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THE GROWING INCOME GAP IN 

THE AMERICAN MIDDLE CLASS

HEARING

BEFORE THE

SUBCOMMITTEE ON WORKFORCE PROTECTIONS 

COMMITTEE ON 

EDUCATION AND LABOR

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

HEARING HELD IN WASHINGTON, DC, JULY 31, 2008

Serial No. 110–107

Printed for the use of the Committee on Education and Labor

(

Available on the Internet: 

http://www.gpoaccess.gov/congress/house/education/index.html 

(II)

COMMITTEE ON EDUCATION AND LABOR 

GEORGE MILLER, California, Chairman

Dale E. Kildee, Michigan, Vice Chairman 

Donald M. Payne, New Jersey 

Robert E. Andrews, New Jersey 

Robert C. ‘‘Bobby’’ Scott, Virginia 

Lynn C. Woolsey, California 

Rube ́n Hinojosa, Texas 

Carolyn McCarthy, New York 

John F. Tierney, Massachusetts 

Dennis J. Kucinich, Ohio 

David Wu, Oregon 

Rush D. Holt, New Jersey 

Susan A. Davis, California 

Danny K. Davis, Illinois 

Rau ́l M. Grijalva, Arizona 

Timothy H. Bishop, New York 

Linda T. Sa ́nchez, California 

John P. Sarbanes, Maryland 

Joe Sestak, Pennsylvania 

David Loebsack, Iowa 

Mazie Hirono, Hawaii 

Jason Altmire, Pennsylvania 

John A. Yarmuth, Kentucky 

Phil Hare, Illinois 

Yvette D. Clarke, New York 

Joe Courtney, Connecticut 

Carol Shea-Porter, New Hampshire 

Howard P. ‘‘Buck’’ McKeon, California, 

Senior Republican Member 

Thomas E. Petri, Wisconsin 

Peter Hoekstra, Michigan 

Michael N. Castle, Delaware 

Mark E. Souder, Indiana 

Vernon J. Ehlers, Michigan 

Judy Biggert, Illinois 

Todd Russell Platts, Pennsylvania 

Ric Keller, Florida 

Joe Wilson, South Carolina 

John Kline, Minnesota 

Cathy McMorris Rodgers, Washington 

Kenny Marchant, Texas 

Tom Price, Georgia 

Luis G. Fortun ̃ o, Puerto Rico 

Charles W. Boustany, Jr., Louisiana 

Virginia Foxx, North Carolina 

John R. ‘‘Randy’’ Kuhl, Jr., New York 

Rob Bishop, Utah 

David Davis, Tennessee 

Timothy Walberg, Michigan 

[Vacancy]

Mark Zuckerman, Staff Director 

Sally Stroup, Republican Staff Director 

SUBCOMMITTEE ON WORKFORCE PROTECTIONS 

LYNN C. WOOLSEY, California, Chairwoman

Donald M. Payne, New Jersey 

Timothy H. Bishop, New York 

Carol Shea-Porter, New Hampshire 

Phil Hare, Illinois 

Joe Wilson, South Carolina, 

Ranking Minority Member 

Tom Price, Georgia 

John Kline, Minnesota 

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C O N T E N T S 

Page

Hearing held on July 31, 2008 ............................................................................... 1

Statement of Members: 

Wilson, Hon. Joe, ranking minority member, Subcommittee on Workforce 

Protections ..................................................................................................... 3

Prepared statement of ............................................................................... 4

Newspaper article submissions: 

‘‘Battleground for Sound Science,’’ New York Sun, July 30, 2008 . 56

‘‘A Desirable Option,’’ New York Sun, August 6, 2008 ................... 58

‘‘Teenager’s Right to Work,’’ New York Sun, August 6, 2008 ......... 59

Woolsey, Hon. Lynn C., Chairwoman, Subcommittee on Workforce Protections ................................................................................................................ 1

Prepared statement of ............................................................................... 2

Statement of Witnesses: 

Bernstein, Jared, senior economist, Economic Policy Institute .................... 28

Prepared statement of ............................................................................... 30

Furchtgott-Roth, Diana, senior fellow, Hudson Institute .............................. 22

Prepared statement of ............................................................................... 23

Greenstein, Robert, executive director, Center on Budget and Policy Priorities ............................................................................................................. 6

Prepared statement of ............................................................................... 8

Minow, Nell, editor, the Corporate Library .................................................... 17

Prepared statement of ............................................................................... 19

(1)

THE GROWING INCOME GAP IN

THE AMERICAN MIDDLE CLASS 

Thursday, July 31, 2008

U.S. House of Representatives 

Subcommittee on Workforce Protections 

Committee on Education and Labor 

Washington, DC

The subcommittee met, pursuant to call, at 10:08 a.m., in Room 

2175, Rayburn House Office Building, Hon. Lynn Woolsey [chairwoman of the subcommittee] presiding. 

Present: Representatives Woolsey, Bishop, Shea-Porter, Hare, 

and Wilson. 

Staff present: Aaron Albright, Press Secretary; Tylease Alli, 

Hearing Clerk; Jordan Barab, Senior Labor Policy Advisor; Lynn 

Dondis, Senior Policy Advisor, Subcommittee on Workforce Protections; David Hartzler, Systems Administrator; Sara Lonardo, Junior Legislative Associate, Labor; Joe Novotny, Chief Clerk; Michele 

Varnhagen, Labor Policy Director; Robert Borden, Minority General Counsel; Cameron Coursen, Minority Assistant Communications Director; Rob Gregg, Minority Senior Legislative Assistant; 

Jim Paretti, Minority Workforce Policy Counsel; Molly McLaughlin 

Salmi, Minority Deputy Director of Workforce Policy; Linda Stevens, Minority Chief Clerk/Assistant to the General Counsel; and 

Loren Sweatt, Minority Professional Staff Member. 

Ms. WOOLSEY [presiding]. A quorum is present. The hearing of 

the Subcommittee on Workforce Protections will come to order. 

I will now give my opening statement. Following will be our 

ranking member. 

So I want to welcome all of you to this hearing on ‘‘The Growing 

Income Gap in the American Middle Class.’’ But before I proceed 

with my opening remarks, I think we should all say happy birthday to Ranking Member Wilson. ‘‘Happy Birthday.’’

Mr. WILSON. Thank you very much. 

Ms. WOOLSEY. And, you know, Joe, our staff person’s birthday is 

today too. See, it is a nice day. 

Income inequality between the top income earners and those in 

the middle class has been growing rapidly over the last three decades. For a frame of reference, the top one percent of the population, those making $450,000 or more in the year 2006, consisted 

of 1.4 million tax filers. The gap has grown so wide that some compare the era we live in to the Gilded Age, a period between 1870 

and 1900 that was distinguished by the excesses of the rich. 

2

In the 1960s and 1970s, the top one percent of earners took in 

10 percent of the total income of this country—now, that is going 

from the 1960s and 1970s—to 2006, the top one percent of earners 

took in over 20 percent of the total income pie. The last time the 

top had this much of total income was in 1928. In addition, the average tax rate for these top earners has fallen to its lowest levels 

in 18 years. 

CEOs are making record salaries, irrespective of performance, 

and these outrageous amounts affect the growing gap directly. In 

2006, the average Fortune 250 CEO was paid over 600 times the 

average worker. Six hundred times is a staggering figure. 

And this past Monday, the Washington Post published its annual 

survey of executive compensation at large public companies and 

found that in 2007 the average annual pay of the top 100 highest 

paid executives was $6.6 million. While those at the top of the income scale are prospering, since the 1990s, income has actually declined for workers at the bottom rung and has actually increased 

only slightly for middle class workers. 

We know that Americans are very tolerant of differences in pay 

and, in general, choose to focus on opportunity instead. I feel like 

they think—everybody thinks that they are eventually going to be 

one of the top one percent. This opportunity, and the attitudes toward it, are vastly different in the United States than the attitudes 

of European workers who actually see fairness in equal outcome, 

not in the potential for equal outcomes. 

But opportunity is slipping away for those in the middle classes 

in our country, as wages remain stagnant, and consumer goods, 

such as food, health care, and gas, have skyrocketed, health care. 

Many are losing their homes, and, as I said, health care is becoming more expensive and less available. 

This, in turn, affects the ability of hardworking Americans, and 

it affects their ability to save for retirement, and it affects their 

ability to put their kids through college. 

How important is the middle class, anyway? Why do we care? 

Well, the middle class is the glue that holds this country together. 

Otherwise, we are just scraping by. 

This hearing will examine the causes and extent of the gap and 

how this inequality affects American workers. 

Nell Minow of the Corporate Library is here to fill us in on the 

issue of excessive pay. This ever-widening pay disparity is bad for 

workers; it is bad for their health; and it is bad for their families. 

And there is even evidence that the rich in this country have a 

shorter life span than wealthy people who live in countries where 

the income gap is not as great as ours. This ever-widening gap has 

broad implications for society as a whole, and if not dealt with, will 

threaten our democracy. 

I look forward to hearing from our witnesses and yield the floor 

to Ranking Member Wilson for his opening statement. 

[The statement of Ms. Woolsey follows:]

Prepared Statement of Hon. Lynn C. Woolsey, Chairwoman, Subcommittee 

on Workforce Protections 

I want to welcome you all to this hearing on ‘‘The Growing Income Gap in the 

American Middle Class.’’ But before I proceed with my opening statement, I want 

to wish Ranking Member Wilson a very happy birthday. 

3

Income inequality between the top income earners and those in the middle class 

has been growing rapidly over the last 3 decades. For frame of reference, the top 

1% includes those making $450,000 or more; in 2006 that consisted of about 1.4 million tax filers. 

The gap has grown so wide that some compare the era we live in to the Gilded 

Age, a period between 1870 and 1900 that was distinguished by the excesses of the 

rich. 

In the 1960s and 1970s the top 1 percent of earners took in 10 percent of the total 

income in this Country. 

By 2006 the top 1 percent of earners took in over 20 percent of the total income 

pie. The last time the top had this much of total income was in 1928. 

In addition, the average tax rate for these top earners has fallen to its lowest levels in 18 years. CEOs are making record salaries, irrespective of performance, and 

these outrageous amounts affect the growing gap directly. 

In 2006, the average Fortune 250 CEO was paid over 600 times the average worker. That is a staggering number. 

And this past Monday, the Washington Post published its annual survey of executive compensation at large public companies and found that in 2007, the average 

annual pay of the top 100 highest-paid executives was $6.6 million. 

While those at the top of the income scale are prospering, since the 1990s, income 

has actually declined for workers at the bottom rung, and increased only slightly 

for middle class workers. 

We know that Americans are very tolerant of differences in pay, and in general, 

choose to focus on opportunity instead. 

This is vastly different than the attitudes of European workers who see fairness 

in equal outcomes, not in the potential for equal outcomes. 

But opportunity is slipping away for those in the middle class as wages remain 

stagnant and consumer goods, such as food and gas, have skyrocketed. 

Many are losing their homes and their health care. 

This in turn affects the ability of hard-working Americans to save for retirement 

and put their kids through college. 

How important is the middle class anyway? 

They are the glue that holds this country together; otherwise we are just scraping 

by. 

This hearing will examine the causes and extent of the gap and how this inequality affects American workers. 

Nell Minow of the Corporate Library is also here to fill us in on the issue of ‘‘excessive executive pay.’’

This ever widening pay disparity is bad for workers; it is bad for their health; and 

it is bad for their families. 

And there is even evidence that the rich in this Country have shorter life spans 

than wealthy people who live in countries where the income gap is not as great as 

ours. 

This ever-widening gap also has broad implications for society as a whole, and if 

not dealt with, will threaten our democracy. 

I look forward to hearing from our witnesses and yield the floor to Ranking Member Wilson for his opening statement. 

Mr. WILSON. Thank you, Madam Chairwoman, and thank you for 

the birthday greetings. And good morning. 

I will be brief in my opening remarks. I want to get to our witnesses as quickly as possibly. 

I, too, would like to welcome each of our witnesses. We look forward to hearing your testimony and appreciate you taking time out 

of your busy schedules to educate us here today. 

As you have noted, Madam Chair, we are here today to look at 

improving the incomes of the American middle class. I believe 90 

percent of the constituents I represent are of the middle class. I 

want everyone, as you indicated, to be in the top one percent. I suspect that we will hear about many factors in today’s economic environment that contribute to income differences among families. 

