funds);

2. the “capital account,” which is the change in

a nation’s assets abroad and foreign assets in

the nation, both direct and indirect, including

purchases of bonds, stocks, and parts of firms;

and

3. flows of value that do not appear in any

account—for example, the value of technology

available in the open literature or purchased at

low cost through a U.S. education, and the value

of illegal shipments.

In 1986, net U.S. payments to foreigners were

$143.9 billion (again see table 8-l). This amount was

precisely equal to, and thus offset by, foreign investment in the United States. The United States required

this amount of investment because net private savings of $8.8 billion were combined with net government borrowing of $147.8 billion.5 In other words,

if Americans consume more than they produce, the

difference must be borrowed from foreigners. The

4Lester C. Thurow and Laura D. Tyson, “The Economic Black Hole, ”

Foreign Po/IcJ, No 67, summer 1987, pp. 3-21

sThe National ]nc~me and product .AcCounts lnCOrPOKIk a statistical

discrepancy in calculating net foreign investment of $49 billion. See

table 8-1.

inescapable arithmetic of these accounts indicates

that balanced trade requires both more U.S. exports

relative to imports and more domestic saving relative to expenditures,

Capital Accounts

The capital flowing into the United States has taken

a variety of forms, including increases in investments

in real assets such as land and buildings, establishment of foreign subsidiaries and joint ventures, and

portfolio investments in equities, corporate bonds,

and short- and long-term government securities (see

table 8-2). Capital flows into the United States continued even through the dollar’s rapid decline in

value during 1986 and 1987.

International movement of capital has been greatly

facilitated by new telecommunications technology,

which permits a firm in Japan to examine markets

in New York, Frankfurt, Paris, Zurich, Chicago, and

Singapore as easily as it examines markets in Tokyo.

Gradual movement toward deregulation of financial

markets in a variety of nations has contributed to

this flexibility. The combination of instantaneous

communication, internationally shared financial information, and relatively unregulated markets provides an unprecedented opportunity to increase the

productivity of capital throughout the world. It also

introduces an unprecedented amount of volatility

into capital markets and weakens any single nation’s

ability to control international financial flows.

Of the change in U.S. investment abroad between

1984 and 1985, 36 percent was in the form of private direct investment. By contrast, only 11 percent

of net foreign investment in the United States was

direct investment. Nearly 60 percent of the 1985 increase in private foreign investment in the United

States was in the form of bank loans, stocks, or treasury bonds. In 1985, $25.5 billion worth of treasury

bonds were purchased by foreigners; thus, roughly

one-fifth of the U.S. Government’s budget deficit in

1985 was directly financed from abroad.

International flows of capital have blurred the distinction between “U. S.” and “foreign” firms. As a

result, tracing the flow of trade dollars in national

accounts may no longer provide a sound guide to

changes in economic power. Multinational firms

have major holdings in the United States, whose production is not counted as imports. Conversely, for-
306

eign firms may be partly owned by U.S. multina- new (1984 to 1985) foreign investment in the United

tionals: 40 percent of the “Japanese” firm Isuzu is States was by these nations (see table 8-3). Even the

owned by General Motors. struggling Latin American nations significantly inIn 1985, 39 percent of U.S. investment abroad was creased their investment in the United States between 1984 and 1985. in Western Europe and Japan, while 76 percent of

Table 8-2.—U.S. Investment Abroad and Foreign Investment in the United States by Type of Investment:

1984 and 1985 (billions of dollars)

All nations

Investment type 1985 total 1984-85 increase Japan 1985 total

U.S. assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 952.4 54.2 56.3

Official assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130.6 11.0

Private assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 821.8 43.1

Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232.7 19.7 9.1

Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73.4 11.4 1.5

Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40.7 12.8 3.9

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 474.9 –0.7 37.1

Foreign assets in U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,059.8 166.0 101.8

Official assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202.3 3.2 N.A.

Private assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 857.5 162.8 N.A.

Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183.0 18.4 19.1

U.S. Treasury Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83.8 25.5 N.A.

Private bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81.8 49.1 8.6

Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125.9 30.1 1.9

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382.9 39.7 N.A.

a Primarily loan from Private banks.

N.A. = Not available,

SOURCE:U.S.Department of Commerce, Bureau of Economic Analysis, “The lnternational Investment Position of the United States in 1985," Survey of Current Business, voI,66, No.6, June 1966, p. 27,

Table 8-3.—U.S. and Foreign Investment by Region, 1984 and 1985 (billions of dollars)

Western Latin

Europe Canada Japan America Other Total

7964:

U.S. assets abroad . . . . . . . . . . . . . . . . . . . . . 272 115 48 267 196 898

Foreign assets in United States . . . . . . . . . 423 58 68 189 156 894

Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –151 57 –19 78 39 4

1985:

U.S. assets abroad . . . . . . . . . . . . . . . . . . . . . 317 119 56 266 195 953

Foreign assets in United States . . . . . . . . . 515 66 102 212 165 1,060

Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –198 53 –46 54 30 –107

NOTE: Numbers may not add due to rounding

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “The international Investment Position of the United States in 1985," Survey of Current Business, vol. 66, No. 6, June 1966, p. 27.

TRADE COMPOSITION

Trends composition of trade can be a cause for alarm, since

they may reveal changes in the competitive status

The change in the volume of trade relative to the of the national economy. It now seems clear that the

size of the U.S. economy has also been accompa- factors driving post-war U.S. dominance in producnied by a change in the composition of trade—the tivity, such as higher levels of education, easier ackinds of goods and services traded. Changes in the cess to capital, and possession of technologically ad-
307

vanced processes, have eroded. Some part of this

loss was inevitable given the fact that it is easier to

catch up with a technological leader than it is to forge

into untested new areas and succeed. In addition,

a technical leader is unable to recover the real value

of exported technology or training. To some extent,

however, the loss has also been the result of complacency and mismanagement in U.S. industries.6

With the advantages of hindsight, the convergence

of U.S. and foreign living standards was also predictable given the incentives for post-war recovery

and international access to U.S. markets. What was

not anticipated, however, was the weakening of the

“product cycle,” which had once seemed to guarantee that U.S. leadership would be virtually selfperpetuating. 7

The logic of the product cycle was difficult to challenge. U.S. producers, facing the world’s most affluent markets, paying the highest wages, and with

access to the largest number of highly skilled workers, had a natural incentive to be the first in the development of sophisticated new products and technologies that substituted capital for comparatively

expensive labor. Production systems developed originally for the advanced U.S. economy were eventually perfected to the point where they could be operated by labor available in less affluent economies

and transferred as U.S. producers moved to begin

yet another cycle.

It is conceivable that the United States could have

continued to lead Japan and Europe indefinitely, with

new products continually replacing the old in the

U.S. export mix. The characteristics of the U.S. market, however, have grown less distinctive over time.

The internationalization of financial markets has

tended to equalize the cost of capital throughout the

world. The traditional product cycle was further

weakened by a convergence in wages, and a number of nations may now actually have greater incentives to introduce labor-saving equipment than the

United States. U.S. advantages stemming from inexpensive raw materials have also been reduced,

by modern production systems requiring lower raw

material inputs in the production recipe. Technol-

~see in!ewlew With Malcolm Baldrige, “Despite Barbs, Baldrige HoPeful on U.S. Business,” Washington Post, Dec. 7, 1986.

7RaYmond Vernon, “]nternationa] Investment and International Trade

in the Product Cycle, ” Quarterly Journal of Economics, May 1966,

ogy has also introduced many options for substituting intellectual resources for scarce or expensive

energy, minerals, and other kinds of natural resources.

Large and affluent domestic markets uninhibited

by interstate trade restrictions once provided unique

advantages for U.S. producers. These advantages are

now available to producers throughout the world.

Moreover, rising incomes in Europe and Japan have

narrowed the huge post-war differences in per capita GNP to the point where innovations designed for

European and Japanese markets increasingly resemble those designed for U.S. markets. And new products and production technologies, coupled with

growing diversity in American households, have fragmented formerly homogeneous U.S. markets in areas

ranging from insurance policies to kitchen appliances. Information technology played a key role in

tailoring products to highly specific markets, and in

facilitating the production and delivery of large numbers of highly differentiated products without adding significantly to costs. Both of these developments

have opened opportunities for foreign entry into U.S.

markets.

Stripped of their unique resource and product-cycle

advantages, U.S. firms may be at a relative disadvantage in applying complex and fast-moving production and product technologies. Japan and Pacific Rim

nations, which have built economic expansion

around exports, have developed an impressive ability to identify niche markets and promising new technologies in areas ranging from automobiles to

compact-disk electronics. Moreover, they have had

longer experience in finding ways to be flexible in

the face of volatile world energy and resource costs

(an advantage now largely invisible given low world

oil prices). By 1984, the exports of U.S. manufacturing firms commonly thought of as “high technology”

businesses had declined in relative importance, while

gains were posted by most natural resource enterprises.

Although shifts in the composition of U.S. trade

indicate that the United States has lost leadership

in technological products, they cannot be interpreted

to indicate that the United States has now moved

to a position of follower in the product cycle. A position of continued leadership would presumably be

indicated by trade patterns generating large num-
308

bers of technologically sophisticated jobs in the

United States (engineers, scientists, supporting technical staffs, and highly skilled craftsmen), while tasks

that could be reduced to relatively routine labor associated with older types of automation would move

abroad. On the other hand, if the United States were

reduced to a position on the second tier of the product cycle, the reverse would be true: increasing net

exports of semi-skilled production jobs and decreasing net exports of jobs involving technologically sophisticated products. In fact, available data show that

what is actually occurring follows neither pattern

exactly.

Links in the chain of product development connecting research, production, and marketing prove

to be some of the Nation’s most fragile assets. Some

links, like the connection between producers and

supporting services, can be documented using the

techniques described in chapter 7. Others are more

difficult to follow, since they involve subtle and informal connections between engineering inspiration

and familiarity with the daily problems of production.8 If such links are lost, regaining them will not

be easy. The task of rebuilding leadership is much

more difficult than maintaining it, and the task of

recovering competitive advantage is different than

riding comfortably on the crest of a product cycle.

Loss of clear technological leadership does not

mean that the United States is necessarily condemned to see its living standards reduced. It does

mean that the United States can no longer take markets for granted, depend on inexpensive resources,

or rely on a global reputation for making state-ofthe-art products. The United States must now compete with many nations on an equal footing—taking

advantage where it can by demonstrating a superior

ability to make products using new technologies.

The prices of a nation’s products and services

today depend to a large degree on active choices of

private management and the government programs

that support them, rather than on traditional price

differences derived automatically from natural endowments. 9 This means that the composition of a

nation’s trade is increasingly a function of the skill

8For greater elaboration of this argument, see Stephen Cohen and

John Zysman, Manufacturing Matters: The Myth ofa Post-hrdustriaf Economy (New York, NY: Basic Books, 1987).

9John Zysmanand Laura Tyson eds., American Industry in International Competition (Ithaca, NY: Cornell University Press, 1983).

and education of its work force, and the success with

which its management succeeds in converting new

ideas into products and profits. These are areas in

which the United States does not have an inherent

comparative advantage.

Changing Comparative Advantage

If overall trade balances were restored, there would

be no cause for alarm in the static picture of trade

composition discussed in the previous sections—

but the process by which the Nation restores this

balance is of great significance. Will the United States

expand exports of technologically sophisticated products and services that result in well-paying domestic jobs, or will the United States be able to compete

only by exporting raw materials and comparatively

low technology manufacturing? There is concern that

the United States has lost critical parts of the technological infrastructure necessary to compete in

many areas involving rapidly changing and advancing technologies.10

Some consolation can be taken from the fact that

recent history provides no case in which loss of trade

leadership led to an absolute decline in the living

standards of the country concerned. Some countries

have, of course, advanced more slowly than the

leaders. The United Kingdom provides a highly visible case. Between 1870 and 1910, Britain lost its

world economic leadership to Germany and the

United States; its share of world manufacturing fell

from 32 percent to 14 percent. Yet during this same

period, per capita consumption increased 50 percent. 1l Today, England’s citizens enjoy a growing

standard of living and productivity, and unemployment is not strikingly higher than in more prosperous European nations.12 Ironically, British interest

in welfare grew rather than declined as the economy slowed in relative terms.

The situation could be dramatically different if the

United States were forced to readjust to a lower relative status through an international financial crisis.

An event such as a disastrous oil crisis, a major default of Latin debtors to U.S. banks, or a loss of conIOS. Cohen and J. Zysman, op. cit., fOotnOte 8.

I I Robert Gi]pin, U.S. Power and the MuMnationa/ Corporation (New

York, NY: Basic Books, 1975).

IZwilliam J. Baumol, “Productivity Growth, Convergence and Welfare: What the Long Run Data Show,” C.V. Starr Center for Applied

Economics, RR#85-27, August 1985.
309

fidence in fiscal management could trigger a collapse

of confidence in the U.S. economy leading to capital flight. A severe domestic recession could set in,

leaving the United States without any easy opportunities for stimulating the economy given the enormous budget deficits that already exist and the need

to keep interest rates high to attract foreign capital.

Such dramatic events could trigger real hardship and

lead to drastic steps to protect U.S. markets. If U.S.

multinationals were to look abroad for less expensive production opportunities, there would be a reduction in U.S. infrastructure expenditures, reducing investment in programs or institutions designed

to enhance domestic productivity.

Comparative Advantage Defined

Since the concept of comparative advantage will

be used and critiqued throughout the following discussion, it is useful to begin by stating the basic argument. The central point is obvious and unassailable: trade between nations allows each nation to

specialize in those areas where it has the greatest

comparative advantage (i.e., lowest cost and/or highest productivity compared to all the other products

produced by that nation), By specializing in what

it does best and trading for other products and services each nation becomes wealthier than would be

the case if no trade took place. Standards of living

in each nation increase regardless of the difference

in relative living standards before trade (see box 8-A).

Documenting Changes in

U.S. Comparative Advantage

Documenting changes in comparative advantage

can be difficult even in the best of circumstances.

It is particularly difficult when the overall trade balance is undergoing significant changes. For a variety of reasons, trade balances turned negative in virtually every part of the economy between 1980 and

1987. This cannot imply that the United States has

lost comparative advantage in every sector. Some

sectors suffered more rapid declines than others.

Given the complex networks of enterprises that

deliver products to consumers, it is difficult to disentangle competitiveness in one part of the network

from that in another. It is also difficult to separate

the productivity of one part of a production network

from the performance of the network acting as an

integrated whole. It is entirely possible that a comparatively low-cost manufacturer has a poor showing in international trade simply because that business is not a part of a network capable of identifying

rapidly changing foreign market niches and moving aggressively to exploit advantages. Static measures, therefore, can give a misleading impression.

An index of the comparative advantage of different U.S. industries can be created by dividing the

value-added a sector gained through exports in a

given year by the value-added lost through exports.

Businesses can be ranked by this index in any given

year. Changes in the competitive status of the business can be measured by the extent to which industry positions in such a list change from year to

year. Changes in competitive ranks between 1972

and 1984 can be measured by taking the ratios between the competitive index for a business in 1984

and the index for 1972. If this ratio is greater than

one, the industry became more competitive between

1972 and 1984 while the reverse was true if the ratio is less than one (see table 8-4), The ratio for all

industries is less than 1 since total imports grew more

rapidly than total exports during the period. Businesses with ratios below the average (0.84) lost in

comparative terms while businesses with ratios

above the average gained.

Table 8-4 accounts for both direct and indirect effects of trade on the output of each business. It attempts to show only the effects of trade, eliminating changes in value-added in each business that

resulted from changes in domestic final demand and

in domestic production recipes. The changes shown

in the table must be treated with caution since it is

based on the same assumptions that led to the creation of tables 7-6 and 7-7 in chapter 7. The results

are also very sensitive to the years chosen for comparison.

Almost all manufacturing enterprises in the United

States lost ground during this period. Heavy declines

and losses were suffered in areas where traditional

product leaders should have been gaining advantage: electronic components & accessories; office,

computing, & accounting machines; aircraft & parts;

and engines & turbines. In addition, automobile

manufacturing and apparel lost significant comparative advantage during the past decade.

With the exception of farm equipment (which has

undoubtedly lost rank subsequently), only two of the
310

Box 8-A.–Comparative Advantage

Suppose that U.S. producers can make a radio for $30 and a computer chip for $10, while in Japan both

a radio and a computer chip can be made for 600 Yen. Without trade, an American with $60 (or a Japanese

with 2400 Yen) could buy one radio and three computer chips. If trade barriers are suddenly lifted, both sides

will discover that they gain by specializing in the area where their comparative advantage is highest. In America

one radio can be exchanged for three chips, while in Japan the exchange ratio between chips and radios is one

to one. Thus, America’s comparative advantage lies in chip production, and Japan’s comparative advantage lies

in radio production.

Suppose that after some haggling it was agreed that the American would exchange three U.S. computer chips

for two Japanese radios. The American would then be able to use his $60 to buy six U.S. computer chips and

trade three of them for two Japanese radios, while the Japanese would purchase four Japanese radios and trade

two of them for three U.S. computer chips. After trade, both the American and the Japanese would be able to

buy two radios and three computer chips with the same money that formerly purchased only one radio and

three computer chips. By specializing in its area of comparative advantage the wealth of each country has increased.

While the data can be used to show that living standards in both nations would increase with trade, they

cannot be used to show which nation has a higher absolute standard of living. Absolute living standards (measured in terms of quantities of goods available per hour worked) depend on the absolute levels of output per

hour in areas where the nation has comparative advantage. This conclusion does not depend on whether Japanese earned the equivalent of $100 an hour or $0.10 an hour. Suppose that the United States could produce

18 computer chips with 18 hours of work while Japan needed 36 hours to produce 12 radios. The United States

would get the same goods (radios and chips) for half as much work as the Japanese. The Japanese would, however, get more per hour worked than they would without trade.

The gap between U.S. and Japanese living standards would close if Japanese productivity approached U.S.

levels. If the Japanese achieved nearly the same production costs as the United States in all products, the advantages of trade would shrink. Taking the example a step further, if the Japanese equalled the United States in

their productivity of radio production but surpassed the United States in their productivity of chip manufacturing,

U.S. workers would again enjoy rising living standards in that 18 hours of work could buy more than three radios

and nine chips. Americans would, however, be making radios instead of chips, and the Japanese would have

a higher standard of living,

The analysis does not say anything about changes in income distribution that might result from trade. If

production wages are lower and working conditions less attractive in the U.S. radio industry than they are in

chip production, the shift from chips to radios could benefit owners of capital and a small number of skilled

engineers at the expense of production workers. Average U.S. wealth could increase, while the welfare of some

groups would decline as the result of trade.

“high technology” enterprises gaining comparative

rank involved electrical or metal manufacturing. Instead, gains were posted by manufacturers using

chemical processes (chemical products and plastics).

Of the 20 industries designated as “high technology,”

15 lost rank.13 Natural resource enterprises, led by

agricultural exports that remained strong in 1984,

ISvirtua]ly all definitions of high-technology rely on one, or both, of

two indicators: “large” or above-average R&D expenditures relative to

value-added or shipments; and a “high” or above-average proportion

of scientists and engineers in the labor force. Examples of definitions

using these criteria include New York Stock Exchange, U.S. International Competitiveness: Perception and Reality (New York, NY: NYSE,

1984); Michael Aho and Howard F. Rosen, “Trends in Technologyintensive Trade: With Special Reference to U.S. Competitiveness,” U.S.

Department of Labor, Bureau of International Labor Affairs, Washington, DC, 1980; Regina Kelly, “The Impact of Technological Innovation

on International Trade Patterns,” Bureau of International Economic Policy and Research, U.S. Department of Commerce, 1977; U.S. Department of Commerce, International Trade Administration, “An Assessment of U.S. Competitiveness in High Technology Industries,” 1983;

Lester Davis, “Technology Intensity of U.S. Output and Trade,” Office

of Trade and Investment Analysis, International Trade Administration,

U.S. Department of Commerce, 1985; Victoria Hatter, “U.S. High Technology Trade and Competitiveness,” Office of Trade and Investment

Analysis, International Trade Administration, U.S. Department of

Commerce, 1985; Organization for Economic Cooperation and Development (OECD), OECD Science and Technology Indicators/1: Resources

Devoted to R&D, Technological Performance and Industrial Competitiveness and Annex, 1985.

While these techniques can capture some of the linkages between

research and the ultimate beneficiary of the research, they are only partially successful. Linkages through capital investment are poorly captured, and the impact of government-sponsored research is not captured at all.
311

showed consistent gains in rank. Lumber, paper, lection of enterprises such as communications, ralivestock, and tobacco increased their rank, as well dio & TV broadcasting, and business services gained

as some Low Wage Manufacturing industries like in rank. U.S. trade in ordnance and associated milileather tanning, miscellaneous textiles (non-apparel), tary equipment also gained sharply in comparative

and household furniture. In addition, a curious col- rank.

Table 8-4.—lndustries Gaining or Losing Apparent Advantage in Trade (measured by change in the ratio

of value-added gained due to exports to value-added lost due to imports between 1972 and 1984)

1984 index* 1984 index

Industry 1972 index Industry 1972 index

NOTE: An index >1 means export/import ratio increased between 1972 and 1984, an index <1 means that the export/import ratio declined

during the same period. * 1984 index = (1984 exports) ÷ (1984 imports)

H

H

H

H

H

H

H

H

H

Amusements . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Miscellaneous manufacturing . . . . . . . . . . . . . .

Apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Construction and mining machinery . . . . . . . .

Electronic components and accessories . . . .

Office, computing, and accounting

machinery. . . . . . . . . . . . . . . . . . . . . . . . .

Miscellaneous fabricated textile products .

Metalworking machinery and equipment . . . .

Special industry machinery

and equipment . . . . . . . . . . . . . . . . . . . . . . . .

Broad and narrow fabrics, yarn, and thread

mills. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other furniture and fixtures . . . . . . . . . . . . . . .

Aircraft and parts . . . . . . . . . . . . . . . . . . . . . . . .

Motor vehicles and equipment . . . . . . . . . . . . .

Materials handling machinary

and equipment . . . . . . . . . . . . . . . . . . . . . . . .

Screw machine products and stampings . . . .

Engines and turbines . . . . . . . . . . . . . . . . . . . . .

Optical, ophthalmic, and photographic

equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

H Service industry machines . . . . . . . . . . . . . . . .

H Scientific and controlling instruments . . . . . .

Footwear and other leather products . . . . . . .

H Electric lighting and wiring equipment . . . . . .

H General industrial machinery

and equipment . . . . . . . . . . . . . . . . . . . . . . . .

Federal Government enterprises . . . . . . . . . . .

Primary iron and steel manufacturing . . . . . . .

H Drugs, cleaning and toilet preparations . . . . .

H

H

H

—

Hotels; personal and repair services

(excluding auto) . . . . . . . . . . . . . . . . . . . . . . . .

Paints and allied products . . . . . . . . . . . . . . . .

Other fabricated metal products . . . . . . . . . . .

Electric, gas, water and sanitary services ., .

Wholesale and retail trade . . . . . . . . . . . . . . . .

Radio, TV and communication equipment . . .

State and local government enterprises . . . . .

Average of all industries . . . . . . . . . . . . . .

Miscellaneous machinery, except

electrical. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Heating, plumbing and structural metal

products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Electric industrial equipment

and apparatus . . . . . . . . . . . . . . . . . . . . . . . . .

Automobile repair and services . . . . . . . . . . . .

Eating and drinking places . . . . . . . . . . . . . . . .

0.49

0.50

0.51

0.57

0.59

0.61

0.61 H

0.61

0.63

0.63

0.65

0.66

0.67

0.70

0.71

0.71

0.71

0.71

0.72

0.74

0.74

H

0.76

0.78

0.80

0.81

0.81

0.81

0.81

0.82

0.82

0.83

0.84

0.84 H

0.84

0.84

0.85

0.86

0.86

Paperboard containers and boxes . . . . . . . . . .

Finance and insurance. . . . . . . . . . . . . . . . . . . .

Glass and glass products ., . . . . . . . . . . . . . . .

Rubber and miscellaneous plastic products .

Real estate and rental . . . . . . . . . . . . . . . . . . . .

Stone and clay products . . . . . . . . . . . . . . . . . .

Maintenance and repair construction . . . . . . .

Plastic and synthetic materials . . . . . . . . . . . .

Primary nonferrous metals manufacturing . . .

Crude petroleum and natural gas . . . . . . . . . .

Health, education, & social services and

nonprofit organizations . . . . . . . . . . . . . . . . .

New construction . . . . . . . . . . . . . . . . . . . . . . . .

Forestry and fishery products . . . . . . . . . . . . .

Coal mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Miscellaneous electrical machinery and

supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Communications, except radio and tv. . . . . . .

Business services. . . . . . . . . . . . . . . . . . . . . . . .

Radio and TV broadcasting. . . . . . . . . . . . . . . .

Tobacco manufacturers . . . . . . . . . . . . . . . . . . .

Chemical and fertilizer mineral mining . . . . . .

Household appliances . . . . . . . . . . . . . . . . . . . .

Transportation and warehousing . . . . . . . . . . .

Paper and allied products,

except containers . . . . . . . . . . . . . . . . . . . . . .

Chemicals and selected chemical products. .

Wood containers. , . . . . . . . . . . . . . . . . . . . . . . .

Printing and publishing . . . . . . . . . . . . . . . . . . .

Petroleum refining and related industries . .

Metal containers . . . . . . . . . . . . . . . . . . . . . . . . .

Ordnance and accessories . . . . . . . . . . . . . . . .

Lumber and wood products, except

containers. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Household furniture . . . . . . . . . . . . . . . . . . . . . .

Nonferrous metal ores mining, except

copper. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Miscellaneous textile goods and floor

coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Farm and garden machinery . . . . . . . . . . . . . . .

Leather tanning and finishing. . . . . . . . . . . . . .

Food and Kindred Products . . . . . . . . . . . . . . .

Stone and clay mining and quarrying . . . . . . .

Livestock and livestock products . . . . . . . . . .

Other transportation equipment. . . . . . . . . . . .

Agricultural, forestry and fishery services . . .

Iron and ferroalloy ores mining , . . . . . . . . . . .

Other agricultural products. . . . . . . . . . . . . . . .

0.88

0.89

0.89

0.89

0.89

0.90

0.90

0.91

0.91

0.92

0.92

0.96

0.96

0.96

0.97

0.97

0.98

0.98

0.99

1.00

1.00

1.00

1.01

1.05

1.05

1.06

1.07

1.08

1.12

1.12

1.14

1.15

1.18

1.18

1.23

1.29

1.32

1.36

1.37

1.43

1.58

1.60

How To Read This Table: In 1984, the ratio of value-added in “electronic components and accessories” gained from exports

to value-added lost from imports was 59 percent of the ratio calculated using 1972 trade patterns.

H = “high-technology” manufacturing sectors, using the categorization suggested in Robert Z, Lawrence, Can America Compete (Washington, DC: The Brookings Institution, 1984), p, 148.

SOURCE: Office of Technology Assessment, based on U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, Input-Output Tables:

1980, unpublished; and U.S. Department of Labor, Bureau of Labor Statistics, 1984 trade estimates rebased into 1980 dollars, unpublished.
312

A different way of viewing the change is to examine the ratios of jobs created to jobs lost by occupation. Table 8-5 shows that, as before, the greatest

losses are concentrated in direct manufacturing occupations, while trade seems to work to the advantage of service occupations and other occupations

that indirectly support manufacturing. Engineers and

engineering technicians appear to be losing ground

as rapidly as the craftsmen and laborers that their

engineering supports. The data reveal a sharp break

between the fate of individuals labeled “engineers”

and those labeled “scientists.” Trade worked to the

advantage of scientific professions more than it

worked to the disadvantage of engineering. Computer operators, communication specialists, and a

variety of other occupations closely tied to the sophisticated management networks described in Part

11 all appear to be associated with enterprises gaining in comparative advantage.

Numerous studies of U.S. trade argue that technology plays an important role in the determination

of U.S. comparative advantage.14 The analysis presented thus far, however, indicates that technologyintensive firms have lost ground over the past twelve

years compared with other U.S. industries. The great14 D.B. Keesing, “The Impact of Research and Development on United

States Trade,” Journal of Political Economy, vol. 75, February, 1967;

W.H. Gruber and R. Vernon, “The R&D Factor in a World Trade Matrix,” in R. Vernon (cd.) The Technology Factor in International Trade

(New York, NY: Columbia University Press, 1970); Thomas C. Lowinger,

“The Technology Factor and the Export Performance of U.S. Manufacturing Industries,” Economic inquiry, vol. 13, June 1975; Robert E. Baldwin, “Determinants of Trade and Foreign Investment: Further Evidence, ”

Review of Economics and Statistics, vol. 61, No. 1, 1979; Michael Aho

and Howard F. Rosen, op. cit., footnote 13.

Table 8-5.—Occupations Gaining or Losing Apparent Advantage in Trade (measured by change in the ratio

of jobs gained due to exports to jobs lost due to imports between 1972 and 1984)

Net 1984 jobs Net 1984 jobs

Occupation category Net 1972 jobs Occupation category Net 1972 jobs

NOTE: An index >1 means export/import ratio increased between 1972 and 1984, an index <1 means that the export/import ratio declined during

the same period. Jobs refer to wage and salary employees only.

Engineers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Precision production occupations . . . . . . . . . . . . . . . .

Engineering and science technicians and

technologists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Personal service occupations . . . . . . . . . . . . . . . . . . . .

Blue collar worker supervisors . . . . . . . . . . . . . . . . . . .

Teachers, librarians, and counselors . . . . . . . . . . . . . .

Technicians, except health, engineering

and science . . . . . . . . . . . . . . . . . . . . .

Material records, scheduling, dispatching,

and distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Management support occupations . . . . . . . . . . . . . . . .

Mail and message distribution workers . . . . . . . . . . .

Average for all occupations . . . . . . . . . . . . . . . .

Writers, artists, entertainers, and athletes . . . . . . . . .

Managerial and administrative occupations . . . . . . . .

Computer operators and peripheral equipment

operators. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Records processing occupations,

except financial . . . . . . . . . . . . . . . . .

Food and beverage preparers and service

occupations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

All other professional, paraprofessional,

and technical . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Helpers, laborers, and material movers, hand . . . . . .

All other service occupations . . . . . . . . . . . . . . . . . . . .

0.65

0.67

0.68

0.68

Hand working occupations, including assemblers

and fabricators. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Machine setters, set-up operators, operators, and

tenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.71

0.73

0.73

0.74

0.74

0.75

0.76

0.77

0.77

0.78

0.78

0.79

0.79

0.79

0.79

0.80

0.80

Mechanics, installers, and repairers . . . . . . . . . . . . . .

Financial records processing occupations . . . . . . . . .

Other clerical and administrative

support workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Secretaries, stenographers, and typists . . . . . . . . . . .

Extractive and related workers, including blasters . .

Natural, computer, and mathematical scientists . . . .

Social, recreational, and religious workers. . . . . . . . .

Cleaning and building service occupations,

except private household. . . . . . . . . . . . . . . . . . . . . .

Construction trades . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Duplicating, mail, and other office machine

operators. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Marketing and sales occupations. . . . . . . . . . . . . . . . .

Protective service occupations. . . . . . . . . . . . . . . . . . .

information clerks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Adjusters and investigators. . . . . . . . . . . . . . . . . . . . .

Transportation and material moving machine and

vehicle operators . . . . . . . . . . . . . . . . . . . . . . . . . .

Communications equipment operators . . . . . . . . . . .

Health technicians and technologists . . . . . . . . . . . . .

Plant and system occupations . . . . . . . . . . . . . . . . . . .

Health service and related occupations . . . . . . . . . . .

Social scientists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Lawyers and judges . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Health diagnosing and treating occupations . . . . . . .

Architects and serveyors . . . . . . . . . . . . . . . . . . . . . .

Agriculture, forestry, fishing, and related

occupations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.60

0.80

0.80

0.80

0.60

0.80

0.80

0.82

0.83

0.83

0.85

0.85

0.86

0.86

0.87

0.87

0.87

0.88

0.89

0.91

0.92

0.96

1.01

1.50

How To Read This Table: In 1984, the ratio of jobs in “hand working occupations” gained from exports to jobs lost from imports was 65 percent of the ratio calculated using 1972 trade patterns.

SOURCE” Office of Technology Assessment, based on U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, Input-Output Tables”

1980, unpublished, U.S. Department of Labor, Bureau of Labor Statistics, “Employment Requirements,” unpublished; and 19S4 trade estimates rebased into

1980 dollars, unpublished.
313

est loss in value-added was in precisely those areas

one would expect to find gains in value-added if the

United States were to remain at the head of product

cycles in emerging technologies. On the other hand,

the United States appears to be gaining advantage

in businesses heavily dependent on raw materials

and in labor-intensive manufacturing—precisely the

areas one would expect to be losing ground to developing nations.

Between 1972 and 1984, the United States lost a

significant volume of high-technology exports primarily because of rapidly increasing imports. Overall, the United States still retained a $4 billion trade

surplus in technology-intensive businesses in 1985.

During the first half of 1986, however, this became

a trade deficit of $1.3 billion. 15 A recent study by the

15Quick,Finan & Associates,Inc., “The U.S. Trade Position in High

Technology: 1980—1986,” Report Prepared for the Joint Economic ComU.S. Department of Commerce found that the technology intensity of U.S. exports remained unchanged

from 1972 to 1984, while Japan’s rose sharply. The

U.S. lead was cut in half.16

mittee of the U.S. Congress, Washington, DC, October 1986, p. 8. The

U.S. Department of Commerce defines “high technology” as including

industrial organic chemicals; plastic materials and synthetic resins; synthetic rubber; synthetic and other manmade fibers, except glass; drugs;

ordnance and accessories, except vehicles and guided missiles; engines

and turbines; office, computing, and accounting machines; radio and

television receiving equipment, except communication types; communication equipment; electronic components and accessories; aircraft and

parts; guided missiles and space vehicles and parts; measuring, analyzing, and controlling instruments; photographic, medical, and optical

goods; and watches and clocks, except instruments for the measuring

and testing of electricity and electric signals.

IsLester A. Davis, “Technolo~ Intensity of U. S., Canadian, and Japanese Manufactures Output and Exports, ” presented at the Industrial

Colloquium on Oligopolies, Technological Innovation, and International

Trade, October 1987.

LONG-TERM TRENDS

The Convergence Club

Is it inherent in the nature of things that leaders

should sooner or later falter? It seems difficult for

any nation to maintain indefinitely a consistently

large lead in productivity. In spite of radically different national economic strategies and two world wars,

productivity growth rates during the past 100 years

are almost perfectly correlated with the degree to

which a nation was trailing the most productive nations in 1870. In other words, the further behind in

1870, the more rapidly the nation caught up. 17 Between 1870 and 1979, differences in the productivity

of 16 industrial nations fell by more than a factor

of 2.18

Why Leaders Falter

Leaving aside the role played by national policy

in encouraging or discouraging investment and innovation, there are a variety of reasons why an economic leader may fail to grow as rapidly as its followers:

ITBaumol, op. cit., footnote 12.

IsAngus Maddison, “Phases of Capitalist Development,” in Baumol,

op. cit., footnote 12.

1 An obvious advantage is gained by imitating

something that has already been shown to be

possible. Even if the imitator is not able to obtain the technology and knowhow required to

match the leader, the knowledge that a product or process is possible has already eliminated

the need to pursue a variety of dead ends.

The avenues for transferring technology are

spectacular, and continue to grow as communication and transportation technologies improve and as multinational corporations become

more highly interdependent and familiar with

each other’s operations. 19 At a minimum, this

process means that the opportunity to capture

the economic rents due to innovation (and

thereby the incentives to undertake innovation)

diminish sharply. The innovator’s investment

in research, therefore, becomes a public good.

Indeed, the imitator’s concentration on production technology may well result in a second generation product that is higher in quality and less

expensive than the original.

lgRaymond Vernon, “Coping With Technological Change: U.S. Problems and Prospects,”in Bruce R. Guile and Harvey Brooks, cd., Technology and Global Industry (Washington, DC: National Academy Press,

1987).
314

However, imitation without the help of the

group developing the innovation requires an extremely sophisticated research infrastructure. It

is apparent that firms conducting their own research are more likely to recognize useful innovations and apply them practically than firms

lacking such an infrastructure. The rate of technology flow across borders must increase as

more countries develop this ability.

2. It seems to be easier for a rapidly developing

nation to take risks with innovations than it is

for an established producer facing relatively

stagnant markets where any innovation must

replace an existing system.20 Established firms

in the United States with a high level of retained

earnings face three options for investment: further domestic investment that could saturate

markets and drive down profits, product diversification and innovation (a high risk strategy),

and movement abroad in an experienced product line—a choice commonly preferred since it

is relatively free of risks.21

Leaders attempting to anticipate the direction

of consumer demand in areas that require

speculation about unknown patterns of consumption are likely to behave more conservatively than firms concentrating on capturing

well-understood markets, but “the simple attitude of waiting” can make leaders less aggressive in exploiting new markets and technical

innovations. 22

3. Leaders may simply fail because of complacency

–for example, if they assumed that all technology worth paying attention would be developed

in the United States, would be freely available

for purchase in the United States, and would

be published in English. Trade grew rapidly during the 1970s, but on balance this tended to favor U.S. manufacturing exporters; OPEC nations, and Latin American nations expanding

through purchases of U.S. capital equipment,

created strong markets for U.S. products. The

United States was not prepared for the explosion of competition based on sophisticated techZOAndreW sayer, “NeW Developments in Manufacturing and Their Spatial Implications,” working paper No. 49, University of Sussex, Department of Urban and Regional Studies, Sussex, England, October 1985.

21A. Maddison, op. cit., footnote 18.

Z2L. L. pasinetti, Structural Change and Economic Growth: A Theoretic/ Essay on the Dynamics of the Wea/th of Nations (Cambridge:

University Press, 1981).

nology such as the one now occurring in Asia.

While it is difficult to prove the case, numerous anecdotes suggest that at least part of

America’s loss of export markets resulted from

an assumption that consumers around the world

longed to imitate U.S. consumption patterns,

and that world markets would largely follow the

path led by U.S. consumers. The corollary was

that there was no need to tailor products specifically for export or to make a special effort

to market them abroad. This argument held that

the very superiority of U.S. goods, and their

association with U.S. economic leadership,

would be adequate to promote sales.

The United States appears to have been

unprepared for a world in which many of the

most basic product and process innovations, or

at least innovations available at a reasonable

cost for producers and consumers, would originate in Japan and elsewhere.

While trading patterns have been changing for

years, technological innovations and newly sophisticated international management strategies may

have accelerated the process. On-line international

data networks already allow global access to current

information in some areas, while new telecommunications equipment permits tighter global integration of production and even research and development. More generally, declining communications

and transportation costs have contributed to an increase in the knowledge and skill base outside the

United States, a development visible in the rapid

growth of trained engineers, financial experts, and

managers in newly industrializing countries. The result is a more competitive economic environment

in which the life cycle of any product has been dramatically shortened.

One study has shown that U.S. firms introduce

new products into foreign markets sooner than they

have in the past (see table 8-6).23 Another study examined data on 65 technologies to see whether the

proportion of technologies transferred within 5 years

of development was greater during 1969-78 than during 1960-68.24 This study concluded that for techZtwi]liam H. Davidson, Ex~rjence Effects in /nternationa~ /nveStmef?t

and Technology Transfer (Ann Arbor, Ml: UMI Research Press, 1980).

24E. Mansfield and A. Romeo, “Technology Transfer to Overseas Subsidiaries of U.S.-based Firms” Quarter/y ./ourna/ of Economics, vol. 95,

1980, pp. 737-750.
315

Table 8-6.—Change in Transfer Rate for 954 Products (by period of U.S. introduction)

0

/0 First introduced abroad in:

Number of 1 year 10 or more

Period of U.S. Introduction products or less 2 to 3 years 4 to 5 years 6 to 9 years years

1945-49 . . . . . . . . . . . . . . . . . 174 8.00/0 9.20/o 8.00/0 16.70/o 46.60/o

1950-54 . . . . . . . . . . . . . . . . . 151 8.6 9.3 12.6 25.8 28.4

1955-59 . . . . . . . . . . . . . . . . . 153 8.5 15.7 17.6 23.6 19.6

1960-64 . . . . . . . . . . . . . . . . . 185 23,2 19.4 14,6 13.5 9.9

1965-69 . . . . . . . . . . . . . . . . . 170 28.2 16.5 11.8 7.1 N.A.

1970-75 . . . . . . . . . . . . . . . . . 121 32.2 18.1 N.A. N.A. N.A.

Total . . . . . . . . . . . . . . . . . 954 17.7% 14.1% 11.7% 14.7% 18.1%

How To Read This Table: Between 1945 and 1949, U.S. firms transferred 174 products to foreign countries. 0f these, 8 percent

were transferred within a year of their introduction in the United States, while 46.6 percent were introduced ten or more years

after they were used in the United States. Between 1970 and 1975, 32.2 percent of the products examined were used abroad

within a year of their introduction in the United States.

N.A. = Not available.

SOURCE: William H. Davidson, Experience Effects in International Investment and Technology Transfer (Ann Arbor, Ml: UMI Research Press, 1980).

nologies transferred to subsidiaries in developed

countries there was a sharp increase in the transfer

of recent technologies, from 27 percent in 1960 to

75 percent in 1968-78—suggesting a marked shortening of the product cycle among the states belonging to the Organization for Economic Cooperation

and Development (OECD). For technologies transferred to subsidiaries in developing countries or

through other channels, including licensing and joint

ventures, the sample showed no statistically significant trend toward more rapid diffusion. At a more

general level, W.W. Rostow has argued that the disappearance of the technological backlog is one of

the most important factors accounting for the rapid

growth of “late developers.”25 The “rich,” on the

other hand, slow down because of the difficulties in

continually operating at the technological frontier.

One result of this faster rate of diffusion is that

fewer areas of technology are dominated by a small

Z5WI w Roqow, why the Poor Get Rich and the Rich Slow Down

(Austin, TX: University of Texas Press, 1980).

number of firms. It is true that in many high-technology industries, the number of firms found in any

one country has probably declined through mergers,

creating the impression of growing concentration at

the global level. However, this has probably been

offset by the process of international diffusion that

spurs new entrants. The number of seemingly independent sources of technology in most high-technology industries appears to have grown, which in

turn enhances the bargaining power of those firms

and of countries seeking effective transfers. This has

been demonstrated by a study of the Brazilian petrochemical industry,26 and in more aggregate data.27

‘2 GFrancisco ~rcovich, “state Owned Enterprises and Dynamic COIRparative Advantages in the World Retro-Chemical Industry: The Case

of Commtiity Olefins in Brazil,” Harvard Institute for International Development, Discussion Paper 96, Cambridge, MA, May 1980.

zTRobert B. Stobaugh, “The Product Life Cycle, U.S. Exports and [international Investment,” PhD Dissertation, Harvard University, Cambridge, MA, 1968.

FOUR HYPOTHESES ABOUT THE FUTURE

At some point the United States must find a way ance is restored in a way that provides growing opto get trade imbalances back to manageable levels. portunities for good jobs in the United States or

[t will need to do so while imports of petroleum in- whether it is restored through acceptance of declincrease and while several key areas of past U.S. ex- ing living standards. U.S. ability to assimilate and

port surpluses, such as agricultural products, are un- apply technology to profitable commercial applicalikely to provide the kind of revenue they have in tions will play a key role in determining the Nation’s

the past. The central issue is whether the trade bal- economic future.
316

Since the future of world trade depends on many

choices made here and abroad, it is foolhardy to construct a definite forecast for the future. But it is useful to explore some illustrative possibilities, as outlined below.

All of the future scenarios assume an eventual return to a balance in total trade—imports equaling

exports. This is not meant to imply that in the year

2005 merchandise imports will exactly equal exports,

but rather that all trade—merchandise, services, and

the net payment of income on investments both in

this country and abroad—will be in balance.

Table 8-7a.—3 Percent Growth Trade Scenarios

Caesar scenario

Sector Imports Exports

Natural resources and

construction. . . . . . . . . . . . . . 16% 14%

Manufacturing . . . . . . . . . . . . . . 49 51

Services . . . . . . . . . . . . . . . . . . . 35 35

Total (percent) . . . . . . . . . . . . 100 100

Total ($ billions) . . . . . . . . . . $980 $980

Banana scenario

Imports Exports

Natural resources and

construction. . . . . . . . . . . . . . 10% 16%

Manufacturing . . . . . . . . . . . . . . 55 49

Services . . . . . . . . . . . . . . . . . . . 35 35

Total (percent) . . . . . . . . . . . . 100

Total ($ billions) . . . . . . . . . . $980

Drucker scenario

Imports Exports

Natural resources and

construction . . . . . . . . . . . . . 18% 6%

Manufacturing . . . . . . . . . . . . . . 50 41

Services . . . . . . . . . . . . . . . . . . . 32 52

Total (percent) . . . . . . . . . . . . 100

Total ($ billions) . . . . . . . . . . $510

Trend scenario

All of the scenarios make use of U.S. Department

of Energy projections for oil imports. What differs

in each scenario is the role and importance of different sectors of the economy in contributing to growth.

Trade scenarios for both 1.5 percent and 3 percent

GNP growth rates are given in tables 8-7a and 8-7b;

the scenarios are not meant to be predictions of the

future, but to provide a sensitivity analysis of how

trade could affect the U.S. economy during the next

two decades. Assumptions leading to the 3 percent

scenarios are described below (the slower growth

rate assumptions can be deduced by analogy):

Table 8-7b.—1.5 Percent Growth Trade Scenarios

Caesar scenario

Sector Imports Exports

Natural resources and

construction. . . . . . . . . . . . . . 16% 14%

Manufacturing . . . . . . . . . . . . . . 49 51

Services . . . . . . . . . . . . . . . . . . . 35 35

Total (percent) . . . . . . . . . . . . 100 100

Total ($ billions) . . . . . . . . . . $710 $710

Banana scenario

Imports Exports

Natural resources and

construction. . . . . . . . . . . . . . 10% 16%

Manufacturing . . . . . . . . . . . . . . 55 49

Services . . . . . . . . . . . . . . . . . . . 35 35

Total (percent) . . . . . . . . . . . . 100 100

Total ($ billions) . . . . . . . . . . $710 $710

Drucker scenario

Natural resources and

construction. . . . . . . . . . . . . .

Manufacturing . . . . . . . . . . . . . .

Services . . . . . . . . . . . . . . . . . . .

Total (percent) . . . . . . . . . . . .

Total ($ billions) . . . . . . . . . .

Imports Exports

180/0 60/0

50 41

32 52

100 100

$370 $370

Trend scenario

Imports Exports

Natural resources and

construction. . . . . . . . . . . . . . 11% 11%

Manufacturing . . . . . . . . . . . . . . 64 47

Services . . . . . . . . . . . . . . . . . . . 25 43

Total (percent) . . . . . . . . . . . . 100

Total ($ billions) . . . . . . . . . . $980

How To Read This Tabie: Under the Caesar scenario for trade

patterns in the year 2005, imports and exports each total $980

billion. Of these totals, 16 percent of imports and 14 percent

of exports are attributable to natural resource and construction industries (see text for more detail).

NOTE: All values calculated in 1980 dollars. Numbers may not add due to

rounding.

SOURCE: Office of Technology Assessment, 1987, based on data from the U.S.

Department of Commerce, Bureau of Economic Analysis, and the U.S.

Department of Labor, Bureau of Labor Statistics.

Imports Exports

Natural resources and

construction. . . . . . . . . . . . . . 1 1 % 11%

Manufacturing . . . . . . . . . . . . . . 64 47

Services . . . . . . . . . . . . . . . . . . . 25 43

Total (percent) . . . . . . . . . . . . 100 100

Total ($ billions) . . . . . . . . . . $710 $710

How To Read This Table: Under the Caesar scenario for trade

patterns in the year 2005, imports and exports each total $710

billion. Of these totals, 16 percent of imports and 14 percent

of exports are attributable to natural resource and construction industries (see text for more detail).

NOTE: All values calculated in 1980 dollars. Numbers may not add due to

rounding.

SOURCE: Office of Technology Assessment, 1987, based on data from the U.S.

Department of Commerce, Bureau of Economic Analysis, and the U.S.

Department of Labor, Bureau of Labor Statistics.
317

1

2

The first scenario, called “Caesar” assumes that

U.S. exports of manufactured goods and natural resource products grow rapidly, balanced by

growing imports of a variety of goods and services. The scenario assumes that trade continues

to grow somewhat faster than GNP, but not as

fast as it has in recent years. Under the admittedly arbitrary assumptions of this scenario, total

trade would increase 150 percent—reaching 30

percent of GNP by 2005. There would be a threefold increase in exports while imports more than

double. If the 1974-84 trends continued for the

next 20 years, trade would reach 50 percent of

GNP.

Exports of natural resource-based products

are assumed to rise sharply to help finance imports of raw materials, of which oil is the largest.

The division of trade among the three broad

groups —natural resources and construction,

manufacturing, and services—is patterned after the relationship that held in 1967. These

broad groups are then broken down into the

individual industries using the 1972 composition of trade. Both traditional U.S. manufacturing concerns and U.S. high-technology firms

fared well in international trade during 1972.

 .The second scenario, “Banana,” also envisages

a high level of world trade but differs from the

first in the composition of U.S. trade. Instead

of achieving a balance in manufacturing trade,

as in the first scenario, it is assumed that manufacturing trade experiences deficits in hightechnology products and gains in comparatively

low-wage areas. In addition, there is a large increase in exports of natural resources. The share

of trade held by services is retained at the same

level as in the Caesar case.

This scenario is an attempt to extrapolate

from recent (1977 to 1984) changes in comparative advantage while bringing trade into balance. This scenario plays down the likely effects on trade of the gradual depletion of U.S.

petroleum reserves, and of the substitution of

advanced (man-made) for traditional materials

in many manufacturing processes.

3. A third scenario, named Drucker since Peter

Drucker has recently written on the subject,28

Zgpeter Drucker, “The Changed World Economy, ” Foreign Affairs,

vol 64, No. 4, spring 1986, pp. 68-79.

4

assumes that technological advances in manufacturing processes will lead to a relative decline

in global merchandise trade, leaving the trade

of ideas and design embodied in services as the

prominent focus. This scenario envisages a situation where competition hinges on an ability

to tailor products to small local markets, making it increasingly important to manufacture

products near their final consumers. Although

there is still substantial trade in manufactured

goods, countries are linked primarily by trade

in services in this scenario.

Advanced communications would allow a

network of small-scale production facilities to

be managed from a central office located virtually anywhere in the world. Advanced materials and processes would offer such a variety of

material substitutions that it would be possible

to displace some imported materials. This could

be true for energy inputs as well, given high

levels of energy efficiency and a variety of resources available for producing electricity and

liquid fuels.

Under this scenario, the absolute level of trade

would barely increase over current levels (in

the 1.5 percent growth case it would decline).

It is assumed in the 3 percent growth case that

total trade in natural resource products would

be less in 2005 than it is now, as technology

would lead to greater food self-sufficiency

around the world and to reduced oil imports.

Trade in manufactured goods is also assumed

to be lower than is currently the case, as the

decentralization of manufacturing would lead

to increased production of tailored products for

local markets. On the other hand, trade in services would increase sharply for reasons given

above; the balance in services would finance

the deficits in trade in manufacturing.

The last scenario, “Trend,” provides a benchmark for comparing the effects of the other

scenarios. Using the same level of trade (30 percent) as Caesar and Banana, Trend uses the

1984 composition of trade, which has been

forced to be in balance by scaling down imports.

Trade in natural resource products is almost in

balance in this scenario. A huge surplus in services is required to balance the deficit in manufacturing.
Chapter 9

The Composition of Trade
CONTENTS

Page

Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......................321

High-Technology Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..............321

Other Manufacturing. . . . . . . . . . . . . . . . . . . . . . . . . ...........................326

Natural Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..................328

Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .................328

Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..............................329

Other Raw Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...................330

Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........................330

Trade in Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........331

Business Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....................331

Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....................333

Income From Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............333
Chapter 9

The Composition of Trade

Many of the changes occurring in U.S. trade can

only be understood by examining specific sectors.

Themes developed in earlier chapters, such as the

rapid diffusion of information technologies, the increased importance placed on flexibility and adaptability, and the higher degree of interfirm linkage,

also apply in an international context—but unlike

the discussions of networks in chapters 3 and 6, the

present chapter is limited to a brief analysis of production sectors heavily involved in international

trade. These include:

● autos,

● textiles and apparel,

● machine tools,

● agriculture,

● energy,

● construction,

● business services, and

● computer software.

Among other things, the discussion covers the “export” portion of final demand (see figure 1-4 of ch. 1).

● semiconductors,

● drugs and medical supplies,

MANUFACTURING

High-Technology Trade

The variety of existing definitions of “technology

intensive” has led to confusion and contradictory results in analyses of the position of U.S. producers

in export markets. Part of the dilemma involves the

curious combination of processes associated with the

high-technology industry. “High technology” can

range from advanced research and development facilities, product development, or marketing to relatively primitive manufacturing operations. Indeed,

assembly of the most sophisticated computer or telecommunications device may involve a production

process virtually identical to the one traditionally

used to produce garments, and skill levels of the

employees involved are often roughly equivalent.1

Therefore, while part of the enterprise may draw an

advantage from an ability to use technology effectively, part of the work may depend on the availability of inexpensive labor.

Much of the production of high-technology goods

has become a global operation, with components

shipped to a variety of different countries before final assembly-leaving a complex trail of value-added

around the world. Moreover, different countries have

established very different strategies for producing

high-technology goods. For example, U.S. producers have taken advantage of low-wage foreign assembly of semiconductors: in 1983, nearly 80 percent of U.S. circuits were assembled abroad. The

Japanese, however, have kept manufacturing close

to their design facilities, and assemble 90 percent

of their circuits at home.2 The complexity of this situation makes it difficult to assess accurately differences in national comparative advantage.

Decisions about whether or not to produce a technology-intensive product in the United States depend

on complex factors, few of which are easy to include

in an assessment of comparative advantage. While

some high-technology products (such as generic

drugs or semiconductor memory chips) lend themselves to economies of scale and mass production,

others (such as application-specific semiconductors

and private branch exchange (PBX) systems) require

close contact and coordination with a customer. Furthermore, many high-technology goods (particularly

pharmaceuticals) are produced offshore to avoid U.S.

regulations or trade restrictions.

‘M. Fernandez-Kelly, For We Are Sold, land My People: Women and

Industy in Mexico’s Frontier (Albany, NY: State University Press, 1983).

See p. 310 for definitions of “high technology.”

‘Charles Ferguson, “American Microelectronics in Decline: Evidence,

Analysis and Alternatives,” paper prepared at the Massachusetts Institute of Technology, Cambridge, MA, November 1985.

321
322

The United States still commands a much larger

share of world technology-intensive exports than any

other nation. The Organization for Economic Cooperation and Development (OECD) estimated that in

1982, only three countries—Japan, Britain, and the

United States—had an overall comparative advantage in “high R&D intensive industries” (aerospace,

office machines, electronics and components, drugs,

instruments, and electrical machinery); and only

four—the United States, Japan, Germany, and Canada—in “medium R&D intensive industries” (autos,

chemicals, non-electrical machinery, rubber& plastics, and non-ferrous metals).

However, the United States lost market share in

all products except computers and consumer electronics between 1970 and 1980. Of the 10 high-technology products considered,3 the United States lost

market share in 8 while Japan gained in 10. The

overall pattern is striking: U.S. losses are almost perfectly mirrored by Japanese gains.

Between 1965 and 1982, U.S. exports of ten broad

product categories grew only slightly more slowly

than those of all of the other large suppliers (the 14

3 U.S. Department of commerce, “An Assessment of U.S. Competitiveness in High Technology Industries,” Washington, DC, 1983, pp.

44-45. The product groups considered are drugs & medicines, business

machines & equipment, computers, electrical and electronic machines

& equipment, telecommunications equipment, electronic components,

consumer electronics, jet engines, aircraft, and scientific instruments.

4 Guided missiles; communications equipment and electronic components; aircraft & parts; office, computing, & accounting machines;

ordnance; drugs & medicines; industrial organic chemicals; scientific

instruments; engines, turbines & parts; and plastic materials, synthetic

resins, rubber & fibers.

largest OECD countries), with the exception of Japan. Japan’s high-technology exports grew by an

average of 21.9 percent per year during this period,

compared to 15.5 percent for the United States and

16.1 percent for all other countries taken as a group.5

Since 1965, Japan’s share of all high-technology exports has more than doubled, from 7.2 percent in

1965 to 17.3 percent in 1982.

By the OECD’s measure, however, the “erosion”

of U.S. comparative advantage in these industries

has been slight. In the high R&D intensive industries, the comparative advantage of three countries—

the United Kingdom, France, and Japan—increased

during 1970-83; Japan also “shed” its advantage in

low R&D intensive industries most rapidly. The comparative advantage of the Netherlands, Sweden, and

particularly Germany increased in the medium R&D

intensive category.

An examination of imports (see table 9-l), however, reveals strikingly different patterns. Japanese

import penetration, low in all areas of manufacturing, increased only slightly during 1970-80. At the

beginning of the period imports were low in the

United States, as in Japan. But import penetration

increased rapidly in the United States. Between 1974

and 1981, U.S. high-technology imports grew nearly

twice as fast as output for domestic consumption.6

5 Victoria Hatter, “U.S. High Technology Trade and Competitiveness, ”

Office of Trade and Investment Analysis, International Trade Administration, U.S. Department of Commerce, Washington, DC, 1985.

6 Lester Davis, “New Definition of ‘High Tech’ Reveals That U.S. Competitiveness in This Area Has Been Declining,” Business America, vol.

5, No. 2, Oct. 18, 1982.

Table 9-1 .—Rates of Import Penetration for Manufacturing: International Comparisons

High R&D -

intensive industries

Country 1970 1975 1980

United States . . . . . . . . . . . . . . . . . 4.8 7.7 14.3

Japan . . . . . . . . . . . . . . . . . . . . . . . . 6.6 6.4 7.9

Germany . . . . . . . . . . . . . . . . . . . . . 21.6 28.4 42.5

France . . . . . . . . . . . . . . . . . . . . . . . 23.1 23.3 28.8

United Kingdom . . . . . . . . . . . . . . . 18.6 31.2 44.2

Italy . . . . . . . . . . . . . . . . . . . . . . . . . 18.3 25.3 33.4

Canada. . . . . . . . . . . . . . . . . . . . . . . 42.6 45.7 58.0

Australia . . . . . . . . . . . . . . . . . . . . . 42.2 39.7 43.1

Netherlands. . . . . . . . . . . . . . . . . . . 71.0 67.8 69.8

Sweden . . . . . . . . . . . . . . . . . . . . . . 44.9 46.1 54.6

Belgium . . . . . . . . . . . . . . . . . . . . . . 75.7 87.3 N.A.

Medium R&D - Low R&D -

intensive industries intensive industries

1970 1975 1960 1970 1975 1980

7.0 8.9 11.2

5.5 5.0 6.9

22.8 27.4 33.4

23.7 26.0 31.6

22.0 29.3 43.1

23.8 27.7 41.8

58.5 59.2 59.2

30.6 30.4 32.5

80.5 79.3 85.6

44.4 48.1 53.5

88.0 86.3 N.A.

4.8 5.7 6.1

3.5 4.4 5.4

16.8 21.6 27.4

11,8 14.7 17.7

13.4 17.4 18.4

11.9 17.8 25.4

12.7 14.1 13.8

14.2 14.8 18.5

38.3 43.4 51.0

23.1 27.2 28.3

40.3 48,8 64.0

NA = Not available.

SOURCE: Organization for Economic Cooperation and Development, OECD Science and Technology Indicators II Resources Devoted to R&D, Technological Performance and Industrial Competitiveness and Annex, 1985.
323

Japanese high-technology imports from the United

States have, however, also grown rapidly in the past

few years, increasing 42 percent during 1982-86.7

Japanese trade in semiconductors is shown in table 9-2. While the Japanese share of both U.S. and

world markets grew substantially during 1982-85,

more than 90 percent of Japanese demand for these

products was met by Japanese suppliers at a higherthan-market price. Indeed, many of the Japanese

firms that produce semiconductors (Hitachi, Toshiba,

Fujitsu, and NEC) were also major consumers of

these devices, and the higher costs were absorbed

because management was willing to undertake a

long-term development program.8

Another analysis of U.S. performance indicates that

since 1962 the U.S. world market share has declined

in 10 out of 17 technology-intensive sectors, though

in four of them—telecommunications apparatus, medicinal & pharmaceutical products, scientific, medical & controlling instruments, and plastics—shares

seem to have stabilized or improved slightly between

1977 and 1982.9 While its international trading position in aircraft has declined, the United States still

holds a commanding 45 percent of the world market. Market share in 2 of these 10 products—office

machines and photographic supplies—has declined

only slightly.

A set of case studies suggests that U.S. firms continue to perform relatively poorly in areas such as

semiconductor memory chips, telephone hand-sets,

and generic drugs, where comparative advantage deTWi]]lam Finan, pery Quick, and Karen Sandberg, “The U.S. Trade

Position in High Technology: 1980-1986,” report prepared for the U.S.

Congress, Joint Economic Committee, Washington, DC, October 1986,

pp. 10-12.

Sc. Ferguson, op. Cit., footnote z.

9Michae] Ah. and f-foward Rosen, “Trends in Technology Intensive

Trade: With Special Reference to U.S. Competitiveness,” Bureau of International Labor Affairs, U.S. Department of Labor, 1980; and United

Nations, Statistical Yearbook: 198,?, New York, NY, 1984.

pends primarily on price, while the Nation continues

to do well in areas such as application-specific semiconductors, advanced telecommunication systems,

and biotechnologies-all of which require careful coordination with the consumer. The characteristics

of these specialized markets often require that production facilities be located close to customers because it is necessary to adapt new products to shifting consumer needs.

The extent to which this U.S. advantage could be

challenged by skillful foreign producers is largely unknown. There is reason to believe that markets for

specialty products will increase as both industrial and

individual customers begin to appreciate the flexibility inherent in new production technology. This

would seem to benefit U.S. producers. On the other

hand, the Japanese have proven successful at entering specialty markets and exploiting flexible chip

production systems. They have, for example, established 25 to 50 design centers for semiconductors

around the world.10 Relatively standardized products

can be made at a central location and adapted

through software or site assembly to fit a variety of

different applications. Both of these effects would appear to work to the disadvantage of U.S. firms incapable of competing in the production of the basic

good. Some of the value-added would, of course, still

remain in the United States, although not necessarily

in the hands of a U.S.-owned firm.

Semiconductors

The dramatic reversal of the U.S. role in the open

market for “merchant” semiconductor manufacturing is symptomatic of the problems the United States

is facing.11 The United States is in grave danger of

Ioc. Ferguson,op. cit., footnote 2

I Isee further discussion of competitiveness in this and other industries in N. Bruce Hannay, “Technology and Trade: A Study of U.S. Competitiveness in Seven Industries, “ in R. Landau and N. Rosenburg, The

Positive Sum Strategy (Washington, DC: National Academy Press, 1986).

Table 9-2.—Japanese Semiconductor Market Shares by Region

Year North America Western Europe Japan Rest of world Total

1982 11 7 90 31 33

1983 13 8 91 33 37

1984 16 10 91 34 38

1985 18 11 92 35 40

SOURCE: Charles Ferguson, “American Microelectronics in Decline: Evidence, Analysis, and Alternatives,” Massachusetts Institute of Technology, Cambridge, MA,

November 1985; based on data from Smith Barney, Dataquest, Semiconductor Industry Association, and The New York Times.
324

losing its leadership in both the design and the production of semiconductors sold on the open market. On the other hand, the sharp decline in the labor content of semiconductors, and the increasing

need to tailor semiconductors and products associated with them to specific markets, seems to indicate that competitive position in this area will increasingly depend on skills in managing and

marketing technology rather than on low wages.

Loss of U.S. leadership may be partly due to

changes in the structure of the industry: where relatively small, entrepreneurial firms funded by venture capital used to enjoy profitable operations in

well-defined market niches, the industry now requires the management skills, capital resources, and

patience of a major firm. Major Japanese firms entering the semiconductor business were able to provide such resources, while small U.S. firms had difficulty expanding.

Both the development and production costs of

semiconductors have grown explosively. The 32-bit

microprocessor chips now entering the market will

sell for as little as $100, but are as powerful as the

large mainframe computers operating a decade ago.

Their development was a major undertaking, requiring a complex network of computer-assisted design

and simulation equipment that cost at least $50 million. A semiconductor manufacturing facility could

be purchased for $2 million in 1975, while a stateof-the art facility for producing a “very large-scale”

integrated semiconductor device today may cost up

to $200 million. Components of the manufacturing

process have themselves become extraordinarily

complex and expensive. Masking units that cost $2

million for the semiconductors of the late 1970s cost

$15 million for 256k-chip production in the mid

1980s. Optical systems that once cost up to $300,000

have been replaced by computer-driven electronbeam devices capable of sub-micron resolution costing $3 to $4 million.

The severe reduction in world demand for semiconductors in 1985 (sales were down by 18 percent)

increased the problems of U.S. producers. Large Japanese firms maintained market share while U.S. producers suffered 25 to 60 percent losses.12 Many

smaller firms were forced to sell technology to competitors, including the Japanese.

Various factors have been responsible for the

emergence of the Japanese semiconductor industry:

●

●

●

●

a capacity for effective reverse engineering;

a management system capable of coordinating

large, expensive, and technologically sophisticated development and production operations;

a strong focus on specialized, high-volume products; and

a national program that successfully blocked imports during a critical period of the industry’s

development.

The dramatic progress of Japanese skills in this area

is highlighted in table 9-3. The Japanese captured

only a small share of the semiconductor market in

the 1970s, but dominated semiconductor production

by the 1980s.

The Japanese have also begun to challenge U.S.

producers in the initial design of advanced memory units, and even of the more sophisticated

microprocessor units. In what maybe a classic case,

Hitachi has become Motorola’s second source producer of its MC68000 chip. And using an improved

semiconductor technology (CMOS), Motorola is now

a second source producer for Hitachi’s chip. The

large Japanese firms are also challenging U.S. producers in the development of the 32-bit processors

that represent today’s state of the art. The Japanese

are expected to have a virtual world monopoly on

one-million bit memory units available in open markets (IBM and AT&T have proprietary designs not

sold on the open market, in part because of antitrust considerations).

The strategy giving the Japanese this lead has also

propelled them into a leading position in equipment

Table 9-3.—Japanese Share of World Markets

in Random Access Semiconductor Memories

Integration level Japanese share of

(thousands of world markets

bits/chip) (percent)

1970 . . . . . . . . 1 0

1974 . . . . . . . . 4 5

1978 . . . . . . . . 16 40

1982 . . . . . . . . 64 70

1985 . . . . . . . . 256 85

1987 (est.) . . . 1,000 90

SOURCE: Charles Ferguson, “American Microelectronics in Decline: Evidence,

Analysis, and Alternatives,” Massachusetts Institute of Technology,

Cambridge, MA, November 1985, baaed on data from Dataquest, Ham12 C. Ferguson, op. cit., brecht & Quist, and the Semiconductor Industry Association. footnote 2.
325

designed to produce advanced semiconductors. Devices for optical masking at megabit levels are sold

by four Japanese companies and one U.S. company,

Teradyne, which is struggling to maintain its market position. Three of the Japanese firms are owned

by semiconductor producers (Fujitsu, NEC, and

Hitachi).

U.S. losses to Japanese producers in these areas

were not primarily due to unique Japanese access

to materials or labor, but owed much to trade policies, dynamic management, and marketing strategies designed to capture the benefits of economies

of scale. The strategy succeeded primarily because

of Japanese ability to learn rapidly and continuously,

at first through acquisition of U.S. technology in open

purchases and reverse engineering and more recently through independent innovation.

Telecommunications

Like semiconductors, telecommunications equipment is a curious amalgam of mass produced,

commodity-type products, such as telephone handsets that compete primarily on the basis of price, and

highly sophisticated, specialized products requiring

close interaction with customers during initial installation and servicing. U.S. producers have virtually

abandoned the commodity market to low-wage nations. AT&T ceased domestic production because it

could not compete with low-wage production from

overseas despite the low labor content of hand-sets.

The shifting value of the dollar, especially in comparison to the yen, may be changing this calculus.

Tokyo-based Fujitsu has begun to export celluar car

phones, modems, and computer disk drives from its

plant in Texas because the labor and overhead rates

per hour are lower than those in Nasu, Japan.13

U.S. producers continue to enjoy a significant share

of domestic business telephone equipment markets,

particularly PBX and large telephone-switching

equipment. U.S. production of satellite systems, fiberoptic, and other major components of telecommunications systems remains quite competitive, although the Japanese challenge in optical transmission is growing.

13’’ For First Time, Fujitsu Exports Gear Made in U. S.A.,” Communications Week, Feb. 15, 1988, p. 34.

A key question is to what extent do advanced telephone and communications systems resemble consumer electronics commodities, and to what extent

do they resemble highly specialized, applicationspecific devices requiring a strong local manufacturing capability? Even advanced telecommunication

products may soon be made overseas. The astonishing power of low-cost microprocessors and memory

units makes it possible to develop generic products

that can be cheaply tailored to meet a variety of purposes. Because of this, there is no guarantee that

U.S. producers can continue to enjoy even the specialty end of telecommunications markets.

The U.S. position is heavily influenced by the fact

that most large telecommunication systems abroad

are owned and operated by governmental or quasigovernmental concerns that discourage foreign purchasing. Japan recently sold half the shares of the

Nippon Telephone and Telegraph system to private

owners, but foreign purchases have not been large.

The United States has elected to open its markets

to foreign sales without insisting on the right to sell

into other public systems.

Drugs and Medical Devices

U.S. pharmaceutical manufacturers rely on international sales for a significant portion of their income.

In 1982, 41 percent of total sales were to foreign

countries, compared to 30 percent in 1967. But foreign firms are beginning to encroach on U.S. markets rapidly and U.S. firms are increasingly producing overseas. The position of U.S. firms is threatened

in part by a gap in research investment. Japanese

and European companies are spending about 11 percent of each sales dollar on research, compared with

about 7 percent for U.S. manufacturers.14

In a survey of large pharmaceutical firms, interviewees noted that the decision to locate abroad is

driven predominantly by the need to reduce innovation costs and gain market shares. In a few cases,

manufacturing abroad is required by local import

laws that make it impossible to market a drug unless it is produced within that country’s borders,

Firms also locate outside the United States for tax

reasons. Since pharmaceutical plants are highly automated, whether located in the United States or

abroad, cheaper labor does not play a large role. An

14 Standard and Poor’s Industry Surveys, Health Care, Sept. 1, 1983.
326

example of the movement abroad is illustrated by

the fact that in 1980, two major U.S. drug companies introduced 94 products world-wide—of which

only 11 were manufactured in the United States.15

Foreign trade is also an important source of income for the U.S. medical devices industry. In 1984,

exports—which accounted for about 12 percent of

industry shipments—exceeded imports by nearly

two-thirds. Even so, U.S. trade surpluses have begun to decline. Historically, the United States has

a net trading deficit in medical devices with only one

of its major trading partners, West Germany. However, in recent years Japan’s medical exports to the

United States have grown much faster than U.S. exports to Japan, and the United States has now incurred a trade deficit with Japan in this area.16

Other Manufacturing

Competition in manufacturing fields outside of

“high-technology” sectors (examined here are autos,

textiles and apparel, and machine tools) also depends

on sophisticated technology, although often in a less

visible way. Sophisticated production technology is

needed to compete in an economy where energy

prices, the value of the dollar, costs of critical materials, and a variety of other factors can change rapidly and unpredictably. The ability to track progress

in both products and production processes is becoming a key to survival in fields as diverse as apparel

assembly and auto manufacturing.

Autos

The auto industry has been a dominating force

in the U.S. economy for more than 50 years. The

industry is heavily linked to other parts of the economy. In recent years these links have extended to

include advanced electronics and materials, used

both in autos produced and in production equipment. In 1960, the United States produced half the

world’s autos. Today Japan is close to that figure.

IsResults Of interviews with executives of several major pharmaceutical firms conducted for the Office of Technology Assessment by the

Conservation for Human Resources, Columbia University, New York, NY.

ISLI.S, Department of Commerce, Bureau of Industrial Economics, U.S.

/mfustria/ Out/ook, 1987 (Washington, DC: U.S. Government Printing

Office, 1987).

The United States imported 38 percent of all autos

sold in 1986.17

Foreign sourcing of auto parts has recently become

increasingly common. The suppliers of the imported

components or finished vehicles may be partly or

fully owned by the importing U.S. manufacturer (see

table 9-4), or may be unrelated in terms of equity

holdings—a process known as “out-sourcing.” Of the

IW.s, f)epartrnent of commerce, Bureau of Economic Anal@, “National Income and Product Accounts,” Survey of Current Business, vol.

67, No. 6, July 1987, Table 1.17.

Table 9-4.—Major U.S. and Foreign Equity Holdings

in Auto Firms, 1987

U.S. ownership of foreign firms:

American Motors Corp.

49% of Arab American Vehicles Ltd., Egypt

31% of Beijing Automobile Works, China

Chrysler

50% of Diamond-Star Motors Corp., USA with Mitsubishi

24% of Mitsubishi Motors Corp., Japan

16% of Maserati S.P.A., ltaly

Ford Motor Co.

70% of Ford Lio Motor Co., Taiwan

25% of Mazda Motor Corp., Japan

48% of lveco-Ford Truck Ltd., Great Britain (with Fiat)

10% of Kia Motors Corp., South Korea

42% of South African Motor Corp., South Africa

30% of AMIN Holdings, Malaysia

30% of Otomobile Sanayi Anomin Sirketi, Turkey

General Motors Corp.

50% of Daewoo Motor Co., Ltd, S. Korea

39% of Isuzu Motors Ltd., Japan

24% of Volvo GM Heavy Truck Corp., USA with Volvo

5% of Suzuki Motor Corp., Japan

50% of New United Motor Manufacturing, USA with

Toyota

49% of General Motors Kenya Ltd., Kenya

49% of Constructor Venezolana de Vehiculos,

Venezuela

46% of Autos y Maquinas del Ecuador

31% of General Motors Egypt S.A.E

22% of omnibus BB Transported S. A., Ecuador

20% of Industries Mecaniques Maghrebines S. A., Tunisia

Foreign ownership of U.S. firms:

Japan

Fuji Heavy Industries Ltd.: 49% of Subaru-lsuzu

Automotive Inc., USA

Isuzu Motors Corp.: 51% of Subaru-lsuzu Automotive

Inc., USA

Mitsubishi Motors Corp.: 50% of Diamond-Star Motors

Corp, USA

Toyota Motor Corp.: 50% of New United Motor

Manufacturing Inc., USA

Europe

Renault: 42% of Mack Trucks Inc., USA

SOURCE: Automotive News, 1987 Market Data Book Issue.
327

big three, Chrysler is the leading out-sourcer. In

terms of value, about 70 percent of the components

of Chrysler’s vehicles are manufactured by outside

suppliers.18 Auto makers also supply their U.S. auto

assembly plants with components produced by their

own foreign plants. In addition, each of the big three

imports at least one foreign-made vehicle and resells

it under a domestic brand name.

Experiences are mixed. Some changes (such as

lighter materials and electronic controls) have been

introduced, but more innovation is needed. A comparison with the Japanese auto industry suggests that

more changes in organization, management, and labor relations will be required.19 U.S. firms have taken

major steps to restructure domestic production, and

have entered joint ownership arrangements with Japanese firms.

Textiles and Apparel20

Textiles and apparel imports have risen sharply,

leading to a 1986 deficit of over $21 billion. This is

4.5 times higher than the 1980 deficit (in current dollars). Trade growth was particularly rapid in areas

where a significant amount of hand labor is required

(a significant part of the apparel market) while U.S.

producers maintained share in areas where highly

automated processes keep labor costs low.

The introduction of a “quick response” system,

which holds inventories low and avoids overstocking, could do much to help U.S. producers compete

with low-wage nations simply by virtue of significantly reduced inventories. However, this will require major changes in how information flows between the different components in the production

and retail chain.

Virtually all textile production technology is currently being imported, and producers of textile machinery and apparel assembly machinery conduct

.

1

8 Kevin Flaherty, “Foreign Sourcing by the U.S. Automobile industry,” report prepared for the U.S. Congressional Research Service, Washington, DC, Nov. 8, 1985.

19W.J Hampton and J. I?. Not-man, “General Motors: What Went

Wrong?” Mar. 16, 1987, p. 102.

zOThis section is drawn from U.S. Congress, Office of Technology

Assessment, The U.S. Textile and Apparel Industry: A Revolution in

Progress–Special Report, OTA-TET-332 (Washington, DC: US. Government Printing Office, April 1987).

virtually no research. U.S. textile machinery manufacturers that dominated the global market for looms

in 1960 now make none of the widely used, advanced programmable/shuttleless looms that can increase output by 200 to 300 percent. In 1983, more

than 90 percent of U.S. textile equipment production was of replacement parts for old U.S.-made

looms.

The single major investment in advanced apparel

production in the past decade involved a joint project

between industry, labor, and the U.S. Government.

The project, known as the Textile/Clothing Technology Corporation (TC)2

, spearheads the U.S. effort

in automated sewing. Thus far, it has succeeded in

automating the production of sleeves for men’s suits.

Industry and organized labor are providing approximately $5 million a year for these and related efforts, and the Federal Government has pledged $3

million. This amount could be much greater; Japan

is spending $80 million to develop a fully automated

apparel process for the 21st century. While TC2 is

an effort to automate sewing production, the Japanese effort is state-led industrial restructuring on a

large scale.

Machine Tools

It is somewhat ironic that the basic tools of mass

production cannot themselves be mass produced.

Of total world machine tool production, 75 percent

is produced in relatively small batches, and 85 percent of all batches have fewer than 50 parts.21 Small

batch production and the need for careful integration of the design, installation, and operation of sophisticated machine tool systems would appear to

give domestic producers a natural competitive advantage. In fact, foreign producers—particularly those

in Japan and West Germany—have made major inroads into U.S. markets. In 1985, the United States

imported 41 percent of its machine tools-nearly half

from Japan, and about 14 percent from West Germany.

A quota on machine tool imports took effect January 1, 1987. It applied to Japan, Taiwan, West Germany, and Switzerland, limiting their shipments to

the United States for 5 years. These temporary restraints were ordered on national security grounds

21 U.S. Department of Commerce, International Trade Administration,

“A Competitive Assessment of the U.S. Flexible Manufacturing Systems

Industry,” July 1985, p. 8.
328

so as to give domestic producers time to modernize. Domestic producers could gain a 20 percent market share from the quota for Japan alone.22

Since much of the equipment marketed by Japanese firms was developed internally by firms that

needed the equipment for their own production, the

Japanese enjoy a good international reputation for

bringing equipment to a plant that works as advertised and performs comparatively reliably. This gives

them a considerable advantage in overcoming producers’ reluctance to invest in equipment fraught

with many unknowns.