On its face, some of the data indicates large differences in the 

economic well being of families. Other data shows that Americans 

4

of all income levels are better off today than they were a generation ago. We all know that there is usually more than one way to 

interpret data, so I think it is important that we use caution in extrapolating too far. 

Out of the many factors that contribute to income differences, 

and I believe a very significant one, is education. The difference in 

earnings between individuals with a high school education and 

those with advanced degrees or high-skilled training is significant. 

Arguably, one of the best ways to find a meaningful solution for 

boosting pay is to bolster our education and training systems. Education and ongoing training is essential for future job growth and 

economic security in today’s global economy. 

As we examine the difficulties faced by those at the lower end 

of the economic spectrum, we should—we would be remiss if we did 

not acknowledge the burden of rising energy costs. Lower-wage 

workers have been shown to suffer disproportionately when fuel 

costs rise. Gas is likely to consume a greater share of their likely 

earnings even when fuel costs are low, exacerbating the burden of 

today’s nearly $4 per gallon fuel cost. Moreover, lower-income 

Americans are more likely to own older, less efficient vehicles. 

I hope somewhere in the context of the continuing debate on the 

current state of the middle class of workers that Congress can do 

something about addressing increasing fuel costs. 

This hearing will provide us with a clearer picture of the level 

of income differences among families and a better understanding of 

the factors that contribute to those differences. 

Thank you, Madam Chairwoman, and I yield back the balance of 

my time.

Prepared Statement of Hon. Joe Wilson, Ranking Minority Member, 

Subcommittee on Workforce Protections 

Thank you, Madam Chairwoman, and good morning. I will be brief in my opening 

remarks. I know we want to get to our witnesses as quickly as possible. 

I too, would like to welcome each of our witnesses. We look forward to hearing 

your testimony and appreciate you taking time out of your busy schedules to educate us today. 

As you have noted, Madam Chair, we are here today to look at improving incomes 

of the American middle class. I suspect that we will hear about many factors in today’s economic environment that contribute to income differences among families. 

On its face, some of the data indicates large differences in the economic well-being 

of families. Other data shows that Americans of all income levels are better off 

today than they were a generation ago. We all know that there is usually more than 

one way to interpret data, so I think it’s important that we use caution in extrapolating too far. 

Out of the many factors that contribute to income differences, and I believe a significant one, is education. The difference in earnings between individuals with a 

high school education and those with advanced degrees or high-skilled training is 

significant. Arguably, one of the best ways to find a meaningful solution for boosting 

pay is to bolster our education and training systems. Education and ongoing training is essential for future job growth and economic security in today’s global economy. 

As we examine the difficulties faced by those at the lower end of the economic 

spectrum, we would be remiss if we did not acknowledge the burden of rising energy 

costs. Lower-wage workers have been shown to suffer disproportionately when fuel 

costs rise. Gas is likely to consume a greater share of their earnings even when fuel 

costs are low, exacerbating the burden of today’s nearly $4.00 per gallon fuel costs. 

Moreover, lower-income Americans are more likely to own older, less efficient vehicles. I hope somewhere in the context of the continuing debate on the current state 

of middle class workers, that Congress can do something about addressing increasing fuel costs. 

5

This hearing will provide us with a clearer picture of the level of income differences among families and a better understanding of the factors that contribute 

to those differences. 

Thank you, Madam Chairwoman, and I yield back the balance of my time. 

Ms. WOOLSEY. Thank you, Mr. Wilson. 

Without objection, all members will have 14 days to submit additional materials for the hearing record. 

I now have the privilege to introduce our very distinguished 

panel of witnesses here with us this morning, and I welcome our 

witnesses. 

Thank you for being here. 

Before I introduce you, I think I should remind everybody how 

the lighting system works. Some of you have not been here before; 

most of you have, though. What you will know is that you are limited to five minutes. When you start speaking, the light will go on 

in front of you. It will be green. When you are down to one minute, 

it will be yellow, and when it is red, that means your time is up. 

So when you see the yellow light, start tying it up and coming to 

conclusion. We won’t—your chair doesn’t fall through the floor 

when it turns red, but we would like you to start ending it there, 

and if you have more to say, we will make sure that you get to during the question and answer. 

So, here we go. We are going to start with Robert Greenstein. 

Robert is the founder and executive director of the Center on Budget and Policy Priorities. In 1996, he was awarded a MacArthur Fellowship, in part, for making the center a model for nonpartisan research and policy organization. In 1994, he was appointed by President Clinton to serve on the Bipartisan Commission on Entitlement 

and Tax Reform. Prior to founding the center, Mr. Greenstein was 

administrator of the Food and Nutrition Service at the U.S. Department of Agriculture. He graduated from Harvard College and 

has received numerous honorary degrees. 

Nell Minow is editor and co-founder of the Corporate Library. 

Prior to founding the Corporate Library, she was a principal at 

Lens, an investment firm that uses shareholder activism to increase the value of underperforming companies. She previously 

served as an attorney at the U.S. Environmental Protection Agency, the Office of Management and Budget and the Department of 

Justice. She is a graduate of Sarah Lawrence College and the University of Chicago Law School. 

Diana Furchtgott-Roth is a senior fellow at the Hudson Institute 

and director of the Center for Employment Policy. She has been a 

chief economist at the U.S. Department of Labor and previously 

served as chief of staff for the president’s Council of Economic Advisors. She received her B.A. from Swarthmore College and her 

master’s from Oxford University. 

Jared Bernstein is director of the Living Standard Program at 

the Economic Policy Institute, EPI. He joined the EPI in 1992 and 

has written extensively on issues, such as income equality, mobility 

and trends in employment and earnings. His latest book is, 

‘‘Crunch: Why Do I Feel So Squeezed and Other Unsolved Economic Mysteries.’’ Mr. Bernstein earned his Ph.D. in social welfare 

from Columbia University. 

6

We will now hear from our first witness, and don’t forget to turn 

on your microphone. 

STATEMENT OF ROBERT GREENSTEIN, EXECUTIVE 

DIRECTOR, CENTER ON BUDGET AND POLICY PRIORITIES 

Mr. GREENSTEIN. Thank you for the invitation to testify today on 

inequality. There is broad consensus among analysts and economists that inequality has been rising for about 30 years and is at 

levels that cause concern. As former Federal Reserve Chair Alan 

Greenspan said a couple of years ago, ‘‘There is a really serious 

problem here in the concentration of income that is rising.’’

Let me start with a brief overview of the data and a cautionary 

note. And the cautionary note is that in looking at inequality one 

cannot place much stock in data—in official census data and what 

is called the Gini coefficient that comes out of those data, because 

the official census data is not based on full income reporting at the 

top of the income scale. 

Specifically, the census data does not count any earnings above 

$999,999 a year. If you earn $20 million a year, it is recorded in 

the census data as $999,999. If your income rises from $20 million 

to $30 million a year, census shows that it is staying flat at 

$999,999. And the census data do not include capital gains income, 

which is very big at the top of the income scale. 

To address these problems in the data, fortunately, about 15 

years ago, the Congressional Budget Office came to the rescue and 

developed a data series that blends census data and data from the 

IRS so that the CBO data count all income, and they also count 

as income, as one should for these purposes, things like food 

stamps, housing subsidies and the earned income credit for the 

people at the bottom of the income scale. The CBO data are widely 

recognized by analysts as the best data available on inequality, 

they cover after-tax as well as before-tax income, and they span the 

period from 1979 to 2005. 

So let’s take a look at what those CBO data tell us. They show 

a stark picture of rising inequality. After adjusting for inflation, 

after-tax income for the bottom fifth of the population, average 

after-tax income for the bottom fifth was only six percent higher in 

2005 than it had been 26 years earlier in 1979. And for the middle, 

the middle fifth, income was 21 percent higher than in 1979. That 

is less than an average of one percent gain per year over the 26-

year period. In contrast, income rose 80 percent among the top 

fifth, and it more than tripled, rising 228 percent, among the top 

one percent of the population. 

In dollar terms, the CBO data show that the average income for 

the bottom fifth is all of $900 per household higher in 2005 than 

it was 1979. The gain was $8,700 per household for the middle 

fifth, and for the top one percent, the gain was $745,000 per household. 

We also have a data source on the distribution of before-tax income that goes back to 1913. This is based on IRS data. 

And it shows, as you noted, Madam Chair, in your opening, that 

the share of before-tax income going to the top one percent is now 

greater than at any time since 1928. 

7

I would note that the rise in inequality in after-tax income—for 

before-tax and after-tax income, the main causes are in the private 

economy, but there is a question as to whether government policy 

ameliorates or exacerbates the trends. And the evidence is compelling that the tax cuts of this decade have exacerbated the trend in 

inequality in after-tax income. 

The CBO data show that the percentage of income that the top 

fifth pays in federal taxes fell in 2005 to its lowest level on record 

in these data. Data from the Urban Institute-Brookings Tax Policy 

Center show that the 2001 and 2003 tax cuts increase after-tax income by a far larger percentage for those at the top of the income 

scale than for those in the middle or the bottom. 

And in dollar terms, the Tax Policy Center data show that in 

2010, when the tax cuts are fully in effect, the average tax cut per 

household for those with incomes over $1 million a year will be 

$158,000 tax cut per household. The average tax cut in the middle, 

the Tax Policy Center tells us, will be $810 per household. 

This is why the noted economist, Alan Blinder, in talking about 

rising inequality, recently noted that recent federal policies were 

the equivalent, if I may use the sports—I am really just using Alan 

Blinder’s sports analogy, he used a sports analogy—he said they 

were the equivalent of piling on, which in football would draw a 15-

yard penalty for unnecessary roughness. 

Let me conclude with just a few very quick comments about the 

implications for federal policy going forward. As you all know, we 

face tough challenges in a series of areas: An unsustainable longterm deficit, need for health care reform, need for tax reform, need 

to address climate change. In every one of those areas, how you address the problem can either exacerbate inequality or mitigate it, 

and I would submit that this ought to be one of, certainly not the 

only by no means, but one of the factors you look at as you evaluate potential responses in those areas. 

In addition, of course, we need a strong economy and rising productivity as a necessary, but not sufficient condition to get more 

widespread prosperity, and that does mean sound investments in 

preschool education, education worker training, infrastructure and 

basic research. 

There are a variety of things that Congress could start doing 

next year, and among them, I would argue, would be such things 

as looking at what are bipartisan proposals to make things like the 

higher education and savers tax credits refundable. We, right now, 

have tax benefits that subsidize the cost of higher education for 

people higher up the income scale who would go to school anyway. 

We shut out people at the bottom. I think more focus on poverty 

reduction goals would be helpful. We need to remove barriers to 

labor organizing. 

There are an array of things we need to do, and the first step, 

of course, is simply focusing more attention on the inequality issue 

and the need to address it. 

And I think this hearing is an important step in what we have 

to do first in order to put on the agenda that one of the lenses 

through which we should evaluate policy in a whole range of areas 

is, does it exacerbate the inequality already being driven by trends 

in the international and national economy or does it lean against 

8

it and help mitigate it and help us have prosperity that is more 

broadly shared across our people? 

Thank you. 

[The statement of Mr. Greenstein follows:]


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Ms. WOOLSEY. Ms. Minow? 

STATEMENT OF NELL MINOW, EDITOR AND CO–FOUNDER, 

THE CORPORATE LIBRARY 

Ms. MINOW. Thank you very much, members of the committee. 

I am really honored to be here. 


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I am here just to make a couple of points about CEO compensation: First of all, that it is not determined by the market and, second, that it does matter. 

I am a passionate capitalist. If I thought that these excessive 

CEO pay plans were beneficial to shareholders or to anybody else, 

I would stand up and cheer. If I thought that they resulted from 

the market or that they promoted market efficiency, I would be enthusiastic about them, but they do not. 

As you pointed out, Madam Chair, disparity between the average 

worker and the CEO is increasing, and the velocity of the increase 

is also increasing, it is snowballing. And I appreciate especially 

your emphasis on equality of potential as our goal. 

So I am here to talk about the tip of the iceberg, CEOs, because 

it is both a symptom and a contributing factor to market failure. 

It makes the days of the robber barons no longer the correct analogy. I think the analogy we should be working off of right now is 

Marie Antoinette. 