In part because of an overt government program

to improve metal fabrication, Japan is the largest producer of machine tools and robots in the world. In

1984, Japan exported more than one-third of the machine tools it made and imported only 3.4 percent

of its consumption. Most of the industry’s production is relatively small in scale—81 percent of the

firms employ fewer than 20 workers. Nonetheless,

a growing fraction of the production is moving to

South Korea, Singapore, and Taiwan, as well as to

licensed manufacturers in the United States, the

22The Washjng(on Post, Dec. 17’, 1986, P. 4

United Kingdom, West Germany, and Belgium.23 In

1982, Japanese producers were using about 31,000

robots-virtually all domestically produced, while the

United States, with nearly twice as much gross output, used only about 7,000.

In terms of price and performance, U.S. machine

tools have a somewhat mixed record in international

markets. Imports have gained a solid position in the

U.S. market. U.S. and European (West German, Italian, and French in particular) producers enjoy a good

reputation in highly sophisticated machine tools designed for specialized applications such as heavy cutting, and in systems that require a considerable

amount of software design. U.S. producers of advanced equipment appear to have a strong advantage in the fabrication of military equipment, but

much of this equipment is so highly specialized and

sophisticated that it does not transfer easily into a

cost-conscious commercial market.24 The Japanese

enjoy a reputation for high-quality, small-and mediumsized machining centers that are durable, simple,

and flexible.25

23”A Competitive Assessment of the U.S. Flexible Manufacturing Systems Industry,” op. cit., footnote 21, p. 32.

241 bid., p. 81.

25Ibid.

NATURAL RESOURCES

While the petroleum crises of 1972/73 and 1979

forced the United States to recognize its dependence

on foreign resources, the United States has suffered

a trade deficit in raw materials for some time. In

1985, food, raw materials, and fuels constituted 24

percent of U.S. exports and 27 percent of U.S. imports, resulting in a net deficit of $45 billion. But

many resource-intensive U.S. industries actually

gained ground in comparison with other sectors of

the economy.

This occurred partly because many of the Nation’s

major trading partners are much more poorly endowed with resources. On average, food, raw materials, and energy represented 40 percent of the imports of the seven largest free economies (75 percent

of Japan’s imports) in 1984, and 20 percent of their

exports (2 percent of Japan’s exports). Most European nations, and certainly Japan, rely on manufacturing exports to cover large trade deficits in

resources.

26 Indeed, it is possible that Japan’s enormous trade surplus occurred partly because Japan

was positioning itself to pay large fuel import bills—

bills that fortuitously did not need to be paid because

oil prices fell.

Agriculture

The United States enjoyed enormous growth in

net exports of agricultural products during the late

1970s and early 1980s, but the trade surplus has

been eroded in recent years. U.S. exports of bulk

commodities (primarily wheat, corn, and soybeans)

have fallen sharply while imports of high-value products (fruits, vegetables, and meats) continue to increase. Ironically, the United States has never done

well in capturing a large fraction of the value of world

26 Directorate of Intelligence, Handbook Of Economic Statistics, 1986

(Washington, DC: U.S. Government Printing Office, 1986).
329

food trade; rather, the Nation has done well in producing large volumes of commodities. In 1984, the

United States had 34 percent of the volume of world

trade in food and food products but only 13 percent

of the value of these products. The United States has

been a net importer of processed food since 1983.27

The export boom of the late 1970s was driven by

a rapid increase in world demand for imported food

made possible by economic growth in developing

nations, the entry of China into world markets, and

continued crop failures in the USSR. U.S. farmers

were in a unique position to exploit these developments because they had large stocks in storage and

could also expand production rapidly. During the

early 1970s, harvested wheat acreage in the United

States rose by an amount greater than the total harvested by Canada during that period.28

But conditions changed rapidly after 1980. A global

recession meant that many developing nations

lacked the resources to purchase imported foods.

Many nations, particularly in the European Economic Community (EEC), rapidly increased production to enjoy a share of expanding world markets.

The rising value of the U.S. dollar helped many nations enter world markets, and once there they were

reluctant to abandon their market shares when world

demand decreased and the value of the dollar fell.

Many maintained shares by providing export subsidies for their farmers. Many developing nations

with heavy debt burdens have been encouraged by

the World Bank, the International Monetary Fund,

and U.S. banks to increase exports of agricultural

products in order to earn the foreign currency

needed to repay their debts.

Technology transfer played a key role in these

events. The U.S. farm community no longer enjoys

a clear lead in agricultural technologies, partly because U.S. multinational corporations have successfully marketed new products abroad. Between 1959

and 1980, global expenditures on public agricultural

research increased by 360 percent in real terms, and

the number of scientists committed to agricultural

27 Penelope Cate, “Upcoming World Trade Talks: What’s at Stake for

U.S. Agriculture,” Congressional Research Service Review, vol. 7, No.

8, September 1986, pp. 2-5, 26-27.

28 U.S. Congress, Office of Technology Assessment, A Review of U.S.

Competitiveness in Agricultural Trade—A Technical Memorandum,

OTA-TM-TET-29 (Washington, DC: U.S. Government Printing Office,

October 1986).

research tripled. The North American share of this

research spending fell from 37 to 23 percent during

the period, while research spending in Latin America and Asia increased six-fold. The United States

did contribute heavily to the growth in world research capabilities—but nearly 30 percent of all students receiving PhDs in agriculture and home economics in the United States between 1975 and 1979

were foreign, as were more than 43 percent of those

who received degrees in agronomy, soils, and soil

science.29

The rapid equilibration of world agricultural technology has, of course, had enormous benefits. The

“Green Revolution” enabled many nations to feed

themselves better, reducing demand for imports and

eroding the comparative advantage of large U.S.

farming regions. Many of the emerging technologies

will have a relatively greater influence on the production costs in regions with poor resources than

in well-developed regions. While it is difficult to obtain accurate estimates of differences in real production costs around the world, it appears that many

basic agricultural commodities can now be produced

at a lower cost outside the United States.

It is clear that the U.S. agricultural community,

once dominant in feeding the world, will need to

work much harder to maintain a trade surplus in

the future.

Energy

Petroleum has dominated U.S. resource trade for

a decade. Energy imports climbed to one-third of all

U.S. imports (half of Japan’s imports) in 1981, but

have fallen sharply as a result of the collapse of

the Organization of Petroleum Exporting Countries

(OPEC) cartel, reduced U.S. energy demand, achievements in diversification of energy inputs in the U.S.

economy, and significant efforts to find substitutes

for petroleum. Should these efforts for finding substitutes for petroleum slacken, however, fuel imports

are likely to increase steadily in the future.

U.S. petroleum production is likely to decline 10

to 30 percent by the turn of the century and more

sharply after that. The U.S. Department of Energy’s

ZgRobert E. Evanson, J. Putnam, and Cad pray, “The Pokrthl fOr

Transfer of U.S. Agricultural Technology,” contract report prepared for

the Office of Technology Assessment, 1985.
330

(DOE) “revised reference case” shows indigenous

production declining 42 percent between 1985 and

2010. 30 If U.S. energy demand follows the DOE forecast, U.S. imports of petroleum (measured in barrels) will increase 225 percent by 2005 and 240 percent by 2010.

Overall world demand for imported fuels will increase if the DOE forecasts are correct, and demand

for oil by developing nations will increase as a result of economic growth and development. World

supplies, however, will shrink as output from the

fields m the United States, the North Sea, and the

Soviet Union begins to decline near the turn of the

century. Arab OPEC countries, particularly Saudi

Arabia, will then dominate world exports even more

than they do currently. It is extremely difficult to forecast the effect of these developments on world prices,

but the United States will need to find a way either

to pay for substantially rising oil imports during the

next 20 years or to reduce demand for petroleum

through greater energy efficiency and/or alternative

fuels.

Efficiency in automobile travel will be a key issue. Unfortunately, the Japanese and other producers appear better prepared to move highly efficient

automobiles (and other energy-efficient products) to

the market than U.S. manufacturers. An international

event that resulted in a sharp increase in world oil

30 U.S. Department of Energy, Office of Policy Planning and Analysis,

“National Energy Policy Plan Projections to 2010,” Washington, DC,

June 1987, table 3-10.

prices would almost certainly leave foreign producers in a better position to meet world demand for

efficient vehicles than U.S. firms.

Other Raw Materials

In addition to more efficient use of energy, new

technologies could change demand for other kinds

of raw materials.31 New materials are likely to become competitive as substitutes for traditional ferrous and non-ferrous metals. Potentially vulnerable

industries include copper, for which fiber optics and

superconductors are substitutes; aluminum, for which

ceramics and carbon fiber composites might substitute; and steel sheet, which could over time see competition from superpolymers used to produce light

corrosion resistant shells for autos, aircraft, and large

storage containers.32

Material demand will be further reduced by designing products such as automobiles for longer life

expectancies, and through recycling. Demand for

raw materials such as steel, chemicals, paper, cement, and aluminum represents a shrinking share

of the economies of most developed nations.33

Jlsee U.S. Congress, office of Technology Assessment, Advanced

Materia/s by Design, Washington, DC, forthcoming.

3ZHarald Malmgren, “Technological Change and Trade Policy,” Trade

Department of the Ministry of Foreign Affairs, Sweden, in New Technologies and World Trade: Proceedings of a Symposium in Stockholm,

Stockholm, Sweden, June 5-6, 1984.

JJEriC ~rson, Marc ROSS, and Robert Williams, “Beyond the Era of

Materials,” Scientific American, vol. 254, No. 6, June 1986, p. 34.

CONSTRUCTION

The U.S. construction industry is being integrated

rapidly into world markets. U.S. heavy construction

firms, and architecture and engineering businesses,

have played a major role in world markets since the

end of World War II. They now face strong competition, particularly from Asian countries. Even U.S.

residential construction firms must now compete

with foreign producers, as appliances, building components (ranging from kitchen cabinets to door

knobs), hand tools, and even entire housing units

are being imported.34

3.Iu.s. Conaressm Office Of Technology Assessment, Technolo.~, Trade!

and the U.S. Residential Construction Industry-Special Rep~rt, OTATET-315 (Washington, DC: Government Printing Office, September

1986).

Although foreign construction contracts were

gained by just 60 of the 400 largest U.S. contractors

in 1985 (accounting for 21 percent of total contract

awards),35 the United States stood at the forefront

of this expanding world market as recently as 1972.

The oil boom of the 1970s increased demand for construction in OPEC countries, which spent substantial sums building highways, ports, and other additions to their infrastructures. While the volume of

U.S. exports rose to meet this developing market,

the U.S. share of world trade in construction held

WIJ.S. Congress, Office of Technology Assessment, hternation~ Competition in Services, OTA-ITE-328 (Washington, DC: U.S. Government

Printing Office, July 1987), p. 124.
331

steady as competing industrial nations also increased

their exports.

The world market for structures became increasingly competitive in the 1980s. Several factors have

contributed to this, including deteriorating economic

conditions and the maturation of construction firms

in the developing world, penetration of international

markets by construction firms from nations such as

South Korea and Brazil, and policies of foreign governments to subsidize construction exports.

Moreover, foreign firms have begun to enter the

U.S. market. Both the number and the earnings of

foreign firms that have been awarded U.S. contracts

have grown dramatically. The number of foreign

firms with U.S. affiliates has also continued to increase.

TRADE IN SERVICES

The poor U.S. performance in merchandise trade

in recent years has been partially offset by trade surpluses in services. Two main components of trade

in services can be distinguished: income from foreign investments, and other services covering a wide

range of activities such as business services, banking, insurance, construction, consulting, information,

and travel.

Data on income from foreign investment are believed to be fairly accurate, but trade in “services”

other than factor income is a notoriously difficult field

to analyze since much of the value goes unmeasured.36 According to the official accounts, for example, income from services other than factor income

offsets less than 3 percent of the merchandise trade

deficit. OTA estimates, however, imply a 16 percent

offset (see table 9-5). A trade surplus in construction,

consulting, engineering, technology, health, and a

menagerie of miscellaneous activities cataloged as

services (including income from international organizations in the United States) offset a $7 billion trade

deficit in travel and transportation in 1984.

The difficulties encountered in developing international agreements about trade in services are even

more complex than those encountered in trade in

products. Services can raise issues of national security (nations want control over their own communication system), “cultural pollution” (there is concern

about the effects of imported television programming), and different national standards of privacy

(compared with some Scandinavian nations, the

United States tends to be more concerned about permitting government access to personal information

and less concerned about corporate access). The

communications and broadcasting industries in

many nations are under direct state control. In virtually all nations (the United States being no exception), trade policy in services requires coordination

with regulatory agencies in areas like banking, communications, or utilities.

Business Services

The net US. trade balance in business services

was negligible in 1984. There was a significant trade

deficit in the most technologically demanding of

these services-telecommunications and data processing—offset by a trade surplus in areas such as

banking, insurance, and selling franchises for

McDonald’s and other firms.

International financial and banking services have

grown more than 20 percent per year for the past

20 years, and the United States has been a leader

in this field. U.S. financial service firms have been

aggressive, innovative, and efficient—qualities that

have enabled them to maintain their international

position in an increasingly deregulated and competitive global environment.

Innovations in financial service products, and in

the technology for delivering services, have helped

U.S. banks maintain their ability to compete in international markets.37 Indeed, U.S. firms have dominated

markets for new products and financial services.

Although foreign banks have increased their presence in the United States significantly in recent

years, the United States still enjoyed a trade surplus

of more than $1 billion in banking in 1984. Conflicting local ordinances and long-established national

SWJ.S. Congress, Office of Technology Assessment, Trade in services:

Exports and Foreign Revenues–Special Report, OTA-ITE-316 (Washington, DC: U.S. Government Printing Office, September 1986).

~lTrade in Services: Exports and Foreign Revenues—Special Report,

op. cit., footnote 34.
332

Table 9.5.—Trade in Services, 1984 (billions of doiiars)

(1) (2) (l)-(2)

Industry Exports imports Balance

Business services ., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18.9 $18.9 $0.1

Accounting ..... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 0.0 0.4

Leasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7 0.5 0.2

Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 0.5

Telecommunications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4

Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0

Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7 2.0 (14)

Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.0 8.6 (0.6)

Investment bank/broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9 4.8 1.1

Franchising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7 0.0 0.7

Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.0 1.0 4.0

Consulting/engineering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3

Management consulting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1

Engineering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 0,2 1.0

information/technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1 3.1 9.0

Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 0.2 2.0

Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 0.5 1.1

Licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 1.0 4.5

Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9 1.4 1.5

Transportation/travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.2 39.2

Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.5 22.8

Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.7 16.4 (2.7)

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4 3.6 5.8

Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8 0.0 1.8

Motion pictures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9 1.5 0.4

Miscellaneous a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7 2.1 3.6

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77.5 65.7 11.8

aAffiliated and affiliated fees (excluding royalties and license fees included under "licensing”), expenditures in the U.S. by foreign governments and international

organizations, receipts from Canadian affiliate trade unions, miscellaneous commissions, wages of U.S. residents abroad, spending by temporary resident aliens,

and other private miscellaneous services.

NOTE: Values given are rounded mid-points ( )= Negative.

SOURCE: U.S. Congress, Office of Technology Assessment, Trade in Services: Exports and Foreign Revenues-Special Report, OTA-lTE-316 (Washington, DC: U.S.

Government Printing Office, September 1986)

traditions of doing business typically make it more

difficult for a foreign firm to provide useful banking

services than to sell a manufactured product. For

example, U.S. banking laws greatly limit banks with

branches in different States and prevent many kinds

of direct industrial financing.38

There seems to be only one potential threat to the

U.S. rank as leader of the financial services industry: Japan. Japanese banks now hold more international deposits than their U.S. counterparts: 26 percent of the total at the beginning of 1986, compared

to 24 percent for U.S. banks.

Citicorp used to be the world’s largest bank, but

of the top 50 current banking concerns in the world,

18 are Japanese, 16 are European, and only 9 are

American. In March of 1985, eight of the top ten

38SeeStephenCOhen and John Zysman, h4anufacturjng Matters: The

Myth of a Post-Industrial Economy (New York, NY: Basic Books, 1987)

banks were Japanese, and Citicorp was fifth.39 Six

of the ten largest banks in California were foreignowned in 1984, up from two in 1979.40

The vast accumulation of wealth in traditional U.S.

insurance firms gives them potentially great power

in overseas markets. The largest five insurers in the

world—Prudential, Metropolitan, Aetna, Equitable,

and Cigna—and 14 of the largest 25, are American.

Of the rest five are Japanese and six are European.41

However, U.S. insurance companies have been protected at home from competition with other financial institutions, and may therefore not be able to

compete effectively for insurance business in foreign

markets.

39 Worldscope, Wright lnvestor's Service and Center for International

Financial Analysis&Research, 1986, reported in The Waf/StreetJournaf, European edition, Oct. 6, 1986.

dosan ~rancjsco Chronic/e, July 20, 1984, P. 3’7.

dlworldscope, op. cit., footnote 39.
333

Because business services need to be carefully tailored to the needs of individual clients, they typically require close association with the firm being

serviced. Advanced telecommunications systems

may permit closer working relationships with clients

abroad, but it is not yet apparent that these links

will be able to substitute for the close personal relationships required for many legal, accounting, and

other service functions. As a result, jobs in transactional services like banking and business services

tend to be susceptible to the indirect effects of trade

in other sectors, particular-y manufacturing (see ch.

7 and table 7-10).

Software42

The computing capability of all information systems depends on software, which has the qualities

of both a service and a product. While computer

hardware manufacturers continue to develop a large

amount of software, a rapidly growing software industry has also emerged. The U.S. software industry is the largest in the world, and is also the world’s

largest exporter. In 1985, U.S. firms controlled about

70 percent of the world software market and earned

some $21 billion. Foreign sales totaled $4 billion.

The largest portion of these revenues came from the

sale of operating systems and applications software

for large, mainframe computers. With few exceptions, foreign firms lag well behind U.S. firms in software technology as well as in sales.

Although U.S.-based firms have been market

leaders for some time and will continue to be highly

competitive, their share of the world market seems

destined to shrink somewhat in coming years. Foreign software firms will improve their relative positions, particularly as they follow the U.S. lead in

switching to packaged (as opposed to customized)

software. While European firms—led by France,

which has the second most competitive software industry after the United States—have been quite visible internationally, over the long run Japan is likely

to emerge as the major U.S. competitor in software.

Japanese government and industry have made major

commitments to improve software productivity and to

create new generations of software technology.

4ZThis section is drawn ]arge]y from /nternationa] COfrl/X?f;(iOn In Services, op. cit., footnote 35.

U.S. leadership in the industry resulted from its

domestic market–by far the largest in the world.

With the interdependence of hardware and software

design growing stronger, this should prove a continuing source of strength for the U.S. industry. Other

traditional sources of strength in the U.S. industry

are a large number of skilled personnel, strong R&D

programs with substantial Federal funding, and

strong and flexible U.S. capital markets. U.S. Government policies that ensure access to foreign markets can help maintain existing U.S. advantages in

this industry. The future strength of the U.S. industry, however, depends most critically on its ability

to master fourth generation languages, on artificial

intelligence, and on progress in automating the production of software.

Income From Technology

The United States appears to be doing well in the

sale of technology. In 1984, the United States enjoyed a $9 billion trade surplus in sales of information of all kinds: educational services (foreign students overwhelmingly choose technical subjects),

royalties, licenses, and information (again see table

9-5). Licensing alone earned $4.5 billion in 1984.

Income from technology transfer has shown steady

growth over the past decade. Most U.S. revenues

from royalties and fees (76 percent) came from developed countries, with Japan’s portion rising from

3 percent in 1967 to 7 percent in 1981.43 Large U.S.

firms appear to prefer transferring technology to subsidiaries through joint ventures, rather than licensing to independent firms. The desire to avoid licensing varies, however, according to the age of the

technology, the size of the licenser, and the importance of the market to which the technology is

licensed.

U.S. receipts from education were also positive.

A growing fraction of the science and engineering

students in the United States are foreign. In 1981,

23 percent of all graduate science and engineering

students, and 43 percent of all engineering students,

were foreign.44

43 Meryl L. Kroner, “U.S. International Transactions in Royalties and

Fees, 1967-78,” Survey of Current Business, January 1980, p. 25; and

U.S. Department of Commerce, unpublished tables; cited in National

Science Foundation, Science /mficators 2982, Washington, DC, 1982.

ddscjence Indicators 1982, op. cit., footnote 43, p. 122.
334

The positive U.S. performance in technology trade

is mirrored in the negative “technology balances”

of the Nation’s major trading partners. Both West

Germany and Japan have been aggressive importers

of foreign technology, as have Spain, Italy, and the

Netherlands. This pattern is reflected in the positive,

though shrinking, balance of patents granted to U.S.

firms and individuals, and foreign nationals.

The statistics cited above, however, provide an extremely poor and possibly misleading measure of

the value of technology flowing across national

borders. 45Information flows within a firm’s divisions

or within subsidiaries of multinational firms are

notoriously difficult to measure, though it is estimated that 40 percent of all U.S. trade may be intrafirm. 46 Conversely, it is not clear that subsidiaries

of foreign firms operating in the United States transfer

significant amounts of technology to the United

States. There is ample anecdotal evidence to suggest that Japanese automobile firms (such as the

Toyota-GM venture) keep the most technologically

sophisticated parts of their operations at home, sending only the relatively low-technology assembly operations to the United States.

On the other hand, the Japanese partners in Boeing’s 767 aircraft venture participated precisely because they hoped to use the experience to learn

things about aircraft production that either were not

for sale or could not be sold because they involved

complex, hands-on “know how.” NEC has learned

enough about computers from foreign partnerships

to attract a partnership with Honeywell, in which

NEC and the Bull company will develop and produce computers and Honeywell will primarily provide marketing services, Komatsu learned an enormous amount about diesel engines from Cummins

Engines. In no case does it appear that the U.S. partner learned significantly from its foreign partner.47

Perhaps more importantly, there are compelling

reasons to believe that the real value of a technoldsRaymond Vernon, “Technology Transfer Between the U.S. and other

Industrialized Countries,” paper prepared for the Office of Technology

Assessment, Mar. 13, 1984.

46John f-fein, “what the Trade Numbers Hide,” Across the Board, vol.

XXIV, No, 10, October 1987, pp. 12-13; and James S. Little "lntra-Firm

Trade: An Update,” New EngLand Economic Review, May-June 1987,

pp. 46-51.

4TYves Doz, Gary Hame], and C.K. Prahalad, “International s@3t@C

Partnerships–Success or Surrender?” paper delivered to the Strategic

Management Society, Singapore, 1986.

ogy cannot be fairly reflected in its price, since the

buyer cannot know its full value in advance. Frequently, a technology purchased for one purpose

turns out to have its greatest potential in an entirely

unexpected area (the technology for the “compact

disk” system, for example, was not purchased with

sound reproduction in mind). The social value (or

the social cost) of the innovation is very different from

the value a firm can place on a technology in the

open market.48

In addition, enormous amounts of technology are

transferred embedded in equipment. Proprietary technologies and associated end-products are frequently

introduced abroad through a subsidiary, joint venture, or licensing agreement. These technology transfers account for an important component of the return to U.S. firms on R&D done in the United States

and thus constitute an additional incentive to R&D

expenditure. One survey has found that 30 percent

of the returns from 30 major firms’ R&D was expected

to come from foreign sales or foreign utilization.49

While the trade surplus in information could be

taken to demonstrate the continued technological

dominance of the United States, it may also show

a greater willingness and ability on the part of foreign governments and firms to scan world markets

actively for new technology. The potential loss in

U.S. competitiveness resulting from this trade surplus in technology sales may well outweigh the immediate income generated from the sales. The reluctance, or inability, of U.S. firms to purchase

technology from abroad may be due to various factors, ranging from corporate cultures that have grown

up with the assumption that foreign technologies are

inferior, to policies on the part of foreign governments that hamper the outflow of technological knowledge. In any event, it is not yet clear whether the

48A detai]ed study of 17 industrial innovations found that their SOCial

rate of return was more than double the before-tax private rate of return.

See E. Mansfield and A. Romeo, “Technology Transfer to Overseas Sub

sidiaries of U.S.-based Firms,” Quarter/y Journal o/Economics, vol. 95,

1980, pp. 737-750. By definition, high-technology industries are R&D

intensive. Even so, the concentration of private industrial R&D in these

sectors is surprising. The Department of Commerce found, for example, that only 10 R&D-intensive industries accounted for more than 60

percent of total private industrial R&D, although they represented only

13 percent of the value of manufacturing product shipments; see “An

Assessment of U.S. Competitiveness in High Technology Industries,”

op. cit., footnote 3.

49Ibid.
335

trade surplus in “information” services should be

considered an asset or a liability.

It is widely agreed that the production of knowledge is an area in which the difficulty of securing

property rights induces market failure, with the result that there may be inadequate research in areas

where property rights cannot be exercised and excessive research in areas where they can.50 Given

the already rapid diffusion of the technologies discussed above, the counterfeiting of trademarked

commercial merchandise and the theft and duplication of intellectual property have become major

international issues. There have been extensive efforts to achieve multilateral agreements in this area,51

50 For more on this subject, see U.S. Congress, Office of Technology

Assessment, Intellectual Property Rights in an Age of Electronics and

Information, OTA-CIT-302 (Washington, DC: U.S. Government Printing Office, April 1986).

51 In 1979, the United States and the European Economic Community (EEC) reached agreement (ad referendum) on the text of a code

to deter international trade in counterfeited trademarked merchandise.

Over the next 2 years, the United States and the EEC intensified efforts

to broaden participation in the code, resulting in multilateral discussions with a number of GATT countries, including Canada and Japan.

These talks resulted in a revised text to be used as the basis for negotibut so far progress has been disappointing. Political pressure is building for bilateral action. The

United States has already pressured Hong Kong, Taiwan, Singapore, and South Korea to clamp down on

offenders on the grounds that without adequate protection, new investors might be reluctant to establish themselves abroad and to transfer technology.

Existing agreements involving intellectual property rights administered under the World Intellectual Property Organization (WIPO) are less than adequate. They build on principles of national treatment,

but statutes vary significantly from country to country

and enforcement is usually weak or non-existent.

Provisions for the settlement of international disputes

are lacking. Additional problems are created by the

nature of technological change itself.

ation of a code acceptable to all GATT members. While the agreement

was accepted by the four major countries, the counterfeit code was

shelved at the 1982 GATT ministerial meeting. Some less developed

countries opposed any mention of the issue in the GATT, arguing that

it fell under purview of the World intellectual Property Organization

(WIPO) rather than the GATT. Though the Ministerial meeting directed

the Director-General of the GATT to hold consultations with WIPO, little progress has been recorded to date.
Part IV

People in the Production Recipe

The following three chapters look inside the

“value-added” generated by businesses and business

networks to see how structural change in the U.S.

economy is transforming the nature of work. Networks measured earlier in terms of flows of money

can also be described as networks of people contributing time, skill, dedication, compassion, and inspiration. The kinds of human contributions needed

to provide an amenity like Housing, Transportation,

or Health are changing even more rapidly than the

shares of different business sectors described in chapter 5. Trends measured in these areas are difficult

to interpret, since there appears to be an enormous

range of choice in the kinds of jobs created by production systems using emerging technology.

As was the case in Part 11, there is no good vocabulary for describing many of the changes taking place.

Structural change must be measured in several different ways: the share of all occupations held by different occupations; the scale and scope of working

teams; the way such teams are managed formally

and informally.

Many traditional occupations (i.e., machine operators, farmers, and data entry clerks) are declining

while jobs are growing rapidly in areas lacking clear

definition. Out of desperation, new jobs are often

called things like “para-professionals,” “para-librarians, ” or “super-clerks.”

For many, the most critical skill has become an

ability to keep abreast of change, to determine what

needs to be learned, and learn while performing the

work that needs to be done. The most important attribute of formal training maybe the extent to which

it creates a capacity for functioning effectively in ambiguous situations, While modern technology may

theoretically permit a production system to operate

efficiently with a small, elite group of managers controlling large groups of employees, whose tasks have

been reduced to mindless repetition monitored by

computers, such an approach seems unlikely to be

compatible with the need to tailor products and react quickly to changing conditions.

When an insurance clerk must adapt to a new

computer terminal, for example, he or she is forced

to learn both a new keyboard and new underwriting software—in effect, learning a new job in the

process. A nurse heading a ward must keep books

in a different way, in order to satisfy changed public regulations and the expectations of newly costconscious hospital management. A cutter in an apparel factory now learns how to use laser cutters instead of those based on knives, and must become

an alert member of a “quick response” team—spending a considerable amount of time in brief meetings

to establish schedules for rapidly shifting production

requirements, rather than working in isolation with

a rigidly prescribed schedule.

In an odd way, changing production strategies and

new technologies may make disparate jobs more

similar. Farm managers, operators of nuclear power

plants, insurance salesmen, and teachers all spend

an increasing amount of time wrestling with abstractions in front of terminals. Jobs with high degrees

of independence, such as independent physicians,

teachers, and independent home builders, are now

being integrated into networks—though not necessarily into hierarchical structures. Jobs once part of

hierarchies may be given greater independence.

A large fraction of new jobs require the capacity

for working with other people. Operation of production networks capable of delivering specialized products rapidly to markets depend increasingly on groups

of people working effectively as a team. The teams

may last for many years, or may be assembled on

a temporary basis for a specific purpose. The performance of such teams often depends as much on

the social skills of their participants as on formal

training or experience.

Members of complex production networks often

have never met one another. Few of them actually

meet the consumers that enjoy the final products

of their work. This may well change as production

networks become more closely coordinated and

operate with more intimate understanding of final

markets.

The emerging economic systems could create a

work environment that is more rewarding in a variety of ways. They can also lead to problems. Iron337
338

ically many of the advantages and liabilities emerge

from the same factors, Flexible production systems

often require skills that are quite general; the employee is expected to learn the specifics of a new

task quickly. This provides employees with greater

freedom, but it can also weaken their bargaining

power and make employment more tenuous. This,

in turn, can lead to an increase in use of part-time

and temporary employees, and can tempt employers

to achieve flexibility through “disposable” workers.

Technology may also be used to create an enormous

gap between well paid, creative professionals and

employees given narrowly defined tasks who are

monitored electronically.

While many new jobs do not expose workers to

the risks of traditional industrial accidents, stress can

be greatly increased in a poorly designed office environment. Many of the most dangerous, least skilled,

and most poorly paid jobs in the economy are unlikely to be affected by new technology or structural

change. Farm laborers, food preparers, hospital orderlies, and other occupations seem likely to remain

those of poorly paid minorities.

The following three chapters address these issues

with the following plan:

● Chapter 10 builds on the analysis of changing

business structures to explore changing networks of people at work. It begins by showing

how occupations of each type enter the production recipes of different businesses. Changing

patterns of jobs created by each business sector are explained by examining changes in final demand, trade, production recipes, and labor productivity. The chapter also examines

changing patterns of occupations, finding that

these changes depend primarily on changes in

staffing within each business type.

Chapter 11 shows how changes in the supply

of labor and changes in demand implicit in the

new economic structure combine to change the

quality of jobs. The chapter explores the changing demand for skills, forces affecting the distribution of wages and compensation, employee

and employer demands for flexibility, job safety,

and factors affecting aspects of job satisfaction

not easily measured in quantitative terms. In

particular, the discussion examines the rapid

changes occurring in the rules governing connections between skills and wages. Inequality

in education may well become the most significant source of wage inequality.

Chapter 12 provides a different perspective on

these issues by taking a more detailed look at

changes in the way different production networks create jobs. Some of the structural

changes within business types that remained

a mystery in chapter 10 can only be explained

by looking at factors affecting work in places

like hospitals, farms, and grocery stores.
Chapter 10

How America Uses

People at Work
CONTENTS

Page

Labor in the Production Recipe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .........341

Introducing People into the Production Recipe . .............................341

Closing the Circle: Converting Skills to Amenity . . . . . . . . . . ...................349

Trends in Net Job Generation and Loss. . . . . . . . . . ............................349

Accounting for Changes in Job Share.... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 351

Trends in Occupations.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................355

Accounting for Occupational Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ...357
Chapter 10

How America Uses

People at Work

LABOR IN THE PRODUCTION RECIPE

The jobs created by the American economy in the

1980s often bear little resemblance to the jobs of the

early 1970s. Employment in manufacturing continues to fall while jobs in transactional enterprises

have increased rapidly. If current trends continue,

each sector will contribute roughly 16 percent of U.S.

jobs in the early 1990s. Of all jobs added between

1980 and 1986, 85 percent were classified as “managerial, professional, technical, sales, or administrative support. ” These categories were responsible for

less than half of all jobs in 1972.

Building on the analysis of structural change in

production undertaken in chapter 5, this chapter explores the forces responsible for some of these

changes. The discussion attempts to explain recent

trends, and provides the basis for examining choices

about how skills can be combined to produce amenities in the future. The analysis begins by describing

how labor enters the production recipes; it next

closes the circle introduced in figure 1-2 of chapter

1 by explicitly calculating the mix of skills required

to achieve each amenity. The chapter then describes

recent trends in U.S. jobs—both by business and occupation categories. Lastly, the analytical tools introduced at the beginning of the chapter are used

to explain how the direct and indirect effects of

changes in domestic demand, trade, productivity,

and shifting production recipes are responsible for

different patterns of employment.

While there are some exceptions, productivity, domestic demand, trade, and production recipes have

all led to declining employment in manufacturing

and increasing employment in transactional firms.

In most cases, however, shifts in household and government consumption (final demand) and changes

in production recipes (intermediate demand) seem

to have had a larger impact on employment than

changes in productivity. New patterns of trade and

new patterns of domestic consumption have played

approximately equal roles.

It appears, however, that changes in hiring within

business sectors like farming, banking, or textile

manufacturing have had a much greater effect on

the shifting mix of skills in the American economy

than changes in the net jobs created by each business. It is difficult to use available statistics to explore the change in occupations within business

types. For this, it is necessary to appeal to the more

qualitative analysis of chapter 12.

Accounting by categories of jobs and job types

avoids many of the empirical difficulties encountered

in chapter 5, which traced changes in “constant dollar” value-added contributed by different business

categories. This occurs for several reasons:

●

●

●

Jobs provide a more reliable measure of

change—unlike prices, the basic unit does not

change over time.

Using job types avoids the problem of defining

a “manufacturing” or “service” enterprise. Job

classifications provide a way of seeing whether

a manufacturing firm is also engaged in activities not usually classified as “manufacturing.”

Measuring job changes provides a way to trace

the results of research and development through

complex networks. It would seem, for example,

that the Recreation and Leisure network does

comparatively little research. In fact, one dollar spent on Recreation and Leisure generates

as much work for scientists and engineers as

the average dollar spent in the economy as a

whole.

Introducing People Into

the production Recipe

The tables in chapter 4 traced the interconnections

that exist in the U.S. economy, by showing how U.S.

businesses combine products purchased from other

businesses (intermediate inputs) with their own

“value-added” to produce output. Chapters 5 and

341
6 discussed changes in the share of GNP (the sum

of all value-added) made by the various sectors, how

businesses are organized to generate this value, and

how patterns in which businesses purchase products and services from each other have changed. The

challenge of the present discussion is to describe

changes within the value-added portion of the production recipe.

Value-added consists of three components:

1.

2.

3.

The

property-type income (the returns paid to investors and any income of self-employed persons)-approximately one-third of all valueadded;

indirect business taxes (a category that includes

most taxes other than corporate income taxes),

which account for around 8 percent of valueadded; and

compensation paid to employees with different

skills which represents the bulk, 59 percent, of

value-added.

first two categories have relatively straightforward interpretations and are discussed in greater detail in chapter 11. Since compensation paid to employees for their associated skills is such a large part

of the value-added portion of the production recipe

and represents the contribution of labor to the economy, it is the object of interest for this chapter.

Trends in the share of value-added paid to employee compensation in several specific businesses

categories are shown in table 10-1. The gradual convergence in patterns of sector organization described

in Part II can also be seen in this table. In general,

the percent of value-added paid to employees increased for sectors with comparatively low ratios in

1956 (farming; mining; finance, insurance, and real

estate; health services; legal services; and auto repair). Many of these sectors approached the 0.7 ratio that has been typical of manufacturing.

Technology and market structures have had uneven effects on compensation. The compensation to

value-added ratio increased in areas like legal and

health services, where capital invested per worker

has grown (statistics on capital investment are provided later in this chapter—see table 10-9). The ratio fell in some heavily capitalized businesses, such

as telephone and public utilities (electric, gas, and

sanitary services). Very little of the value-added in

heavily capitalized real estate businesses is paid as

compensation.

A Taxonomy for Skills

Lacking any good alternative, the skills people contribute to production can be measured using occupation categories. As has been the case in so many

parts of this analysis, the selection of occupation categories is no easy task. Critical changes can be

missed if the wrong units are selected to measure

change. While the U.S. Bureau of Labor Statistics

takes great pains to maintain a consistent set of occupation descriptions, and to update them when necessary, enormous ambiguities remain—some of the

greatest of which are found in precisely the occupations where the fastest growth is occurring. A work

force moving rapidly to new jobs built around advanced information equipment or networks of semiautonomous work teams does not fall into convenient categories.

Two sets of occupation categories are used in the

discussion:

●

●

The 16 occupations summarized in box 10-A

were selected because they expose areas where

the most rapid occupation changes are

occurring.

Use of the 11 summary categories, shown in

table 10-2, were made necessary by a major

change in the occupation classification system

in 1980 that makes more detailed comparisons

between the 1970s and 1980s impossible.2

A table providing more detail on both systems appears in the Appendix.

Skills in the Production Recipe

Using pay as a proxy for the contribution made

by each occupation, table 10-2 describes how skills

enter production recipes, showing how much and

what kind of employment is needed to produce a

unit of output. Table 10-2 is identical to table 4-2

of chapter 4, except that table 10-2 provides more

1 Percentage breakdown of value-added is based on the “1977 lnputOutput Tables,” Survey of Current Business, vol. 64, No. 5, May 1984.

2 See John Tschetter, “Producer Services Industries: Why Are They

Growing So Rapidly?” Month/y Labor Review, vol. 110, No. 12, December

1987, pp. 31-41.
343

Table 10-1 .—Compensation as a Percent of Value-Added by Selected Businesses

—

1956 1966 1976 1986

All private industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Natural Resources

Agriculture, forestry, and fishery services . . . . . . . . . . . . . . .

Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Electric, gas, and sanitary services . . . . . . . . . . . . . . . . . . . . .

Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fabricated metal products . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Food and kindred products . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Apparel and other textile products . . . . . . . . . . . . . . . . . . . . .

Machinery, except electrical . . . . . . . . . . . . . . . . . . . . . . . . . .

Instruments and related products . . . . . . . . . . . . . . . . . . . . . .

Motor vehicles and equipment . . . . . . . . . . . . . . . . . . . . . . . . .

Chemicals and allied products . . . . . . . . . . . . . . . . . . . . . . . . .

Transportation and Trade

Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Wholesale trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Retail trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Transactional Activities

Telephone and telegraph . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

FIREb 

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Business services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Legal services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Personal Services

Hotels and other lodging places . . . . . . . . . . . . . . . . . . . . . . .

Automobile repair and services . . . . . . . . . . . . . . . . . . . . . . . .

Amusement and recreation services . . . . . . . . . . . . . . . . . . . .

Social Services

Health services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Educational services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Social services and membership organizations . . . . . . . . . .

a

lncludes production of computers

—

52.8%

15.8

34.4

34.3

70.0

68.0

80.0

58.7

86.6

72.8

76.9

56.4

53.4

65.3

53.6

56.3

52.5

18.7

60.8

22.5

57.6

39.7

47.4

41.5

84.8

98.8

52.7% 54.4% 54.3%

18.5

35.2

30.1

70.4

66.5

76.8

56.0

84.2

71.1

69.9

49.3

53.8

18.9

31.8

29.8

67.1

70.0

74.7

58.8

85.1

73.6

76.1

67.5

55.1

21.3

32.2

28.2

67.3

70.0

74.9

60.3

82.2

80.3

74.0

78.0

62.8

63.8 67.4 63.9

54.4 54.5 56.7

58.7 59.8 59.0

43.3 47.1 41.5

19.2 23.1 26.6

67.0 63.6 62.1

22.6 40.8 53.9

57.8 58.6 65.3

39.7 38.6 43.3

51.8 60.4 63.2

49.0 71.7 76.6

93.7 93.4 93.6

98.4 98.5 97.7 —

b

Finance, insurance, and real estate includes U.S. Department of Commerce imputations for owner-occupied housing

NOTE Only a sample IS shown for some categories

SOURCE Based on U.S. Department of Commerce, Bureau of Economic Analyses, “National Income and Product Accounts,” historical diskettes, Tables 6.1 and 6.4.

detail on the value-added portion of the production

recipes while table 4-2 provided more detail on intermediate inputs. Both show that value-added in

manufacturing is a comparatively small fraction of

the total value of manufacturing output, since manufacturing businesses are more highly linked to other

parts of the economy by intermediate inputs. But

table 10-2 reveals that certain occupations, like executives and managers or administrative support

workers, are endemic to all sectors; others, such as

machine operators or professional specialties, are

relatively concentrated in one or two sectors. The

table also shows the relative importance of skill in

the production recipes of the sectors. For example,

per unit of output, the Social Services sector uses

a greater amount of inputs from the administrative

support occupation than High Wage Manufacturing

uses from all of the blue-collar occupations (precision production, craft, &repair; machine operators,

assemblers, & installers; and transportation & material moving).

The direct contribution employment and its associated skills makes to a sector’s production recipe

depends on the interaction of two factors: the staffing pattern of the sector, and the compensation paid

for a particular skill or occupation.

The factors connecting skills and wages are obviously complex. The summary data in table 10-3 show

the difficulty of using occupations as a proxy for

skills. Wages, for example, do not necessarily correlate to experience or levels of education. A variety

of factors, such as skillful union bargaining, discrimination on the basis of race, age, and sex, and measurable forces of supply and demand, interact to establish wages. Wages in the service industries, for
344

Box 10-A.—Selecting Occupations

1. Managers and Management Support include executives, administrators, and support occupations like accountants and tax examiners.

2. Technical Professionals include engineers; natural, computer, and mathematical scientists; and architects and

surveyors.

3. Education and Health Professionals include teachers, librarians, counselors, physicians, registered nurses,

therapists, and other medical professionals.

4. Other Professionals and Related Support include social scientists, social workers, ministers, lawyers, judges,

writers, artists, soothsayers, entertainers, and athletes.

5. Technicians, and Related Support include drafters, computer programmers, licensed practical nurses, surgical technicians, air traffic controllers, paralegals, and other technicians working in health, engineering, and

the sciences.

6. Safes Workers include cashiers, insurance agents, real estate agents, travel agents, and a variety of other

marketing and sales occupations.

7. Other Customer Contact workers include occupations directly involved with customers but not involved in

sales. These include receptionists, insurance adjusters, and hotel desk clerks.

8. Information Distribution occupations include telephone operators, mail carriers, duplicating machine operators, meter readers, stock clerks, dispatchers, and other people responsible for keeping records, scheduling,

dispatching, and distribution.

9. Data Entry, Manipulation, and Processing workers include computer operators, bookkeepers, secretaries, file

clerks, tellers, and other office occupations.

10. Food and Beverage Preparers include most workers in restaurants and other commercial and institutional

food service firms (e.g., bartenders, cooks, waiters, and waitresses).

11. Other Service Workers include, firemen, police, guards, child care workers, nursing aids, flight attendants,

barbers, janitorial services, and private household workers.

12. Precision Production, Craft, and Repair occupations include the most highly skilled of the “blue collar” workers and their supervisors. The category includes machinists, tool and dye makers, the construction trades,

mine workers, mechanics, and repair workers.

13. Machine Operators, Assemblers, and Inspectors involve more routine blue-collar work: machine set-up and

operation, machine tending, and a variety of hand-work occupations such as hand sewers and welders.

14. Transportation and Material Moving workers include aircraft pilots, drivers of trucks, buses, and other equipment, and operators of forklifts and other industrial vehicles.

15. Handlers, Equipment Cleaners, Helpers, and Laborers are the lowest paid blue-collar workers. The jobs include refuse collectors, hand backers, and vehicle washers.

16. Farming, Forestry, and Fishery occupations include farm managers and supervisors as well as farm workers.

SOURCE: Based on classifications provided by the U.S. Department of Labor, Bureau of Labor Statistics.

example, have grown faster than measured produc- Table 10-4 avoids some of the problems inherent

tivity. This is presumably because employees in service enterprises gained some share of the productivity

increases generated elsewhere in the economy.3

Chapter 11 discusses a number of reasons for believing that the connections between occupations

and wages shown in table 10-3 will change during

the next decades.

sThis effect, sometimes known as the “Baumol disease,” is described

in W.J. Baumol, “Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis, ” American Economic Review, June 1967, pp.

415-426.

in accounting by wages, showing only the jobs required in each sector of the U.S. economy and each

sector’s occupational staffing pattern. The table, of

course, suffers from a limitation of its own—it cannot show how much each occupation contributes to

the value-added in each industry. But it does show

the mix of skills employed by each sector and how

members of certain occupations are distributed

across the sectors of the economy.

Tables 10-2 and 10-4 provide two perspectives on

the way people enter production recipes that are use-
o

I

I

Table 10-2.—A Production Recipe Including Labor

Natural Manufacturing Transportation Transactional Personal Social

Resources Construction Low Medium High & Trade Activities Services Services

Total Intermediate Inputs . . . . . . . . . . . . . . . . . . . . 53.3% 56.8% 63.5% 63.7% 70.4% 39.2% 27.2% 41.0 % 21.7 %

Value-Added . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46.7 43.2 36.5 36.3 29.6 60.8 72.8 59.0 78.3

Property-Type Income . . . . . . . . . . . . . . . . . . . . . 31.4 7.1 10.6 10.9 8.3 13.6 40.9 21.8 5.0

Indirect Business Taxes . . . . . . . . . . . . . . . . . . . 3.5 1.1 1.1 1.7 2.2 9.6 9.9 3.5 0.2

Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.8 35.0 24.9 23.7 19.0 37.6 22.0 33.7 73.0

Executive, Administrative, & Managerial . . . . 1.3 6.4 2.1 3.0 2.4 6.1 5.7 5.1 8.9

Professional Specialty . . . . . . . . . . . . . . . . . . . 1.0 0.6 0.4 2.1 2.0 1.0 2.7 2.7 30.4

Technical & Related Support . . . . . . . . . . . . . 0.3 0.3 0.2 0.8 0.6 0.3 0.9 0.3 3.8

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1 0.4 0.5 0.9 0.4 11.0 1.4 2.2 0.4

Administrative Support

(including clerical). . . . . . . . . . . . . . . . . . . . . 1.2 2.2 1.9 2.7 1.7 5.1 7.6 2.8 12.5

Service Occupations.. . . . . . . . . . . . . . . . . . . . 0.1 0.2 0.2 0.3 0.2 5.3 1.5 12.6 10.0

Precision Production, Craft, and Repair . . . . 2.8 18.0 5.3 4.9 5.2 3.6 1.5 4.0 3.8

Machine Operators, Assemblers,

and lnspectors. . . . . . . . . . . . . . . . . . . . . . . . 0.3 0.6 11.2 6.7 4.8 0.4 0.2 1.5 0.6

Transportation and Material Moving . . . . . . . 0.9 2.4 0.7 1.1 0.8 3.6 0.2 1.0 1.6

Handlers, Equipment Cleaners, Helpers,

and Laborers . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 3.8 2.0 1.2 1.0 1.2 0.3 0.7 0.8

Farming, Forestry, and Fishing . . . . . . . . . . . 3.1 0.0 0.3 0.0 0.0 0.0 0.1 0.8 0.2

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

How To Read This Table: $100 in Output from Natural Resource Businesses combined $53.30 of materials purchased from other businesses with $46.70 of value-added in Natural

Resource businesses. The value-added paid included the following: .$31 .40 was in the form of returns to capital, $1.30 was paid as compensation to executives, administrators,

and managers, $1.00 was for compensation to professionals (mostly scientists and engineers), and $1.20 was paid to clerks and other administrative support personnel.

NOTE: See appendix for a key to the occupations classification scheme. Numbers may not add due to rounding.

SOURCES: 1977 Input/Output Table, Survey of Current Business, May 1984, used for decomposition of value-added; 1980 Input/Output Tables, Bureau of Economic Analysis, unpublished; 1984 Occupation

by Industry Employment Matrix, Bureau of Labor Statistics, unpublished; Table 5, “Median Weekly Earnings for Wage and Salary Workers in 1984,” Bureau of Labor Statistics, adjusted to include

compensation; U.S. Department of Labor, “Total Employment By Occupation, 1984,” adjusted to account for self-employed workers, unpublished.
346

Table 10-3.–Characteristics of the Occupations, 1984

Median Educationd

Age

earningsb Percent Percent Percent Percent Percent Percent Unemployment

Occupationa

($ weekly) female blackc

high school college 16-24 25-54 rate

Executive, Administrative,

and Managerial . . . . . . . . $483 33.6% 6.1% 49.6% 45.0% 7.5 ”/0 79.60/0 2.70/o

Professional Specialty. . . . . 455 48.5 6.7 24.1 74.5 8.0 81.8 2.5

Technicians & Related

support . . . . . . . . . . . . . . 379 48.1 20.5 67.9 28.6 23.1 70.1 2.9

Sales . . . . . . . . . . . . . . . . . . . 319 47.9 12.4 65.4 21.0 24.8 64.1 5.4

Administrative Support

(including clerical) . . . . . 275 79.9 11.6 82.0 11.0 21.3 68.1 5.1

Private Household Services 134 96.2 29.6 42.3 1.6 30.9 51.0 6.9

Protective and Other

Services. . . . . . . . . . . . . . 232 58.2 23.7 63.2 5.7 31.4 58.3 9.2

Precision Production, Craft,

and Repair. . . . . . . . . . . . 384 8.5 7.9 70.9 5.4 16.0 73.2 7.5

Machine Operators,

Assemblers, and

Inspectors . . . . . . . . . . . . 277 41.1 13.9 61.0 2.8 18.6 70.1 10.7

Transportation and Material

Moving ., . . . . . . . . . . . . . 344 8.3 15.1 63.4 3.1 15.8 72.7 9.2

Handlers, Equipment

Cleaners, Helpers, and

Laborers . . . . . . . . . . . . . 251 16.6 22.7 60.1 2.6 43.3 49.9 15.1

Farming, Forestry, and

Fishing. . . . . . . . . . . . . . . 203 15.6 8.0 52.2 7.9 24.2 61.8 8.5

Average . . . . . . . . . . . . . . . . . 326 43.7 10.1 60.0 22.1 19.7 69.5 6.6

aSee appendix for a key to the occupations classifications scheme. Service occupations are here broken out into “private household” and “Protective and other. ”

bMedian earnings data in current dollars, calculated for “wage and salary workers who usually work full-time.”

cRace data compiled from Employment and Earnings, annual review issue. Data are for 1985.

dEducational attainment data collected from annual survey (not annual averages).

SOURCE: Office of Technology Assessment, 1988, based on unpublished data provided by the U.S. Department of Labor, Bureau of Labor Statistics.

ful for understanding recent patterns of change. For

example:

●

●

●

●

●

Although High Wage Manufacturing only

spends about 4 cents per dollar of output on

inputs from the Transactional Activities sector

(see table 4-2 of ch. 4), it spends nearly twice

that amount (7.1 cents) on labor inputs that

would be considered transactional: managers,

professional specialists, technicians, sales workers, and administrative support workers.

About one-quarter of all jobs in Social Services

(dominated by teaching and health activities)

are held by individuals requiring professional

training, making this by far the most highly educated sector.

Over three-quarters of the managers and management support jobs are in the service sectors.

About one out of eight jobs fall into the data

entry, manipulation, and processing occupations

—more than double the number employed as

food and beverage preparers. The data entry occupation represents nearly one-third of all jobs

in the Transactional Activities sector.

More people work in Transportation & Trade

than in all of manufacturing and Construction

combined.

The remaining element connecting jobs and skills

to structural changes in the economy is the unseen,

indirect requirement for different types of labor generated through firms’ purchases of inputs needed for

their production recipes. Using methods described

in chapter 4 (and data in tables 10-2 and 10-4), table 10-5 traces the links connecting the natural resources & construction, manufacturing, and service

sectors in 1984.4 The impact of sectoral linkage on

the work force is similar to that found for value-added

(table 4-4 of chapter 4) and trade (table 7-10 of chapter 7). Demand for manufacturing and natural resource & construction products tends to generate a

significant portion of jobs outside these sectors, while

the service sector tends to be relatively insular.

Fully 14 percent of all service sector jobs result

indirectly from demand for the natural resource and

manufacturing products; manufacturing alone was

4The table shows only domestic jobs, since imports have been removed using methods described in ch. 7.
Table 10-4.–Employment by Occupation and Industry, 1984

Natural Low Wage Med Wage High Wage Transportation Transactional Personal Social

Resources Construction Manuf. Manuf. Manuf. and Trade Activities Services Services

Percent of all jobs in each occupation, by sector:

Managers and Management Support

Technical Professionals

Education and Health Professionals

Other Professionals

Technicians

Sales Workers

Other Customer Contac t

Information Distribution

Data-entry, Manipulation, and Processing

Food and Beverage Preparer s

Other Service Workers

Precision Production, Craft, and Repair

Machine Operators, Assemblers, and Inspectors

Transportation and Material Moving

Handlers, Equipment Cleaners, and Helpers

Farming, Forestry, and Fishing

Total (percent)

Percent of all jobs in each sector, by occupation:

Managers and Management Support

Technical Professionals

Education and Health Professionals

Other Professionals

Technicians

Sales Workers

Other Customer Contact

Information Distribution

Data-entry, Manipulation, and Processing

Food and Beverage Preparers

Other Service Workers ,

Precision Production, Craft, and Repair

Machine Operators, Assemblers, and Inspectors

Transportation and Material Moving

Handlers, Equipment Cleaners, Helpers .,

Farming, Forestry, and Fishing

Total (percent)

Millions of job s

2.2%

6.3

0.3

1.5

2.6

0.4

1.8

1.8

2.1

0.1

0.5

5.7

1.2

5.3

4.4

70.9

4.5

5.2%

2.8

0.5

1.1

1.8

0.8

0.5

1.5

6.0

0.1

0.9

15.0

2.1

5.2

3.9

52.7

100.0

4.8

5 9%

2 4

0 0

0.3

14

0.6

02

07

2.5

00

0.4

192

1.2

7.3

16.7

0.3

4.5

13.8%

1.1

0.0

0.2

0.9

1.4

0.1

0.5

7.1

0.0

0.8

50.2

2.1

7.2

14,5

0.2

100.0

48

2.3%

1 6

0.0

0 6

1.0

0.9

04

3.4

1.9

0.0

0.7

7.1

27.0

2.8

10.9

4.2

4.5

5.6%

0.7

0.0

0.4

0.7

2.2

0.1

2.8

5.5

0.0

1.5

18.6

465

2.7

9.5

3.2

100.0

4.8

8.1%

21.0

0.1

6.3

11.3

3 9

1.0

90

6.8

0.1

1.7

15.3

37.7

9.4

15.0

1.0

9.3

9.2%

4.5

0.0

2.3

3.6

4,4

0.1

3.5

9.3

0.1

1.7

19.2

31.0

4.4

6.3

0,4

1000

99

5 o%

183

00

2 1

70

1.3

04

51

32

0.0

12

125

21.0

5.2

9 8

0.4

5.7

9.2%

6.4

0.0

1,2

3.7

2 4

0.1

3.2

7 1

0.0

20

25.6

28.1

4.0

6.7

0.2

100.0

6.1

26.9%

5 8

1 7

8 1

6.2

79.0

15.2

35.8

18.2

72.2

7.0

18.1

4.1

51.2

24.2

0.6

26.3

10.8%

0.4

0.4

1.0

0.7

31.4

0.7

4.9

8.8

17.0

2.5

8.0

1.2

8.5

3.6

0.1

100.0

281

22 3%

23.5

1.0

21.0

18,2

8 9

4 0 3

153

31.4

0.7

142

6.7

1.8

2.3

5.5

4.5

2.8

8.4%

3.6

0.5

54

4.2

7.2

3.7

4.3

31.2

0.3

10.3

6.1

1.0

0.8

1.7

1.2

100.0

13.7

4 7%

03

1.4

5.9

14

33

116

15

2.0

91

22.9

4.3

2.9

3.1

3.2

9.7

5.6

8.8%

0.1

1.7

3.5

0.7

6.1

2.4

0.9

4.5

10.0

37.8

9.0

3.9

2.4

2.2

5.7

100.0

6.0

22.6%

20.9

95.4

54.2

50.9

1.8

29.2

27.3

3 1 9

179

51.5

11.2

3.1

13.4

10.2

8.4

26.8

8.9%

1.6

23.8

6.7

5.7

0.7

1 3

3.7

1 5 2

4.1

17.9

4.9

0.9

2.2

1.5

1.0

100.0

28.6

Millions

Total of Jobs

100.0%

100.0

100.0

100,0

00.0

00.0 00.0

00.0 00.0 00.0 00.0 00.0

100.0

100,0

100,0

100,0

1000

10.6

2.0

6.7

3.3

3.0

0.5

1.2

3.6

2.7

6.2

9.3

11.7

7.6

4.4

3.9

3.3

100.0

106.8

113

2.1

71

3 6

3 2

11.2

1 3

3 8

13.6

6.6

9.9

125

8.2

4.7

4.2

3.6

106.8

How To Read This Table: 2.2°/0 of all managers and management support jobs are provided by natural resource businesses (top table). 5.2°/0 of all jobs in Natural Resource businesses

go to managers and management support (bottom table).

NOTE: Employment displayed IS for wage and salary jobs adjusted for the self-employed, The 16 occupation categories listed here accord with the 11 listed in table 10-2, except that certain occupations are

subdivided for a more complete listing of occupation categories (e.g., “professional specialty” is subdivided into “technical professionals, “ “education & health professionals, ” and “other” (mostly

law and science). self-employed persons are accounted for through data provided by the Bureau of Labor Statistics. See the appendix for a key to the occupations classification scheme. Numbers

may not add due to rounding,

SOURCE: Office of Technology Assessment, from 1984 Industry by Occupation Employment Matrix, developed by the U.S. Department of Labor, Bureau of Labor Statistics, Office of Economic Growth and

Employment Projections,
348

Table 10-5.—1984 Wage and Salary Employment Generated From 1984 Demand for Natural Resources,

Construction, Manufactured Products, and Services

Percent of 1984 jobs resulting from 1984 demand for:

1984 jobs Natural resources

Sector (percent) and construction Manufacturing Services

Natural Resources and Construction:

Natural Resources . . . . . . . . . . 3.5% 12.8% 6.6% 1 .2%

Construction . . . . . . . . . . . . . . . 4.5 28.6 2.7 1.7

Subtotal . . . . . . . . . . . . . . . . . 7.9 41.4 9.4 2.9

Manufacturing:

Low Wage Manufacturing . . . . 4.6 4.5 15.8 1.0

Medium Wage

Manufacturing . . . . . . . . . . . . 9.6 13.1 26.1 3.8

High Wage Manufacturing . . . 5.9 6.1 18.9 1.7

Subtotal . . . . . . . . . . . . . . . . . 20.0 23.7 60.8 6.5

Services:

Transportation & Trade . . . . . . 26.3 19.8 18.0 29.9

Transactional Activities . . . . . . 13.0 12.2 9.2 14.3

Personal Services . . . . . . . . . . . 5.5 1.6 7.4

Social Services . . . . . . . . . . . . . 27.2 1.1 39.0

Subtotal . . . . . . . . . . . . . . . . . . . 72.1 34.9 29.8 90.6

Total (percent) . . . . . . . . . . . . 100.0 100.0 100.0 100.0

Total (millions of jobs). . . . . 96.9 9.2 21.2 66.6

How To Read This Table: In 1984, demand for natural resource and construction products, indirectly and directly, generated

9.2 million jobs, 41.4 percent of which were in the Natural Resource sector, 23.7 percent were manufacturing jobs, and 34.9

percent were service sector jobs.

SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” historical diskettes, various tables; and “1980 Input/Output Tables, unpublished; U.S. Department of Labor, Bureau of Labor Statistics, “1984 Occupation by Industry Matrix,” unpublished; and 1984 trade

estimates, rebased from $1977 to $1980, unpublished

responsible for 1 out of 11 service jobs. Of the service jobs created indirectly, 72 percent appeared in

three industries: wholesale & retail trade, business

services, and transportation & warehousing.5 Purchases of manufactured goods were responsible for

nearly one-quarter of all transportation and warehousing workers, 23 percent of all business service

jobs, and 16 percent of all wholesale and retail

employees in 1984. Although a strong link exits between the demand for manufacturing goods and

service sector jobs, the natural resources & construction sector contributes proportionately more to service sector employment than does manufacturing.

5 This analysis does not attempt to factor in the indirect effect Of manufacturing workers spending their wages on service products like travel,

and on the service jobs that might be produced in the process. Rather,

this analysis merely looks at the indirect effect caused by manufacturing businesses purchasing service inputs for their production recipes.

For further analysis on the connections between manufacturing and

business services see Bobbie H. McCrackin, ‘{Why Are Business and

Professional Services Growing So Rapidly?” Economic Review, Federal

Reserve Bank of Atlanta, August 1985; and John Tschetter, op. cit., footnote 2.

Of the 86 percent of service jobs created directly

through demand for service products, nearly 90 percent appear in six industries: wholesale& retail trade

(28 percent), government (25 percent), health, education, & social services (17 percent), business services (9 percent), and eating&drinking places (9 percent). Demand for service products indirectly created

about the same number of jobs in the manufacturing sector as the number of service sector jobs created by demand for manufactured goods, albeit at

a proportionately much lower rate.

Some manufacturers depend heavily on demand

from service industries. Aircraft manufacturers, for

example, sell primarily to airlines. Over half of all

the jobs in the furniture& fixtures (non-household)

industry were generated through demand for service products, presumably an indirect result of furnishing service industry office buildings. A similar

situation held for 46 percent of printing & publishing jobs, 39 percent of the service industry machine

employees, and 34 percent of the scientific and controlling instruments workers.
349

Closing the Circle: Converting Skills

to Amenity

Using methods similar to those employed in chapter 4 to convert value-added by production sectors

into categories of amenity, the jobs and occupations

needed to provide the amenities can also be calculated. These estimates, shown in table 10-6, complete the circuit outlined in chapter 1. They trace

value from the labor offered by households to the

amenities received for their skills.

The table is an interesting measure of the distance

the economy has moved from subsistence. A table

computed for a developing economy (or indeed the

American economy of 1874) would show most jobs

involving farming or manual labor used to provide

basic food and housing. In 1984, however, less than

one-third of all American workers were directly or

indirectly involved in the provision of the Food and

Housing amenities. Only about 11 percent of these

workers were farmers or other laborers. Most were

managers, professionals, technicians, service workers, or sales workers.

Health, Education, and the Government employ

disproportionately large numbers of professionals.

The U.S. Department of Defense is responsible for

about 7.2 percent of all jobs in the economy, but

one-third of these jobs are categorized as managers

and professionals.

Managers and administrators account for about 10

percent of all jobs in most amenity categories, and

administrative support occupations (such as clerks

and secretaries) provide about one-sixth of the jobs

needed. Not surprisingly, most sales employees work

to provide Food (restaurant and grocery sales), Housing (real estate), Transportation (travel), and Clothing and Personal Care (clothing sales). Over one-third

of all manual jobs, including precision craft jobs, are

involved in the production of Food and Housing.

TRENDS IN NET JOB GENERATION AND LOSS

The data just introduced will be used to explore

the forces driving changes in U.S. job creation during the last decade. Before proceeding, it is worth

reviewing the nature of these changes in greater

detail:

● A steady 30-year decline in the manufacturing

sectors’ share of employment has been almost

exactly offset by increases in Transactional

Activities (see figure 10-1a). Taken together, Low

Figure 10-la. -Manufacturing and

Transactional Activities Jobs as a

Percent of All Jobs

Percent of all jobs

25-

20-

15-

l 0 -

-----

--------- ------

------------- -------

5 -“

-----------

0~fql:uuttv:!( rr:rrt[;vrvl~v ‘ ~

1950 1956 1962 1968 1974 1980 1986

— Manufacturing ‘ --- Transactional

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” historical diskettes, table 6.10.

and High Wage Manufacturing lost more than

one million full-time jobs between 1978 and

1986 (see figure 10-lb). Manufacturing was the

only sector to lose jobs over this time period.

● Between 1950 and 1975, the share of employment lost by Natural Resource businesses (primarily farming) was almost exactly off-set by the

increased share of Social Services (dominated

by education, medicine, and government). Both

Figure 10-lb.-Low Wage, Medium Wage,

and High Wage Manufacturing Job

as a Percent of All Jobs

15-

l 0 -

- -------------

----------------- ------ ----------

------

5 -

0 !llll l: llll l: l ll l~nll:,lTT1!uull I

195 0 195 6 1962 1968 197 4 198 0 198 6

— Low Wage Manuf .-

--- Medium Wage Manu f

— High Wage Manuf .

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” historical diskettes, table 6.10.
Table 10-6.–Jobs Required To Supply Different Kinds of Amenity in 1984

Personal

Clothing and Business and Recreation and Government Federal Millions

Food Housing Transportation Health Personal Care Education Communication Leisure n.e. c. Defense Exports Total of jobs

Percent of jobs in each occupation category, by amenity network:

Managers and Management Support - - 14.5% 15.1 %

Technical Professionals 9.6 13.9

Education and Health Professionals” 1.5 1.1

Other Professional s 7.1 7.3

Technicians 6.8 9.4

Sales Workers 23.8 17.0

Other Customer Contact . . . . . . . .. . . . . . 7.7 10.2

Information Distribution 16,1 17.4

Data-Entry, Manipulation, and Processing 10.3 12.3

Food and Beverage Preparers ., 56.2 4.8

Other Service Workers. 6.1 188

Precision, Production, Craft. and Repair 13.4 22.9

Machine Operators, Assemblers, and

Inspectors 13.4 17.1

Transportation and “Material Moving . . . . . . . . . . 18.6 17.8

Handlers, Equipment Cleaners, and

Helpers 17.4 22.2

Farming, Forestry, and Fishing . . . . . . . . . 43.7 15.6

Total (percent ) 16.3 14.8

Percent of jobs in each amenity category, by occupation:

Managers and Management Support. 9.4% 10.8%

Technical Professionals 1.2 1,9

Education and Health Professionals ., 0.6 0.5

Other Professionals 1.4 1.7

Technicians . . . . . . . . . 1.3 1.9

Sales Workers 5.2 12.0

Other Customer Contact 0.6 0.8

Information Distribution . . . . . . . . 3.5 4.3

Data-Entry, Manipulation, and Processing 8.0 10.6

Food and Beverage Preparers 21.4 2.0

Other Service Workers. 3.5 11.8

Precision, Production, Craft, and Repair” 9.6 18.1

Machine Operators, Assemblers, and

Inspectors, 6.3 8.9

Transportation and Material Moving 5.0 5.3

Handlers, Equipment Cleaners, and

Helpers 4.1 5.9

Farming, Forest, and Fishing . . . . . . . . 8.9 3.5

Total (percent) 100.0 100.0

Millions of jobs 17.5 15.8

8.3%

8.0

1.1

4.0

4.9

12.7

6.7

9.5

7.0

2.7

3.0

11 1

10.0

134

10.4

1.7

7.6

11 .5%

2.1

1.0

1.8

1.9

17.6

1,0

4.5

11,8

2.2

3 6

17.1

10.1

7,7

5.3

0.7

100.0

8.1

12.1 %

9.1

30.9

23.9

26.0

6.3

18.3

9.3

15.2

10.2

22.2

7.3

6.2

7.3

7.1

4.7

13.0

9.8%

1.4

15.8

6.1

6.0

5.1

1.7

2.6

14.8

4.9

15.9

6.6

3.6

2.5

2.1

1.2

100.0

13,9

6.6%

4.5

0.7

3.5

3.4

13.0

6.4

8.9

5.3

4.3

4.8

7.2

16,7

6.7

8.3

1.9

7.0

9.9%

1.3

0.6

1.7

1,5

19.4

1.1

4.6

9.6

3.9

6.4

12.1

18.2

4.2

4.7

0.9

100.0

7.5

7.9%

9.5

27.0

15.0

12.3

2.0

7.5

5.4

10.5

3.0

13.4

6.2

3.1

6.8

6.0

4.3

8.6

9.7%

2.2

21.0

5.8

4.3

2.4

1.0

2.2

15.6

2.2

14.5

8.5

2.8

3.5

2.7

1.6

100.0

9.2

8.8%

6 2

1.2

5.9

5.2

4.7

19.4

7.7

12,5

2.2

3.5

3.9

2.8

2.3

2.8

0.9

5.5

7.1%

2.3

1.4

3.6

2.9

9.0

4.2

5.1

29.3

2.5

6.0

8.4

4,0

1.8

2.0

0.5

100.0

5.8

7.8%

6.9

7,3

11.9

9.2

8.8

9.5

7.8

7.2

7.6

10.5

6.8

7.6

7.1

6.6

7.2

8.0

10.3%

1.7

6.1

5.0

3.4

11.6

1.4

3.5

11.4

5.9

12.3

10.0

7.2

3.9

3.2

3.0

100.0

8.5

5.0%

5.7

12.6

7.4

6.2

1.9

4.7

3.7

6.0

2.8

6.6

4.8

2.7

4.8

47

2.3

5.1

10.3%

2.2

16.5

4,8

3.6

3.9

1.1

2.6

15.1

3.4

12.0

11.0

4.1

4.1

3.6

1.5

100.0

5.4

7.1%

14.1

16,1

9.9

9.5

2.6

5.0

5.9

7.9

3.7

8.4

6.9

6.8

6.1

5.7

2.5

7.2

10.4%

3.9

15.0

4.6

4.0

3.8

0.8

2.9

140

3.2

10.9

11.3

7.3

3.7

3.1

1.1

100.00

7.7

6.8%

12.5

0.4

4.1

6.9

7.2

4.6

8.3

5.7

25

2.8

9.4

13.6

9.2

8.8

15.4

7.0

0.3%

3.6

0.4

2.0

3.0

0.8

0.8

4.3

10.4

2.3

3.7

15.7

14.9

5.8

4.9

7.3

100.0

7.5

100.0%

100.0

100,0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

10.6

2.0

6.7

3.3

3.0

10.5

1.2

3.6

12.7

6.2

9.3

11 7

7.6

4.4

3.9

3.3

100.0

106.8

11.3

2.1

7.1

3.6

3.2

11,2

1.3

3.8

136

6.6

9.9

12.5

8.2

4.7

4.2

3.6

106.8

NOTE: Employment displayed is for wage and salary jobs adjusted for the self-employed. The 16 occupation categories listed here accord with the 11 listed in table 10-2. except that certain occupations are

subdivided for a more complete listing of occupation categories (e.g., “professional specialty” is subdivided into “technical professionals, “ “education & health professionals, ” and “other” (mostly

law and science). Self-employed persons are accounted for through data provided by the Bureau of Labor Statistics. See the appendix for a key to the occupations classification scheme. Numbers

may not add due to rounding.

SOURCE: Office of Technology Assessment, from 1964 Industry by Occupation Employment Matrix, developed by the U.S. Department of Labor, Bureau of Labor Statistics, Office of Economic Growth and

Employment Projections and U.S. Department of Commerce, Bureau of Economic Analysis, "1980 Input-Output Tables,” unpublished.
351

sectors have held a relatively constant share of

all jobs since 1975 (see figure 10-1c).

● The share of employment held by Construction,

Transportation & Trade, and Personal Services

has not changed significantly since 1950 (see

figure 10-l d). The steady share of jobs held by

the Transportation & Trade sector resulted from

gains in wholesale and retail trade, which were

offset by losses in transportation. Construction

employment is highly cyclical.

● Government employment (including defense)

peaked in 1970. Federal civilian employment

is now below the levels of 1950. State and local governments gained share through 1980.6

Accounting for Changes in Job Share

Changes in each business’ share of U.S. employment are driven by the forces described in earlier

chapters: domestic demand, production recipes, and

trade patterns. The effect of these forces on the

changing value-added contributions of each major

business sector was traced in chapter 5. Clearly, any

factor that changes the contribution a sector makes

to the gross national product (GNP) affects the number of jobs contributed by that sector, depending on

the productivity with which the sector uses labor.

These effects are examined separately in table 10-

7. Some highlights:

● Comparatively stable full-time-equivalent employment in Natural Resources during 1972-84

GUS, Department of Comnlerce, Bureau of Economic Analysis, “National Income and Product Accounts,” historical diskettes, table 6.7b.

Figure 10-1c.-Natural Resource and

Social Service Jobs as a percent Of

All Jobs

195 0 195 6 1962 196 8 1974 198 0 198 6

— Natural Resourc e ‘

- - Social Services

SOURCE: U S. Department of Commerce, Bureau of Economic Analysis, “Nat! onal Income and Product Accounts, ” historical diskettes, table 6.10,

●

●

●

resulted from declining measured productivity

(requiring more jobs for a given level of output),

which offset the effects of declining domestic

demand.

Manufacturing’s share of all employment fell

sharply as a result of three effects: rising productivity, shrinking domestic markets for High

Wage Manufacturing enterprises, and increasingly unfavorable terms of trade,

Transportation and wholesale & retail employment grew both because of increased domestic and international demand and changes in

production recipes.

Explosive growth in transactional employment

occurred because of comparatively slow productivity growth and rapid growth in demand for

Transactional activities both as final and intermediate demand.

The major difference between table 10-7 and table 5-1 of chapter 5 is the addition of labor productivity. Labor productivity, or output per job in an industry, depends on the level of technology utilized,

the quality of management, the capital invested per

worker, and the skills, experience, and esprit of the

staff. All of these factors are in flux.

Table 10-8 summarizes recent trends in productivity, as measured by output per hour worked. Output per hour in 1984 was comparatively high for Natural Resource and Medium and High Wage Manufacturing enterprises, and comparatively low for the

poorly capitalized Personal and Social Services—

this despite the fact that most workers in Social Services are relatively well educated.

Figure 10-1d.-Construction, Personal

Service, and Transportation & Trade Jobs

as a Percent of All Jobs

Percent of all jobs

25-

20-

15-

l 0 -

5 -

- -.-_ ------ >.-. F.. . --- . -----r-.. --- ------- d

, 1 1 1 I 0 T 1 1 1 I 1 I I 1 1 I , 1 I 1 1 r I 1 1 I , ! 1 I , I 1 ! 1 , ,

1950 1956 1962 1968 1974 198 0 198 6

-

--- Constructio n

— Trans. & Trad e

Personal Service s

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” historical diskettes, table 6.10.
Table 10-7.—Changes in Industry Share of Full-Time Equivalent Employees (FTEs) from 1972 to 1984 for Various Factors

(in percent; numbers will not necessarily add due to rounding and interactive effects)

Natural Low Wage Medium Wage High Wage Transportation Transactional Personal Social Real Estate

Resources Construction Manufacturing Manufacturing Manufacturing and Trade Activities Services Servicesa and Rentalb

Job shift share . . . . . . . . . . . 0.0 –0.5 –1.9 –1.3 –1.7 1.5 3.3 0.1 0.3 0.3

Productivity c . . . . . . . . . . . . . 0.5 0.2 –0.8 –1.4 –0.5 –0.9 1.3 0.4 1.0 0.1

Production recipe and

demand. . . . . . . . . . . . . . . . –0.6 –0.8 –1.0 0.1 –1.1 2.3 2.0 –0.3 –0.8 0.1

Production recipe . . . . . –0.1 –0.0 –0.3 –0.2 –0.3 1.0 –0.2 – 1.2 – 0.1

Final demand. . . . . . . . . –0.5 –0.7 –0.6 0.2 –0.8 1.0 –0.1 0.5 0.1

Domestic demand. . . –0.5 –0.8 –0.0 0.4 –0.4 0.3 0.8 –0.1 0.2 0.1

Trade . . . . . . . . . . . . . . –0.0 0.1 –0.6 –0.3 –0.3 0.5 0.2 0.0 0.4 0.0

Interactive 0.1 0.0 –0.1 0.0 –0.1 0.1 0.0 0.0 0.1 0.1

How To Read This Table: Between 1972 and 1964, employees of businesses in the Transactional Activities sector increased their share of the U.S. work force by 3.3%. Of this

increase, 1.3°/0 can be attributed to changes in this sector’s productivity; 1.0% to changes in intermediate demand for Transactional Activities (“production recipe”); and 1.OO/O

to changes in final demand for Transactional Activities (0.8% was domestic demand).

a

lncludes Federal Defense.

bReal Estate and Rental has been broken out of Transactional Activities due to the difficulty in estimating total output in 1984.

CEstimated using 1984 and 1972 Output per FTE.

NOTE: Job Shift Share = Productivity + Production Recipe and Demand + Interactive

Final Demand = Domestic Demand + Trade

Numbers may not add due to rounding.

SOURCE: Office of Technology Assessment, 1988.
353

Table 10-8.—Productivity and Productivity Growth

(measured in 1977 dollars)

Output per hour Annual growth rates in productivity

in 1984 (in percent)

($1977) 1958-1984 1958-1973 1973-1984

Natural Resources. . . . . . . . . . . . . . . . . . . . . . . . $31.50 3.11% 5.47% 0.62%

Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.88 –0.74 0.74 – 1.32

Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.24 2.02 2.61 1.32

Low Wage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.52 2.26 2.53 2.16

Medium Wage . . . . . . . . . . . . . . . . . . . . . . . . . 32.72 2.03 2.15 1.90

High Wage . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48.19 1.97 3.03 0.64

Transportation and Trade . . . . . . . . . . . . . . . . . . 14.91 1.71 2.79 0.54

Transactional Activities . . . . . . . . . . . . . . . . . . . 25.65 1.04 1.38 0.58

Personal Services . . . . . . . . . . . . . . . . . . . . . . . . 10.40 1.83 2.76 0.22

Social Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.20 0.88 1.08 0.35

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.07 1.58 2.67 0.41

NOTE: Growth rates represent regressions on the log of output per hour.

SOURCE: U.S. Department of Labor, Bureau of Labor Statistics, “Time Series Data Base for lnPut-OutPut Industries," June 1985, unpublished.