The key points I want to make are, first of all, it is not the market that determines CEO pay. The CEO process exploits market inefficiencies. If you look at the people at the top of the pyramid on 

pay, everybody else is the ultimate pay-for-performance. Whether 

you are talking about athletes or musicians or movie stars, they 

are all pay-for-performance. But CEOs pick the people who set 

their pay and get rid of the ones who don’t pay them enough. And 

for that reason, the pay just continues to go up. 

I think that the most important point to consider in looking at 

CEO pay is that like any other allocation of assets by the board of 

directors, it has to be looked at in terms of its return on investment, and the return on investment, as documented by Professor 

Rakesh Khurana at Harvard University, is less than a piggybank. 

It is less than T-bill. It is not a productive use of the corporate assets. 

I have a lot of examples in my testimony, and I encourage you 

to take a look at them. I noticed that after I filed my testimony this 

week there was a headline in the New York Times that said—

about IndyMac. It said, ‘‘Bad Loans: The Cause of the Failure at 

IndyMac.’’ Excuse me, it was bad CEO pay that was the cause of 

the failure at IndyMac, because in the subprime—this is a perfect 

example of what I am talking about—subprime, the executives 

were paid on the volume of business they created, not on the quality of business they created. 

Now, we could never pay Congress what you are worth, because 

your worth is beyond price, but let’s say we did decide to pay you 

based on the number of laws you passed. I think there would be 

more laws. That doesn’t necessarily mean that they would be better 

laws, and that is pretty much what happened in the subprime circumstance. 

Very, very few companies, very few—we have a list of them that 

we keep—have what are called clawbacks, meaning that after you 

find out that someone has been paid based on falsified accounting 

or inflated earnings, they have to actually give the money back. So, 

in other words, there is really no downside for them, and it creates 

all kinds of perverse incentives. 

19

Bad pay misaligns the interests of the executives with shareholders and with employees, and, furthermore, our office has shown 

that the primary indicator of litigation, liability and investment 

risk is disparity between CEO pay and performance. 

And I think I will reserve the rest of my time, because I want 

to have a free and frank exchange of ideas. 

Thank you. 

[The statement of Ms. Minow follows:]

Prepared Statement of Nell Minow, Editor, the Corporate Library 

Madame Chairman and members of the committee, thank you very much for the 

opportunity to appear today. I am very pleased that this committee is looking into 

this vital area of concern. 

I am a passionate capitalist. If our current system of executive compensation tied 

pay to performance, if it provided an effective incentive to create long-term shareholder value, if it met any possible market test, I would stand up and cheer. If I 

thought, as some have argued, that the amounts at issue are so small in proportion 

to the assets being managed that they do not have any material impact, I would 

not be here. On the contrary, the CEO compensation in America’s public companies 

is a perversion of the market that imposes enormous and growing costs on America’s 

working families—as shareholders, customers, employees, and members of the community. Executive compensation must be looked at as any other asset allocation. 

And the return on investment for the expenditures on CEO pay is by any measure 

inadequate. We are not getting what we pay for. These outrageous pay packages 

juxtaposed with losses in share value and jobs diminishes our credibility and increases our cost of capital. In today’s global economy this is an expense we clearly 

can no longer afford. 

The economist John Kenneth Galbraith said, ‘‘The salary of the chief executive of 

the large corporation is not a market award for achievement. It is frequently in the 

nature of a warm personal gesture by the individual to himself.’’

He said that in the 1950’s. The primary change since then is the number of zeroes 

at the end of the figures. 

My firm, The Corporate Library, maintains an extensive database on corporate 

governance in public companies, and that includes a great deal of information and 

analysis of executive compensation. The data show that the disparity between pay 

and performance is enormous and growing. We have done a series of studies showing that the largest percentage increases in total compensation for CEOs had very 

little connection to long-term value creation. 

It’s a very small group in the stratosphere of pay: rock stars, movie stars, athletes, investment bankers, and CEOs. Of that group, the first four are in the ultimate pay-for-performance category, with a tiny percentage at the very top making 

millions of dollars, and with deals that evaporate quickly if a movie, a CD, or a corporate acquisition tanks. Their pay is set through tough arms-length negotiations. 

CEOs are the only ones who pick the people who set their pay, indeed they pay 

and provide information to the people who set their pay. And no matter what ‘‘independence’’ standard we try to impose, the board room culture of congeniality and 

consensus is so powerful that it makes it very hard to object, especially when the 

compensation consultant helpfully provides an avalanche of numbers designed to 

justify pay increases. In the wonderful world of CEOs, like the children in Lake 

Woebegon, everyone is above average. Even Warren Buffett acknowledges his own 

failings as a director, particularly in approving excessive compensation: ‘‘Too often, 

collegiality trumped independence.’’ If Warren Buffett, always a significant shareholder in any company on whose board he serves, does not feel able to oppose excessive pay, something is wrong. 

In the 1990s, the cult of the CEO was based on the idea that vision and the ability to inspire were what made the CEOs worth the hundreds of millions of dollars 

they were paid. But a book by Harvard Business School professor Rakesh Khurana, 

Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs, 

makes a compelling case that corporate boards err seriously when they pick chief 

executives based on ‘‘leadership’’ and ‘‘vision’’ or when they pay huge premium pay 

that is not sensitive to performance to attract a ‘‘superstar.’’ Bringing in a CEO with 

a great record at another company may give the stock price a short-term boost. But 

high-profile transplants such as Al Dunlap at Sunbeam (which went into bankruptcy) and Gary Wendt at Conseco (which went into bankruptcy), CEOs should 

20

have to make the same disclaimers that money managers do: ‘‘Past performance is 

no guarantee of future performance.’’

Some have argued that CEO pay is set by the market. But it is not, as a return 

on investment assessment shows. And the consequence can be disastrous. 

For example: the very first report we ever issued at The Corporate Library, in 

January of 2000, we said that we thought there was a problem at what was then 

the fastest-rising stock in the history of the New York Stock Exchange. We said that 

the CEO’s insistence on receiving 2 million stock options at $10 a share below the 

stock’s trading price indicated that he expected the stock to decrease in value and 

did not want to pay the price for that decline that the shareholders did. It also indicated that the board of directors had no ability to provide any independent oversight 

and no ability to say ‘‘no.’’

That was Global Crossing which a year later became the fourth biggest bankruptcy in U.S. history. 

At one financial services company there was a pay plan that had nine different 

measures of performance. But the plan gave the board discretion to award all of the 

bonuses for meeting any or all of those goals. They decided for fiscal 2006 to base 

the formula on the single metric of return on equity. The company was Bear 

Stearns. Another harbinger of and contributor to disaster. We also noted problems 

at a bank where the CEO’s pay was as large as CEO salaries at firms exponentially 

larger and included $260,000 one-time initiation fee to a country club; reimbursement for payment of taxes ($12,650), financial planning ($15,000) and other perks. 

Is there any reason that the shareholders should be paying a CEO’s taxes or financial planning? That bank is IndyMac, now the second-largest bank failure in history. 

The subprime crisis was in part caused by pay plans that were based on volume 

of loans rather than quality of loans. That was a guarantee of disaster. Here are 

some of the mind-boggling numbers: 

For 2006, Angelo Mozilo’s total actual compensation was valued at over $102 million. His annual bonus for that year was based on a performance target of diluted 

earnings per share, or ‘‘EPS.’’ For Fiscal 2006, Countrywide Financial’s reported 

EPS was $4.30, which was an increase of 4.62% over Fiscal 2005 EPS of $4.11, resulting in a cash incentive award of $20.5 million to Mr. Mozilo. These inflated 

earnings forced the company’s stock up by 26%. 

But by the end of 2007, when Countrywide finally revealed the losses it had previously obscured, shareholders lost more than 78% of their investment value. Meanwhile, in early 2007 Mr. Mozilo sold over $127 million in exercised stock options before July 24, 2007, when he announced a $388 million write-down on profits. On 

August 16, Countrywide narrowly avoided bankruptcy by taking out an emergency 

loan of $11 billion from a group of banks. Mr. Mozilo continued to sell off shares, 

and by the end of 2007 he had sold an additional $30 million in exercised stock options. Mr. Mozilo received more than $102 million in compensation and $157 million 

in exercised stock options, while total shareholder return was negative 78% over the 

same period. He was entitled to receive another $58 million in non-qualified deferred compensation and supplemental pension benefits when he retires in connection with the Bank of America merger in 2008. 

At Citigroup, Charles Prince received total compensation valued at over $25.9 million in 2006. His incentive awards for that year totaled more than $23 million and 

were based on multiple performance measurements. Specifically, the company stated that ‘‘revenues grew 7%, almost all of which was organic,’’ ‘‘net income from continuing operations grew at about the same rate as total revenues (about 7% in each 

case),’’ ‘‘the 2006 return on equity was 18.8%,’’ and ‘‘total return to stockholders was 

19.6%.’’ Then in 2007, the company announced its $24.1 billion write-down in connection with sub-prime lending. Soon after, Charles Prince announced his resignation and left the company with $40 million in severance. Shareholders lost 45% of 

their investment value by the end of the year. 

At Merrill Lynch, former-CEO Stanley O’Neal received total compensation of more 

than $91 million for 2006. His incentive compensation was also based on multiple 

performance measurements. The company stated the following about the Mr. 

O’Neal’s performance against objectives: 

The Committee considered performance against the CEO objectives determined at 

the beginning of the year and noted that all financial targets were met or exceeded 

and all strategic and leadership objectives were met with distinction. This review 

included consideration of numerous objectives. 

On October 24, 2007, Merrill Lynch reported an $8.4 billion subprime mortgagerelated write-down. Just days later, Stanley O’Neal announced his retirement. He 

received more than $160 million in stock and retirement benefits in connection with 

his departure, while shareholder lost more than 41% of their investment value over 

21

the year. On January 17, 2008, Merrill Lynch took an additional $14.1 billion writedown, bringing its subprime mortgage-related losses to nearly $23 billion. 

During 2006, management at New Century Financial Corp issued false and misleading statements about the company’s financials to boost earnings, which allowed 

New Century stock traded at artificially inflated prices. On March 2, 2007, the company announced that it was the subject of federal criminal probes related to securities trades and accounting fraud. On April 2, 2007, the company filed for Chapter 

11 bankruptcy. Over the three year period prior to filing for bankruptcy, Robert K. 

Cole, Chairman and CEO of New Century Financial Corp, received over $22 million 

in total compensation, most of which he received from exercised stock options that 

he sold at artificially inflated stock prices. 

In 2006, management at Novastar Financial Inc. reported a rise in earnings after 

the company originated a record $2.8 billion in loans, boosting the company’s stock 

price to inflated levels. Then in February 2007, the Novastar’s stock fell by 42% 

after announcing fourth quarter and year-end 2006 results, and warned that 

NovaStar was expecting to earn little or no taxable income in the next five years. 

In November 2007, Novastar stock plunged after the subprime mortgage lender 

posted a $598 million third-quarter loss and said that bankruptcy was possible. 

Over the three-year period leading to the enormous losses, Scott F. Hartman, Chairman and CEO of Novastar, received more than $13.6 million in total compensation. 

In January 2007, American Home Mortgage earnings soared 288% after the subprime lender originated a record $15.5 billion in loans during the fourth quarter of 

2006. Just eight months later, on August 6, 2007, American Home Mortgage Corp 

filed for bankruptcy. The stock was at 44 cents a share, down from an annual high 

of $36.40. Total compensation awarded to Michael Strauss, Chairman and CEO of 

American Home Mortgage, over the three-year period prior to the bankruptcy was 

over $8 million, largely based on bonuses tied to inflated earnings targets. 

On June 15, 2008, American International Group (AIG) announced its plans to replace Chief Executive Officer Martin Sullivan with a director of the company who 

has been chairman since 2006, Robert Willumstad after the company posted losses 

for two consecutive quarters totaling $13 billion. Mr. Sullivan’s contract entitled him 

to approximately $68 million. 

There is an obvious disconnect between the performance of these CEOs and the 

compensation they received. They led the companies in a risky strategic direction 

that resulted in significant losses for investors across nations. Incentive compensation based on earnings and revenue increases is problematic in a situation like that 

of sub-prime mortgages. Principal officers, for themselves and in particular for those 

down the line who are similarly incentivized, can push ‘‘sales’’ without adequate 

concern for quality. There is a disconnect in that bonuses are ‘‘earned’’ as business 

is booked; only when it is clear that the business is defective—and that such defect 

should have been apparent at the outset—is the hit to earnings recognized. By that 

time, the CEO has been paid based on the inflated numbers. Fewer than 13 percent 

of public companies have clawback policies requiring executives to return bonuses 

based on inflated numbers. So why should they worry about manipulating the figures to get the money upfront? 

There is no way to justify any of these pay plans by saying they meet a market 

test. Marie Antoinette would be ashamed to get paid like this while shareholders 

are losing money and employees are losing jobs. The last time Congress tried to fix 

this problem it made it worse by adopting the notorious 162m of the tax code. It 

poured gasoline on the fire by encouraging the award of stock options. Just thirty 

years ago, a CEO might get 30,000 options. Now million-option grants are not unusual and even stock option grants have only a tangential relationship to the creation of long-term, sustainable value. As long as CEOs pick the people who serve 

on their boards and shareholders have no ability to remove them, this will continue. 

In the 2006 proxy season, 25 director candidates failed to get the support of a majority of the shareholders. Yet 24 of them continue to serve on those boards. If shareholders cannot get rid of directors who agree to pay completely disconnected from 

performance, it will only get worse. 

The pay-performance disparity is so outrageous, so atrocious that it undermines 

the credibility our system of capitalism. In a global environment, information and 

the ability to trade in any market at any time will provide our system with the 

toughest market test in the history of our country. As we compete for capital, we 

must be able to show those inside and outside our country that we deserve their 

trust and will provide them with a competitive return instead of shoveling more 

money into the pockets of the top executives. 

I would like to acknowledge the assistance of Paul Hodgson, Alex Higgins, Marjorie Schwietering, Lauren Warmington, and other staff members at The Corporate 

22

Library in preparing this testimony. Many thanks to the committee and its staff for 

the opportunity to appear, and I will be glad to answer any questions. 

Ms. WOOLSEY. Well, thank you, and thank you for knowing how 

valuable we are. 

Mr. WILSON. Particularly the chairwoman. 

Ms. WOOLSEY. All right. 

Ms. Furchtgott-Roth? 

STATEMENT OF DIANA FURCHTGOTT–ROTH, DIRECTOR OF 

THE CENTER FOR EMPLOYMENT POLICY, HUDSON INSTITUTE 

Ms. FURCHTGOTT-ROTH. Madam Chairwoman, thank you very 

much for inviting me to testify, and I would like to submit my written remarks for the record, if that is all right. 

I chose to wear this ring today, because it was the one piece, the 

one thing that was sent over in 1976 when my father-in-law’s family was in Czechoslovakia. They could only send one child to the 

United States in 1976, and they chose to send my father-in-law. He 

came with nothing except this ring, which was sent with him in 

case of emergency. 

The ring symbolizes mobility. He came with nothing, yet he became chair of the psychology department in South Carolina. I, his 

daughter-in-law, am testifying before you today in Congress. His 

son became an FCC commissioner. 

What is important is not equality but mobility and opportunity. 

We can all be equally poor, like Cuba and Haiti, but what we need 

to do is focus on workplace opportunities, not on workforce protections that result in reduced opportunities. It is because of opportunities that so many people want to come to the United States 

today. 

There are many problems with traditional measures of inequality, one of the most important being that they don’t take into account mobility. One problem is some measures use pre-tax, pretransfer income, and that doesn’t account for the income people actually have to spend. 

In the latest data released by the IRS, 97 percent of taxes are 

paid by the top 50 percent, so people who earn a lot don’t have all 

that income to spend. And people at the lower end receive Medicare, Medicaid, food stamps, housing vouchers. When after-tax and 

after-transfer incomes are measures, the Commerce Department’s 

data show that inequality has not changed. 

Another reason that income inequality looks like it has changed 

is the Tax Reform Act of 1986, and that changed the taxation of 

corporate and individual income taxes. Before that, corporate income taxes were lower, so a lot of small businesses were encouraged to file as corporations. After that, it became advantageous for 

small businesses to file as individuals. So it looked like people—

normal people—were making a lot more money, but really it was 

just a change from corporate tax receipts into individual tax receipts. 

Another problem with measures of inequality is demographic 

changes. Not all households are the same size, and households 

have shrunk over time, as there are more single parents, more divorces. There are 1.7 people per household in the lowest fifth and 

23

about 3.1, on average, in the top fifth. The differences in household 

income are larger than differences in income per person. 

Also, with the entry of greater numbers of women in the workforce over the past 25 years, something that all of us appreciate, 

a growing tendency toward dual-income couples polarizes income 

distribution without any change in individual income inequality. 

Two earners marrying, if they are two attorneys or two automotive 

mechanics, results in an immediate change in the distribution, because it takes two lower-income households and makes them into 

one upper-income household. 

A police officer married to a nurse, each at the top of their profession, can earn about $200,000; whereas, if the police officer just 

had his own income, it would be closer to $100,000. 

If more teenagers take after-school jobs, the number of low-income taxed households balloons and income inequality appears to 

increase. 

The demographic characteristics at the bottom fifth of households 

shed light on consumption patterns. The bottom quintile has the 

highest average age, 52, while the top quintile has the second 

youngest age of 47. Believe or not, only 17 percent of households 

in the top fifth own their houses free of mortgage; whereas, 30 percent of people in the bottom quintile actually own their houses free 

of mortgage. So we have more assets in the bottom quintile even 

though they appear to be worse off. 

Many people in the bottom quintile are not truly poor. They are 

older citizens living off accumulated assets and accumulated wealth 

that has been decried by some witnesses today. 

America’s workforce isn’t in the middle of a surge of inequality—

we should be wary of conclusions reached from dubious data, and 

we should keep in mind other ways of determining inequality, such 

as by adjusting for household size and consumption expenditures. 

To the extent there is inequality in incomes, differences in education are an important factor. A better education gives everyone 

a better shot at the workplace. Yet putting in place more government benefits and mandated employer-provided benefits to combat 

alleged problems of inequality isn’t going to help the people that we 

are trying to help, especially women. With the Paycheck Fairness 

Act on the floor today, we need to be especially careful of different 

kinds of employer mandates that hurt women, because the unemployment rate for women in the United States is far lower than in 

those countries that have those larger mandates. 

Members should consider doing ways to help the economy grow, 

such as keeping taxes low, making use of America’s oil and gas reserves through oil drilling and exploration so we have a reliable 

source of domestic energy and removing ethanol mandates that are 

driving up our food prices. 

Thanks so much for giving me the opportunity to testify today. 

[The statement of Ms. Furchtgott-Roth follows:]

Prepared Statement of Diana Furchtgott-Roth, Senior Fellow, Hudson 

Institute 

Mr. Chairman, members of the Committee, I am honored to testify before your 

Committee today on the subject of the income gap in the American middle class. 

American workers are earning more today than they were a year ago. Real disposable personal income has increased steadily since 1996. Between January 1996 and 

24

May 2008, real disposable personal income increased 54.5 percent. Over past year, 

from May 2007 to May 2008, real disposable income increased by 7.3 percent. In 

addition, the Census Bureau reported 0.7 percent increase in median household income from 2005 to 2006 (the 2007 numbers will come out next month). 

With increases in income, what has happened to inequality? The popular perception of income inequality is dire. A quick search through the popular press will yield 

dozens of articles and speeches decrying the increasing excesses of the super-rich 

while the poor grow ever poorer. Robert Frank’s best-selling book, Richistan, portrays the ‘‘new rich’’ who have multiple mansions and staffs of household helpers. 

David Shipler’s The Working Poor: Invisible in America describes those in low-wage 

jobs, struggling to get by. Yet rather than relying on anecdotes, we should base our 

views of inequality on a firm understanding of the data. 

Economists use a variety of measures to determine how equally the income ‘‘pie’’ 

is divided. These measures include inequality indices and earning shares. 

Common to all these measures, however, are certain challenges. All measures 

need a definition of income, and defining income is not as straightforward as it 

seems. Some researchers will use pre-tax income, while others will look post-tax income before transfer payments such as food stamps, Medicare, or Social Security. 

Others use post-tax, post-transfer income. What measure is used makes a significant difference.

For example, consider the Gini coefficient, as calculated by the Census Bureau. 

The Gini coefficient is a statistical index inequality ranging from zero to one, calculated from the distribution of income throughout the population. Low values represent low levels of inequality, while values near one mean that income is concentrated among a few individuals. As can be seen from a Census Bureau table 

using alternate measures of income, the official Gini coefficient is consistently overestimated by about 5 percentage points,1 after taxes and transfers are accounted for 

(see figure above). 

A report from the Census Bureau concludes that ‘‘there have not been any statistically significant annual changes in the Gini index over the last 10 years.’’ 2 A Congressional Budget Office report found that, between 1991 and 2005, the quintile of 

households with children with the lowest earnings experienced the second greatest 

percentage increase in income, after the top quintile. The lowest quintile experienced the largest percentage growth in earnings.3

The Internal Revenue Service reports that the top 50 percent of earners paid 97 

percent of income taxes in 2006, a percentage which increased in almost every year 

since 1992 4 (see figure above). Meanwhile, personal current transfer receipts, as reported by the Bureau of Economic Analysis, have been steadily increasing (see figVerDate 0ct 09 2002 17:44 Nov 10, 2008 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6621 G:\DOCS\110TH\WP\110-107\43629.TXT HBUD1 PsN: DICK

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25

ure below). These transfer payments go disproportionately to lower-income individuals. The net effect of taxes and transfer programs is to bring greater equality to 

the purchasing power of individuals.

Additionally, we need to consider the spending power of American dollars. Lowincome households spend a greater portion of their income on goods that have become cheaper with international trade, such as food. High-income households, on 

the other hand, spend for ‘‘high-end services like private secondary schools, college 

tuition, high-end spas, message therapists, landscape gardeners, and other service 

providers whose relative prices rise steadily relative to the overall consumer price 

level.’’ 5 Jerry Hausman and Ephraim Leibtag found in 2004 that a Wal-Mart in a 

new market decreases food prices by 15 to 25 percent.6

Demographic changes can create potentially spurious increases in income inequality. Most inequality measures are calculated from household or family income. So 

the increasing tendency of high-income men to marry high-income women will boost 

the inequality among household incomes without changing inequality among individual earners. 

Furthermore, not all households are the same size, and household size has diminished over time due to later marriages, fewer children, and divorce. There are 1.7 

people in the average household in the lowest fifth of households, and this number 

rises steadily to 3.1 persons in the top fifth of households. Differences in household 

income, then, are larger than differences in income per person. Similarly, there are 

differences in the number of earners per household, with the top fifth averaging 2.1 

earners compared to the bottom fifth’s half an earner per household.7 Since more 

people are working in the higher income households, it is hardly surprising that the 

household as a whole is earning more. 

Besides the questions of determining the ‘‘true’’ Gini coefficient highlighted above, 

there are concerns when using the Gini coefficient for comparison. It is important 

to realize that the Gini coefficient represents a snap-shot of inequality. As the working force population changes its average characteristics, the Gini coefficient likewise 

changes. 

Consider an economy where workers have the same earnings experience over 

their lives. Younger workers earn less than older workers, and earnings rise 

throughout workers’ careers. A snap-shot of this economy will show income inequality between workers even though lifetime income is more equal. In this case, the 

Gini coefficient indicates less an egregious lack of income equality than a need for 

good credit markets. 

But even more than properly understanding the nuances of the numbers used to 

track income inequality, we need to understand the data that are used to generate 

them. A study by Thomas Piketty and Emmanuel Saez is the basis, directly or indirectly, for many of the commentators warning of rising income inequality. This 

study uses individual income tax returns from 1913 to 1998 (updated to 2001) to 

chart changes in the top earners’ income shares over the past century. 

To calculate these shares, Piketty and Saez aggregate the reported income of the 

top percentage groups of interest (specifically, the top 1 percent) and divide this 

number by the total personal income reported in the National Income and Product 

Accounts by the Bureau of Economic Analysis.8

Unfortunately, this simple measure is wholly dependent on the consistency of the 

underlying data. Individual income tax returns provide complicated data to work 

with, especially over time, because income tax returns provide data on tax units, 

not individuals. A married couple filing together represent one tax unit, as does 

their teenage son whose earned $3,350 at his part-time and summer jobs.9 These 

three represent one household, but two tax units: one relatively rich, the other relatively poor. 


fr3.eps
26

With the entry of greater numbers of women into the workforce over the past 25 

years, the growing tendency towards dual income couples polarizes the income distribution without any change in individual income inequality. Two earners 

marrying, whether they be attorneys or automotive mechanics, results in an immediate change in the income distribution. A police officer married to a nurse, each 

at the top of their profession, can earn almost $200,00. If more teenagers take afterschool jobs, the number of low-income tax ‘‘households’’ balloons and income inequality appears to rise. 