Low rates of productivity growth between 1973

and 1984 have been the source of considerable anguish.7 There are no completely satisfactory explanations, though a large variety have been offered:

a surge of less experienced workers from the baby

boom, a decrease in R&D expenditures, dramatic

shifts in oil prices that led to greater inputs of both

capital and labor, and new government regulations

that increased labor without increasing sales.8 There

is, of course, always the possibility that measurement

techniques are inadequate.9

There is reason to believe that traditional patterns

of productivity growth may be changing. Information technology maybe able to produce productivity

gains in areas never before expected. While most

national productivity growth once depended on manufacturing, it is possible that productivity growth in

7 Edward F. Denisen, Accounting for Slower Productivity Growth

(Washington, DC: The Brookings lnstitution, 1974] and Martin N.Bail~

“WhatH asHappened to Productivity Growth?’’Science, vol. 234,0ctober 1986, pp. 443-450.

Ssee Edward F. Denisen, “The Interruption of Productivity Growth

in the United States,” The Economic Journal, vol. 93, March 1983; Herbert Giersch and Frank Welter, “Towards an Explanation of the Productivity Slowdown: An Acceleration-Deceleration Hypothesis,” The Economic Journal, vol. 93, March 1983; Wayne B. Gray, “The Impact of

OSHA and EPA Regulation on Productivity,” working paper, National

Bureau of Economic Research, Cambridge, MA, July 1984; Assar Lindbeck, “The Recent Slowdown of Productivity Growth,” The Economic

Journal, vol. 93, March 1983; Zvi Griliches, “R&D and the Productivity

Slowdown,” The American Economic Review, vol. 70, No. 2, May 1980;

Martin N. Baily and Alok K. Chakrabarti, “Innovation and Productivity

in U.S. Industry,” Brookings Papers on Economic Activity, No. 2, 1985.

gsee Michael R. Darby, “The U.S. Productivity Slowdown: A Case of

Statistical Myopia,” The American Economic Review, vol. 74, No. 3,

June 1984.

crucial information industries may make major contributions to national productivity growth during the

next two decades. All of this is obviously speculative since table 10-8 shows no significant recent

growth in the productivity of service activities. The

discussions of chapter 6, however, clearly showed

the potential for real productivity growth.

There are also no acceptable techniques for measuring the productivity with which a complex production network delivers concrete services like

health or education to final consumers. In periods

of transformation, one of the most important products generated by businesses is learning and experience with new production paradigms. None of this

learning can be gauged using short-term measures

of output. The advantage of new and more flexible

systems of production can only be measured by

examining how they operate in a fast-moving, competitive environment over a significant period of

time. Indeed, in order to achieve system-wide

productivity improvements it might be necessary for

some components of the network to experience

productivity declines. The increased use of less-thantruckload delivery to keep inventories at a minimum

is such an example. The discussions in chapter 6

provided some perspective on this issue for individual sectors.

Some evidence of the potential for changes in

productivity growth can be found in statistics tracing new patterns of capital investment following the

1982 recession (see table 10-9). Capital investment

in areas such as retail services averages less than
354

Table 10-9.–Capital Invested Per Person Engaged in Industry, 1982 and 1985

(all figures in thousands of 1982 dollars per person)

Total capital stock

Gross stock Net stock

per person per person

1982 1985 1982 1985

Natural Resourcesa. ... , . . . . . . . . . . . . . $305 $345 $172 $187

Construction . . . . . . . . . . . . . . . . . . . . ., .

Manufacturing . . . . . . . . . . . . . . . . . . . . . .

Transportation and Trade . . . . . . . . . . . .

Wholesale trade . . . . . . . . . . . . . . . . . .

Retail trade . . . . . . . . . . . . . . . . . . . . . .

Transportation . . . . . . . . . . . . . . . . . . . .

Transactional Activities

Finance, insurance,

and real estateb

. . . . . . . . . . . . . . .

Banking . . . . . . . . . . . . . . . . . . . . . . .

Credit . . . . . . . . . . . . . . . . . . . . . . . . .

Security . . . . . . . . . . . . . . . . . . . . . . .

Insurance carriers . . . . . . . . . . . . . . .

Business services. . . . . . . . . . . . . . . . .

Legal services . . . . . . . . . . . . . . . . . . . .

Personal Services

Auto repair services and garages . . .

Hotels and other lodging . . . . . . . . . . .

Motion pictures . . . . . . . . . . . . . . . . . . .

Amusements and recreation . . . . . . . .

Social Services

Health . . . . . . . . . . . . . . . . . . . . . . . . . . .

Education . . . . . . . . . . . . . . . . . . . . . . . .

23

71

47

34

22

186

151

63

132

11

16

31

9

81

56

37

50

11

2

17

73

46

41

23

172

161

80

137

11

21

29

10

84

57

37

49

12

2

12

40

26

20

13

93

92

38

80

7

10

18

5

45

32

20

26

7

1

9

39

98

48

85

7

13

17

6

49

34

20

26

8

1

How To Read This Table: ln 1982, net holdings of capital equipment in the natural resource

industry were valued at $172,000 per person employed in that industry. By 1985, this value had

grown (in real dollars) to $187,000.

a

lncludes agriculture, forestry, fisheries; mining; and electric, gas, and sanitary services.

bAlso Includes Insurance agents and brokers, and services; real estate; and holding and other investment companies.

NOTE: Net capital excludes all equipment that has bean fully depreciated using standard techniques. “Persons” refers to FullTime Equivalent Employees plus self-employed persons In that industry, as defined In the National Income and Product

Accounts, table 6.10.

SOURCE: J.C. Musgrove, “Fixed Reproducible Tangible Wealth In the United States, 1982-1985,” p. 37; U.S. Department of

Commerce, Bureau of Economic Analysis, Survey of Current Business, August 1988; and “National Income and Product

Accounts,” historical diskettes.

half of that in manufacturing. Still, between 1982 and are beginning to result in real productivity gains. ”

1985, capital investment per worker grew more rap- Similarly, grocery stores spent nearly as much on

idly in many service businesses—in areas as diverse computers and related peripheral equipment in 1982

as wholesale trade, health care, automobile repair, as the entire motor vehicle industry. ’2 Education was

law, and insurance—than in manufacturing.10 Insur- an exception to the trend; as table 10-9 shows, this

ance companies, hospitals, and banks are now mak- industry remained close to the bottom of the list.

ing heavy investments in information technologies

and other equipment; these kinds of expenditures

llJarnes Brian Quinn and Christopher E. Gagon, “Will Services FoIlow Manufacturing Into Decline?” Harvard Business Review, vol. 64,

IOSW James Brian Quinn, “The Impacts of Technology in the Serv- No. 6, November-December 1986, p, 99.

ices Sector,” in Bruce R. Guile and Harvey Brooks (eds.), Technology IZU.S, f)epartnlent of Commerce, Bureau of the Census, “1982 Enand Globa/ Industry(W ashington, DC: National Academy Press, 1987), terprise Statistics: General Report on Industrial Organization,” October

for a more detailed discussion of capital investments by services. 1986, table 8, p. 292,
355

TRENDS IN OCCUPATIONS

The discussion thus far has followed changes in

the total employment of different production sectors.

Changes in the organization of work within these

sectors have been much greater than shifts of employment between sectors. Again, it is useful to examine trends in job creation by occupation before

attempting an explanation.

Figure 10-2 traces changes in occupations during

the past century. Table 10-10 provides greater detail for the period between 1972 and 1987. There

has been a consistent increase in the number of people who spend most of their day in front of office

equipment or computer terminals, and a sharp decline in demand for people living by the strength

of their backs or the talents of their hands. In particular:

● Farm workers have declined from about onethird of the work force at the turn of the cen-

●

●

●

tury to less than 3 percent of the total.

Operatives and craft workers increased from

about 20 percent of all workers in 1900 to more

than 35 percent at their peak in the 1950s, but

their numbers have since fallen.

There was consistent growth in clerical work

between 1910 and 1980. This trend has slowed

only in the last few years. The number of secretaries actually declined during the 1982/83

recession; growth since then has been moderate.13

Since 1972, most job growth has been in either

“administrators, executives, professionals” and

their support staffs, or in sales and “other service workers”—a category that includes food handlers. Most manual jobs lost share.

13 H. Hartmann, R.E. Kraut, and L.A. Tilly, eds., Computer Chips and

Paper Clips (Washington, DC: National Academy Press, 1986).

Figure 10-2.—Major Occupational Groups of the U.S. Civilian Labor Force, 1900-80

Percent of alI jobs

1 00% T

I

7 5 %

i

5 0 %

I

I

25%

0%

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . .

1900 1910 192 0 193 0 194 0 195 0 196 0 197 0 198 0

= Salesworker s

= Farmworker s

worker s

NOTE: Figures are approximate, due to changing classification systems. See sources for details,

SOURCES: U.S. Department of Commerce, Bureau of the Census, Historical Statistics of the United States, Part 1 (Washington, DC: US. Government Printing Office, 1975), Series D, p. 139; and U.S. Bureau of the Census, Statistical Abstract of United States, 1982-83 (103rd cd.), Washington, DC, 1982, table 848.
356

Table 10-10.–Job Growth by Occupation: 1972 to 1987

Percent share of

November 1986-

1972-80 1980-86 November 1987

Occupation category 1972 jobs job growth job growth 1986 jobs job growth

Managerial and professional specialty . . . . 19.6 34.6 43.9 24.2 38.5

Executive, administrative, and

managerial . . . . . . . . . . . . . . . . . . . . . . . . 8.9 17.1 23.6 11.5 19.5

Professional specialty . . . . . . . . . . . . . . . . 10.8 17.5 20.3 12.7 17.0

Technical, sales, and administrative

support . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.8 39.1 39.1 31.3 17.7

Technicians and related support . . . . . . . 2.3 5.3 5.1 3.1 – 1.0

Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4 13.3 23.2 12.1 –1 .4

Administrative support, including

clerical . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.0 20.5 10.8 16.2 20.1

Service occupations . . . . . . . . . . . . . . . . . . . 13.2 13.1 15.6 13.4 14.5

Private household . . . . . . . . . . . . . . . . . . . 1.8 –2.2 –0.8 0.9 1.2

Protective service. . . . . . . . . . . . . . . . . . . . 1.5 1.7 2.9 1.6 6.2

Other service. . . . . . . . . . . . . . . . . . . . . . . . 10.0 13.6 13.6 10.9 7.1

Precision production, craft, and repair. . . . 12.6 11.2 11.0 12.2 4.3

Operators, fabricators, and laborers . . . . . . 21.2 3.7 –8.4 15.7 28.1

Machine operators, assemblers, and

inspectors . . . . . . . . . . . . . . . . . . . . . . . . 10.5 1.4 –9.0 7.2 9.9

Transportation and material moving, . . . 5.0 2.0 0.7 4.2 5.9

Handlers, equipment cleaners, helpers

and laborers . . . . . . . . . . . . . . . . . . . . . . 5.7 –0.3 –0.1 4.3 12.3

Farming, forestry, and fishing . . . . . . . . . . . 4.7 –1.2 –1.8 3.1 –1.0

Total employed. . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0 100.0

How to Read this Table: ln 1972,19.6 percent of all jobs were in the category “managerial and professional specialty," but

34.6 percent of job growth between 1972 and 1980 (and 43.9 percent of such growth between 1980 and 1986) occurred in this

occupation category,

NOTE: See the appendix for a key to the occupations classification scheme. Numbers may not add due to rounding.

SOURCE: U.S. Department of Labor, Bureau of Labor Statistics, Employment and Earnings, for data since 1983. Bureau of Labor Statistics conversions used for data

prior to 1983, in order to make it consistent with Occupational Employment Survey classifications shown.

The rapid growth of occupations classified as “executive, administrative, and managerial” shows the

difficulty of interpreting the data. While only about

9 percent of all jobs in 1972 were placed in this category, it was responsible for more than 20 percent

of all job growth between 1972 and 1986, and almost

one-quarter of all such growth since 1980. Some of

these new “executive” jobs result from changes in

the scale and scope of enterprises, some from new

technologies that affect occupational structure, some

from a shift to production systems built around

smaller work teams that require more managers, and

some from a shift of business activity to sectors that

employ more managers (e.g., fast food franchises and

video rental). Some of the growth may also result

from upgrading of clerical jobs to quasi-professional

status, or simply from inflation of job titles. The

educational level of these new managers also provides some clues. In 1980, 25 percent of all managers

aged 25-34 had no more than a high school degree,

25 percent had one to three years of college, and

only one in five had more than four years of college.14

Changes in employment by occupation and industry necessarily deal with national averages. But these

numbers shed little light on the actual problems

faced by the millions of workers forced to adjust to

a new occupation or industry. Some of the adjustment, of course, can be accommodated by natural

attrition, since the number of job openings due to

death, retirement, or other reasons is several times

greater than the number of openings created by employment growth15—while 9 million workers left the

“S.E. Berryman, “Shadows in the Wings: The Next Educational Reform,” Occasional Paper No. 1, National Center on Education and Employment, Teachers College, Columbia University, New York, NY, Mar.

13, 1987.

15 U.S. Department of Labor, Bureau of Labor Statistics, Occupational

Projections and Training Data, Bulletin 2202, Washington, DC, 1982,

p. 9.
357

work force in 1985, 11 million new jobs were created, meaning that two million new jobs were the

result of economic growth. Nevertheless, within this

economy-wide picture of job replacement and creation, millions of people must face the difficulties of

looking for work in an unfamiliar field.

Statistics showing the number of persons forced

to change jobs during the past few years leave little

room for doubt about changing demands for different occupations. Manufacturing workers with three

or more years on their jobs were more likely to lose

their jobs than people with similar job tenure employed in other businesses.16 Of all U.S. manufacturing employees, 15 percent lost their jobs between

1979 and 1983, and roughly 14 percent between

1981 and 1985.17 Job loss from 1981 to 1985 was

particularly great among machine operators, assemblers, and inspectors, occupations that involved the

physical work of creating and assembling durable

goods; this group comprised 7.2 percent of the 1986

labor force but 23 percent of all displaced workers.

During 1987, absolute manufacturing employment

increased somewhat while growth of sales jobs

slowed.

Declining demand for manufacturing occupations

meant that only 66 percent of manufacturing workers displaced between 1981 and 1985 were reemployed by January 1986. 18 Displaced professional

and technical personnel were most likely to be re16 Paul O. Flaim and Ellen Seghal, “Displaced Workers of 1979-83:

How Have They Fared?” Monthly Labor Review, vol. 108, No. 6, June

1985. The U.S. Bureau of Labor Statistics has recently published data

on this subject from 1981 to 1985; see Francis W. Horvath, “The Pulse

of Economic Change: Displaced Workers of 1981 -85,” Monthly Labor

Review, vol. 110, No. 6, June 1987. pp. 3-12.

See also U.S. Congress, Office of Technology Assessment, Teclmology and Structural Unemployment: Reemploying Displamd Adults, OTAITE-250 (Washington, DC: U.S. Government Printing Office, February

1986); Robert L. Crosslin, James S. Hanna, and David W. Stevens, 1’ldentification of Dislocated Workers Utilizing Unemployment Insurance

Administration Data: Results of a Five State Analysis,” National Commission for Employment Policy, RR-84-03, Washington, DC, 1984;

Jeanne Prail Grodus, Paul Jarley, and Louis A. Ferman. P/ant Closings

and Economic Diskwation (Kalamazoo, MI: W.E. Upjohn Institute, 1981);

and Avery F. Gordon, Paul G. Schervish, and Barry Bluestone, “The

Unemployment and Reemployment Experience of Michigan Auto Workers,” Boston College, Social Welfare Research Institute, August, 1985.

ITJob IOSS is defined to mean a layoff from which the person was not

recalled or a loss resulting from a plant closing, an employer going out

of business, or “other reasons.” See Michael Podgursky, “Job Displacement and Labor Market Amusement: Evidence from the Displaced

Worker Survey,” Department of Economics, University of Massachusetts, Amherst, MA, Jan. 19, 1986.

18 F. Horvath, op. cit., footnote 16.

hired, although not necessarily in the same occupation. The shift from production to service occupations is apparent in patterns of displacement and

rehiring (see table 10-11). Slightly more than half

of service workers displaced had found work—

virtually all in the same occupation. Over half of all

machine operators, assemblers, and inspectors able

to find work after being displaced were reemployed

in service occupations. Similarly, 68 percent of displaced craftsmen were able to find new jobs but only

56 percent were working in their prior occupation.

On average, displaced workers in blue-collar occupations spend twice as long looking for new work

as white-collar professionals.19

Accounting for Occupational Changes

Most of the changes in occupation just described

are explained by shifts in broad occupational patterns; some changes, however, defy explanation from

this perspective, and must be addressed through an

analysis of the underlying factors. Building on table

10-7, table 10-12 attempts to disentangle the several

different effects. Changes in domestic demand, trade,

production recipes, and productivity effects fail to

explain most shifts in occupations. The bulk of the

changes result from shifting patterns of staffing within

each industry.

International trade and domestic demand have

had some effect on occupations. Between 1972 and

1984, trade increased the share of jobs held by

managers, professionals, sales workers, and service

workers, and reduced demand for production occupations (more detail on this is found in chs. 7 and

8). Changes in domestic demand have had a similar effect. Even without the effects of trade, new

patterns of consumer expenditures would have increased demand for managers, scientists, and clerical personnel, while reducing demand for precision

craft workers and farm, forestry, and fishery workers.

The major limitation of the the analysis shown in

table 10-12 is the assumption that productivity

changes affect demand for all occupations in an industry in the same proportion. It assumes, for example, that labor productivity changes in automobile production resulted from equal growth in the

productivity of the clerks, managers, and craft workers employed in that industry.

Igpaul o. Flairn and Ellen Seghal, op. cit., footnote 16.
358

Table 10-11.—Reemployment of Workers Displaced Between 1981 and 1985

Percent employed

Percent Percent employed in in service

Occupation category reemployed the same occupation occupations

Executive, administrative and managerial . . . . . . . . . 72.1 43.0 0.2

Professional specialty . . . . . . . . . . . . . . . . . . . . . . . . . . 77.6 59,8 5.2

Technicians and related support . . . . . . . . . . . . . . . . . 76.4 30.1 6.7

Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65.1 45.3 6.2

Administrative support (including clerical) . . . . . . . . 67.7 44.9 7.6

Service occupations. . . . . . . . . . . . . . . . . . . . . . . . . . . . 53.5 52.2 52.2

Precision production, craft and repair . . . . . . . . . . . . 68.5 55.7 7.3

Machine operators, assemblers, and inspectors. . . . 41.0 36.6 18.4

Transportation and material moving . . . . . . . . . . . . . . 17.1 45.9 11.2

Handlers, equipment cleaners, helpers, and

laborers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68.6 26.7 10.7

Farming, forestry, and fishing . . . . . . . . . . . . . . . . . . . 72.5 n/a n/a

How To Read This Table: 72.1 percent of people displaced from executive, administrative, and management support occupations

between 1981 and 1985 were reemployed by 1986. 43% of all people displaced from these occupations were reemployed in

the same occupation. Only 0.2% were reemployed in service businesses.

SOURCE: Francis W. Horvath, “The Pulse of Economic Change: Displaced Workers

Table 10-13 provides some insight into patterns

of occupational productivity within business categories. Between 1983 and 1986, for example, the number of executives and managers grew faster than the

overall employment in every industry except wholesale trade, making it the fastest growing occupation

over this time period. Job growth for professional

specialists (engineers, scientists, teachers, doctors,

nurses, lawyers, etc.) nearly equalled U.S. average

job growth, but this occupation had disproportionately high gains in the agriculture, manufacturing,

and public utilities industries. The two slowest growing occupations over this time period were operators, assemblers & inspectors, and service workers

(food service employees, private household workers, and custodians). The rapid growth of transactional businesses, most notably in the other services and the FIRE (finance, insurance, and real estate)

industries, which had 7 percent annual growth in

demand for managers, has fueled total national job

growth in this occupation.

The last few years have also seen wide divergences

in hiring practices for administrative support and

clerical personnel. Manufacturing, mining, and transportation, as well as the finance, insurance, and real

of 1981 -85,” Monthly Labor Review vol. 110, No. 6, June 1987, pp. 3-12

estate industries, all added jobs in this occupation

category at a slower rate than average industry job

growth. In contrast, the professional service and

other service industries, including health and education, added clerical jobs more rapidly than jobs

in other areas. Professional service employers are

using clerical workers in quasi-professional jobs by

substituting computers for functions like routine underwriting, and are eliminating many routine data

entry functions in the process. Hospitals and other

professional health organizations are using increasing numbers of clerical employees to manage what

has become a complex, information-intensive enterprise. Management of health facilities has come to

be dominated by professional specialists, bringing

with them a growing demand for expertise in record keeping and billing as well as patient care.

These statistics describe massive changes in the

way the United States is using different skills to produce goods and services demanded by the American public. They have little explanatory power.

Understanding the changes requires a deeper comprehension of the way people are used in new production networks. This is the task of chapter 12.
Table 10-12.—Change in Occupational Job Share from 1972 to 1984 for Various Factors (in percent)

Handlers,

Executive, Administrative Precision Machine operators, equipment cleaners,

administrative, Professional Technicians and support (including Service production, assemblers, and Transportation and helpers, and Farming, forestry,

and managerial specialty related support Sales clerical) occupations craft and repair inspectors material moving laborers and fishing

Job Shift Share 2.1 19 0.7 1,8 –0.1 0.3 –0.2 –2.9 –0.8 –1.5 – 1,3

Productivity 0.2 0.5 01 –0.2 0.5 0.2 –o 3 –0.8 –o 1 –o. 1 02

Production

Recipe &

Demand 02 –0.2 –o o 0.9 0.5 0.2 –O 6 –0.6 01 –o 2 –0.3

Production

Recipe 0 1 –0. 3 –o o 0.5 0 1 –0. 0 –0.1 –0. 2 0 1 –o o –o 1

Final

Demand 0 1 0.2 0.0 0 3 0.4 0.2 –o 5 –0. 4 –0. 0 –o 2 –o 3

Domestic

Demand 0.1 0.1 0.0 0.2 0.3 0.1 –o 4 –0. 0 –0. 0 –o 1 –o 3

Trade 0.1 0.1 0.0 0.2 0.1 0.2 –o 1 –o 4 0.0 –0.1 –o o

Staffing

Patterns 1.7 1.6 06 1.1 – 1,1 –0.1 07 –1 4 –0.8 – 1.2 –1.1

How To Read This Table: Between 1972 and 1984, the share of all jobs classified as executive, administrative, and managerial increased by 2.1 percentage points. Of this change,

only 0.2 percentage points could be explained by changes in production or consumption recipes and –2 percentage points could be explained by changes in the productivity

of different business types. The bulk of the change (1 .79°/0) was attributable to changing staffing patterns.

NOTES: Job Shift Share = Productivity + Production Recipe and Demand + Staffing Patterns. Final Demand = Domestic Demand + Trade Numbers may not add due to rounding. See the appendix for a

key to the occupations classification scheme.

SOURCE. Office of Technology Assessment, 1988.
360
Chapter 11

Matching People to Jobs
CONTENTS

Page

Labor Supply: The Size and Composition of the U.S. Work Force . ............... 364

Changes in the Quality of Jobs Produced . . . . . . . . ........ . .................. 367

Technology and Skill . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. ., .. ... ... ... .. 368

Income and Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........... 372

Flexibility and Job Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........... 381

Job Satisfaction and Alienation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......... 389
Chapter 11

Matching People to Jobs

Few jobs will remain unaffected as structural

change in the U.S. economy reshapes demand for

skills, and as changes in demographics and education reshape supplies of skills and experience.

Managers, physicians, laborers, clerks, sales people,

and many others will find their jobs redefined. They

will face changes in their power to command wages,

in the stability of their positions, in the safety and

the stress of their work, and in the texture of their

daily working life. There will be new opportunities

for pride and enjoyment in the workplace, and new

opportunities for frustration and alienation.

Two things must happen to increase the fraction

of people holding jobs that pay well and are rewarding in other ways: first, people looking for work must

have the education and experience needed to take

such positions; and second, production networks

must change in ways that generate large numbers

of such positions. Both are necessary for constructive change, but neither is sufficient. Increased supplies of well qualified people do not guarantee that

the economy will generate good jobs. Technology

capable of generating interesting employment opportunities can also be used to exaggerate the differences between rewarding and unrewarding jobs.

Previous chapters demonstrated that increasing

demand for flexibility is a critical part of structural

change in a period when trade and deregulation

have heightened competitive challenges. This flexibility can only be achieved if management strategies are redefined to exploit the opportunities created by innovation. The point at issue is the way

business networks will achieve the needed flexibility. Will flexibility be gained through production systems designed under the assumption that most employees will have few skills and little personal interest

in the product or service delivered? Or will flexibility be achieved instead by building the capacity to

adapt quickly and effectively with individuals and

teams—creating value-added from the skill and commitment of all individuals involved?

It is simply too early to prove which of these strategies is more efficient with statistically convincing

data. There is every reason to believe, however, that

a production system based on skilled employees taking interest and pride in what they do is more likely

to prosper in a period of transformation and heavy

competition than one built on the presumption that

good ideas come only from an elite. The second alternative also carries high social costs. It is reasonable

to ask whether a democratic society can or will tolerate sharply growing disparity between elite and less

privileged workers. The evidence presented throughout this discussion suggests that there is nothing inevitable about growing inequality in wages or job

quality. Nor is there any guarantee that technology

will be used to decrease inequality.

Flexibility, of course, is important for employees

as well as for businesses. Working parents need flexibility to combine child raising with employment.

Students and the elderly often prefer flexible schedules. Ambitious employees may want the flexibility

to combine work with training and the freedom to

move within and among companies. The critical

question is whether strategies to achieve flexibility

can work to serve both employer and employee interests.

One obvious effect of new production systems is

their ability to affect the bargaining power of different groups. The pay commanded by different occupations is determined by a baffling mix of market

forces and social values. Changes in both factors

seem likely to reshape the links between pay and

skill during the next two decades. Paying the average employee in the “Security and Commodity

Broker” industry 3.8 times more than the average

employee in education may well be a rational allocation of national economic assets. It is also possible that the rules that led to this and other large inequalities in pay are based in part on factors that

could change as the economy is reshaped.

The factors shaping demand for work of different

kinds are complicated by the fact that work can be

an end in itself as well as a means to an end. Most

people do not simply work until the “marginal unpleasantness is not worth the marginal wage,"1 

nor

1 Tibor Scitovsky, The Joyless Economy (London, England: Oxford

University Press, 1976), p. 90.

363
364

do most see work as merely receiving payment for

an unenjoyable task. Pay cannot substitute for the

triumph an inventor senses when an idea clicks, the

delight a teacher takes on opening a mind to a new

world, the pride a craftsman takes in a well built

house, or the satisfaction a nurse or physician can

find in delivering a baby or saving a life. The extent to which society expects such experiences or

responsibilities to substitute for pay, of course, can

change, For example, women are less likely to accept non-cash rewards in lieu of wages for traditionally “female” tasks, such as nursing and elementary

school teaching, now that other opportunities are

opening for their skills.

Many of the forces driving inequality will weaken

over the next several decades, but they could well

be replaced by others. The gap separating male and

female wages, for example, has declined; this results

in part from the growing number of women needing incomes and a rapid decline of high-paid, traditionally male jobs.

It is likely that incomes will depend increasingly

on education and other formal credentials. This could

be true because formal training has practical value

in adding to a person’s productivity and because education serves as a kind of hazing process, allowing

those that emerge first priority in getting good jobs.

Credentials provide a manager with an easy tool for

selection when the characteristics needed are difficult to define with precision. As a result, credentials

may gain in value as more jobs fall into nontraditional categories.

Inequality in educational levels may lead increasingly to inequality in incomes. Most of the people

entering the work force during the next two decades

will be minorities and other groups that have often

been poorly served by the Nation’s educational system. Older workers displaced by new technology

may lack the basic literacy and mathematical skills

demanded by employers with expanding job opportunities.

The relative bargaining power of workers and

management can be affected by changes in production systems. When a premium is placed on adaptability, the premium paid for seniority in a narrow

task or for specialized skills must weaken. But people well adapted to the needs of a rapidly changing

economic environment have found it difficult to

translate their contribution to high wages because

they lack a monopoly on any particular skill. If nothing else, the task of rewarding individual contributions to a business becomes much less mechanical.

This chapter enters these issues in the following

order. It first addresses changes in U.S. labor supplies, examining both the number and kind of workers entering the work force. It then explores four

aspects of the quality of the jobs being produced:

1. changes the demand for skills,

2. changes in wages and non-wage benefits,

3. changes in the flexibility and security of jobs,

4

and

changes in job quality (measured in terms of

both safety and the extent to which jobs match

an individual’s expectation of work as an act

of self-fulfillment).

LABOR SUPPLY: THE SIZE AND COMPOSITION OF THE U.S. WORK FORCE

During the next two decades, the U.S. labor force

is likely to grow much more slowly than it has in

the recent past. The average worker will be older,

more likely to be female, and less likely to be a nonhispanic white.

The labor force grew 3 percent per year during

the early 1970s as the baby boom generation entered the work force and as women acquired jobs

in increasing numbers. Growth rates declined sharply as the last of the baby boomers came of age.

While the number of workers aged 45-55 is expected

to double during the next two decades, the number

of new entrants will decline rapidly. The proportion

of workers under the age of 24 could fall from approximately 30 percent in 1985 to 16 or 17 percent

by 2005. Overall annual growth in the work force

is expected to reach about 1 percent by the early

1990s;2 growth could approach zero by 2020, depending on future rates of immigration.

ZJanet L. pJoIwood (~rnrnissioner of Labor Statistics, U.S. Department

of Labor), “The Future of Employ merit,” address to the Institute of Industrial Relations, University of California at Los Angeles, Oct. 18, 1986.
365

Women now constitute nearly two-thirds of all labor force growth, a share that is expected to continue through the end of the century.3 Younger

women today are participating in the work force at

a rate approaching that of their male counterparts.

Between 1976 and 1986, women identifying themselves as “housekeepers” fell from 41 to 32 percent

(see table 11-1). More women are looking for fulland part-time work, although a growing fraction of

part-time work is involuntary.

In a sharp break from tradition, women are remaining in the work force even when they have children. Women born before 1945 tended to leave their

jobs to raise children (see figure 1l-1). In 1984, over

two-thirds of women with children aged 6 to 17 were

in the labor force—more than double the rate of

1950.4

sRona]d E. Kutscher, “Projections 2000—@emiew and lrnpliCath3nS

of the Projections to 2000,” Month/y Labor Review, vol. 110, No. 9,

September 1987, p. 4.

4u.s. Department of Labor, Bureau of Labor Statistics, Handbook of

Labor Statistics 1983, Bulletin 2175, Washington, DC, 1983; and Employment and Earnings, vol. 33, No. 11, November 1986.

While the number of working women is increasing, the percentage of men at work is actually below 1966 levels (again see table 1l-1). In 1960, men

between the ages of 55 and 64 were about as likely

to be in the work force as their younger colleagues,

but their participation rate has fallen steadily and

is now below 70 percent (see figure 11-2). If this 20-

year trend continues, only half of the men aged 55

to 64 will be working by the turn of the century. Participation for men over the age of 65 has fallen even

more sharply, from 45 percent in 1950 to about 15

percent in 1985.

Declining participation rates among older men can

be attributed to two main factors. First, some men

are leaving the work force because early retirement

maximizes returns on a pension.5 Second, many

older men work in “declining” occupations and industries, and face a choice of retiring early, remaining employed by accepting a low-skill, low-wage po5 U.S. Department of Labor, Bureau of Labor Statistics, cited in “Demographic Forecasts,” American Demographics, vol. 8, No. 3, March 1986,

p. 58.

Table 11-1 .—Employment Status of Noninstitutionalized Adults Age 16 and Over (in percent)

Category 1986 1976 1981 1986

Men:

Employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Full time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Voluntary part time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Involuntary part timea 

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Looking for work (unemployed) . . . . . . . . . . . . . . . . . . . . . . . .

Looking for full time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Looking for part time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Not in labor force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Housekeeping b 

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Education b 

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Women:

Employed ., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Full time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Voluntary part time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Involuntary part timea 

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Looking for work (unemployed) . . . . . . . . . . . . . . . . . . . . . . . .

Looking for full time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Looking for part time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Not in labor force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Housekeeping b 

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Education b 

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

81.5%

77.2

2.9

1.3

2.1

1.9

0.2

16.5

N.A.

N.A.

N.A.

100.0

38.6

30,0

7.6

1.1

1.5

1.2

0.3

59.9

N.A.

N.A.

N.A.

100.0

75.1%

69.4

3.6

2.1

4.7

4.4

0.4

20.2

0.3

1.8

18.1

100.0

36,8

27.5

7,9

1.4

3.5

2.8

0.7

59.7

41.2

1.8

16.7

100.0

72.8%

67.0

3.6

2.2

4.9

4.6

0.3

22.3

0.4

1.5

20.4

100.0

49.1

36.8

10.0

2.4

4.3

3.7

0.6

46.6

34.5

1.7

10.4

100.0

73.6%

66.9

3.9

2.8

4.4

4.0

0.4

22.0

0.6

1.9

19.5

100.0

53.0

39.5

10.5

3.1

3.5

2.7

0.7

43.5

31.8

1.8

9.9

100.0

= Not available.

b For years 1966 and 1976, assumes that persons in education and housekeeping aged 16-20 are same proportion as total.

SOURCE: U.S. Department of Labor, Bureau of Labor Statistics, Handbook of Labor Statistics 1983, Bulletin 2175; Employment and Earnings, vol. 33, No. 11, Review,

November 1986.
366

Figure 11-1.-Work Force Participation of

Women Born in Different Years

Percent of all women in age group

sition, or receiving extensive and often costly

vocational training in order to keep a job of the same

stature.6

6 0 -

Born 1946-50 Born 1935-35

Born 1921-26

Born 1941-46 50-

4 0 -

20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64

Age

How To Read This Figure: 46% of women born between 1931

and 1935 were working when they were between the ages of

20 and 24. By the time they reached age 25-29, however, only

36% were working (many were now at home with young children). This same group of women, however, returned to the

work force by the time they were 45-49 years of age, when

over 60°/0 were working.

People are defined to be participating in the work force

if: (1) they did any paid work, (2) they made specific efforts

to find employment sometime during the prior four weeks,

(3) they were waiting to be recalled to a job from which they

had been laid off, or (4) they were waiting to report to a new

job within 30 days.

SOURCE: Ray Marshall and Beth Paulin, “Employment and Earnings of Women:

A Historical Perspective,” Working Women: Past, Present, and Future,

Industrial Relations Research Series (Washington, DC: Bureau of National Affairs, 1987),

Figure n-2.-Participation Rates for

Workers Aged 55-64 (percent employed

or actively looking for work)

Percen t

8 0 -

6 0 -

Women

4 0 -

How To Read This Figure: The percentage of men aged 55-64

participating in the work force declined from about 90% in

1950 to about 50% in 1987 (see figure 11-1 for definition of

“participation”).

● November 1987.

SOURCE: U.S. Department of Labor, Bureau of Labor Statistics, Employment and

Earnings, various issues.

The increase in early retirements, however, may

be a temporary phenomenon—an artifact of structural change and not a long-term trend. In the future, workers may not have retirement benefits that

allow or encourage early retirement. Baby boomers

may not want to retire if they are healthier and if

their jobs are more rewarding and a more integral

part of their social lives.7

The effects of earlier retirement and lower numbers of working hours per adult appears to have

more than offset the increase in the number of working women. Figure 11-3 indicates that the number

of hours worked per working age adult has actually

declined during the past few years. On the other

hand, the number of hours worked per American

6 See U.S. Congress, Office of Technology Assessment, Technology

and Aging in America, OTA-BA-264 (Washington, DC: U.S. Government

Printing Office, June 1985), pp. 27-29.

7 Terry Stephenwn Supp]e, “The Coming Labor Shortage, ” A~e~ican

Demographics, vol. 8, No. 9, September 1986, p. 35.

Figure n-3.-Recent Declines in Hours

Worked Per Working-Age Adult* and

Increases in Hours Worked Per Capita

Index with 1965=1

1.15 , I

\

1.05-

,, , 

- ‘ ,

1- ‘ <

0.95-

0.9-

085 I T I I I : I T I I : I I I 1 : I I I T ~ T I I I ~ I I I I ~ I I I T ~

1950 1955 1960 1965 1970 1975 1980 1985

-

--- Hours per capita

— Hours per working -

age adult*

How To Read This Figure: The number of hours worked per

capita in 1986 was 14% higher than in 1965 (i.e., the index

went from 1.00 to 1.14 during the period). The number of hours

worked per working age adult (defined to be all people between the ages of 16 and 65 that are not in jails, nursing

homes, or other institutions), however, declined by about 4%

(the index fell from 1.00 to 0.96).

● Noninstitutional population aged 18 to 85.

SOURCES: U.S. Department of Labor, Bureau of Labor Statistics, Monthly Labor

Review, various issues; and U.S. Department of Commerce, Bureau

of Economic Analysis, “National Income and Product Accounts,”

historical diskettes, table 6.11.
367

(counting the entire population) has increased as the

baby boom has entered the work force. Higher gross

national product (GNP) per capita has therefore been

achieved in part by simply adding more people to

the work force.

The racial mix of American workers is also changing rapidly. A majority of the people entering the

U.S. labor force during the next few decades will be

black, Hispanic, or Asian (see table 11-2). Blacks represented 9.2 percent of the work force in 1970, but

are expected to account for 11.8 percent in the year

2000. The U.S. Bureau of Labor Statistics (BLS)

projects that by the early 1990s more than 17 percent of all new entrants to the labor force will be

black. Growth rates for Asian and Hispanic workers are more difficult to anticipate, since the rate depends on the extent to which illegal immigration

from Asia and Central and South America is contained. Hispanics are expected to grow from 7 percent of the work force in 1986 to at least 10 percent

in 2000.8

Table 11-3 summarizes three sets of assumptions

about participation rates for the year 2005:

1.

2.

3

The first case assumes simply that 1986 participation rates remain unchanged.

The second case assumes that participation rates

for women are at least 90 percent of the rate

of men in each age group (a trend established

by women born in 1962/63); it also assumes

that participation rates of older workers decline,

following 20-year trends.

In the third case, it is assumed that men over

the age of 55 will have approximately the same

participation rate as they did in 1975, while

older women participate at 90 percent of male

rates.

fIR. E. Kutscher, op. cit., footnote 3, P. 4

Table n-2.-Racial Composition of the U.S. Work Force 1986-2000

Percent of

Percent of the Percent of the growth in work force

work force in 1986 work force in 2000 between 1986 and 2000

Black . . . . . . . . . . . . . . . . 10.8 11.8 17.4

Asian a . . . . . . . . . . . . . . . 2.8 4.1 11.4

Hispanic b. . . . . . . . . . . . . 6.9 10.2 28.7

White . . . . . . . . . . . . . . . . 86.4 84.1 71.2

NOTE: Totals exceed 100 percent because hispanics are also counted in other races.

a lncludes native Americans, Alaskan natives, Pacific islanders.

b Persons of Hispanic origin may be of any race.

SOURCE: Ronald E. Kutscher, “Projections 2000-Overview and Implications of the Projections to 2000,” Monthly Labor Review,

vol. 110, No. 9, September 1987, p. 4.

Table n-3.-Work Force Participation Rates

Age range:

16-17 18-19 20-24 25-34 & 4 4 45-54 55-64 65+

Men:

Case #1: 1986 Levels . . . . . . . . . . . . . . . 0.41 0.66 0.85 0.94 0.95 0.91 0.68 0.16

Case #2: 2005 Trend . . . . . . . . . . . . . . . 0.41 0.66 0.85 0.94 0.95 0.91 0.50 0.03

Case #3: 2005 Alternative . . . . . . . . . . . 0.41 0.60 0.80 0.94 0.95 0.91 0.75 0.20

Women:

Case #1: 1986 Levels . . . . . . . . . . . . . . . 0.42 0.60 0.73 0.73 0.75 0.67 0.43 0.08

Case #2: 2005 Trend . . . . . . . . . . . . . . . 0.41 0.80 0.77 0.85 0.86 0.82 0.42 0.05

Case #3: 2005 Alternative . . . . . . . . . . . 0.41 0.60 0.77 0.85 0.86 0.82 0.68 0.18

SOURCE: Office of Technology Assessment, 1988 (see text for details).

CHANGES IN THE QUALITY OF JOBS PRODUCED

An analysis of the match between jobs desired and The following discussion will examine four aspects

jobs available must confront the vexing problem of of the issue:

defining a “good” job. Clearly, the answer to this 1. How do the changes in production networks

question is as varied as the U.S. labor force itself. translate into changes in demand for different
368

kinds of skill?

2. How well are different skills paid? How can

these differences be explained?

3. How much flexibility does a job offer to those

that desire it?

4. How well does a job match an individual’s expectation of work as an act of self-fulfillment?

Is the job dangerous?

Technology and Skill

The problem of estimating the impact of new production recipes on skills and work life is not new.

Hesiod worried about the effects of structural change

on Greek workers in 800 B.C.9 Literature since the

industrial revolution documents concern about the

dehumanizing effects of automation, the alienation

of worker from employer, and the increasingly vague

connection between what a worker does during the

day and a product of real social value (see box

1 l-A).

One question remains at the core of these discussions: precisely what do humans do better than machines? The question is presented in different ways

as each new wave of innovation sweeps old patterns

of production aside. Information technology has

given it an entirely new twist. Machines are not only

able to beat the fabled John Henry at steel driving,

and weave more skillfully than Ned Ludd, they are

now capable of seeing, touching, remembering billions of facts, and even undertaking elementary

forms of reasoning.

In a period of transformation, basic questions need

to be asked about where people can fit in as machines substitute for labor and skill. There is always

one easy answer: people will be used instead of machines when they are less expensive. Anyone holding a job on this basis is obviously vulnerable. There

are better answers.

Technology can enhance the human elements of

work by automating tasks that have forced men and

women to mimic machines. As chronicled in this

volume (particularly in chs. 6 and 12), the technology now entering the U.S. economy has the potential to reduce the mechanical aspects of most work,

allowing greater use of human imagination and

greater opportunity for personal communication. IngHesiod, Works and Days.

formation technology can remove barriers between

conception and execution in ways that expand the

time devoted to developing and testing the products

of imagination. The ratios of authors to typesetters,

architects to draftsmen, clothing designers to textile

and apparel workers, and even of individual tutoring to repetitive recitation of lectures, can all increase.

Medical personnel can spend more time talking with

patients, and less time struggling with routine forms

or counting cells through microscopes. Technology

can allow sales personnel to spend more time with

customers and clients so that they can more fully

understand a customer’s idiosyncratic tastes and

desires. Innovation also makes it possible to tailor

products and services to fit—benefiting both the customer and the producer while creating a more satisfying link between work and the final product.

It is obviously possible that the new technology

can be used to make jobs more and not less mechanical. Information equipment could be used to

create rigidly authoritarian management styles that

force employees into narrowly defined tasks with little room for individual expression. In general, however, attempts to organize production in this way

have not met with success.

Some jobs seem virtually unaffected by changes

sweeping the rest of the economy. The jobs of farm

workers, house cleaners, and nursing assistants require menial tasks that are difficult to replace with

technology. Many such jobs involve sub-standard

working conditions. Most are held by minorities and

women.

The New Production Networks

The old debates over the links connecting technology and skill plainly need redefinition. The impact

of complex production networks on jobs during the

past few decades defies convenient characterization.

It is not enough to ask whether technology degrades

or upgrades a specific task (such as machining or

typing). Rather, it is necessary to measure the effect

of change on the entire network of employment that

combines to deliver an amenity. These networks

now combine a baffling collection of jobs. Jobs lost

on the factory floor may be replaced by informationhandling positions in other business sectors in other

States.
369

What is the net effect of a shift from an economy ch. 10)? It is likely, for example, that wages for

dominated by machinists and farmers to one domi- “managerial” occupations will be reduced as grownated by middle managers, para-professionals, sales ing numbers of people take jobs classified as manclerks, and information processors (as outlined in agement. However hard the Bureau of Labor StatisBox 1 l-A.—The Debate on Technology and Skills: Selected Views

Adam Smith, who provided the first clear example of the advantages of labor specialization, expressed clear

reservations about the effects of such a development taken to the extreme:

The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always

the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding

out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion,

and generally becomes as stupid and ignorant as it is possible for a human creature to become.l

The management specialist Fredrick Taylor attempted to apply the principles of good engineering design

in machinery to the design of jobs. The central idea was to disconnect conception from execution, dividing tasks

into discreet, highly specialized functions. Management would specify the correct way for an employee to move

and act in the performance of these functions much as it would design specifications for a piece of equipment.

The employee would be evaluated entirely in terms of the effectiveness of such actions, and would not be expected to understand the integrated operation of the production process.

Daniel Bell, and others writing in the 1960s and early 1970s, argued that the share of unskilled workers

was diminishing throughout the economy, being replaced by substantial numbers of knowledge-based employment opportunities.2 Several empirical studies seemed to confirm this.3 One 1963 analysis of automation in coal

mining concluded that:

. . . extreme division of labor characteristics of previous stages of industrial development would be replaced by situations with fewer and less specialized work roles. The jobs of the future would require multi-skilling and share responsibility, possibly giving rise to composite or autonomous work groups with little or no internal supervision.4

Concern about alienation of the labor force has taken a somewhat different turn with each new wave of

automation. In 1958, Charles Bright looked at technologies then entering the factory, and concluded that “automation had reduced the skill requirements of the operating work force and occasionally of the entire factory

force, including the maintenance organization. "

5 P.B. Doeringer and Michael Piore described the emergence of

a “dual labor force”-one split between routine, low skilled jobs and an elite set of jobs—with reduced opportunities for moving from one area to the other.6 David Noble reviewed the history of machine tools to prove a similar

point.7 While many of these works take a starkly ideological perspective, aspects of the thesis do find broad support. Abernathy, Clark, and Kantrow, writing about the “single, dominant paradigm for production” in the United

States, find:

If skills can be progressively built into machines, then workers need not be especially skilled themselves . . .

. . . [G]ear up for long production runs, buffer yourself with enough inventory to keep the lines moving, inspect for

defects-if at all—at the end of those lines, treat workers primarily as a reservoir of costs that can be bled out under

pressure as the need arises, and you will boost your market share, your profits, your stockholder’s good disposition,

your bond ratings, your own compensation, and the Nation’s industrial health.8

IThe Weafth of Nations, 1776 (London: Every man’s Library, J.M. Dent & %ns Ltd., 1947), vol. II, p. 278.

‘Daniel Bell, The Corning of Post-lndusfrial Society (New York: Basic Books, 1973); C. Kerr, J.T. Dunlop, F.H. Carbison, and CA. Myers, lndustrialisnr

and /ndustria/ Man (Cambridge, MA: Harvard University Press, 1960).

‘R. Blauner, Alienation and Freedom (Chicago, IL: University of Chicago Press, 1964); C.R. Walker, Toward the Automatic Factov (Westport, CT: Greenwood

Press, 1957); J. Woodward, lndushid Organization: Theory and Practice (London, England: Oxford University Press, 1965).

4E.L. Trist and K.W. Bamforth, “Some Sociaf and Psychological Consequences of the lmngwafl Method of COaf Getting: An Examination of the Psychological

Situation and Defenses of a Work Croup in Relation to the Social Structure and Technological Content of the Work System,” Human Relations, vol. 4, No.

1, 1951, pp. 3-38.

SJ.R. Bright, “Does Automation Raise Skill Requirements?” Harvard Business Review, vol. 36, No. 4, July/August 1958, p. 86.

$P.B. Doeringer and M.J. Piore, /nternaf Labor Markets and Manpower Ana/ysis (Lexington, MA: Heath-Lexington Books, 1971).

7David F. Noble, Forces of Production: A Social Histoty of Industrial Automation (New York, NY: A.A. Knopf, 1984); America By Design: Science, Technology, and the Rise of Corporate Capitalism (New York, NY: A.A. Knopf, 1977).

8W. Abernathy, K. Clark, and A. Kantrow, Industrial Renaissance: Producing a Competitive Future for America (New York, NY: Basic Books, 1983).
370

tics works to ensure consistency of definitions,

statistics give an imperfect view of the changes taking place. Many changes can only be understood by

examining patterns of job change in individual sectors, as undertaken in chapter 12.

Perhaps the most striking change is that occupations now held by people with college degrees are

growing comparatively quickly. College graduates

held 13.2 percent of all jobs in 1967 but 25.3 percent of all jobs in 1987 (see table 11-4). About half

of all new jobs were filled by college graduates during these two decades.

The way jobs are created, and the pay that can

be commanded by these jobs, depends heavily on

management discretion. Two factors appear to have

a major impact on the way production strategies

translate into demand for skills, and into the bargaining power of employees offering different skills:

the extent to which businesses, or networks of businesses, are managed as authoritarian hierarchies;

and the extent to which workers can be easily substituted for each other.

The Rise and Fall of Hierarchies.—Will new

business networks provide more or less freedom

than the ones they replace? Will they provide workers with more independence and therefore more opportunities for taking pride in what they accomplish

at work, or will they result in rigidly hierarchical

management structures in which individual employees find themselves meticulously monitored in the

way they undertake ever more specialized assignments? 10 The studies of business networks in chap10 See Barbara Baran and Carol Parsons, “Technology and Skill,” Berkeley Roundtable on International Economics, University of California,

Berkeley, CA, January 1986.

Table 11-4.-Education Levels of the U.S. Work Force,

1967-87 (in percent, age 25-64)

Labor force share in:

Education level 1967 1979 1987

Less than 4 years of high

school . . . . . . . . . . . . . . . . . . . 41.1 21.9 14.9

4 years of high school . . . . . . . 35.2 39.6 40.2

1 to 3 years of college. . . . . . . 10.6 17.3 19.7

4 years of college or more . . . 13.2 21.3 25.3

Total (ages 25-64) . . . . . . . . . 100.0 100.0 100.0

NOTE: Percentages calculated for March of years indicated.

SOURCE: Wayne J. Howe, “Education and Demographics: How Do They Affect

Unemployment Rates?” Monthly Labor Review, vol. 111, No. 1, January 1988, p. 4.

ters 6 and 12 provide no clear guidance. There appears to be no necessary link between production

technology and the kinds of jobs created. Both manufacturing and office work can be upgraded or sharply downgraded as the result of new equipment.

Clerical office workers can be upgraded to take on

new responsibilities—becoming “parapublishers,”

“paralibrarians,” and “paramanagers’’—or their jobs

can be reduced to mindless data entry. 11 Production

workers can be made a part of teams expected to

move quickly from a design to a new product, or

they can be reduced to machine tenders.

It is difficult to demonstrate which management

strategy will prove most effective in different circumstances. On the other hand, there is a growing body

of anecdotal evidence supporting the view that the

new generation of automation works well in office

and manufacturing environments only when people expected to work with the equipment have a role

in modifying the system. 12 It now appears that more

of the next generation’s job opportunities will be built

around ambiguous situations, as opposed to those

that are routine. Insurance underwriters will see

more complex and unusual cases. Manufacturing

operatives may need to intervene in the production

process only when something breaks, or when a control program needs to be redesigned around a new

part. It maybe possible to build such a system using

unskilled personnel with narrow task assignments

operating under rigid hierarchical control. However,

it is difficult to conceive that this kind of arrangement—or one that prevents the organization of a

team of people who expect to work together for some

time—could work well under dynamic conditions.

Company interest in employee roles is frequently

credited for the success of the GM/Toyota plant in

Fremont, CA.13 Xerox, Kodak, Hewlett Packard, and

several other firms have shifted production to teams

including engineering marketing, design, and production. There is a growing belief that large plants

11 Larry Hirschorn, “Office Automation and the Entry Level Job. A

Concept Paper,” Management and Behavioral Science Center, Wharton School of Business, University of Pennsylvania, Philadelphia, PA,

no date; and R. Howard, Brave New Workplace (New York, NY: Viking

Press, 1985).

12 M.A. Mai&qUe and R.M. Hayes, “The Art of High-Technology Management,” Sloane Management Review, vol. 25, winter 1984, pp. 17-21.

13 See Richard Corrigan, “GM-Toyota-Deal Symbolizes the Trend

Toward an international Car Market,” National Journal, vol. 15, No.

23, June 4, 1983, pp. 1156-1161.
371

may suffer diseconomies because of the distance between different kinds of workers inherent in a large

scale. A senior vice president of General Electric’s

aircraft engines division was recently quoted as saying that management can be closer to workers if

plants are limited to between 600 and 1,500 people.14 Nearly two-thirds of the 830-person work force

in a Westinghouse Furniture Systems plant in Grand

Rapids, MI is involved in both product design and

business strategy. The teamwork seems to have paid

off: plant productivity—measured by constant dollar sales per employee—rose 74 percent between

1983 and 1986.15 Unfortunately, the integration of

job design with equipment design is probably an exception and not the rule. Interviews with 196 organizations found little planning in reorganization of

offices around new technology. 16

Efforts to introduce mass production models in

clerical activities have met with mixed success. It

was once thought that large “typing pools” and

segregated “back office” activities would represent

the future of clerical work. While no national statistics are available, anecdotal evidence suggests that

instead of being isolated in “electronic sweatshops,”

clerical staffs are being more closely integrated into

the substantive work of businesses in ways that make

these employees less and not more mechanical. The

insurance industry, discussed in greater detail in

chapter 12, provides examples of businesses which

have reintegrated clerical and professional tasks in

both function and office location. Surveys conducted

by Honeywell, Minolta Corp., and Professional Secretaries International have shown that 70 to 90 percent of secretaries believe automation makes their

tasks go faster, and frees time for more interesting

and challenging work.17 A survey by the National

Association of Working Women (9-to-5) found that

work with new office technology was both more in14C.H. Deutsch, “U.S. ]ndustry’s Unfinished Struggle,” The New York

Times, Feb. 21, 1988, p. 7.

15 John Hoerr, “&tting Man and Machine to Live Happily Ever After,” Business Week, No. 2995, Apr. 20, 1987, p. 61.

16 B. Johnson and R.E. Rice, “Policy Implications in Implementing Office

Systems Technology,” paper presented at the 11th Annual Telecommunications Research and Policy Conference, Annapolis, MD, April

1983.

17H, Hartmann, R,E. Kraut, and L.A. Tiny, ed., Computer ChiPS and

Paper Clips: Technology and Women’s Employment, National Research

Council (Washington, DC: National Academy Press, 1986).

teresting and enjoyable (68 percent) and less stressful and pressured (54 percent) .18

The integration of management with other workers is a necessity in comparatively small establishments whether or not they are a part of larger firms.

Travelers Corp., a Hartford, CT insurance firm, is

finding that after their organization had responded

to new technology-based sales and underwriting systems, their middle managers were not managing in

traditional ways but were participating more substantively in the work of the firm.19

There is legitimate concern that electronic surveillance can monitor every keystroke and track every

moment of a typist’s life. Telephone company supervisors can measure the precise length of time an

information operator spends handling each call,

know precisely when the operator takes a break, and

listen in on all calls.20 Between 20 and 35 percent

of all clerical workers (4 to 6 million people) may

be monitored by electronic equipment.21

Obviously, data gathering is needed for purposes

other than monitoring individuals; data collected

electronically from individual work stations is apparently used to evaluate individuals in only about half

the cases.22 While electronic surveillance is chilling,

it is not obvious that this represents greater intrusion than more traditional systems in which supervisors personally monitored performance. Automated surveillance monitors only the most routine

activities, and many of the characteristics of “electronic sweatshops” seem applicable only to the most

mechanical tasks. Most jobs requiring judgement,

and most jobs “with new applications, ” are not susceptible to electronic supervision.23

Iag-tos, “The g-to-s National Su~ey on Women and Stress,” National

Association of Working Women, Cleveland, OH, 1984.

lgpeter pJul~, “f-10w Managers Will Manage, ” Fortune, vol. 1 ] 5, NO.

23, Feb. 2, 1987, p. 50.

Znsee R, Howard, op. cit., footnote 11; R. Rice et al., “The Survival

of the Fittest: Organizational Design and the Structuring of Word Processing,” paper presented at the meeting of the Academy of Management, Dallas, TX, August 1983; and U.S. Congress, Office of Technology Assessment, The Electronic Supervisor: New Technology, New

Tensions, OTA-CIT-333 (Washington, DC: U.S. Government Printing

Office, September 1987).

ZIThe Electronic Supervisor, op. cit., footnote 20, p. 32.

Zzsee H. Hartmann et al., cd., op. cit., footnote 17; and “The 9-@-5

National Survey on Women and Stress,” op. cit., footnote 18.

23 Alan Westin et al., “Privacy and Quality of Work Life Issues in Employee Monitoring,” contract report prepared for the Office of Technology Assessment, 1986, cited in The Electronic Supervisor, op. cit., footnote 20.
372

Ironically, while factory and “back office” production is moving away from hierarchical management,

many occupations not traditionally tied to any formal bureaucratic management-such as physicians,

teachers, residential construction managers, and

farm managers–may find themselves increasingly

enmeshed in bureaucracies. Physicians are often

now employees of health maintenance organizations.

Professionals with training in business as well as agriculture are now managing large farms. Teachers may

find themselves in structures more familiar in other

information industries if technology leads to greater

specialization in teaching functions.24 It maybe technically possible to introduce rigid, hierarchical management into such systems by greatly reducing the

autonomy of these professions. It is more likely that

these systems will move toward a new form of management strategy-being neither hierarchical nor a

network of independent individuals.

The collapse of traditional hierarchies in many networks has led to new roles for managers. Chapter

10 documented a rapid growth of people identified

as “managers” that is not matched by growth in traditional management support personnel. These statistics alone suggest that the daily tasks of managers

are more closely integrated with work done by other

staff members. The integration ranges from managers who do their own typing and data analysis because word processing and data manipulation has

been vastly simplified by automation, to store managers who double as sales staff because routine management has been simplified by centrally controlled

software.

General v. Specific Skills.-Even if average skill

levels increase, wages could go down if employers

treat workers as relatively interchangeable commodities. Skills could become more homogeneous while

tasks grow more specialized. This change has advantages, in that it allows people with solid basic

training to help their firms adjust rapidly to new requirements. Convergence of skills can give workers greater mobility, affording them a certain degree

of immunity to problems in a particular firm or industry. Generalized skills can, however, also make

workers more of a mass commodity, and can greatly

zqFOr a review of the% studies see H. Hartmann et a]., cd., OP. cit.,

footnote 17.

weaken the ability of the worker to bargain with employers. 25

Rapid growth in temporary help businesses seems

to argue that there is strong demand for skills not

linked to the special interests of individual firms. This

growth has been aided, of course, by an increasing

tendency on the part of many U.S. firms to reduce

long-term commitments, so as to adjust staffing

according to short-term need; until recently, temporary workers were thought of as little more than

replacements for absences, or “fill-ins” during peak

workloads. Today’s temporary employees are often

those with skills so transferable that they need no

specific training to work in an unfamiliar firm. Temporary employment agencies contributed nearly 3

percent of total job growth between 1982 and

1985–the average number of workers employed by

these firms at any given time doubled during this

period, reaching 735,000 at the end of 1985 and

786,000 by 1986. Nearly one-third of this total was

employed by the Federal Govemment.26 While many

of these temporary individuals specialize in office

work, a growing number are also industrial workers (typically low-paid helpers, laborers, or material

movers), nurses, nursing aids and orderlies, and

even people needed for defense work in engineering job shops.27

Income and Compensation

The changes in the mix of skills required by the

U.S. economy are of more than theoretical interest.

They can translate directly into changes in the distribution of wages. The value attached to different

skills changes in complex ways, depending on both

the supply of workers offering different training, experience, and talents and the demand for labor.

Both supplies and demands are changing. When

the baby boom generation was entering the job market, entry level workers typically had more education and less experience than the ones they replaced.

Accordingly, the older workers of tomorrow are likely

25 Harry Braverman, Labor and Monopoly Capital: The Degradation

of Work in the Twentieth Century (New York: Monthly Review Press,

1974).

26 Eileen Applebaum, “Alternative Work Schedules Of Women,” Paper presented to the Economics Department of Temple University, Philadelphia, PA, July 1985.

27M.L. ~rey and K. L. Hazelbaker, “Employment Growth in the Temporary Help Industry,” Monthly Labor Review, vol. 109, No. 4, April

1986, pp. 37-44.
373

to have increased expectations based on both education and experience. The economy will need to

expand at least 2.5 percent per year for the next two

decades simply to pay the baby boom work force

wages equivalent to those paid today for experienced

workers with equivalent educations.28 Wages are also

under pressure because Americans find themselves

in direct competition with foreign producers (see ch. 7).

In theory, workers can increase the “quality” of

the services offered by investing in education and

by virtue of job experience. In fact, markets depend

on a variety of factors that cannot easily be quantified. 29 Wages can depend on the relative cost of capital and workers. Real wages have fallen while real

capital costs have, if anything, increased during the

past few years. Compensation (wages, salaries, and

benefits) has not grown as fast as labor productivity,

and the fraction of national income paid as compensation has declined.

Discrimination on the basis of sex, race, and other

factors still plays a role in setting wages. There are

also deep cultural factors that determine how much

a person should be paid to work in dangerous or

unpleasant occupations or in occupations that are

attractive or rewarding. The logic of these factors

hinges on values that are difficult to forecast.

International competition may force managers to

rethink basic strategies for rewarding pay. The ratio of pay between U.S. managers and U.S. blue-collar

workers within manufacturing is at least twice the

equivalent ratio in Japan.30 Are American managers

prepared to argue that the U.S. scheme is based only

on a concern about maximizing the performance of

their firms?

It is apparent that major changes are underway.

The following discussion will trace some of the factors that connect changes in the structure of the economy with changes in links connecting skills and income. It begins by examining overall trends in

compensation paid, attempting to explain how real

Jgsee W.H, Esse]man and 0.S. Yu, “Economic Growth to Meet hlcome Expectations,” .fourrfaf of Po/icy Ana/ysis and Management, vol.

2, No. }, fall 1982, pp. 111-118.

Z9G,S, Becker, ffuman Capita/ (Chicago, fL: University of Chicago press,

1975).

WI, Hattori, “pr~u~ Diversification,” in Effective Management: A .fap

anese View, TBS-Britannica, Tokyo, 1983 (Cambridge, MA: The MIT

Press, 1984).

GNP per capita could be increasing while real wages

are declining. It then addresses some of the factors

that lead to changes in the way the funds available

for compensation are allocated on the basis of occupation, race, sex, and other factors.

Shares of National Income

Patterns of growth in income and wages appear

to have changed sharply in the early 1970s. Averaging out the effects of recessions, real per capita

GNP has increased steadily for a generation but real

weekly earnings received by private workers in 1985

were nearly 14 percent below their 1973 peak. The

real hourly wages of non-supervisory workers in private businesses declined by 10 percent during the

same period.31 Younger workers fared particularly

poorly. 32 While gains in compensation roughly followed gains in productivity during the 1970s, they

diverged in 1980 (see figure 1-20 of ch. 1). Productivity grew sharply between 1982 and 1986, but compensation barely recovered from the 1982 recession.

These paradoxes are explained by four factors (box

11-B provides a guide to the accounting vocabulary

used in the next few paragraphs):

1. Compensation grew more rapidly than GNP be2.

3.

4.

tween 1950 and 1970, but has-grown slightly

more slowly than GNP since 1970.

The fraction of compensation received as wages

and salaries is declining, as a growing share of

compensation is paid as benefits.

The fraction of personal income received as

wages and salaries is declining, as transfer payments (particularly payments made to retirees)

and unearned income capture a growing fraction of all personal income.

The fraction of the population working has increased.

One of the most basic changes is that that the fraction of GNP paid as depreciation increased steadily

during the 1970s. This reduced the amount that

31 U.S. Department of Labor, Bureau of Labor Statistics, Handbook of

Labor Statistics, 1982; and Employment and Earnings, vol. 33, No. 11,

November 1986.

32The William 1’, Grant Foundation Commission on Work, Family,

and Citizenship, “Youth and America’s Future,” Washington, DC, p.

21, based on analysis of March 1974 and March 1987 Current Population Survey Public Use Tapes, calculations by Center for Labor Market

Studies, Northeastern University, Boston, MA.
374

could be paid to individuals in the form of compensation or investment income. An increase in depreciation would be expected from an economy going

through a major transformation, since a significant

amount of capital stock would become obsolete.

Compensation’s share of GNP has fallen slightly

since the early 1970s, while the share of GNP paid

as wages and salaries has dropped at a faster rate

(see figure 11-4). Expanding imports, heightened domestic competition, and a variety of other factors obviously created considerable pressure for wage restraint; workers are seeing a smaller fraction of their

compensation in the form of wages and salaries.

Wages have come under particularly intense pressure in the heavily unionized High Wage Manufacturing industries (see ch. 10). Since 1981, each year

has seen record low or near-record low wage adjustments as measured by the Bureau of Labor Statistics.33

The personal income (as distinct from GNP—see

box 1 l-B) that did not go into wages, salaries, and

benefits went to transfer payments and returns to

capital. Private and public pensions and other benefits grew quickly during the past two decades. Aid

to families with dependent children and other types

of transfers grew sharply during the late 1960s, but

have not since grown in percentage terms (see figure 11-5). Employer contributions for social insurance have tripled since 1950 (as a fraction of all personal income), while employer contributions for

health insurance have grown eightfold. Many unions have solicited increases in benefits in lieu of

taxable wage benefits; indeed, employer benefits are

often greater in sectors characterized by high levels

of unionization (see table 11-5).

After falling steadily for 25 years, “unearned” income (money collected from proprietary income and

rent, dividends, and interest payments) has been increasing as a fraction of all personal income since

the mid 1970s (its GNP share has been constant since

1970). 34 Figure 11-6 suggests that the increase is due

almost entirely to interest income, which has grown

far more rapidly since 1976 than during the two previous decades—possibly due to the comparatively

high real interest rates of the past decade.

ttThis BM series dates back 18 years, and covers private industry

agreements covering 1,000 workers or more, See Joan Borum and James

Conley, “Wage Restraints Continue in 1985 Major Contracts,” Month/y

34 This form of income has, however, not captured a growing share

of GNP, suggesting that the portion of “property type income” paid as

personal income is shrinking while depreciation, retained earnings, and

Labor” Review, vol. 109, No. 4, April 1986, pp. 22-28. other categories are gaining share. -

Box 11-B.–U.S. Gross National Product and Personal Income in 1986 (trillions of dollars)

Gross national product . . . . . . . . . . . . . . $4.2 Personal income . . . . . . . . . . . . . . . . . . . $3.5

Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5

Wages and salaries . . . . . . . . . . . . . . . . . . . . . . 2.1 Wages and salaries . . . . . . . . . . . . . . . . . . . . ., 2.1

Supplements to wages and salaries. . . . . . . . . 0.4 Other labor income (supplements less employer

contributions to social insurance) . . . . . . . . 0.2

Proprietors’ income and rental income adjusted Proprietors’ income and rental income adjusted

for depreciation (a). . . . . . . . . . . . . . . . . . . . 0.3 for depreciation (a). . . . . . . . . . . . . . . . . . . . 0.3

Net interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 Personal interest income (b) . . . . . . . . . . . . . . 0.5

Corporate profits adjusted for 0.3 Personal dividend income . . . . . . . . . . . . . . . . 0.1

depreciation (a,c) . . . . . . . . . . . . . . . . . . . . . .

Depreciation(d) . . . . . . . . . . . . . . . . . . . . . . . . . 0.5

Indirect business taxes & other (e) ... , . . . . . 0.3 Transfer payments . . . . . . . . . . . . . . . . . . . . . . 0.5

fess personal contributions for

social insurance . . . . . . . . . . . . . . . . . . . . . . . —0.2

(a) More precisely, these “property-type” incomes reflect inventory valuation and capital consumption adjustments.

(b) Personal interest is net interest, plus interest paid by government, plus interest paid by consumers to business, less interest received by government.

(c) Corporate profits include dividends, undistributed profits, profits tax liability, inventory valuation, and capital consumption adjustment.

(d) Capital consumption allowance with capital consumption adjustment.

(e) Business transfer payments, less subsidies, less current surplus of government enterprises (together, these are less than $0.02 trillion)

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” Survey of Current Business, July 1987, Table A.
375

Figure 11-4.-Compensation and Wages &

Salaries as a Percent of GNP

(current dollars)

Percent of GNP

Figure n-6.-Property-Type Income

as a Percent of GNP (current dollars)

Percent of GNP

30 [

I

25

60 20

1 5

5 5 10

5

50 0

45

1955 1960 1965 1970 1975 1980 1985

- Wages & Salaries

How To Read This Figure: Wages and salaries paid to employees were about 54% of GNP in 1970 but fell to 49% of

GNP in 1986. Compensation paid to employees—defined as

wages and salaries, employer contributions for social insurance, and “other labor income” (a category including employer contributions to pensions, profit sharing, group insurance,

workers’ compensation, supplemental unemployment, and

directors’ fees)–was slightly more than 60% of GNP in 1970

and is now slightly below 60%.

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” historical diskettes, table 2.1.

Figure n-5.-Transfers and Benefits

(as a percent of personal income

in current dollars)

Percent of personal income

25

Other Labor Income (Private Benefits)\

20

15

10

5

0

Aid to Families with

‘1950 1955 1960 1965 1970 1975 1980 1985

How To Read This Figure: Transfer payments (which include

old-age, survivors, disability, and health insurance benefits;

government unemployment insurance benefits; veterans benefits;

government employees retirement benefits; and aid to families with dependent children) rose from about 5% of personal

income in 1950 to 15% in 1981. Transfer payments plus “other

labor income” (see definition in figure 11-4) totaled 20°/0 of

personal income in 1986. In addition to these two components, personal income includes: wages and salaries, proprietors’ income, rental income, personal dividend income, and

personal interest income (less personal contributions for social insurance).

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts, ” historical diskettes, table 2.1.

1955 1960 1965 1970 1975 1980 1985

= Net Interest

— Depreciation ”

How To Read This Figure: Property-type income (the sum of

rental income, proprietors’ income, corporate profits, and

depreciation) was about 25% of GNP in 1960, is now about

21% of GNP. Net interest increased from 2% of GNP in 1980

to 7% in 1986. Profits (defined as corporate profits adjusted

for inventory valuation and depreciation) fell from 12% of

GNP in 1950 to 5.6% in 1986.

● Capital consumption allowances with capital consumption adjustment.

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” historical diskettes, tables 1.1, 1.9,

and 1.14.

Trends in the Dispersion of Compensation

As the total fraction of GNP paid as wages and salaries is declining, it is not surprising that there has

been concern about how available funds are allocated. This proves to be a vexing subject because

existing data makes it difficult to determine whether

inequality is growing or shrinking.35

It is clear that inequality in the way both wages

and capital earnings are allocated by family has increased (see figure 2-8 of ch. 2). Only the highest

income families enjoyed real increases in labor income, with families in the the top 1 percent and top

5 percent enjoying particularly large growth. Growth

in unearned income has been allocated more evenly,

35 In addition to the discussion in ch. 2 (see especially footnote 33

of that chapter), see Lucy Stetson Gorham, U.S. Industry Employment

Trends from 1969 to 1995 and the Implications for Economic Inequality, Massachusetts Institute of Technology, Department of Urban Studies

and Planning, Cambridge, MA, 1984; Barry Bluestone and Bennett Harrison, “The Great American Job Machine,” Study Prepared for the Joint

Economic Committee of the U.S. Congress, Dec. 9, 1986; Janet L. Norwood (Commissioner, U.S. Bureau of Labor Statistics), “The Job Machine Has Not Broken Down,” The New York Times, section 3, p. 3,

Feb. 22, 1987; Richard M. Cyert and David C. Mowery, eds., Technology and Employment: Innovation and Growth in the U.S. Economy

(Washington, DC: National Academy Press, 1987).
376

Table n-5.-Other Labor Income by Industry (as percent of compensation)

1950 1960 1970 1980 1985

Agriculture, forestry, fishery . . . . . . . . . . . . . . . 0.3 2.0 2.8 5.4 5.2

Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 7.5 8.8 12.0 11.3

Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 2.4 3.5 8.8 10.5

Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 6.2 7.9 12.3 12.7

Durable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7 6.3 8.5 12.8 13.0

Nondurable .,.. . . . . . . . . . . . . . . . . . . . . . . . . 3.4 6.1 7.1 11.6 12.3

Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 3.8 4.8 9.3 10.1

Communications . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 7.3 12.7 16.6 18.3

Electric & gas utilities . . . . . . . . . . . . . . . . . . . . 6.0 9.0 9.8 15.4 15.9

Wholesale trade . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 2.8 4.3 6.7 7.2

Retail trade.... . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 2.3 3.6 5.5 6.2

Flea. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.0 10.9 10.4

Other services . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 6.1 6.8

Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1 0.2 1.1 3.2 4.5

a

Finance, insurace, and real estate,

NOTE: For definition of “other labor income," see figure 11-4.

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts," historical diskettes, Table 6.13.

with the top 40 percent of all families enjoying some

growth in capital income.

Taking all sources of income together, it appears

that the real income of most American families has

declined in recent years and that the gap separating the wealthiest and poorest families has increased

The discussion of chapter 2 suggested, however that

many of these changes have resulted from demographic factors (e.g. smaller family sizes, growth of

households headed by women) and from correlations

between the earnings of husbands and wives. Adjusting for family size and numbers of earners, and

using what may be a more appropriate adjustment

for inflation, it appears that most family types enjoyed real growth in total income between 1970 and

1986. Families headed by eldery people did comparatively well (their incomes grew 50 percent between 1970 and 1986), while the incomes of both

young families and families consisting of single

mothers with children experienced no significant

gains. Even making these adjustments, however,

family incomes were less equally distributed in 1986

than in 1970.36

The changes underway in the economy are likely

to affect most of the factors that determine wages.

It appears, for example, that discrimination on the

basis of gender is shrinking while inequality growing out of differences in educational attainment is

growing. Income transfers have the effect of eliminating some of the differences between Americans

who are employed and those who are retired or

otherwise without income. New patterns of investment in emerging industries can alter the mix of

returns paid to labor and capital. Capital investment

is increasing in networks that once contributed valueadded primarily through labor, such as health, education, and insurance processing.

Table 11-6 shows the compensation paid in the

industries where jobs were being added most rapidly and most slowly between 1983 and 1986. On

average, the jobs created paid better than the average job, but the patterns of relative change are difficult to explain. There is little correlation between

wage growth by industry and productivity growth,

and little correspondence between high wages and

high rates of job growth.37 Some of the industries

that added the most full-time-equivalent jobs after

the recession paid low wages while others paid well.

Wages and salaries paid to men have become

more unequal over the last 20 years (see figure 11-

7). There was a sharp rise in inequality during the

recession of 1982 that was not reversed during the

subsequent recovery; employers appear to have

made major wage adjustments during the period.

Wages paid to women, on the other hand, appear

to have become more equal during the same period,

although inequality has grown slightly since 1981.

sqJ.S. Congress, Congressional Budget Office, “Trends in Family income: 1970-1986,” (Washington, DC: U.S. Government Printing Office,

February, 1988).

37A regression examining the connection between wages and job

growth shows an R2 below 0.1.
377

Table 11-6.—The 12 Industries with the Highest and Lowest Growth in

Full-Time Equivalent Employees Between 1983 and 1986

Compensation per Percent above

full-time equivalent or below 1386 Job Growth

job ($1986) compensation average 1983-1986 (000s)

Highest growth industries:

Retail trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,183 –38.5 2,094

Business services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,105 –12.2 1,180

Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28,499 8.4 888

Health services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,271 –3.9 524

Wholesale trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,129 14.6 460

Other services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,885 2.2 301

Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28,159 7.1 231

Miscellaneous professional services . . . . . . . . . . . . . $33,175 26.1 222

Social services and membership organizations . . . . $15,679 –40.4 221

Hotels and other lodging places . . . . . . . . . . . . . . . . . $16,603 –36.9 197

Credit agencies other than banks . . . . . . . . . . . . . . . . $26,360 0.2 187

Trucking and warehousing . . . . . . . . . . . . . . . . . . . . . . $27,577 4.9 171

Lowest growth industries:

Oil and gas extraction.. . . . . . . . . . . . . . . . . . . . . . . . . $40,727 54.9 –142

Farms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,344 –56.9 –110

Telephone and telegraph . . . . . . . . . . . . . . . . . . . . . . . $43,968 67,2 –77

Primary metal industries . . . . . . . . . . . . . . . . . . . . . . . . $38,092 44.8 –75

Leather and leather products . . . . . . . . . . . . . . . . . . . . $17,694 –32.7 –52

Railroad transportation . . . . . . . . . . . . . . . . . . . . . . . . . $48,379 83.9 –51

Apparel and other textile products . . . . . . . . . . . . . . . $16,212 –38.4 –51

Textile mill products . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,565 –21.8 –34

Chemicals and allied products . . . . . . . . . . . . . . . . . . $40,074 52.4 –27

Petroleum and coal products . . . . . . . . . . . . . . . . . . . . $56,600 115.2 –26

Coal mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45,029 71.2 –18

Metal mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $41,122 56.4 –15

NOTE: compensation includes employer contributions for social insurance, as well as “other labor income,"pensions, group insurance, etc.

SOURCE: U.S Department of Commerce, Bureau of Economic Analysis. “National lncome and Product Accounts," Survey of Current Business, vol. 66, No. 7 July 1986,

various tables

Figure n-7.-Measures of Inequality in

Earnings (using the gini coefficient

--see text for definition)

.

0.47- -

0.45-

0.43

, 1 1 0.39+ /’ , ,

, 1

1967 1970 1973 1976 1979 1982 1985

— All Workers — M e n ‘

--- Wome n

How To Read This Figure: The Gini coefficient measures inequality. A coefficient of O means complete equality (i.e., all

workers would have precisely the same earnings), a coefficient of 1 means complete inequality (i.e., one worker would

receive all earnings). The figure shows that for all workers,

inequality in wage and salary earnings in 1970 was approximately the same as it was in 1985.

SOURCE: McKinley L. Blackburn and David E. Bloom, “The Effects of Technological Change on Earnings and Income Inequality in the United

States, ” National Bureau of Economic Research, working paper No.

2337, Cambridge, MA, August 1987.

When both men and women are considered there

appears to have been no significant change in inequality in wages.38 This happens because the gap

separating men and women is shrinking even while

the distribution of wages among men is increasing.

The data used to make these statements have two

major limitations. First, the data do not contain information about benefits paid by employers. The increase in part-time and temporary work has aggravated the difference between permanent full-time

jobs paying benefits and temporary positions with

few benefits. Benefits range from 18 percent of compensation in the highly unionized communication

industries and 13 percent in durable goods manufacturing to 6 percent for service employees (again

see table 11-5). Many women are not paid benefits.

38 McKinley L. Blackburn and David E. Bloom, “The Effects of Technological Change on Earnings and Income Inequality in the United

States,” Working Paper No. 2337, National Bureau of Economic Research,

Cambridge, MA, August 1987.
378

Second, the data are unable to examine the distribution of earnings above a certain threshold (or

“top-code”) established by the U.S. Bureau of the

Census for each year. Since much income growth

has apparently occurred in the highest income

groups, this can be a major limitation. Changes in

the “top-code” can further confuse the results.39

A comparison of compensation paid to individuals

working in different industries avoids both of these

problems but creates another. It is unable to reflect

changes in compensation occurring within individual business sectors. An examination of distribution

indicates that there has been some increase in inequality when average compensation is ranked by industry. Figure 11-8 shows that the fraction of all compensation paid by industries with high and low rates

of compensation is growing. The share of all compensation paid by industries that pay less than 75

percent of the national average doubled between

1956 and 1986. Looking at the other end of the specturm, the figure shows that in 1956, only 1 percent

of all compensation was paid by industries whose

39see us, Congre55iona] Budget Office, “The Changing Distribution

of Federal Taxes: 1975-1990,” (Washington, DC: U.S. Government Printing Office, November 1987); and the discussion of this subject in ch. 2.

Figure 11-8.-Distribution of

Compensation, 1956 and 1986

Percent of all

/

National average

compensation paid

100 .-

,.

90

1

/

80

7 0 } /

I

60 -

50

40 - /’

30 -

20 -

nl I I I 1 , 1

10t =---3-’

I

I

I

“ 0 20 40 60 80 100 120 140 160 180 200

Percent of national average compensation

How To Read This Figure: In 1956, 99% of all workers were

paid compensation that was less than 140% of the national

average compensation paid, while 10% were paid less than

60% of average compensation. In 1986, 92% of all workers

were paid compensation less than 140% of the national

average, while 5% were paid less than 60% of the national

average.

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “Nation.

al Income and Product Accounts, ” historical diskettes, tables 6.4 and

6.7.

average compensation was 40 percent or more above

the national average; in 1986, however, 7.5 percent

of compensation was paid by such industries.

The statistics cited above apply to industries and

not to occupations. Chapter 10 demonstrated that

there has been a significant change in the distribution of occupations within individual businesses. Between 1973 and 1982, more jobs appear to have

been lost in occupations from the lowest wage group

than from middle income groups (constant 1982 dollars); measured in current dollars, the middle group

actually increased its share of the total.40 The dangers

of assuming that new jobs added in an occupation

classification are the same as the average existing

job have already been discussed.

Accounting for Differences

in Wages and Compensation

Some of the changing patterns of income just discussed result from changes in the education, sex,

and race of the individuals entering the work force.

These connections can be powerful but are difficult

to trace.

The Effects of Education and Experience.—

There has been considerable discussion about

whether recent declines in rates of national productivity growth can be traced to changes in the quality of the U.S. work force. There are conflicting possibilities. On one hand, the entry of relatively large

numbers of inexperienced workers—the baby boom

generation and women without significant work

experience—seems likely to have decreased overall levels of productivity. On the other hand, the new

job entrants were better educated, at least as measured in terms of average numbers of years in school,

than their predecessors.

The increasing levels of educational attainment

shown in table 11-4 do not all result from the fact

that younger workers are better educated than older

ones. Figure 11-9 indicates that the major difference

between young workers and older workers is a

40 Neal Rosenthal, “The Shrinking Middle Class: Myth or Reality?”

Monthly Labor Review, vol. 108, No. 3, March 1985, p. 4. Later work

by the Bureau of Labor Statistics shows that within each occupation,

there was a downward shift in average earnings between 1973 and 1982;

see Patrick J. McMahon and John H. Tschetter, “The Declining Middle

Class: A Further Analysis,” A40rrthfyf,abor Review, vol. 109, No. 9, Sep

tember 1986, pp. 22-27.
379

Figure n-9.-Education Levels of

Workers in 1985 (percent of workers

with education above indicated levels)

8 years elementary

1 year high school

4 years high school

1 year college

4 years college

5 years college

1

0 20 4 0 6 0 8 0 1 0 0

Percent

How To Read This Figure: In 1985, 97.8% of workers aged

25-29 had at least eight years of education while 91.8% of

workers aged 50-59 had at least eight years of education.

SOURCE U.S. Department of Education, Center for Education Statistics, Digest

of Education Statisties 1987 (Washington, DC: U.S. Government Printing Office, May 1987), table 9

higher rate of completion of high school. Workers

aged 40-49 are actually more likely to have advanced

degrees than their younger colleagues, presumably

because many returned to get degrees. Unfortunately,

these statistics say nothing about the quality of the

education produced; chapter 3 provided some evidence suggesting a decline in educational quality.

Returns to investments in education appeared to

be falling during the early 1970s, in part because

of the large number of baby boomers entering the

work force. Many were better educated than the people they were replacing. The declining wages paid

for education led in part to speculation that Americans were “over educated.”41 Figure 11-10 makes

it clear, however, that education has been paying

increasing returns in the 1980s, An analysis of 1980

census data for white male workers seems to reveal

a much stronger return to investments in education

than to work experience after age 30.42

41 R.B. Freeman, The Over-Educated American (New York, NY: Academic Press, 1976).

4z.4 regression on the wages of white men, using the following variables [statistically significant coefficients in brackets]: average years of

education [0.63], percent not in labor force in 1975, average hours

[0.008], percent under 20 [-2.38], percent aged 20-29 [-1.43], percent

aged 30-39, percent aged 40-49, percent aged 50-64, percent over 65

[-4.96], percent in south [0.227]; R2 0.851. See B.T. Thornton Dill, L.W.

Cannon, and R. Vanneman, “Race and Gender in Occupational Segregation, ” in Pay Equity: An Issue of Race, Ethnicity and Sex (Washington, DC: National Committee on Pay Equity, February 1987).

Figure 11-10.-Does It Pay To Graduate From

College? (ratio of income of college graduates

to income of high school graduates)

Ratio

1 4 I I

k , , , 1

1.2 ! 1 1 1 1 1 1 1 I 1

1970 1972 1974 1976 1978 1980 1982 1984

How To Read This Figure: In 1979, the average worker with

4 years of college had earned income 24°/0 higher than the

average worker with only 4 years of high school (an income

ratio of 1.24). By 1985, college graduates earned an average

of 38°/0 more than high school graduates (a ratio of 1.38).

SOURCE: U.S. Department of Education, Center for Education Statistics, The Condition of Education (Washington, DC: U.S. Government Printing Office,

1988), table 2:3.

The value of education was particularly pronounced for younger workers entering an increasingly competitive labor market. The real mean

hourly earnings (1985 dollars) for civilian males aged

20-24 fell 26 percent between 1973 and 1986, but

the earnings of high school drop-outs fell 42 percent

while earnings for college graduates fell only 6 percent.43

Without attempting to adjust for the quality of education, which standardized test score trends indicate

may be declining, some estimates indicate that the

increased overall level of education in the work force

added 0.47 percentage points to GNP growth rates

between 1973 and 1982.44

Retraining can, however, reinforce rather than

lessen inequality. The Education section of chapter

6 suggested that an important function of modern

education was to prepare people to continue to learn

throughout their career. This seems to be the case.

People with good educations and high incomes represent the majority of all those engaged in adult edu4~The Wil]iam T. Grant Foundation, op. cit., fOOtnOte 32.

44Martin Nei[ Bai]y, “what Has Happened tO Productivity Growth?”

Science, vol. 234, No. 4774, Oct. 24, 1986, p. 445.
380

cation and training.45 One-third of all people with

more than 5 years of college participated in adult

education in 1984, as opposed to only 2 percent of

people with less than nine years of schooling. And

while only 28 percent of all families in the United

States had incomes over $35,000 in 1984, over 37

percent of people enrolled in adult education came

from these families.46

The Effects of Race and Sex.—The rapid increase of women in the work force, and the continued, though diminishing, disparity between male

and female wages, has contributed to the growing

inequality in wages, as more women have entered

the labor force during this period. Table 11-7, for

example, indicates that while male and female wages

have become somewhat more equal since 1973–

the worst year for women—the ratio between female

and male earnings is still far from even.47

Salaries of younger women more closely approach

those of men (again see table 11-7). In 1979, women

20 to 24 years old earned 77 percent of the weekly

earnings of their male counterparts—a fraction that

grew to nearly 86 percent by 1985. The ratio for

women 25 to 34 years of age increased from 0.68

45 See U.S. Congress, Office of Technology Assessment, Technology

and Structural Unemployment: Reemploying Displaced Adults, OTAITE-250 (Washington, DC: U.S. Government Printing Office, February

1986), p. 275.

46 U.S. DepaflMent of Education, Center for Education Statistics, The

Condition of Education (Washington, DC: U.S. Government Printing Office, 1986), based on “Current Population Survey,” Washington DC, May

1984,

47 The ratio between male and female wages seems to have considerable durability, as evidenced by this passage from Leviticus 27.1-4:

The Lord spoke to Moses and said, “When a man makes a special vow

to the Lord which requires your valuation of living persons, a male between

twenty and sixty years old shall be valued at fifty silver shekels. If it is a

female, she shall be valued at thirty shekels,”

Table 11-7.-Changes in Ratio of

Female to Male Wages

Female/male wage ratio:*

1960 1970 1973 1980 1985 1986

0.61 0.59 0.57 0.60 0.64 0.70

Recent years, by age cohort:**

20-24 25-34 35-44 45-54

1979 . . . . . . . . . . . . . . 76.7 67.5 58.2 57.0

1985 . . . . . . . . . . . . . . 85.7 75.1 63.2 59.6

SOURCES: *David E. Bloom, “Women and Work,” American Demographics, September 1986, p. 25.1986 data provided by the Bureau of the Census,

U.S. Department of Commerce, September 1987.

**Council of Economic Advisors, Economic Report of the President,

1987, p. 221.

to 0.75 during the same period. However, women

between 45 and 54 years of age earned less than

60 percent as much as males in 1985—a fraction that

did not change significantly after 1979.48

Between 35 and 40 percent of the pay gap separating men and women results from the occupations

women choose or have forced upon them.@ Some

of the remaining gap in pay results from the fact that

women have not invested as heavily in their own

education as men, or have elected to choose college

majors that lead to low paying occupations. Half of

the earnings difference separating male and female

college graduates may be explained by choice of major.50 This, of course, leads to a question of causality. Are women underinvesting in themselves or

choosing low paying majors because they do not feel

that they can obtain well paying jobs, or are their

choices based on other factors (interests in nursing

rather than engineering) that lead to lower wages?51

Most professional women are teachers, but there

are growing numbers in other fields (see table 11-

8). Occupational segregation has declined primarily because women have entered male professions,

and not the reverse. Women have done most poorly

in business management; only 36 percent of administrators are women, and only 5 to 10 percent of top

executives. Only one Fortune 500 company is

headed by a woman—Katharine Graham of The

Washington Post.

Table 11-9 indicates the extent to which women

and minority wages are lower than white male wages

because of differences in education and work experience. Much of the disparity between male and female wages, and between the wages of whites and

blacks, results from segregation by occupation, rather

than inequality in pay for identical work.52 Half of

all women, for example, work in occupations where

two-thirds of all workers are female.53

iscouncil of Economic Advisors, Economic Report of the President,

January 1987, Washington, DC, p. 221.

WD.J. Treiman and H.1 Hartmann, cd., Women, Work, and Wages.’

Equal Pay for Jobs of Equal Value (Washington, DC: National Academy Press, 1981).

50Ibid.

slKenneth Arrow, “Economic Dimensions of occupational Segregation: Comment l,” in Signs: Journal of Women in Culture and Society

1, pt. 2 (Sprint, 1976), pp. 233-237.

5ZW.T. Bkjby and J.N. Baron, “Men and Women at Work: Sex, Segregation and Statistical Discrimination,” American Journal of Sociology,

vol. 91, pp. 759-799.

53 B.T. Thornton Dill et al., op. cit., footnote 42.
381

Table 11-8.—Percent Female in Selected Occupations

1970 1986

Architects . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Bus drivers . . . . . . . . . . . . . . . . . . . . . . . . . 28

College & university teachers . . . . . . . . . 29

Computer scientists . . . . . . . . . . . . . . . . . 14

Doctors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Lawyers . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Technicians . . . . . . . . . . . . . . . . . . . . . . . . 34

1st year medical students . . . . . . . . . . . . 9a

8

50

37

28

18

20

47

34

a

Represents 1969 ratio.

SOURCES: David E Bloom, ’’Women and Work,’’ American Demographics, vol.

8, No. 9, September 1988, p. 25. Council of Economic Advisors, Economic Report of the President, 1987, p. 219.

The disadvantages faced by blacks in the American workplace have been painfully difficult to

change. Black unemployment is at least twice that

of whites in all age groups except women over 55,

while black male teenagers with work experience

dropped from 67 to 47 percent between the mid1960s and the mid-1970s; current unemployment

among black teenagers is close to 50 percent. Differences in levels of educational attainment are creating growing inequality among blacks. The earnings

of young black male high school drop-outs fell 61

percent between 1973 and 1986 while the earnings

of black college graduates increased 6.5 percent. 54

The heavy hand of history continues to limit black

mobility. Blacks are comparatively immobile because

of their concentration in inner cities, while many

attractive jobs are opening in suburban and exurban areas poorly served by public transportation (see

54 The William T. Grant Foundation, op. cit., footnote 32.

the last section of ch. 5). Poor neighborhoods and

other factors contribute to comparatively weak

educational experiences. A history of unemployment

and underemployment further limits opportunity; a

large fraction of young blacks has already been

scarred by chronic unemployment. Many reach their

prime working age without any successful work experience. 55

One of the greatest barriers facing minorities is

the way they have been served by the educational

system. While there are not major racial differences

in “median years of school completed,” there appears to be a significant disparity in the quality of

the education obtained (see figure 11-11).

Flexibility and Job Security

Americans have always been willing to tolerate

frequent job changes. Unlike workers in most other

developed countries, Americans frequently change

jobs and even move to different parts of the country to find them. This mobility has been a source

of strength for the U.S. economy, allowing it to shift

with comparative ease into new production systems. 56

But an economy that achieves flexibility largely

through the use of “disposable” workers, who accumulate little experience and have little loyalty to

5s.I. No~OOd, “The FUtUre of Employ merit,” op. Cit., footnote 2.

S6~ec~n~/ogyand ,S/ruc(ura/ Unernp/oyrrrent, OP. Cit., footnote 45, P.

144.

Table 11.9.—The Effects of Education, Experience, Sex, and Age on Income

Male occupations Female occupations Effect on expected

(<34.1% F) (>34.1% F) female earnings

Average education. . . . . . . . . . . . . . . . 13.2 13.5 + 1.9 percent

Average hours . . . . . . . . . . . . . . . . . . . 44.2 43.0 – 1.0 percent

Percent under 30 . . . . . . . . . . . . . . . . . 27.5 30.8 –5.3 percent

Percent new workers . . . . . . . . . . . . . 10.0 12.7 – 1.1 percent

White occupations Minority occupations Effect on expected

(<34.1% Min.) (>34.1% Min.) minority earnings

Average education. . . . . . . . . . . . . . . . 14.2 12.1 – 11.7 percent

Average hours . . . . . . . . . . . . . . . . . . . 44.4 42.9 – 1.3 percent

Percent under 30 . . . . . . . . . . . . . . . . . 24.4 34.5 – 15.0 percent

Percent new workers . . . . . . . . . . . . . 9.2 13.3 – 1.6 percent

How To Read This Table: Individuals in occupations that were predominently male had an average education of 13.2 years,

while individuals in predominently female occupations had an average of 13.5 years of education, This factor would cause

the female occupations to pay 1.9 percent more than the male occupations.

SOURCE: B.T. Thronton Dill, L W Cannon, and R. Vanneman, “Race and Gender in Occupational Segregation,” Pay Equity: An Issue of Race, Ethnicity Sex, National

Committee on Pay Equity, February 1987 Work based on 5 percent sample of 1980 census data from U S. Department of Commerce, Bureau of the Census.
382

Figure 11-11.-Literacy Skills by Race

Percent scoring above Indicated level

Prose Comprehension Quantitative Literacy I

White Hispanic Black White Hispanic Black

How To Read This Figure: Americans aged 21 to 25 were given

a series of tests in 1985 to determine literacy levels (some

of the results of this test are also reported in table 3-27 of

ch. 3). In the prose comprehension portion of the test, 25%

of the whites but only 3.1% of the blacks who took the text

received scores of 350 or more; 98% of whites and 86% of

blacks recieved a score higher than 200.

SOURCE: US. Department of Education, Center for Education Statistics, Digest

of Education Statistics 1987 (Washington, DC: U.S. Government Printing Office, May 1987), table 11.

an individual employer, pays a considerable price.

Some of the cost appears in productivity lost because

of continual personnel changes. There are high social costs as well. Often the people most heavily affected are those with the fewest resources.

While employers are demanding and receiving

greater flexibility from their workers, there has also

been increased demand in the work force for nonstandard work hours. Mothers of small children, students, the elderly, and others wanting to combine

paid jobs with outside activities seek options other

than full-time employment from 9:00 AM to 5:00 PM.

Many would prefer to adjust their working hours as

needs change from week to week.

It appears that the new production and service networks being built around many different markets can

provide greater options for both employees and employers. Technology can help by lowering the transaction costs associated with monitoring uneven work

schedules, by improving the tools used to train and

retrain people needing to move to new jobs, and

even by creating options to work at home.

In the past, it was common to attribute a lack of

flexibility to union work rules or other contractual

rigidities. While these complaints are still heard, they

have greatly diminished. Many contracts now contain provisions to help employees adjust to new technologies, and unions have generally recognized the

need for productivity growth and technical change

in an increasingly competitive world.57

The Employer’s Perspective

Firms have reacted to demands for greater flexibility and adaptability in a variety of ways. Flexibility is inherent in sectors where small businesses are

continually formed and disbanded. Small businesses

are often bound by few inhibitions in hiring and firing. Many larger firms have tried to achieve flexibility by minimizing commitments to employees and

by hiring large numbers of “contingent” workers (see

below).

There are also many cases where firms have made

a conscious effort to gain flexibility by investing in

their employees. Chapter 3 documented the enormous investment being made in education and training at the corporate level. Other firms have found

ways to use profit sharing to spread the pain of economic hard times among many workers, rather than

letting a few bear the burden when they are laid off.

Some have allowed greater choice in work schedules—permitting employees to adjust their work to

home needs.

There is no clear indication of which strategy is

prevailing, or which is most likely to succeed under the rules now governing the U.S. economy.

Traditional Strategies for Flexibility. -U.S.

businesses have always achieved flexibility through

plant closings and layoffs, coupled with new hiring

in areas where growth is occurring. There is no sign

that this strategy is changing. Between January 1981

and January 1986, 10.8 million jobs were lost due to

plant closings, abolition of positions, or slack work.58

New techniques for achieving flexibility are now

coming into wider use. Businesses unwilling to undertake the cost of hiring permanent workers during periods of long-range uncertainty have turned

increasingly to part-time and temporary workers.

sTsee cye~ and MOWery, op. cit., footnote 35, for a review of this

subject.

saFrancis W. Horvath, “The Pulse of Economic Change: Displaced

Workers of 1981 -1985,” Monthly Labor Review, vol. 110, No. 6, June

1987, pp. 3-12.
383

Over the past decade, there has been significant

growth in the number of contingent workers—

individuals employed temporarily, subcontracted

from an intermediary firm, part-time workers, and

self-employed individuals. Taken as a whole, this

group increased 25 percent between 1975 and 1985

(compared to total employment growth of 22 percent), There are now 30 million employees in these

categories—27 percent of the labor force.59 The

growth of a contingent work force may also mean

that a significant number of people will find themselves without work during recessionary periods, as

firms seek to streamline costs by cutting back on employment of subcontractors or temporaries. This

could be particularly true among service sector businesses, many of which are now considered to be

relatively insulated from the impact of recessions.

The comparative decline of employment in manufacturing has also reduced the proportion of traditional, 40-hour per week “full time” jobs. Not only

do most service businesses have lower average numbers of working hours, the hours per job in these

businesses have been declining (see figure 11-12).

Hours fell sharply in the fast-growing retail businesses. Time devoted to finance, insurance, and real

estate activities declined until the early 1980s, but

the trend was reversed when this sector rebounded

from the 1982 recession.

It is obvious that a lack of commitment to employees can carry a high price. Constant turnover can

prevent the development of effective working teams

that seem critical to productivity.60 Most new production systems and delivery networks involve a

considerable amount of informal, on-the-job learning. The costs of this learning are high, but are seldom recorded (see notes to table 3-26 of ch. 3). Attempts to avoid training can prove costly. A survey

of firms attempting to introduce new automation during the past few years found that the training needs

associated with new equipment were “vastly underestimated” in most of the cases examined.61

59S. Christopherson, “Peak Time, Slack Time: The Origins of Contingent Labor Demand,” Working Paper Series 117, Institute of Industrial

Relations, University of California at Los Angeles, October 1986.

‘See John E. Ettlie, ‘r Facing the Factory of the Future, ” paper prepared for the National Science Foundation by the Center for Social and

Economic Issues, Industrial Technology Institute, Ann Arbor, Ml, August 1984.

61 B. Johnson and R.E. Rice, op cit., footnote 16.

Figure 11-12.-The Decline in Hours per

Job in Different Businesses

Hours per worker per year (thousands)

1

2.0

1.9

1.8

1.7

1.6

1.5

‘1950

—

How To

finance,

1955 1960 1965 1970 1975 1980 1985

Manufacturing — F.I.R.E .

Transport 8 Trade ~ All Jobs

Read This Figure: In 1950, the average worker in

insurance and real estate (F. I. R. E.) businesses

worked approximately 1,840 hours per year. By 1986, employees in F.I.R.E. averaged 1,755 hours per year.

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts, ” historical diskettes, tables 6.6 and

6.11.

Firms unable to command loyalty are vulnerable

to raids on valuable workers. The problem is particularly acute in the rapidly growing “high technology” sectors of the U.S. economy, where many firms

make a business of luring crucial employees from

each other. Intel was co-founded by Robert Noyce,

Andrew Grove, and Gordon Moore, who helped invent the integrated circuit before leaving Fairchild.

Zilog was founded by seven Intel executives; LSI

Logic was founded by former Fairchild executives;

and MOS is the brainchild of ex-Motorola Employees. Lester Hogan abandoned General Electric with

18 engineers to work at Motorola, and then left Motorola for Fairchild. It is not uncommon for semiconductor executives, engineers, and programmers to

have worked for half a dozen firms;62 similarly, turnover rates in the U.S. electronics industry are 20 to

30 percent per year.63 Of course, these moves may

be as much the result of opportunities in the recipient enterprises as of some substandard commitment

to employees among firms losing key workers.

62Charles H. Ferguson, “U.S. Microelectronics in Decline: Evidence,

Analysis, and Alternatives,” Massachusetts Institute of Technology, VLSI

Memo No. 85-284, Cambridge, MA, December 1985.

63 U.S. Electronics Association, 1980, cited in Ibid.
384

Alternative Strategies for Flexibility.–

Profit Sharing.–There is compelling theoretical

evidence to suggest that firms may be collectively

better off if they find a way to share the risks more

equitably among their employees by adjusting compensation for all workers instead of placing most of

the cost on the few who must be let go.64

A variety of mechanisms are possible, but all involve making some portion of employee compensation vary with a firm’s profitability. In addition to

being a mechanism for keeping employment comparatively steady, profit sharing can be used as a

management tool to provide employee incentives.

A number of firms have reported successful experiments in profit sharing as a tool in motivating employees. An observer looking at a program in the

Philips Company, where bonuses average 40 percent of an employee’s pay, reports that motivation

is so strong that “if a husband dies, the wake is at

night so that no one misses work.”65 Firms that elect

to manage their operations by giving individual

managers considerable independence, such as

managers of most franchised service stations, expect

the managers to bear the risks and rewards of fluctuating profits.

Perhaps the Nation’s premier example of profit

sharing is Lincoln Electric, the world’s largest manufacturer of arc-welding products. The company pays

6 percent of net income in common stock dividends.

Of the rest, bonuses range from 20 to 120 percent

on top of base salaries that are already competitive.

Although national statistics are difficult to read, it

appears that while few firms have gone as far as Lincoln, there has been significant growth in schemes

to share profits and risks. A recent survey of a variety of data sources revealed the following:66

● half a million companies have some form of

profit sharing;

● at least 6 major airlines and 15 companies have

employee ownership plans taken in response

to deregulation and cost pressures that followed;

● overall, 11 million employees in 8,000 busi-

●

●

●

●

nesses now own at least 15 percent of the companies employing them;

in 1983, 19 percent of all production employees, 27 percent of all technical and clerical employees, and 23 percent of all professional and

administrative employees were covered by

profit sharing agreements;

the National Bureau of Economic Research

found that “one-shot” bonus payments, replacing general pay increases, were called for in

almost 20 percent of all 1985 union contracts,

up from 6 percent in 1984;

20 percent of 564 companies surveyed by

Hewitt Associates in 1986 gave one-time bonuses to white collar workers, up from 7 percent in 1985; and

it is estimated that Ford will pay an average of

$3,000 per worker in profit sharing bonuses because of the company’s strong 1987 performance.

67

In spite of the fact that the classic “Scanlon Plan”

calls for 75 percent of profit sharing to go to employees, most profit-sharing schemes actually in place

appear to apply primarily to professionals and

managers. Top executives get most of the benefit.

A study of 491 companies conducted by the Conference Board, a business research organization,

showed that while 58 percent had top executive bonus plans, only 11 percent had profit sharing plans,

8 percent had all-employee bonuses, and 3 percent

had group cost-control incentives. One leading bank

pays bonuses of 30 percent for excellent branch

managers but only 6 to 8 percent in bonuses to employees. 68

Training and Retraining. 69—Another way to ensure that flexibility can be achieved without layoffs

is to develop planning strategies that encourage

workers to adapt themselves to new jobs created as

production systems change.70 Since firms have difficulty guaranteeing that investments in worker training will rebound to their advantage, rather than to

that of an employee who can take his or her knowledge elsewhere, there is an understandable reluctance for firms to invest heavily in training.

64M. L. Weitzman, The share Econon-Iy (Cambridge, MA: Harvard

University Press, 1984).

bSTheodoreCohn, repofied in R.M. Kanter, “The Attack on pay,” Harvard Business Review, vol. 64, No, 2, March-April 1987.

66 R.W. Kanter, op. cit., footnote 65.

67 John Holusha, “Ford Had Record Net of $4.6 Billion for 1987, ” The

/Vew York Times, Jan. 28, 1988, pp. D1, D4.

68 R.W. Kanter, op. cit., footnote 65.

69 For a comprehensive examination of this subject, see Technology

and Structural Unemployment, op. cit., footnote 45.

70 R.W. Cyert and D.C. Mowery, cd., op. cit., footnote 35.
385

Private corporations are often forced to remedy

defects in training provided by the elementary and

secondary school system. For example, 18 percent

of firms responding to a 1985 Training Magazine survey of firms with 50 or more employees said that

they offered a remedial education program of some

sort.71 Nearly one-quarter of the firms surveyed in

1977 by the Conference Board reported that “some

or much” of what they taught their employees in

corporate training programs was “really the responsibility of the schools. "

72 Similarly, 11 percent of firms

surveyed in 1975 provided remedial education,73 either in-house or in the form of tuition reimbursement, for basic education after hours. The Department of Defense is also forced to make heavy

investments in remedial training.74 In the view of

one expert:

It appears that one could cynically describe the U.S.

educational philosophy as one of indifference for 18

years followed by insistence on intensive, enormously expensive retraining efforts. There seems to

be insufficient time and money to do it right, but

plenty of time and money to do it over again.75

As the previous discussion suggests, it appears that

most training serves to help people with good educations stay ahead. The opportunities and problems

involved are discussed in greater length in the Education section of chapter 6.

Industry pays for most retraining in the United

States. The social gains from investments in training, however, can exceed the private returns realized by individual firms, and private sector retraining programs are often beyond the means of the

individuals most in need of such assistance—

suggesting the need for public policy that can encourage greater investment in training.76

71 Dale Feuer, “Where the Dollars Go?” Training: The Magazine of

Human Resources Deve/opmenf, October 1985, p. 48.

Tzseymour Lusterman, Educatjon in /dUStT (New York: The Conference Board, 1977).

731bid.

Tqsee U.S. General Accounting Office, Report to the Secretary of the

Army, “Poor Design and Management Hamper Army’s Basic Skills Education Program,” GAO/FPCD-83-19, Washington, DC, June 20, 1983;

and Thomas G. Sticht, Basic Skills in Defense, Office of the Assistant

Secretary of Defense, Manpower, Reserve Affairs and Logistics, March

1982.

Tssee U.S. Congress, office of Technology Assessment, “Education, ”

sector study, Washington, DC, 1987.

76 For a recent review, R.M. Cyert and D.C. Mowery, ed., op. cit., footnote 35.

Flexibility and Business Size.-There is no clear

relationship between the structure of a business sector, measured in terms of the size and scope of firms,

and the strategies adopted for flexibility in that sector. Analysis is restricted to anecdotes, which demonstrate that both small and large firms can provide

flexibility at a comparatively low human cost.

A business network can achieve flexibility by letting small businesses and self-employed individuals

absorb most of the pain of adjustment. This is the

primary source of flexibility for sectors dominated

by small businesses, such as construction. During

economic downturns, many small construction firms

either go bankrupt or are effectively closed while

their owners undertake maintenance or renovation

jobs.77

There are examples of areas where networks of

small enterprises have been able to operate effectively in highly volatile situations while providing

attractive work environments.78 Small firms, however, are typically much more willing to achieve flexibility through rapid layoffs and new hires. They are

far less likely to be covered by union contracts. In

1983, 18.8 percent of all U.S. employees worked under union contracts. Of this total, 4.7 percent of firms

with fewer than 25 employees had such contracts,

as opposed to 30 percent of all firms with more than

500 employees.79

Smaller firms are also less likely to help their workers adjust to new job demands, or to find new work

when they are laid off. One survey found that firms

with 10,000 or more employees spend on average

$86 per worker for training, while firms with 500

to 1,000 employees spend $27 per worker.80

There is no ambiguity about the relative poverty

of benefit packages offered to small business. While

67 percent of all U.S. employees are covered by an

TTSee U,S, Congress, office of Technology Assessment, Technolog)

and the Future of the US. Construclmn Imiustn (Washington, DC: The

AIA Press, 1986).

T6This is a strategy that Charles Sable argues has worked effectively

in Northern Italy and in parts of Western Europe See Michael Piore

and Charles Sable, The Second Industrial Divide (New York Basic Books,

1984),

79 U.S. Small Business Administration, The State of Small Business

(Washington, DC: U.S. Government Printing Office, 1985), p. 253.

80 Seymour Lusterman, op. cit., footnote 72; see also S. Lusterman

Trend; in Corporate Education and Training (New York, NY: The Conference Board, 1985).
386

employer’s health plan, for example, 85 percent of

the workers in firms with more than 500 employees are covered, as compared to only 39 percent of

workers in firms with fewer than 25 employees. Similarly, 56.4 percent of all workers are covered by an

employer or union pension fund. Only 18.7 percent

of employees in small firms are covered in such a

manner, while 86 percent of employees in firms with

more than 500 workers are covered.81

Small firms may also be more flexible in hiring

scarce talent when a new business opportunity

emerges. They have often been able to raid skilled

employees from other businesses.82 Entrepreneurs

have also been able to take advantage of the training employees have received in larger firms, though

small, entrepreneurial firms are often bought by

larger ones.

Willingness to hire and fire workers on short notice, and to pay high premiums for crucial tasks, can

combine to create a large gap between the wages

of skilled and unskilled workers in small firms. The

gap separating the wages of a physician and a nurse

in a private practice is typically far larger than in

a corporate health maintence organization.83

Sectors operating with a few large and dominant

firms can achieve flexibility if the larger firms successfully pass the burden of adjustment to smaller

“satellite” suppliers. This strategy is widely practiced

in Japan, and applies to some satellite systems operating in the United States—firms such as Eli Lilly,

Hewlett-Packard, and Digital have no layoff policies

similar to those offered in Japan. IBM faces business

downturns by curtailing contracts with supplier firms,

performing this work within IBM itself.

The Employee’s Perspective

Employees as well as employers can desire flexibility. The key question is whether variations in work

schedules are under the control of the worker or the

employer. There should be reasonable ways to

search for compromise.

BIU.!3. small Business Administration, op. cit., footnote 79, PP. 259

and 274,

Szpresentatlon of Gordon Moore, Chairman & CEO of the Intel Corp.,

Symposium on Economics and Technology, National Academy of Engineering, Palo Alto, CA, Mar. 17-19, 1985.

WU,S. Congress, Office of Technology Assessment, “Health, ” sector

study, Washington, DC, 1987.

It is difficult to estimate the underlying demand

for flexibility in work schedules, if only because relatively few people have the luxury of considering such

choices. There is reason to believe that a real unmet need exists among employees for greater flexibility. Parents with young children, for example,

would clearly benefit from adjustable work schedules, particularly given the shortage of adequate child

care facilities; a survey of women with children under five found that one-quarter were forced to curtail their working hours due to the unavailability of

day care.84 Inability to change schedules among parents has also led to such social developments as

“latch key children.” Many elderly people, forced

to choose between the shock of complete retirement

and continued full-time employment, would opt for

greater flexibility if it were available. The extent to

which a person is interested in more or less work

is heavily dependent on income (see figure 11-13).

As income rises, people are more likely to choose

unpaid time than pay. Women appear to trade free

time and income in a different way, but both sexes

follow a roughly similar pattern.85

Figure 1-21 of chapter 1 makes it plain that the

burden of adjustment to the emerging economy has

been most painful for those with poor educations.

84f7, Applebaum, Op. cit., footnote 26.

Bs,$usan E. Shank, ‘“preferred Hours of Work and Corresponding Earnings,” Monthly Labor Review, vol. 109, No. 11, November 1986, p. 43.

Figure 11-13.-Desire for More or Fewer

Hours of Work (percent of workers

aged 25-54)

Weekly earnings

less than 150

150-199

200-249

250-299

300-399

400-499

500-599

600-749

greater than 750

40 20 0 20 40 60 80

Percent

How To Read This Figure: In 1985, about 21 0/0 of all women

earning $200-250 a week wanted to work more hours, while

slightly more than 12°\0 wanted fewer hours of work.

SOURCE: Susan E Shank, “Preferred Hours of Work and Corresponding Earnings,” Monthly Labor Review, November 1986, p 43.
387

People with post-graduate degrees were scarcely affected by the recessions of the early 1980s, while

one high school drop-out in four was unemployed

at the peak of the downturn. The figure presented

in chapter 1 also forces some reflection about “natural” or “frictional” unemployment; post-graduates

seem perfectly capable of keeping “frictional” unemployment below 3 percent.

Figure 11-14 shows that overall growth in unemployment can be traced largely to growing unemployment of young, poorly educated workers. Unemployment grew even for young college graduates

between 1967 and 1979 as the baby boom entered

the job market. Older workers also suffered growing unemployment during this period. During the

1979-87 period, however, growth in unemployment

Figure 11-14.-6ontribution of Growth in

Unemployment Rates by Age and Education

to Increase in Total U.S. Unemployment

30

25

20

15

10

5

0

I/ —

- 5 , , I r 1

25-34 35-44 45-54 55-64 25-34 35-44 45-54 55-64

Age cohort

= College Graduate ~ 4 yrs High School

How To Read This Figure: Unemployment was 3.0°/0 in March

1967, 4.2°/0 in March 1979, and 5.7°/0 in March 1967. This figure

shows the extent to which this increase can be explained

by growth in the unemployment rates of workers with different levels of education (removing the growth in unemployment due to demographic effects—e.g., the entry of large

numbers of young workers who tend to have higher rates of

unemployment than middle aged workers).

The figure shows that nearly 25°/0 of the growth in the U.S.

unemployment rate between March 1967 and March 1979

resulted from an increase in the unemployment rate of workers aged 25-34 who had only four years of high school; 5°/0

of the increase could be explained by growth in the unemployment rates of college graduates aged 25-34. Similarly,

22°/0 of the growth in the U.S. unemployment rate between

March 1979 and March 1987 was attributable to a further increase in the unemployment rates of workers with high

school educations aged 25-34.

SOURCE Wayne J Howe, “Education and Demographics: How Do They Affect

Unemployment Rates?" Monthly Labor Review, voI 111, No 1, January 1988, pp. 3-9

among college graduates was not responsible for any

significant part of overall growth the national unemployment rate. But much of the overall increase

could still be traced to rising unemployment among

high school graduates—particularly younger ones.

While the average number of hours worked per

week has not declined significantly for two generations, there has been an extraordinary amount of

movement in work schedules. Figure 11-15 summarizes changes in working hours that occurred between 1979 and 1985. The 40-hour week is becoming less common, while there is considerable growth

in both shorter and longer work weeks.86

Surprisingly few adults hold stable, full-time jobs

and receive pay for 40 hours a week, 50 weeks a

year. This translates into significant variation in

yearly incomes, The average year-to-year change in

work hours during the 1970s was nearly 320 hours

(see table 11-10); while change among white men

matched this average, change ranged from 280 hours

for white women to 350 hours for blacks. More than

20 percent of white men reported average changes

of more than 500 hours per year over the 10 year

period, and nearly 75 percent experienced at least

1 year of change of at least that magnitude.87

With the exception of the 17 percent of the U.S.

labor force working under union contracts, those

working in firms having a long tradition of no layoffs, and those working for the Federal government,

which until recent budget cutbacks has tended to

discourage firing except in rare circumstances, few

Americans have much control over their job tenure.

Nearly two-thirds of all U.S. workers aged 25 and

older have worked for their current employers less

than 9 years, while less than 1 of every 8 people

(and only 1 in 15 women) have been with the same

firm for 20 or more years (see table 11-11).88

While strong circumstantial evidence suggests that

these variations are involuntary, some variation in

working hours is voluntary. Parents may elect to

86Shir]ey J. Smith, “crowing Diversity of Work Schedules, ” ~Onth/J’

Labor Review, vol. 109, No. 11, November 1986, p. 8. ~7Greg J, f)uncan, Years of Po}’erty, Years of P/enty, Survey Research

Center, Institute for Social Research, University of Michigan, Ann Arbor, Ml, 1984, p. 10.

‘Paul O. Flaim, “Work Schedules of Americans, An Overview of New

Findings,” Monthly Labor Review, vol. 109, No. 11, November 1986,

p. 5.
388

Figure 11-15.-Change in Average

Weekly Hours Worked

(May 1979-May 1985)

Percent change in weekly hours

60 -“

5 0 -

4 0 -

3 0 -

2 0 -

10-

0 -‘

-10 -

)

-20 v 1 T , ,

1-29 30-34 35-39 40 41-48 49+

Usual hours worked each week

= All workers ~ Men m Wome n

How To Read This Figure: The number of men and women

working 40 hours per week declined about 4% between May

1979 and May 1985. The number of women working more than

49 hours per week increased nearly 50% during this period.

SOURCE: Shirley J. Smith, “Growing Diversity of Work Schedules,” Monthly

Labor Review, vol. 110, No 11, November 1986, p. 10.

work fewer hours when their children are young.

University professors take sabbatical leave once

every 7 years.

Table 11-10.—Year-to-Year Changes in Annual

Work Hours (1969-1978)

Average yearly change in work hours . . . . . . . 319 hours

Percent of sample with average yearly

change in annual work hours

Less than 100 hours . . . . . . . . . . . . . . . . . . . . . . 19 percent

100 to 250 hours . . . . . . . . . . . . . . . . . . . . . . . . . 27 percent

250 to 500 hours . . . . . . . . . . . . . . . . . . . . . . . . . 34 percent

More than 500 hours . . . . . . . . . . . . . . . . . . . . . 20 percent

Percentage for whom work hours changed

by 500 hours or more

In at least one year. . . . . . . . . . . . . . . . . . . . . . . 68 percent

More than half the time. . . . . . . . . . . . . . . . . . . 11 percent

NOTE: Data applies to “household heads and wives,” and includes unmarried

men and women who headed households and wives of men who headed

households.

SOURCE: Greg J. Duncan, Years of Poverty, Years of Plenty, Survey Research

Center, Institute for Social Research, University of Michigan, Ann Arbor, Ml, 1984.

Table 11.11.—Continuous Employment with

Current Employer (men and women age 25 and older)

Years of continuous employment

Total 1 or less 2-9 10-19 20 or more

Men. . . . . . . 100.0 18.0 42.2 23.2 16.7

Women . . . . 100.0 23.4 50.8 19.1 6.7

Total . . . . 100.0 20.3 45.9 21.4 12.3

SOURCE: Paul O. Flaim, “Work Schedules of Americans: An Overview of New

Findings,” Monthly Labor Review, voI 109, No. 11, November 1986, p. 4.

Under current practices, workers often receive little

notice of impending layoffs, which increases their

sense of powerlessness. Blue-collar workers receive

an average of 7 days notice of plant closing, and

white-collar workers an average 15 days; unionized

blue-collar workers receive an average of 2 weeks,

while blue-collar workers in non-union establishments receive an average of only 2 days.89 With such

short notice, it is not unusual for workers to face

extended periods of unemployment—which vary

among different industries—before securing another

job, during which time they may lose all unemployment and health benefits that were associated with

their previous job. As a recent OTA study concluded,

“Notice periods this brief do not allow time to prepare an effective program of adjustment assistance

for the displaced workers.”90

On the whole, little of the growing variation in

work schedules appears to be voluntary. For example, the percentage of women working involuntarily part-time increased 300 percent between 1967

and 1984.91 In October 1986, 23 percent of men and

17 percent of women working part-time reported that

they would prefer full-time work—percentages that

have grown sharply during the past 10 years.92

Accepting part-time work can mean real economic

hardship. Part-time workers earn an average of $4.50

per hour compared to $7.80 per hour for full-time

workers, while receiving far fewer benefits. Moreover, more than 19 percent of women working involuntarily part-time lived in households below the

poverty level in 1983, up from 13.4 percent in 1979.93

The factors that have led to part-time work also

create a situation where many people put in exWU.S, Congress, Office of Technology Assessment, Plant C/osing: Advance Notice and Rapid Response-Special Report, OTA-ITE-321 (V4ashington, DC: U.S. Government Printing Office, September 1986); U.S.

General Accounting Office, “Plant Closings: Information on Advance

Notice and Assistance to Dislocated Workers,” Washington, DC, 1987.

~P/ant ciosin~:Advance Notice and Rapid Response—Special Report,

op. cit., footnote 89, p. 1.

~1 E. App]ebaum, op. cit., footnote 26. While the ranks of ail involuntary part-time workers have declined slightly since 1983, current levels

are historically high (5.3 million in 1986 v. 4 million in 1980); the U.S.

Bureau of Labor Statistics indicates that there is normally a much greater

decline two to three years into a recovery. See Richard L. Worsnop,

“Part Time Work,” Congressional Quarterly’s Editorial Research Reports,

vol. 1, No. 22, June 12, 1987, p. 291.

9ZU.S. Department of Labor, Bureau of Labor Statistics, Enrp/oyrnent

and Earnings, vol. 33, No. 11, November 1986, p. 17.

9SE. App]ebaum, op. cit., footnote 26.
389

tremely long hours. Figure 11-15 demonstrated significant growth among people working more than

49 hours per week, and among women working from

41 to 48 hours. At the same time, moonlighting in

a second job—or in several jobs—has reached record high levels. The moonlighting rate among

women doubled between 1970 and 1985.94

Flexible work hours (“flex-time”) have been encouraged by the Federal government,95 while 4 of

every 10 American employers have implemented

programs that give workers the freedom to change

the time at which they arrive and leave from work.96

For example, Intel, a company of 21,500 employees located in California’s Silicon Valley, has created

a “flexible work program, “ in which temporay workers agree to adjust their hours according to the firm’s

needs (anywhere between O and 40 hours per week,

at an expected average of 20 to 25) in return for partial benefits.97

Volatility of work schedules can translate into volatility in income. The ability to change jobs results

in opportunities for growth and higher income as

well as opportunities for failure. A study following

5,000 families during the 1970s found extremely high

rates of both upward and downward movement in

income. Dividing household incomes into five categories, 23.2 percent moved at least two categories

during the decade, and 36.8 moved at least one. Only

40 percent remained in the same relative income

position. While more than 71 percent of the white

men working in relatively low-paying occupations

(clerical and sales, unskilled labor, and non-union

operatives in non-durable manufacturing) had moved

into higher-paying occupations during the decade,

only 40 percent of the black males had done so.98

~4John F, S[inson, Jr,, “Moonlighting by Women Jumped to Record

Highs,” kfonthl~r Labor Re}iew, vol. 109, No. 11, November 1986, p,

23. See also John D. Owen, Working Hours (Lexington, MA: Lexington

Press, 1979),

95U.S, Congress, General Accounting Office, “Alternative Work Schedules for Federal Employees.” GAO/GGD-85-63, Washington, DC, July

19, 1985.

96 U S. Department of Labor, Bureau of Labor Statistics, “BLS reports

on Employer Child Care Practices,” news release No. 88-7, Jan. 15, 1988,

~rplant closing: Ad\,ance .Notice and Rapid Response—Special Report,

op. cit., footnote 89, p 11,

98Greg J, Duncan, op, cit., footnote 87, table 4.5; and University of

Michigan, Institute for Social Research, “Five Thousand U.S. Families—

Patterns of Economic Progress,” vol. 1, 1984,

Job Satisfaction and Alienation

Perhaps the most important gap between expectation and reality in the emerging U.S. economy may

exist in an aspect of employment that is difficult even

to describe, much less quantify. One of technology’s

most important contributions to the work force is

its ability to make work a source of interest and pleasure, rather than one of drudgery and exertion. The

work place can be a part of a pleasurable society, and

can provide a sense of worth and accomplishment.

Expectations in jobs areas varied as people themselves. Empirical analysis of this subject is limited,

and necessarily somewhat vague. Most people would

describe a “good” job as one that offers opportunities for learning, creativity, autonomy, and variety.99

New production networks have the potential to improve many jobs measured on all of these factors.

Of course, not everyone would find increased interest and challenge at work a mark of progress. Some

people prefer impersonal, routine tasks that do not

follow them home—tasks that may involve their

hands but not their minds, freeing them for conversations at work.l 00

People also want an opportunity to see and evaluate the results of their individual contributions. While

most workers resent intrusive monitoring by supervisors, they may enjoy an opportunity to measure

the quality of their own work.101

While statistics available from polls are ambiguous (see table 11-12), it appears that at least half of

U.S. workers look on employment as both a source

of money and a basic expression of self worth. Unfortunately, it is not possible to tell what percentage of the labor force would respond in this way if

it were clear that technology could make jobs more

interesting, or if increased flexibility in working hours

could minimize conflicts between work and raising

children; as table 11-12 shows, nearly one-third of

the individuals responding to one poll did claim that

they would consider a cut in pay in return for more

interesting work. There was near-unanimous agreeggj,R, HaCkman and G. Oldham, Work Redesign (Santa Monica, CA

Goodyear Publishing Co., 1980); and J.R. Hackman, J.L. Pearce, and

J,C, Wolfe, ‘i Effects of Change in Job Characteristics on Work Attitudes

and Behaviors, A Naturally Occurring Quasi-Experiment, ” Organizational Behavior and Human Performance, vol. 21, pp. 289-304.

IO~Katze]], Yanke]ovich et al., Work, Productivity, and .fOb Satisfaction, The Psychological Corp., 1975.

101 The Electronic Supervisor, op. cit., footnote 20, p. 56.
390

Table 11-12.—The Rewards of Working

Question: Response

It is personally important

to work?(a)

“1 have an inner need to do

the very best I can, regardless of pay.”

Would you take a cut in salary for more meaningful

and interesting work?

Is your main interest in

work earning money for

other things?(a)

“Most people get their real

satisfaction from their

home life and their leisure,

not their work. ”

“1 find my work interesting

but I wouldn’t let it interfere with the rest of my

life.’’(a)

“The hue and cry about

mounting job dissatisfaction is an invention of

professors, journalists, and

the ‘left’.” (b)

Management’s concern for

the welfare of their employees improves productivity .

88 percent answered YES

Answering YES

63 percent of college

graduates

48 percent of high school

graduates

52 percent average

32 percent answered YES

7 percent answered YES

51 percent union leaders

DISAGREE

62 percent management

DISAGREE

21 percent answered YES

80 percent union leaders

DISAGREE

71 percent management

DISAGREE

86 percent union leaders

AGREE

82 percent management

AGREE

SOURCES: (a) Harvey Lauer, Jobs in the 1980s and 1990s: A Sourcebook for

Policymakers, Aspen Institute, Queenstown, MD, June 1983.

(b) Katzell, Yankelovich, et al., Work, Productivity, and Job Satisfaction, The Psychological Corp., 1975.

ment that the productivity of the workplace depended heavily on management’s concern for their

employees.

Occupational Health and Safety

An obvious measure of the quality of American

jobs is the extent to which they provide an environment that minimizes the risk of injury and disease.

While fatalities and injuries directly traceable to work

are responsible for only a small fraction of deaths

and sickness in the United States, there is much

room for improvement. Over 10 million work-related

injuries leading to restricted activity or requiring

medical attention occur each year. Of these, approximately 3 million result in lost work time. In 1985

alone, 2 million people suffered disabling injuries

on the job, and over 10,000 died.102

102 U.S. Bureau of the Census, Statistic/Abstract of the United States:

1987 (107th edition.), Washington, DC, 1986, table 696.

For the most part, changes in economic structure

have improved the safety of working conditions.

While the correlation between safe jobs and areas

of strong growth is not strong, jobs are increasing

where the risks of accidents are comparatively low

(see table 11-13). Automated equipment can be substituted for some of the most hazardous work: robots

replace human paint sprayers, and automated weaving equipment reduces exposure to particles that

cause “brown lung. ” This was done in part to comply with new occupational health and safety regulations. Taken together, such effects appear to have

reduced injury rates more than 30 percent since

1972. 103

Tracing the impact of economic change on workplace safety is an uncertain business. Data collected

on deaths and injuries resulting from work can be

unreliable. Accident rates are affected by demographics (younger, less experienced workers tend

to have more accidents), business cycles (injury rates

increase when high employment rates bring inexperienced people into new jobs and lead to more

overtime), changes in the way safety regulations are

enforced, and a variety of other factors than can

mask the effects of structural change in the economy. 

104 Rapid changes in production technology increase the difficulty of ensuring safety conditions.

Production processes may become obsolete before

they can be shown to expose workers to hazards.105

The emerging structure of the U.S. economy may

add new kinds of risks. Stress resulting from working conditions has become a major health hazard, 106

resulting in stress-related absenteeism and medical

expenses that may cost between $50 and $75 billion annually.107 In addition, alcoholism and drug

abuse may be related to job-induced stress. The National Institute on Drug Abuse has estimated that

U.S. firms lose $33 billion per year due to employee

drug abuse.108

103 U.S. Congress Office of Technology Assessment, Prevendn~ ]]hess

and /rIjury in the Workplace, OTA-H-256 (Washington, DC: U.S. Government Printing Office, April 1985), p. 35.

Ioisee Ibid,

IOS See R. Howard. op. cit., footnote 11.

IOGR. Arndt and L. Chapman, “Potential Office Hazards and Control,”

contract report prepared for the Office of Technology Assessment, September 1984, in Preventing Illness and Injury in the Workplace, op.

cit., footnote 103.

I07u,s. congress, Office of TechnoloW Assessment, Automation Of

America’s Offices, OTA-CIT-287 (Washington DC: U.S. Government Printing Office, 1985), pp. 300-304.

10~David W. Hoyt et. al., “Drug Testing in the Workplace–Are Methods Legally Defensible?, ” Journal of the American Medical Association,

vol. 258, No. 4, July 24/31, 1987, p. 504.
391

Table 11-13.—The Safest and Most Dangerous industries

(lost workday cases per year per 100 full-time equivalent jobs (FTEs))

Percent growth in Percent of all growth

Lost workday cases lost workday cases Percent of all FTEs in FTEs between

in 1984 1975-84 in 1984 1975 and 1984

Security, commodity brokers . . . . . . . . . 0.3 –25% 0.4%0 0.2%0

Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7 17 2.1 0.5

Insurance carriers . . . . . . . . . . . . . . . . . . . 0.8 33 1.7 0.3

Educational services . . . . . . . . . . . . . . . . 1.3 – 7 1.7 0.3

Communication . . . . . . . . . . . . . . . . . . . . . 1.4 – 7 1.7 0.2

Personal services . . . . . . . . . . . . . . . . . . . 1.5 15 1.2 0.2

Pipelines, except natural gas . . . . . . . . . 1.7 6 0.0 0.0

Real estate. . . . . . . . . . . . . . . . . . . . . . . . . 2.2 16 1.4 0.4

Business services. . . . . . . . . . . . . . . . . . . 2.2 10 4.9 2.5

All private industries . . . . . . . . . . . . . . 3.7 12 100.0 100.0

Rubber and misc. plastics products . . . 6.4 – 4 1.0 0.2

Stone, clay, and glass products . . . . . . . 6.6 12 0.8 –0.0

Fabricated metal products . . . . . . . . . . . 6.7 2 1.9 0.0

Construction . . . . . . . . . . . . . . . . . . . . . . . 6.9 25 5.7 1.1

Water transportation . . . . . . . . . . . . . . . . 7.3 –11 0.2 –0.0

Air transportation . . . . . . . . . . . . . . . . . . . 7.5 1 0.6 0.2

Food and kindred products. . . . . . . . . . . 8.1 11 2.1 –0.1

Trucking and warehousing . . . . . . . . . . . 9.1 21 1.7 0.3

Lumber and wood products . . . . . . . . . . 9.9 16 0.9 0.1

FTE = Full.time equivalent employee.

SOURCES: For injury rates, US Bureau of the Census, Statistical Abstract of the United States: 1987 (107th edition.), Washington, DC, 1966; for FTEs, U S Department

of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts, ” historical diskettes, table 6.7b. FTE

While uncertainty in the American economy have

often been great, pressures can increase in periods

of rapid change. Rapid changes in working environments and management practices can lead to stress.

Many new office jobs result in increased responsibility without increased authority—a combination

that easily leads to stress. 109 Increased use of electronic surveillance equipment may also contribute

to stress.110

The first part of this chapter documented a dramatic increase in work force participation rates of

women, many of whom must combine work with

stressful family responsibilities; this, in turn, can increase stress on the job as well. For example, a recent survey of several firms found that roughly onequarter of employees over age 40 provided care for

elderly relatives, and that 80 percent of these

providers were women;111 this has translated into

109 See the discussion of the insurance industry in the Personal Business and Communication section of chapter 12.

I l~see g-to.5, “The 9 t. 5 National Survey on Women and Stress—

Office Automation: Addendum,” National Association of Working

Women, Cleveland, OH, 1984, pp. 4-5; see also The Electronic Supervisor, op. cit., footnote 20.

111 "Issues for an Aging America: Employees and Elder Care,” University of Bridgeport, Center on Aging, Bridgeport, CT, 1987.

symptoms of depression

among the providers of

elderly themselves. 112

that are three times higher

eldercare than among the

Increased numbers of jobs are now found in

offices. Until recently, little was known about illness

related to an unhealthy indoor environment—now

called the “sick building syndrome. ” Unlike toxic

substances associated with industrial settings, Federal safety standards have not yet been applied to

indoor pollution. Symptoms are typically vague, including dizziness, drowsiness, and headaches, but

can also include such life-threatening diseases as cancer and pneumonia.113 The problems are often difficult or impossible to trace. Many appear to be tied

to tobacco smoke, building fabrics, and copymachine chemicals. 114 The long term effects are still

112 University of Michigan, School of Nursing, cited in Fairlee Winfield, “Workplace Solutions for Women Under Eldercare Pressure,” Personnel, vol. 64, July 1987, pp. 31-39.

113 Hal Levin, “Indoor Air Pollution and Its Applications in Office Budding Development and Operation,“ in J. Thomas Black et al., cd,, The

Changing Office Workplace, The Urban Land Institute, Washington, DC,

1986.

114 Robert Steyer, “Sick-Building Syndrome. ” Across the Board, December 1986, p. 35.
392

largely speculative. They are likely to be at least as ade, States have had to shoulder most of the burgreat as exposure to air pollution outdoors. 115 den of addressing the 733,000 public, commercial,

Asbestos exposure in buildings also presents a seri- and large residential buildings that are estimated to

ous problem in some areas. While the removal of contain the substance. 116

asbestos from schools has been given much attention by the Federal government during the past dec- 116 U.S. Environmental Protection Agency, cited in Rochelle L. Stanfield, "Abating Asbestos,” National Journal, vol. 19, No. 43, Oct. 24,

1987, p. 2704. 115 Hal Levin, op. cit., footnote 113
Chapter 12

Work and the Amenity Networks
CONTENTS

Page

Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..............395

Farming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............. 395

Food Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....................396

Retailing and Wholesaling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ....397

Food Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........................397

Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............................398

The Future of Health Care Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...398

Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...................,...400

Labor Productivity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................401

Job Skills and Job Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........402

Transportation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....................,..403

Personal Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...405

Freight Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....................405

Safety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..................406

Clothing and Personal Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............406

Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..408

Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........................408

Skills and Work Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..............408

Wages and Part-Time Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............409

Educational Demand and the Desire to Teach . .............................410

Personal Business and Communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....411

Recent Trends... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...................411

The Insurance Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..............412

Looking to the Future. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .................415

Recreation and Leisure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..................416

Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........................417

Manufacturing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..........................419

Production Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....................420

Equipment Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....421
Chapter 12

Work and the Amenity Networks

While chapters 10 and 11 chronicled massive

changes taking place in the working life of most

Americans, many of the changes proved difficult to

explain. The present chapter attempts to explain

some of these changes by examining the way the

structural shifts described in chapter 6 affect the nature of work in each amenity network.1

It proves to be easier to document the kinds of

jobs that are disappearing than the kinds being created by economic change. The number of jobs in

traditional occupations like machine operators,

1 As with chapter 6, the amenity discussions in the present chapter

are drawn largely from a set of working papers conducted in support

of this document; since the papers were cited in the appropriate sections of chapter 6, citations are not reproduced here. Also in keeping

with the form set by the earlier chapter, this discussion concludes with

a look at the U.S. manufacturing sector as a whole, though many manufacturing activities are addressed by the individual amenity discussions.

farmers, and secretaries is declining while there has

been rapid growth in jobs classified as “other.” The

problem of tracking shifts in occupations is made

all the more difficult by the fact that many careers

have become serial specialties. Few people can expect to begin a career with a long apprenticeship

and end it with a gold watch. Employers are likely

to find that the most valuable employees are those

with protean characteristics—people capable of shifting rapidly to new tasks and teaching themselves

what needs to be known. Typically, this requires an

ability to work as a part of a group that often combines disparate backgrounds and capabilities. The

right kind of education can provide employees with

considerable scope. Given no other information, it

is often difficult to determine whether a person staring at a computer screen is operating a nuclear power

plant or answering a consumer’s inquiry about a

credit card charge.

Over 17 million people owe their jobs directly or

indirectly to food production, processing, preparation, and sales. This is roughly 16 percent of all U.S.

jobs. Of this total, one out of five work preparing

foods, largely in restaurants (see figure 12-1). Food

production provides nearly as many jobs for data

entry employees as for farmers.

Productivity growth in this network has been uneven. Rapid growth in on-farm productivity and

steady advances in food manufacturing technology

have resulted in declining employment in these

areas. Comparatively slow productivity growth among

grocery stores, restaurants, and wholesale facilities,

coupled with rising demand, has resulted in rapid

job growth. There is a real danger that structural

changes underway in food production will result in

an industry sharply divided by skills and wages.

Farming

Although farms employed one-third of the U.S.

work force at the end of the 19th century, there were

only about 3 million people working on farms in the

United States in 1986. The farm jobs that remain are

likely to fall into two categories: (i) jobs for managers

and skilled equipment operators whose wages and

skills will more closely resemble those in advanced

manufacturing firms than those in traditional farming; and (ii) poorly paid, temporary and often dangerous jobs for unskilled farm labor.

The fate of the much celebrated “family farm” remains clouded. Some, of course, can and will grow

to become major production operations. Others will

be maintained even at very low rates of return on

assets by farm families willing to sacrifice income

for the independence and dignity of farm life. Increasingly, this independence is available only for those

able to supplement farm income with income from

other sources. Of roughly 2.2 million farms operating in 1982, only 860,000 were operated by individuals who reported no off-farm income. More than

one-third of the operators worked more than 200

days a year in off-farm occupations.2 Taken as a

2 U.S. Bureau of Census, 1982 Census of Agriculture, Washington, DC,

October 1983.

395
396

Figure 12-1.-Jobs Needed To Produce Food

in 1984 (percent of 17.5 million jobs)

Managers & Support

Technical Profession

Education & Health

Other Professional

Technicians

Sales Workers

Other Customer Contact

Information Distrib.

Data Entry etc.

Food & Beverage

Other Service Work

Precision Production

Machine operators

Transportation Ops.

Handlers & Laborers

Farming & Forestry

I 1

0 5 10 15 20 25

Percent of all jobs

SOURCE: See table 10-6 of chapter 10.

whole, farms with annual sales below $40,000 (71

percent of all farms operating) failed to make any

net income in 1985.3 Farming enterprises with annual sales above $500,000 (1.2 percent of all farms)

were responsible for 55.3 percent of all net farm income in 1985, and are expected to provide more

than 80 percent of all farm output by the turn of the

century. 4 These large farms are typically managed

like modern production facilities (see figure 12-2).

While growing farm productivity will eliminate

many jobs, it appears that there will be continuing

need for the services of farm laborers. There are

presently 2.6 million hired farm workers, of whom

740,000 work more than 150 days a year,5 New technologies may substitute for some stoop labor in areas

such as fruit harvesting, but reliable estimates are

difficult to obtain. It does appear that these workers

are the most glaring exception to cheerful estimates

showing how machinery has substituted for difficult

and dangerous work. In 1985, employees in agriculture, forestry, and fishing enterprises were nearly

five times more likely to suffer a death on the job

than the average U.S. employee.6 The continued

availability of individuals willing to work seasonally

3 U.S. Bureau of the Census Statfsdcaf Abstract 01 the United States.”

1987 (107th edition.), Washington, DC, 1986, table 1114.

41985 statistics from Census Bureau, cited in footnote 3. Forecasts

from Office of Technology Assessment, Technology, Public Policy, and

the Changing Structure of American Agriculture, OTA-F-285 (Washington

DC: U.S. Government Printing Office, March 1986).

5U s Department of Agriculture, Economic Research Service, “The

Hird Farm Working Force, 1983” AER-554, Washington, DC, June 1986.

b$~a~js~jcaj A~sfraC~ of the United States: 1987, op. cit., footnote 3,

Table 696,

Figure 12-2.-Professional, Technical,

and Managerial Positions in Agriculture

as a Percent of all Jobs in Agriculture

Percent

7 ,

6

5

4

3

2

1

0

1960 1976 1980 1983 1985 1987”

= Professional & Tech = Managers & Admin.

‘November 1967,

SOURCE’ U.S. Department of Labor, Bureau of Labor Statistics, matrices for Employment by Occupation and Industry, Washington, DC, various years,

for very low wages, and the alternative of inexpensive produce from abroad, diminishes incentives to

introduce technology and capital equipment as a substitute for migrant farm labor.

Food Manufacturing

The food manufacturing work force has been decreasing in absolute numbers because labor productivity has grown faster than demand for the output

of food in domestic facilities. Total employment in

food and kindred product manufacturing fell from

1.83 million in 1955 to 1.65 at the end of 1987.7 The

beef and pork industries, which have labor costs that

exceed the average for all food manufacturers, have

made major efforts to reduce such expenses. Productivity gains made possible in part by centralized processing of boxed beef described in chapter 6 caused

the number of meat cutters and butchers to decline

an average of 1.2 percent annually between 1970

and 1982.8 Partial automation in centralized facilities has had the effect of narrowing tasks and reducing skills.

Mechanization has also eliminated some of the

heavy lifting and other hazards of cutting, though

meat cutting remains a highly dangerous occupation. Food processing is still one of America’s most

dangerous industries, with the second highest rate

7 U.S. Department of Labor, Bureau of Labor Statistics, Employment

and Earnings, various issues.

8 U.S. Department of Labor, Bureau of Labor statistics, Employment

Projections for 1995 Bulletin 2197, Washington, DC, March 1984, p. 48.
397

of occupational injuries and illnesses per full-time

worker.9

Retailing and Wholesaling

Retail and wholesale food stores (primarily groceries and their suppliers) provide at least as many jobs

as farming. In 1985, retail groceries employed 2.6

million persons and wholesalers 670,000. Some of

the best paid employees in the American food production and delivery system work in grocery stores;

high levels of unionization have held wages considerably above retail averages. This situation is changing rapidly as employers attempt to drive down labor costs.10

The impact of new information technologies on

employment will be more indirect. While they will

increase the productivity of cashiers somewhat,

much check-out work will remain labor-intensive.

Technology will have its greatest effect on the clerical jobs associated with taking orders, processing invoices, preparing announcements, handling promotional coupons, making sales calls, and correcting

errors in all of these processes.

The negotiating status of grocery employees has

been undermined by declining employment in beef

preparation—a job requiring a unique and specialized skill. Chicken and pork preparation has been

almost completely removed from retail grocery firms

—replaced with centralized processing and brandname products. Beef preparation may follow. Continued movement of meat cutting into factory settings, however, is by no means certain. Some upmarket stores have rehired butchers primarily for

promotional reasons (see p. 209).

Management has taken advantage of soft labor

markets to be much more aggressive in opposing

unions. In a widely reported case, Kroger, the Nation’s second largest retailer, closed a large number

of operations in Pennsylvania because it claimed that

union wages made it uncompetitive. 11

9U.S, Bureau of Labor Statistics, Occupational /rJjUf’;es and ifi~esses

in the United States cited in Statistical Abstract of the United States:

1987, op. cit., footnote 3, table 697.

‘Wharles R. Handy, “Food Retailing,” in Food Marketing Review, 1986,

AER-565, U.S. Department of Agriculture, Economic Research Service,

Washington, DC, February 1987,

11 P.R. Kaufman, “Food Retailing, ” in Food Marketing Review, 1985,

U.S. Department of Agriculture, Economic Research Service, Washington, DC, 1986.

These strategies have had a striking effect on

wages and work hours. Grocery wages are now declining and retail labor’s share of the food dollar actually decreased 3.5 percent in 1985.12 Part-time

workers are replacing full-time workers; hours per

week in grocery stores fell from 32.5 in 1977 to 30.6

in 1983. At the end of 1983, average weekly earnings in grocery stores were nearly equal to the average weekly earnings of all private workers and were

37 percent higher than the earnings of average retail workers. By the end of 1987, average weekly

earnings in groceries had fallen to 78 percent of the

average for all private workers and were only 15 percent higher than average retail wages. Jobs in grocery stores may increasingly resemble conventional

retail jobs in both the skills they require and the

wages that are paid.13

Food Services

Restaurants and other food service businesses

have been a major source of new jobs in the United

States. Most of these jobs pay very low wages, and

provide only part-time work. In October 1987, the

average worker in an eating and drinking place

worked 25.9 hours a week (down from 35.5 hours

in 1960) and earned $4.44 an hour (a wage less than

half the national average).14 The difference between

restaurant employment and jobs elsewhere in the

economy may become even more exaggerated as

automated equipment substitutes for routine skills

in many facilities, and the management of a fast food

franchise is made much easier by the introduction

of sophisticated computer-based inventories and

accounting information that can be derived directly

from check-out registers.

Food service employees not only work part-time,

but typically work hours that would not be attractive if alternatives were available. Restaurant employees often work in the evenings and on weekends.

Low wages make the jobs unattractive to anyone

forced to commute any significant distance. A commute costing $5 could reduce take-home pay by 20

percent.

IZR, parlett and D, Dunham, “Food Prices Post Small Rise, ” in Natio~a/ Food Review, Report No. 32, U.S. Department of Agriculture, Ec&

nomic Research Service, Washington, DC, 1986, p. 17.

ISU s Department of Labor, Bureau of Labor Statistics, EmP/o.Vment

,.

and Earnings, various issues.

14u,s. Department of Labor, Bureau of Labor statistics, ~~@OV~e~t

arrcf Earnings, vol. 34, No. 12, December 1987, p. 95.
398

Fast-food service was made possible in part by the dustry. Food chains such as McDonald’s and Wendy’s

fact that many young people were willing to work have already started to hire senior citizens to comirregular hours for low wages. The industry may face pensate for a shortage of teenagers.15

difficulties as the number of entry-level workers declines for demographic reasons (see ch. 11). Retired 15 Terry Stephenson Supple, “The Coming Labor Shortage,” Amerworkers may be a new source of labor for the in- ican Demographics, vol. 8, No. 9, September 1986, p. 34.

HEALTH

Bringing the Health amenity to Americans requires

the efforts of about 14 million people. The range of

talents required is enormous. Health enterprises employ large numbers of professional personnel, technicians, as well as semi-skilled personnel (see figure 12-3). The extraordinary amount of paperwork

associated with health care in today’s economy is

evident from the fact that Health spending produces

nearly as many jobs for data entry personnel as it

does for education and health professionals.

The Future of Health Care Employment

Factors Affecting Supply and Demand

As recently as 1983, estimates provided by the U.S.

Bureau of Labor Statistics (BLS) suggested an overall increase of 3 million new health care jobs between

1982 and 1995—almost 12 percent of all new jobs

created. 16 Although these numbers suggested a slight

16 G.T. Silvestri, J.M. Lukasiewicz, and M.E. Einstein, “occupational

Employment Projections Through 1995,” Monthly Labor Review, vol.

106, No. 11, November 1983, pp. 37-49; and U.S. Department of Labor, Bureau of Labor Statistics, “Employment Projections for 1995,” Bulletin 2197, Washington, DC, 1984 .

Figure 12-3.-Jobs Needed To Produce Health in

1984 (percent of 13.9 million jobs)

Managers & Support

Technical Profession

Education & Health

Other Professorial

Technicians

Sales Workers

Other Customer Contact

information Distrib.

Data Entry etc.

Food and Beverage

Other Service Worker

Precision Production

Machine Operators

Transportation Ops.

Handlers and Laborers

Farming and Forestry

024 6 8 10 12 14 16 18

Percent of all jobs

SOURCE: See table 10-6 of chapter 10.

slowing of the growth in health care employment

that was experienced during the 1970s, they did not

fully reflect the profound changes that were beginning to occur in the early 1980s. Table 12-1 shows

an uneven pattern of growth. There has been a rapid

and continuing rise in the more highly skilled medical professions, but comparatively slow growth

among licensed practical nurses and other “health

technicians.” The number of these technicians actually declined in 1987. The table, of course, does

not include many people indirectly employed by

health enterprises.

Significant changes underway in the structure of

the Nation’s health care network will have profound

effects on the nature and number of jobs created in

this system. Employment in health services will shift

away from the hospital. New jobs will be created primarily in smaller, ambulatory care facilities, nursing homes, and home health agencies. Jobs within

the hospital setting will also change in response to

new technologies and management strategies. The

following themes will dominate:

●

●

The combination of an increase in the supply

of physicians17 and growth in the number of

investor-ownership of hospitals and ambulatory

facilities may result in a greater proportion of

physicians and other health practitioners becoming salaried employees of health care corporations.18 As a result, physicians’ wages may

decline or stabilize.

Conflicting forces will affect growth in occupations sometimes known as physician “extenders”

—such as physician assistants, nurse practi17 In 1981, on average, only 36.9 percent of physicians were over 50

and 41.4 percent were under 40. See American Medical Association,

“Profile of Medical Practice, 1981,” Chicago, IL, 1981.

18 D. Neuhauser, “Twenty-First century Medical Education: Economic,

Social, Political and Technological Implications for Change,” presented

at the 94th Annual Meeting of the Association of American Medical Colleges, Washington, DC, 1983.
399

Table 12-1.—Health Related Occupations

tioners,

Number of jobs Percent Annual percentage

(in thousands) women growth rate in numbers

11/83 11/87 11/87 11/83-11/87 11/86-11/87

Health diagnosing . . . . . . . . . . . . . . . . 706 826 18.1 4.00 9.0

Health assessment . ..............1,909 2,118 85.1 2.63 7.6

Health technologists . ............1,113 1,173 83.7 1.32 –0.6

All occupations (for reference) . . . . . . . . . . . . . . . . . . . . . 45.1 2.52 2.8

Average hourly earnings

(percent above/below

national average)

1983 10/87

Offices of physicians . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –10,2 –7.3

Hospitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 9.7

Nursing homes and personal care . . . . . . . . . . . . . . . . . . . . . –35.3 –33.5

SOURCE: U.S. Department of Labor, Bureau of Labor Statistics, Employment and Earnings, Tables A-22 and C-2, various issues

mid-wives, and nurse anesthesiologists.

Pressures to contain costs would seem to favor

the substitution of low-wage personnel to perform certain physician tasks. However, the growing surplus of physicians may make it harder

for physician extenders to gain entry into the

field.

● Although hospital utilization is declining, demand for registered nurses is increasing, in part

because many of the people admitted to hospitals require more care. A real nursing shortage

has resulted in some regions. There are a variety of explanations, the most compelling being

comparatively low wages and irregular working hours offered nurses coupled with the growing number of attractive alternative employment

opportunities for women with comparable education and training.19 More nurses are likely to

obtain BAs, MAs, and even doctorates.20 The

nursing profession may become increasingly

polarized between highly skilled jobs in acute

care hospitals and general duty nursing jobs in

ambulatory and convalescent care facilities and

home care settings.

● Hospital-based employment for licensed practical nurses is also likely to shift towards convalescent and home health care.

19 L. H. Aiken and C.F. Mullinix, “The Nurse Shortage: Myth or Reality,” The New England Journal of Medicine, vol. 317, No. 10, 1987,

pp. 641-646; J.K. lnglehart, “Problems Facing the Nursing Profession,”

New England Journal of Medicine, vol. 317, No. 10, 1987, pp. 646-652.

20 U.S. Department of Health and Human Services, Health Resources

Administration, “Source Book—Nursing Personnel,” DHHS Publication

No. HRA81-21, Washington, DC, September 1981.

●

●

●

●

The number of positions for health care managers and administrators will continue to grow.21

Traditionally these workers were doctors or

nurses, but today the vast majority are graduates of health care administration, public health,

or business programs.

Demand for medical technicians with different

specialties is sensitive to the nature of the equipment used in health care. Demand also depends

on where the technology is used (much equipment is now used away from the hospital) .22 Demands for comparatively high levels of training are likely to increase since it is very likely

that new equipment will be the rule rather than

the exception. Technicians and assistants unable to keep abreast of fast moving changes in

technology may find employment opportunities

shrinking because of automation.

Health care workers with comparatively few formal skills, such as nurses’ aides, orderlies, and

attendants, constitute about 40 percent of the

health work force. These jobs are likely to shift

from hospitals to convalescent and home care

settings.

Increasing application of information and communications technologies to health care delivery can have significant effects on the nature

zlFrom 1980 to 1982, the number of health administrators grew frOm

213,000 to 228,000. See U.S. Department of Labor, Handbook o~bbor

Statistics 1983, Bulletin 2175, (Washington, DC: U.S. Government Printing Office, 1983).

ZZU,S, Depa~ment of Labor, Bureau of Labor Statistics, “Medical Technology of the 1980s: Giving Birth to New Health Careers,” Occupational

Outlook Quarter/y, vol. 27, No. 1, winter 1983, pp. 3-14.
400

of work in health profession. For nurses, com- 14

puter technologies can reduce the time spent

performing clerical duties and increase the time

available for direct patient care. Complex medical care technologies can create nursing specialties, as is now seen in intensive care units.

Home health care employment may be more

highly skilled, due to earlier hospital discharge

and new telemedicine capabilities. Computeraided diagnosis and treatment technologies

could result in greater job responsibilities for 2.

non-physician providers, and in perceived deskilling of physicians. At the same time, however,

consumer use of these technologies could reduce the need for health care providers of any

kind.

● Since 13 percent of health care workers are minorities, as compared to 10 percent in the rest

of the labor force, and since the overwhelming

majority of health care employees are female,

reductions in hospital employment due to layoffs or closures will significantly affect these

groups—particularly in depressed urban centers.

In addition, many current health workers may 3.

also be displaced if jobs that remain in the hospital require an upgrading of skills through

tougher requirements or longer training periods

(e.g., a BA for RN licensing).

Wages in Health Services Delivery

The earnings of wage and salary workers in the

many health service occupations are below average

The proportion of women in the health services delivery sector is high, and will remain so

in the future. While women constituted 45.1 percent of the national labor force in December

1987, table 12-1 shows that they accounted for

85 percent of all employment in health assessing occupations and 84 percent of all health

technologists. Women typically are paid only

70 percent of men’s earnings (see discussion in

ch. 11).

The growth of largely non-unionized proprietary health care chains, and the growth of contracting out for health services-as evidenced

by temporary nursing agencies and laundry

services—may circumvent unions and benefit

provisions and result in lower wages. Historically, unions have been able to win wage and

benefit increases from hospitals for the 15 to

20 percent of the health labor force that is unionized, most of whom are lower-skilled workers. The union pay advantage typically amounts

to approximately 5 percent for nurses and 10

percent for lower-skill workers.24

The shift in employment from the hospital to

ambulatory care facilities may also result in a

lowering of wages, particularly for nurses. In

1980, nurses in hospitals earned approximately

$4,500 more than nurses employed in physicians’

offices.25 Employees in the rapidly growing

home health care business are often paid extremely low wages.

(again see table 12-1). Some increase has occurred Z4F. A. Sloan and g. Steinwald, Hospital Labor Markets: Analysis of

in the past few years, but progress has been com- Wages and Work Force Composition (Lexington, MA: Lexington Books,

1980); R. Feldman and R. Scheffler, “The Union Impact on Hospital paratively slow.23 There are at least three reasons Wages and Fringe Benefits.” Industrial and Labor Relations Review.

for estimating continued low average wages in the vol. 35, 1982, pp. 196-206; and U.S. Department of Labor, Bureau of

sector: Labor Statistics, “Industry Wage Survey: Hospitals,” Bulletin 2204, Washington, DC, 1984.