The Tax Reform Act of 1986 lowered the top income rate from 50 percent to 28 

percent, and raised the capital gains tax to equal the ordinary income rate.10 Prior 

to the passage of the Tax Reform Act, it was advantageous for many small-business 

owners to file under the comparatively lower corporate tax rate. After the Act, the 

individual tax rate was more favorable than the corporate rate, so small businesses 

switched to filing individual tax returns. This explains that large jump in the inequality series of Piketty and Saez between 1986 and 1988. A mass switch from corporate to individual filings by small-business owners fits this pattern perfectly.11

After correcting for this change and the effect of transfer payments, Cato Institute 

economist Alan Reynolds finds that ‘‘the apparent increase of 1.7 percentage points 

in the top 1 percent’s share from 1988 to 2003 in the unadjusted Piketty-Saez estimates becomes no increase.’’ 12

As well as analyzing income inequality directly, we can consider consumption inequality. This provides a better view of how much citizens actually spend, and 

therefore how well Americans live. Consumption spending generally has fewer fluctuations than income, so consumption data will be influenced less by transitory 

shocks. Data from the Consumer Expenditure Survey of the Bureau of Labor Statistics adjusted for the number of people per household gives us insight into spending 

equality among Americans.13

In 2006, the last year for which data are available, Americans in the lowest quintile of pre-tax income spent $12,006 per person, compared to $16, 572 per person 

in the middle fifth household, and $30, 371 per person in the top quintile. On a per 

person basis, the top quintile spends only 2.5 times what the bottom quintile does, 

and 1.8 times what the middle fifth does. 

When spending is broken down into categories, results are similar. The bottom 

quintile spends $874 per person for health costs, about 1.5 times as much as the 

top quintile’s $1318 per person. For food, the bottom fifth paid $1,878 while the top 

fifth paid $3,304. The top 20 percent spend only 1.8 times as much. In housing, the 

lowest quintile spent $4,781 to the top’s $9,700—about two times as much. In all 

these categories, the middle quintiles are roughly in between. 

The areas where the high-income quintile outspends the low-income quintile are 

personal insurance and pension, entertainment, and transportation. The top 20 percent spend 14.6 times more on personal insurance than the lowest fifth, but only 

three times more than the middle fifth. In both entertainment and transportation, 

the top quintile expends about three times as much as the bottom quintile. The top 

quintile outspends the middle quintile in entertainment and transportation by 2.2 

times and 1.7 times, respectively. The pattern that emerges is not one of extreme 

inequality. The top income earners do not outspend the lowest earners by extreme 

amounts. 

The demographic characteristics of the bottom fifth of households shed light on 

consumption patterns. The bottom income quintile has the highest average age, 52, 

while the top quintile has the second youngest age at 47 (the second-highest quintile 

has an average age of 46). Only 17 percent of the top twenty percent own homes 

mortgage-free, with 75 percent still paying off their mortgage; 30 percent of the bottom fifth own homes free of any mortgage, and only 13 percent have to spend for 

mortgages.14

These data support the conclusion that some households in the bottom income 

quintile are not truly poor. Instead, they are older citizens living off accumulated 

savings. Some of those in the top quintile are at the peak of their earning careers, 

and are saving up for their future. 

Another important difference between income quintiles is in education. The percentage of reference people in each household with a college education rises to 83 

percent in the top quintile, starting at 40 percent for the lowest 20 percent of households.15

Studies consistently find high returns to education. A study by economists Louis 

Jacobson, Robert LaLonde, and Daniel Sullivan on displaced workers in Washington 

State found that workers increased their incomes by 7 to 10 percent per year of community college, the same as students entering directly from high school.16 Another 

study by economists Thomas Kane and Cecilia Rouse found that these returns, 

27

about a 5 to 10 percent improvement in earnings per year of education, are remarkably similar across community colleges and four-year colleges.17

Perhaps more importantly, the subjects studied make a difference. A related study 

by Jacobson, LaLonde, and Sullivan find higher returns, 14 percent income improvement per year of education for men and 29 percent for women, when more technical 

or quantitative subjects are taken.18

Education gives Americans the skills they need to succeed in today’s dynamic 

business world. Improvements to the education system focused on providing quality 

education in key areas will increase the human capital of America’s citizens and 

help workers attain their potential in the workplace. 

America’s workforce is not in the midst of a surge of inequality as popularly portrayed. We should be wary of conclusions reached from dubious data, and keep in 

mind other ways of determining inequality, such as through consumption expenditures. To the extent that there is inequality in incomes, differences in education are 

an important factor. A better education system gives everyone a fairer shot in the 

workplace. 

Putting in place more mandated employer-provided benefits to combat alleged 

problems of inequality would hurt those Americans that members of Congress are 

seeking to help. Many of the protections are aimed at women. Examples of such protections include paid maternity leave, government-provided child care, and ‘‘paycheck fairness’’—mandating that women be paid the same as men not for equal 

work, as is the case now, but for jobs of equal worth. 

Yet women in the United States have enjoyed a low unemployment rate, one comparable to men’s, because low taxes and lack of employer mandates encourage 

women to work outside the home and be hired. This has remained true over the 

past year, as the economy has slowed. According to BLS data, the 2007 unemployment rate for American women was 4.5 percent and the rate for men was 4.7 percent. In June, 2008, the adult female unemployment rate in the United States was 

4.7 percent, compared to the male rate of 5.1 percent. Of particular note is that the 

unemployment rate for American women moves closely to the rate for men. 

In other countries, unemployment rates for women are higher than in the United 

States. In 2007, compared to the rate for American women of 4.5 percent, the rate 

for women in Canada was 4.8 percent; Australia, at 4.8 percent; France, at 9.1 percent; Italy, at 7.9 percent; Sweden, at 6.4 percent; and the UK, at 5 percent. In 

Italy, France, the Netherlands, and Sweden, women have a significantly higher unemployment rate than men.19

Not only do women in the United States have a lower unemployment rate, they 

also find jobs more quickly. According to the latest release from the OECD, only 9.2 

percent of unemployed women in the United States had been unemployed for a year 

or more. This compares favorably to Australia, where 15.2 percent of unemployed 

women were unemployed for a year or more; France, where it was 43.3 percent; Germany, where it was 56.5 percent; Italy, where it was 54.8 percent; Japan, where 

it was 20.8 percent; the Netherlands, where it was 43.6 percent; Spain, where it was 

32.2 percent; Sweden, where it was 12.2 percent; and the UK, where in 2006 14.9 

percent of unemployed women had been unemployed for a year or more.20

The labor force participation rate for American women is also high. From 1980 

to 1990, the participation rate rose 6 percentage points to 57.5 percent as large 

numbers of women entered the workforce. The rate peaked in 1999 at 60 percent, 

and in 2007 was only seven tenths of a percentage point lower, at 59.3 percent. In 

April 2008, 59.6 percent of women were in the labor market. The 2007 labor force 

participation rate for women was higher than in Australia at 59 percent; Japan, at 

47.9 percent; France, at 51.3 percent; Italy, at 37.9 percent; the Netherlands, at 59 

percent; and the UK, at 56.5 percent. 

The way to reduce economic inequality is to provide more education and job opportunities for those in lower income groups. To that end, we need to focus not only 

on education, but also on how to spur economic growth and keep prices low. Members could consider keeping taxes low, making use of America’s oil and gas reserves 

through oil drilling and exploration so that we have a reliable source of energy, and 

removal of the ethanol mandates that are driving up our food prices. 

Thank you for giving me the opportunity to testify today. I would be glad to answer any questions. 

ENDNOTES

1 U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements, 

Table RDI-5, ‘‘Index of Income Concentration (Gini Index), by Definition of Income: 1979 to 

2003.’’ Available at http://www.census.gov/hhes/www/income/histinc/rdi5.html 2 Ibid. 

28

3Dahl, Molly, Congressional Budget Office, ‘‘Changes in the Economic Resources of Low-Income Households with Children’’ May 2007. Available at http://www.cbo.gov/ftpdocs/81xx/

doc8113/05-16-Low-Income.pdf 4 Internal Revenue Service, SOI Tax Stats—Individual Income Tax Rates and Tax Shares, 

Table 1 ‘‘Number of Shares, Shares of AGI and Total Income Tax, AGI Floor on Percentiles in 

Current and Constant Dollars, and Average Tax Rates.’’ Available at http://www.irs.gov/

taxstats/indtaxstats/article/0,,id=129270,00.html 5Gordon, Robert and Ian Dew-Becker. ‘‘Controversies about the Rise of American Inequality: 

A Survey.’’ NBER Working Paper No 13982 (May 2008), pg 33. 6 Hausman, Jerry and Ephraim Leibtag. ‘‘CPI Bias From Supercenters: Does the BLS Know 

that Wal-Mart Exists?’’ NBER Working Paper No 10712 (August 2004). 7 U.S. Department of Labor, Consumer Expenditure Survey, Table 55. Available at ftp://

ftp.bls.gov/pub/special.requests/ce/aggregate/2006/quintile.txt 8Piketty, Thomas and Emmanuel Saez. ‘‘Income Inequality in the United States, 1913-1998.’’ 

Quarterly Journal of Economics, Vol 118, Is 1 (Feb 2003) pp 1-39. 9 Internal Revenue Service, ‘‘2007 Inst 1040 Instructions for Form 1040 and Schedules A, B, 

C, D, E, F, J, and SE.’’ Chart B, pg 7, for dependent children who are not blind or over 65 years 

of age. 10Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, as reported by Stacey Kean and 

David Brumbaugh, Congressional Research Service, CRS Report for Congress No. 87-231E, ‘‘Tax 

Reform Act of 1986 (P.L. 99-514): Comparison of New with Prior Tax Law.’’. 11 Reynolds, Alan. ‘‘Has U.S. Income Inequality Really Increased?’’ Policy Analysis no 586, Jan 

8, 2007. 12 Ibid., at 11. 13 All calculations on per-person spending are performed using U.S. Department of Labor’s 

Consumer Expenditure Survey, table 1, available at http://www.bls.gov/cex/home.htm. 14 Ibid. 15 Ibid. 16 Jacobson, Louis, Robert J LaLonde and Daniel Sullivan. ‘‘The Impact of Community College 

Retraining on Older Displaced Workers: Should We Teach Old Dogs New Tricks?’’ Industrial 

and Labor Relations Review, Vol 58, No 3 (April 2005) pp 398—415. 17Kane, Thomas J. and Cecilia Elena Rouse. ‘‘The Community College: Educating Students 

at the Margin Between College and Work,’’ Journal of Economic Perspectives, 13, no. 1 (Winter 

1999): 63-84. 18 Jacobson, Louis, Robert J LaLonde and Daniel Sullivan. ‘‘Is Retraining Displaced Workers 

a Good Investment?’’ FRB of Chicago Economic Perspectives, Vol 29, Iss 2 (2nd Quarter 2005) 

pp 47-66. 19 Bureau of Labor Statistics, ‘‘Comparative Civilian Labor Force Statistics, 10 Countries, 

1960-2007,’’ Washington, DC: Department of Labor, Updated April 18, 2008. 20OECD Employment Outlook 2007, Statistical Annex Table G, p 267. 

Ms. WOOLSEY. Thank you. 

Dr. Bernstein? 

STATEMENT OF JARED BERNSTEIN, DIRECTOR OF LIVING 

STANDARDS PROGRAM, ECONOMIC POLICY INSTITUTE 

Mr. BERNSTEIN. Chairman Woolsey, Ranking Member Wilson, I 

thank you for the opportunity to testify—happy birthday—and I 

commend the committee for examining what many economists and 

policymakers consider the most important economic challenge we 

face. 

Of course, in the current economy challenges abound. The economy, while not officially in recession, is clearly weak in key sectors, 

most notably in the job market. As we meet today, even as the 

economy continues to expand, the paychecks of middle income families are—the paychecks of middle income persons are falling behind their families’ economic needs, and living standards are sliding. 