Z5U s Department of Hea]th and Human Services, Health Resources

Z3E. Sekscenski, “The Health Services Industry: A Decade of Expan- Administration, “The Registered Nurse Population: An Overview,” DHHS

sion,” Monthly Labor Review, vol. 104, 1981, pp. 9-16. Publication HRS-P-OD-83-1, Washington, DC, November 1982.

HOUSING

The jobs produced to supply Americans with hous- respondingly large number of jobs in the financial

ing and to provide construction services of all kinds or real estate industries.

are most heavily concentrated in “precision production,” a category that includes most building trades The use of labor in the construction industry pro-

(see figure 12-4). The large financing costs of hous- vides a good example of the ways diverse, multiing described in chapter 6 do not produce a cor- disciplinary teams can be assembled on short no-
401

Figure 12-4.-Jobs Needed To Produce Housing in

1984 (percent of 15.8 million jobs)

Managers 8 Support

Technical Profess {on

Education & Health

Other Professional

Technicians

Sales Workers

Other Customer Contact

Information Distrib.

Data Entry etc.

Food and Beverage

Other Service Worker

Precision Product Ion

Machine Operators

Transportation Ops.

Handlers and Laborers

Farming and Forestry

1 1

0

5 10 15 20 25

Percent of all jobs

SOURCE” See table 10-6 of chapter 10

tice for a variety of projects.26 Adapting itself to a

long history of uncertain demand, the industry has

achieved enormous flexibility. Unfortunately, much

of this flexibility has been achieved by avoiding longterm commitments in the form of either capital investment or permanent staffs. Most single-family

home construction is undertaken by small independent builders with no permanent payroll. Even major projects, such as the construction of a nuclear

power plant, typically involve a unique combination

of contractors, subcontractors, and temporary personnel.

The price of flexibility appears to have grown in

recent years. Labor productivity in construction has

actually declined, construction wages have fallen in

comparison to national averages, and uncertainty

surrounding employment in construction has risen.

Capital-to-labor ratios increased 2.6 percent per year

from 1947 to 1968, but declined by 3 percent per

year from 1968 to 1981. After a jump of 4 percent

in 1982, the rate has continued to decline.27

New manufacturing technology used in construction could increase capital investment and encourage

greater commitment to a trained permanent staff.

This could radically transform the employment demands of the industry. A significant amount of work

on home construction is already done in factory setzbsee Michael piore and Charles Sable, The Second /dUStr;d Divide

(New York, NY: Basic Books, 1984).

Z7U.S. Depafiment of L&M, Bureau of labor Statistics, cited in Building

Research Board, National Research Council, Construction Productivity

(Washington, DC: National Academy Press, 1986).

tings (pipe trees, roof trusses, pre-hung doors, and

entire wall panels). This has the effect of moving jobs

from the construction site into more manufacturing

and designing settings.

Labor Productivity

Real productivity in the construction industry has

fallen steadily since 1968, with the exception of certain years. Overall, only mining appears to have

suffered a worse decline, but in mining the decline

is largely due to increased investment in workplace

safety. The decline in construction productivity is

particularly perplexing since it is obvious that many

new technologies (plastic piping, pre-hung windows,

factory-made roof trusses, etc.) have made some parts

of the construction process—particularly in the residential sector–more productive (see p. 226).

There is no consensus about why new technologies have not led to higher measured productivity

in the construction industry. A variety of explanations have been offered.28 It is possible that productivity has declined because a highly fragmented industry that has never invested heavily either in

research or capital equipment has simply failed to

keep pace with technology available in other parts

of the economy .29

Poor management practices and craft traditions

may also contribute. One recent review of major construction practices (both residential and non-residential) estimated that only about 40 percent of a

worker’s time is spent in productive activity; of the

rest, more than half is lost because of administrative delays, poor selection of methods, or jurisdictional delays.30 Administrative delays result from

poor coordination, late deliveries, confusion at the

site, and inadequate planning. Many new commercial buildings, for example, use poured concrete; the

price of building form-work for the concrete represents half the total cost. Yet architectural drawings

seldom indicate how these forms should be designed,

28 U.S. Congress Office of Technology Assessment, Technology, Trade,

and the U.S. Residential Construction Industry-Special Report, OTATET-315 (Washington, DC: U.S. Government Printing Office, September 1986), pp. 31-32.

Z9J.E, Cremeans, “Productivity in the Construction Industry,” Corrstruc(ion Review, vol. 27, May/June 1981.

~Richard L. Tucker, “Construction Technologies,” in Technology and

the Future of the U.S. Construction Industry (Washington DC: The AIA

Press, 1986).
402

and take no account of the complications introduced

by imbeds needed for items such as electrical boxes.

As one analyst has noted: “Architects love to put

a lot of imbeds . . . and you depend on the workers

in the field to somehow hold it in exact position

while you place the concrete around it and push it

around.” 31

Jurisdictional problems are not necessarily the result of union work rules, but stem from longstanding craft traditions: “Carpenters don’t put in conduit,

for example, even though they’re quite capable . . .

Operators can’t unload the truck. It takes a particular craft that has the stuff on the truck to unload their

stuff.”32 Estimates of productivity gains made possible through better communication and management

practices with no new technology range from a few

percent for processes such as installing insulation,

to 130 percent for structural work in commercial

buildings or installing piping in heavy industrial

structures.

New technology clearly has the potential to increase productivity throughout the construction industry. Many of the most basic problems in field erection, primarily affecting heavy construction, have

received virtually no help from contemporary technology. Making field connections of pipes, beams,

electrical wire or other elements is extremely inefficient in the field. The current process “leaves a lot

of standing around.”33

Wall elements, and even entire building modules,

have been successfully manufactured in factories to

improve overall productivity, particularly in the residential sectors of Sweden and Japan. Much of this

improvement has resulted from greater use of factory production techniques based on robotics and

computer-assisted design/production systems. The

Japanese firm of Sekisui Heim claims to have reduced the labor hours for a residence from 400

person-days for a conventional site-built house to 125

person-days for a manufactured house, and to have

an experimental system capable of reducing construction time to 20 person-days. The Swedes, estimate that they can reduce labor from 175 to 75

person-days using factory construction; of the 75,

31 Alton S. Bradford, “Computers and Construction, in Technology and

the Future of the U.S. Construction Industry, op. cit., footnote 30.

321bid.

331bid.

nearly two-thirds are taken up by site preparation

and erection.34

Productivity in residential construction is also discussed in the Housing section of chapter 6.

Job Skills and Job Quality

Compared with jobs elsewhere in the economy,

jobs in construction are traditionally well paid but

are relatively dangerous and insecure.35 A shift

toward more factory-based construction could change

this picture. The Swedes chose to encourage factorybased construction as a matter of national policy in

part because it could create better and more stable

jobs in the industry.

Wages

While jobs in construction still pay more than the

average U.S. wage, construction wages fell from 28

percent above the median annual U.S. private sector wage in 1971 to less than 9 percent above the

median in 1986—when the ratio of median annual

construction wages to the national average median

wage reached a post-war l0W.

36

Skills and Work Quality

The Swedes emphasize that their homes are “factory crafted,” not mass produced, and that automated

equipment is used by skilled teams that have often

worked together for years.37 They do not use “mass

production” lines. In Japan, where factory production is projected to serve 50 percent of the domestic

market in the mid 1990s, “housing companies apparently enjoy a high level of worker loyalty and productivity.”38

U.S. factory construction of housing is often little

more than site construction under a roof. Assembly

34 Paul Kando, “perspectives on Swedish and Japanese Factory Built

Housing” contract report prepared for the National Institute of Building Sciences, Washington, DC, Nov. 5, 1986.

35 John Tschetter and John Lukasiewicz, “Employment Trends in the

Building Trades,” Occupational Outlook Quarterly, vol. 27, No. 2, spring

1983, p. 8.

36 U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” historical diskettes, table 6.8b.

sT~e Schipper, Stephen Meyers, and Henry Kelly, Coming in From

the Cold: Energy Efficient Housing in Sweden (Cabin John, MD: Seven

Locks Press, 1985).

~James G. Sackett, “Japan’s Manufactured Housing Capability, ” contract report for the U.S. Department of Energy, Washington, DC, May

1986.
403

of mobile homes (“manufactured housing”) is typically more heavily automated, using an assembly

line approach resulting in less skilled and more routine jobs. There is often a considerable amount of

turnover, particularly during periods of slack demand

for housing. Some firms have used manufacturing

facilities to replace skilled craft workers with lowwage employees who enjoy little job security. Twothirds of all jobs in U.S. home manufacturing facilities require less than one year of training; 33 to 40

percent require less than a month.39

Technology also promises to change the use of labor in design and engineering firms. Computer-based

designs can radically reduce routine architectural

jobs. Each designer is typically supported by 3.8

draftsmen and 0.2 persons engaged in writing specifications and documentation. Most of the individuals

calling themselves architects are, in fact, engaged

in such support activities.40 At least one in four jobs

in architecture is therefore threatened by new technology. Computer-based designs will also affect engineering draftsmen, who are generally not trained

engineers.

Jobs in design and engineering may also change

with the introduction of computer-based design systems. Manual tasks can largely be replaced. The staff

remaining are likely to be members of interdisciplinary teams consisting of designers, builders, and individuals familiar with the specific needs of a client.

Interpersonal skills, and a basic grasp of all parts of

the construction process—from design to engineering analysis to site construction—will be needed for

members of such teams.41

3gTechnO\Ogy, Trade, and the U.S. Residential Construction lndustry—

Special Report, op. cit., footnote 28, table 5.

4°Harry Mileaf, “Computers and ConstructIon,” in Technology and

the Future of the U.S. Construction lndustry op. cit., footnote 30.

41 A. Bradford, in Technology and the Future of the U.S. Construction Industry op. cit., footnote 30.

Figure 12-5.-Construction Jobs as a

Percent of all Jobs

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts, ” historical diskettes, table 67

Job Security

Employment in construction varies with the weather,

with the seasons, and with the business cycle. An

average annual construction work force of some 4

million varies by as much as one-quarter between

winter and summer; this is especially acute in the

northern areas of the United States. Approximately

40 percent of U.S. construction workers found themselves without employment at least once during

1981, as opposed to 18 percent of all U.S. nonagricultural workers.42 The industry has always been

very sensitive to changes in the business cycle (see

figure 12-5), and this sensitivity appears to have increased during the past few decades.43

42 Ibid., p. 7.

43 Tschetter and Lukasiewicz, op. Cit., footnote 35, P. 5

TRANSPORTATION

The U.S. transportation system provides starkly firms, however, such as owner-operator truckers and

contrasting employment opportunities. Some firms, cab drivers, might actually be earning less than the

such as major railroads, rely on well-paid manage- minimum wage if they accounted properly for their

ment and labor. Skilled operators of large, complex hours.

equipment (such as ships, aircraft, and trains) have

large responsibilities and are well rewarded. Unions Providing the Transportation amenity produces

have helped maintain wages. Many transportation more jobs in manufacturing and other professions
404

than it does for equipment operators (see figure 12-

6). Automobile production results in a large number of well paying positions. The operation of automobiles produces a varying assortment of jobs, including a large number of sales workers ranging from

automobile sales personnel to sales workers in gasoline stations paid hourly wages 40 percent below

average 1987 wages.

Employment in the industry is strongly affected

by changes in demand, production recipes, and trade

described in earlier chapters. The decline in highway and airport construction obviously translates

into a loss of comparatively well paid construction

jobs. Deregulation of trucking and aircraft has created fierce competition, making union organization

more difficult.

Technologically sophisticated equipment has created demands for higher skill levels in many transportation occupations. Advanced computers and

communications equipment are becoming standard

in airport control towers. Modern aircraft have become machines of staggering complexity. Railroads,

trucking firms, and urban delivery vehicles are keeping close touch with their vehicles using a variety

of communication devices. All of this equipment

must be designed and maintained, and operators

must develop skills to use them properly.

The administrative complexity of transportation

is rising as the value and diversity of freight shipments increase. Investments in careful identification

of loads within trucks, careful routing and tracking

Figure 12-6.-Jobs Needed To Produce Transportation

in 1984 (percent of 8.1 million jobs)

Managers & Support

Technical Profession

Education & Health

Other Professional

Technicians

Sales Workers

Other Customer Contact

Information Distrib.

Data Entry etc.

Food and Beverage

Other Service Worker

Precision Production

Machine Operators

Transportation Ops.

Handlers and Laborers

Farming and Forestry

o 5 10 15 2 0

Percent of all jobs

of deliveries, increased insurance, greater use of partload shipments, and the rapid shift to more complex air transport equipment and facilities all contribute to this diversity. At the same time, new strategies for inventory control are partly responsible for

the complexity of transportation information. All of

this creates growing demand for clerical, analytical,

and technical employees in transportation firms.

While technology helps optimize the flow of traffic, individual operators of aircraft, trucks, and other

vehicles maintain enormous independence and individual responsibilities. They must not only perform

their required tasks competently, but they are the

transportation firm’s representatives in dealing with

customers. This sense of independence and responsibility can make transportation an attractive occupation. While technology can help managers keep

closer tabs on the location of vehicles and operator

performance, thereby reducing the perception of freedom to some extent, the responsibility for the vehicle’s safety and performance remains clear. The skills

and responsibility entailed should continue to command comparatively high wages.

Workers in many parts of the transportation industry benefited from public regulation. Public transport workers, railroad workers, and airline employees were particularly advantaged, though trucking

regulation sheltered the wages of many drivers in

that industry as well.

In a newly deregulated environment, airlines struggling to compete with non-union lines are obtaining concessions from their employees. Truckers are

forced to compete with independent, non-union

operators who often work long hours and average

30 percent lower wages.44 Railroads, struggling to

meet competition from trucking, have broken some

long-standing union work rules, doing such things

as running trains with two-man crews. The system

is in such flux that industry-wide patterns of employment are extremely difficult to trace.

Employment in most transportation industries has

grown more slowly that private employment. Employment in automobile manufacturing is virtually

the same as it was in 1955. Transit operators have

44see U.S. small Business Administration, The State Of Smd BUs;-

ness 1987 (Washington, DC: U.S. Government Printing Office, 1987),

SOURCE: See table 10-6 of chapter 10. pp. 185-206.
405

declined. On the other hand, there has been sharp

growth in the airline industries and in service industries that support personal and business transportation. Trucking, warehousing, and wholesale

trade have grown modestly faster than overall employment. Many changes are occurring in the kinds

of jobs offered by these businesses, however. Employment in regular route common carrier truck

firms has not grown, even though overall employment in trucking has increased.

Personal Transport

Table 12-2 shows sharp declines in jobs in most

mass transportation occupations. Only air travel

posted significant gains. Jobs in both inter- and intracity rail and bus transport have remained virtually

unchanged. Most local and inter-urban transport facilities are located in older metropolitan areas, such

as New York, Philadelphia, Boston, and Chicago.

They are heavily unionized, and work rules provide

them with relatively stable 8-hour jobs and no split

schedules despite the fact that urban commuting requires working two peaks. Moreover, the jobs provide good incomes for employees, many of whom

are members of minority groups who might otherwise face bleak job markets in central cities.

In many regions, the provision of attractive employment opportunities in public transport has resulted in high labor costs and increased transit fares.

As a result, transit workers in some areas are under

pressure to accept part-time or split schedules and

lower wages. Many new “paratransit” services benefit from the fact that they can use operators willing

to work erratic hours at comparatively low wages

in competitive labor markets.

Freight Transport

Two major movements are underway in freight

transportation. First, rail lines, operating under increasingly competitive conditions, have placed unprecedented pressures on rail unions to accept

greater flexibility in work rules. The results of this

development have been mixed. It is clear, however,

that unless the work rules are revised in a way that

permits rail lines greater flexibility, rail freight will

be limited to an extremely narrow set of commodities—typically bulk coal and grain deliveries,

The second movement resulted from the nearly

complete deregulation of trucking during the late

1970s, which increased competition between regular route common carriers, independent owner operators, and railroads (particularly in long hauls). These

operators may be unaware of their real costs. Many

compensate for poor earnings by forcing themselves

to drive extraordinary hours. Erratic working hours

have, of course, long been necessary adjuncts of

truck operation; however, both fatigue and parsimonious maintenance may have contributed to the

growing number of trucking accidents (see discussion below),

Table 12-2.—Employment and Employment Growth in Selected

Transportation Industries

Full-time-equivalent Average annual

employment (in thousands) growth rate (o/o)

Industry 1955 1965 1975 1986 1955-86

All private industries. . ............53,530 57,864 67,443 87,653 1.7

Motor vehicles and equipment . . . . . 876 831 777 870 0.6

Other transportation equipment . . . . 991 1,005 909 1,152 0.1

Railroad transportation. . . . . . . . . . . . 1,196 730 541 311 –3.6

Local and interurban passenger . . . . 332 290 282 322 –0.1

Transportation by air. . . . . . . . . . . . . . 128 221 351 533 4.2

Water transportation . . . . . . . . . . . . . . 235 218 187 178 –0.8

Pipelines, except natural gas . . . . . . 19 17 18 –0.8

Trucking and warehousing. . . . . . . . . 1,073 1,249 1,571

Wholesale trade. . . . . . . . . . . . . . . . . . 3,164 3,648 4,521 5,849

Transportation services . . . . . . . . . . . 82 92 137 288 4.3

Auto repair, services, and garages . . 311 450 638 1,129 4.0

NOTE: Full-time-equivalent employment includes part-time workers converted to a full time schedule using the ratio of the

number of average weekly hours worked to the weekly hours typically worked by a full-time employee in the industry.

The total also includes self-employed persons. The percentage growth rate is computed using a simple regression.

SOURCE: U S Department of Commerce, National Income and Product Accounts, historical diskettes
406

If, as chapter 6 suggests, independent truckers

eventually lose market share to major companies capable of managing sophisticated marketing, sales,

communication, and dispatch systems, many truck

drivers may be increasingly treated primarily as paid

employees of major firms. Such a development would

represent a reversal of the present trend toward

small-scale trucking activities brought about largely

by deregulation—since 1980, the number of motor

carriers with annual sales under $1 million has more

than doubled, while those in larger sales classes have

held steady or decreased (see ch. 5).

Safety

Transportation jobs are among the most dangerous in the Nation. Death rates are nearly three times

the national average. Trucking and warehousing businesses reported losing 208 workdays per 100 fulltime-equivalent workers in 1984, up from 188 in

1980. The average for all private businesses in 1984

was 63 workdays lost per 100 full-time workers (a

3 percent decline from 1980). Local passenger transit, railroads, and air transport all reported work

losses 40 percent over national averages.45 While ac45 Statistical Abstract of the United States. 1987, op. cit., footnote 3,

table 697.

cidents involving passenger cars, motorcycles, and

even medium trucks all fell by at least 10 percent

between 1980 and 1984, accidents involving light

and heavy trucks rose to historically high levels by

1985—even after a significant decrease in such accidents during 1982.46 Indeed, between 1981 and

1985, the annual rate of truck accidents increased

roughly 40 percent faster than the increase in total

truck miles traveled.47

Transportation jobs can also be extremely stressful. Stress-related illness is seldom reported as an

occupational injury, but it is well known that bus

drivers have higher rates of hypertension, and of diseases of the gastrointestinal tract and the musculoskeletal system, than other workers. While some of

this may be traceable to noise, vibration, and carbon monoxide fumes, some studies suggest that the

illnesses are related to the need to keep schedules

that are extremely difficult to meet in any but ideal

conditions. 48

46 lbid., table 1028.

47 Statement of Edith B. Page, Office of Technology Assessment, to

the Committee on Public Works and Transportation, Subcommittee on

Surface Transportation, U.S. House of Representatives, Washington, DC,

Sept. 16, 1987.

48 S.L. Symne “swia] Determinants of Health,” in Social Determinants

of Health and Disease, paper provided to OTA by the Centers for Disease Control, Atlanta, GA, p. 65.

CLOTHING AND PERSONAL CARE49

The network of fiber, textile, apparel, transportation, wholesaling, and retail businesses that combine to bring the amenity of Clothing and Personal

Care to Americans dominates the pattern of jobs

shown in figure 12-7. Retailing and machine operators represent 40 percent of all jobs in the network.

This may soon change.

The network of businesses that produce fiber, textiles, and apparel combine to be the Nation’s largest

nondurable goods manufacturer, employing one out

of every every nine manufacturing workers. Apparel

is the largest employer, with 1.1 million employees

at the end of 1987. Textile mills provide 713,000 jobs

49 The following section is drawn largely from U.S. Congress, Office

of Technology Assessment, The U.S. Textile and Apparel industry: A

Revolution in Progress-Special Report, OTA-TET-332 (Washington, DC:

U.S. Government Printing Office, April 1987).

and organic fiber producers employ 61,000. The textile machinery industry, a durable goods sector, employs 21,000 people. Retail apparel and accessory

stores provide jobs for nearly 1 million people. General merchandise stores (which also sell apparel) employ over 2.5 million people.50

Growth in domestic demand has partially offset

employment losses resulting from increases in imports and productivity. Between 1977 and the end

of 1987, employment in the apparel industry fell 15

percent and textile employment fell 19 percent. Total employment fell by 370,000. It is important to

note, though, that many of the jobs eliminated by

automation were dangerous and unpleasant. The

threat of “brown lung” that haunted the industry for

50 U.S. Department of Labor, Bureau of Labor Statistics, Employment

and Earnings, vol. 34, No. 12, December 1987, table B-2.
407

Figure 12-7.-Jobs Needed To Produce Clothing &

Personal Care in 1984 (percent of 7.5 million jobs)

Managers & Support

Technical Profession

Education & Health

Other Professional

Technicians

Sales Workers

Other Customer Contact

Information Distrib.

Data Entry etc.

Food and Beverage

Other Service Worker

Precision Product Ion

Machine Operators

Transportation Ops.

Handlers and Laborers

Farming and Forestry

, , 1 (

0 5 10 15 20 25

Percent of all jobs

SOURCE: See table 10-6 of chapter 10.

years has been reduced significantly through the use

of machines for tasks that would pose health and

safety threats to human operators.

In apparel, labor-intensive operations still predominate in the industry, and job declines are largely

due to import penetration. Women account for 81

percent of apparel employment. The ratio of production workers to total employees was 84 percent at

the end of 1987, in comparison to 68 percent for all

manufacturing. Job loss has been particularly severe

in the apparel industry, which provides large numbers of low wage production jobs for women and

minorities. 51

In textile mill products, adoption of new, capitalintensive technology has resulted in sharply increased productivity. This has led to both job losses

and a major redesigning of jobs that remain. Burlington Mills, for example, began a major modernization program in 1978 and has since reduced its work

force by at least 10,000. Stevens has spent more than

$480 million on its capital program since 1978, and,

like Burlington, has trimmed 10,000 people from its

payroll. Modernization, of course, does not always

lead to job loss—especially if new plant and equipment can be used to expand markets.52 Indeed, modernization is a crucial element in maintaining any

domestic production industry.

The only industry sector claiming new job creation was retail trade. Employment in apparel retail51 The U.S. Textile and Apparel Industry: A Revolution in Progress—

Special Report, op. cit., footnote 49.

52 Textile Week, Aug. 10, 1981, p. 6.

ing increased 26 percent between 1977 and the end

of 1987, adding 225,000 jobs.53

Apparel jobs have traditionally paid lower wages

than textile manufacturing jobs—themselves lowpaying by U.S. industrial standards. The wages are,

of course, much higher than those paid by many

of America’s competitors. Average 1987 hourly earnings in apparel retail trade were $5.69, in contrast

to $6.01 for apparel manufacturing, $7.23 for textile mill products manufacturing, and $8.75 for textile machinery manufacturing, In the newer manmade fiber industry, however, wage rates are significantly higher, with average hourly wages at

$12.20. 54 These compare to an average hourly rate

for all manufacturing of $10.00.

It is important to note that the United States is not

alone in suffering employment losses in the textile

and apparel industry. Job loss has occurred throughout the developed world—for example, 53 percent

in the Netherlands and 37 percent in the United

Kingdom within the last decade. At the same time,

employment in developing nations is gaining significantly—111 percent in South Korea and 194 percent in Mauritius, for example.55

Domestically, textile employment is geographically

concentrated, particularly in the Southeast where

plant closings and job loss can mean economic

devastation to an entire town or region. In North

Carolina, South Carolina, Georgia, Tennessee, Alabama, Florida, Kentucky, and Mississippi, 33,400

jobs were lost in 1985, bringing textile employment

17 percent below its 1951 level. According to the

Bureau of Labor Statistics, 32.2 percent of the region’s

total manufacturing employment in 1951 was in the

textile industry. By 1985, this figure had shrunk to

only 13.5 percent.56 The absolute decline in employment has been the greatest in North Carolina, South

Carolina, New York, and Pennsylvania.

53 U.S. Department of Labor, Bureau of Labor Statistics, Employment

and Earnings, various issues.

54 U.S. Department of Labor, Bureau of Labor Statistics, Employment

and Earnings, vol. 34, No. 12, December 1987, table C2, pp. 91-93.

September 1987 figures used.

Sslnternationalhhr organization, %ciad and Labor Practices of~uftinational Enterprises in the Textile Clothing and Footwear Industries,

cited in Bureau of National Affairs, Dai/y Labor Report, Jan. 3, 1985,

p. A-6.

S6US. Department of Labor, f3ureau of Labor Statistics, cited in AFLCIO News, July 19, 1986, p. 3.
408

The technology described in chapter 6 has the po- trol, reordering, design, layout, and other features

tential to reshape the jobs offered by the system in could lead to a new pattern of work organization,

very basic ways. Automated equipment—much of making it possible to substitute highly trained and

it imported—has already revolutionized textile mills well paid workers for those now forced into narrow

and replaced many low-skill, dangerous jobs. Produc- production tasks. Flexibility could be achieved through

tivity in textile production grew at twice the rate of teams capable of moving quickly to fill new orders

manufacturing industries during the past decade. and adapt designs to changing markets.

Equipment that combines automated inventory conEDUCATION

Productivity

Education is responsible for at least 9 percent of

U.S. jobs. This estimate, based on official reports,

may underestimate the number of individuals working as teachers or trainers by as much as 50 percent. U.S. corporations obviously make heavy investments in teaching and training, but because people

labeled “teachers” are paid relatively low wages,

many instructors in a business setting have more

expensive sounding titles like “productivity engineer.” Earlier discussions also demonstrated that

learning and teaching tasks are becoming routine

parts of many jobs.

The business of delivering the Education amenity

also generates a significant amount of work for clerical and other service occupations (see figure 12-8).

While the productivity of teaching is notoriously

difficult to measure, there is little to suggest that it

has increased in several generations. Indeed, growth

in staff-to-student ratios, coupled with declines in

average test scores, suggests that real productivity

has fallen. In Japan and Taiwan, it appears that

school systems with staff-to-student ratios lower than

those in the United States may provide better basic

instruction.

Many excuses can be offered for a decline in measured U.S. school productivity .57 Much of the growth

in U.S. staff-to-student ratios resulted from more

sTlt must be recognized that productivity measurements in education

attempt to quantify what is difficult to view in objective terms: the quality

of teaching. For example, if two teachers provide a far better learning

experience for the same amount of students than one teacher, is their

productivity still lower because of the ratio? Are standardized test scores,

which may be biased against certain demographic groups, a true measure

of the productivity of teaching? Is productivity low because more attention is being paid to students with special physical, mental, or emotional problems?

Figure 12-8.-Jobs Needed To Produce Education

in 1984 (percent of 9.2 million jobs)

Managers & Support

Technical Profession

Education & Health

Other Professional

Technicians

Sales Workers

Other Customer Contact

Information Distrib.

Data Entry etc.

Food and Beverage

Other Service Worker

Precision Production

Machine Operators

Transportation Ops.

Handlers and Laborers

Farming and Forestry

1 1 I ,

0 5 10 15 20 25

Percent of all jobs

SOURCE: See table 10-6 of chapter 10.

administrative positions, rather than instructors.

Some of the increased overhead costs–but probably

not all—result from the need to administer more

complex government programs.

Skills and Work Quality

The Work Environment

The occupation “teacher” is one of the largest undifferentiated categories maintained by the Bureau

of Labor Statistics. The underlying assumption here

is that teachers are largely interchangeable—to some

extent the assumption is correct.58

The essential difference between teaching and

another form of mass delivery, of course, is that there

58 There are differences in the skills of individual instructors, but Virtually no distinctions are made in either job descriptions or pay except

for distinctions based on credentials and seniority. Often the only way

to advance in status as a teacher is to become an administrator, which

may in part explain the growth in the relative size of school administration activities during the past decade.
409

is always something new and exciting about a group

of students. The thrill of watching a student discover

for the first time a new idea or a great work of art

is a reward that cannot be measured by conventional

accounts.

On the other hand, many teachers in the United

States are expected to cure a growing number of social problems—brought on, in part, by the shrinking proportion of traditional families. Different interest groups expect schools to indoctrinate students

in everything from religious beliefs to sexual hygiene.

Teachers have been sued for exercising both too

much and too little discipline. Such pressures can

lead not only to frustration, but in some cases to real

physical danger.

Specialization and Differentiation of

Occupations

Most educational institutions are managed in a way

that gives individual instructors almost unlimited

freedom in the conduct of instruction within their

own domains. Yet, as in so many other cases throughout the economy, unlimited freedom does not necessarily translate into diversity or innovation. Observers have noted that instruction in high schools

is astonishingly uniform throughout the country. A

system that appears to be highly labor-intensive,

thereby permitting much individual attention and

flexibility, is in fact often impersonal and inflexible.

An educational work environment making heavy

use of new instructional technologies, such as the

one described in chapters 3 and 6, could be significantly different from the current system. Schools

have already seen some growth in the use of instructors working on specialized problems: teaching the

physically or mentally handicapped is one such example. This specialization can be expected to grow

enormously with use of new technology. At a minimum, teaching staffs could be divided into the following kinds of specialties:

●

●

tutors trained in professional areas such as

chemistry or English literature, who would work

with individuals on a daily basis, coach them

as they work through problems, monitor their

progress in the programmed instructional systems, and challenge them to debate;

specialized consultants, who would work with

students over a wide geographic area, handling

●

●

●

questions or problems that individual tutors felt

incompetent to address;

people specializing in the preparation of software that would include computer programming, and in the preparation of visual and audio materials for presentation (which could

include animation, simulations, or even complete reenactments of historical events);

system monitors, paid to maintain order when

students are working with information-based

systems and to handle routine problems; and

specialists in the production and maintenance

of hardware in the schools, and central distribution and communication modes.

This greater differentiation would plainly lead to

differentiation in training and pay. Individuals designing and maintaining the software would necessarily be peers of software design teams working elsewhere in the economy. Teachers would have to

make the transition to the more demanding task of

tutors, which would require them to spend virtually

all of their time handling unique and difficult questions. But teachers exasperated by routine assignments would find themselves much freer to experiment with new ideas and enjoy the company of their

students. Any attempt to introduce differentiation in

job descriptions may, however, be resisted by unions interested in maintaining a uniform professional

position on issues such as pay, seniority, and working conditions.

Wages and Part-Time Work

Teachers are among the best educated class of

workers in the market, but are paid significantly less

than the average wage. And while there are exceptions, most teacher salaries have not kept pace with

inflation.

Measured in constant 1983-84 dollars, the salaries

of teachers actually fell from a high of $24,194 in

the 1972-73 school year to $20,733 in 1980-81; recent interest in educational reform raised average

teaching salaries to $22,019 in the 1983-84 school

year.

59 In 1981, about 30 percent of all public school

59 National Education Association, “Estimates of Shool Statistics 1983-

1984,” Washington, DC, 1985.

52-635 0 - 88 - 14
410

teachers received pay for some form of employment

other than teaching to supplement their income.60

There is also little opportunity for advancement.

Few teachers are able to enjoy significant increases

in pay after their first 10 to 12 years on the job.61

This is all the more difficult to accept since they receive a starting salary that is far below those offered

in many other professions requiring college training. The result is that comparatively little difference

in the wages paid teachers: 61 percent of all teachers

receive between $15,000 and $25,000 in pay.62

Teachers, of course, are seldom paid for yearround work, and are left to their own devices to find

employment during summer months. Comparatively

few teachers can find work during these months in

anything but temporary clerical or sales jobs. Many

do not work, but spend the time in leisure activities

or, in the case of university faculty, doing research

needed for promotion or tenure. Teachers are seldom provided office space or significant clerical support services in their schools and, as a result, spend

an average of 4 to 5 hours a week working at home.63

The Nation’s primary and secondary school systems have always been subsidized by women willing to work for low wages because they could find

no alternative employment commensurate with their

intellectual skills. This, of course, is changing with

the dramatic increase in the participation of women

in all parts of the labor force.

Educational Demand and

the Desire to Teach

The combination of new job opportunities for

women, relatively stagnant pay, and deteriorating

work conditions in many school systems has resulted

in a dramatic decline in the percentage of women

choosing to get degrees in education. While roughly

38 percent of women in their first year of college

intended to go into education in 1968, this percent60 National Education Association, “Status of the American Public

School Teacher, 1980-1981,” Washington, DC, 1982.

Gl~rnegie Forum on Education and the Economy, A fVation prepared:

Teachers for the Zlst Century, report of the Task Force on Teaching

as a Profession, Washington, DC, May 1986, p. 98.

wus Depa~ment of Labr, Bureau of Labor Statistics, and f-OLIis Harris

and Associates Inc., cited in Carnegie Forum, op. cit., footnote 61, p. 97.

GtFrancis W, Horvath, “work at Home: New Findings from the CUrrent Population Survey, ” Monthly Labor Review, vol. 109, No. 11, November 1986, pp. 31-35.

age fell to only about 10 percent in 1985.64 The fraction of males obtaining bachelor’s degrees in education fell from 9.5 percent to 6.5 percent between

1971 and 1980.65 In 1966, when teachers were asked

“suppose you could go back to your college days and

start over again; in view of your present knowledge,

would you become a teacher?, ” 53 percent said that

they certainly would. By 1983, only 24 percent gave

a positive response.66

There seems little question that developments

such as these are likely to lower the quality of teaching in the public school system. Indeed, there is evidence of a critical juncture in the teaching market—

in a break from the past, there are likely to be more

jobs than prospective teachers over the next 10

years.

67 Moreover, the fraction of education graduates with backgrounds in science or mathematics

choosing to enter teaching has fallen. In 1971, 59

percent of all graduates from science teaching programs, and 63 percent of all graduates from mathematics teaching programs, entered teaching. By

1980, the fraction had fallen to between 54 and 55

percent, respectively.68

The disparity between teacher salaries in science

and mathematics and salaries offered individuals

with equivalent education levels is particularly high.

The National Science Foundation estimates that

300,000 new mathematics and science teachers will

be needed during the next 10 years, a number larger

than the total of those now teaching. The problem

is aggravated by the fact that the average age of the

Nation’s science and math teachers is 42.69

Overall, as many as 1.3 million new teachers will

be needed between 1986 and 1992.70 Assuming that

the demand for new teachers would be met from

existing colleges and universities, this would mean

that 23 percent of people graduating from college

64 Alexander W. Austin, et. al., The American Freshman: National Forums for Fall, 1968-1985, Cooperative Institutional Research Institute.

GSU,,$. f)epartment of Education, National Center for Educational Statistics, The Condition of Education, 1982 Edition (Washington, DC: U.S.

Government Printing Office), p. 96.

66 National Education Association, “Status of the American Public

School Teacher, 1980-81,” 1982; and unpublished tabulations, July 1983,

in The Condition of Education, op. cit., 1985 edition, footnote 65.

GTSee Carnegie Forum, op. cit., footnote 61.

b8Betty M. Vetter, “Supply and Demand for Science and Math

Teachers,” National Institute of Education, Conference on Teacher Shortage in Science and Mathematics, Washington, DC, Feb. 8-10, 1983.

GgU.S. Congress, Office of Technology Assessment, “Education, ” Sector study, Washington, DC, 1987.

70 Carnegie Forum, op. cit., footnote 61.
411

would need to enter the teaching profession during quate training may contribute to demand for techthe early 1990s—a fraction far higher than is likely nology in the classroom that can make the best

to be attracted to the profession, given recent his- possible use of the time of trained teachers.

tory.71 The potential shortage of teachers with ade71 Ibid., p. 31.

PERSONAL BUSINESS AND COMMUNICATION

Recent Trends

The skills required to provide the amenity of Personal Business and Communication are dominated

by managers and clerical personnel (see figure 12-

9). Information technology is likely to have a particularly dramatic impact on jobs in this sector.

Of the industries that contribute the most jobs in

this sector, only the heavily capitalized communications industry has achieved productivity growth

rivaling that of manufacturing; productivity in this

sector has been spectacular, rising 750 percent between 1954 and 1984.72 Productivity gains were far

lower in banking (where reported productivity actually fell during the 1970s), insurance, law, and real

estate.

New technology has the potential to change the

mix of skills in the transactional businesses that are

the principal deliverers of Personal Business and

7zl,15. Department of Labor, Bureau of Labor Statistics, “Productivity

Measures for Selected Industries,” Washington, DC, various years.

Figure 12-9.-Jobs Needed To Produce

Personal Business and Communication in

1984 (percent of 5.8 million jobs)

Managers & Support

Technical Professor

Education & Health

Other Professional

Technicians

Sales Workers

Other Customer Contact

Information Distrib.

Data Entry etc.

Food and Beverage

Other Service Worker

Precision Production

Machine Operators

0 5 10 15 20 25 30 35

Percent of all jobs

SOURCE: See table 10-6 of chapter 10.

Communication, but the changes have been extremely

difficult to measure. In fact, technical changes may

reverse recent trends slowing productivity growth

in communications, where complex and highly differentiated services requiring more personalized attention may lead to lower measured productivity

while they result in higher productivity growth rates

among office-based operations.

The discussion of chapter 11 showed how the

choices management must make about the use of

technologies translate into stark differences in the

number and quality of jobs in transactional businesses. Because of the sharply contrasting possibilities, and the near impossibility of using objective

measures such as reported job descriptions to understand trends, analysts are constantly forced to fall

back on anecdotes. Unfortunately, there are two opposing classes of anecdotes, with radically different

pictures of the direction of office employment; both

descriptions are true.73

Possible employment scenarios include a situation

in which most skill has been built into equipment—

in this case, computer and communications equipTssee, for example, L. curnrnings, The Rationalization and Automation of Clerica/ Work, Master’s Thesis, Brooklyn College, 1977; Maarten DeKadt, “Insurance: A Clerical Work Factory,” in Andrew Zimbalist,

cd., Case Studies in the Labor Process (New York: Monthly Review Press,

1979); E. N. Glenn and R. Feldberg,“Degraded and Deskilled: The

Proletarianization of Clerical Work,” Social Problems, vol. 25, October

1977; E.N. Glenn and R. Feldberg, ‘(Technology and Work Degradation: Effects of Office Automation on Women Clerical Workers,” in Joan

Rothschild, cd., Machina Ex Dea (Elmsford, NY: Pergamon Press, 1983);

Joan M. Greenbaum, in the Name of Efficiency (Philadelphia: Temple

University Press, 1979); Ida Hoos, Automation in the Office (Washington, DC: Public Affairs Press, 1961); K. Nussbaum and J. Gregory, “Race

Against Time: Automation of the Office” (Cleveland: Working Women

Education Fund, April 1980); and U.S. Congress, Office of Technology

Assessment, Automation of America Offices, OTA-CIT-287 (Washington, DC: U.S. Government Printing Office, December 1985); H. Hartman, R.E. Kraut, and L.A. Tilly, eds., Computer Chips and Paper Clips

(Washington, DC: National Academy Press, 1986); K.S. Koziara, M.H.

Moskow, and L.D. Tanner, eds., Working Women (Washington, DC:

The Bureau of National Affairs, Inc., 1987).
412

ment instead of advanced production machinery—

leaving operators to perform highly routine but

stressful occupations. Telephone information operators, assisted and monitored by computer equipment, are an extreme example. At the other extreme,

highly differentiated products in commercial insurance or financial services can require close cooperation of teams composed of managers and paraprofessionals.

Available data provide a poor guide to much of

what is happening in this sector. Productivity gains

among transactional businesses require major changes

in management and organization. These changes

affect not only clerical employees, but managers,

professionals, and technical support staffs as well.

In many cases, the distinctions between clerical and

managerial jobs have become almost impossibly

blurred. One-third of all the job growth in finance,

insurance, and real estate businesses between 1983

and 1986 resulted from new positions for executives,

administrators, and managers, even though these

occupations represented only 22 percent of all jobs

in these businesses in 1983 (see table 12-3). Administrative support jobs, on the other hand, were responsible for only about 30 percent of job growth,

even though these clerical positions represented 43

percent of the 1983 work force.

The distribution of work within the clerical work

force is also changing. Table 12-4 provides a bewildering picture. Why did the number of supervisors

grow rapidly and then fall? Why did the number of

mail delivery jobs increase nearly as rapidly as jobs

for computer operators? Exactly what are these “computer operators” doing? A careful examination of an

important industry in this sector can provide some

clues but no completely satisfactory answers.

Table 12-3.–Changes in the Occupation Mix of

Finance, insurance, and Reai Estate, 1983-1986

Share of Share of

1983-86 1983

Occupation job gain jobs

Executive, administrative, and

managerial . . . . . . . . . . . . . . . 33.2 22,3

Professional specialty . . . . . . . 0.9 2.4

Technicians and related

support . . . . . . . . . . . . . . . . . . 0.6 1.8

Sales. . . . . . . . . . . . . . . . . . . . . . 28.5 23.2

Administrative support

(including clerical). . . . . . . . . 31.3 42.8

Service occupations. . . . . . . . . 3.6 4,3

Precision production, craft,

and repair . . . . . . . . . . . . . . . . 1.8

All other . . . . . . . . . . . . . . . . . . . 1.6

Total . . . . . . . . . . . . . . . . . . . . 100.0 100.0

NOTE: Numbers may not add to 100 due to rounding.

SOURCE: U.S. Department of Labor, Bureau of Labor Statistics, Employment and

Earnings, table A-25, various issues. Data for 1986 are from November, and have not been seasonally adjusted.

The Insurance Industry: A Case Study

of Automation on Employment74

The insurance industry provides a good example

of the kinds of changes underway in many businesses providing transactional services. Automation

can radically reshape the organization of work in

an insurance company, changing the definition of

clerical, professional, and management jobs. Clerical jobs can be upgraded and responsibilities expanded, as the tasks of data entry and analysis are

combined using computers and communication networks. Professional jobs can become increasingly

demanding while routine tasks are eliminated.

74 This material draws heavily on Barbara Baran, “Technological Innovation and Regulation: The Transformation of the Labor Process in

the Insurance Industry,” contract report for the Office of Technology

Assessment, Washington, DC, January 1985.

Table 12-4.–Growth in Administrative Support Occupations, 1983-1987

Number Annual percentage

(in thousands) growth rate

Occupation 11/83 11/87 11/83-11/87 11/86-11/87

All administrative support ... , . . 16,628 18,539 2.76 3.4

Supervisors . . . . . . . . . . . . . . . . . . . 667 767 3.55 –3.9

Computer equipment operators. . 696 901 6.67 7.5

Secretaries, stenographers,

typists . . . . . . . . . . . . . . . . . . . . . 4,942 5,078 0.68 4.0

Financial records processing. . . . 2,470 2,403 –0.69 –0.7

Mail and message distributing . . 832 991 4.47 7.4

Other administrative support . . . . 7,021 8,399 4.58 4.2

SOURCE: U.S. Department of Labor, Bureau of Labor Statistics, Employment and Earnings, Table A-22, various issues.
413

Individuals are now given a variety of different titles (such as “paraprofessional,” “skilled clerical,”

“paratechnical,” or “professional clerical”), and often

use computer terminals to process highly standardized information on applications and payments.

These new positions combine tasks once done by

data entry clerks, raters, and underwriters. In effect,

skilled clericals, “(limited by the decision parameters built into the machines) are responsible for the

soundness and accuracy of the millions of routine

risks their companies write.”75 This pattern of work

organization already dominates directly marketed insurance products, where customer service representatives are essentially sales people, underwriters,

raters, data entry clerks, and claims personnel.

There is considerable potential for productivity increases. Between 1970 and 1980, for example, the

number of life insurance policies written increased

49 percent, while the labor force expanded by 10

percent. Property/casualty insurance, not as heavily automated, did not show equivalent gains. Nevertheless, some firms indicated that they enjoyed a 70

to 85 percent increase in output per operator when

cathode ray tubes (CRTs) replaced older data processing equipment. Turnaround time was cut dramatically, while storage space was reduced by 50 percent or more.76 Quality was also improved.

This system can either result in widening the division separating clerical from professional work or

make the division smaller to the point where there

is no clear distinction between a skilled clerical and

middle manager. The difference depends on the extent to which the market demands relatively routine, standardized products that lend themselves to

high levels of automation, and on the management

strategies of the companies involved. One estimate

indicates that approximately 70 percent of the policies in life insurance, and 50 percent in the property/casualty area, are extremely routine and can

be automated.77

Changes in occupation patterns illustrate the net

effect of the developments just described most clearly.

Between 1978 and 1981, when overall insurance employment grew by 8 percent, professional and tech75Ibid.

76 LOMA, Word Processing Survey, 1979.

77 The U.S. Bureau of Labor Statistics classifies property/casuahy claims

examiners as “professional and technical” jobs, while life/health claims

examiners are classified as “clerical.”

Table 12-5.—Percent Change in Selected Occupations

in the Insurance Industry, 1978.1981

Occupation Change

Professional/technical. . . . . . . . . . . . . . . . . . . . . . . . . 11.4°/0

Accountant/auditor . . . . . . . . . . . . . . . . . . . . . . . . . 11.4

Systems analyst, EDP . . . . . . . . . . . . . . . . . . . . . . . 44.4

Claims examiner, property/casualty . . . . . . . . . . . 10.1

Special agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86.3

Underwriter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.8

Computer programmer . . . . . . . . . . . . . . . . . . . . . . 41.1

Managers/officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4

Sales workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.0

Clerical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6

Accounting clerks . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7

Hand bookkeeping. . . . . . . . . . . . . . . . . . . . . . . . . . – 1.1

Claims clerk ., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1

Claims adjuster . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2

Claims examiner, Iife/health. . . . . . . . . . . . . . . . . . 26.2

Clerical supervisor. . . . . . . . . . . . . . . . . . . . . . . . . . 9.4

File clerk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –9.6

General office clerk. . . . . . . . . . . . . . . . . . . . . . . . . –0.3

Office machine operator. . . . . . . . . . . . . . . . . . . . . 17.9

Rater . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2

Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.9

Typist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –0.1

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3

SOURCE: U.S. Department of Labor, Bureau of Labor Statistics, Occupational

Employment Survey, Washington, DC, 1978 and 1981.

nical jobs grew nearly 40 percent faster than the average, and managers and officers grew nearly 60

percent faster (see table 12-5). Total clerical employment grew far more slowly than average job growth,

as did growth of specialized sales workers. Computerbased positions increased (computer programmers

increased by 41 percent), while jobs in traditional

areas such as bookkeeping were lost—presumably,

these titles were redefined, or jobs were replaced by

systems analysts. There was virtually no growth of

specialized underwriters, since their tasks were increasingly handled by skilled clericals; significant

growth was seen among clerical life/health claims

examiners, clerical office machine operators, secretaries, and clerical supervisors. Other clerical categories registered little change, although file clerks

seem to be on the decline due to the ability of automation to assume such tasks.

Changes in job classifications must be treated with

some caution. The survey conducted for this analysis discovered cases where managers were locked

into compensation schemes that did not adequately

adjust for inflation. As a result, the only way to increase a person’s pay was to increase his or her rank.

In other cases, jobs were redefined and reclassified
414

in response to successful affirmative action suits.

Indeed:

Not only were women moved into managerial positions to meet company quotas, but men were at the

same time often also promoted from professional to

managerial categories to maintain their seniority. The

company where we conducted our case study, for example, had been hit by a successful affirmative action suit. Between 1973 and 1979, supervisory personnel in their underwriting departments grew by

202 percent.78

Automation of Insurance: The Mass

Production Approach

The new skilled clerical jobs, while routine, are

more demanding than the ones they replaced. It is

not obvious, however, that they offer better job opportunities. To begin with, these new positions pay

little more, and in some cases no more, than clerical jobs. Yet the new jobs carry considerably greater

responsibility, only without much sense of control—a

situation that can increase stress. In the older pattern of clerical work, employees were often able to

do routine tasks nearly automatically and could enjoy the sociability of an office environment; the new

systems require far greater concentration and fewer

opportunities for casual conversation.79 The new

work involves a “curious combination of abstraction

and routinization” and, since there is little tangible

evidence of work completed, a reduced sense of

accomplishment 80 (see p. 371).

While these changes have had a significant impact on the productivity of clerical workers, their effect on middle management positions maybe even

greater. Standardization and computerization eliminate a number of tasks once reserved for professional underwriters and claims examiners. Those

that remain often have significantly changed jobs.

In the newer systems, much less of a professional’s

time is spent reviewing routine matters that can or

have been automated; more time is spent “living by

one’s wits. ” Underwriters devote more time wrestling with exceptions and difficulties, developing new

78Bara~, op. Cit., footnote 74! p. 106”

XIp. Adler, “Rethinkin~ the Skill Requirements of the New Technologies,” Harvard Business School, working paper, Cambridge, MA, October 1983.

MJS. Zuboff, “some ]rnplications of Information Systems Power for the

Role of the Middle Manager,”Harvard Business School, working paper, May 1983.

products, selling products to customers, or—in the

case of property/casualty insurance—working in the

field.

This pattern of organization has affected not only

the insurance companies themselves but staffing in

insurance agencies. Automation forces agencies to

increase emphasis on sales, since much of their service functions have been moved to other parts of the

insurance system. This is significant because between

1970 and 1981, agencies and brokerage houses generated 45 to 50 percent of all new insurance jobs

and 61 percent of all new clerical jobs. The agencies, particularly the captive agents of a large insurance firm, are becoming more closely integrated with

the parent company.

Productivity improvements in agencies resulted

from a vast decrease in routine paper work and record keeping. Routine policy renewal or endorsement

is the most time-consuming operation for personal

lines, and the second most time-consuming process

for commercial insurance lines. Nearly 40 percent

of the document handling for these operations involves rehandling or correcting of previously handled

documents, A survey of agency productivity increases

occurring within 2 years of automation showed that

revenues per employee increased by an average of

70 percent, with agency gains ranging between 50

and 125 percent.81

Automation of standardized products can also affect the location of work and the sexual composition of the work force. The new processing centers

are typically located in suburban facilities, which are

physically separated from the corporate headquarters of the company (see ch. 5.) One industry survey found that 75 percent of industry firms had made

major changes in the location of their facilities in

the past 5 years; 94 percent of these, or 71 percent

of all firms, had shifted the bulk of their work to

suburban locations. Of the remaining 29 percent,

most had either made small-scale transfers of work

to suburbs or small towns or were actively considering such moves.82

Personnel managers often search for regions with

large numbers of white housewives with high school

educations. It was felt that such people are less likely

81 Temp1e, Barker, and Sloane survey, h ~atjOna/ (.hIdewder, May

13, 1983, pp. 18-22.

8ZB. Baran, op. cit., footnote 74.
415

to demand high wages, more likely to accept parttime work, and more willing to be flexible in adjusting to newly automated systems.83

Approximately 88 percent of all new jobs added

in insurance between 1960 and 1982 were filled by

Women.84 Most of these jobs were clerical—92 percent of clerical employees and two-thirds of technical employees in insurance are female—but women

moved increasingly into management positions during the 1970s. The proportion of females in management positions grew from 11 to 24 percent between 1970 and 1979; women professionals grew

from 17 to 38 percent, and women technicians from

38 to 65 percent.85

Part of this increase resulted directly from successful affirmative action suits in the 1970s, but some

evidence suggests that automation is associated with

a shift to a heavily female work force. The records

of one large property/casualty insurer indicated that

women comprised 70 percent of the work force of

the highly automated personal lines of insurance,

but only 56 percent of the less automated commercial lines. Similarly, women held 82 percent of the

grade 7 underwriter jobs in personal lines but less

than 60 percent of the jobs in commercial lines.

Even the physical environment of the newer administrative settings reflects the changes in occupations brought by automation. The walls of many

private offices have been torn down, and middle

managers and professionals now work side by side

with clericals in shoulder-high cubicles.86

Automation of Insurance:

The Team Approach

While automation can produce relatively routine

and unpleasant jobs for skilled clericals, it can also

create situations where routine clerical work is absorbed into jobs that are interesting, varied, and rewarding. This is particularly true in such areas as

commercial insurance, where products are complex

and difficult to standardize. It may also be true in

areas where overall volume is comparatively low,

83 lbid.

84 U.S. Department of Labor, Bureau of Labor Statistics, Employment

and Earnings, various issues.

85 Eileen Applebaum, “Alternative Work Schedules of Women,” paper presented to the Economics Department of Temple University, Philadelphia, PA, July 1985.

86 Based on interviews reported in Baran, op. cit., f00tnote 74.

but local customer services are desirable. Such local offices are staffed by multi-disciplinary teams

working closely together, in which skilled clericals

work directly with agents—something once the exclusive province of underwriters-and are given considerable amounts of responsibility.

Over 70 percent of the life insurance companies

interviewed said that they had introduced some type

of team arrangement, emphasizing geographic areas

where work volume is comparatively low.87 They

are tied to extremely sophisticated computers and

data retrieval systems through telecommunications

networks (such as IVANS, or insurance value-added

networks). Between 1973 and 1983, the ratio of

claims handled by an office staff to claims handled

by field offices increased from 0.5 to 3.5.

Carriers and agencies that can expand their operations to provide a variety of financial services require a new mix of talents and a flexible work staff.

Increased use of training programs and new licenses

in this area indicate that agency employees are expanding their scope.

Looking to the Future

The complex changes in the organization of production in the insurance industry have led to a number of conflicting theses about the future of employment in all industries associated with providing

Personal Business and Communication. Clearly,

there is significant room for network-wide productivity growth, since many transactional businesses

can benefit from the introduction of existing technology and the power of integrated information and

communications systems is growing (see discussion

in ch. 6).

A detailed survey of industry specialists conducted

by Georgia Institute of Technology suggested that,

given optimistic assumptions about the capacity and

utilization of new information technology, output per

clerical worker could grow at an annual average rate

of 7 percent during the next two decades, with the

bulk of the increase coming between 1990 and

2000. 88 The labor reduction coefficients calculated

by the same survey (the ratio of the hours needed

871bid.

88 D.J. Roessner et a]., lrn~ac( of Office Automation on Office Workers, Georgia Institute of Technology, April 1984.
416

to complete a task in the year 1980 to the number

of hours needed to complete the same task in the

year 2000) averaged 0.42, with the productivity gains

being greatest for data processing and database management, and least for communications and monitoring. Similar projections for 1990 and 2000 appear

in table 12-6, first for the insurance industry and then

for selected industries within the Transactional Activities sector.

If clerical work can be automated to the extent suggested by the Georgia study, the distribution of jobs

in the insurance industry would no longer be a

pyramid, with a small number of top managers, a

larger number of professionals and technicians, and

a still larger number of clerks. Rather, it would be

shaped more like a diamond, with a small number

of top managers and clerks and a large number of

quasi-professionals in the middle.

Table 12=6.—Labor Coefficients for the insurance industry

1990 2000

Occupation S2 S3 S2 S3

Managers . . . . . . . . . . . . . . . . . . 0.99 0.84 0.88 0.50

Sales workers . . . . . . . . . . . . . . 0.98 0.94 0.96 0.89

Clerical . . . . . . . . . . . . . . . . . . . . 0.84 0.84 0.70 0.53

NOTE: S2 and S3 refer to different scenarios used in the study. The coefficient for clerical workers is a weighted average.

SOURCE: Wassily Leontief and Faye Duchin, The Impacts of Automation on Employment, 1963-2000, Institute for Economic Analysis, April 1984.

Labor Coefficients for 1990 in Selected Transactional Industries

Credit Business Miscellaneous

Occupations Banks agencies Securities Insurance services services

Professional/technical . . . . . . . 1.27 0.96 0.85 0.86 1.11 1,02

Manager ... , . . . . . . . . . . . . . . . 1.13 0.87 0.90 0.84 1.08 1.11

Sales. . . . . . . . . . . . . . . . . . . . . . 1.05 0.76 0.68 0.95 0.93 0.96

Clerical . . . . . . . . . . . . . . . . . . . . 1,10 0.83 0.72 0.71 1.01 0,95

SOURCE: M.P. Drennan, “lmplications of Computer and Communications Technology for Less Skilled Service Employment Opportunities,” report for the U.S. Department of Labor, USDL-21-36-80-31, 1984.

RECREATION

The rapidly growing demand for the Recreation

and Leisure amenity has made this an increasingly

important source of employment in the American

economy. According to the U.S. Travel Data Center’s

definition of the travel industry, the industry employed some 4.5 million people in 1972 (a little over

6 percent of the work force).89 Using the somewhat

different definition of the industry employed in this

analysis, by 1984, it was directly and indirectly employing 8.5 million people, or 8 percent of American jobs. Providing this amenity creates significant

numbers of jobs for virtually every occupation category (see figure 12-10). While comparatively few technical jobs are created, recreational spending ripples

into both service and production occupations.

‘Albert J. Comes, Hospitality in Transition: A Retrospective and Prospective Look at the U.S. Lodging Industry, American Hotel and Motel

Association, 1985, based on data from the U.S. Department of Labor,

Bureau of Labor Statistics, “Supplement to Employment and Earnings,

United States 1909-1978,” Washington, DC, July 1984.

AND LEISURE

Figure 12-10.-JobsNeeded To Produce Recreation &

Leisure in 1984 (percent of 8.5 million jobs)

Technicians

Sales Workers

Other Customer Contact

Information Distrib.

Data Entry etc.

Food and Beverage

Other Service Worker

Precision Production

Machine Operators

Transportation Ops.

Handlers and Laborers

Farming and Forestry

0 2 4 6 8 10 12 14

Percent of all jobs

SOURCE: See table 10-8 of chapter 10.

Will employment in the Recreation and Leisure

network continue to expand at the same rate? The

evidence is mixed. The service and retail jobs that

make up the vast majority of the sector’s work force
417

are not easily replaced by labor-saving technology.

This implies that recreation employment will continue to be labor-intensive. In fact, a recent analysis of the lodging industry suggests that hotel industry

is becoming even more labor-intensive: in 1933,

there was one employee for every 5 hotel rooms;

in 1982, there was one for every two rooms.90

On the other hand, if there is a slowdown in the

rate of growth of recreation demand, then demand

for labor may drop as well. Coupled with downward

pressure on work force levels because of decreasing numbers of young people who have traditionally worked in leisure industries, this could limit job

creation in the sector.

While the sector has clearly generated a significant amount of employment, many of the jobs created by restaurants, hotels, and amusements do not

offer high wages or significant opportunities for advancement. In 1987, these industries respectively

paid roughly half, two-thirds, and three-quarters of

the average hourly wage.91

90 Albert J. Gornes, op. cit., footnote 89.

WU.S. Department of Labor, Bureau of Labor Statistics, Employment

and Earnings, vol. 34, No. 12, December 1987, table C2, pp. 83-97.

Wages are for September 1987, reflect money payments only, and do

not include tips.

But these figures focus on only the direct services

provided by the away-from-home recreational businesses, neglecting the significant number of jobs resulting from the production of products for recreation and leisure. Outdoor recreation means purchases

of everything from tennis rackets and hiking shoes

to recreation vehicles. The businesses themselves

purchase manufactured products ranging from frenchfry slicers to jet aircraft. Travel generates employment for travel agencies and the people who make

and maintain the complex communication and data

processing systems on which that these businesses

now depend. New hotel and motel construction was

responsible for 11 percent of all new 1986 nonresidential construction.92

Figure 12-10 indicates that 10 percent of the jobs

associated with this amenity fall into the relatively

good paying managerial and precision production

occupations. When indirect effects are included, the

Recreation and Leisure amenity generates more jobs

for precision production manufacturing jobs than it

does food and beverage workers.

92 Depaflment of Commerce, Bureau of Economic Analysis, “National

Income and Product Accounts,” historical diskettes, table 5.4.

GOVERNMENT

Federal defense and government activities like fire,

police, and administration activities that could not

be allocated to other amenity groups produce about

13.1 million jobs. Managers, education and health

professionals, and data entry workers represent over

40 percent of all of these jobs (see figure 12-1 1).

A large share of the government workers not easily

traceable to an amenity network like Education or

Health work at the Federal level. The Department

of Defense, the Postal Service, and the Veterans

Administration employ over two-thirds of all Federal workers, and have been responsible for nearly

all growth in the Federal work force since 1977.93

Federal employment has grown at only one-third the

rate of private employment since 1977, resulting in

a decreasing share of the overall labor force94 (see

figure 12-12). Outside the Department of Defense,

Federal employment growth was slowed by the hiring freeze imposed in 1981, reduced employment

ceilings for many agencies, and cutbacks of approximately 14 percent and 17 percent at two large Federal agencies: the Department of Health and Human

Services and the Department of Agriculture.95 By

1986, the Federal work force was less than half that

of State and local governments.

In part because of the growing complexity of government administration, and in part because some

clerical activities are handled under contract, the Federal work force is increasingly composed of skilled

professional and administrative jobs. Jobs in these

categories were 35 percent of all Federal jobs in 1976

and 42 percent in 1986.96 The educational attain93 U.S. Congress, Congressional Budget Office, Federal Civilian Employment (Washington, DC: U.S. Government Printing Office, December 1987), p. x.

94Ibid., p. ix.

95 Ibid., p. xii.

96 lbid,, p. xiii. Statistics refer to non-postal employees.
418

Figure 12-11.-Jobs Needed for Defense and Other

Government in 1984 (percent of 13.1 million jobs)

Managers & Support

Technical Profession

Education & Health

Other Professional

Technicians

Sales Workers

Other Customer Contact

Information Distrib.

Data Entry etc.

Food and Beverage

Other Service Worker

Precision Production

Machine Operators

Transportation Ops.

Handlers and Laborers

Farming and Forestry

, 1 1 1 I , 1 1

0 2 4 6 8 10 12 14 16 18

Percent of all jobs

SOURCE: See table 10-6 of chapter 10,

Figure 12-12.-Government Employees

Not Directly Involved in Education

(as a percent of all employed persons)

Percen t

10

8

6

4

2

0

‘1955 1960 1965 1970 1975 1980 1985

m Gov. Enterprises = Defense

0 Civilian not

Including Education

How To Read This Figure: Civilian employment in Federal,

State, and local government (not including State education

employees) peaked in the mid 1970s and has subsequently

declined as a fraction of all employed persons. Federal

defense employment (a category that includes the Coast

Guard) fell sharply at the end of Viet Nam War. Federal, State

and Local Enterprises (e.g., power authorities) have accounted

for a nearly constant share of employed persons since 1955.

Employed persons include full-time employees, self-employed

persons, and part-time employees and converted to full-time

equivalents.

Notice that the employment in this figure are NOT the same

as that shown in figure 12-11. Figure 12-11 shows both direct

and indirect employment and excludes government employees

who can be traced directly to an amenity network like Food.

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “National Income and Product Accounts,” historical diskettes, table 6.10.

ment of Federal workers have also increased—31

percent of all non-postal employees held a bachelor’s

degree or better in 1986, up from 25 percent in 1976.

The 1986 national average was 22 percent.97

Although the Federal government is often depicted

as inefficient and overstaffed (it apparently takes 55

employees to answer a letter received by the Secretary of Health and Human Services98), the productivity of the Federal government has increased at

an annual rate of 1.6 percent from 1979 to 1986—

significantly higher than other service sector industries such as finance, insurance, and real estate (–.8

percent); legal services (– 1.9 percent); and business

services (– 1.8 percent).99

Measured productivity in government has slowed

since 1982. The decline can be attributed in part to

a negative measured rate of productivity growth in

the Department of Defense.100 Productivity in the

non-postal, civilian portion of the Federal government grew at an annual rate of 2.2 percent between

1982 and 1986, rivaling some of the productivity increases occurring in the manufacturing sector.

The source of productivity gains in non-defense

areas can be tied to the widespread implementation

of computers into the workplace, suggesting that significant future employment growth in this sector is

unlikely. Introduction of computers in the Social

Security Administration, for example, resulted in a

reduction of employment.101 When the Department

of Commerce implemented a new electronic system

for issuing export licenses, the approval time for

overseas sales was cut from from 13 days to 3.102

The Internal Revenue Service is experimenting with

a new electronic tax filing system that promises to

cut processing time by a factor of two, reduce filing

errors by a factor of ten, and deposit a refund check

in the taxpayer’s bank account three weeks after the

97 lbid p. xiii; and U.S. Department of Labor, Bureau of Labor Statistics, “Table 13: Occupation of employed persons by age and years of

school completed,” unpublished.

98 "’The Grace Commission Report,” 1983, cited in Lewis Lapham,

Michael Pollan, and Eric Etheridge, The Harper’s Index Book (New York,

NY: Henry Holt and Co., 1987), p. 43.

WU.S. Department of Labor, Bureau of Labor Statistics, “’I’ime series

Data for Input-Output Industries,” June 1987, unpublished.

Iwlbid., p. 22.

101 Ibid., p. 20.

102 Lee Mercer, Acting Deputy Undersecretary for Export Administration, U.S. Department of Commerce, “’Elain’ Joins ‘Stela’ to Cut Processing Time,” Business America, vol. 109, No. 5, Feb. 29, 1988, pp. 7-10.
419

return is filed.103 This new system should not only

hold down labor costs in the IRS, but should also

have a large indirect effect on the Postal Service as

the more than one billion pieces of yearly tax correspondence are reduced.

This document was typed by professional staff

using the same desktop personal computers that

were used to perform all of the OTA calculations presented here and to create all of the graphics. The

hardware and software costs averaged about $2,500

per station. In most cases, the data used in the analysis was received from Federal agencies over the telephone line or on floppy disks that could be inserted

directly into the desktop equipment. The staff that

once performed largely clerical work have become

IOj.fudy Rosenfe]d, “The Electronic Taxman, ” PC Wor/d, April 1987, specialists in perfecting graphics or formatting digiPP. 184-191. tal text files.

MANUFACTURING

Manufacturing employment is the paradigm of

work in U.S. society. The vocabulary of labor analysis and statistics, and much of the scholarly debate

over changes in work force skills, is built around

production work.

These paradigms change slowly even though classic manufacturing jobs—craftsmen, laborers, and machine operators—are likely to be only 10 to 15 percent of the labor force by the end of the century.

Even in manufacturing the mix of skills needed may

increasingly resemble the mix of skills needed by

businesses like banking and insurance.

The productivity gains achieved with new manufacturing technology have not uniformly reduced the

need for all kinds of occupations. For the most part,

they have resulted in sharp declines among manual workers (operators and laborers) rather than

among management staff (see figure 12-1 3). Workers classified as “precision production, craft, and repair” have held a roughly constant share of jobs.

As in the case of insurance (discussed in the previous section), there is considerable uncertainty over

the way new manufacturing technology can or should

be used. Fragmentation of markets, and the inherent characteristics of robotic and other production

equipment, seem to point away from mass production runs and toward the production of smaller

batches (see ch. 5). Using the technology installed

in most major metal shaping facilities today, producing batches of 10 or less requires ten times as many

people per piece produced as a production line making 1,000 or more identical parts. 104 Advanced “flexlo4f-firoyUki Yoshikawa, K. Rathmill, and J. Hatuany, Computer-Aided

Manufacturing: ArJ Interrrationaf Comparison (Washington, DC: National

Academy Press, 1981).

Figure 12-13.-Occupations in Manufacturing

(as a percent of all manufacturing jobs)

Percent

50

40

80

20

10

0

1960 1976 1978 1980 1982 1983 1985 1986 1987’

= Managers & Professionals ~ Precision Craft

n Laborers & Operatives

● November 1987.

SOURCE: U.S. Department of Labor, Bureau of Labor Statistics, matrices for Employment by Occupation and Industry, Washington, DC, various years,

ible manufacturing systems” (FMS) can result in a

radical change in the economics of mass as opposed

to batch production. The Japanese, who are being

forced away from mass production by the need to

serve smaller local markets as well as export markets, are making heavy use of FMS to increase the

productivity of small batch production dramatically. 105 A flexible manufacturing system (FMS) used

in small batch production runs may require only onefifth the number of employees needed with conventional systems (see table 12-7).

Even more importantly, the FMS systems change

the nature of jobs created in manufacturing. For example, FMS creates nearly twice as many engineering jobs per part produced as a conventional sys105 Ramchandran Jaikumar, “Postindustrial Manufacturing,” Harvard

Business Review, vol. 64, No. 6, November/December 1986, pp. 69-76.
420

Table 12-7.—Manpower Requirements for

Meta-=Cutting Operations: Fiexibie v.

Conventional Manufacturing

(workers need to produce the same number of identicai parts)

Number of workers

Conventional

Type of activity U.S. system Japanese FMS

Engineering . . . . . . . . . . . . . 34 16

Manufacturing overhead . . . 64 5

Fabrication . . . . . . . . . . . . . . 52 6

Assembly . . . . . . . . . . . . . . . 44 16

Total . . . . . . . . . . . . . . . . . 194 43

NOTE: There is no column for a U.S. FMS because as of the end of 1986, no U.S.

machine tool producer had an FMS on Iine.

SOURCE: Ramchandran Jaikumar, “Postindustrial Manufacturing,” Harvard Business Revlew, November/December 1988, p. 73.

Flexible Manufacturing Systems (FMS)

Used for Machining Metal Collars

Before FMS After FMS

Number of machine tools . 8 4

Number of processes . . . . . 3

Number of workers . . . . . . . 10

Machine utilization . . . . . . . 50% 75%

Factory availability

per day . . . . . . . . . . . . . . . 16 hours 24 hours

Necessary lead time. . . . . . 6 days 1 day

SOURCE: Okuma Machinery Works Ltd., reported in B. Stokes, “The 21st-Century

Factory,” National Journal, Feb. 13, 1986, p. 383.

tern (again see table 12-7). Successful use of FMS to

achieve high degrees of flexibility in rapidly moving markets requires close cooperation between design engineering and production. Products and production techniques must be designed simultaneously.

The Japanese find, for example, that the productivity

of software development (usually considered a “service” occupation) is critical in the overall cost of products made from FMS; for example, Yukio Hasegawa,

an expert on robotics at Waseda University, estimates

that the cost of FMS production could be cut by 25

percent given advances in the productivity of software development. 106 Teamwork, a mixture of skills,

and a high degree of intellectual flexibility appear

necessary to make FMS work.

The discussion in chapter 6 explained that the jobs

created by new manufacturing strategies depend

heavily on management choice. There is some evidence that the Japanese have moved more rapidly

to exploit the flexibility inherent in FMS while U.S.

firms have opted to use the equipment more as a

106 Bruce Stokes, “The 21st-Century Factory, ” National Journal, Feb.

13, 1988, vol. 20, No. 7, p. 386.

direct substitute for mass production. A recent survey found that U.S. manufacturers used FMS systems to make an average of 10 different parts while

the Japanese averaged 93 parts per FMS system.107

Production Workers

The debate over whether new production equipment will lead to a net increase or decline in the

skills of manufacturing workers is impossible to resolve given the uncertain future of new production

technology. Chapter 11 summarized some of the debate. It is clearly possible that new production equipment would lower skills on the shop floor but create

many highly skilled support jobs, both in manufacturing enterprises and in the businesses that supply them.

Even the comparatively narrow question of whether

new manufacturing technology will make production work more interesting and challenging or more

mundane proves difficult to resolve. While there are

no convincing data on the subject, anecdotes suggest that management has a wide range of choice

in the kinds of jobs that are created in new production systems.108 Since experience is limited, it is difficult to prove which choice is preferred. There are

reasons to believe that attempts to achieve productivity without actively involving workers in the design and operation of a plant can prove disastrous—

particularly in dynamic situations where products

change rapidly.109

Obviously not all managers are convinced of the

advantages of designing systems around a skilled

production force. Computer-controlled equipment

has been introduced in a way that, as one manager

put it the “ . . . operator can be just short of an

idiot’’ 110 (see box 12-A). In fact, a majority of the operators interviewed in one survey believed that the

use of numerically controlled machine tools made

their jobs less interesting and less rewarding. As one

operative put it, “you get to be, in my opinion on

a NC [numerically controlled machine tool], a little

‘071bid.

108 Carol Parsons et al., “The Development of Programmable Automation Systems in Discreet Parts Manufacturing Industries,” contract

report prepared for the Office of Technology Assessment, Washington,

DC, 1984.

109 Ray Marshall, “EConomiC Performance and Work Force Quality,”

Testimony before the Joint Economic Committee, U.S. Congress, Oct.

21, 1987.

110 Parsons, Op. cit., footnote 108.
421

Box 12-A.–Does Technology De-Skill

Production Workers?

“In most companies the programmer is paid as

a grade 9 while the operator is paid as a grade 6.

But in our company there aren’t any up-in-thefrontoffice type programmers. So the CNC operators are

paid as a grade 8. This was OK with the operators

but some of the other employees were angry because operators spend a lot of time just sitting reading a book.”

—A vice president for manufacturing of a firm in Iowa

“Yes and no. Operators now have new skills.

With the old machines they had to have a feeling

for tool nudging and continuous adjustments. Now

they need to understand the cycle of a program.

We also need more competent electronic technicians and troubleshooters. There are poor diagnostics on the [CNC] machines. ”

–A vice president for manufacturing in an independent producer

of manifold and other engine parts

that has used CNC for 3 years.

SOURCE Carol Parsons et al., “The Development of Programmable Automation Systems in Discreet Parts Manufacturing Industries,”

contract report prepared for the Office of Technology Assessment, Washington DC, 1984.

weak-minded." 111 In such cases, a job once held by

a trained machinist is replaced by one inwhich an

individual performs simple loading operations and

spends more time waiting for something to go wrong.

Programming of the equipment is removed from the

shop floor, and placed in the hands of specialists.

When something does go wrong, the worker on the

floor can do little more than call a repair team. The

result is generally boredom, as well as frustration

over loss of autonomy; moreover, responsibility without control can create enormous stress. The feeling

of helplessness can be increased when workers loose

incentive bonuses because of equipment failures

over which they have no control.

On the other hand, there are examples of shops

where teams of designers and operators have collaborated in a way that benefits the entire work force.

An examination of textile machinery manufacturing

in West Germany found that “firms concentrate their

expertise in coordinating the design and assembling

Ill Ibid., p. 201.

the full product. "

112 operators in such facilities may

take delight in reprogramming equipment to reduce

the processing time by a few seconds and beat the

record of the previous shift. In one Japanese firm

employing an FMS, for example, “systems engineers

with a thorough knowledge of several disciplines. . .

[rotate] through all manufacturing departments,"113 

so that each would be able to gain the kind of competitive expertise that may be unobtainable without

a coordinated approach to design and assembly.

The Japanese seem to have faith that new production technology will lead to much higher demands on the skills of their workers. An increasing

fraction of their production jobs are held by college

graduates, or by high-school graduates whose knowledge of mathematics and science rivals that of college juniors or sophomores in the United States. Nissan Motors recruits high school graduates with a

rigorous nationwide test that places particular emphasis on mathematics and science.114

Equipment Maintenance

One undisputed trend is the increasing need for

highly skilled individuals capable of designing, installing, and maintaining new automated equipment.

An overwhelming majority of firms interviewed indicated that they had difficulty finding qualified personnel; most had instituted in-house training programs. These training programs are not trivial. The

equipment involved is highly complex and cannot

be understood with a few brief lessons. A survey of

48 British engineering plants in 1981 indicated that

firms with numerically controlled tools thought they

needed maintenance personnel with higher skills,

while those that had not automated indicated that

they hoped to simplify equipment so that the skills

of maintenance personnel could be reduced.115

Several of the automated firms indicated that they

were concerned about raiding by other firms of

trained personnel, and were nervous about their

training investments. Many of the advanced systems

I Izcharles Sabel et al., “How To Keep Mature Industries innovative,”

Technology Review, vol. 90, No. 3, April 1987, p. 30.

I ls.Jaikumar, op. cit., footnote 105, P. 75.

114B. stokes, op. cit., footnote 106.

I lsp.J, Senker and T. M. Brady, “Skills for Automation: The Maintenance Training Gap, ” paper prepared for the 2nd International Conference on Human Factors in Manufacturing, West Germany, June 11-

13, 1985.
422

require people familiar with a number of fields: hy- stressful, since a single problem in a highly condraulics, electronics, and mechanical equipment.116 nected factory system can shut down a large and exThese jobs plainly demand a flexible intellect and pensive facility. Such problems are often difficult to

can be quite challenging. They can also be extremely diagnose under pressure.

116 Parsons, op. cit., footnote 108
Chapter 13

Alternative Paths for

the U.S. Economy
CONTENTS

Page

Component Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .........426

Consumer and Government Purchases . . . . . . . . . ............................426

International Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..................426

Production Recipes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....................428

Labor Productivity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..................430

Staffing Patterns . .............. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......431

Comparing the Influence of Different Factors . ..............................433

Combining Component Assumptions into scenarios. . ..........................434

Constructing the scenarios. . . . . . . . .,...... . .............................434

Impact on Business Sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............434

Impact on occupations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................436

At a Crossroads.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...................439

A Caveat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..........................439
Chapter 13

Alternative Paths for the U.S. Economy

Given the enormous range of choices Americans

face about what to buy, what to produce, how to produce it, and whom to employ, confident forecasts

about the future are absurd. To an extent never before possible, the future hinges on conscious choice.

It is possible, however, to construct self-consistent

descriptions of the future that may provide a useful

guide for policy makers.

This chapter examines the impact on the economy of a number of different scenarios, which include different assumptions about change in five

main areas:

● consumer and government purchases,

● international trade,

● production recipes,

● labor productivity, and

● staffing patterns.

Chapters 2 through 12 provide quantitative and

qualitative support for likely changes in these broad

areas. The effects of these assumptions are summarized by two indicators of change: shifts in the sectoral composition of the Gross National Product

(GNP) (as discussed inch. 5) and changes in the numbers of jobs in each production sector and occupation (as discussed in ch. 10).

Four scenarios are constructed from the various

assumptions made about each of the broad areas:

1. “Trend” is an attempt to extend trends established during the past two decades into the

future.

2. “Manufacturing” attempts to maintain the traditional lines of manufacturing.

3. “Stagnation” assumes that growth slows due to

slack demand, reduced productivity, and a trade

situation in which the United States slips behind its trading partners in the production of

sophisticated equipment and services.

4. “Transformation” reflects a series of hypotheses about the ways consumers may elect to purchase amenity and the manner in which producers may choose to organize production. The

underlying theme is one of high flexibility in

the tailoring of goods and services to targeted

tastes and markets. This scenario assumes that

trade falls sharply as a fraction of economic

activity because most products can be made

more efficiently in locations close to the consumer, due to both reduced material and energy

inputs and the fast pace of technology transfer.