Though these problems are of recent vintage, they are also a microcosm of the topic we are here to discuss today: The inequality 

of economic outcomes. 

Other witnesses have presented the statistics to make the case. 

I will only add a few examples and then discuss the causes of the 

problem and suggest some policy ideas. 

The gap between the economy’s growth and the income of the 

median family in the 2000s, in this business cycle, is one of the 

29

clearest examples of the inequality phenomenon. While output per 

hour of productivity increased smartly in the 2000s, up 19 percent, 

the real income for the typical family fell—fell—by about one percent. Given the concentration of growth at the top of the income 

scale, middle income families responsible for creating that growth 

are failing to reap its benefits. 

The increase in inequality is remarkably consistent across data 

sets, income definitions and other adjustments. The CBO data, as 

Bob Greenstein described, is the most complete source. It adjusts 

for taxes, it adjusts for transfers, it adjusts for family or household 

size, as was just raised. In large part, because of their addition of 

capital gains, critically important, these data show particularly 

large increases in inequality compared to, say, census, which admit 

those gains. 

Consumption inequality trends reflect those of income inequality. 

Again, in the 2000s, spending data revealed that expenditures fell 

three percent real for households in the bottom two-fifths, relatively flat in the middle and up seven percent for households at 

the top of the scale. 

Inequality is much more severe in the U.S. compared to that of 

most other advanced economies, and in reference to what Diana 

was just talking about regarding mobility, it is a particularly troubling aspect of such comparisons that income mobility is greater in 

these countries, except in the U.K. 

Now, these differences are often raised to suggest that more extensive social protections in Europe and the Nordics hurt their 

macro economy, but the evidence belies this claim: Both Norway 

and the Netherlands, for example, have higher productivity than 

the U.S. and lower unemployment rates. Excluding the U.S., average OECD employment growth was greater in the 2000s than it 

was here, and poverty was considerably lower. 

Now, turning to causes, increased inequality of labor earnings is 

usually attributed to technological change and the unmet demand 

of employers for skilled workers. Now, the idea here is that the 

production of the goods and services in the economies become more 

complex, and employers need more highly skilled workers. When 

the supply of such workers is low relative to employers’ demand, 

the relative wage increases. 

Now, this common sense explanation certainly makes sense and 

describes the relevant dimension of the problem, but it is too reductionist. It happens to be a very good idea for any economy to increase the skilled labor force—that is integral to a productive economy—but it can’t be the sole reaction to rising inequality. 

Now, first, we have to recognize that 70 percent of today’s workforce has less than a college degree. Thus, unless we are willing to 

consign this majority to stagnant living standards, simply pressing 

for higher skills is too narrow an agenda. 

Another important reason why the skills explanation is incomplete is that it refers largely to labor earnings, while non-labor, or 

capital income—profits, dividends, interest income, capital gains—

has become increasingly important as a component of rising inequality. 

Bob Greenstein mentioned the first ‘‘do no harm’’ principle of 

public policy regarding the contribution of tax changes since 2001 

30

to increasing inequality, so I won’t spend any time on that, but beyond tax policies there are other sins of omission that have contributed to higher inequality. We failed to strengthen workers’ legal 

ability to organize, we have gutted investments in their skills and 

training, under-invested in their public—in our public infrastructure and stood by while the employer-based systems of health coverage and pensions slowly unraveled. 

I can elaborate on those items as—in the Q and A, but I will stop 

there in the interest of time. 

Thank you. 

[The statement of Mr. Bernstein follows:]

Prepared Statement of Jared Bernstein, Senior Economist, Economic 

Policy Institute 

Chairwoman Woolsey, Ranking Member Wilson, I thank you for the opportunity 

to testify, and I commend the committee for targeting the critical challenge of economic inequality and the American middle class. In doing so, you are targeting what 

many economists and policy makers consider the most important economic challenge 

we face. 

Of course, in the current American economy, challenges abound. We are faced 

with the aftermath of the bursting of a massive housing bubble, and the spillovers 

from that event are significantly constraining financial markets. The economy, while 

not officially in recession, is clearly weak in key sectors, most notably in the job 

market, where employment is down by about 440,000 jobs on net, and unemployment up about a point compared to one year ago to 5.5%. The underemployment 

rate, a more comprehensive measure of diminished job opportunities was 9.9% in 

June. These job market declines, in tandem with spiking prices driven by higher 

food and energy costs, are leading to real declines in compensation. Simply put, the 

paychecks of middle-income are falling behind these families’ economic needs, and 

their living standards are sliding. 

Though these problems are of recent vintage, and can to some extent be closely 

tied to the bursting of the housing bubble, they are also microcosm of the topic we 

are here to discuss today: the inequality of economic outcomes. 

Figure 1 shows this relationship by plotting the productivity of the American 

workforce against the real income of the median family. While output per hour increase smartly in the 2000s, up 19%, real income for the typical family fell by about 

1%. In fact, this split between productivity and median family income has been ongoing since the mid-1970s, and is regarding as one symptom of increasing inequality. When economic growth is concentrated at the top of the income scale, many 

families responsible for creating that growth will fail to reap its benefits.

This period stands in stark contrast to the first few decades of the post-WWII era, 

when, as shown in the next figure, productivity and median family income grew in 


bern1.eps
31

lock-step, both doubling over these years. Clearly, the current era of rising inequality began in the mid-1970s, a fact that will be useful in diagnosing the problem later 

in this testimony.

Since committee staff has asked me to focus on causes and solutions, I will spend 

little time on the spate of statistics that document the increase in inequality. Those 

interested in such analysis should examine Chapter 1 of the book State of Working 

America, wherein myself and co-authors (Mishel, Shiersholz) present the evidence 

in great detail. Here, I will offer one very long term look at the issue, which tracks 

the share of national income held by the top 1%, including capital gains (an important component of income/wealth inequality), going back to 1913 (Figure 3). In 2006, 

most recent data point for this series, this share was 23% the second highest in the 

series. As the figure reveals, there was only one year with a higher share: 1928. 

Note also that the current share is twice that of the early 1970s.

Such evidence of historically high levels widely accepted. The causes, on the other 

hand, are hotly debated. And since appropriate solutions require accurate diagnoses, 

I will spend the rest of this testimony on causes and solutions. 

Inequality: Causes and Solutions 

Labor Earnings: Most commonly, increased inequality of labor earnings is attributed to technological change and the unmet demands of employers for skilled workers. Often, this explanation is discussed under the rubric of ‘‘skill biased technological change,’’ or SBTC. Simply stated, the theory maintains that the production 

of the goods and services in the economy has become more complex, and employers 


bern2.eps bern3.eps
32

1This section is adapted from the forthcoming State of Working America, 2008/09, by Mishel, 

Bernstein, and Shierholz. 

need more highly skilled workers to undertake the necessary tasks. When the supply of such workers is low relative to employers’ demands for them, the relative 

wage—the pay of highly skilled workers compared to others—increases, i.e., wage 

inequality goes up. 

In this sense, some economists view wage inequality as a race between technology 

and the supply of skilled workers. In periods when technological advances win that 

race, inequality rises, and visa-versa. Offsetting rising inequality in this framework 

requires an increase in the relative share of skilled workers, which, in the policy 

debate, usually translates into more college graduates with the skill sets that are 

complementary to the relevant technologies. 

This common-sense explanation certainly makes sense and describes a relevant 

dimension of the problem, but it is too reductionist. By definition, if inequality is 

increasing in this model, skill deficits are to blame. Such analysis can only return 

one policy recommendation: more skilled workers, or, more precisely, raise the relative supply of college graduates. That is generally a good idea for any economy, 

since skilled labor is integral to a productive economy, but it cannot be the sole reaction to rising inequality. 

First, we must recognize that 70% of today’s workforce has less than a four-year 

college degree. Thus, unless we are willing to consign this majority to declining living standards, either relative or absolute (i.e., real income stagnation), simply pressing for higher skills is too narrow an agenda. 

Second, in recent years, the college wage premium has actually been fairly flat, 

as shown in the table below. The values in the table are the wage advantage of college-education over high-school educated workers, controlling for the variety of factors noted above. The measure grew by about 14 percentage points over the 1980s, 

about half that much over the 1990s, and about zero in the 2000s. Thus, to the extent that wage inequality rose over the 1990s and especially the 2000s, it was increasingly a function of growing disparities within educational groups.

REGRESSION–ADJUSTED COLLEGE PREMIUM 

Year Percent 

1979 23.4%

1989 37.8%

2000 45.3%

2006 45.4%

Source: State of Working America, 2006/07

Heuristically, this might be understood be considering a school teacher, a midlevel office manager or HR director, a lower-level computer programmer, compared 

to an investment banker. All of these workers could be college-educated, but many 

faced stagnant earnings in recent years (the real college wage rose 2.5%, 2000-07, 

compared to 15%, over the 1990s), while others—the banker in our example—experienced large gains. This is an example of ‘‘within-group’’ inequality growth, and it 

is less amenable to skill upgrading solutions. 

Thus, while increasing the share of skilled workers is part of the solution, it is 

not the sole solution. It remains a critically important one, and I return to it below. 

But those interested in wielding policy to turn this inequality tide need also consider various mechanisms and institutions within our economy that have historically ensured that the benefits of growth are more broadly shared. 

Capital Income: 1 Another important reason why the skills explanation is incomplete is that it refers largely to labor earnings, while non-labor, or capital income—

profits, dividends, interest income, capital gains—has become an increasingly important component of rising inequality, particularly at the very top of the income scale. 

Two trends have reinforced the increasing important role of capital income: 1) 

such income has become more concentrated among households at the top of the income scale, and 2) capital income accounts for a larger share of total income. 

On the first point, the receipt of capital income has become much more concentrated over the last few decades, according to the data from the Congressional 

Budget Office. Whereas the top 1% received 34.2% of all capital income in 1979, 

their share rose to 58.6% by 2000 and rose further to 65.3% in 2005 (the latest year 

for these data). Thus, the top 1% roughly doubled its share of capital income between 1979 and 2005. Correspondingly, the share of capital income going to the bottom 90% declined from 36.7% in 1979 to just 15.1% in 2005. 

33

2Some of this section originally appeared in earlier testimony (http://www.epi.org/content.cfm/webfeatures—viewpoints—testimony—20080213) though I have updated some of the 

analysis. 

Second, the economy, particularly the corporate sector (excluding government, 

non-profits, and proprietors) is now generating both higher returns to capital income 

(greater profits and interest), and this has expanded capital’s share of total income. 

For instance, income such as capital gains, interest, and dividend income comprised 

18.0% of personal market-based income in 1979 and 24.2% in 2007. This necessarily 

generates greater income inequality since, as the CBO reveal, most capital income 

is received by those who are well off. 

Likewise, the share of income in the corporate sector going to capital income in 

the recent recovery was the highest in nearly 40 years: in the 2004-07 recovery capital income accounted for 22.3% of corporate income, a jump from its 19.2% share 

in the 1976-99 recovery. The share going to compensation was correspondingly at 

a low point. The resulting historically high returns to capital are associated with 

the average worker’s compensation being 4.4% lower and the equivalent of transferring $206 billion dollars annually from labor compensation to capital incomes. 

First, Do No Harm: All of the data and arguments presented this far are in regards to inequality from market outcomes, i.e., before taxes and transfers. And 

clearly, these market outcomes have become much more unequal in terms of distribution. It is thus important not to exacerbate the problems we have with policies 

that further amplify market-driven inequalities. For example, changes since 2001 to 

the Federal tax code have worsened the distributional outcomes, by disproportionately lowering the tax liabilities of the wealthiest families. 

Such regressive tax policies hurt most families both directly and indirectly. Directly, they exacerbate the already excessive inequalities in market outcomes (i.e., 

the pretax distribution). Indirectly, they diminish revenues such that the Federal 

government is less able to perform needed functions (without borrowing), many of 

which, like safety net policies, disproportionately benefit the least well off. While the 

direct impact of the regressive tax cuts has been extensively measured and is wellappreciated, this indirect effect—the defunding of public services that boost economic security of the least advantaged—is also important and problematic. 

Beyond tax policy, other policy ‘‘sins of omission’’ have contributed to higher inequality. We have failed to strengthen workers’ legal ability to organize, gutted investments in their skills and training, under-invested in our public infrastructure, 

or stood by as the employer-based systems of health coverage and pensions slowly 

unravel. 

The following section briefly suggests policies to proactively push back against the 

trends toward greater inequality. 

Reconnection Growth and Living Standards of Middle and Lower Income Families2

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

Bargaining Power: The inability of most workers’ to bargain for a greater share 

of the value they’re adding to our economy is at the heart of the various gaps documented above. Historically, a broad set of policies and norms, including unions, minimum wages, defined-benefits pensions, and health care provisions, helped to lift 

workers’ ability to bargain, and were thus associated with more broadly shared 

prosperity. 

Many factors have eroded these institutions and norms. Global competition clearly 

has strong upsides, as the increased supply of goods and capital has lowered prices 

and interest rates. But this same increased supply has hurt the bargaining power 

of many workers in this country, particularly those with less than a college education. Indeed, recent trends in the offshoring of white collar work are reducing the 

bargaining power of more highly educated workers as well. 

Unions play a key role in precisely this area. Research reviewed in Mishel et al 

(2007, table 3.37) shows that the decline in union density explains one-fifth to onehalf the increase in male wage differentials over the past 25 years, and union wage 

premiums remain highly significant, even after controlling for human capital and 

observable characteristics. 

The decline in unions is partly a mechanical function of the loss of jobs in unionized industries, like manufacturing, but the more important explanation is the very 

unbalanced playing field on which unions try to gain a foothold. In fact, Freeman 

(2007) argues that slightly more than half of the non-union workforce would like 

some type of union representation, a finding that is not particularly surprising given 

the divergence of incomes and productivity shown above. 

34

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

The problem here is that the legal and institutional forces that have historically 

tried to balance the power of anti-union employers and their proxies have significantly deteriorated in recent decades, as described by Shaiken (2007). One legislative solution is the Employee Free Choice Act (EFCA), a bill that helps to restore 

the right to organize in the workplace. A central component of EFCA is so-called 

majority sign-up or ‘‘card-check,’’ which gives the members of a workplace the ability 

to certify a union once a majority sign authorizations in favor the union. The law 

also puts much needed teeth back into labor law by ratcheting up the penalties for 

those who violate the rights of workers trying to organize or negotiate a contract. 

Macro-Economic Conditions: Full employment—a tight match between labor supply and labor demand—is another important criterion for reducing the gap between 

overall growth and living standards of working families. Historically, very low unemployment rates have also been a key contributor to workers’ bargaining power, 

ensuring that employers needed to bid compensation up to get and keep the workers 

they needed in order to meet the demand for their goods and services. 

We do not need to look back too far in time to corroborate such assertions, as the 

latter 1990s was a period of uniquely low unemployment in the context of the last 

few decades (unemployment was 4% on average in 2000). Overall poverty fell by 2.5 

points, 1995-2000, but declines among minorities that were more than twice that 

magnitude. In the 2000s, though unemployment did fall to the mid-four percent 

range at its lowest, job markets were never as tight, job creation was much weaker, 

and poverty was higher at the end of the cycle than at the beginning. 

Such trends are not at all unique to the 1990s cycle: longer term analysis confirms the result. For many of the years over the period 1949-73, the unemployment 

rate was actually below the so-called NAIRU: the lowest unemployment rate considered to be consistent with stable prices.3 Recall from Figure 2, however, that this 

was the period when real median family income grew in step with the overall economy. Conversely, over the post-73 period, the labor market was often slack, as unemployment was higher than the rate associated with full employment. As has been 

shown, middle-incomes grew much more slowly over these years and inequality increased. 

Of course, the conventional response would be that inflation must have grown 

more quickly over the earlier period, when job markets were especially tight but, 

in fact, the opposite is true. Even controlling for the steep inflation of the latter 

1970s, inflation actually grew more slowly when the job market was ‘‘tight than recommended,’’ at least based on the NAIRU criterion. We relearned this lesson in the 

latter 1990s, also a period of decelerating price growth, even while the unemployment rate was headed for 30-year lows. 

In order to take a closer look at the benefits of full employment, and the costs 

of its absence, the next table examines these dynamics from the perspective of African-American median income. I take advantage of the Congressional Budget Office’s 

series of the so-called ‘‘natural rate’’ of unemployment (the rate associated with stable price growth). By comparing this rate to the actual unemployment rate, we have 

a measure of whether the job market was above or below full employment (i.e., 

slack, meaning lots of job seekers and too few jobs, or taut, meaning the a tight 

match between the number of workers and the number of jobs). 

The first column of the table accumulates the annual percentage-point differences 

over the two time periods. Thus, if CBO’s natural rate was 5% and the actual jobless rate was 4.5%, this would show up as a ¥0.5 percentage point in the analysis. 

Between 1949-73, the unemployment rate was often below the ‘‘natural rate,’’ cumulatively 19 percentage points. This happens to be about the same number of points 

that unemployment was above this rate in the latter period. In other words, in the 

first period, job markets were typically much tighter than in the second period. 

When job markets were much tighter—when the unemployment rate average 

4.8%—the incomes of black families grew at an average annual rate of 3.7%, compared to less than 1% in the latter period, when unemployment average 6.2%. Of 

course, many other factors were in play here. As shown above, every group’s income 

grew more slowly in the latter period. The early progress of blacks grew off of a very 

low base, making it easier to post large percentage gains. Also, a larger share of 

black families was headed by single parents in the latter period, and this too contributed to the income slowdown. But less favorable job market conditions surely 

played an important role as well. 

The last column in the table is offered to rebut the commonly heard caveat regarding tight job markets: they generate unacceptably high levels of inflation. This 

simple comparison shows that inflation was lower when job markets were much 

35

4http://www.epi.org/content.cfm/webfeatures—snapshots—20080716. 

tighter, contradicting the simple story. Clearly, tight labor markets, persistently 

below the supposed natural rate, have been associated with much better income 

growth for African-American families.

FULL EMPLOYMENT, AFRICAN–AMERICAN FAMILY INCOME, UNEMPLOYMENT, AND INFLATION, 

1949–2006

Cumulative Points 

Below or Above Full 

Employment 

Real Annual Growth, 

Median Income, AfrAm Families 

Average Unemployment Inflation*

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

1973-2006 .............................................. 20.7% 0.8% 6.2% 3.7%

*Post-73 comparison leaves out 1979-82 to avoid upward bias. Including these years gives an average of 4.3%.

Sources: CBO NAIRU estimates; Census Bureau, median family income (RS deflator); BLS, unemployment; BLS, CPI-RS deflator. 

In this regard, the 2000s were an important reminder of the impact on minorities 

of less then full employment. Interestingly, once the jobless recovery ended in the 

fall of 2003, the job market over this cycle was roundly praised by many commentators, mostly with reference to the low unemployment rate. But employment growth 

was weak over this recovery, and the low unemployment rate partially masked 

other problems (like declining employment rates) that depressed the bargaining 

power of minority workers. 

The policy levers here, at least in normal times, i.e., outside of recessions, rest 

mainly with the Federal Reserve, but Congress can also play an important role 

which I discuss below under the rubric of investment policy. 

Safety Nets: Historically, working families in our country have depended on employers to provide health care and pensions, but it is not an exaggeration to observe 

that this system of employer-based coverage is slowly unraveling. A slow but undeniable shift is occurring, as the economic risks associated with illness and aging out 

of the workforce are shifting from employers to workers. This shift is not simply affecting the least skilled workers, but, as Gould (2007) shows in the area of employer-based health coverage, it is reaching workers at all wage and skill levels. In 

the area of pensions, the shift from defined benefits (a guaranteed pension) to defined contribution has been at the heart of the process of shifting risks from firms 

to workers. 

These shifts have motivated a vibrant debate regarding reform of our health care 

system. Such reform is especially urgent given the realization that the rate of increase in health spending in both the public and private sector is unsustainable. But 

this debate also has considerable bearing on the inequality debate, since the distribution of health care coverage and even outcomes have increasingly been skewed 

in a similar manner to other economic variables discussed thus far.4 And in this regard, certain types of health care reform, such as ‘‘pay or play,’’ or single payer models, could also involve considerable redistribution from the with above average care 

to those with less (or no) coverage. Similarly, the lack of savings preparedness 

among many persons approaching retirement (see Weller and Wolfe, 2005) and the 

shift from guaranteed pension underscores the need for pension reform as well. 

It is beyond my scope here to review these plans. I refer interested parties to 

EPI’s Agenda for Shared Propserity, an initiative by our institute to elaborate in 

some detail the best plans for meeting these challenges. I raise these issues in the 

context of this testimony because in this era of increasing inequality, health and 

pension coverage, especially through the job, are eroding, even as the economy expands. As ongoing technological change, globalization, and the lost bargaining power 

of many in the workforce have led to trends documented above, employers have been 

in the process of backing off their historical commitments to their workforce in 

many ways, including these types of coverage. And of course, the least advantaged 

workers rarely had such coverage to lose in the first place. 

The inequality data along with information on profitability reveal that it is not 

for lack of resources that firms have been cutting back on health and pension coverage, although rising health costs can and should also be viewed as a competitiveness issue. Instead, it is yet another symptom of the unbalanced nature of growth 

in the current economy, as wealth flows upwards and risks flow down. 

As these policy debates unfold, I urge the committee to view the issue of health 

care and pension reform as one that is intimately related to the findings regarding 

incomes, wages, and inequality in the first section of my testimony. By helping to 

36

provide workers with access to health care and pensions, we take a huge step towards improving job quality and blocking the ongoing risk shift. 

Finally, given the changes in the structure of work and the demography of the 

workforce, our nation’s Unemployment Insurance system is also in need of reform 

and modernization. The Unemployment Insurance Modernization Act, already 

passed by this chamber, would make such changes, including providing benefits to 

both part-time workers and those who leave their jobs for compelling family reasons. 

The bill also accounts for shorter job tenures by considering a worker’s most recent 

work history when determining eligibility for UI benefits. 

Investments in Human and Physical Capital: The emphasis in this section thus 

far has been more towards creating good jobs than on improving the skills of workers. That ‘‘demand-side’’ emphasis is important, because, as noted earlier 70% of the 

workforce is non-college educated, and we must have a strategy for improving the 

quality of all jobs, not just those for workers with high levels of education. Similarly, 

regardless of skill levels, all workers will benefit from more effective and efficient 

safety nets. 

But it’s also critical to invest in the skills of the workforce of both today and tomorrow. Unfortunately, our budgetary priorities have been moving in the opposite 

direction, as federal budgets over the past few decades have shortchanged training 

programs. Eisenbrey (2007), for example, shows that Federal investment in employment services and training is down about $1 billion in real terms since 1986 (from 

about $6 to $5 billion, 2006 dollars) even while the workforce has grown in size considerably over those years. The result is a decline in the budget for worker training 

and services from $63 to $35 per worker, in 2006 dollars. 

According to the Coalition for Human Needs (2008) analysis of Congressional appropriations for a number of training programs, real declines have occurred in a 

number of job training programs between FY05 and FY08. Spending on both adult 

(-12%) and youth training (-14%) through the Workforce Investment Act are down, 

as are dislocated worker training (-9%) and adult basic education (-12%). 

As Savner and Bernstein (2004) discuss, one reason this disinvestment is misguided is that recent initiatives in worker training have shown considerable promise 

relative to earlier, less effective approaches. Our analysis was partly motivated by 

the evident limitations of work-first policies, i.e., programs that placed workers in 

jobs with little attention to job quality or career opportunities. In reaction, there has 

been a growing emphasis on programs designed to help job seekers prepare for good 

jobs and advance to careers. As we wrote: 

‘‘This new generation of programs shares several key elements. First, they’re 

grounded in extensive knowledge of the local labor market, focusing on occupations 

and industries that offer the best opportunities for advancement. Second, they help 

workers access education and training at community colleges, community-based 

training programs, and union-sponsored programs that work with employers to design curricula based on the skills that employers actually need. And third, they provide access to remedial services—often referred to as ‘‘bridge’’ programs—so that 

people who have weak basic skills can prepare for postsecondary-level programs.’’