Two of these scenarios, the Trend and Transformation scenarios, outlined in earlier chapters, include both a low- and a high-growth variant, making an actual total of six scenarios. The low-growth

case (in which real GNP grows at 1.5 percent per

year) assumes the comparatively slow growth rates

of the late 1970s and early 1980s. The high-growth

case (real GNP grows at 3 percent a year) assumes

that the economy is able to restore the high rates

of growth of the late 1960s. These cases were chosen to illustrate the boundaries of reasonable GNP

growth rates, and are in general concordance with

the U.S. Department of Labor’s low-and high-growth

projections for the year 2000.1

These different scenarios will obviously result in

different levels and arrangements of GNP and jobs

in the year 2005. Each GNP level can, however, be

produced by very different kinds of economies.

The analysis is not a closed dynamic model, in

which demand for output generates a set of prices

and a pattern of income which, in turn, generate purchasing patterns and a demand for output.2 Instead,

the scenarios are intended to illustrate rough parameters for the future direction of the economy, providing an awareness to possible changes rather than

an exact prediction.

l~e Norman C. Saunders, “Economic Projections to the Year 2000,”

A40rrtldy Labor Review, vol. 110, No. 9, September 1987, pp. 10-18.

ZFor a description of an operational dynamic model, see W. Leontief

and F. Duchin, “The Impacts of Automation on Employment, 1963-

2000,” Institute for Economic Analysis, New York University, New York,

NY, April 1984. A description of a forecasting model used by the Bureau of Labor Statistics appears in N.C. Saunders, “The U.S. Economy

Through 1990–An Update,” Month/y Labor Review, vol. 104, No. 8,

August 1981, pp. 18-27; and U.S. General Accounting Office, “Bureau

of Labor Statistics Employment Projections: Detailed Analysis of Selected

Occupations and Industries,”GAO/OCE-85-l, Washington, DC, Apr.

25, 1985.

425
426

Changes in each of the five main areas that collectively define these scenarios are called the component assumptions. These assumptions, and their

individual effects on sectoral contribution to GNP and

jobs, are described below, providing a sensitivity to

the relative impact of each component assumption.

Following this discussion, they will be combined into

the six scenarios.

COMPONENT ASSUMPTIONS

The influence of assumptions about demand,

trade, production recipes, productivity, and staffing

patterns is examined by assuming an economy

where other factors are held constant. The impact

of the changes is then shown cumulatively. This

means beginning with baseline patterns for demand,

trade, production recipes, productivity, and staffing.

First, only demand is changed and values for the

other factors are left at baseline levels. Second, demand is set at a fixed future level (for instance, at

the 3 percent trend level) and alternative trade patterns are explored. Third, demand and trade are set

at fixed future levels and the effects of different production recipes are explored. The series is continued

until all factors are considered.

This analysis is undertaken only to illustrate the

direction of change resulting from altering assumptions—none of the cases can be considered realistic

descriptions of the future. The calculations are based

on straightforward input-output techniques described

in chapters 4, 7, and 10. While most of the component estimates were prepared for 85 business sectors, uncertainties are so large that the results are

displayed only for nine summary sectors to avoid

giving a false sense of precision.

Consumer and Government Purchases

The analysis in Part I resulted in two types of estimates about the future of personal and government

spending: a trend case, and an alternative pattern

of demand built on speculation about how technology, changes in government regulation, and changes

in how consumers acquire information could lead

to a higher level of amenities than the trend. Estimates were made for both high- and low-growth rates

(see table 2-9 of ch. 2 for a summary of the alternative demand estimates).

At the level of aggregation shown in table 13-1,

these assumptions have a surprisingly modest effect

on economic structure. The alternative cases result

in significantly lower use of Natural Resources (primarily because of an assumed increase in the energy

efficiency of houses and automobiles), higher spending on Transactional Activities, and lower consumption of High Wage Manufacturing products—all of

which translates into shifting patterns of value-added

for these sectors. Because productivity and staffing

patterns have been kept constant, the impact on jobs

mirrors the changes in value-added.

International Trade

Four trade cases were outlined at the end of chapter 8 under the assumption that the United States

would achieve something approaching balanced

trade in the year 2005. The cases differ in assumptions about the total volume of trade and about the

comparative advantage of U.S. products. Briefly recapitulating:

1. The Caesar case assumes that the United States

2.

3.

recovers a dominant position in the export of

sophisticated manufactured products while trade

continues to grow as a fraction of the U.S. GNP.

In this case, the gross level of trade increases

from the 1984 level of 22 percent to 30 percent

of GNP in 2005. Exports of manufactured goods

and services exceed imports while the United

States becomes a slight net importer of natural

resources, largely because of oil imports.

The Banana case, like the Caesar case, assumes

that trade rises to become 30 percent of GNP

in 2005. The Banana case, however, assumes

that the U.S. trade balance is restored primarily by increasing exports of raw materials and

resource-intensive manufactured products (following trends of the past decade). Exports of

high technology products continue to fall. Imports and exports of services are identical to the

Caesar case.

The Drucker case supposes that technological

advances will lead to a decline in merchandise
Table 13-1.—Sensitivity Matrix of Jobs and Value-Added Under Different Assumptions of Final Demand

1984 3% Trend 1.5% Trend 3% Alternative 1.5% Alternative

Value- Value- Value- Value- ValueProduction sector Jobs added Jobs added Jobs added Jobs added Jobs added

Natural Resources . . . . . . . . . . . . . 4.5

Construction ., , . . . . . . . . . . . . . . . 4.5

Low Wage Manufacturing. . . . . . . 4.5

Medium Wage Manufacturing . . . 9.3

High Wage Manufacturing . . . . . . 5.7

Transportation and Trade . . . . . . . 26.3

Transactional Activities . . . . . . . . 12.8

Personal Services . . . . . . . . . . . . . 5.6

Social Services. . . . . . . . . . . . . . . . 26.8

Total (percent). . . . . . . . . . . . . . . 100.0

Total jobs in millions,

GNP in trillions (1980$) . . . . . . . 107.0

9.2

6.2

3.2

9.7

9.2

19,4

24.2

3.6

15.3

100.0

3.0

4.3

4.1

4.5

8.8

5.0

25.5

12.6

6.4

28.7

100.0

200.0

9.1

5.8

3.3

9.3

8.2

19.1

24.2

4.2

16.7

100.0

5.4

4.6

4.3

4.3

9.3

5.2

25.6

12.9

5.8

28.1

100.0

143.0

9.5

6.0

3.1

9.8

8.4

19.0

24.5

3.8

16.1

100.0

4.0

4.1

4.2

4.8

8.8

4.9

26,3

13.0

7.0

26.9

100.0

199.0

8.5

5.9

3.6

9.3

7.9

19.7

24.9

4.6

15.6

100.0

5.4

4.2

4.4

4.5

8.9

4.9

25.5

12.9

6.4

28.4

100.0

144.0

8.7

6.1

3.3

9.4

8,1

19.1

24.7

4.2

16.4

100.0

3.9

NOTE: Numbers may not add due to rounding.

SOURCE: Office of Technology Assessment, 1988.
428

trade, leaving the exchange of ideas and designs

(services) as the prominent focus of trade. The

level of gross trade is assumed to fall to 10 percent of GNP—approximately the level of trade

in 1970. A deficit of natural resource and manufactured goods is balanced by exports of services.

4. The Trend case assumes 1984 levels of trade,

but increases exports to restore the trade balance.

Table 13-2 indicates that the effects of these different cases tend to be isolated to a few sectors. The

Caesar case succeeds in boosting manufacturing’s

share of jobs and GNP relative to the other trade assumptions, especially in the Medium and High Wage

sectors. The main impact of the Drucker case is to

boost the share of jobs and GNP appearing in the

Low Wage Manufacturing sector—not surprising

since a lower level of trade coupled with no change

in domestic demand would effectively force businesses in this sector, such as textile and apparel

firms, back “on-shore.” As expected, the Banana case

increases the Natural Resource sector’s share of jobs

and GNP while reducing the role of manufacturing.

Since balanced trade is a net generator of jobs,

both cases with high levels of trade (Caesar and

Banana) generate 4 to 5 million more jobs than the

low-trade volume Drucker and 84-Base cases. Interestingly, the low-trade Drucker case generated as

many jobs as the Trend, presumably because of the

labor-intensive service industries created by Drucker.

As was the case with domestic demand, however,

the impact of the radically different trade cases on

the structure of the economy is relatively small.

Production Recipes

Changes in the production recipe are considered

in two parts: first, changes in the use of non-durable

intermediate inputs for production; and, secondly,

changes in the kinds of capital equipment purchased.

Intermediate Inputs

The complex changes in production recipes reviewed in chapters 4, 5, and 6 defy easy generalization. Three hypotheses are developed to explore

ranges of reasonable possibilities:

1. The trend case is developed by extrapolating

the changes in recipe occurring between 1972

2.

3.

to 1980 for an additional ten years. The general patterns of the trend were discussed in

chapter 4. Inputs from natural resource and

manufacturing sectors decline, and inputs from

the service sectors, particularly Transactional

Activities, increase. The trend case also results

in a higher level of inter-industry transactions,

indicating a more tightly linked economy that

is a reflection of increased specialization.

The stagnation case assumes that production

recipes remain fixed at 1980 levels.

The alternative recipe is based on the sectoral

analyses of chapter- 6. It resembles the trend

case except that it is carried out 15 years further to 2005, and Natural Resource inputs to

each sector are cut to 70 percent of their 1980

level—a reflection of the economy’s reduced use

of natural raw materials. Through the adoption

of modern production techniques and a changing product mix, it is also assumed that the production recipe of the Construction, Low Wage

Manufacturing, and High Wage Manufacturing

sectors would increasingly begin to resemble

the production recipes now used by Medium

Wage Manufacturing.

One-third of Medium Wage Manufacturing’s

production recipe change from 1980 to 2005 has

been added to the 1980 recipe of each of these

sectors, resulting in an overall increase of inputs, especially those originating in the Medium

Wage Manufacturing, Transactional Activities,

and Transportation & Trade sectors. A similar

technique is applied to make education and the

“paper pushing” parts of government behave

more like Transactional Activities in the way they

purchase inputs from the rest of the economy.

The results shown in table 13-3 indicate that the

alternative recipe case postulates a much higher use

of advanced technology, reflected in an increased

role for Medium Wage Manufacturing, the need for

more distributive and transactional services provided

by the Transportation & Trade and Transactional

Activities sectors, and a sharply reduced role for the

Natural Resource sector. The trend recipe case proves

to be roughly intermediate between the stagnation

case and the alternative.

The alternative case creates 11 percent more jobs

than the trend case, which in turn creates 6 percent

more jobs than the stagnation case. This is because
Table 13=2.—Sensitivity Matrix of Jobs and Value-Added Under Different Scenarios of International Trade

1984 Caesar Banana Drucker Trend

Value- Value- Value- Value- ValueProduction sector Jobs added Jobs added Jobs added Jobs added Jobs added

Natural Resources . . . . . . . . . . . . . 4.5

Construction . . . . . . . . . . . . . . . . . . 4.5

Low Wage Manufacturing. . . . . . . 4.5

Medium Wage Manufacturing . . . 9.3

High Wage Manufacturing . . . . . . 5.7

Transportation and Trade . . . . . . . 26.3

Transactional Activities . . . . . . . . 12.8

Personal Services . . . . . . . . . . . . . 5.6

Social Services. . . . . . . . . . . . . . . . 26.8

Total (percent). . . . . . . . . . . . . . . 100.0

Total jobs millions,

GNP in trillions (1980$) . . . . . . . 107.0

9.2

6.2

3.2

9.7

9.2

19.4

24.2

3.6

15.3

100.0

3.0

4.4

4.1

4.8

9.0

5.4

25.5

12.4

6.3

28.1

100.0

205.0

9.1

5.7

3.5

9.6

8.8

19.1

23.8

4.1

16.3

100.0

5.6

4.8

4.1

4.6

9.1

5.3

25.1

12.6

6.3

28.1

100.0

204.0

9.8

5.7

3.3

9.6

8.6

18.7

24.0

4.1

16.2

100.0

5.6

4.3

4.1

5.2

8.8

5.3

24.8

12.4

6.4

28.6

100.0

200.0

8.9

5.8

3.9

9.4

8.8

18.6

23.8

4.2

16.6

100.0

5.4

4.3

4.1

4.5

8.8

5.0

25.5

12.6

6.4

28.7

100.0

200.0

9.1

5.8

3.3

9.3

8.2

19.2

24.2

4.2

16.7

100.0

, 5.4

NOTE: Numbers may not add due to rounding.

SOURCE: Office of Technology Assessment, 1988.
Table 13-3.-Sensitivity Matrix of Jobs and Value-Added Under Different Production Recipe Scenarios

1984 Stagnation Trend Alternative

Value- Value- Value- ValueProduction sector Jobs added Jobs added Jobs added Jobs added

Natural Resources . . . . . . . . . . . . . 4.5 9.2 4.3 9.1 4.3 7.4 2.5 3.5

Construction . . . . . . . . . . . . . . . . . . 4.5 6.2 5.8 4.0 5.2 4.1 5.2

Low Wage Manufacturing. . . . . . . 4.5 3.2 3.3 4.1 3.8 3.4 2.8

Medium Wage Manufacturing . . . 9.3 9.7 8.8 9.3 8.9 9.6 10.4 12.0

High Wage Manufacturing . . . . . . 5.7 9.2 5.0 8.2 4.8 6.0 3.7 7.3

Transportation and Trade . . . . . . . 26.3 19.4 25.5 19.1 27.3 20.0 30.8 21.0

Transactional Activities . . . . . . . . 12.8 24.2 12.6 24.2 13.3 28.4 13.5 31.8

Personal Services . . . . . . . . . . . . . 5.6 3.6 6.4 4.2 6.1 4.3 5.6 4.1

Social Services. . . . . . . . . . . . . . . . 26.8 15.3 28.7 16.7 27.2 15.2 26.1 12.2

Total (percent). . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Total jobs millions,

GNP in trillions (1980$) . . . . . . . 107.0 3.0 200.0 5.4 212.0 5.4 235.0 5.4

NOTE: Numbers may not add due to rounding.

SOURCE: Office of Technology Assessment, 1988.

the alternative and trend cases lead to increased

inter-industry linkage and result in significantly

greater demand for intermediate inputs from the

comparatively labor-intensive service sectors.

Producers’ Durable Equipment

Three producers’ durable equipment composition

cases have been constructed: a trend case, which

extends the 1950 to 1985 trends out to 2005; a manufacturing case, which uses the 1972 pattern of investment to depict a surge in expenditures on industrial machinery; and an information case, which

extends the 2005 share of computers, communication equipment, instruments, and photocopiers to

50 percent of all durable equipment expenditures.

Table 13-4 shows that the relative change attributable to these cases is small, with almost no difference

between the information and trend cases. The major difference occurs in the manufacturing case,

which increases the share of both jobs and GNP for

the High Wage Manufacturing sector while lowering Medium Wage Manufacturing’s share. This result is expected, given the emphasis on industrial

machinery (a High Wage product) that reduces the

share of equipment expenditures for information

equipment (a Medium Wage product).

Labor Productivity

Not unexpectedly, a plausible range of assumptions about productivity translates into quite signifTable 13-4.—Sensitivity Matrix of Jobs and Value-Added Under Different Scenarios of

Producers’ Durable Equipment

1984 Information Manufacturing Trend

Value- Value- Value- ValueProduction sector Jobs added Jobs added Jobs added Jobs added

Natural Resources . . . . . . . . . . . . . 4.5 9.2 4.3 9.1 4,4 9.1 4.3 9.0

Construction . . . . . . . . . . . . . . . . . . 4.5 6.2 4.1 5.8 4.1 5.8 4.1 5.8

Low Wage Manufacturing. . . . . . . 4.5 3.2 4.4 3.3 4.5 3.3 4.5 3.3

Medium Wage Manufacturing . . . 9.3 9.7 9.1 9.6 8.5 9.0 9.0 9.5

High Wage Manufacturing . . . . . . 5.7 9.2 4.9 8.0 5.1 8.4 4.9 8.1

Transportation and Trade . . . . . . . 26.3 19.4 25.4 19.0 25.6 19.2 25.5 19.1

Transactional Activities . . . . . . . . 12.8 24.2 12.7 24.4 12.7 24.3 12.7 24.3

Personal Services . . . . . . . . . . . . . 5.6 3.6 4.2 4.2 6.4 4.2

Social Services. . . . . . . . . . . . . . . . 26.8 15.3 16.7 16.7 28.7 16.6

Total (percent). . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Total jobs millions,

GNP in trillions (1980$) . . . . . . . 107.0 3.0 200.0 5.4 199.0 5.4 200.0 5.4

NOTE: Numbers may not add due to rounding.

SOURCE: Office of Technology Assessment, 1988.
431

icant differences in the distribution and numbers of

jobs.

●

●

●

●

The trend productivity case assumes that the

productivity growth rates established between

1958 and 1984 continue to 2005.

The high productivity case assumes that trends

prevailing between 1958 and 1972 are restored

and continue between 1984 and 2005.

The low productivity case assumes that the

growth rates that occurred from 1973 to 1984

continue until 2005.

There are two alternative cases, Both assume

that productivity in the Construction sector follows the long-term (1958 to 1984) trend in productivity experienced in the Medium Wage

Manufacturing industry; in other words, it is

assumed that Construction will increasingly resemble manufacturing. The productivity of the

Transportation sector is assumed to follow the

low productivity path because of the increase

in less-than-truckload hauling. The high productivity trend is used for the retail and wholesale

trade (assuming the use of new technologies,

such as scanners, and new processes, such as

self service).

Greater use of capital equipment (particularly

computer and communication technology) is assumed to increase productivity in Transactional

Activities and the government portion of the Social Service sector at a rate of 2 percent per year

from 1984 to 2005. The productivity of the rest

of the Social Service sector, consisting mainly

of private health and education, is assumed to

grow as it did from 1973 to 1984. The use of

new technology is not assumed to change studentteacher ratios, but instead will change the quality of education in ways that are not normally

measured (it will, for example, increase the

productivity of a student’s time). The highalternative case assumes that the productivity

of the Natural Resource, manufacturing, and

Personal Service sectors grows at the high productivity rates through 2005; the low-alternative

case assumes the low productivity rate for these

sectors.

All of the cases shown in table 13-5 have higher

shares of employment in the service sectors than in

1984, with the largest increases coming from the high

productivity and high-alternative cases. This is undoubtedly the result of the much higher rates of

productivity in the Medium and High Wage Manufacturing, Construction, and Natural Resource sectors as opposed to the service sectors. The modifications made in the alternative cases lower the share

of employment in the Construction sector due to improvements in productivity, but indirectly increase

the share held by manufacturing, largely because

of gains in service sector productivity. In the lowalternative case, this assumption results in the highest share of High Wage Manufacturing jobs of any

of the cases examined. (Since changes in labor

productivity would not affect the amount of value-

-added generated, these calculations are not presented.)

Staffing Patterns

The remaining component examined is the occupational mix within each sector. Three cases were

constructed:

Table 13-5.—Sensitivity Matrix of Jobs Under Different Scenarios of Productivity

High- LowProduction sector 1984 Trend High Low alternative alternative

Natural Resources . . . . . . . . . . . . . . . . . . . . . 4.5 3.0 2.1 4,3 2.3 5.2

Construction . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 6.4 5.3 6.1 4.9 4.1

Low Wage Manufacturing . . . . . . . . . . . . . . . 4.5 3.7 4.0 3.2 4.3 3.9

Medium Wage Manufacturing . . . . . . . . . . . 9.3 7.8 8.6 6.8 9.3 8.3

High Wage Manufacturing . . . . . . . . . . . . . . 5.7 4.3 4.0 4.8 4.3 5.9

Transportation and Trade . . . . . . . . . . . . . . . 26.3 23.7 21.6 25.5 25.3 21.4

Transactional Activities. . . . . . . . . . . . . . . . . 12.8 13.5 14.3 12.6 13.6 11.5

Personal Services. . . . . . . . . . . . . . . . . . . . . . 5.6 5.8 6.8 5.9 8.4

Social Services . . . . . . . . . . . . . . . . . . . . . . . . 26.8 31.7 29.9 30.1 31.2

Total jobs (percent) . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0 100.0 100.0

Total jobs (millions) . . . . . . . . . . . . . . . . . . 107.0 150.5 132.4 178.2 123.0 145.4

NOTE: Numbers may not add due to rounding.

SOURCE: Office of Technology Assessment, 1988
432

●

●

●

a stagnation case, which assumes staffing patterns as they existed in 1984;

a trend case, which extends changes that have

occurred in staffing since the recession of the

early 1980s to 2005; and

an alternative case, based on the trend case,

which makes modifications following the sectoral analyses of chapter 12.

As in the alternative recipe and productivity cases,

the alternative staffing pattern case attempts to make

Construction emulate a manufacturing concern by

imposing the 2005 staffing pattern of High Wage

Manufacturing onto Construction. Similarly, the staffing patterns of Low Wage and High Wage Manufacturing are made to resemble that of the Medium

Wage sector by adding two-thirds of Medium Wage

Manufacturing’s 1984-2005 change to their 1984 staffing pattern. Medium Wage Manufacturing itself has

been modified to reflect increased use of advanced

manufacturing technologies by increasing the numbers of technical professionals and technicians, and

by lowering the numbers of machine operators and

precision production workers. The staffing patterns

of the service sectors are changed to reflect a decrease in information distribution and processing occupations, based on the developments outlined in

chapter 12. The number of people employed as

“managers” are reduced by one-third and reclassified as “other professionals” in each service sector.

This is based on an assumption that occupations

growing out of new information technology will be

both managerial and clerical in nature (akin to the

para-professionals included in the “other professional” classification).

Because changes in staffing patterns do not alter

the sectoral composition of jobs and GNP, it is necessary to look at the changes on the basis of occupations. Table 13-6 shows that the alternative and

trend assumptions are somewhat similar and contrast sharply with the stagnation case. Under the

alternative and trend assumptions, the share of

managers, technical professionals, and sales workers rises while the share of education and health

professionals, information distributors, precision production workers, machine operators, and farmers

fall.

The differences between the trend and the alternative cases are in the size and not the direction of

change. The alternative case produces more technical workers, “other” professionals, and transport

workers, and fewer data entry & manipulation and

precision production workers, than the trend case,

Jobs for managers and sales workers also grow more

slowly in the alternative case.

Table 13-6.-Sensitivity Matrix of Jobs Under Different Scenarios of Staffing

Occupation

Managers and management support . . . . . . . .

Technical professionals . . . . . . . . . . . . . . . . . . .

Education and health professionals . . . . . . . . .

Other professionals. . . . . . . . . . . . . . . . . . . . . . .

Technicians . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sales workers. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other customer contact . . . . . . . . . . . . . . . . . . .

Information distribution . . . . . . . . . . . . . . . . . . .

Data entry, manipulation, and processing. . . .

Food and beverage preparers . . . . . . . . . . . . . .

Other service workers. . . . . . . . . . . . . . . . . . . . .

Precision production, craft, and repair . . . . . .

Machine operators, assemblers, and

inspectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Transportation and material moving. . . . . . . . .

Handlers, equipment cleaners, helpers, and

laborers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Farming, forestry, and fishing . . . . . . . . . . . . . .

Total jobs (percent) . . . . . . . . . . . . . . . . . . . . .

Stagnation Alternative Trend

10.6 13.5 17.3

2.0

6.7

3.3

3,0

10.5

1.2

3.6

12.7

6.2

9.3

11.7

4.9

4.9

8.9

6.7

13.4

1.3

2.6

8.8

4.3

8.2

5.8

3.0

5.6

4.4

3.9

13.7

1.2

3.2

11.3

4.0

7.6 5.6 5.2

4.4 5.3 4.5

3.9 4.0 4.9

3.3 1.7 1.7

100.0 100.0 100.0

Total jobs (millions). . . . . . . . . . . . . . . . . . . . . 200.0 200.0 200.0

NOTE: Numbers may not add due to rounding.

SOURCE: Office of Technology Assessment, 1988.
433

Comparing the Influence of Different

Factors

Table 13-7 shows the relative effects of all the factors just described when combined into the highgrowth Trend scenario. While the magnitude of

different factors varies widely between sectors,

changes in productivity have the greatest influence

on the change in a sector’s share of jobs between

1984 and 2005. Lagging productivity is the primary

reason for a gain in Construction’s job share, while

declining demand is nearly as powerful a factor

behind High Wage Manufacturing’s decline in job

share. Although the Transportation & Trade sector

would lose job share if the positive trend in productivity continued, the trend in the recipe of production substantially reduces the loss.

When staffing patterns are considered, however,

even the productivity effects are overwhelmed by

changes in staffing patterns within individual sectors (see table 13-8).

Table 13-7.—Change in Percentage of Job Share From 1984 to 2005 According to the High-Growth Trend Scenario

1 2 3 4 5

Production

Production sectors Job share shift Productivity Demand Recipe interactive

Natural Resources . . . . . . . . . . . . . . . . . . –2.4% –2.2 –0.2 0.0 0.0

Construction . . . . . . . . . . . . . . . . . . . . . . . –0.4 –0.1 0.0

Low Wage Manufacturing . . . . . . . . . . . . 0.0 –0.4 0.1

Medium Wage Manufacturing. . . . . . . . . –0.6 –0.2 –0.5 0.1 0.0

High Wage Manufacturing. . . . . . . . . . . . –1.9 – 1.0 –0.7 –0.2 0.0

Transportation and Trade . . . . . . . . . . . . –3.2 –3.9 –0.8 1.8 –0.3

Transactional Activities . . . . . . . . . . . . . . 2.3 1.6 –0.2 0.7 0.2

Personal Services . . . . . . . . . . . . . . . . . . . –0.4 – 1.0 0.8 –0.3 0.1

Social Services . . . . . . . . . . . . . . . . . . . . . 6.1 5.9 1.9 –1.5 –0.2

NOTE: 1-2 +3+4+5. Numbers may not add due to rounding.

SOURCE: Off Ice of Technology Assessment, 1966.

Table 13-8.—Change in Percentage of Job Share From 1984 to 2005 According to the High-Growth Trend Scenario

1 2 3 4 5 6

Production

Occupations Job share shift Demand Recipe Productivity Staffing Interactive

1. Managers and management support . . . . . .

2. Technical professionals . . . . . . . . . . . . . . . . .

3. Education and health professionals. . . . . . .

4. Other professionals . . . . . . . . . . . . . . . . . . . .

5. Technicians . . . . . . . . . . . . . . . . . . . . . . . . . . .

6. Sales workers . . . . . . . . . . . . . . . . . . . . . . . . .

7. Other customer contact . . . . . . . . . . . . . . . . .

8. information distribution . . . . . . . . . . . . . . . . .

9. Data-entry, manipulation, and processing. .

10. Food and beverage workers . . . . . . . . . . . . .

11. Other service workers . . . . . . . . . . . . . . . . . .

12. Precision production, craft, and repair . . . .

13. Machine operators, assemblers, and

operators . . . . . . . . . . . . . . . . . . . . . . . . . . .

14. Transportation and material moving . . . . . .

15. Handlers, equipment cleaners, helpers &

laborers. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16. Farming, forestry, and fishing. . . . . . . . . . . .

NOTE: 1 =2+3+4+5+6. Numbers may not add due to rounding.

7.3%

0.9

–0.2

1.3

1.2

1.9

0.1

–0.4

–0.8

–2.4

–0.8

–3.1

–3.0

–0.3

0.6

–2.2

0.0%

–0.1

0.5

0.1

0.1

–0.3

0.0

0.0

0.1

0.0

0.6

–0.4

–0.3

–0.1

–0.1

0.0

0.1%

0.0

–0.3

–0.1

–0.1

0.6

0.0

0.0

0.1

0.2

–0.3

–0.1

–0.2

0.1

0.0

–0.1

0.3%

0.0

1.3

0.4

0.3

–1.2

0.1

0.0

0.9

–0.5

0.8

–0.1

–0.6

–0.3

–0.1

–1.2

6.7%

1.1

– 1.4

0.9

0.9

3.6

–0.1

–0.4

– 1.6

–2.2

–2.2

–2.8

–2.2

0.2

1.2

–1 .6

0.2 %

–0.1

–0.3

0.0

–0.0

–0.8

0.1

0.0

–0.3

0.1

0.3

0.3

0.3

–0.2

–0.4

0.7

SOURCE: Office of Technology Assessment, 1988.
434

The

COMBINING COMPONENT ASSUMPTIONS INTO SCENARIOS

Constructing the Scenarios

six scenarios described at the beginning of

this chapter were constructed by combining assumptions from the set just described:

●

●

●

The two Trend scenarios cluster assumptions

extrapolating trends in domestic demand, international trade, the recipe of production, producers’ durable equipment, labor productivity,

and staffing patterns. These scenarios represent

an effort to provide a reasonable extrapolation

of trends established in the recent past.

The Manufacturing case represents an attempt

to describe a U.S. economy in which parts of

traditional manufacturing enjoy a renaissance.

This is done by coupling the Caesar trade scenario with capital equipment investments dominated by industrial machinery purchases. The

trend projection for production recipes is used

to reflect the shifting mixture of inputs as raw

materials decline and services increase. The

resultant output is converted to jobs via the high

productivity scenario, and finally translated into

occupations using the 1984 staffing patterns.

The Stagnation case is designed to illustrate the

effect of sluggish economic growth. It is constructed using the low-growth domestic demand

trend, the low productivity trend, and the Banana

trade scenario. The stagnation case keeps the

recipe of production as it was in 1980, and maintains 1984 staffing patterns. The scenario assumes few changes except that trade is brought

into balance as a result of large exports of natural resource materials such as foodstuffs, lumber, and coal.

● The two Transformation cases are designed to

show what might happen if the economy undergoes a major transformation in consumption

and production recipes of the type described in

chapters 3 and 6. High- and low-growth rate

cases are examined separately. The alternative

scenarios are used for domestic demand, production recipe, productivity, and staffing patterns. The Drucker scenario is used for international trade, which assumes a low level of

merchandise trade because of the world-wide

diffusion of technology. In terms of capital equipment expenditures, the information scenario is

used.

These assumptions are summarized in table 13-9.

Impact on Business Sectors

The structure of the U.S. economy resulting from

these assumptions is displayed in table 13-10. As expected, the Trend scenarios continue the pattern of

structural change discussed in chapters 5 and 10,

while the Transformation scenarios result in a change

in direction. With the exception of the Stagnation

scenario (which postulates large foreign sales of resources), all of the scenarios result in a decline in

the share of national output and employment generated by Natural Resource enterprises.

Taken together, the Nation’s manufacturing enterprises hold a roughly constant share of GNP in

all scenarios, although the sectoral mix depends

heavily on the scenario.3 The comparatively high

3 This finding is similar to that reported for the year 2000 by the U.S.

Department of Labor. See Valerie A. Personick, “Industry Output and

Employment through the End of the Century,” Monthly Labor Review,

September 1987, vol. 110, No. 9, pp. 30-41.

Table 13-9.—The Assumptions Used in the Scenarios

Scenarios

Assumption Trend 3% Trend 1.5% Manufacturing Stagnation Transformation 3% Transformation 1.5%

Domestic demand . . . Trend-3% Trend-1.5% Trend-3% Trend-1.5% Alternative-3% Alternative-1.5%

Trade . . . . . . . . . . . . . . . . Trend Trend Caesar Banana Drucker Drucker

Production recipe . . . . Trend Trend Trend Stagnation Alternative Alternative

Producers’ durable

equipment. . . . . . . . . Trend Trend Manufacturing Base-84 Information Information

Productivity. . . . . . . . . . High Low High Low High alternative Low alternative

Staffing patterns . . . . .Trend Trend Stagnation Stagnation Alternative Alternative

NOTE: See this chapter’s text for definitions.
.,

. .

.,

,..

.,

435

u)

w

05

I
436

technology Medium Wage Manufacturing enterprises

hold a constant or growing share of GNP while High

Wage Manufacturing loses share. Manufacturing as

a whole actually increases its share of GNP under

the Transformation scenarios.

While all the scenarios examined show manufacturing enterprises providing a shrinking fraction of

jobs during the next two decades, the rate of decline

remains well below that of the previous 20 years.4

Manufacturing seems likely to provide 16 to 18 percent of all jobs by the year 2005. The next section

suggests, however, that the nature of these jobs may

change rapidly.

Although every scenario indicates that the share

of value-added and jobs contributed to the economy

by the service sectors is likely to increase, the size

and composition of the contribution varies widely

depending on the scenario chosen. The comparatively low rates of productivity growth in the Social

Service sector, and increasing demand for health and

other services contained in the Trend and Manufacturing scenarios, result in a significant increase in

Social Services employment. Transactional Activities employment also grows sharply in the Trend

cases because of relatively slow rates of productivity

growth and the continuation of strong demand for

their products. The sharp increases in service sector productivity evident in the Transformation scenarios

reduce the share of jobs held by the Transactional

Activities sector.

Impact on Occupations

Since all earlier analysis suggests that shifts of jobs

within sectors has the greatest effect on the kinds

of jobs provided by the US. economy, it is not surprising that the differences between the scenarios

are most pronounced when measured by their impact on different occupations (see table 13-1 1). Unemployment rates, provided in table 13-10, are computed assuming high and low estimates of the labor

force in 2005 of 146 and 158 million (see ch. 11 for

details). The scenarios result in unemployment rates

4Again, the Department of Labor reached a similar conclusion in their

projections. See Ibid.

varying from 23 percent to minus 7 percent (implying a labor shortage).5

Composition

The scenarios lead to startling contrasts in the composition of the 2005 work force. For example, both

the Trend and the Transformation scenarios lead to

a situation where one out of every six or seven jobs

is classified as managerial or management support,

while the two cases that do not include an assumption about changing staffing patterns (Manufacturing and Stagnation) leave this category comparatively

unchanged from 1984. In both the Trend and the

Transformation cases, the number of people employed in occupations with comparatively low skills

(food & beverage preparers and farm workers) decline. Many of these declining occupations are also

some of the most dangerous occupations in the

economy.

The difference between the Manufacturing and

Stagnation cases and the other two cases is clearly

visible in estimates of the future job opportunities

for precision production &craft workers versus technicians and technical professionals. Both the Trend

and Transformation scenarios indicate a decline in

the production and craft workers and an increase

in technicians. These findings are in rough agreement with forecasts made by the U.S. Department

of Labor.6

The Transformation cases lead to a significant decline in employment for people who enter and perform routine manipulation on data (because of the

assumed high rates of productivity growth in these

occupations), and a doubling of the share of jobs held

by technical professionals in 1984. The share of jobs

called “other professionals” increases dramatically,

due to the assumption that some managerial functions are reclassified and appear in this category. The

5 The upper range of OTA estimates of the labor force are higher than

those projected by the Department of Labor because of OTA’s larger

projected population and higher assumed participation rates. This coupled with more extreme assumptions about productivity and production recipes result in a much wider future range of unemployment of

–7 to 23 percent while the Department of Labor predicts a smaller

range of 4.5 to 7.7 percent. See Howard Fullerton, Jr., “Labor Force

Projections: 1986 to 2000,” Monthly Labor Review, September 1987,

vol. 10, No. 9, pp. 19-29.

6 George T. Silvestri and John M. Lukasiewicz, “A Look at Occupational Employment Trends to the Year 2000,” Monthly Labor Review,

vol. 110, No. 9, September 1987, pp. 46-63.
437

. . . . . . . . . . . .

. . . . . . . . . . . .

. . . . . . .

. . . . . . . :U): : :

. . . . . . . .C— . .

. . . .

. . . .

. .

. . Od ::::
438

Transformation cases do not lead to an increase in

jobs for teachers or health professionals, because of

the assumed growth in non-traditional aspects of

health care and education (e.g. software development).

Turnover

The change in the skills needed by the U.S. economy in both the Trend and Transformation scenarios

is dramatic. Only the Stagnation and Manufacturing cases result in a set of jobs matched to the skills

in the work force today. The Trend and Transformation cases result in a 14 to 20 percent shift of employment between occupations—meaning that at a

minimum, 14 to 20 percent of all jobs would be redefined during the next 20 years. Obviously, the high

level of aggregation in the tables masks large changes

in job definitions within categories such as “precision production worker” or “data entry worker.”

Some categories will be redefined by attrition as new

workers enter with new skills and people with less

needed skills retire. Others will be redefined by layoffs and new hires.

Earnings

If some of the scenarios suggest that a significant

fraction of all jobs will be redefined in the next two

decades, they also suggest that there will be a net

decline in jobs traditionally paid low wages and an

increase in the number of jobs that now pay high

wages (see figure 13-1). While the Stagnation and

Figure 13-1.-Earnings Distributions of

Scenarios Based on 1986 Median Weekly

Earnings by Occupation

Percent of all jobs

8 0

6 0

4 0

2 0

0

Lower earnings Middle earnings Upper earnings

= 1984 = Stagnation n Manufacturing

m Trend m Transformation

NOTE: Lower group is 2/3s of the average, upper is 4/3s of the average, middle

is remainder.

SOURCE: Office of Technology Assessment, 1987.

Manufacturing scenarios leave income distribution

comparatively unchanged, the Trend and Transformation scenarios lead to a decline in the percentage of people in occupations paying less than 66 percent of 1986 median weekly earnings, and a sharp

increase in the percentage of people in occupations

paying more than 133 percent of 1986 median

weekly earnings.

Educational Attainment

Given the correlation between income and education, it is not surprising that occupations dominated

by people with no more than high school degrees

decline in all the scenarios except Manufacturing and

Stagnation (see figure 13-2). In both the Trend and

Transformation scenarios, the share of all jobs in positions now held by people with four or more years

of college increases while the share of jobs offered

people with lower educational levels declines. The

share of jobs available for people with four years of

high school or less declines most sharply.7

Minorities and Women

The Department of Labor reports that blacks and

Hispanics respectively account for about 11 and 7

percent of the labor force in 1986, but will makeup

17 percent and 29 percent of of the total labor force

growth between 1986 and 2005 (see table 11-2 of

ch. 11).8 Extrapolating from current statistics, the Labor Department estimates that minorities will be disproportionately employed in occupations that are

projected to decline, such as machine setters and

assemblers, and underrepresented in occupations estimated to increase, such as technicians and managers.9

With few exceptions, the occupations projected to

grow now employ significant numbers of women

while male-dominated jobs are in declining occupations. The major exceptions are the rapidly growing natural scientist, computer specialist, and engineering, architectural, & surveyor occupations, all

now largely male. The share of jobs held by machine

setters (42 percent female) is projected to decline.10

7 A similar finding was reported by the Department of Labor in Ibid.

8 H. Fullerton, op. Cit., footnote 5.

9 G. Silvestri and J. Lukasiewicz, op. cit., footnote 6.

10 Ibid.
4 3 9

Figure 13-2.-Educational Requirements of

Scenarios

< 4 yrs. High School

4 yrs. High School

1-3 yrs. College

> 3 yrs. ColIege

Based on 1986 Educational

Attainment

1

1

I , 1 I 1 r , /

10 15 20 25 30 35 40 45

Percent of all jobs

= 1984 m Manufacturing

= Trend m Transformation

SOURCE: Office of Technology Assessment, 1987.

At a Crossroads

These scenarios present stark contrasts for the future of the economy. Given continued productivity

growth and freedom to transform production processes, the economy clearly has the opportunity to

provide both real increases in amenity and a much

improved mix of jobs. Changes in consumption and

production recipes could even result in a net improvement when measured levels of economic growth

are comparatively low. The analysis presented in

chapter 3 reveals that the low-growth Transformation case can lead to improved levels of amenity—

in respect to employment, the low-growth Transformation scenario could lead to a 16 to 23 percent unemployment rate given current working habits, but

this could be reduced to 4 percent unemployment

if the yearly number of hours worked declines 15

to 20 percent (e.g., a 35-hour work week).

Table 13-12 shows how the need for the basic

amenities would be satisfied with respect to jobs by

the various occupation classifications if the economy

followed the path outlined by the high-growth Transformation scenario. Although many of the component assumptions that compose this scenario are

rather drastic and tend to be exacerbated by the high

rate of economic growth, they provide a rough indicator of the nature and magnitude of change that

could occur.

The occupational composition of the amenities

echoes the assumptions underlying the transformation scenario: technicians, technical professionals,

sales workers, and managers play a larger role in

almost every amenity group. Data entry and information distribution workers, precision production

workers, and machine operators tend to decline in

importance in all amenity groups. Compared to the

patterns that prevailed in 1984 (see table 10-6 of ch.

10), the fraction of jobs in the education & health

professional occupation drops significantly in the

Health, Education, and Government amenity groups,

and the share of work conducted by farmers is reduced in the Food and Export amenities.

Overall, the share of the employed workers dedicated to the production of the Food, Housing, and

Export amenities declines while the fraction of all

jobs that are needed to supply the amenities of Recreation and Leisure, Clothing and Personal Care, and

Government increases.

Though not shown in table 13-12, every amenity

requires less value-added from the Natural Resource

sector and more from the Medium Wage Manufacturing and Transactional Activities sectors in 2005

than in 1984 (see table 4-6 of ch. 4). The magnitude

of some of these potential shifts is sometimes startling: the fraction of value-added contributed from

the Natural Resource sector to the Food amenity

drops from 15 to 3 percent; the share of Construction value-added used to provide the amenity of

Housing could fall by half; and the relative role of

the Social Services sector in providing value-added

to the Health, Education, and Government amenities could significantly decrease.

A Caveat

The probability of an economic future like that

depicted in the high-growth Transformation scenario

is low, but the probability of no change is even more

unlikely. The preceding 12 chapters have outlined

many changes that have been evolving steadily over

time, like the shift from manufacturing to services,

and some that are surprises, like the rapid diffusion

of information technologies. In comparison to the

last 15 years, many of the changes assumed in the

scenarios for the year 2005 are conservative, but the

analyses presented here must not be read as Confident forecasts. They are not intended to be a comprehensive model of the U.S. economy. They are

designed instead to illustrate how choices that affect different parts of the economy may affect the
--

:Ou : : : :
441

structure of the economy as a whole. The choices ernment. The way government choice can influence

reflect decisions made by individual households, by the directions taken by the economy, for better or

producers, by people looking for work, and by gov- for worse, is the subject of the next chapter.
Chapter 14

Public Regulation and Incentives
CONTENTS

Page

The Challenge.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....445

A Framework for Public Choice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........446

Consumption Recipes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ...446

Production Recipes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...................447

International Trade Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............455

Improving the Flexibility of People at Work and the Quality of the

U.S. Work Force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....................458

Improving the National Database . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........462

You Can’t Go Home Again . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............463
Chapter 14

Public Regulation and Incentives

THE CHALLENGE

New technologies and the expansion of economic

networks around the globe have the potential to increase the welfare and promote the happiness of all

Americans. The changes could:

●

●

●

●

●

lead to rapid growth in the choices available to

consumers;

create unprecedented opportunities for communication, self expression, and entertainment;

eliminate the least attractive jobs in the economy, and add large numbers of jobs that are

rewarding in pay as well as in other ways;

allow rapid economic growth without stressing

the natural environment; and

make training in any subject available to any

person at any point during a career.

The new environment, however, also creates significant risks:

●

●

●

●

●

Employers may attempt to achieve flexibility by

avoiding long-term commitments to employees

and hiring more temporary and part-time workers with little job security.

There may be a growing gap between the kinds

of jobs created by an economy capable of supplying a large fraction of its workers with good

jobs paying high wages and the kinds of workers entering the work force.

Failure to restore balance in U.S. trade accounts

could trigger a trade crisis, undermining the economic security of the United States and its allies.

The United States could become vulnerable to

a sudden increase in world oil prices or a sudden disruption in oil supplies.

Information technologies can be used in ways

that threaten the privacy and independence of

individuals in and out of the work environment.

There is nothing inevitable about either of these

outcomes. The difference depends heavily on the

choices made by American producers, investors, and

consumers during the next few decades. These decisions are, in turn, heavily influenced by a complex network of Federal, State, and local rules and

incentives. The question addressed by this chapter

is whether the set of policies designed to promote

growth and welfare in the United States, developed

through accretion and tinkering over the last two

generations, is well adapted to the current environment. In many cases the answer is no. An economy

operating as an interlinked network may operate best

with a set of rules that are very different from those

which performed well for an economy built around

well-defined production operations that acted in relative isolation. Programs that work well in a situation where products and production methods change

comparatively slowly may be counterproductive in

a world characterized by enormous uncertainty. Approaches to business sectors dominated by small,

rapidly changing establishments—which may or may

not be parts of a large firm—may be quite different

from those designed to optimize the performance of

an economy operating with a few dominant producers operating from large facilities. 1

The policy opportunities discussed here are designed to provide a framework for developing a coherent set of programs to stimulate real growth

throughout the economy, rather than being a detailed

assessment of specific programs. The chapter follows

the rules and incentives that influence the four crucial elements of all networks: consumption recipes

(from Part I of this document), production recipes

(Part II), trade in the production recipe (Part III), and

people in the production recipe (Part IV). A detailed

analysis of the costs and benefits of specific policy

opportunities is not attempted in the discussion that

follows. Instead, the material is divided into two

parts. The first part identifies a set of general objectives against which policy proposals should be measured. These objectives are clearly traceable to issues

identified in earlier parts of this document.

The second part of each discussion deals with specific options. None of these proposals have been analyzed in depth, nor has an attempt been made to

provide a comprehensive list of options relative to

I See the discussion in Michael Piore and Charles Sable, The Second

/ndu.s/ria/ Divide (New York, NY Basic Books, 1984).

445
446

each objective; indeed, other such strategies could

and should be considered. The examples are provided simply to illustrate the central thesis of the

chapter: public choices made about the rules under

which the U.S. economy operates have unprecedented

power to determine whether the economy grows,

and to guide the direction this growth will take.

Previous chapters argue that American’s major

economic networks are becoming more similar in

the way they are managed, in the skills they look

for from people at work, in the way they are affected

by world trade, and in the way they are affected by

financial markets. Nonetheless, each network remains unique in many ways. Each operates with a

unique mix of public and private spending, and a

unique set of regulatory controls and incentives.

While opportunities for new policies are suggested

by the separate discussions of networks in chapters

3, 6, 9, and 12, no attempt is made to summarize

them here.

A FRAMEWORK FOR PUBLIC CHOICE

Consumption

Objectives

Recipes (Part I)

The growing complexity of consumer choices were

explored at some length in chapters 2 and 3. Consumer choices are becoming more complex as new

technology and new patterns of competition increase

the variety of products offered. At the same time,

consumers may have less time to make informed

choices.

Consumer choices are affected by public policy in

four primary ways: regulations, deductions and

credits in the personal income tax, product labeling, and consumption taxes (generally on “luxuries”

and items like cigarettes and alcohol). Many of these

policies were developed using paradigms that may

need serious reexamination as the economy moves

in new directions. The government, of course, is also

a major consumer, spending nearly $30 for every

$100 of private consumer expenditures. There are

several areas where more sophisticated purchasing

strategies by the government would not only improve the productivity with which public interests

are served, but would stimulate innovation that could

work to the benefit of private markets.

Education (largely supplied at public expense) also

plays a critical role in shaping consumer choice. A

good education can make a person aware of a greater

variety of choices and improve the process of choosing. There is, for example, evidence that education

can influence a person’s ability to construct a “consumption recipe” for staying healthy. Similarly, it can

allow a person to navigate the complexity of modern consumption decisions made massively more difficult by the new range of choices available. And it

can open new opportunities for enjoyment (one of

the traditional functions of education was to increase

a student’s ability to take pleasure from the culture

that surrounded him).2 Opportunities for improving

education are discussed under the section on production recipes.

Illustrative Options

Regulation. -Regulation has been justified for a

variety of reasons: controlling the abuse of monopoly power, preventing destructive competition in

areas where there appeared to be a “natural monopoly,” protecting public health and safety, and ensuring the availability of information in areas where

the absence of information could be dangerous or

where obtaining such information could be prohibitively expensive. Regulation has also been justified

when the market does a poor job of allocating costs

and benefits. Examples include: the maintenance of

environmental quality, ensuring the safety of products, and ensuring that the United States does not

become dangerously dependent on foreign sources

of oil.3

The changes now transforming the economy undermine many of the reasons given for regulation

2 "ln the nineteenth and early twentieth centuries, education in the

United States became universal, but it also become more and more a

training in production skills and less and less a preparation for the enjoyment of life. Our puritan attitude and the requirements of our capitalist economy are equally to blame or credit . . . “ Tibor Scitovsky, The

.Joyless ,EcorIorny, (London: Oxford University Press, 1976), p. 229.

3FOr a comprehensive review of this subject, see S. Breyer, Re@ation and its Reform (Cambridge, MA: Harvard University Press, 1982);

and Regulation: Process and Politics (Washington, DC: Congressional

Quarterly, Inc., 1982).
447

to ensure effective competition, but increase the need

to provide consumers with information, protect consumer safety, and ensure environmental quality.

Regulating Monopolies and “Destructive” Competition.—Technology and other factors have reshaped

production recipes in ways that appear to have reduced the danger of monopoly concentration. Regulatory restrictions have been sharply decreased in

airlines, rail, trucking, long-distance telephone communication, and some aspects of banking. Regulatory reform may soon spread to other major business sectors. Private networks can bypass regulated

telephone lines; onsite cogeneration units may compete with regulated producers of electric power; cable and video tape rentals compete with broadcast

television (regulated through licensing).

Excessive regulation may prevent the emergence

of business structures more compatible with emerging technologies, and may limit the ability of U.S.

firms to compete abroad. Enthusiasm for reform

must be tempered by the fact that structural change

may well result in new kinds of monopoly manipulation of markets. It is unlikely that any simply or

universal rule can be developed for prescribing regulations preventing the abuse of monopoly power.

Regulation to Supplement Consumer Information.

—The cost of obtaining information for making informed consumer decisions may be on the rise, because the number and complexity of decisions are

growing while the time available for making choices

is in increasingly short supply. The cost of acquiring information needed to make wise purchasing decisions is part of the price (or the entertainment) of

shopping. Some kinds of information, however, are

prohibitively expensive to obtain—even though the

information about such things as product safety may

be of great value to the consumer. Few individuals

can afford to pay for tests to ensure, for example,

that food is not contaminated, or that children’s clothing is not flammable. Passengers assume that airlines meet safety standards, and workers assume that

the chemicals to which they are exposed have been

tested to determine their health effects.

The net social value of informed consumer choice

is large, since consumers are ultimately responsible

for ensuring the efficient performance of free markets. The provision of information has always been

an important function of regulation for this reason.

In effect, consumers use regulation to buy collectively

the information that would be difficult to buy as individuals. While ordinary markets could handle most

such problems given negligible bargaining costs, this

has not always occurred in important cases.4

Significant improvements could be made in the

kind of information available to consumers through

improved labeling. An alternative is taxes applied

to specific products like cigarettes, alcohol, or gasoline, which force consumers to consider the social

cost implicit in such purchases.

Unfortunately, there are no set rules about the

kinds of information that should be provided at public expense. Information about the energy use of automobiles and appliances has clearly helped create

a market for efficiency. Information about nutrition

appears on food packages. There are many other

areas where more information would be useful. Food

labels may contain no information about potentially

harmful components such as sodium, alcohol, cholesterol, saturated fats, or chemical contaminants.

Energy consumption of homes and other aspects of

housing quality remain a matter of conjecture for

most home purchasers.

Personal Income Tax Reforms. -Spending decisions of individuals can be strongly influenced by

Federal tax policy. In spite of major reforms, the U.S.

tax code still contains long lists of consumer purchasing choices that are subsidized, or by default

not subsidized, through tax relief. The net effect may

not be appropriate for the emerging economy. Taking only a single example, the code places no limits

on deductions for purchasing first or second homes

(thereby encouraging savings in the form of home

purchasing) but does not provide complete deductibility for education (thereby discouraging savings

taken in the form of human capital).

Production Recipes (Part II)

Objectives

The challenges and choices faced by American

producers were outlined in some detail in earlier

chapters. It is clear that most people will need to

endure a period of great uncertainty as deep structural changes undermine traditional production networks. It is not clear how Americans will elect to

4See discussion in S. Breyer, op. cit., footnote 3.
448

manage uncertainty. Two broad strategies seem possible. The first is to avoid commitments of any kind:

keep investments in new plant and equipment to

a minimum, minimize permanent commitments to

employees, minimize investments in training, and

wait for someone else to develop technology. The

second strategy is to invest heavily in being “smart,”

with the aim of profiting in all kinds of economic

environments. This means reacting quickly to exploit market opportunities, and moving adroitly

when bad luck strikes. Such a response to uncertainty requires a well educated work force capable

of prospering in a period of continuous change, and

a strong long-term commitment to the development

and exploitation of technology.

Much evidence suggests that while the second

strategy may work well for some firms in some circumstances, the Nation’s economy would be placed

at considerable risk were it widely adopted. The

choice between the two strategies will be strongly

influenced by the rules established through tax law,

support of innovation and invention, and other

aspects of public policy.

Previous chapters also argued that the second kind

of flexibility can be achieved using technology now

entering the marketplace. Capturing this potential

requires a willingness to undertake basic changes

in the way businesses are managed, in the size and

scope of individual establishments, and in the way

establishments are linked together through formal

and informal production networks. These changes

will require some wrenching transformations, the

effects of which can be measured in terms of job

redefininition within firms, the opening and closing

of plants, and changes in the location of productive

activity. Constructive change requires both a continuous flow of innovation and a financial market

willing to make the changes needed to convert these

inventions into profitable products and services. An

appropriate response to the challenges of new technology and expanded international competition requires highly flexible capital markets willing to

rethink old paradigms about the design of business

networks.

On the other hand, there can be too much of a

good thing. There may be a narrow line separating

a financial market capable of moving rapidly to restructure production around new processes, and one

that has become a casino crippled by short-term

speculation largely unrelated to the long-term health

of a production enterprise. The challenge in designing policy is finding a way to encourage flexibility

without sacrificing an ability to undertake research,

marketing strategies, or restructuring plans that may

pay returns only after many years.

Two major classes of public action in this area are

discussed with these challenges in mind:

1. programs designed to improve the performance

of U.S. financial markets; and

2. programs designed to create new incentives for

innovation, which include a look at strategies

to improve the Nation’s infrastructure in ways

compatible with the emerging economy.

Programs designed to improve the quality and

productivity of the Nation’s education and training

activities are discussed in the section concerning

choices for public policy concerning the U.S. work

force.

Illustrative Options

Helping Financial Markets Work Better.—

The central challenge in this area is finding a source

of capital for projects that require continuity over

a period of 5 years or more. Venture capital has

proven to be an invaluable source of funds for small

startup firms, supplying sums up to $20 or $30 million for new projects.5 But venture capitalists cannot supply the $100 million required for a large manufacturing initiative. For this, companies must turn

to public offerings and investors that generally demand competitive quarterly returns. This is perfectly

satisfactory for low-risk ventures or ventures where

losses can be cut quickly. It is not well matched to

many of the kinds of investment that are needed to

bring something like digital television to consumer

markets, or to develop and market a 64-megabyte

computer memory device. Such ventures require

deep pockets and patience.

The concepts outlined below are designed to demonstrate that choosing to revise public rules can encourage a more dynamic response in the creation

5 While supplies of venture money remain high in relative terms, in

1986 even American venture capital began moving away from

technology-intensive products and moving sharply toward investments

like discount shopping malls.
449

of new production strategies. The last of the three

items on the list complements the set, attacking

defects in rules governing both production and consumption recipes.

Tax Reform.-Revisions in the tax code during the

1980s, intended to increase savings rates and concentrate investment in innovation and research,

have not achieved the effect once hoped for. Rates

of savings and investment in new plant and equipment have not increased, while many indicators

show that income inequality has grown during the

past decade. Personal savings rates have actually

fallen since 1981 and in 1986 reached their lowest

level since the second world war. (This is due in part

to the high rate of retained earnings in business—

as a percent of GNP, the sum of personal and business savings has not changed significantly (see figure 2-4 of ch. 2).) Moreover, changes in the tax code,

such as removal of the R&D tax credit, may have

the effect of decreasing incentives to invest in research and innovation. The proposals sketched below have the common purpose of discouraging shortterm, speculative investment and encouraging patient capital.

The tax code also provides a grab-bag of deductions that are essentially hidden expenditures, designed to encourage everything from housing to religious contributions. The value of these deductions

rose from about one-quarter of Federal revenues in

1967 to one-half in 1983. These “hidden” appropriations were reduced in the 1986 tax reform, but are

still enormous.

Proposals to reform the tax code would fill a small

stadium. The following are exhibited to illustrate the

power the tax code has in influencing the structure

of the American economy. They are not a systematic review of alternatives and no effort has been

made to explore their implications in detail.

Reducing taxes on high-risk, long-term personal

investment. Tax rates on capital gains could be

changed so that gains realized on investments

held for long periods of time (5 to 10 years) are

taxed at much lower rates than gains earned

on short-term investments. This could be done

without affecting total revenues received from

capital gains taxes.

Limitation of interest deductions for personal

income to a fixed amount per family. Interest

●

deductions provide an incentive for homeowning. Without questioning the logic of subsidizing the housing expenditures of the middle class

instead of expenditures in other areas, it is obvious that overly generous incentives can distort consumption decisions and encourage the

affluent to invest in extravagant housing and

multiple residences.

Reform or abolish the corporate income tax. The

corporate income tax has three principal virtues and many liabilities. It provides a source

of revenue other than the ever unpopular personal income tax, it provides away to influence

corporate behavior to achieve a variety of goals,

and it provides a way to tax foreign investors.

These benefits carry a high price:

—The byzantine complexity of the corporate tax

codes means that tax lawyers play a major

role in mapping private investment strategies.

The Tax Reform Act of 1986 will raise net corporate taxes and eliminate some of the distortions inherent in the older system, but this

increase also raises the importance of skillful manipulation of tax law. Decisions distorted by tax considerations are likely to be

less efficient than decisions motivated entirely

by considerations of the risks and rewards of

alternative products and production methods.6

—Corporate taxes do not result in a significant

amount of income for government. In 1986,

corporate taxes contributed only 10.1 percent

of all Federal revenues and only 7.8 percent

of all Federal, State, and local government

revenues.

—The transactional costs of complex tax law

are high, requiring many businesses to retain

a small army of lawyers, accountants, and

other professionals that adds to the unprofitable overhead of business activity.

—Corporate taxes also have the effect of discouraging savings taken in the form of corporate investment, since the income is taxed

twice: once as corporate income, and once

as dividends from the investment as personal

income.

6 Auerbach estimated that the social cost of capital misallocation resulting from differential asset taxation was 3.19 percent of the corporate

capital stock. See Alan J. Auerbach, “Corporate Taxation in the United

States,” Brookings Papers on Economic Activify, No. 2, 1983, pp.

451-513.
450

–The corporate tax can hurt U.S. exports. U.S.

export prices include domestic taxes in the

price of what is sold, while foreign competitors often use tax systems, like value-added

taxes, that can be reimbursed if goods are exported.

Reform Regulation of Financial Institutions.—Restrictions on the operation of banks in the United

States may no longer be consistent with the new demands of international competition and the capital

requirements of innovative enterprises.7 A majority

of the world’s largest banks are foreign-owned, in

part because U.S. law limits interstate banking and

may therefore discourage expansion. The GlassSteagall Act of 1933 prevents firms that accept savings deposits from making equity investments or

sitting on boards of directors. Merchant banks in Japan and West Germany, in contrast, provide important sources of patient capital. Japanese banks also

benefit from relatively inexpensive capital, due to

both high national savings rates and government

sponsorship of certain classes of investment.

Reforms in this area might include:

Revisions in banking law could create financial

institutions better able to provide funds for

projects that had outgrown venture funding but

were deemed too risky for public holdings

judged on the basis of quarterly returns. Banks

could also provide a defense for firms that might

be vulnerable to predatory takeovers because

of heavy investment in long-term research efforts; 8 and

Revisions in Labor Department regulations governing pension investments (funds that hold 22

percent of all U.S. corporate equities and 16 percent of all U.S. bond issues) could allow a fraction of the funds to be used for investments in

innovations carrying higher risk.

Reducing “Transactional Costs. “-Chapter 5 illustrated spectacular growth in the transactional “overhead costs” of the American economy that can result from unproductive speculation. But it is far easier

to complain about transactional costs than to develop

concrete steps to avoid them. The difficulty of measuring transactional costs means that changes in regulation may have the effect of reshuffling costs without actually affecting the total.

Strategies for reducing national transactional costs

need careful review. Several of the steps suggested

above, such as elimination of the corporate income

tax or revision of formal regulations on price and

market entry, could do much to lower unneeded legal, accounting, and other professional services. On

the other hand, greater market freedom might also

encourage more complex contracts and more lawsuits.

Other ways to alleviate transactional costs include:

A comprehensive review of tort law could determine how best to match formal safety regulations with legal redress open to individuals

through the courts. Recent reforms, notably in

California, have established new criteria for

assigning liability costs—such as payment in

proportion to contribution to proven negligence

—and for limiting prohibitive punitive payments. The review could be analogous to the

review recently conducted for Federal criminal

law.

Improving the efficiency of public services and

channels for communicating with individuals,

so that routine tasks such as access to data, title searches for property, or tax filings can be

undertaken without professional assistance, is

another possibility.

Support for Innovation.-Private support of research and innovation falls short of levels that serve

the

●

7For a comprehensive discussion of this issue, See U.S. tingress, Office

of Technology Assessment, International Competition in Services: Banking, Building, Software, Know-how, OTA-ITE-328 (Washington, DC: U.S.

Government Printing Office, July 1987).

8 There is, however, little empirical evidence to support a contention

that hostile takeovers are primarily directed at firms that engage in longterm planning. See J. Pound, K. Lehn, and G. Jarrell, “Are Takeovers

Hostile to Economic Performance?” Regulation, September/October

1986, p. 25.

Nation’s interest for a variety of reasons:

Many kinds of long-term research (such as space

exploration and basic research in areas like

mathematics, chemistry, and biology) have no

clear links to a company’s “bottom line”; if they

do, the payoff is so distant that few rational investors would be interested. Yet yesterday’s

basic research is the stuff on which today’s

productive innovation is based.

Many sectors of the U.S. economy are so fragmented that no single firm has the competence

or resources to undertake major research programs. Farming, the health industry, and the
451

construction industry are obvious examples.

● Even the most technologically sophisticated businesses invest less in research than levels that

could be justified to maximize collective wealth

and social welfare, since no individual business

is able to capture all possible benefits of the research.9 Many domestic and even international

competitors may enjoy some of the benefits of

innovation, thereby reducing any one firm’s net

returns on an invention. While the Nation’s interest is served, for example, by research designed to offset the effects of rapidly increasing

oil imports during the 1990s, private planning

horizons are typically too short to contemplate

major long-term research in the area. Research

in projects of common interest may go underfunded unless there is a social mechanism for

sharing the costs and benefits of major classes

of invention.

● Financial markets may be organized in a way

that discounts the value of innovation and risktaking when measured against speculative “paper” investment alternatives.

There is little doubt about whether public support

of innovation is needed in these cases. There is little agreement about how this public support should

best be provided. History is littered with failed government research projects-the Department of Energy’s

electric car; the Department of Transportation’s

Transbus; the Department of Housing and Urban Development’s “Operation Breakthrough” in housing

technology; the liquid metal, fast breeder reactor;

and supersonic transport are some examples. It is

possible to make major improvements in funding

strategies because of the lessons learned from past

experience. And there are success stories, as evidenced by the clear and continuing pipeline connecting innovation in federally supported agricultural

and medical research laboratories with private manufacturers and practitioners.

Much can be learned from a close examination

of successful foreign experiments. The Japanese have

forged effective techniques for pooling corporate and

9see Kenneth J. Arrow, “EcOnOmic Welfare and the Allocation of Resources for Invention, ” in National Bureau of Eccnomic Research, The

Rate and Direction 01 Innovation Activity (Princeton, NJ: Princeton

University Press, 1962); R.R. Nelson, “The Simple Economics of Basic

Science Research,” Journal o/ Po/itica] Economy, vol. 67, 1959; E. Mansfield et al., “Social and Private Rates of Return From Industrial innovations,” Quarter/y Journal of Economics, May 1977.

government funds to develop and transfer technologies of mutual interest to participating firms, while

leaving participants with proprietary protection in

most areas. The Japanese semiconductor industry,

for example, shared in the development of some chip

manufacturing equipment needed by all participants,

but manufacturers retained proprietary rights to the

details of circuit designs.

Developing good ideas is necessary but not sufficient. Financial markets must be receptive to new

ideas, and there must be a clear channel connecting publicly supported innovation with investors

prepared to apply such efforts. These steps require

businesses capable of grasping the implications of

research results, and of collecting the resources

needed to back such results with money and talent.

As earlier discussion suggests, the transfer of technology is by no means certain in many critical parts

of the economy.10

Apart from the programs to stimulate innovation

through financial markets discussed earlier, government funding of innovation could take a variety of

other forms, including the following.

A National Vision. –A set of national goals, including but not limited to national security, could focus

public imagination on research and investment. Such

programs might involve:

●

●

●

If

development of technology permitting a radical improvement in the productivity (and fun)

of education that would allow access to instruction for all, in virtually any subject, at any time

during a career;

development of a low-cost, high efficiency personal vehicle, which could replace the automobile in a world of expensive petroleum and possibly become a major U.S. export;

support for ambitious scientific ventures, such

as a series of unmanned probes of the planets

or a permanent scientific station in space;

such goals are accepted, they would provide a

market for an enormous variety of innovations and

private initiatives. Selection of the education “vision,”

for example, could stimulate private developments

across a wide arena, including consumer electronics,

software development, communications, basic re10 See Fred V.Guterl, “TeCtlnOIOgy Transfer Isn’t Working, ” ~US;TleSS

Morror, vol. 130, No. 3, September 1987, pp. 44-46.
452

search on artificial intelligence, and factors that contribute to learning and reasoning.

Expanding the Use of “Engineering Research Centers’’and “University Research Initiatives".-The Bell

laboratories provided a unique mixture of basic research and corporate business interest under the

shelter of communications regulation. This environment resulted in many of the inventions on which today’s information revolution is based. In this regulated

environment the laboratory had several key elements:

it was able to attract some of the best people

in the field,

it was able to combine support of basic research

with an interest in applied problems—in effect,

basic problems were tackled by people predisposed to see practical applications,

support was continuous, and projects could

maintain continuity without the burden of a constant scramble for “soft” funding, and

there was a critical mass of equipment and

professional talent assembled on a-single site.

The challenge here is to assemble a similar combination of elements in other areas, in order to spark

both innovation and application. This quest is particularly important in areas lacking the luster of

“glamour” technologies like superconductivity or artificial intelligence. The problems of manufacturing

a building, automating apparel assembly, or improving information flows in an office may also be of vital importance to the national welfare.

Tax resources used to support industrial research

and innovation should be considered a source of national savings, and not consumption. But it is treated

as simple public consumption in official accounts,

and in the minds of most people who think about

the use of government funds. Properly managed Federal investment in innovation is likely to pay rich

rewards to the Nation as a whole. Untraditional

sources of income could be sought for subsidizing

such research. The Japanese, for example, use

receipts from national bicycle racing to support research.

Combining public and private funds not only amplifies the effect of public spending. It can ensure

that research priorities are set in a way that allows

graceful transfer of collective research to proprietary

products-a development that can have a positive

impact on the productivity of both individual businesses and entire industries. Several models are

available, including:

●

●

●

●

The National Science Foundation (NSF) has

funded 13 Engineering Research Centers (ERCs)

(similarly, the U.S. Department of Defense is

contemplating a University Research Initiative).

These provide a useful model for such programs,

even though total funding remains low; the ERC

program was funded at $30 million in fiscal year

1987, and the entire NSF Engineering Directorate had a budget of $163 million.

Trade associations like the Electric Power Research Institute (EPRI) may provide a good

model for pooling research funding in fragmented businesses. EPRI is funded primarily

through voluntary contributions from member

companies, which include public utilities, and

matching Federal funds are sought for certain

specific projects. Many other business sectors

have trade associations that might serve as a

good foundation on which to build jointly funded

research programs, for both production and

non-production sectors in the U.S. economy.

The National Laboratories could also provide

a sound technical base for applied research, if

their civilian programs could be expanded and

properly managed.

Massachusetts, Michigan, and several other

States have programs that in effect mingle private and public funds for investments in new

ventures.

Another approach to public support of innovation

is to hope that funding for defense-related research

will “trickle down” to civilian industries. While the

United States spent 2.8 percent of its GNP on research in 1986, a fraction only slightly higher than

the amount spent by Japan, West Germany, and

other major industrial nations, over 69 percent of

U.S. research spending goes for defense-related

research—this compares with (as of 1984) 50 percent in the United Kingdom, 30 percent in France,

10 percent in West Germany, and 3 percent in Japan.

11 The fraction of all Federal research spending

going for defense fluctuated between 48 and 54 per11 U.S. Congress, Congressional Research Service, “The Federal Contribution to Basic Research,” CRS 87-633 SPR, July 23, 1987, table 12.
453

cent during the 1970s, but climbed sharply in the

1980s (see figure 14-1).

There is a longstanding debate over the extent to

which defense research is an efficient way to ensure

innovation in the civilian economy.12 There is evidence that the rapid military buildup of the 1980s

did not place a major burden on overall supplies of

engineers; 13 it is obviously difficult to determine

whether defense projects have attracted the best

graduates. But there is evidence that civilian applications of defense research are difficult to find. While

13 percent of the patents generated by the U.S. Department of Agriculture are licensed by private firms,

only about 1 percent of Navy patents are so licensed.14

The U.S. Department of Defense (DoD), concerned

by the lack of innovation in the civilian economy,

has begun to take direct action. Concerned about

the rapidly growing dependence of DoD on foreign

sources of semiconductors, a task force of the Defense Science Board recently found that U.S. defense

industry relied heavily on products purchased from

worldwide commercial markets. This group expressed

12 See a review in U.S. Congressional Budget office, Defense Spending and the Economy (Washington, DC: U.S. Government Printing Office, 1983).

ISpane] on Engineering Labor Markets, National Research Council,

The Impact of Defense Spending on Nondefense Engineering Labor Markets (Washington, DC: National Academy Press, 1986).

“F.R. Lichtenberg, “Military R&D Depletes Economic Might,” T h e

Wall Street Journal, Aug. 21, 1986.

Figure 14-1.-Defense Research and

Development Funding (as a percent of

all federal research and development)

Percent

70 J

6 5 -

6 0 -

1965 1970 1975 1980 1985 estimates

SOURCE: M.E. Davey and Genevieve Knezo, “The Federal Contribution to Basic

Research,” U.S. Congressional Research Service report No. 87-633-SPR,

Washington, DC, July 23,1987, table 12. Updated for 1967 and estimates

for 1988 and 1989 by the National Science Foundation, data provided

by the Congressional Reference Service, Mar. 9, 1988.

concern that declining non-military sales of U.S. technology firms often left the United States with a

Hobsen’s choice: “buy foreign” or “buy second-best.”

The task force concluded that

The major reason for the relative inadequacy of

technology development in the United States vis-avis that in Japan has been the difference in the industrial policies and structure of the two countries

[emphasis in original document].

They went on to state that DoD could move rapidly to:

1. Support the establishment of a semiconductor

manufacturing technology institute, 2. Establish at

Eight Universities Centers of Excellence for Semiconductor Science and Engineering, 3. Increase Department of Defense spending for research and development

in semiconductor materials, devices, and manufacturing infrastructure, 4. Provide a source of discretionary funds to the Defense Department semiconductor suppliers, 5. Establish under the Department

of Defense a Government/Industry/University forum

for semiconductors [emphasis in original document].15

In part responding to this recommendation, the

Secretary of Defense initiated a “Department of Defense Initiative on the U.S. Industrial Base,” designed

to:

. . . effectively pursue a DoD strategy to support the

fundamental goal of U.S. technological and manufacturing leadership and world class capability. The

strategy will explicitly recognize that potential solutions will fall within two basic categories. First, those

for which DoD has a direct responsibility and which

can be pursued within the full potential of DoD policies and programs. Second, those for which the

responsibility falls elsewhere in the Government and

for which DoD must attempt to lead and/or influence other agencies’ consensus to revitalize the US.

technological and manufacturing base. 16

There is clear consensus on the need to ensure

a competitive and vigorous civilian economy in order to maintain a sound defense. There is less agreement about whether a strategy directed primarily by

defense objectives is an adequate substitute for ci15 Defense science Board, “Task Force on Defense Semiconductor Dependency” (Washington, DC: U.S. Government Printing Office, December 1986).

16 Memorandum from the Secretary of Defense, “Manufacturing, Industrial Base, and Competitiveness,” Washington DC, May 5, 1987.
454

vilian programs. Obviously, the two should be coordinated. Whatever mechanism is used, it is critical that no institution gain a monopoly on research.

Making Government More Efficient as an Information Enterprise.—The Federal government is one of

the Nation’s largest information-based enterprises.

Outside of defense, the Federal government directly

employs 3 percent of the Nation’s work force. State

and local government employees (other than those

employed in education) represent another 6 percent.

Most government workers are in the business of

gathering, communicating, or processing information in one way or another. Research and investment directed at making this process more efficient

could not only improve government efficiency, but

could provide an information base of value to other

enterprises.

Wisely managed Federal procurement could create a market for a variety of service sector innovations, and could force the adoption of standards, protocols, and conventions that might facilitate the

formation of a market for service sector technologies.

Given the important role that productivity increases

play in establishing patterns of international trade,

wages, and economic growth, and given the fact that

the service sector represents a huge portion of the

U.S. economy, improved productivity in this area

would be of direct benefit to governments—as well

as to consumers and businesses. The national accounts themselves may be a barrier to clear thinking in this area, since they treat all funds spent to

improve productivity in government as consumption and not as investment.17

A Careful Review of Priorities for Federally Supported Loans and Borrowing.-The Federal Government now allocates much of its $200 to $300 billion

in loan accounts to the housing and agriculture industries. But in 1983, the government lost at least

$8.4 billion in tax income by subsidizing loans

through the Rural Electrification Administration, the

Farmers’ Home Administration, the Commodity

Credit Corp., farm export credits, foreign military

sales credits, and other programs; such losses continue to plague the entire farm finance system. An

approximately equal amount was lost through loans

for subsidized housing, student loans, tax-exempt

17 Robert Eisner, “The Federal Deficit: How Does it Matter?” Science,

vol. 237, No. 4822, Sept. 25, 1987, pp. 1577-1582.

industrial development bonds, and other tax exemptions for private purposes. Approximately $59 billion in tax credits for investment were claimed.18

It is reasonable to ask whether these largely hidden costs are appropriate, given the areas most likely

to stimulate national economic growth. At a minimum, there should be a clear accounting of public

spending that results directly and indirectly from

these programs but escapes the scrutiny of annual

appropriation.

National Competitions. —In many cases, innovators within large firms are unable to move an idea

from the laboratory into a fully developed product

because they cannot guarantee a market. One way

to avoid this problem would be to run a series of

publicly sponsored competitions for the development

of specific products or software capabilities. The government could establish a series of generic application procedures, and could encourage businesses to

submit designs. The winner might be given a cash

reward, and the government could either purchase

the initial production run at an agreed price or subsidize its sales price.

Other competitors finishing near the top might

have the cost of their research covered. For example, if the project covered the cost of an innovative,

highly efficient automobile, the government could

pay a manufacturer the difference between $20,000

and the manufacturer’s list price for the first 10,000

vehicles meeting the performance specification sold

to the public at a price between $6,000 and $6,500.19

If the concept worked, the government would have

encouraged development of a new product with minimal interference, at a total cost of less than $140

million.

It might also be useful to consider introduction of

significant awards for individual researchers or research teams, which could permit specially talented

groups to pursue a line of research comparatively

free of interruption for 5 years. Such research could

be in areas of importance to both manufacturing and

service enterprises, aimed at improving the performance of the integrated networks linking all U.S. producers.

18 Herman B. Leonard, Checks Unbalanced: The Quiet Side of Public

Spending (New York, NY: Basic Books, 1986).

19 This was proposed by Battelle Laboratories in 1982.
455

International Trade Policy (Part III)

Objectives

U.S. and international production networks are

now tied together in intricate ways. This includes

large-scale flows of financial resources, production

and supply networks linked through sophisticated

communications and transportation systems, and

even interconnected design and research projects.

World debt (including the U.S. foreign debt) has

become a global problem, transcending national

borders.

The clear objective of U.S. trade policy should be

to create an international trading environment that

can do what economists have always claimed it could

do: raise living standards among all trading countries simultaneously. It is obvious, however, that

while trade has generally served both the United

States and its trading partners well, the international

market is far from free. The United States faces vigorous international competition from firms supported

by their home governments, and America may have

as many, if not more, trade barriers than many of

its competitors. There is reason to believe, however,

that other nations have benefited more from their

management of trade than has the United States because of the skill with which they have pursued this

strategy.

U.S. trade policy has often been conducted in virtual isolation from domestic policy. The trade policy that exists has all too often been limited to quota

protection for business sectors with strong political

support. The consequences on U.S. trade of changes

in domestic programs for communications, banking,

agriculture, or other sectors are often not given adequate attention. Given the expansion of the U.S.

economy into international production networks,

these issues can no longer be ignored.

It is unlikely that any unilateral U.S. action can

succeed in transforming the world trading system

in ways that allow for the benefits inherent in a freely

operating world trading system. Indeed, international

links severely constrain the extent to which the

United States can control its own economy. Standard Keynesian strategies for stimulating demand can

result in increased imports instead of new domestic

jobs. Monetary strategy can be frustrated by international capital flows. Designing domestic tax programs will become increasingly difficult as firms

around the world develop complex relationships with

each other.

Only collaborative efforts involving both advanced

and underdeveloped nations are likely to create a

trading regime consistent with the broad objective

of making trade a “positive sum game” for all nations, and stimulating rapid growth in the world

economy. There is no simple way to accomplish this;

there can only be painstaking and skillful bargaining in a variety of international forums. Success will

require intelligence and endurance.

Calls for greater coordination are obviously not

new. Any effort to encourage nations to cooperate

on matters so closely tied to domestic political programs is likely to encounter enormous obstacles,

such as nationalism and conflicting domestic priorities. Yet the need for coordination grows more important as the economies of the world become ever

more interconnected. Inward-looking national fiscal

programs that work at cross purposes are likely to

grow steadily more dangerous. The need to coordinate foreign economic assistance, banking, and trade

policy provides a major example. The best long-term

solution to third world debt is to help them become

prosperous trading partners. This will require intelligent coordination of policy throughout the developed world.

U.S. leadership in this area is crucial. This leadership, of course, depends on the development of a

coherent strategy patiently administered.

Illustrative Options

It is extremely difficult to separate programs designed to improve the performance of the domestic

economy from those designed to improve the U.S.

position in international markets. Most of the programs described in this chapter are focused on creating an environment where the American economy

can grow and prosper by building around a new set

of opportunities introduced by technology. Renewed

growth in national productivity, and the need for flexible response to new opportunities, are of critical importance if the United States is to improve its living

standards and compete successfully in international

markets. At the same time, it is clear that domestic

policies leading Americans to consume more than

they produce are related to current U.S. trade defi-
456

cits. While tracing causes and effects is difficult and

controversial, it is obvious that trade policy cannot

be separated from domestic fiscal policy.

Examples of projects applying specifically to trade

include, but are certainly not limited to, those outlined below.

Improved Coordination of OECD Banking and

Fiscal Policies.-Until very recently, there has been

more rhetoric than reality in programs for controlling wild fluctuations in exchange rates, and little

serious effort to guarantee that U.S. and foreign macroeconomic policies are not working at cross purposes. But the sheer volume of international trade

has now made it impossible for a nation to alter its

domestic economy without considering the potential reactions of trading partners. Moreover, international firms have developed great facility in moving assets in ways that can frustrate the efforts of

a nation acting alone. Currency traded in private

markets, for example, can overwhelm currency purchases by central banks.

If national fiscal and monetary policies are not coordinated, each nation will find its efforts to regulate its economy increasingly frustrated. The Basel

Committee offers a framework for coordination of

banking policy,20 while recent actions taken by the

“group of seven”—the United States, Canada, Japan,

France, West Germany, Great Britain, and Italy–to

control currency fluctuations could also be built

upon.

Increased Efforts to Develop Cooperative Research Projects.-The problems the United States

faces in improving education, health care technology, or transportation networks are not unique. A

revolution in education technology or rapid progress

in pure scientific research would benefit all nations.

Significant efficiencies could be achieved from greater

use of international funding for research projects with

benefits likely to be of universal value.

Export Promotion Activities-A variety of techniques are available for using national resources to

promote U.S. exports. If nothing else, personnel in

overseas missions can keep U.S. producers abreast

of the complex regulations and procedures that must

be understood to complete transactions in foreign

markets. This is particularly helpful for small busi20 See lnternational Competition in Services, op. cit., footnote 7.

nesses, which are often unfamiliar with practices

abroad and unable to invest in a large staff to follow such issues. In West Germany, trade associations

have helped small firms to pool resources and bid

on overseas projects. It would be possible to provide

direct Federal support for such efforts among U.S.

enterprises.

The Agricultural Information and Marketing Service, operated by the U.S. Department of Agriculture,

runs a computer database that includes current and

highly specific information on potential foreign markets. A surprisingly large fraction of successful U.S.

farmers now own personal computers, and this project appears to be a success. The concept might be

useful in other markets.

Subsidies for Language Training, Translation,

and Education.-One problem faced by U.S. exporters is their sheer ignorance of the nature of foreign markets-ignorance magnified by a widespread

inability to speak any language but English. While

it may once have been true that products made in

America virtually sold themselves, combining quality

with an image of being at the cutting age of taste

and technology, in many areas this is no longer the

case. While many U.S. firms still demonstrate a reluctance to learn about developments in other countries,21 sales abroad depend as never before on understanding foreign cultures, tastes, and business

practices. There is an unpleasant history of U.S. firms

failing in attempts to sell large refrigerators to countries with tiny kitchens or blond-haired dolls to African or Asian nations.22

Successful exporting depends increasingly on an

understanding of the history and culture of the people with whom U.S. firms expect to trade. Understanding could be facilitated through expanded support for programs designed to send U.S. students

abroad for study, and increased funding for joint research programs that involve close working relationships between U.S. and foreign engineering and scientific staffs.

Temporary Tariff Protection.-The merits of

protection have been hotly debated in the United

States at least since Alexander Hamilton’s Report on

21Clay Chandler, “U.S. Industry Cool to Japan’s High-Tech Publications,” The Washington Post, Sept. 8, 1987, p. D1.

ZZC.H. Deut~h, “U.S. Industry’s Unfinished Struggle,” The New yOrk

Times, Feb. 21, 1988, sec. 3, p. 1.
457

the Subject of Manufactures argued for the protection of “infant” U.S. industries. Protectionism typically penalizes low-income groups by imposing an

implicit sales tax on many essential goods, while benefiting specific workers, regions, and industries.23

There is considerable debate over whether the cost

of saving a job through protectionist measures is

higher than alternative methods of job generation.24

The political dilemma, of course, is that the consumer tax implicit in protection is effectively hidden while direct taxation to promote education or

training, and therefore competitiveness, is extremely

visible.

Protectionist measures can also be damaging to

long-term U.S. interests if they have the effect of

diminishing incentives for invention and innovation.

In principle, U.S. markets are so large that vigorous

competition among domestic firms would be likely

even if foreign firms were excluded. In practice, however, comfortable domestic arrangements have often

blocked the effective operation of domestic competition. Prior to sharp competition from abroad, for

example, U.S. automobile companies vied with each

other primarily over styling and not over price, quality, or efficiency .25 Foreign entrants into the automobile industry demonstrated that real improvements

in quality and performance could be made, and

thereby provided urgent incentives for U.S. automobile manufacturers to match their performance.

Arguments in favor of increased protection have

come from affected industries and employees, and

from a group of trade theorists who argue that government intervention can shape an environment in

which firms make strategic decisions affecting trade.26

They argue, for example, that if an innovator can

capture “super-normal profits” by being first with

a new technology, the government can help domestic firms maintain comparative advantage in areas

23 Susan Hickok “The Consumer Cost of U.S. Trade Restraints,” Federal Reserve Bank of New York Quarterly Review, summer 1985, pp.

1-12, cited in World Bank, Wor/d Deve/oprnent Report, Washington,

DC, 1986.

Z4U.S. Congress, Office of Technology Assessment, ~eclmolo~ a~~

Structural Unemployment–Reemploy@ Displaced Adults, OTA-ITE250 (Washington, DC: U.S. Government Printing Office, February 1986).

Zs]an Ajtschu]er, et al., The Future of the Automobile.’ The Repofl

of MIT’s International) Automobile Program (London: George Allen &

Unwin Publishers Ltd., 1984).

zGAnne Krueger and Baran Tuncer, “An Empirical Test of the Infant

Industry Argument,” The American Economic Review, vol. 72, No. 5,

December 1982.

where such benefits can be captured.27 It could do

this by subsidizing domestic research and the dissemination of this research, and by protecting domestic markets in ways that would give domestic

firms an opportunity to reduce costs by perfecting

techniques. This learning would allow them to enter foreign markets with costs lower than their competitors and thereby to move rapidly in capturing

market shares. This success itself may deter competitors from entering the market.28 The fact that the

U.S. government would be willing to undertake such

a strategy might deter other nations. The Japanese

record in implementing a strategy of this sort has

been reported as both a success and as a failure. It

appears that the Ministry of International Trade and

Industry has made a number of costly mistakes as

well as championing several successes.29 As outlined

earlier in this chapter, of course, support for domestic

research can be justified for many reasons other than

its potential impact on the competitiveness of domestic U.S. firms in international markets.

To the extent that explicit protectionist measures

can be justified, the cost of tariffs appears to be significantly lower than that of non-tariff protection for

a variety of reasons:30

●

●

●

Protection necessarily raises the price of goods

sold to domestic consumers, but tariffs ensure

that this price increase is captured by the United

States. Quotas allow foreign producers to raise

prices or change product mixes, and the price

differential is left primarily in foreign hands.

Tariffs retain competitive pressure on domestic producers to promote continuous progress

in efficiency, and protect consumers against

price increases that might be taken by monopoly suppliers under the shelter of the quotas.

The cost of tariffs is clear and visible to the public, while quotas make the price consumers pay

for trade protection difficult to see.

27 James A. Brander and Barbara J. Spencer, “Export Subsidies and

International Market Share Rivalry,” National Bureau of Economic Research, working paper No. 1464, Cambridge, MA, 1984; and David J.

Richardson, “International Trade Policies in a World of Industrial

Change,” in Federal Reserve Bank of Kansas City, lndustrial Change

and Public Policy, 1983, p. 286.

zaFedera] Reserve Bank of Kansas Ci{y, op. cit., footnote, 27, P. 287.

Zg[ra MW~iner and Thomas Hout, Japanese Industrial PO/jCY (Berkeley, CA: University of California, Institute for International Studies,

1980).

30 See Robert Lawrence, Can America Compete? (Washington, DC: The

Brookings Institution, 1984).
458

Improving the Flexibility of People at

Work and the Quality of the

U.S. Work Force (Part IV)

Objectives

Part IV paints starkly contrasting possibilities for

the future of working life in America. The economy

could expand by building on the talents of employees in jobs that permit greater freedom to work on

a continuously changing set of products and problems. On the other hand, tomorrow’s workplace

could be built around disposable employees, as employers avoid any commitment to workers in the

form of expected job tenure and any investment in

the form of education or training. Many firms now

maintain flexibility by using comparatively large

numbers of temporary and part-time employees,

minimizing commitments to employees in the form

of retraining, and undertaking change largely through

layoffs and early retirements. There could be a major mismatch between labor supplies (many new

workers are likely to be members of minority groups

with comparatively poor educations) and growing

demands for well educated workers (see ch. 11).

Objectives for policy designed to improve the performance of people in the production recipe, therefore, include the following:

●

●

●

●

●

ensuring a well-trained work force, in which the

skills of those needing jobs are appropriate for

the employment opportunities that will appear

over the next two decades;

compensation systems that maintain incentives

and improve the match between compensation

and individual contributions to insurance and

retirement plans, while avoiding any unhealthy

growth of inequality in the distribution of national income;

achieving a level of job security that does not

strangle the mobility and flexibility necessary

in the emerging U.S. economy;

helping two-earner households and single parents gracefully combine the responsibilities of

child raising with a working life; and

providing adequate safeguards for health and

safety in-the workplace.

Illustrative Options

The discussion that follows explores ways of encouraging business owners to increase their commitments to employees, instead of trying to achieve

flexibility through a constant series of layoffs and

rehirings. The options also reflect ways of affecting

the overall framework of people in the production

recipe, encouraging the use of training and experience by subsidizing supplies of skilled individuals.

A Learning Research Institute.-There is no enterprise more critical to the Nation’s future than its

system of education. Education is a major part of

the U.S. economy, employing 8 percent of the work

force. Yet educational enterprises are organized in

away that frustrates attempts to make basic changes

in the productivity of the educational process. It is

often assumed that there can be no efficiency gains

from capitalization of employees, or from basic

changes in management strategies of delivering

educational services. Both assumptions may be

wrong. Unfortunately, few levels of management appear capable of even questioning the educational

process.

Much of the educational system is, in effect, a series of isolated fiefdoms built around individual school

systems, if not individual classrooms, that communicate ineffectively. One symptom of the inefficiency

of the system performing as a whole can be seen

by examining investments in research as a fraction

of gross receipts. If the Nation’s educational enterprises invested in research and development in the

same proportion to gross receipts as the average U.S.

industry, investment would have amounted to between $8 and $12 billion in 1985—60 to 90 times

more than the actual total.31 Although the National

Science Foundation, the Department of Education,

the Department of Defense, and some of the more

affluent States have made modest investments in improving the process and the technology of education, support and management of the sum total of

such programs seems incommensurate with the critical importance of the improvements. At one time,

it might have been argued that no technology was

available for attacking the basic problems of productivity of teachers or learners. But technologies now

entering the market have made this assumption obsolete.

31 ln 1987, the U.S. Department of Education and the National Science Foundation spent approximately $130 million on research and

development in education. This is approximately 0.06 percent of total

government spending on education and 0.025 percent of all spending

on education. As a nation, the United States spends roughly 2.5 percent of GNP on research and development.
4 5 9

While the potential for technological improvements

in education exists, the institutions available to evaluate innovation, and to examine the radical changes

in management that may be needed to exploit this

potential, seem inadequate to the task. One possible remedy, designed in part to highlight the importance of the problem, would be to create a new

institution with a clear charter to improve the productivity of teaching and learning throughout the U.S.

economy.

Several models could be considered. One would

be an independent “Learning Research Institute,”

managed in much the same way that the National

Institutes of Health are managed and sheltered from

political change to the greatest extent possible. Lessons learned from research institutes in other areas

could be used to construct a charter that would provide the greatest possible insulation from political

manipulation while ensuring that the system was

responsive to the needs of its clients—the Nation’s

students and teachers.

The Institute’s charter could include K-12 schooling, post-secondary education of all kinds, and training and retraining programs. Its responsibility could

be the development of a range of new teaching strategies making appropriate use of information technology. Programs might range from active research

in techniques of pedagogy to strategies for managing instruction in the classroom, at home, and in

business settings. This public resource could also

make major investments in the development of instructional software, appropriate for such areas as

public television programming or the learning of ambitious teaching systems based on technologies likely

to be available over the next two decades. And since

the problems confronted by such a program would

be of international interest, it is likely that the project

would attract strong international support (see the

discussion of cooperate international research programs earlier in this chapter).

Subsidies for Education Beyond High School.-It

seems possible to increase the productivity of schools

to the point where most students would have the

equivalent of 2 years of college education by the time

they reach the age of 18—the age at which they are

still supported by public education funding. A solid

grounding in basic mathematical, scientific, and cultural concepts facilitates the adjustment to more specialized training.

At present, however, support for post-secondary

education is largely in the form of loans for college,

with a scattered assortment of programs for “retraining.” Typically, this training is available only after

a person has lost a job. The pain of adjustment could

be significantly reduced if training were conducted

before calamity strikes. Advanced warning of layoffs

would clearly help.32

Subsidies for training beyond high school could

be available throughout a person’s career, and not

be limited to formal university curricula. A combination of entitlements and loan subsidies could allow flexibility in the timing and location of postsecondary education. The entitlements might cover

the equivalent of 2 years of college tuition, with some

further amount of training receivable at any point

in an individual’s career. With appropriate safeguards,

such programs could also be used to support inhouse corporate training programs. Loans could be

repaid automatically through payroll deductions

when the person is working, but would not exceed

an acceptable percentage of gross income—6 percent might be such a level.

Universal National Service.-A program requiring all young Americans—possibly between the ages

of 18 and 26—to undertake some kind of public service for 1 or 2 years could have a variety of benefits,

Joining the armed services would be one of several

options; teaching assignments might be more appropriate for college graduates, and such work could

also help reduce the cost of publicly supported education. If entry into a service program could be adjusted to coincide with periods of excessive unemployment, it might provide a useful tool to smooth

large fluctuations in unemployment rates.

One of the dangers inherent in the highly fragmented, market-oriented future suggested earlier is

that citizens will fail to recognize their obligations

to the society that supports them. This program

would give participants an opportunity to acquire

that sense of responsibility, and to view aspects of

American life that they would otherwise never experience first-hand.

32 For more on this subject, see ~echno/OgY ad SfrUCfU~a/

Unemployment–Reemploying Displaced Adults, op. cit., footnote 24;

and U.S. Congress, Office of Technology Assessment, Plant Closing: Advance Notice and Rapid Response, OTA-ITE-321 (Washington, DC: U.S.

Government Printing Office, September 1986).
4 6 0

Encouraging Commitment to Employees

Through Greater Use of Bonuses and ProfitSharing.-Employers can be encouraged to achieve

flexibility through compensation adjustments instead

of layoffs, tying private bonus payments to changes

in a business’ value-added or using bonus payments

for the government payrolls that comprise nearly 20

percent of the total work force (see discussion inch.

11). Bonuses allow a company to adjust its payroll

costs during difficult times in a transparent way without the need to renegotiate all wages.33

It is possible that if enough firms adopted a policy where wages represented a fixed base with bonuses dependent on a firm’s performance, the U.S.

economy could more efficiently respond to problems

encountered during economic downturns. There has

already been considerable movement in this direction: apart from small business, 19 percent of all production employees, 27 percent of all technical and

clerical employees, and 23 percent of all professional

and administrative employees were covered by some

kind of profit sharing agreement in 1983.34 One way

of encouraging such programs might be to lower the

taxes paid on bonuses.

Universally Retainable Pensions and Health

Insurance.-Even with a significant change in compensation plans, it is likely that structural change

in the U.S. economy will result in a continuous series of new business starts and failures. Labor mobility will be essential to ensure that the system

adjusts efficiently to new opportunities. It is not reasonable to expect individuals to bear the full cost

of the adjustment. Apart from retraining and unemployment support, it is important that people forced

to shift jobs be able to maintain pensions and health

insurance. 35

Currently, it is difficult to hold onto a pension while

changing jobs. In 1986, 80 to 90 percent of all pension plans required workers to remain with a firm

for ten years before being “vested” (receiving rights

to a pension). A 1981 survey found that only 2 percent of all employees covered by single-employer

corporate pension plans were able to transfer vested

pension credits to another plan; evidence suggests

that this ratio has not changed significantly since that

time.36 People forced to take a series of part-time or

temporary jobs can expect to have no pension coverage. Correcting the problem may be critical for developing a consensus about the need for mobility

within America’s labor force.

Many workers also risk losing their pensions if

their companies file for bankruptcy. Nearly 30 million Americans—the vast majority of those with “defined benefit” plans—are now covered by the Pension Benefit Guarantee Corp. (PBGC). The fund,

however, is in grave trouble as the result of bankruptcies in firms with large, underfunded pension programs. Many are in the steel industry; the LTV Corp.’s

failure alone threatened to exceed the PBGC’s assets.37 In addition, another 10 million workers are

under “defined contribution” pension plans not covered by the PBGC.

Similarly, health insurance plans vary enormously

around the Nation, making continuity very difficult.

Many small firms offer limited coverage or none at

all. Small firms pay much more than large ones to

cover each employee, while health insurance costs

for people who are not members of an organization

qualifying for group insurance rates are higher still.

Bankruptcy can threaten any coverage. Recent law

has alleviated some, but far from all problems in this

area.

Given that the economy as a whole benefits from

labor mobility, it is reasonable to expect that companies, and society as a whole, should pickup some

of the cost of this flexibility. Programs that ensure

the continuity of pensions and health insurance

could be improved. The displaced should not have

to bear the entire cost. The government may not save

money by ignoring the problem, since costs clearly

increase when welfare cases grow in number, or

when Medicaid is forced to cover the cost of serious

illnesses that may develop because people without

health insurance postpone medical treatment.

33 M.L. Weitzman, The Share Economy (Cambridge MA: Harvard

University Press, 1984).

UR. M. Kanter, “The Attack on Pay,” Harvard fhh?eSS Review, vol.

65, No. 2, March-April 1987, p. 61.

qs~e p. Choate and J.K. Linger, High-F7ex Scxiefy: Shaping Amerjcak

Economic Future (New York, NY: Knopf, 1986).

qbRay Schmitt, “pension Vesting, Integration, and Portability (W),”

U.S. Congressional Research Service, report No. 85-884-EPW, Washington, DC, Aug. 9, 1985.

sTThe pBGC has r~ent]y ruled that LTV’s pension liability must be

handled by that company. See Cindy Skrzycki, “Agency Returns Pension Liabilities to LTV)” The Washington Post, Sept. 24, 1987, p. D1.
461

Encouraging Greater Flexibility of Working

Hours (under mutual agreement between employers and employees).-New information technologies make it possible to manage varying work

schedules more easily than ever before. They even

permit taking some work home, since much work

in the U.S. economy now involves manipulation of

information and not things. Greater flexibility in work

time would not only make it easier for parents to

combine work with child raising, it would make it

easier for people to combine vocations with avocations and even to make better use of public highways and recreational facilities.38

Workers are understandably reluctant to allow employers the freedom to change work schedules, while

employers are understandably reluctant to allow employees flexibility that might interfere with production schedules. Surely some compromise is possible. Initial steps might include:

● Encouraging the implementation of State, local,

and private sector programs similar to the Federal Employees’ Flexible and Compressed Work

Schedules Act (first passed in 1978 and made

permanent in 1985), which allows Federal government workers to adopt a schedule of either

8-hour days at odd hours or longer but fewer

days. The success of this program, in which the

employer and employee must both agree on the

“flex-time” arrangement, has been documented

by the positive response it receives from most

of the nearly 500,000 employees involved, and

by the higher productivity it appears to foster.39

● Second, the statutory restrictions on experiments with flexible work schedules of over 40

hours in a single week, like the Fair Labor Standards Act, which covers roughly two-thirds of the

U.S. work force; and the Contract Work Hours

and Safety Standards Act, which applies to all

workers under contract to the Federal Government, might be reexamined.40

38 See John D. Owen, Working Hours (Lexington, MA: Lexington Press,

1979).

39 U.S. Congress, General Accounting Office, “Alternative Work Schedules for Federal Employees,” GAO/GGD-85-63, Washington, DC, July

19, 1985.

to~gls]atlon guiding standards for Federal contract workers is broken down by type (named for sponsors of each act): Walsh-Healy for

suppliers of goods, Davis-Bacon for suppliers of construction, and

McNamara-O’Hara for suppliers of services.

Subsidies for Child Care. -Children may too

often be victims in the U.S. economy. Parents, particularly those with low incomes, are frequently

forced to place their children in inadequate childcare facilities or leave them unattended at home as

“latch key” children. Greater flexibility in labor markets, and better early education for children, would

result from accepting some portion of child care as

a public responsibility—day care programs now in

place in various Federal agencies could serve as

models for such an approach.

At some extra expense, schools that are closed during the summer could shift to year-round training,

as they do in Japan and Taiwan. This would also

alleviate the dilemma many teachers face in finding temporary employment during the summer. During the academic year, the functions of school facilities could be expanded so that children would be

routinely kept in supervised activities unless parents

wanted them home immediately after school.

Linking Welfare Programs to Reemployment

Strategies.-Some welfare programs may have the

effect of reducing incentives for individuals to rejoin

the work force, or may even act to weaken family

structures. Retraining, subsidized day care for working parents, and other programs designed to encourage reemployment need to be better integrated

with welfare initiatives. Some interesting models for

this exist at the State level, notably in Pennsylvania

and Massachusetts.41

Providing Consistent Protection for Workers.-An economy built around flexible production

networks, comparatively small firms or establishments, and an assumption of continuous change in

production methods and products can undermine

standard methods for protecting workers from harmful exposure to chemicals and other health risks.

Many production methods are replaced even before

the safety of a new process is completely understood.

New technologies also introduce a range of health

and safety issues unlike the more obvious risks of

work in physically dangerous occupations. Management of stress, indoor air quality, and other factors

becomes increasingly critical, Electronic supervision

il~e T~d W. Rufuth, “Moving Clients Into Jobs, ” Pub]ic We/fare,

spring 1987, pp. 10-21.
4 6 2

of employees not only increases stress but can raise

serious questions of privacy .42

New technologies and the changing occupational

structure of the work force alter the nature of health

and safety problems, while changes in the scale and

scope of businesses affect opportunities for solving

the problems. A basic review of priorities in the area

may be needed.

Improving the National Database

It is essential that policy be built on the best possible information, While data collection is an unromantic subject, severe flaws in national statistics

present barriers to clear thinking about both domestic and international policy (the list could be continued at much greater length):

● data linking consumer spending to household

types are extremely limited;

● data on living conditions of the poor (i.e., how

many are homeless, how many are hungry, how

many lack health care) are largely speculative,

and differ widely depending on the source being used;

• detailed benchmark input/output data, specifying what inputs are used by U.S. industries

to produce the Nation’s output—of critical importance to national accounts—are typically as

much as 10 years old;

● input/output accounts lack information about

the role of imports critical for important classes

of analysis;

● data on service industries are far less detailed

than data on manufacturing;

●

●

●

●

●

information about programs affecting trade by

directly or indirectly promoting exports or discouraging imports is scattered throughout both

the Federal Government and independent agencies like the International Trade Commission,

and has not been assembled in a form useful

for integrative analysis;

information on inputs and employment in government is extremely limited;

information on research and training in private

and public firms is virtually nonexistent;

different sets of government accounts track data

in different ways and use a bewildering variety

of categories, which often means that comparisons between the National Income and Product Accounts, input/output statistics, industry

data from the Bureau of Labor Statistics, and

trade statistics are incompatible; and

accounts of government receipts and spending

are maintained as unrelated entities, making it

difficult to understand changes in net Federal

commitments (such as commitments from pensions), in net subsidies (from guaranteed or subsidized loans or tax benefits), or in the overall

value of Federal assets.

Perhaps most importantly, the basic structure of

American economic statistics makes all government

spending appear as current consumption—in effect,

government investment is not allowed to appear as

such. This can be dangerously misleading.43 There

are few investments that are more important to the

future than when government taxes individuals for

such collective purchases as education, roads and

other national infrastructure, and basic research.

4ZI_J.S. Congrex, office of Technology Assessment, The Electronic Supervisor: New Technology, New Tensions, OTA-CIT-333 (Washington,

DC: U.S. Government Printing Office, September 1987). qssee R, Eisner, op. cit., footnote 17.
463

YOU CAN’T GO HOME AGAIN

The present chapter, and indeed this entire document, presents the future of the American economy in terms of a series of choices—choices that

must be made by people acting as consumers, as

investors, as employees, and as voters. New information technology, and an economy irrevocably enmeshed in international trade, have done far more

than make old choices about the pursuit of happiness more complex. They have forced consideration

of an unprecedented new range of choices.

Many of the paradigms that once described expectations about the American economy no longer apply. For example, it may once have been reasonable to expect that:

●

●

●

●

●

the American economy could be managed without continuous concern for foreign economies,

most significant technical innovations would be

developed and used first by Americans,

hands-on production jobs would dominate attractive employment opportunities,

large “economy of scale” production facilities

capable of driving down the price of mass produced commodities would dominate production,

and

a person with a conventional high-school education could earn an income adequate to support a middle-class family.

However desirable or undesirable, none of these

are realistic descriptions of America’s future. Instead,

it is not only possible, but likely, that networks delivering amenities ranging from housing to education will be transformed in fundamental ways over

the next generation. None of the alternatives are familiar ones.

A particularly dramatic change is likely in the mix

of marketable skills. These skills are likely to differ

significantly from those that dominated the work

force of the 1960s. Demand for manual skills will

decline and demand for intellectual skills, and skill

in working with people will increase. Specifically,

a person’s success in the new environment is likely

to depend critically on the extent to which the nation’s educational system gives them basic skills and

the ability (and opportunity) to upgrade knowledge

and skills continuously. The key publicly-supported

infrastructure in such a world may well be a productive system for teaching and learning.

The preceding pages have attempted to describe

important characteristics of the practical options now

available and the policy strategies likely to shape the

direction taken. History may well prove wrong many

of the details.

In the face of great uncertainty, two things seem

clear:

1. The possibilities open to America in 1988 represent a set of stark contrasts. A society could

be built that vastly increases the power of all

Americans to express unique tastes, and find

work that both pays well and is rewarding in

other ways. But one could also be built that

rewards only an elite while a majority of Americans are constrained to live with shrinking opportunities. While a highly linked world economy could increase prosperity throughout the

globe, tension over trade could undermine longstanding friendships and the very foundations

on which Western security has been based for

a generation.

2. Secondly, the difference between the alternatives depends as never before on choice instead

of necessity. These choices, in turn, hinge crucially on the management of public policy. This

requires finding ways both to expand the economy in ways that create attractive employment

opportunities and provide Americans with the

training needed to take advantage of these opportunities.

It is inevitable that America’s system for connecting human talent, dedication, and sacrifice to the

production of amenity will be transformed during

the next few decades. Choices made today play a

crucial role in determining which of many possibilities becomes our legacy.

Appendix on Data and Methods

Input-Output Analysis

Much of the analysis that appears in chapters 4, 5, 7,

and 10 is based on input-output calculations. The following discussion will briefly review input-output methods,

focusing on techniques employed in this study that may

be unfamiliar. For a comprehensive treatment of the theory behind input-output analysis see the recent text by

Miller and Blair.1 A description of the mechanics involved

in constructing input-output tables and the underlying

mathematical derivation are contained in a report published by the Department of Commerce.2

The analysis actually employed in the input-output calculations presented in this report used 85 business sectors. Detail is available on 537 business types for the

“benchmark” years in which the quinquennial census of

industries is conducted.3 Unfortunately the last “benchmark” for which data are available is 1977. The Department of Commerce has updated the 85-sector data to 1981

using annual survey data that are much less comprehensive than the census data.4

The “Use” Table

The heart of input-output data is the “use” table. The

columns of this table show the value of each commodity

used in a given year by producers in each type of industry. 5 Matrix element U(i,j) shows the value of commodity

i used by industry j for i and j = i to 85. Data are also provided on the total value of industry and commodity output and the value-added by each industry.

The 1977 table shows, for example, that the motor vehicles and equipment manufacturing industry (j=59)

produced output whose total value was $117.7 billion.

This output was created by purchasing $84 billion in commodities from other businesses, and adding $33.7 billion

in value in industry 59 itself. The columns of the use table indicate the amounts of each type of commodity purchased by the industry. For example, in 1977 the motor

vehicle industry purchased $2.3 billion worth of miscel1 Ronald E. Miller and Peter D. Blair, Input-Output Analysis (Englewood Cliffs,

NJ: Prentice-Hall), 1985. For further reading, see Wassily Leontief, Input-Output

Economics (New York, NY: Oxford Press, 1966); and Alpha C. Chaing, Fundamental/

Methods of &fathematica/ Economics (New York, NY: McGraw-Hill, 1974).

‘Philip M. Ritz, “Definitions and Conventions of the 1972 Input-Output Study,”

Department of Commerce, Bureau of Economic Analysis, Staff Paper, BEA-SP

80-034, July 1980.

3See for example, U.S. Department of Commerce, Bureau of Economic AnalySIS, The Detailed input-Output Structure of the U.S. Economy, 1977, 1984.

4 Mark A. Planting, “Input-Output Accounts of the U S. Economy, 1981 ,“ Survey of Current Business, January 1987. The 1980 revision was the latest available

for most of the calculations presented in the text.

5

The use table IS shown as table 1 in the “Input-Output Structure of the U.S.

Economy, 1977,” U.S. Department of Commerce, Bureau of Economic Analysis,

Survey of Current Business, vol. 64, No. 5, May 1984, p. 52

laneous fabricated textile products (i= 19), and $5.0 billion of rubber and miscellaneous plastic products (i = 32).

The use of different commodities by the various industries can be expressed as a series of linear equations using

the following variable names: call the total value of the

output of industry j, X(j), and the value-added by industry j, VA(j),6 The fact that the value of industry output is

equal to the value of commodities purchased as inputs

plus the value-added by the industry can be written as

follows:

x(j) =

(1)

i= 1

The total output for a particular commodity in the economy is equal to the sum of the deliveries of a commodity

to all industries in the economy plus any deliveries to

final demand. Hence, if Y(i) is defined to be the sales for

commodity i, and Q(i) the total output of commodity i

in the economy, we can write this accounting equation

in the following form:

+ Y(i) (2)

j= 1

The sum extends only from j = 1 to 79 since at the 85-

sector level, only the first 79 industries use intermediate

inputs from domestic industries. The remaining 6 industries are: Noncomparable imports [j =80], Scrap, Used,

and secondhand goods [j=81], Government Industry

[j=82], Rest of the world industry [j =83], Household industry [j =84], and Inventory valuation adjustment [j =85].

All elements of U(i,j) are zero for i =82 to 85 and for j =80

to 85.

Final Demand (Y(i)) is divided into five components:

Y(i) = C(i)+ GPFI(i)+INV(i)+ EXP(i)-lMP(i) (3)

where

C(i) =

GPF1(i) =

INV(i) =

EXP(i) =

IMP(i) =

commodity i purchased as final demand by

consumers and the government

commodity i purchased as gross private fixed

investment

inventory change in commodity i

exports of commodity i

imports of commodity i

6 The following calculations will use a notation that differs from standard input/output notation. The object of the present discussion is to provide a clear,

and quick description of the analysis for the lay reader The variable names were

chosen as mnemonics in order to obviate memorizing numerous unfamiliar variables that will only be used once, Standard notation will be indicated in the notes.

For example, most works use W to represent value-added.

7

In conventional notation: C = commodity purchased as final demand by consumers, G = commodity purchased as final demand by the government, J =

commodity purchased as gross private fixed investment, N = inventory change

in commodity, E = exports of commodity, M = imports of commodity.

467
468

For simplicity, the effects of inventory change are not included in the following discussion and the variable INV

is not used.8

The "Make" Table

Calculations are complicated by the fact that some commodities are made by more than one industry. In 1977,

for example, only $50.7 billion of the $63.2 billion worth

of Chemicals and selected chemical products (commodity

#27) were made by the Chemicals and selected products

industries (industry #27) the remainder being produced

by other industries. Petroleum refining and related industries produced $6.9 billion worth of commodity #27.

In input-output analysis, the table used to account for

secondary production in an economy is called a “make”

table written in matrix form as M(i,j).9 The columns of

the make show the commodities j produced by industry

i. The diagonal elements of the table show the primary

products of industries, while the off-diagonal elements are

the secondary products. The make matrix includes all

commodity output (including deliveries to final demand),

and all industry output. These accounting relationships

can be written as follows:

Q(j) =

i= 1

The make table is created by collecting data on individual establishments within an industry category. The

output of each establishment is assigned to a single commodity class. In practice, of course, many establishments

make more than one product (sometimes referred to as

secondary production). The output of each establishment

is assigned to the commodity type representing the largest

fraction of its output. Most establishments producing more

than one commodity produce items that all fall into only

one of 85 possible commodity classifications. As firms expand the scope of their production, however, this may

be an increasingly tenuous assumption (see ch. 5).

Correcting for Scrap

By convention, each industry is permitted to make

“scrap” in addition to other commodities. Call the amount

of scrap produced by industry S(i). The total output of an

industry can then be written as the sum of commodities

1 to 79 it produces plus scrap. The equation is as follows:

X(i) = (4)

j = l

The available data can be used to calculate the fraction

of all industrial output produced as scrap [S(i) /X(i)] and

‘For most purposes, changes in inventories can be treated exactly as changes in C.

9 The “make” table is shown in table 2 in the article cited in footnote 1.

the fraction of commodity i produced by industry j

IM(i,j)/Q(j)]. 10 As a result, equation (4) can be rewritten

as follows:

X(i) =

j= 1

Where S'(i) = S(i)/X(i).

Shifting to vector notation, let X be a 79-element vector representing industry output, Q be a 79-element vector representing commodity output, Y be a 79-element

vector representing the first 79 elements of final demand.11 The 79x79 matrices U’ and M’ are defined as

follows in their normalized form:12

U(i,j)/X(j) (6)

M’(i,j) = [1/(1 -S’(i))] *[M(i,j)/Q(j)] (7)

Notice that these equations make two major assumptions

that lie at the core of input-output calculations and make

it mathematically possible to describe the behavior of a

highly linked economy:

1. Industry inputs change in direct proportion to industry output.

11. The fraction of a commodity produced by each industry (including the fraction of output counted as

scrap) remains fixed.

Equation (4) can be rewritten in the new notation to provide a convenient bridge between industry output and

commodity output:

x = M’ *Q (8)

The normalized matrices U’ and M’ can be used to rewrite equation (2) as follows:

Q = U’*X + Y

Q

= U’*M’*Q + Y

or

Q = A*Q + Y (9)

Where A = U’ *M’ is Leontief’s original “transactions”

matrix whose jth column shows the value of a commodity

needed to make a dollar’s worth of commodity output.

The A matrix was shown in summary form in table 4-2.

Constructing the Basic Equation

Equation (9), the key equation of input-output analysis, is equivalent to 79 coupled linear equations. It’s solution allows an estimate of the total output of a commodity (or industry) created by any pattern of final

10 The scrap produced by each industry is shown in columns #81 of the Make

table—Table 2 in the Department of Commerce publication cited in footnote 1.

11 In this discussion vectors and matrices are represented in BOLD type. Matrix

multiplication is indicated using the character ● also used to indicate scalar multiplication (i.e. the product of two vectors G and H could be written as the sum

over i of Cl(i) *H(i) or as G* H.)

Izln Conventional notation u’ is called B (the matrix of “technical coefficients”)

and M’ is called D (the matrix of “commodity output proportions”)
4 6 9

demand. Making the key assumptions of linearity described earlier, a solution to (9) can be written as follows:

Q = @A)-1 . Y (lo)

Industry output can be calculated using equation (8) to

convert commodity output to industry output:

X = M’ *(l-A)-1 * Y (11)

Including Capital Goods in the

Transactions Table

The matrix U used in the construction of equation (6)

does not include any purchases of capital equipment. Capital equipment purchases are included as a part of final

demand (see equation (3)). Ultimately, of course, the purchase of capital goods depends on the size and growth

rates of different types of industries. A fully dynamic

model can include these effects. It is possible, however,

to make a third simplifying assumption and include annual capital purchases of each industry as a part of an

expanded transactions table. The assumption is:

III. lndustry purchases of gross private fixed investment

are in direct proportion to industry output.

This assumption can be put to use given the gross private fixed investment in commodity type i purchased by

industry j. Call this matrix CAPITAL(i,j). Data for CAPITAL(i,j)

are available for the input-output benchmark years.14 Call

this benchmark matrix CAPITALb

(i,j). The data, available

for the benchmark years, can be updated given information about gross private fixed investment by commodity

(GPFl(i)) in any given year. One component of GPFI, residential structures, is not incorporated into the transactions

table because it is not an input into a businesses production process. This updating procedure makes the assumption that the share of a particular capital good used by

the various industries has not changed from the benchmark year used and it makes no effort to distinguish between capital purchased for replacement and capital used

for expansion.

The matrix CAPITALb

(i,j) can then be used to create

a new transactions matrix A” that includes intermediate

inputs and gross private fixed investments. The matrix

A“ can be defined as follows:

A"(i,j) = A(i,j)

k= 1

13 See WWS,IIY, [.eont]ef and Faye Duchin, The Impacts Of Automation on Ernp/oyment /9&’–2000, Inshtute for Economic Analysis, under contract to the

Nat]onai Saence Foundation. Contract #PRA-8012844, April 1984, for an example of a dynamic model.

14Gerald Sllvers[eln, “New Structures and Equipment by Using Industry’, 1977,”

SUrV:V O/curren/ Business, No\ember 1985, and Peter B Coughiln, “New Structures and Equipment by Using Industry, 1972, ” .Sume}I of Current Business, July

1980.

It should be noted that capital coefficients tend to be much

less stable than the technical coefficients. Equation (9)

can then be rewritten as follows:

Q = (I-A”)-1 * (C + EXP - IMP) (12)

Where domestic final demand, inventory changes, exports, and imports have been written as 79-element

vectors.

Adjusting for the Effects of Trade

The use table appearing in equation(1) shows the commodities needed as inputs to an industry’s production

process without regard to whether they were produced

by a domestic industry or purchased from abroad. Similarly, no distinction is made between the consumer or

government purchases of foreign and domestic products.

Unfortunately no data is available to distinguish between

foreign and domestic products in either the use table or

in consumer and government purchases, It is possible to

explore situations where imports have penetrated different proportions of U.S. markets by making a fourth simplifying assumption:

IV. The fraction of a given commodity supplied by imports is the same for each industry. The fraction also

represents the imported proportion of all consumer

and government purchases.

Let the fraction of a commodity i supplied by domestic

producers (eg. the fraction imported) be called R(i). These

ratios can be computed from equation (9) imports of commodity i used as intermediate demand and imports of

commodity i purchased by consumers and by the government must combine to total total imports IMP(i). Using

the notation of equation (9),

IMP(i) = (13)

j= 1

rearranging:

R(i) (14)

j= 1

This ratio can now be used to remove imports from equation (11).15 The resulting equations effectively treat all imports as noncomparable imports which are not included

in transactions. The domestic part of the transactions matrix can be written as A“d

, and the domestic part of final

consumer and government consumption as Cd defined

as follows:

15 For other analyses that use this trade adjustment method see Kan Young,

Ann Lawson, and Jennifer Duncan, “Trade Ripples Across U.S. Industries, ” Working Paper, U S. Department of Commerce, Office of Business's Analysis, January

1986, and Charles F. Stone and Isabel Sawhill, “Labor Market Implication of the

Growing internationalization of the U.S. Economy,” paper for the National Commission for Employment Policy, Contract #J-9-M-5-0040, February 1986
470

A“d(i,j) = (1-R(i)) *A’’(i,j) (15)

Cd(i) = (l-R(i))*C(i) (16)

Using equations (14) through (16) in (1) an equation can

be written that includes only domestic inputs and the part

of consumer and government demand met from domestic producers:

Q = (I-A’’d)

-

’ * (Cd + EXP) (17)

X = M’*(l-A"d)

-1 * (Cd + EXP)

Equation (8) has again been used to convert commodities Q to industry output X.

Equation (17) can now be used to explore the effects

of different patterns of trade. For example the calculations

presented in chapter 7 were computed using the following techniques:

● An economy with no imports can be constructed by

holding EXP(i) constant and setting R(i)=0 for all i.

● An economy with no exports can be constructed by

holding R(i) constant and setting EXP(i)=0 for all i.

● An economy with no trade can be constructed by

setting R(i)= EXP(i)=0 for all i.

Notice that the total amount of domestic production is

different in each case.

When an attempt is made to show what would happen if, for example, 1984 trading patterns applied in 1972,

ratios similar to R(i) can be computed for both imports

and exports and used to construct an equation similar

to (14) except that only consumer and government purchases remain as final demand. This was done in the calculations of chapter 5. The impact of changes in final demand on industry output X could be computed by altering

C, changes in producer recipes could be considered by

changing A“, and changes in trade by changing R(i) (and

an equivalent set of ratios for exports).

One final complication must be introduced. Using

standard BEA conventions, tariffs levied against imports

are counted as a part of the imports of wholesale and retail trade (i =69) and transportation and warehousing

(i =65), resulting in a postive import figure for those two

commodities. Imports are normally reported as a negative component of final demand. In most cases the ratios

R(i) for these two commodities are not set to O when a

“no import” cases are considered, eliminating any effect

caused by changing levels of duties on value-added or

jobs.

The ratios calculated for the case when the transactions

matrix is adjusted for both imports and exports, are shown

in table A-1 for the years 1972, 1977, 1980, and 1984.

Adjusting for Inflation

As the discussion of chapters 4 and 5 point out, an analysis of structural change which is not sensetive to price

effects requires a way to convert equations like (17) into

Table A-1 .-Import and Export Penetration of

Domestic Consumption (R(i))

I-O industry

number 1972 1977 1980 1984

1 . . . . . . . .

2

3 ::::::: :

4 . . . . .

5 . . . . . .

6 . . . . . . .

7 .. .,,,..

8 . . . . . .

9

10 : : : : : : : :

11 . . .

12 . . . . . . . .

13 . . . . . . . .

14 . . . . .

15 . . . . . .

16 . . . . . . . .

17 . . . . . .

18 . . . . . . . .

19 ... .

20 . . . . . . . .

21 . . . .

22 ... .

23 . . . . . . . .

24 . . . . . . .

25 . . . . . . . .

26 . . .

27 . . . . . . . .

28 . . . . . . . .

29 . . . . . . . .

30 .. .

31 . . . . . . . .

32 . . . . .

33 . . . . . . . .

34 . . . . . . . .

35 . . . . . . . .

36 . . . . . . . .

37 .

38 . . . . . . . .

39 . . . . . . . .

40 . . . . . . . .

41 . . . . . . . .

42 . . . . . . . .

43 . . . . . . . .

44 . . . . . . .

45 . . . . . . . .

46 . . . . . . . .

47 . . . . . . . .

48 . . . . . . . .

49 ... .

50 . . . . . . . .

51 . . . . . . . .

52 . . . . . . . .

53 . . . . . .

54 . . . . .

55 . . . . . . . .

5 6

57 . . . . . . . .

58 . . . . . . . .

59 . . . . . .

60 . . . . . . . .

61 . . . . . . . .

0.99638

1,13763

0.68196

1.00411

0.71468

0.85251

1.10012

0.85830

0.97033

0.96660

1.00008

1.00016

1.03645

0.98373

1.09075

0.97380

0.93414

0.92693

0.99465

0.94652

0.99782

0.97538

0.97440

0,95912

1.00341

1.00815

1.03750

1.04874

1,02309

1,01916

0.93417

0.97348

0.92430

0.81517

0.97748

0.97576

0.92915

0.92932

1,00210

1.01587

1.02922

0.98350

1.08907

1.00256

1.30584

1.02528

1.03972

1,04678

1.04430

1.01635

1.12892

1.05915

1.02810

0.95881

1.01201

0.91533

1.05319

0.99511

0.93747

1.17626

0.92683

0.99668

1.22197

0.82617

1.00238

0.72308

0.85694

1.13734

0.55526

0.97905

0.99811

1.00000

1.00035

1.19322

0.99458

1.12184

1.00279

0.99347

0.88988

1.00835

0.95999

0.94497

0.97392

0.97317

0.95990

1.01286

1.01085

1.03102

1.05883

1.01285

1.02558

0.91723

0.97559

0.99445

0.72191

1.00395

0.97548

0.91808

0.92639

1.00277

1.03349

1.02255

0.98984

1.16325

1.01627

1.26968

1.04767

1.00981

1.14341

1.07955

1.00774

1.13879

1.09862

1.03293

0.97119

1,02757

0.89801

1.01658

1.01121

0.94131

1.34053

0.98572

0.99732

1,36148

0,85170

1.00357

0,97932

0.81841

1,17189

0.64179

1.00394

0,99023

1.00002

1.00032

1.12094

0,99783

1.13420

1.02382

1.03886

0.87163

1,01180

0.99217

0.95938

0.97693

0.95769

0,97810

1,00956

1.01345

1.05875

1.12547

1.00386

1.02828

0.93132

0.98605

1.03125

0.68944

1.01164

0.97220

0,93415

0.97582

1.00909

1.03204

1.02332

0.98410

1.13442

0,99853

1.39385

1.05790

0.98710

1.09642

1.05441

1.01349

1.20961

1.12053

1.09864

0.99456

0.96785

0.93408

1.01127

1.00079

0.87614

1.27526

0.97620

0.99711

1.35224

0.61239

1.00264

0.93621

0.80827

1.17266

0.73057

1.01465

0.88700

1.00000

1.00035

1.08519

0.99123

1.05530

0.94681

0.94244

0.76981

0.95152

0.94942

0.98778

0.96688

0.89611

0.95551

1.00468

1.02135

1.07061

1.08509

1,02106

1.01920

0.91806

0.96655

0.93547

0.49741

0.95776

0.95647

0.88598

0.85358

0.99759

1.01474

1.01848

0.95595

1.04763

0.99282

1.21651

0.97490

0.95082

0.92172

0.98087

1.04215

1.03667

1.05859

1.04475

0.93552

0.98016

0.81497

0.88130

0.98615

0.80553

1.15410

0.96223
471

Table A.1.—lmport and Export Penetration of

Domestic Consumption (R(i))–(Continued)

I-0 industry

number 1972 1977 1980 1984

62 . . . . . . 1.04763

63 . . . . . 1.00619

64 ...,.,,, 0.9119 4

65 .., ,..., 1.0559 7

66 . . . . . . . . 1.01285

67 . . . 1.00000

68 .. ...,,, 0.9956 5

69 . . . . . . 1.03358

70 ,,, ,,,.. 1.0011 6

71 ...,.,, 1.0117 7

72 .. .,,... 1.0001 3

73 ,,, ,,,,, 1.0094 9

74 ,, ....., 1.0000 0

75 .. .,..,. 1.0000 0

76 . . . . . 1.03465

77 .. ....,, 1.0002 7

78 ,, .,.... 1.0148 5

79 .. .,..., 1.0000 0

80 . . . . . . . 0.00000

81 . . . . 0.87134

82 . . . . . 1.00000

83 .. ... ...–1.85569

84 . . 1.00000

85 . . . . . . . . 1.00000

1,04451

0.98295

0.88240

1.07930

1.01899

1.00000

0.98453

1.04830

1.00083

1.01345

1,00062

1.02132

1.00092

0.99979

1.01681

1.00046

1.01375

1.00010

0.00002

2.35374

1.00000

–3.11294

1.00000

1.00000

1.02127

1.00607

0.86642

1.08638

1.02057

1.00000

0.97851

1,06149

1.00149

1.01468

1.00061

1.01796

1.00083

0.99981

1.02182

1.00034

1.00385

1.00014

0.00000

–3.12859

1.00000

–4.06765

1.00000

1.00000

1.01192

0.93225

0.73565

1.08062

1.02866

1.00000

0.98173

1.05060

1.00157

1.01489

1.00096

1.02743

1.00157

0.99972

1.02022

1.00049

1.01553

1.00016

–0.78546

0.89780

1.00000

–1.80829

1.00000

1.00000

constant dollars.16 Most of the data used in this analysis

are expressed in 1980 dollars because of the extensive

use of the 1980 input-output table as an endpoint. The

calculation of constant dollar industry output or valueadded can be done by defining C80(i) to be the consumer

and government demand for product i expressed in constant 1980 dollars, and U80(i,j) to be the use matrix in

constant dollars. They can be computed as follows:

C80(i) = P(i)*C80(i)

U80(iJ = u(iJ)* P(i)

Using the definition in equation(6)

U80’(i,j) = u80(ij)/x80(j) = U’(i,j)*P(i)/P(j) (18)

Assuming that the deflator for an industry’s scrap is the

same as the deflator for the entire industry the matrix

M’ is unaffected by the deflation process since it involves

ratios of identical commodities. As a result, a 1980 based

A matrix can be calculated as follows:

A80(i,j) = A80’*M’

A80(i,j) = A(i,j)*P(i)/P(j) (19)

lsForadditiona] examples ofdeflating input-output matrices, WeWassi]ykontiefand Faye Duchin, The/mpacts of,.4utomation on Employment 1965’-2OOO,

op. cit., p. 3.18; and Anne P. Carter, Structural Change in the American Economy

(Boston, MA: Harvard University Press, 1970), p. 21

Equation (18) can also be used to compute a deflated

value-added using equation (1)17.

VA(j)

i= I

(20)

Equation (20) provides a way to construct a deflated

value for value-added given deflators for the products of

each industry. Because it involves deflating both the gross

output, X(j), and the intermediate inputs, U(i,j), it is called

“double-defaltion.” The process is considered a “preferred

method” when all relevant data is available. 18 As the discussion of chapter 5 points out, however, it is often necessary to use other methods to compute deflators for

value-added. Arguments about the ratio of deflated manufacturing value-added to the sum of all value-added in

the economy (the GNP) hinge on disputes about the validity of these alternative methods.

While the logic of the deflation process just described

may be clear, two problems must be overcome to put it

to practical use. The first problem results from the fact

that deflators for the 85-level input-output industries are

not published as a consistent time series. The Bureau of

Labor Statistics compiles such a series, but the deflators

are for 156 industries and are based on gross output (the

value of shipments).19 Using them in equations 18-20 requires an aggregation for some to the 85 BEA input-output

industries using current dollar value of their gross output. 20

A second problem results from using domestic price

deflators to adjust input-output tables when many intermediate inputs are imported. The Producer Price Index

that forms the basis for industry deflators is based on

17 Equation (20) makes the implicit assumption that deflators for industry and

deflators for commodities are identical. For simplicity, this assumption is frequently

used in practice. The error introduced by using industry deflators for commodities can be estimated by using the make matrix to convert commodity deflators

to industry deflators. If the industry deflator is called P‘ The deflator for industries

1-79 are computed as follows:

k-1

The procedure reveals that errors of were close to 3 percent in only 4 of 85

industries—most prove to be very small. Attempting to use the make matrix to

compute commodity deflators from industry deflators and vice versa introduces

an additional uncertainty because the make matrix is only updated infrequently.

As a result, estimation of P’ contains errors whose size is difficult to estimate

except when benchmark years are compared.

18Milo F, Peterson, “cross Product by Industry, ] 986, ” Survey Of Current f?US;-

ness, April 1987, pp. 25-27.

Igs= Va]erie A. Personick, Methodology for Time Series Data on hdusmy, OUCput, Price and Employment, unpublished Bulletin, Bureau of Labor Statistics, Office of Economic Growth and Employment Projections, fall 1987; and “Time Series Data Base for Input-Output Industries, ” unpublished, Bureau of Labor Statistics,

Office of Economic Growth and Employment Projections, June 1985.

20 See “BLS Economic Growth Model System Used for Projections to 1990, ” Bulletin 2112, April 1983, app. F,
472

changes in domestic prices.21 Using domestic deflators obviously leads to an error under conditions of disequilibrium when the price of foreign goods may be changing

at different rates than the price of domestic goods. The

error can be reduced by removing imported products from

the transactions table using methods described in equations 13-16.

Converting Industry Output to an

Estimate of Employment

Equation (13) allows an estimate of output given assumptions about demand (Y), producer recipes (A), and

trade (R(i), and EXP(i)). The estimates of output X can

be converted to estimates of employment for each industry and occupation through use of a matrix which shows

the number of jobs in occupation category k available in

industry i. Call this matrix L(k,i). The number of jobs in

occupation category k are represented by OCC(k) and

computed from L as follows:

OCC = L*X (21)

The occupation by industry matrix L is available for

the year 1984 from the Bureau of Labor Statistics.** It provides data on approximately 679 occupations and 331 industries. Self employed persons are not included in the

basic data. Data is available, however, on the total number of self employed persons by occupation.23 When it

is necessary to include self-employed persons, elements

of the matrix L are increased under the assumption that

the percentage of people in an occupation that are self

employed does not depend on the industry in which they

work. That is, if 10 percent of all machine operators are

self employed, 10 percent of all machine workers in the

metal container industry are self employed. If the total

number of self employed persons in an occupation SEL(k)

are known, a labor matrix including self employment can

be constructed as follows:

i =85

L’(k,i) =

i = l

Collapsing the 331 BLS industries to BEA’s 85 allows the

construction of a crude measure of labor productivity by

simply dividing total industry output by total industry employment. 24

21 See Andrew G Clem and William D. Thomas, “New Weight Structure being

Used in Producer Price Index,” Monf)dy Labor Rewew, August 1987, and Ehzabeth

Gibbons and Gerald F Halpln, “Import Price Delines in 1986 Reflected Reduced

011 Prices, ” Monthly Labor Review, April 1987

21(’1984 Industry by Occupallon Matrix,” Bureau of labor Statistics, Office of

Economic Growth and Employment Projections, unpublished, June 1985

23 "’Total Employment by Occupation, 1984 and 1995 Projected,” Bureau of Labor Statistics, Office of Economic Growth and Employment Projections, unpubIished, June 1985

Z4LISe of I_l S ~pa~mentOf Labor, Bureau of Labor Statlshsc, “BLS lnPUt-OUtPUt

Industry Sectors, ” unpublished, md U S Department of Commerce, Bureau of

Economic Analysls, “Appendix B lndustn Class] flcahon of the 1977 input-output

Tables," Survey of Current Business, vol 64, No. 5, May 1984, p. 80.

k=67 9

PROD(i) =

k= 1

A matrix L“ that keeps staffing patterns the same with

in industry but increases productivity (equivalent to an

assumption that the productivity of all occupations in the

industry increase by the same percentage) can be computed as follows:

L“(k,i) = L’(k,i)* [OLD PROD (i)]/[NEW PROD (i)]

Converting to 10 Indusries and 16

Occupations

Since 79 categories of commodities and industries could

not be conveniently displayed in the text, the results of

the 79-industry calculations were summarized using ten

business sectors. Their relationship to the standard inputoutput industry categories is shown in table A-2.

Since 679 occupation categories are clearly also unmanageable, the occupation data was compressed to show

45 occupation categories for most calculations. These 45

occupation categories can in turn be reduced to 16 or 11

categories. The 16 category aggregation is used whenever

possible since it provides somewhat better detail on occupations of interest to this study. The 11 category set

is used when it is necessary to be consistent with some

historical BLS series. Table A-3 provides a map showing

how the three categories are related.

Constructing Demand Scenarios

The analysis described in the text is built from a series

of models. Scenarios are created in the following steps:

1.

2.

3.

4.

5.

6.

7.

8.

Estimating U.S. population by age and sex.

Estimating numbers of households by type and by

income.

Estimating spending patterns by households of different types and incomes.

Estimating the demand for the output of the business categories for which input-output data is

available.

Estimating the output of different businesses that result from domestic demand.

Estimating how trade affects the output of businesses

by business category.

Estimating the employment created in different business categories given estimates of yearly output and

industry productivity}’.

Estimating jobs by occupations.

Each of these steps provides techniques for understanding trends during the past few decades, which can be used

as the basis for constructing estimates about the future

that were described in the input-output section appear-
473

Table A-2.—Grouping the 79 Input-Output Industries Into 10 Summary Sectors

Natural Resource Intensive Production

1. Livestock and livestock products

2. Other agricultural products

3. Forestry and fishery products

4. Agricultural, forestry, and fishery services

5. Iron and ferroalloy ores mining

6. Nonferrous metal ores mining, except copper

7. Coal mining

8. Crude petroleum and natural gas

9. Stone and clay mining and quarrying

10. Chemical and fertilizer mineral mining

Construction

11. New Construction

12. Maintenance and repair construction

Low Wage Manufacturinga

16. Broad and narrow fabrics, yarn, and thread mills

17. Miscellaneous textile goods and floor coverings

18. Apparel

19. Miscellaneous fabricated textile products

20. Lumber and wood products, except containers

21. Wood containers

22. Household furniture

23. Other furniture and fixtures

32. Rubber and miscellaneous plastic products

33. Leather tanning and finishing

34. Footwear and other leather products

64. Miscellaneous manufacturing

Medium Wage Manufacturing

14. Food and kindred Products

26. Printing and publishing

36. Stone and clay products

40. Heating, plumbing, and structural metal products

41. Screw machine products and stampings

42. Other fabricated metal products

44. Farm and garden machinery

47. Metal working machinery and equipment

49. General industrial machinery and equipment

50. Miscellaneous machinery, except electrical

51. Office, computing, and accounting machines

52. Service industry machines

53. Electrical industrial equipment and apparatus

54. Household appliances

55. Electric lighting and wiring equipment

56. Radio, TV, and communication equipment

57. Electronic components and accessories

58. Miscellaneous electrical machinery and supplies

62. Scientific and controlling instruments

63. Optical, ophthalmic, and photographic equipment

High Wage Manufacturing

13.

15.

24.

25.

27.

28.

29.

30.

31.

35.

37.

38.

39.

43.

Ordinance and accessories

Tobacco manufacturers

Paper and allied products, except containers

Paperboard containers and boxes

Chemicals and selected chemical products

Plastic materials and synthetic materials

Drugs, cleaning, and toilet preparations

Paints and allied products

Petroleum refining and related industries

Glass and glass products

Primary iron and steel manufacturing

Primary nonferrous metals manufacturing

Metal containers

Engines and turbines

45. Construction and mining machinery

46. Materials handling machinery and equipment

48. Special industry machinery and equipment

59. Motor vehicles and equipment

60. Aircraft and parts

61. Other transportation equipment

Transportation and Trade

65. Transportation and warehousing

68. Electric, gas, water, and sanitary services

69. Wholesale and retail trade

74. Eating and drinking places

Transactional Activities

66. Communications, except radio and television

67. Radio and TV broadcasting

70, Finance and insurance

71. Real estate and rental

73. Business services

Personal Services

72. Hotels: personal and repair services (exe. auto)

75. Automobile repair and services

76. Amusements

84. Household Industry

Social Services

77. Health, education, & social services

78. Federal government enterprises

79. State and local government enterprises

82. Government industry n.e.c., excluding defense

Defense

82. Government industry, defense only

a

1984 Wages and Salaries per Full-Time Equivalent Employee by Industry (NIPA Table 6.4B and 6.7B) were ranked and divided into 3 groups of 7 Industries each These

industries were matched to BEA Input-Output Categories via an unpublished mapping system provided by the BEA.

ing earlier in this appendix. The section that follows will both demand and value-added are forced to conform to

provide details on the first three steps. the same total GNP in the year 2005. A closed model caA closed model would ensure consistency in the way pable of exploring structural changes of the magnitude

that the production recipes affect prices that in turn in- examined in this analysis, and capable of maintaining

fluence consumption. Income available to different oc- consistency over 20-year periods, would require precise

cupations would be used to compute income distribution, data in many areas where existing data are not available.

which would also influence consumption.25 The scenarios Indeed many of the most critical pieces of information

examined in this work are forced into consistency in that (e.g. the cross elasticities between information and transportation demand) are unknowable. The assumptions

25 See Duchin and Leontief, op cit , footnote 13 needed to make such a model work in the absence of
474

Table A-3.—Grouping 45 Occupation Classifications in a 16-Occupation Set and an 1 l-Occupation Set

Executive, Administrative, and Managerial

Managers and Management Support

Managerial and administrative occupations

Management support occupations

Professional Specialty

Technical Professionals

Engineers

Architects and surveyors

Natural, computer, and mathematical scientists

Education and Health Professionals

Teachers, librarians, and counselors

Health diagnosing and treating occupations

Other Professionals

Social scientists

Social, recreational, and religious workers

Lawyers and judges

Writers, artists, entertainers, and athletes

All other professional, paraprofessional, and technicians

workers

Technicians and Related Support

Technicians

Health technicians and technologists

Engineering and science technicians and technologists

Technicians, except health and engineering and science

Sales

Sales Workers

Marketing and sales occupations

Administrative Support, including clerical

Other Customer Contact

Adjusters and investigators

Information clerks

Private Household and Other ServIce

Food and Beverage Preparers

Food and beverage preparers and service occupations

Other Service Workers

Cleaning and building service occupations, except private

household

Health service and related occupations

Personal service occupations

Private household workers

Protective service occupations

All other service occupations

Precision Production, Craft, and Repair

Precision Production, Craft, and Repair

Blue collar worker supervisors

Construction trades

Extractive and related workers, including blasters

Mechanics, installers, and repairers

Precision production occupations

Plant and system occupations

Machine Operators, Assemblers, and Inspectors

Machine Operators, Assemblers, and Inspectors

Machine setters, set-up operators, operators, and tenders

Hand working occupations, including assemblers and fabricators

Transportation and Material Moving

Transportation and Material Moving

Transportation and material moving machine and vehicle

operators

Handlers, Equipment Cleaners, Helpers, and Laborers

Handlers, Equipment Cleaners, Helpers, and Laborers

Helpers, laborers, and material movers

Farming, Forestry, and Fishing

Farming, Forestry, and Fishing

Agriculture, forestry, fishing, and related occupations

Information Distribution

Communications equipment operators

Mail and message distribution workers

Duplicating, mail, and other office machine operators

Material records, scheduling, dispatching, and distribution

Data Entry, Manipulation, and Processing

Computer operators and peripheral equipment operators

Financial records processing occupations

Records processing occupations, except financial

Secretaries, stenographers, and typists

Other clerical and administrative support workers

KEY: The 1 I-occupation aggregation shown in bold are commonly used in Bureau of Labor Statistics time series.

The 16-occupation aggregation shown in italics are used in most of the summary statistics presented in this document.

The 45-occupation groups 1-45 are subheadings of the 679-occupation categories available from the Bureau of Labor Statistics data.

credible statistics are large, and often difficult to interpret. for use on a personal computer.27 The assumptions used

The methods described below are designed to make the in the calculations follow those used by SSA—with the

best possible use of existing data, while allowing specula- exceptions noted:

tive assumptions to be kept clearly in view. . Three mortality rate alternatives. These translate into

an assumed increase in U.S. life expectancy (from

Demographics birth) of between 2 and 7 years over the next 20

years.

Estimates of the future U.S. population by age and sex . ‘Three fertility rate alternatives. The lowest is 1.6

were made using a demographic model developed by the births per woman and the highest 2.3, with a midU.S. Social Security Administration (SSA)26 and adapted point of 2.0. Fertility rates fell sharply from 3.4 in

26 U.S. Department of Health and Human Services, Social security Administra- 27 U.S. Congress, Office of Technology Assessment, “Modified Social Security

tion, “social Security Area Population Projections, 1984,” Actuarial Study No. Population Projection Program,” working paper prepared for the Economic Tran92, Washington, DC, May 1984. sition Project, November 1985.
475

●

the baby boom period of the early 1960s to well below 1.8 during the mid 1970s, but have since risen

slightly and are now above 1.8.

There has been some debate about whether, over

the long term, the U.S. fertility rate will remain below the “replacement rate"—which allows the long

term natural rate of increase of the U.S. population

to remain positive—of 2.1. A long term rate of 1.9

or less will mean that, even accounting for immigration, the rate of natural increase will become negative toward the end of the 21st century .28

Immigration projections. Although net legal immigration has stood at an annual average rate of just over

500,000 persons during the past decade, the effects

of immigration reform may cause this figure to increase. In so far as amnesty provisions now apply

to all illegal aliens who arrived in the United States

prior to 1982, the number of legal immigrants may

rise significantly, while the illegal immigrant population declines.

Illegal immigration, however, is more difficult to

predict. Over the next 20 years, this factor will depend heavily on economic conditions in developing

countries (particularly in Central and South America). Indeed, immigration pressures resulting from

economic failure in developing nations could have

as great an impact on the U.S. economy as the disruption in trade that such failures cause. In this study,

it is assumed that illegal immigration will, after an

initial decline through the early 1990s, creep back

to currently estimated levels. This would place annual net legal and illegal immigration in 2005 at close

to 1 million.29

By way of comparison, the U.S. Census Bureau’s

“high” series for net immigration, which also assumes a significant level of illegal immigration,

matches the current overall level cited here of

roughly 750,000 (though OTA estimates an increase

by 2005). The Census “middle” series assumes only

a small rate of illegal immigration.30 The comparatively high rates of illegal immigration assumed here

result in population estimates for the year 2005 that

are slightly higher than those projected by SSA;

roughly, the middle estimate used here is roughly

similar to the SSA high estimate.

These assumptions can be converted to population estimates for the year 2005 using standard demographic techZaFOr Some interesting perspectives on the issue, see Ben J. Wattenberg, The

Birth Dearth (New York, NY: Pharos Bcmks, 1987), chapter 3.

Z9F. D, wan et a., “projections of Net Legal and Illegal Immigration to he United

States,” contract paper prepared for the Office of Technology Assessment by the

Population Research Center, University of Texas, Austin Texas, August 1984.

30U. S. Bureau of the Census, Current Population Reports, Series P-25, No. 952,

Projections of the Population by Age, Sex, and Race: 1983 to 2080 (Washington,

DC: U.S. Government Printing Office, 1984).

niques. Results of the projections show an annual average increase in total population of between 0.76 and 1.06

percent, with a median estimate–the one most frequently

used in the projections that follow—of 0.93 percent. This

annual growth rate would place the U.S. population at

292 million by 2005—some 23 percent higher than the

1983 population of 238 million. By way of comparison,

the annual average increase in population between 1960

and 1983 was 1.1 percent, while the U.S. Census Bureau’s

estimates for 2005 show an overall population increase

from 1983 of 25.9 percent for the “high” series and 17.7

percent for the “middle” series (annual rates of increase

of 1.05 and 0.74, respectively). The incorporation of illegal immigration into the estimates used in this analysis

accounts for the difference between the OTA median estimate and the Census “middle” series.31

Households

Estimates of population by age and sex can be used

to estimate the number of households of different types.

The estimates assumed that people of any age and sex

are as likely to be in any of 17 household types in 2005

as they were in 1984. This implicitly assumes that divorce

and marriage rates remain unchanged. The 17 household

types are listed in table A-4. The probabilities were computed for each age and sex using the 1984 Current Population Series (CPS).32

All U.S. households were ranked by income per family member using CPS data. This ranked list was divided

into seven equal groups—each group representing different income-per-family-member cohorts. It was then possible to compute the percent of all households of a given

type that were in each of the seven income cohorts. Unless otherwise noted, it was assumed that the income distribution of each household type remained unchanged.

Household income for each household type and income

cohort could therefore be estimated given information

about total personal income available.

Spending by Household Groups

The initial projection of patterns of consumer expenditures to 2005—the Trend scenarios-rests on the assumption that these expenditures will be based on existing relationships between expenditure by household type and

income, and historically based price trends. The existing

relationship between expenditures, household types and

household income is defined by the patterns of expenditlFOr a review of the Census Projections, see U.S. Bureau of the Census, projections of the Population by Age, Sex, and Race: 1983 to 2080, op. cit.

3ZU.S, ~pa~ment of Commerce, Bureau of the Census, digital files. % “HOLISehold Formation Program,” working paper prepared for the Office of Technology

Assessment, Washington, DC, May 1986.
476

Table A-4.—The 17 Household Types Used To

Construct Demand Scenarios

1. Single consumer unit, age 15 to 34

2. Single consumer unit, age 35 to 64

3. Single consumer unit, age 65 and Over

4. Two or more unrelated adults living together, age 15 to

84 (no children) (excluding household type #13)

5. Married couples living without any children, age 15 to 65

6. Single parent with children under 18, age 15 to 65 (excluding household type #14)

7. Married couples with own child, oldest child under 6,

householder age 15 to 65 (excluding household type #15)

8. Married couples with own child, oldest child 6 to 17,

householder age 15 to 65 (excluding household types #16

& #17)

9. Family or couple headed by a person at least age 65

10. Married couples with own child, oldest child over 17,

householder age 15 to 65 (excluding household type #12)

11. All other units

12. Married couples with own child, oldest child over 17,

householder under 65, with only one child

13. Two unrelated adults living together, age 15 to 64 (no

children)

14. Single parent with children under 18, age 15 to 65, with

only one child under 18

15. Married couples with only one child under 6, householder

age 15 to 65

16. Married couples with only one child age 6 to 17, householder age 15 to 65

17. Married couples with only two children, oldest child’s age

is between 6 and 17, householder age 15 to 65

ture of the U.S. Bureau of Labor Statistics’ “Consumer Expenditure Survey” (CES) for 1982/83. The underlying

logic of the model is that as household incomes and types

of households change, the spending patterns of households change to resemble the established expenditure patterns of income cohort and type into which they have

moved.33 Alternative consumption scenarios were constructed from the base established in the Trend scenarios

following methods outlined in chapter 3.

The effect of demographics and household income on

consumption patterns was estimated using statistics available from the CES. Regression coefficients were computed

using an equation linking expenditure in each household

type to household income for each of 31 commodities.

The categories were chosen to be as closely compatible

as possible with the categories used in the National Income and Product Accounts Personal Consumption Expenditure (PCE) accounts (see table A-5). Expenditures

on these 31 items accounted for 75 percent of total PCE

in 1983.

Expenditures on the remaining 9 items—health, education, gasoline, electricity, natural gas, other household

fuels, stationery, religion and welfare, and foreign

travel—are estimated independently (see ch. 3).

ss’’Consumer Demand Projection Program,” working paper prepared by L. Renner for the Office of Technology Assessment, April 1986.

This was necessary because expenditure data in the

CES, on which the model is based, is incomplete or because there was reason to believe that a price and income

coefficients provide an unsatisfactory guide to the future

even in the trend cases. For example, the CES covers only

out of pocket medical expenses, which account typically

for about one quarter of total medical care expenditures.

Education from the CES presents another problem since

demographic changes, in particular the slow growth of

the school age population, will have a greater impact on

household educational expenditure than household income or type of household. For energy items, the impact

of improved efficiencies is not reflected in existing patterns of household expenditure. The remaining three

items—stationery, religion and welfare, and foreign

travel—were not separately identified in the CES data.

The influence of income on consumption in 31 categories was computed separately for 17 household types

(see table A-4). The equation used was as follows:

EX(h,j,I) = a(h,j) + b(h,j)*I + c(h,j)*12

(22)

Where EX(h,j,I) is the annual expenditure of household

type h for commodity type j when the household income

is L The coefficients a(h,j), b(h,j), and c(h,j) were computed by the Bureau of Labor Statistics. A quadratic form

was used so that saturation effects and declines in purchases of “inferior goods” with income could be detected.

Expenditures are multiplied by a price adjustment factor based on an assumed future price changes and a set

of price elasticities taken from an examination of the Consumer Expenditure Series data (see table A-6).34 If the adjustment factor is over 1, for example, total expenditure

on a given item will be higher than it otherwise would

be if prices had not been taken into account. Some adjustments were made to ensure that the set of price

changes and elasticities formed a consistent set. A consistent set leave total spending by a household unchanged

(e.g. total spending before the price change is equal to

total spending after the price change with spending on

each commodity adjusted using the elasticities for each

commodity).

In the course of developing the model a number of price

adjustments were used. A first series (series A of table

A-6) was based on an assumed continuation of 1963-83

trends in relative prices.35 However, series A resulted in

a set of 2005 expenditures that were questionable because

they sometimes resulted in projections that often departed

significantly from historical trends. A major departure

from a trends does not necessarily mean that the result

is unrealistic. It does require a search for a plausible ex34 Paul Devine, “Forecasting Personal Consumption Expenditures from Crosssection and Time-series Data,” Ph.D dissertation, University of Maryland, 1983.

MU.S, ~pa~ment of Commerce, Bureau of Economic Analysis, National income and Product Accounts, historical diskettes, table 7.10.
477

Table A-5.–Consumption Items Estimated Using Income and Price Equations and Items Estimated Using

Other Methods (1983 spending in each category in billions)

Independently estimated Estimated using price and incomeb

Stationery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8 Food at home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....265.0

Religion and welfare . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47.6 Food away from home . . . . . . . . . . . . . . . . . . . . . .....104.7

Foreign travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.9 Alcohol. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52.3

Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.1 Tobacco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.0

Health . . . . . . . . . . . ..............................267.8 Owner-occupied housing . .......................233.9

Gasoline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90.1 Tenant-occupied housing . . . . . . . . . . . . . . . . . . . . . . . . 96.8

Natural gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.9 Maintenance services . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1

Electricity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.3 Maintenance commodities . . . . . . . . . . . . . . . . . . . . . . . 23.6

Household fuels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.5 Tenants insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.4

Total . . . . . . . . . . . ......................,......533.0 House furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60.2

House appliances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30.9

% of PCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.8 Water and sewer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3

New vehicles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87.0

Used vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.6

Vehicle maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70.7

Other private transport . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2

Air fare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.3

Other public transport . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4

Personal care commodities . . . . . . . . . . . . . . . . . . . . . . 20.4

Personal care services . . . . . . . . . . . . . . . . . . . . . . . . . . 14.0

Men’s and boys’ clothing . . . . . . . . . . . . . . . . . . . . . . . . 38.6

Women’s and girls’ clothing . . . . . . . . . . . . . . . . . . . . . 76.4

Other apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,5

Footwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.3

Apparel services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6

Telephone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.9

Personal business . .............................132.5

Entertainment services . . . . . . . . . . . . . . . . . . . . . . . . . . 58.2

Entertainment commodities . . . . . . . . . . . . . . . . . . . . . . 62.4

TV and sound . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.4

aSee ch.3 for a discussion of the techniques used for the independent estimates.

bCalculated using the quadratic equations Iinking expenditures for 17 household types to household income and using price elasticities described in table A-5. The

31 categories in this list to totaled 75.2% of all consumer expenditure in 1984.

planation and a judgment about which “trend’’to use

as the basis for constructing scenarios.

A second price series (series Bin table A-6) was developed as a result of a detailed review of consumption

trends. In most cases, series B retains the same price

elasticities but changes assumptions about future prices.

The adjustments are discussed in chapter 3. The most

notable case is items of clothing. In the past, prices of

clothing fell sharply by about 34 percent between 1963

and 1983. An assumed continuation of this trend in future as in price series A results in a large increase in the

share of total expenditure devoted to clothing, representing major departure from historical trends. The question then becomes whether to use the ’’trends" established

by price elasticities or trends emerging from other variables. Expenditures unclothing and Personal Care, have

represented about 9 percent of PCE over the last 20 years.

The results of the expenditure model including series A

price adjustment would have increased expenditures on

clothing to over 12 percent of total PCE. In order tearrive at a Trend scenario more in keeping with the historical development of expenditures, it was therefore assumed that prices would remain constant in real terms.

Consumption Scenarios

In the Trend scenarios, personal consumption expenditures are projected for two different scenarios for annual

economic growth rates: 1.5 percent and 3 percent. Since

it is assumed that PCE will retain a constant share of GNP,

the total level of expenditure on personal consumption

in 2005 is therefore established in advance. The purpose

of the Trend projection for PCE then is to estimate the

distribution of expenditure on different items within that

pre-determined total.

Equation (22) can be used to estimate spending in each

household type given information about household incomes. The projections of expenditure derived from the

model are combined with the independently estimated

items to provide projected expenditures on all items of

PCE for 2005 under the 1.5 percent and 3 percent growth

assumptions. These expenditures are shown in table A-
478

Table A-6.—Price Assumptions

Series A Series B

Price Price

Price Price adjustment Price Price adjustment

elasticity ratio factor elasticity ratio factor

Food at home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Food away from home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Alcoholic beverages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tenant-occupied housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Lodging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tenants insurance &other rental costs . . . . . . . . . . . . . . . . .

Maintenance & repair services . . . . . . . . . . . . . . . . . . . . . . . . .

Maintenance&repair commodities . . . . . . . . . . . . . . . . . . . . .

Telephone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Water &sewer.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

House furnishings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Household appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Housekeeping services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Men’s & boys’ apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Women’s & girls’ apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other apparel.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Footwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Apparel services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

New vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Used vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Vehicle maintenance & repair . . . . . . . . . . . . . . . . . . . . . . . . . .

Private transportation services . . . . . . . . . . . . . . . . . . . . . . . . .

Airfare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other public transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Entertainment services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tobacco products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Personal care commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Personal care services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Entertainment commodities . . . . . . . . . . . . . . . . . . . . . . . . . . .

TV & sound equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Personal business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

–0.39 0

–0.53 0

–0.16 0

2.269

–0.76 0

–0.40 0

–0.43 0

–1.04 0

–1,08 0

–0.43 0

–1.27 0

–0.83 0

–0.43 0

–1,42 0

–1.16 0

–0.74 0

–0.76 0

0.410

0.130

–0,41 0

–0.02 0

–0.50 0

–1.85 0

–1.14 0

–0.73 0

–0.37 0

–0.09 0

0,570

–1.94 0

–1.02 0

–0.35 0

1.012

1.224

0.848

1.019

0.643

1.243

1.412

1.188

0.533

0.633

0.803

0,753

1.412

0,709

0.580

0.709

0.643

1,218

0.654

1.802

0,820

1,510

0.536

1.397

0.892

1.179

0.905

1.265

0.652

0.293

1,302

Owner-occupied housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.269 1.019

0.9953

0.8984

1.0267

1.0436

1.3988

0.9166

0.8621

0.8359

1.9730

1.2172

1.3213

1.2654

0.8621

1.6296

1.8811

1.2897

1.3988

1.0842

0.9462

0.7854

1.0039

0.8137

3.1698

0.6830

1.0870

0.9408

1.0090

1,1433

2.2927

3.4978

0.9117

1.0436

7. Government spending was estimated using techniques

already outlined in chapters 2 and 3.

Converting Consumption in the Consumer

Expenditure Series (C=) Categories

to Consumption in lnput-Output (I-O)

Categories and Consumption by

Amenity Group

Consumption in each of the categories shown must be

converted into consumer and government demand in the

categories used for the input-output analysis discussed

in the first part of this appendix. Two steps were required:

first, the consumption by CES categories was converted

into the categories used in the National Income and Product Accounts (NIPA) Table 2.4 using data provided by the

Bureau of Labor Statistics. Since the CES and the NIPA

consumption data come from different sources, there is

not an exact correspondence between the two even in

–0.3 9

–0.9 8

0.2

2.269

–0.7 6

–0. 4

–0.4 3

–1.0 4

–1.1 2

–0.4 3

–0.4 3

–1.4 2

–1.1 6

–0.7 4

–0.7 6

0.41

0.13

–0.4 1

–0.0 2

–0. 5

–1.8 5

–1.1 4

–0.7 3

–0.3 7

–0.0 9

0.57

–0.7 6

2.269

1.012

1.224

0.59

1.019

0.8

1.243

1.412

1.188

0.8

0.633

0.803

0.753

1.412

1

1

1

1

1

0.654

1.802

0.82

1.51

1

1.399

1.073

1.179

0,905

1.265

0.8

0.7

1.302

1.019

0.995

0.82

0.9

1.044

1.185

0.917

0.862

0.836

1.284

1.217

1.245

1.265

0.862

1

1

1

1

0.785

1.004

0.814

0.95

0.941

1.009

1.143

1.185

1.43

0.912

1.044

cases where there is no ambiguity about definitions.36 To

avoid this problem, the scenarios were computed using

1983 data from NIPA increased by the ratio between the

CES estimatefor 2005 and the CES base in 1983.

Consumption in NIPA table 2.4 was converted into demand in the input-output categories using the ’’margins”

tables provided with input-output benchmarks (seethe

discussion in ch. 4)37 Government consumption was converted to I-O categories using similar tables provided by

the U.S. Department of Commerce.

Government spending scenarios were constructed in

the categories shown in NIPA tables 3.9, 3.15, and 3.16

of the National Income and Product Accounts. Consumption in the categories of NIPA tables 2.4, 3.9, 3.15, and

36 See Raymond Gieseman, “The Consumer Expenditure Survey: Quality Control by Comparative Analysis," Monthly Labor Review, March 1987, pp. 8-14, for

a comparisonof the CES data series with the National income and Product Accounts PCE data.

37u,s, Department of Commerce, hrveyofcurrent~ usiness, Op. Cit., fOOtnOte2.
479

3.16 were converted into consumption by amenity type 3. Most of the details are explained in that chapter. Box

using assumptions detailed in table A-8. A-1 provides details on the algorithms used to estimate

The trend scenarios were used as the basis for con- education costs.

structing the alternative scenarios described in chapter

Table A-7.—Personal Consumption Expenditures— 1983 and the Scenarios (billions of 1983 dollars)

Trend Trend ALT ALT

1983 % Share 3 % % Share 1.5% % Share 3% % Share 1.5% % Share

Amenity ($) of total ($) of total ($) of total ($) of total ($) of total

1) FOOD

Food at hom e 298.4

Food away from home : : : : 123.6

Tobacco, ... ... 28.0

Total 450.0

2) HOUSING

Shelter ... 330.7

Household operation 139.2

Utilities ., 111.0

Total 580. 9

3) TRANSPORTATION

Vehicles . ., 108.6

Vehicle maintenance 71.9

Gasoline and oi l 90.1

Air fare ... ., : : : : 15.3

Other transport 9.4

Total 295.3

4) HEALTH

Total 267.8

5) CLOTHING AND PERSONAL CARE

Personal care 34.4

Clothing . . . :, . : ::::... 167.4

Total 201.8

6) EDUCATION

Total 35.1

7) PERSONAL BUSINESS and

COMMUNICATION

Telephone .,, ,.. ,,, .,, .,, .,,,,,.,, 37.9

Stationery . .,.,,,... 5.8

Personal business , , , , . . , , , , , . . , , , , , , , , 132.5

Total 176.2

8) RECREATION & LEISURE

Entertainment services . . . 58.2

Entertainment commodities, ... 62.4

TV and sound ., ., . . . . ., ., 31.4

Lodging. . . . 13.3

Religion and welfare . . . . 47.6

Foreign travel.. ,,, ,, .,.,, ,,, ,, ,, 8.9

Total 221.8

Total of above. . . . . . . . . . . . . . . . . . . . . . . . . 2.228.9

13.4

5.6

1.3

20.2

14.8

6.2

5.0

26.1

4.9

3.2

4.0

0.7

0.4

13.2

12.0

1.5

7.5

9.1

1.6

1.7

0.3

5.9

7.9

2.6

2,8

1.4

0.6

2.1

0.4

10.0

100.0

433.0

235.0

31.2

699.2

586.8

306.9

163.9

1,057.6

191,8

134.4

81.2

41.8

12,7

461.9

650.0

72,2

378.9

451.1

43.3

78.7

11.1

282.9

372.7

154.3

149.8

87.6

41,8

91.2

23.1

547.8

4.283,8

10.1

5,5

0.7

16.3

13.7

7.2

3.8

24.7

4.5

3.1

1,9

1.0

0.3

10.8

15.2

1.7

8.8

10.5

1.0

1.8

0.3

6.6

8.7

3.6

3.5

2.0

1.0

2.1

0.5

12.8

100.0

402,0

146.8

35.5

584.3

465,2

221.0

137.7

823.9

140.2

97.5

75.2

22.3

10.3

345.5

420.3

51.5

238.7

290.2

41.4

66.2

8.0

171.3

245.5

81.1

104.9

61,0

23.3

65.0

14.4

349.7

3.100.5

13.0

4,7

1.1

18.8

15.0

7.1

4.4

26.6

4.5

3.1

2.4

0.7

0.3

11.1

13.6

1.7

7.7

9.4

1.3

2.1

0.3

5.5

7.9

2.6

3.4

2.0

0.8

2.1

0.5

11.3

100.0

387

259

22

668

565

302

95

962

192

135

41

52

10

430

500

72

446

518

56

111

455

183

165

106

84

119

657

4,246

9.1

6.1

0.5

15.7

13,3

7.1

2.2

22.7

4.5

3.2

1,0

1.2

0.2

10.1

11.8

1,7

10.5

12.2

1,3

2.6

0.3

7.8

10.7

4.3

3.9

2.5

2.0

2.8

15.5

100.0

321

164

429

201

80

710

162

114

36

27

7

346

418

52

281

333

48

92

8

201

301

97

115

78

51

86

427

3,093

10.4

5.3

0.8

16.5

13.9

6.5

2.6

23.0

5.2

3.7

1,2

0.9

0.2

11.2

13.5

1,7

9.1

10.8

1.6

3.0

0.3

6.5

9.7

3.1

3.7

2.5

1,7

2.8

13.8

100.0

SOURCE 1983 data from NIPA. Scenarios from OTA.
480

Table A-8.—Consumption by Amenity Group Derived From Consumption by the Personai and

Government Expenditure Categories of the Nationai income and Product Accounts (NIPA)

Personal Consumption Expenditures

(line numbers from NIPA Table 2.4)

Food:

3 food purchased for off-premise consumption

4 purchased meals & beverages

5 food furnished employees

6 food produced & consumed on farm

7 tobacco products

Housing:

24

25

26

29

30

31

32

33

34

37

38

39

40

42

43

owner-occupied nonfarm dwellings-space rent

tenant-occupied nonfarm dwellings-rent

rental value farm dwellings

furniture

kitchen & other appliances

china, glassware, tableware, and utensils

other durable house furnishings

semidurable house furnishings

cleaning & polishing preparations

electricity

gas

water & other sanitary services

fuel oil & coal

domestic services

other

Transportation:

65

66

67

68

69

70

71

72

74

75

76

78

7 9

8 0

81

new autos

net purchase of used autos

other motor vehicles

tires, tubes, etc.

repair, greasing, etc.

gas & oil

bridge, tunnel, ferry, toll roads

insurance premiums

transit systems

taxicabs

railway (commuter)

railway (except commuter)

bus

airlines

other

Health:

45 drug preparations and sundries

46 ophthalmic products

47 physicians

48 dentists

49 other professional services

50 privately controlled hospitals

51 health insurance

Clothing and Personal Care:

12

14

15

16

17

18

19

21

22

shoes & footwear

women’s & children’s clothing

men’s & boys’ clothing

standard military clothing

cleaning, storage and repair of clothing

jewelry & watches

other

toilet articles & preparations

barbershops, beauty salons, and health clubs

Education:

99 higher education

100 elementary & secondary schools

101 other

Personal Communication and Business:

41 telephone & telegraph

35 stationery & writing supplies

56 brokerage charges

57 bank service charges

58 services furnished without payment by financial

intermediaries

59 expenses of handling life insurance

60 legal services

61 funeral & burial expenses

62 other

Recreation and Leisure:

27

83

84

85

86

87

88

89

91

92

93

94

95

96

97

102

104

105

106

107

other

books & maps

magazines, newspapers, and sheet music

nondurable toys and sport supplies

wheel goods, sports equipment, boats, and pleasure

aircraft

radio & TV receivers

radio & TV repair

flowers, seeds, & potted plants

motion picture theaters

legitimate theaters

spectator sports

clubs and fraternal organizations

commercial participant amusements

parimutuel net receipts

other

religious & welfare activities

foreign travel

expenditures abroad by U.S. residents

less expenditures in U.S. by foreigners

less foreign travel remittance in kind

Government Consumption

(line number and table number from the National Income and

Product Accounts March 1986 version)

Food:

32–Table 3.16

61–Table 3.15

Housing:

26—Table 3.16

27–Table 3.16

30 & 31–Table 3-16

53 & 54–Table 3-15

55–TabIe 3.15

57–Table 3.15

25–Table 3.16

24–Table 3.16

26—Table 5.4

32—Table 5.4

40—Table 5.4

agriculture

agriculture

sewerage @ 47%a

sanitation @ 47%

energy @ 44%

housing & urban renewal

water and sewerage @47%

energy @ 44%

water @ 47%

housing and community development

new residential structures (except

mobile homes)

mobile homes

broker’s commissions
481

Transportation:

35—Table 3.16

36 & 37—Table 3.16

38—Table 3.16

67—Table 3.15

Health:

15—Table 3.16

16—Table 3.16

20—Table 3.16

24–Table 3.15

41 —Table 3.15

50—Table 3.15

Education:

10—Table 3.16

11 —Table 3.16

12—Table 3.16

13—Table 3.16

40—Table 3.16

20—Table 3.15

48—Table 3.15

78—Table 3.15

highways @ 62%

water and air transport @ 41%

transit and railroad @ 50%

transportation @ 31%

health services

hospitals

medical care support

health & hospitals

medical care

hospitals & medical care

elementary & secondary education

higher education

libraries and other education

other

labor training and services

education

education

labor training and services

Recreation and Leisure:

28—Table 3.16 recreational and cultural activities

56—Table 3.15 recreational and cultural activities

Government, n.e.c.

21 —Table 3.16 welfare & social services

44—Table 3.15 welfare & social services

45—Table 3.15 other

26—Table 3.16 sewerage @ 53%

27—Table 3.16 sanitation @ 53%

55—Table 3.15 water and sewerage @ 53%

6—Table 3.16

7—Table 3.16

17—Table 3.15

18—Table 3.15

19—Table 3.15

8–Table 3.1 6

35—Table 3.16

36 & 37–Table 3.16

38–Table 3.1 6

67–Table 3.1 5

41—Table 3.16

30 & 31 –Table 3.16

57–Table 3.1 5

39–Table 3.1 6

33–Table 3.1 6

66—Table 3.15

2–Table 3.1 6

2—Table 3.15

7—Table 3.15

74—Table 3.15

18—Table 3.16

26–Table 3.1 5

19—Table 3,16

31—Table 3.15

37–Table 3.1 5

73—Table 3.15

Defense and Space:

22—Table 3.16

10—Table 3.15

51 —Table 3.15

1—Table 3.9

police

fire

police

fire

correction

correction

highways @ 38%

water and air transport @ 59%

transit and railroad @ 50%

transportation @ 69%

commercial activities

energy @ 56%

energy @ 58%

economic development, regulation,

and services

natural resources

natural resources

administrative activities

administrative activities

international affairs

economic development

government employees

government employees

worker’s compensation

disability

retirement

retirement

insurance

unemployment insurance

postal service

veteran’s benefits and service

space

other

national defense purchases

aPercentage represent the portion of this expenditure category allocated to the particular amenity with the remaining percentage being attributed to Government,

n.e.c. This division was primarily based on the ratio of a commodity’s total intermediate use to the sum of its intermediate use Plus personal consumer expenditures

on the item. This ratio gives a rough indication of personal use as opposed to business or common use of an item; the latter was allocated to the omnibus Government

category while the former was assigned to the specific amenity. This division was based on data reported in U.S. Department of Commerce, Bureau of Economic

Analysis, “The Detailed Input-Output Structure of the U.S. Economy, 1977,” 1984.
482

Box A-l.—Calculating Education Costs in Different Scenarios

The purpose of this calculation is to compute the time allocations of students and teachers under different assumptions

about the use of computer equipment and the cost consequences of the scenarios. For simplicity it is assumed that a program

of instruction is divided into three parts: (i) a period during which students are using computers under comparatively loose

supervision, (ii) a period during which teachers are lecturing students, (iii) tutorial sessions where a teacher spends time

with one or a small number of students. [n addition to staff costs for teachers working in each task, education costs include

the capital costs of buildings, computer and other equipment, and other overhead costs.

The scenarios are constructed from assumptions on the following topics:

NC = The number of students per teacher in situations where only a room monitor is required.

NM = The number of students per teachers in lectures or similar situations.

NT = The number of students per teachers in tutorials.

R = The overall student teacher ratio in the school system.

FSC = The fraction of time students spend on a computer or other instructional hardware.

A calculation of costs also requires an estimate of overhead personnel required per student, the annualized average cost

of computers per student (a function of number of students per screen as well as the cost per screen), and the salaries of

each type of teacher.

The variables that must be calculated to estimate time allocations and costs are as follows:

FST = Fraction of student time spent in tutorials

FSM = Fraction of student time spent in lectures

FTC = Fraction of teacher time spent in computer monitoring

FTT = Fraction of teacher time spent in tutorials

FTM = Fraction of teacher time spent in lectures

These unknowns can be computed from the assumptions using the following equations:

a. The fractions showing student time use sum to 1 (FSC+FST+FSM = 1)

b. The fractions showing teacher time use sum to 1 (FTC+FTT+FTM= 1)

c. The student teacher ratio in tutorials is NT (FTT=R*FST/NT)

d. The student teacher ratio in tutorials is NC (FTC=R*FSC/NC)

e. The student teacher ratio in tutorials is NM (FTM = R* FSM/NM)

Equations a. and b. can be rewritten as follows:

f. FSM= 1-FSC-FST

g. FTT= l-FTC-FTM

Using equations d. and e. in equation 7 yields

h. (R/NT)*FST = l-( R/NC) *FSC-(R/NM)*FSM

Using equations h. and f., two of the variables can be calculated directly:

FSM = l-FSC-(NT/R)* l-(R/NC)*FSC-(R/NM) *FSM)

FSM* (l-NT/NM) = l-( NT/R} FSC*(l-NT/NC)

FSM = ((l-NT/R)+ FSC*(NT/NC-l))/(1-NT/NN) by symetry

FST = ((l-NM/R) +FSC*(NM/NC-l))/(1-NM/NT)

Since FSM and FST have been calculated, equations c., d., and e. can be used to calculate FTM, FTC, and FTT.

The number of computers required per student can be calculated from FSC and the number of students using a computer

at any given time. These variables can be used to calculate the cost of scenarios described in chapter 3.

Index

Acquisitions. See Mergers and acquisitions under Scale and

scope in Structural change entry,

After-tax income. See Income.

Agriculture. See Farming under Food entry.

Air transportation. See Transportation.

Amenity networks (see also Consumption recipe, Networks,

and individual Amenity categories as listed on p. 6)

61, 89-149, 159-160, 203-279, 395-422

Amenity categories defined 6, 62

Employment (by occupation category):

Clothing and Personal Care 407

Education 408

Food 396

Government (amenity) 418

Health 398

Housing 401

Occupational contributions to value-added 35

Personal Business and Communication 411

Recreation and Leisure 416

Transportation 404

In the consumption recipe 89-149

In the production recipe 203-279

Employment 395-422

Role of imports in production 9, 296

Spending 6, 7, 61, 65

In the scenarios 84

Structural change effects 40-51

Value-added contributed by the production sectors 8

Clothing and Personal Care 238

Education 241

Food 205

Health 213

Housing 223

Personal Business and Communication 253

Recreation and Leisure 266

Transportation 230

Anti-trust regulation. See Regulation and incentives, Scale

and scope under Structural change entry,

Apparel. See Clothing and Personal Care.

Appliances. See Housing.

Automobiles. See Trade, Transportation.

Baby boom generation (see a/so Demographics):

Employment 35, 241, 364, 367, 379, 387

Impact on wages 37, 372

Future of 55, 80, 82, 125, 196, 366, 373

Impact on:

Age structure of the U.S. population 71

Consumption recipes 71

Education 128

Household structure 72

—Spending patterns 20, 64, 71, 125

Banking. See Information businesses under Personal Business and Communication entry.

Benefits. See Compensation under Income entry, Employment.

Buildings. See Construction, Housing.

Bus travel. See Transportation.

Business entry and exit. See Scale and scope under Structural change entry.

Business structure. See Scale and scope under Structural

change entry.

Canada 18, 102, 103, 135, 322, 329, 456

High technology trade 322

Hours worked 69

Capital income. See Unearned income under Income entry.

Capital investment. See Production recipe,

Census of Service Industries (1982) 270

Clothing. See Clothing and Personal Care.

Clothing and Personal Care (see also Amenity networks) 6,

22, 46-47, 125-126, 159, 203, 204, 211, 236-240, 276,

406-408

Amenity category defined 62, 125

Amenity network trends 237-238

Apparel production 47, 237

Fashion products 125, 236

Robotics 71, 238

Technology 47, 154, 236, 238, 240, 298

Demand (consumption) 46, 125-126

Demographic effects 125

Income effects 46, 125

Price effects 125-126

Scenarios 125-126

Spending trends 46, 62, 63, 64, 65, 125

Technology effects 126

Trade effects 296

Employment 47, 369, 406-408, 439

Apparel production 47, 337, 349, 406, 407

By occupation category 406, 407

Fiber production 406, 407

Geography of employment 407

International comparisons 407

Job losses 407

Minorities 47

Productivity 47, 406-408

Retail stores 47, 406, 407

Safety 237, 406-408

Skill changes 47, 408

Technology effects 407, 408

Textile machinery production 406-407, 421

Textile production 47, 406, 407

Textile/Clothing Technology Corp. (TC)2 327

Trade effects 47, 298

Wages 407

Work conditions 236

Work teams 408

Fiber production 47, 236, 237

Technology 238

Geography of production 237

Government programs:

Research and development 47, 237, 327

Network production 47, 237, 276

Industry councils 237, 239

Information technology and 236, 238, 240

Inventories 47, 238-240, 327

485
486

Measuring productivity 47, 238-240

Production technology and 236-238

“Quick Response” 238-240, 327, 337

Trade effects 47

Network prospects 236

Retail stores 47, 237

Markdowns 239

Scale and scope 237, 240

Stock outs 239

Textile (fabric) production 47, 236, 237

Competition in 182

Technology 47, 239, 407

Textile machinery production 236, 286, 327

Trade:

Comparative advantage 309, 311

impact on structural change 177

Textile and apparel trade 47, 236, 237, 286, 296, 298,

321, 326-327

Trade regulations 237

College education. See Education.

Communications. See Personal Business and Communication.

Commuting. See Consumer demand under Housing entry,

Personal transportation under Transportation entry.

Comparative advantage. See Trade.

Compensation. See Income, Employment.

Competitiveness. See Trade.

Computer Assisted Design (CAD) 180, 227, 238, 240, 248,

275, 278, 324

Computer Assisted Manufacturing (CAM) 180, 275

Computer Assisted Tomography (CAT) 42, 55, 222, 245

Conglomerate integration. See Scale and scope under Structural change entry.

Constant dollars. See Inflation measurements.

Construction (see also Housing, Production sectors) 151,

439

Capital investment 401

Commercial buildings 401-402

Employment 45, 346, 385, 400-403, 404

Sectoral share of total U.S. employment 351

Volatility 403

Wages 401, 402

Work teams 401, 403

Heavy construction 224-225, 235, 401, 402

Scale and scope 225

Site erection 402

Intermediate demand for construction services 155, 223,

224

Commercial buildings 224

Hospitals 224

Industrial buildings 224

Infrastructure (highways, sewers, etc.) 224

Interest rates 224

Schools 224

Linkages to other production sectors 156

Occupational health and safety 228, 402

Production sector defined 149

Productivity 44, 45, 222, 226, 228, 401-402

Prospects for the Construction sector 222, 226-228

Role in the amenity networks 159, 229

Role in the production recipe 151-152

Sectoral share of GNP 165, 171

Demand effects (domestic and international) 174

Production recipe effects 175, 176

Technology 111-113, 222, 226-228

Trade 222, 225, 295, 317, 330-331

Value-added contribution to Housing amenity network

223

Consumer demand. See Consumption recipe, Spending.

Consumer Expenditure Survey (by the Bureau of Labor Statistics) 73

Consumption networks. See Amenity networks, Consumption recipe, Networks.

Consumption recipe (see also Amenity, Amenity networks,

Demographics) 22-24

Combined effect of demographics, income, and prices 80

Complexity of consumer choice 70

Consumer households (see also Demographics) 71-73

Defined 72

Forecasts 73

Household income 71

Household type 71

Spending patterns 71, 73-74, 462

Consumption networks 12-13, 55-85

Consumption recipe defined 7-8, 22, 61

Forces affecting the consumption recipe 71-80

Income effects (see also Income) 73, 75-81

Niche markets 22, 31, 70-71, 181

Demographic effects 71

Technology effects 71

Trade effects 285, 307

Prices 56, 61, 64-65, 71, 80-81

Elasticity effects 80

Impact on demand scenarios 83

Trade effects 281

Regulation and incentives 23-24, 445, 446-447

Consumer information 447

Education 446

Environment 24, 447

Government procurement 24, 297, 299, 446, 454

Labeling 24, 447

Personal income taxes 24, 447, 449

Policy objectives 446

Protection of consumers 21, 23, 447

Regulation 446-447

Subsidies 24, 56, 61

Scenarios (consumption scenarios for individual amenity

categories are found under the listings for each category, see p. 6) 425, 426, 433, 434, 439

“Alternative” 426, 434

“Trend” 426

1.5 Percent GNP growth trend 434

3 Percent GNP growth trend 434

Spending trends 63-66

By households 73-74

Energy and natural resources 22

Government spending 65-66, 68

High-value products 22

Income effects 79-80

Services 22, 65, 67
487

Time use 56, 66-70

Acquisition of information 67

Demographic effects 69

Housework 68-69

Impact on purchasing decisions 70

international comparisons 69

Leisure (see also Demand under Recreation and Leisure

entry) 22, 68-69, 116, 137, 139-140

Market/non-market economy 67

Technology effects 140

Trading time and money 67-68

Trading work and leisure 68

Trends 68-70

Work (see also Hours worked under Employment entry) 22,68-69, 116, 198-199, 366, 387, 389

Trends 22-23, 63-71

Contingent work force. See Employment.

Corporate training. See Education, Employment

Current dollars. See Inflation measurements.

Data entry and manipulation occupations 53, 395, 436

Occupation category defined 344

Role in the production sectors 346

Share of U.S. employment 358

Defense:

Amenity (see also Amenity categories) 6, 35, 159

Amenity category defined 62

Spending trends 62-66, 68

Industrial policy 33, 453

Production sector 149

Research programs 30, 452-453

“Ripple” into civilian economy 452-454

Defense Science Board 297

Deficits. See Government, Trade.

Deflators. See Inflation measurements.

“Deindustrialization.” See Structural change.

Demand. See Consumption recipe.

Demographics (see also Consumption recipe, Labor supply

under Employment entry):

Divorce rates 83

Fertility rates 474

Households:

Impact on consumption recipes 71-74, 80, 81

Impact on income distribution 22, 38, 78, 376

Size 20, 72

Structure (household type) 20, 22, 72, 110, 118

Immigration 83, 364, 367, 475

Impact on:

Consumption scenarios 83

Education 48, 128, 131

Recreation and Leisure 140

Time use 69

Transportation 46

Population:

Baby boom effects 72

Geography 191-192

Movement 29, 194-195, 196-197

Depreciation. See Income, Structural change.

Direct Requirements Table 152

Displaced workers. See Employment.

Education (see also Amenity networks, Learning Research

institute) 6, 22, 36, 47-49, 126-132, 159, 240-251,

374-380, 408-411

Amenity category defined 62

Amenity network trends 241

Demand (consumption) 47-48, 126-132

Adult education 48, 128, 130-131, 251, 379-380, 459

Colleges and universities 48, 127, 128

Corporate training 127, 128, 130, 241-243, 245, 248-

251, 382-385, 459

Demographics and 48, 128, 131

Enrollment trends 129, 131

Government spending 66, 68, 242

International comparisons 128, 130

Literacy trends 128-130, 248

Minorities 381, 382

Primary and secondary schools (K-12) 48, 128, 130-131

Productivity of learning 47, 243-244, 248-250, 458-459

Remedial education 129-130, 384

Scenarios 131-132

Spending trends 47, 62-65, 128-129

Employment (in Education) 346, 349, 408-411

By occupation category 408

Corporate training 408

Definition of tasks 132

Differentiation and specialization of tasks 49, 241, 337,

368, 409

Educational hierarchy 372

Job quality 408-409

Part-time work 408-409

Productivity 408

Skills 246, 408-409

Supply and demand for teaching 410-411

Technology effects 409

Wages 49, 409-410

Women and teaching 49, 410

Impact on U.S. competitiveness 126, 127, 130, 308, 456,

458-459

Impact on employment (economy-wide) 34, 47, 48, 240-

242, 356, 370, 379, 386, 387, 395

Income 241, 364, 373, 376, 378-380

Productivity 378-379

Skills 126-127, 242-243, 246, 337-338

Unemployment 242, 381

Impact on GNP growth 379

Impact on health 47, 99

Information technology 47, 48, 240-251, 451, 459

Artificial intelligence 244

Communications 48, 242, 244-247

Diagnostics 48, 243-244, 250

Group learning 245-247

Individualization 244

Simulations 48, 244-248

Technology implementation 49

Measuring amenity in Education 126-127

Network prospects 240-241

Teaching institutions (production) 240-251

Capital investment 48, 241, 251, 354

Colleges and universities 250-251

Geography 241, 251
488

Information technology and 48, 459

Instruction techniques 48, 131, 243-247, 249, 250, 459

“Intensity” (spending per student) 131, 247

Primary and secondary schools 48, 244, 250, 251, 410,

461

Productivity 47, 240, 243, 247-250, 408, 458

Regulation 241

Research and Development 48, 49, 246, 458-459

Scale and scope 241, 250-251, 458

Education and health professional occupations:

Occupation category defined 344

Role in the production sectors 346

Share of U.S. employment 358

Elderly (see also Demographics) 20

Eldercare by employees 391

Employment 365

Demand for work 382, 286

Food demand 90

Health status 73, 74, 217-219

Households 22

Housing demand 43, 73-74, 106

Impact on consumption recipes 71

Income patterns 376

Recreation and Leisure demand 140

Spending patterns 73-74

Transportation demand 115, 120-122

Employment (see also Employment under individual

amenity categories as listed on p. 6) 337-422

Benefits 190, 377, 385-386

Compensation (see also Income) 342, 364, 368, 372-381

As a percent of GNP (value-added) 342-343, 373-375

As a percent of personal income 373

Benefits (as a percent of compensation) 37, 373, 374

Capital investment effects 38, 376

Distribution 37-38, 338, 364, 373, 375-378

Forces affecting distribution of compensation 378-380

Gender effects 373, 376, 377, 380, 400

In the production recipe 345

Industry trends 37

Occupational segregation and 380

Productivity and 37, 343-344, 353, 373, 376

Profit sharing 382, 384

Ranked by industry 376-378

Ranked by occupation 378

Trade effects 372, 374

Wages 37, 78, 189-190, 78, 338, 343, 373, 374, 380,

386

Contingent work force 382

Growth 38, 383

Displaced workers 39, 358, 382, 460

Advance notice of plant closings 388, 459

Movement 29

Time spent unemployed 356-358, 388

Education effects 47, 48, 240, 364, 370, 373, 376, 378-

380, 386-387, 395

Adult and corporate training 241-242, 245, 248, 249-

251, 379-380, 382-385

Skills 243, 246

Employment by occupation and industry (matrix) 358,

360

Flexibility and job security 39, 189, 223, 364, 368, 381-

389, 445, 455-462

Desire for more or less work 386

Employee strategies 38, 338, 363, 386-389, 458, 461

Employer strategies 38, 358, 363, 368, 382-386, 461

Home based work 106, 460

Hours worked (“flex-time”) 20, 38, 68-69, 366, 382,

383, 386, 387, 389, 461

Impact on incomes 389

Impact on productivity 382, 461

Profit sharing 382, 384, 460

“Raiding” of employees 383, 386

Scale and scope effects 382, 385-386

Training and retraining 384-385, 459

Geographic effects 28, 194-195, 198-200

In the amenity networks 395-422

Job quality 338, 364, 367-392

Job satisfaction and alienation 39, 68, 363-364, 368,

389-392

Occupational health and safety 39, 209, 228-230, 237,

242, 338, 363, 368, 390-392, 406, 461-462

Stress 338, 390, 391, 414, 421, 422, 462

Labor productivity (see also Productivity) 351, 353, 378,

382, 383, 390

Connection with capital investment 353-354

Impact on shares of total U.S. employment 338, 341,

351, 352, 357, 359

Manufacturing 279

Within industries 358

Labor supply 35, 363, 364-367, 445

Age structure of the work force 364-398

Baby boom generation 35, 364, 366, 367, 372, 378,

379

Education effects 36, 363, 458

Elderly 35, 365, 376, 382, 386, 391

Immigration rates and 364, 367

Impact on GNP growth 367

Impact on income distribution 38

Impact on productivity 378

Labor force growth 364-365

Minorities 35, 364, 367, 380-381, 387, 389, 438, 458

Participation rates 20, 140, 365-367, 373

Skill supplies 363

Structural change effects 35

Women entering the work force 35, 364-366, 378, 380,

381, 438

Linkages 346, 348

Manufacturing 26, 27, 341-343, 346, 349, 351, 370, 373,

377, 383, 419-422

Non-cash rewards for work 364

Occupations (see also individual occupation categories as

listed on p. 344):

Allocated to amenity categories 10, 349-350

Allocated to production sectors 10, 344, 347

Changing definitions 35, 337, 356, 370, 395, 438

Characteristics 346
489

Education effects 36, 356, 380

Job growth by occupation category 36, 355-357

Measuring skill levels in terms of occupations 342

Role of occupation categories in the production sectors

344

Scale and scope effects 36, 337, 356

Value-added contributions to amenity categories 35

Part-time work 38, 338, 382-383, 458

Benefits 377, 388, 460

Involuntary part-time work 38, 364, 388

Wages 388

Production networks and 337-392

Hierarchical structures 370-372

Monitoring 371, 389

Work teams 337, 342, 356, 370-371, 383

Regulation and incentives 39, 445, 455-462

Adult education 39, 384-385, 445, 459

Day care 461

“Flex-time” 389, 461

Health insurance 39, 460

Learning Research Institute 39, 458-459

National service 459

Occupational health and safety 39, 390, 461-462

Pensions 39, 460

Policy objectives 458

Profit sharing 39, 382, 384, 460

Welfare and reemployment 39, 461

Role in production recipe 34-39, 338, 341-349

Defined 9

Regulation and incentives 13

Skills 342-348

Scale and scope effects 189-190, 370-372

Scenarios:

Labor productivity 425, 428-430, 433, 434

Participation rates 367, 436

Staffing patterns 425, 426, 431-434, 436

Self-employment 38, 183-184, 383, 385

Services 27, 341, 343-344, 346, 377, 383

Skills 39, 338, 364, 367-372

Bargaining power and 363, 364, 370, 372

Connection with amenity 341, 349, 358, 368

Connection with pay 34, 37, 338, 343, 363, 372, 373

Demand for skills 363, 368, 458

Education effects 127, 242-243, 338

Flexibility 39, 338

“General” v. “specific” skills 372

Impact on trade 286, 308

Literacy skills 364

Occupation patterns and 341

Technology effects 34, 368-372

Structural change effects (impact on job shares) 34, 337,

338, 346, 363

Domestic demand 338, 341, 351-352, 357, 359

Production recipe effects 338, 341, 351-352, 357, 359

Staffing pattern changes 387, 389

Trade 338, 341, 351-352, 357, 359

Technology effects 34, 356, 363, 364

Temporary work 38, 338, 372, 382-383, 389, 458

Benefits 377, 460

Growth 372

Trade effects 9, 31, 281, 287, 290-291, 294-295, 299, 312,

321

Jobs gained by exports 291, 293

Jobs lost to imports 291-292, 294-296

Linkages 294-296, 333

Transfer payments 374

Trends in job shares:

By occupation category 355-360

By production sector 349, 351-354

Unemployment rates:

Education effects 36, 38, 242, 387

Future of 436

Race effects 381

Seasonal variation 403

Unions 200, 374, 382, 384, 385, 387, 388

Workplace hierarchy 337

Energy and natural resources (see also Housing, Natural Resources, Transportation):

Electric generating facilities 182, 277

Employment:

Impact on linkages 346, 348

Energy:

Forecasts 445

Impact of oil prices on inflation measurements 168

Impact of oil prices on structural change 170, 171, 174-

176, 230

Petroleum availability 19, 330

Trade effects 329-330

In the scenarios 426, 428, 434

Raw materials 277-278

Trade effects 330

Trade effects 285, 288, 296, 297, 299, 303, 304, 307, 315,

317, 328-330

Comparative advantage 281, 310-311, 313

Linkages to other sectors 295

Environment. See Energy and natural resources, Health,

Transportation.

Environmental Protection Agency 214

Exports (see also Trade):

Amenity network 159, 439

Fabric and Apparel Linkage Council (FASLINC) 239

Families. See Households.

Family farms. See Farming under Food entry.

Family income. See Income.

Farming, forestry, and fishery occupations 53, 395, 432,

439

Employment growth 355, 356

Occupation category defined 344

Share of U.S. employment 357, 359

Farms. See Food.

Federal Express 180, 248, 261

Firm size. See Scale, Scope under Structural change entry.

Final demand. See Consumption recipe.

Flexible manufacturing systems (see also Manufacturing)

180, 275, 276, 419-421

Food (see also Amenity networks) 6, 22, 40-41, 89-94, 147,

159, 203, 212, 229, 395-398

Amenity category defined 62

Amenity network trends 159, 203, 205
4 9 -

Consumption (demand) 6, 40, 89-94

Demographics 90, 210

Food quality and variety 89-91

Grocery stores (food at home) 40, 89, 210

Income effects 90

Nutrition (health effects) 40, 89, 91-94, 447

Prices 89, 210

Restaurants (food away from home) 40, 89-91, 93-94

Scenarios 82, 84, 94-95

Spending trends 40, 62-65, 89, 90

Trade effects 297

Employment 6, 40, 338, 349, 395-398, 439

By occupation category 395-396

Farm income 395-396

Farm operators 183, 205, 337, 338, 355, 372, 395-396

Farm workers 205, 368, 395-396

Food manufacturing 206, 395-397

Food services (non-restaurant) 210

Grocery stores 41, 204, 349, 395, 397

Job quality 395

Meat cutting and packing 41, 204, 209, 397

Occupational health and safety 209, 396-397

Part-time work 41, 397

Productivity 206, 209, 395-397

Restaurants and other food services 204, 210, 349, 395,

397-398

Skill demands 397

Technology and 41, 204, 396, 397

Trade effects 291

Unionization 397

Wages 342, 397

Wholesale outlets 395, 397

Government programs 41

Product safety 205

Research and development 41, 205, 451, 454

Share of spending for Food 68

Subsidies 41, 206

Trade 41, 456

Measuring amenity 40, 89

Network prospects 204-206, 211-212

Production 40-41, 143, 203-212

Advertising 41, 208

Biotechnology 205, 206, 323

Coupons 41, 211, 397

Farm technology 204, 205

Farming 40, 41, 182, 203, 205-206, 329.454

Food irradiation 207

Food manufacturing 41, 205, 206-208, 211

Geography of production 206

“Green revolution” 12, 329

Grocery stores 41, 203, 205, 208-211, 354

Information technology 40, 41, 204, 208, 211, 395, 397

Margins 151

Meat cutting and packing 208-209

Post-harvest technology 204, 206-208, 211-212

Productivity 40, 41, 204-209, 211-212, 395-397

Research and Development 40, 207-208, 329, 451

Restaurants and other food services 41, 203, 205,

20&209

Scale and scope 40, 185, 204-206, 208-210, 396, 450

Scanners (using bar codes) 41, 211

Specialization (to niche markets) 204

Warehousing 209

Wholesale outlets 208-211

Trade 40-41, 297, 309-311, 315, 321, 328-329

Bulk commodities 41, 204, 286, 297, 328-329

High-value products 40, 41, 204, 297, 328-329

Manufactured products 206

Technology transfer 41, 304, 329

Food and beverage preparer occupations 53, 417, 436

Employment growth 356

Occupation category defined 344

Role in the production sectors 346

Share of U.S. employment 358

Forecasts. See Scenarios.

France 50, 135, 224, 452, 456

High technology trade 322, 333

Hours worked 69

Machine tool trade 328

Future. See Scenarios.

Geography of production. See Income, Structural change,

Trade.

Government (see also Regulation and incentives):

Amenity network 159, 439

Employment 349, 417-419

Data collection 462

Employment in the Federal Government 387, 417-419,

460

Growth 417

Productivity 418-419

Skill changes 417-418

Technology effects 418-419

Government organizations. See individual listings.

Role in the U.S. economy 4

Share of spending 7, 23, 56, 62, 65-66, 68, 164, 446

Scenarios 83-84

Great Britain 15, 19, 102, 103, 135, 304, 308, 328, 407,

421, 452, 456

High technology trade 322

Hours worked 69

Gross national product (GNP) (see also Sectoral share of

GNP under Structural change entry):

As consumption 61

Defined 62

Growth 367, 373, 425

Non-cash economy and (“imputed” values) 61, 63

Personal Consumption Expenditures (PCE) 64, 83

Savings and investment 61, 65, 157, 305, 449

Business savings 65, 449

Foreign investment 65, 304-305

Government savings (structural budget deficit) 65

Personal savings 65, 449

Trade as a percent of GNP 303, 317

Gross Private Fixed Investment (GPFI) 151, 153

Defined 151

Producers’ Durable Equipment (PDE) 151, 153, 430

Spending on information equipment 16, 153

Structures 151, 153
491

Handicapped:

Transportation demand 123

Recreation and Leisure demand 133

Handlers, equipment cleaners, helpers, and laborers (occupation):

Occupation category defined 344

Health (see also Amenity networks) 6, 22, 36, 41-43, 94-

105, 159, 203, 212-222, 398-400

Amenity category defined 62

Amenity network trends 212-213

Employment 337, 338, 342, 346, 349, 358, 368, 398-400,

439

By occupation category 398

Education effects 399-400

Home health care agencies 398-400

Hospitals 390, 399, 400

Job growth in 398, 399

Minorities 400

Nurses 42, 43, 213, 337, 368, 372, 398-400

Nursing homes 398

Physicians 43, 337, 372, 398

Professional managers in 399

Subcontracting 400

Technology effects 399-400

Unions 400

Wages 386, 398, 400

Women 42, 399, 400

Government programs:

Health care financing 43

Health insurance 43, 96, 460

Hill-Burton Act 213, 217

Medicaid 96, 103, 213, 218

Medicare 96, 103, 213, 219

Research and development support 451

Share of spending for Health 68

Health businesses (production) 212-222

Capital investment 215, 354

Competitive markets and 96

Day care 218

“DOC in a box” 43, 215

Environmental protection 214

Geography of production 215, 216, 220-221

Group practices 43, 179, 215, 216, 220

Health care financing 43, 215, 220

Health insurance 43, 213, 214, 217

Health maintenance organizations 43, 100, 179, 216-

217, 372

Home health care 42, 43, 134, 135, 219-220

Hospices 43, 218

Hospitals 42, 43, 179, 213, 215, 217-218, 354, 398, 399

information flows in 95-96

Labor costs 215

Nursing homes 43, 218-219

Pharmaceuticals 219-220

Private practitioners 43, 179, 213-216, 220

Productivity 220-222

Regulation and deregulation 213-214

Scale and scope 217-218, 451

Sectoral structure 181, 213

Technology 42-43, 213, 214, 219, 220, 222, 245, 400

Health status (consumption) 94-105

Access to health care 98, 101-102

Accidents 100, 116, 337

Acquired Immune Deficiency Syndrome (AIDS) 104

Acquisition of information 95-96

Alcohol effects 98, 99

Cancer 91-92, 95, 97-98, 104, 105

Causes of death 97

Clinical treatment effects 97, 100-103, 218

Diet and nutrition 41, 91-94, 98-100

Disease prevention 41, 94-95, 97, 98, 100, 101

Education effects 47, 99

Environmental factors 41, 94, 100-101, 391

Gender differences 99

Health insurance and 103

Health promotion 41, 94, 100

Heart disease 91-92, 95, 97, 99, 104

Hereditary factors 98, 99

Income effects 99, 100, 103

Infant mortality 42, 97, 98, 100, 103

International comparisons 102-103

Life expectancy 42, 94, 97-101, 103

Lifestyle effects 42, 94, 98-100

Morbidity 99

Mortality 42, 97-101

Occupational health and safety. See Employment.

Pharmaceuticals and 100, 102

Prices 96, 213, 215, 217

“Production function” for Health 95

Regional differences 98

Scenarios 82, 103-105

Smoking 97-101, 214

Societal attitudes and 98, 99

Spending trends 41, 42, 62-65, 95, 104

Stress 94, 99-100, 337, 338, 390-391

Technology effects 98, 101, 134-135, 219

Measuring amenity 42

Network prospects 212, 220-222

Trade:

Drugs and medical devices 321, 325-326

Health Care Financing Agency 219

Health maintenance organizations. See Health.

High Wage Manufacturing (see also Production sectors):

Employment:

Labor productivity 351

Sectoral share of U.S. employment 349, 351

Skill levels by occupation 346

Wages 374

Intermediate demand 154

Linkages to other sectors 154, 156, 158, 171

Production sector defined 149

Role in the amenity networks 159, 213, 229

Scenario effects 426, 432, 433

Sectoral share of GNP 25, 165, 171-172

Demand effects (domestic and international) 174

Production recipe effects 175, 176

Trade:

Impact on employment 291

Indirect effects 289, 290

Home building. See Housing, Construction.
492

Home ownership. See Consumer demand under Housing

entry.

Horizontal integration, See Scale and scope under Structural

change entry.

Hospitals. See Health.

Household income. See Income.

Households. See Consumption recipe, Demographics.

Housing (see also Amenity networks, Construction) 6, 43-

45, 105, 114, 159, 222-228, 400-403, 439

Amenity category defined 62

Amenity network trends 222-223

Consumer demand (consumption) 105-114

Affordability 44, 107-113

Commuting and 44, 106, 110-111, 117, 198-199

Elderly 43-44, 106

Energy use 44, 107, 109, 112-113, 134, 447

Financing 44, 109-110, 113, 223

Government spending and 66, 68

Handicapped and 106

Home entertainment 106

Home ownership 44, 107, 108, 110

Hopelessness 44, 110

House density 107

House quality 106-113

House size 107

Housing quality 44

Income effects 44, 110, 111, 113

Investment in home equity 107

Land costs 44, 109, 223

Location 106, 109, 111, 113

‘

(Manufactured housing” (mobile homes) 109

Movers 106, 195-197

Renters 44, 108, 110

Scenarios 84, 113-114

Spending trends 43, 44, 62-65, 70, 107-109, 113

Tax laws and 110, 113, 447, 449

Technology and 111-113

Trade effects 297

Utilities 114

Zoning laws and 109

Employment 45, 337, 349, 400-403

Architecture and engineering 402-403

By occupation category 400, 401

“Craft” traditions 401-402

Factory construction 45, 224, 402-403

Flexibility and volatility 223, 401, 403

Job quality 402-403

Labor productivity 401-402

Real estate 349

Skill changes 45, 402-403

Technology effects 401-403

Work teams and 227, 372, 401, 403

Government programs 45, 107

Building codes and inspection systems 222-224, 226

Communications technology 45

Energy pricing 45, 112

Research and development 454

Tax credits 226

House construction (production) 222-228

Appliances 112

Architecture and engineering 112, 227, 402, 403

Building components 227-228

Capital investment 44, 45, 222-224, 401

Computer Assisted Design (CAD) 227-228

Energy and natural resource use 45, 109, 112, 223,

226, 227

Factory construction 44, 45, 111, 222, 224, 225, 227-

228, 402-403

Home showrooms 45, 71, 222, 227

Labor costs 109

“Manufactured housing” (mobile homes) 224, 225, 403

Metal buildings 225, 228

Productivity 45, 222, 226-228, 401-402

Remodeling and renovation 226, 228

Research and development 44, 222

Roofing 228

Scale and scope 44, 183, 223, 225, 451

Subcontracting 225, 226

Technology 45, 111-113, 222, 226-228

Traditional construction 44

Measuring amenity 105-106

Network prospects 222, 226-228

Trade:

Appliances 45, 222-223, 297, 330

Building components 297, 330

Energy 297

Housing units 281, 297, 330

Imports. See Trade.

Income (see also Consumption recipe):

After-tax income:

Distribution 38, 76, 77

Compensation (see also Employment) 342, 372-381

As a percent of GNP 373-375

Benefits 37, 373, 374

Wages 37, 373-375

Productivity and 37, 343-344, 353, 373, 376

Depreciation:

As a percent of GNP 373-374

Structural change effects 37, 374

Distribution (see also Low-income households) 363,

375-381

Adjusted for family size 376

After-tax income 38, 76, 77

Among minorities 373, 381

Compensation 37, 338, 364, 373, 375-378

Demographic effects 22, 38, 78, 376

Family income 78, 375-376

Forces affecting income distribution 76-78, 378-380

Gender effects 37, 78, 364, 373, 376-377, 380

“Gini” coefficient 77-78, 377

Impact on consumption recipes 56, 71, 75-78

Impact on employment 52

Impact on scenarios 75

Impact on sectoral share of GNP 52

Impact on spending 22, 79-80, 125

Occupational segregation and 380

Ranked by industry 378

Ranked by occupation 378

“Top code” 77-78, 318
493

Trade effects 310, 374

Trends in 75-78

Unearned income 78

Wages 37, 77-78, 380

Education effects 364, 373, 376, 378-380

Flexible work schedules and 389

Geography 28

Impact on consumption recipes 71, 75-81

Impact on spending:

Clothing and Personal Care 46

Health 99

Net worth 78

Distribution 78

Homeowners 108

Renters 108

Personal income 373, 374

Transfer payments 374

Aid to Families with Dependent Children 374

As a percent of personal income 373

Employer contributions to health insurance 374

Employer contributions to pensions 374

Employer contributions to social insurance 374

Unearned income (capital, property-type income) 37, 342,

374, 375

As a percent of personal income 373, 374

Impact on income distribution 38, 78, 375-376

Interest income 374

Industrial organization. See Scale and scope under Structural change entry.

Industries. See Production sectors; for a disaggregated list of

industries that comprise the production sectors, See

Table A-2 in the Appendix.

Inflation measurements (see also Analytical methods):

Constant v. current dollars 64, 166-168

Deflators 167-168

Computers and 168

Imports and 168

Prices 64, 166-167

information distribution occupations 432

Occupation category defined 344

Information technology. See Personal Business and Communication, Technology, Transactional Activities.

Input/output analysis (see also Analytical methods) 31, 147,

462

Defined 148

Used to produce the scenarios 426

Interconnections. See Linkages.

Intermediate demand. See Production recipe.

Japan 18, 44, 102-103, 130, 135, 182, 262, 269, 285, 307,

402, 408, 420, 421, 450-452, 454, 456, 457, 461

Automobile trade 326, 327, 334

Business services trade 332

Construction industry 224, 225, 227, 402

Employment 373

Energy and natural resource trade 328, 329

Exports 313

High technology trade 321-326, 333

Innovation 314

Investment in the United States 304

Machine tool trade 327, 328

Semiconductor production 321, 323-325, 330, 333, 334

Software trade 333

Textile and apparel trade 327

Trade policy 298, 457

Trade with the United States 287, 291, 305, 306

Labor supply. See Demographics, Employment.

Learning Research Institute (see also Education) 30, 39,

458-459

Leisure industries. See Recreation and Leisure.

Linkages 143, 144, 149, 154, 161

Direct effects 154-155, 159

Direct and indirect effects 155-159

Employment linkages 346, 348

In the scenarios 428, 430

Manufacturing/Services 26, 32, 65, 143, 156, 278, 294,

343

Output multipliers 156-158

Technology effects 155

Trade linkages 32, 158, 281, 285-286, 294-296, 333, 455

Impact on research and development 296

Literacy. See Education.

Local Area Networks (LANs) 255

Low-income households (see also Distribution under Income entry):

Food demand 204

Health demand 103

Housing demand 44, 110, 111

Recreation and Leisure demand 141

Regulation and incentives:

Subsidies 24

Spending patterns 75

Data collection problems 462

Transportation demand 120-122

Low Wage Manufacturing (see also Production sectors):

Employment 428, 432

Sectoral share of U.S. employment 349

Intermediate demand 154

Linkages to other production sectors 154, 156, 158

Production sector defined 149

Sectoral share of GNP 172

Demand effects (domestic and international) 174

Production recipe effects 175, 176

Trade:

Comparative advantage 311

Direct effects 289

Machine operators, assemblers, and inspectors (occupation)

432, 439

Displacement 357

Occupation category defined 344

Share of U.S. employment 358-360

Magnetic Resonance Imagery 42, 222, 245

Managers and management support occupations 53, 417,

432, 436

Employment growth 355, 356

Occupation category defined 344

Role in the production sectors 346

Share of U.S. employment 357-360
494

Manufacturing (see afso High Wage Manufacturing, Low

Wage Manufacturing, Medium Wage Manufacturing)

32, 39, 45, 181, 273-279, 419-422, 462

Advanced production technology 274-276

“Batch” v. “mass” production 276, 419, 420

Flexible manufacturing systems (FMS) 180, 275, 276,

419-421

Robotics 275

Capital investment 354

Employment 26, 27, 35, 341, 342, 346, 348, 351, 358,

370, 373, 377, 419-422

Displacement 357, 383

Education effects 421

Equipment maintenance 421-422

Occupational health and safety 421, 422

“Raiding” 421-422

Self employment 183-184

Skill changes 276, 419-421

Technology effects 419-421

Transportation and 46

Wages 407

Work teams 421

Energy use 275

Foreign ownership of U.S. firms 304

Geography of production 190, 191, 194, 199-200, 231

In the scenarios 52, 425, 426, 428, 430-432, 434, 436,

439

Inventories 275

Linkages to other sectors 26, 149, 278, 281, 294-295,

343, 346, 348, 349

Direct effects 154

Direct and indirect effects 155, 158, 159

Management techniques 274, 420

Prices 279

Problems with defining “manufacturing” 150

Production recipe changes 274-276, 278-279

Role of services 278

Productivity 149, 167, 274, 275, 277-279, 353, 419, 454

Capital 279

Energy 277, 279

Labor 278

Materials 278-279

Multi-factor 279

Services 279

Regulation 273, 274

Research and development effects 153, 188, 274

Scale and scope 28, 84, 185, 186, 274-275, 278

Mergers and acquisitions 278

Sectoral organization 183

Share of GNP 165, 166

Trade effects 158, 289-291, 294, 314, 317, 321-328

Comparative advantage 309, 312, 313

Margins. See Production recipe.

Median income. See Income.

Medicaid 96, 103, 213, 218, 460

Medicare 96, 103, 213, 219

Medium Wage Manufacturing (see also Production sectors)

428, 430-432, 436, 439

Employment:

Labor productivity 351

Intermediate demand 155

Linkages to other production sectors 156

Production sector defined 149

Role in the amenity networks 159, 213

Sectoral share of GNP 172

Demand effects (domestic and international) 174, 175

Production recipe effects 175, 176

Trade:

Impact on employment 291

Indirect effects 289, 290

Mergers. See Scale and scope under Structural change

entry.

Mining Enforcement and Safety Administration 214

Minorities (see also Demographics):

Employment 35, 47, 200, 338, 364, 367, 380-381, 400,

405

Education effects 381, 382, 458

Hours worked 387

Income 389

Housing demand 108, 111

In the scenarios 82, 438

Recreation and Leisure demand 137

Transportation demand 120

“Modification of Final Judgement” decision 248, 255

Multi-factor productivity. See Productivity.

Multifiber Arrangement 177

Multiple system operators (MSOs) 266

National Food Consumption Survey 93

National Income and Product Accounts 61, 151, 288, 476,

478-479 See table A-8 of the Appendix.

National security. See Defense, Trade.

National Tourism Database Program 273

Natural Resources (see also Energy and natural resources,

Production sectors) 143, 426, 428, 431, 434, 439

Employment:

Labor productivity 351

Sectoral share of U.S. employment 349, 351

Intermediate demand 154

Linkages to other production sectors 154, 156, 158

Production sector defined 149

Role in the amenity networks 159, 229

Sectoral share of GNP 25, 165, 170, 171, 175

Demand effects (domestic and international) 174, 175

Production recipe effects 175, 176

Trade:

Indirect effects 289, 290

Net worth. See Income.

Networks (see also Amenity networks, Consumption networks, Production networks) 5-12, 40-51

Characteristics 10-12, 143, 445

Defined 6-10

Niche markets. See Consumption recipe.

Occupational health and safety. See Employment.

Occupational Safety and Health Administration (OSHA) 214

Occupations. See Employment; See also occupation categories as listed on p. 344 (for a disaggregate list of occupations that comprise the major occupation categories, See Table A-3 of the Appendix).
495

Organization of Petroleum Exporting Countries 116, 304,

314, 329, 330

Trade with the United States 287

Other customer contact occupations:

Occupation category defined 344

Other professional occupations 432, 436

Occupation category defined 344

Share of U.S. employment 358

Other service occupations 53

Employment growth 356

Occupation category defined 344

Share of U.S. employment 358

“Out-sourcing. ' See Production recipe.

Output multiplier. See Linkages.

Part-time work. See Employment.

Participation rate, See Employment.

PBX (private branch exchange) systems 254, 286, 321, 325

Personal business. See Personal Business and Communication.

Personal Business and Communication (see also Amenity

networks) 6, 49-50, 132-136, 159, 203, 229, 251-264,

266, 272, 411-416

Amenity category defined 62, 132

Amenity network trends 252-253

Demand (consumption) 49, 132-136

“Broadcast” v. “narrowcast” 134

Direct marketing 49

Electronic media 49, 133

Entertainment 49

Government spending 68

Home information 134-135

Nationwide databases 135

Personal business 49, 134-136

Point-to-point 49, 133, 134, 261, 266

Postal services 49, 133

Prices 136, 253, 255

print media 133, 134

Scenarios 82, 84, 136

Spending trends 6-7, 49, 62-65

Technology and 133-136

Telecommunications 49, 133-135

Employment 411-416

Banking and finance 411, 412

By occupation category 411

Clerical 50, 256, 337, 371, 412-416

Compensation 342

Future of 411-412, 415-416

Geography of employment 414

Insurance 411-415

Labor productivity 411-416

Managerial 50, 256, 411-416

Monitoring 371

Part-time work 415

Skill changes 50, 256, 370, 412-414

Technology effects 50, 256, 411-415

Telecommunications 411

Wages 414, 415

Women and work 414-415

Work organization 256, 371, 412-416

Impact on U.S. trade (economy-wide) 260, 286

Information businesses (production) 49, 251-264

Advertising 49, 259-260, 262, 265-266

Banking and finance 50, 134, 154, 179, 198, 252, 256,

258-259, 262, 263, 299, 332, 354, 450

Broadcasting 252, 254-255, 260, 261, 266, 311, 331

Capital investment 252, 260

Competition in 256-258

Direct marketing 49, 134, 260

Geography of production 256, 258, 260

“Human capital” 254

Information processing 255, 260-263

insurance 50, 134-136, 242, 245, 252, 255-258, 262,

263, 332, 354, 371, 412-415

Intermediate demand for communications and information 255-256, 263

Network productivity 263-264, 412, 415

Postal services 254-255, 261, 262

Print media 49, 254-255, 260, 261, 264

Regulation and deregulation 50, 252-255, 258, 261, 262

Scale and scope 253-254, 256, 258-260

Software development 264

Telecommunications 252-254, 261-266, 299

Measuring amenity 49-50

Network prospects 252-253

Trade:

Banking 331-332

Broadcasting 331

Information processing 331

Insurance 331, 332

Software 333

Telecommunications 323, 325, 331

Personal care. See Clothing and Personal Care.

Personal Consumption Expenditures (see also Gross National Product) 64, 83

Personal Services (see also Production sectors)

Employment 428

Labor productivity 351

Sectoral share of U.S. employment 349, 351

Linkages to other production sectors 156, 158

Production sector defined 149

Role in the amenity networks 265

Role in the production recipe 151

Sectoral share of GNP 172

Production recipe effects 175

Trade:

Impact on employment 291

Policy. See Regulation and incentives.

Population. See Demographics.

Postal Service (U.S. Post Office) 417, 419

Precision production, craft, and repair occupations 53, 401,

417, 419, 432, 436, 439

Displacement 357

Employment growth 355, 356

Occupation category defined 344

Share of U.S. employment 357, 359

President’s Commission on Americans Outdoors

Price elasticity. See Prices under Consumption recipe entry,

Prices. See Consumption recipe, Inflation measurements

Primary education. See Education.
Producers’ Durable Equipment (see also Gross Private Fixed

Investment) 151, 153, 430

Product cycle. See Trade.

Product diversification. See Scope under Production recipe

entry.

Production networks. See Amenity networks, Networks,

Production recipe.

Production recipe (see also Linkages, Networks, Production

sectors, Structural change) 147-161, 165, 168, 172,

175-177, 274-276, 341

Capital investment 37, 151, 153, 187-188, 204, 215, 223,

229, 241, 252, 260, 279, 342, 351, 353-354, 376, 434

Changes in 152-155, 278-279

Defined 8, 24, 150

Intermediate demand (total intermediate inputs) 147, 151,

255-256, 263

Direct inputs 154-155, 159

Direct and indirect inputs 155-158, 159

Impact on structural change 175-177

Margins 150, 159

Defined 147

For the Food network 151

Technology effects 150

“Out-sourcing” 155, 176

People in the production recipe. See Employment.

Production networks 24-25, 143-200

Regulation and incentives 29-31, 445, 447, 454

Creating a “national vision” 451-452

Environmental controls 445

Financial rules 29

Government productivity 454

Government subsidies 454

Impact on scale and scope 179

Monopoly regulation 21, 447

National competitions 454

Policy objectives 447-448

Public/private cooperation 452-454

Reducing transactional costs 450

Regulation of financial institutions 450

Research and development (support for innovation) 30,

449-454

Tax reform 449-450

Role of energy and natural resources in 307

Scenarios 433-439

Impact on employment 428, 433

Intermediate inputs 428, 430, 434

Producers’ Durable Equipment 430, 434

Trade in the production recipe. See Trade

Trends 24-29

Value-added (final demand) (see also Gross national product) 147, 151, 153

As a percent of total output 152, 341, 343, 345

Defined 147

Deflating value-added 167-168

Employee compensation (wages and benefits) 147, 342

Indirect business taxes 147, 342

Property-type income 147, 342

Venture capital and 448

Production sectors (see also Linkages, Production recipe,

Structural change, and individual production sectors

as listed on p. 149) 147

Defined (taxonomy) (for a disaggregate list of industries

that comprise the production sectors, See Table A-2

of the Appendix)

“Blurring” of definitions 150

Employment contributions to amenity categories 10

Value-added contributions to amenity networks 8,

159-160

Productivity (see also Labor productivity under Employment

entry):

Compensation and 37, 343-344, 353, 373, 376

Education effects 378-379

Firm size and 188

Impact on comparative advantage 310, 313

Impact on structural change 171-172, 200, 454

In the amenity networks 143, 149, 150, 220, 226, 232,

238-240, 247-248, 401-402, 408

Manufacturing 277, 279

Measurement techniques 353

Multi-factor productivity 188, 279

Research and development effects 353, 454

Scenarios 425, 430-431, 434

Services 418, 454

Quick Response (see also Network production under Clothing and Personal Care entry) 238-240, 327, 337

Railroads. See Transportation.

Recommended Daily Allowances (RDAs) 92

Recreation and Leisure (see also Amenity networks, Time

use under Consumption recipe entry) 6, 22, 36, 61,

137-141, 159, 264-273, 341, 416-417, 439

Amenity category defined 62, 137

Amenity network trends 265-266

Demand (consumption) 50, 137-141

Demographics and 137, 140

Government spending 66, 68

Home entertainment 50, 106, 137-139

“Leisure literacy” 138

Lodging 50, 138, 270

Outdoor recreation 50, 137, 138, 140, 269

Prices 139

Scenarios 82, 84, 141

Spectator amusements 138-139

Spending trends 7, 50, 62-65, 138

Technology and 137, 138, 140-141

Time use 50, 68-69, 137, 139-140

Travel 50, 137, 138, 269

Employment 416-417

By occupation category 416-417

Demographic effects 417

Future growth 416-417

Lodging 417

Productivity 51

“Ripple” effect of demand for recreation and leisure

products 417
497

Technology effects 51, 417

Travel 416-417

Wages 51

Government programs 51, 417

Public v. private recreation 137

Leisure industries (production) 264-273

Arts and entertainment 265, 267-268, 270

Broadcast media 265-267

Home entertainment 51, 264-269

Lodging 270-271

Outdoor recreation 264, 265

Parks services 271-272

Regulation and deregulation 264, 266

Scale and scope 267-272

Sectoral structure 265

Social organizations 265

Specialization 272

Travel 51

Measuring amenity 50, 137

Network prospects 264

Technology 268-269, 272-273

Audio 51, 139, 140, 267, 268

Information technologies 51, 135, 140, 268-269,

272-273

Video equipment 51, 138-140, 266-267, 269

Trade 138, 264, 296

Consumer electronics 51, 264, 268, 296, 322

Regulation and incentives (see also Consumption recipe,

Employment, Government, Production recipe, Trade)

20-21, 23-24, 441, 445-462

Consumption recipe policy (demand) 23-24, 446-447

Employment policy 39, 458-462

Impact on productivity 353

Impact on structural change 180-181, 194, 199-200

Improving the national database 462

Production recipe policy 29-31, 447-454

Trade policy 32-34, 455-457

Report on the Subject of Manufactures 298

Sales occupations 53, 432, 439

Employment growth 356, 357

Occupation category defined 344

Role in the production sectors 346

Share of U.S. employment 357, 359

Scale and scope. See Structural change.

Scenarios (see also individual amenity networks as listed on

p. 6) 425-441

Component assumptions 426-433

Comparing the influence of components 433

Impact on amenity 439-440

Impact on gender in the work force 438

Impact on job turnover 438

Impact on minorities 438

Impact on skill changes 438, 439

Impact on the occupation categories 436-439

Impact on the production sectors 434-436

Impact on wages 438

“Manufacturing” 51, 53, 425, 434, 436, 438

“Stagnation” 51, 425, 434, 436, 438

“Transformation” 10, 11, 51, 53, 425, 434, 436, 438-440

“Trend” 51, 53, 425, 433, 434, 436, 438

1.5 percent GNP growth trend 425, 434, 439

3 percent GNP growth trend 425, 433, 434, 439, 440

Consumption (demand) 80, 82-85, 94-95, 103-105, 113-

114, 122-126, 131-132, 136, 141, 425, 426, 433, 434,

439

“Alternative” 56-57, 82, 84, 105, 114, 122, 124-126,

131, 135, 426, 434

Impact on amenity 57

Income effects 52

Spending effects 52

“Trend” 80, 82, 84, 105, 113, 122, 124-126, 131, 426

1.5 percent GNP growth trend 82, 84, 434

3 percent GNP growth trend 82, 84

Employment 52

Labor productivity 430-431, 433, 434

Participation rates 367, 436

Staffing patterns 425, 426, 431-433, 436

Production recipe 425, 426, 433, 439

Trade 315-317, 425-427, 434

Impact on employment 52

Scope. See Scale and scope under Structural change entry.

Secondary education. See Education.

Self employment. See Employment.

Service industries (see also Personal Services, Social Services, Transactional Activities, Transportation &

Trade):

Capital investment 354

Data on service industries 462

Employment 27, 35, 341, 343-344, 346, 358, 377

Displaced workers 357, 383

Hours worked 383

Geography of production 190, 191, 194-195, 198-200

Impact on:

Demand for construction services 224

Inflation measurements 168

Specialization of production 154

In the scenarios 426-428, 430-432, 434, 436, 439

Linkages to other sectors 26, 65, 143, 278, 295-296, 333,

346, 348

Direct effects 154, 155

Direct and indirect effects 156, 158

Prices 65

Problems with defining “services” 150

Productivity 279, 353, 418, 454

Purchases of information equipment 153

Sectoral organization 183

Share of GNP 165, 173

Spending trends 65

Trade effects 303, 312, 317, 321, 331-335

Business services 331-333

Comparative advantage 281, 312

Income from foreign investment 331, 332

Measurement techniques 288

Skills. See Employment.

Social Services (see also Production sectors) 203, 428, 436

Employment:

Labor productivity 351

Sectoral share of U.S. employment 349, 351

Skill levels by occupation 346
498

Linkages to other sectors 154, 156

Production sector defined 149

Role in the amenity networks 159, 213

Sectoral share of GNP 172

Demand effects (domestic and international) 174, 175

Production recipe effects 175, 176

Trade:

Impact unemployment 291

Standard metropolitan statistical areas (SMSAs) (see also

Geography under Structural change entry) 196

Structural change (see also Production recipe) 150, 165-200

Defined 24-25

“Deindustrialization” 165-166

Economy-wide 21-39, 153-154, 165-200

Forces contributing to structural change 165, 180-182

Geography of production 28-29, 144, 165, 190-200

Causes of change 190-191, 193-196, 199-200

High technology industry 194-195

Impact unemployment 191

Impact on housing demand 191

Impact on minorities 381

Impact on transportation demand 191

In the amenity networks 206, 215, 216, 23], 233-234,

237,240,241,251, 258,260

Personal income and 191, 193

Regional movements 29, 190-196,381

Technology effects 190

Trade effects 281,285-288

Urban-rural movements 28-29, 190, 196-200

Impact on depreciation 12,37,374

Impact on employment 34, 35,337,346,363

In the amenity networks 40-51, 144

Consumption recipe 89-149

Employment 395-422

Production recipe 203-279

In the future 425-441

Scale and scope 144, 165, 177-190,200

Business entry and exit 182, 184, 185, 195,285

Definitions 177, 180

Demand effects (domestic) 181-182

Economies of scale 26-27, 178, 180, 181, 185, 188

Economies of scope 186, 188,233

Employment growth 27, 182-186

Forces of change 180-182

Impact unemployment (economy-wide) 36, 178, 183-

184, 189-190,370-372,382, 385-386

Impact on research and development 178, 179, 186-189

In the amenity networks 189, 204-2O6, 2O8-21O, 217-

218,223,225,230, 232-233,237,241,250.251, 253-

254, 258-260, 267, 268, 270

Integration (conglomerate, horizontal, vertical) 186

Mergers and acquisitions 27, 181, 185, 188-189, 315

Product diversification 27-28, 179, 185, 186

Product specialization 185, 186

Productivity and 189

Regulation and deregulation 179-181

Technology effects 180, 187

Trade effects 31, 179, 281, 285, 286

Sectoral share of GNP (see also individual production sectors as

listed on p. 149) 25-26, 165-177, 342

Demand effects (final domestic demand) 25, 170,

172-175

Production recipe effects 25, 170, 175-177

Significance 177

Trade effects (final international demand) 25, 26, 170-

175, 288

Sundries and Apparel Findings Council (SAFLINC) 239

Surface Transportation Act 235

Teaching. See Education.

Technical professional occupations 53, 432, 436-439

Occupation category defined 344

Share of US. employment 357, 358

Technicians and related support occupations 436, 439

Occupation category defined 344

Role in the production sectors 346

Technology:

Impact on:

Employment 34, 337-338, 363, 364, 368-372, 382, 389,

390, 445, 460

Niche markets 71

Structural change 15-18, 180, 190, 193-194

Time use 67-68

Trade (see also High technology trade under the Trade

entry) 31, 285, 287, 313-315, 317, 326, 333-335

Information technology:

Impact on business performance 17-18, 180

Impact on the productivity of production networks 16-

17, 180, 211-212, 220-222, 226-228, 233-240, 242-

264, 268-269, 272-273, 327, 353, 445

Spending on information equipment 16, 251

Technology transfer 451

Temporary work. See Employment.

Textile/Apparel Linkage Council (TALC) 239

Textile/Clothing Technology Corp. (TC)2 327

Textiles. See Clothing and Personal Care.

Third world debt (see also Trade) 329

Time use. See Consumption recipe; See also Demand under

Recreation and Leisure entry, and Flexibility under

Employment entry.

Trade (see also trade discussions in the individual amenity

networks):

Advertising industry and 260

Agricultural trade 286, 291, 304, 309-311, 315, 321,

328-329

Automobiles 286, 321, 326-327

Capital/labor ratio of trade 291, 294

Comparative advantage 31-32, 281, 297-298, 308-313, 457

Defined 309-310

Impact on income distribution 310

Industry trends 32, 281, 309-311, 321, 323, 329

Employment trends 32, 281, 372

Productivity and 310

Construction trade 321, 330-331

“Convergence club” 287, 307

Costs and benefits 281, 288, 297-299

Currency trends 298, 304, 313, 317, 329-330

Data collection 462

Energy trade:
499

Petroleum 287, 299, 303

Natural resources 285

Exports 170, 281

As percent of GNP 18, 303

Role of imports in production 9, 297

Value-added generated by exports 289-290

Financial markets and 305, 307-309

Capital costs in different countries 307

Foreign investment in the United States 65, 304-306,325,

331

Geography 306

Income earned 331, 332

Treasury bonds 305

Foreign sourcing 326-327

High technology trade 281, 303,304,307,310,312-313,

315,317,321-326

Drugs and medical devices 289, 321,323,325-326

High technology trade defined 321

Semiconductors 286, 297,321,323-325

Telecommunications 323, 325

Impact on:

Employment 9,31, 281,290-296,298-299, 308,321,

373

Linkages 32,281,285-286, 294-296,333,455

Prices 281

Structural change 18-19,281,285

U.S. living standards 305, 308-310,315

Imports 170,281

As percent of GNP 18,303

impact on amenity networks 286

Impact undomestic production recipes 288

Impact on inflation measurements 168

Science and engineering 291

Value-added generated by imports 289

In the production sectors 289-291

Intellectual property rights 335

Intra-firm trade 334

Long-term trends 313-315

Changing positions of trade leadership 306-308, 313-

315,324

Machine tools 326-328

Manufacturing 289, 291,294,296,309,312-314, 317,

321-328

National security issues 298-299,327,331,451

Niche markets and 285-287,307,309,317

Political decisions and 304

Problems of equity 299

Product cycle 298,307, 313,315

Assessed 19,307-308

Defined 18,307

Impact unemployment 308

Raw materials 330

Regulation and incentives 13,32-34,281,298, 445,

455-457

Currency fluctuations (exchange rates) 298, 456

Domestic policy and 33,299,450,455-456

Education (language and cultural training) 34,456

Export promotion 34, 456

Financial markets 305

Fiscal and banking policy 33,298,299, 455,456

International coordination 298-299,455,456

Monetary policy 305, 308,455,456

Policy objectives 455

Quotas 327-328,455, 457

Research and Development 33-34, 299,456,457,459

Tariffs 34,456-457

Trade adjustment aid 298

Trade in services 331

Unfair trade practices 286

Research and development effects 313-314,325, 327,

329,333

Role in amenity networks 9

Role in the production recipe 31-32, 143,281,285-299

Defined 9

Geography of trade 285,286,288

Production networks and 285,287,289,297, 309

Scale and scope 285, 286

Scenarios 281,315, 317,425

Services 295-296,303, 312,317,321,331-335

Business services 331-333

Income from technology 333-335

Measuring trade in services 289,332

Software trade 333

Technology effects:

Energy and natural resources 31,307

Impact on comparative advantage 313

Measuring trade in technology 288,305,314

Technology transfer 313-315,329,333-335

Telecommunications 31,305,313,314,317

Textile and apparel trade 286,321,326, 327

Trade balances 294, 303-306,309,316-317, 445,456

As a percent of GNP 18

Capital accounts 305-306

Current accounts 304,305

Debt owed abroad 304, 305,455

interest on debt owed abroad 304

Trade composition 281, 303,306-313,321-335

Defined 306

Transactional Activities (see also Production sectors) 32,39,

143-144,203,416,426, 428,431,434,436

Employment

Sectoral share of U.S. employment 351

Skill levels by occupation 346

Intermediate demand 154

Linkages to other production sectors 156, 158

Production sector defined 149

Role in amenity networks 159,213,253

Role in the production recipe 151

Sectoral share of GNP 25, 165, 172

Demand effects (domestic and international) 174

Production recipe effects 175, 176

Trade:

Direct effects 289

Impact unemployment 291

indirect effects 289, 290

Linkages 294,296

Transportation (see also Amenity networks, Transportation

&Trade) 6,45-46, 114-125, 159,229-236,403-406

Air transportation:

Air traffic contro1 234
Connection with ground transit 119, 122

“Hubbing" 232

Amenity category defined 62

Amenity network trends 229-230

Automobiles 115, 118, 119, 122, 154, 181, 182, 187, 194,

294, 342, 354, 404, 457

Energy efficiency 46, 116, 119, 122-124, 330, 447

New vehicle types 46, 119, 120, 122, 451, 454

Trade 46, 285, 286, 289, 303, 309, 321, 326-327, 334,

457

Capital investment 229

Employment 46, 337, 403-406

Air transportation 404, 405

By occupation category 403-404

Deregulation and 404-406

Freight transportation 405-406

Job quality 232, 404-405

Hours worked 404, 405

Mass transit 405

Minorities 405

Occupational health and safety 229, 230, 232, 404-406

Rail transportation 404, 405

Self employment 183

Skill changes 403, 404

Technology effects 404

Trucking 404-406

Unions 403-405

Energy and natural resources and 224, 231, 235

Petroleum use 230

Environmental quality and 116

Freight transportation (intermediate demand) 46, 229-236,

405-406

Air transportation 189, 233-234, 404

Bus transportation 230-231

“Captive shippers” 233

Demand for freight transport 231, 233

Geography 233, 234

Rail transportation 229-236, 240, 252, 404

Trucking 193-194, 230-233, 235, 236, 404

Water transport 235

Government programs 46, 125, 126

costs 120

Government spending 66, 68

Highways 46, 116, 118, 121, 122, 124, 194, 199, 224,

229, 230, 404

Regulation and deregulation 119, 183, 230, 232-233

Road signs and signals 46, 120, 121, 124

Subsidies 120-121, 123, 236

Housing trends and 46

“Intermodelism” 230, 235

Measuring amenity 45

Network productivity 119-120, 123, 232-236

Information technology and 46, 120, 231, 232, 234,

235

Network prospects 229

Personal transportation (consumption) 29, 114-125, 234,

405

Air travel 119, 121, 123-125, 234, 248

Alternative travel modes 121

Bus travel 119, 183, 230, 233

Commuting 45, 46, 110-111, 117-118, 120, 198-199,

230-231

Congestion 46, 118, 120, 229, 230

Demographic effects 46, 117

Distances traveled 116-118

Elderly and 115

Gender differences 118

Impact on the environment 116, 122

Mass transit 45, 46, 119, 120, 200, 229

Rail travel 119

Safety 116, 124

Scenarios 82, 122-125

Spending trends 45, 62-65, 115, 116

Time spent traveling 116, 118, 119

Type of trip (work, leisure, etc.) 115, 118, 122

Vehicle ownership 46, 115, 121

Vehicle use 45, 115, 116, 118-120, 122

Prices 232-235

Scale and scope 230, 232-233, 406

Technology 119, 124, 233-236

terminals 122, 229

Trade 9, 46, 296, 323

Energy imports 116

Impact on Transportation spending 296

Transportation and material moving occupations 432

Occupation category defined 344

Transportation & Trade (see also Production sectors, Transportation) 32, 428, 433

Employment:

Sectoral share of U.S. employment 349, 351

Linkages to other production sectors 154, 156, 158

Production sector defined 149

Role in the amenity networks 159, 265

Role in the production recipe 151

Sectoral share of GNP 165, 172

Demand effects (domestic and international) 174, 175

Production recipe effects 175, 176

Trade:

Indirect effects 289, 290

Linkages 294

Travel and Tourism Administration 273

Trucking. See Transportation

Unearned income. See Income.

Unemployment rates. See Employment.

Uniform Price Code (UPC) 211

Unions. See Employment

United Kingdom. See Great Britain.

Universal Communications Standard (UCS) 211

University education. See Education.

Value-added. See Gross national product.

Values:

Impact on consumption recipes 56, 61

Impact on structural change 20

As reflected in demographics 20

As reflected in regulation and incentives 20, 180-181

Vertical integration. See Scale and scope under Structural

change entry.

Vocational education. See Education.
501

West Germany 50, 102, 135, 180, 182, 308, 328, 421, 450, Machine tool trade 327, 328

452, 456 Trade with the United States 305

High technology trade 322, 333 “Writing to Read” program 244, 248

Hours worked 69

0

52-635 (512)