Savner and I also recognized that even the best training programs will not work 

when the jobs aren’t there. There will always be disadvantage localities beyond the 

reach of even the strongest macroeconomic booms, and neither full employment in 

the rest of the economy nor the most integrated training program will help. In these 

cases, we advocate the creation of public-service jobs to keep people gainfully employed, drawing on the successful experience of transitional jobs programs that have 

sprung up around the country using public funds to create work for people struggling to get a foothold in the labor market.

37

Of course, educational disadvantages begin well before most people reach the 

workforce. Income inequality itself is a factor, preventing children’s whose abilities 

should lead to higher academic achievement, but whose income class blocks their 

opportunity. Figure 4 shows that even once we control for academic ability, it remains the case that higher income children are more likely to complete college. Each 

set of bars shows the probability of completing college for children based on income 

and their math test scores in eighth grade. For example, the first set of bars, for 

the students with the lowest test scores, shows that 3% of students with both low 

scores and low incomes completed college, while 30% of low-scoring children from 

high-income families managed to complete college. 

The fact that each set of bars has an upward gradient is evidence against a 

meritocratic system. The pattern implies that at every level of test scores, higher 

income led to higher completion rates. The third set of bars, for example, shows that 

even among the highest scoring students in eighth grade, only 29% of those from 

low-income families finished college, compared with 74% of the from the most 

wealthy families. In fact, this 29% share is about identical to the completion rates 

of low-scoring, high-income students (30%), shown in the first set of bars. In other 

words, high-scoring, low-income children are no more likely to complete college than 

low-scoring, wealthy children. 

Such barriers to higher education revealed in these last two figures are costly in 

terms of reduced mobility. Recent research by mobility analysts at the Brookings 

Institution revealed that among those who lived as children in the lowest income 

families, college completion was strongly associated with leaving the bottom fifth in 

adulthood: 16% of those with a college degree remained low-income as adults, compared to 45% without college. Similarly, 54% of high-income children who completed 

college were high-income adults. But less than half that share—23%—without a college degree managed to maintain their top-fifth status. That is, 77% of the children 

who grew up in top-fifth families but failed to complete college, fell to lower income 

classes as adults. 

Though much recent educational policy has stressed accountability and standards, 

these results should serve to remind us that education policy designed to offset inequality also needs to be concerned with access to educational opportunity. Students 

with the cognitive strengths to achieve higher educational completion are too often 

blocked by income constraints, and the costs of such barriers in terms of diminished 

mobility are very high indeed. 

Along with human capital, investments in public physical capital should also be 

considered. Though such ideas are not typically discussed in the context of inequality, I raise them as such here, because I believe they are an important complement 

to the macroeconomic discussion above. The reality of a recession-like contraction 

in the job market means that the bargaining power associated with tighter labor 

markets is conspicuously absent. As such, workers wages and compensation are falling in real terms, due to slower wage growth and fewer hours of work (faster price 

growth is also a major factor for real wage losses in the current context). In this 

regard, investment in public infrastructure can be considered one way to generated 

much needed labor demand and jobs for those falling behind. 


bern4.eps
38

5http://www.transportation.org/news/96.aspx 

Three facts motivate this contention. First, American households are highly leveraged, and may well be poised for a period of enhanced savings and diminished consumption. In this context, public investment should be viewed as an important 

source of macro-economic stimulus and labor demand—the creation of new, and 

often high quality jobs—which is clearly lacking from our current labor market. 

Second, there are deep needs for productivity-enhancing investments in public 

goods that will not be not made by any private entities, who by definition cannot 

capture the returns on public investments in roads, bridges, waste systems, water 

systems, schools, libraries, parks, etc. Three, climate change heightens the urgency 

to make these investments with an eye towards the reduction of greenhouse gases 

and the conservation of energy resources. 

One area of particularly significant job loss has been in construction. Jobs in residential building and contracting are down 480,000 over the past two years, and 

when we include other jobs related to housing, such as real estate, we find a decline 

of over 600,000 jobs since June 2006. In other words, there exists considerable labor 

market slack that will certainly deepen if the economy is in or near recession. 

In this regard, infrastructure investment serves a dual role of deepening on investments in pubic capital while creating good jobs for workers that might otherwise 

by un- or underemployed. One common argument against such investment in the 

context of a stimulus package is that the water won’t get to the fire in time, i.e., 

the implementation time lag is too long to quickly inject some growth into the ailing 

economy. However, research by EPI economists has carefully documented current 

infrastructure needs that could quickly be converted into productive, job-producing 

projects (Mishel et al, 2008). 

Take, for example, the August 2007 bridge collapse in Minneapolis. The concrete 

for the replacement bridge began flowing last winter, and the bridge is now halfway 

done, with full completion expected by December. The American Association of State 

Highway and Transportation Officials claim that according to their surveys, ‘‘state 

transportation departments could award and begin more than 3,000 highway 

projects totaling approximately $18 billion within 30-90 days from enactment of federal economic stimulus legislation.’’ 5

The following are other relevant examples identified by these researchers: 

• There are 772 communities in 33 states with a total of 9,471 identified combined sewer overflow problems, releasing approximately 850 billion gallons of raw 

or partially treated sewage annually. In addition, the Environmental Protection 

Agency (EPA) estimates that between 23,000 and 75,000 sanitary sewer overflows 

occur each year in the United States, releasing between three to 10 billion gallons 

of sewage per year. • According to a survey by the National Association of Clean Water Agencies, communities throughout the nation have more than $4 billion of wastewater treatment projects that are ready to go to construction, if funding is made available. 

Funds can be distributed immediately through the Safe Drinking Water and Clean 

Water State Revolving Funds and designated for repair and construction projects 

that can begin within 90 days. • The National Center for Education Statistics (NCES) put the average age of the 

main instructional public school building at 40 years. Estimates by EPI find that 

the United States should be spending approximately an [additional] $17 billion per 

year on public school facility maintenance and repair to catch up with and maintain 

its K-12 public education infrastructure repairs. • According to a 1999 survey, 76% of all schools reported that they had deferred 

maintenance of their buildings and needed additional funding to bring them up to 

standard. The total deferred maintenance exceeded $100 billion, an estimate in line 

with earlier findings by the Government Accounting Office (GAO). In just New York 

City alone, officials have identified $1.7 billion of deferred maintenance projects on 

800 city school buildings. • The U.S. Department of Transportation has identified more than 6,000 high-priority, structurally deficient bridges in the National Highway System that need to 

be replaced, at a total cost of about $30 billion. A relatively small acceleration of 

existing plans to address this need—appropriating $5 billion to replace the worst 

of these dangerous bridges—could employ 70,000 construction workers, stimulate 

demand for steel and other materials, and boost local economies across the nation. • The House Committee on Transportation and Infrastructure has identified more than $70 billion in construction projects that could begin soon after being funded. 

An effective short-term stimulus plan could include resources directed at projects for 

roads, rails, ports, and aviation; only projects that can begin within three months 

would be considered. 

39

Finally, while I have discussed these infrastructure needs in the context of recession and stimulus, it is important to recognize that a) these are all necessary and 

productivity-enhancing investments that should be made regardless of the state of 

business cycle, and b) recent history suggest that it is a mistake to think that labor 

market slack will no longer be a problem when the recession officially ends. 

This last point deserves a bit of elaboration. Much of the current recession/stimulus debate has stressed that recent recessions—the ones in 1990-91 and 2001—

were both mild and short-lived, and perhaps the next recession will follow the same 

pattern. It is critical to recognize that these claims are based solely on real output 

growth, and not on job market conditions. The allegedly mild 2001 recession, wherein real GDP barely contracted, was followed by the longest ‘‘jobless recovery’’ on 

record. Though real GDP grew, payrolls shed another net 1.1 million jobs. The unemployment rate rose for another 19 months and for just under two years for African-Americans. The pattern was similar, though not quite as deep, after the early 

1990s recession. 

Part of the explanation for this disjuncture has to do with the way recessions are 

officially dated by the committee at the National Bureau of Economic Research, as 

they have apparently given less weight to the job market and greater weight to output growth. But policy makers are likely to give greater consideration to working 

families whose employment and income opportunities are significantly weakened as 

unemployment rises and job growth contracts. Thus, from a stimulus perspective, 

these investments will be still be relevant well after the recession is officially ended. 

Conclusion 

The existence of historically very high levels of income concentration in the American economy is well documented. While there is certainly debate about the causes 

of this trend, one factor widely agreed upon is education, in that skilled workers 

clearly have a large and growing wage and income advantage over less skilled workers. But other factors, including weakened distributional institutions, the absence 

of full employment, and deficient safety nets and investment are also problematic. 

At the same time, changes in tax policy have exacerbated inequalities that are already being driven up by imbalanced market outcomes. 

I have elaborated ways to strengthen the mechanisms which historically have 

been called upon to ensure a fairer distribution of the fruits of growth. I recognize 

that many of these steps are ambitious, such as creating greater access to higher 

education by economically disadvantaged children. Others, such as tight labor markets or infrastructure investment, cut across many committees in Congress and 

even across government institutions, like the Federal Reserve. 

Such an ambitious agenda is necessary, if we are to accomplish what must be a 

foremost goal of public policy: the reconnection of growth and living standards. The 

existence and expansion of this gap strikes at the heart of our core economic values, 

such as the belief that working families’ living standards should reflect their contribution to the economy’s growth. Every year that productivity rises, but middle incomes stagnate, poverty increases, and children are blocked from the opportunities 

to realize their potential, is another year in which the basic American economic contract is broken. I commend the committee for investigating this serious problem and 

look forward to working with in any way that would to helpful to fix it. 

BIBLIOGRAPHY

Mishel, L., Bernstein, J., & Allegretto, S. (2007). The State of Working America 

2006/2007. Ithaca: Cornell University Press. 

Freeman, R. B. (2007). America Works: Critical Thoughts on the Exceptional US 

Labor Market. New York, Russell Sage Foundation. 

Mishel, L., Eisenbrey, R., & Irons, J. (2008, January). Strategy for Economic Rebound: Smart stimulus to counteract the economic slowdown. Washington, D.C.: 

EPI Briefing Paper No. 210, Economic Policy Institute. 

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

American Prospect. 

Shaiken, H. (2007, February). Unions, the Economy, and Employee Free Choice. 

Washington, D.C.: EPI Briefing Paper No. 181, Economic Policy Institute. 

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

Ms. WOOLSEY. Thank you very much. 

And we will start right with you, Dr. Bernstein, because I would 

like you to elaborate on the importance of labor unions in building 

40

a middle class for our nation. And I think you could just keep going 

with where you wanted to go on that one. 

Mr. BERNSTEIN. Thank you. I am glad you gave me that opportunity. 

The inability of workers to bargain for a greater share of the 

value that they are adding to our economy is at the heart of the 

gap that many of the panelists have described today. 

Now, historically, there has been a broad set of policies and 

norms, and they have included unions but also minimum wages, 

defined benefit plans, as opposed to defined contributions, health 

care provisions. Many factors have eroded these institutions and 

norms. Global competition, which I agree with other panelists, has 

clear, strong upsides; it has also hurt the bargaining power of 

many workers in this country. 

Unions play a key role in boosting bargaining power, and I stress 

the importance of legislation like the Employee Free Choice Act to 

level the playing field for workers hoping to organize. 

Ms. WOOLSEY. Thank you. 

Bob, I have a question, Bob Greenstein. In your testimony, you 

mention that reducing poverty is a major goal. The Progressive 

Caucus, of which I am co-chair with Barbara Lee, has endorsed the 

goal of cutting poverty in half over the next 10 years. 

Do you see this as possible, and why is lifting Americans out of 

poverty so essential to our economic health? 

Mr. GREENSTEIN. I think this is a very important goal. I also 

have endorsed that goal. I do think it will be a real challenge to 

get there, and it may be that if policymakers implement a striking 

array of policies to reduce poverty, the reduction may fall short of 

cutting it in half, but there is no question that one can make substantial progress on that front. 

I think there are a number of kinds of implications. One of them 

is obviously economic. Children who are the low—low-income children today are a key part of the workforce of tomorrow. In order 

to have greater economic growth, we need a greater degree of 

growth in the productivity. We need a skilled and trained workforce. We have growing amounts of research evidence that poverty 

in childhood, especially early childhood, can have an inhibiting effect on the degree of skills that children ultimately develop, the 

level of education they ultimately get and so forth. 

So this is an area where we can benefit the overall economy 

while reducing poverty at the same time. 

Similarly, one of the reasons—if you look at the long-term fiscal 

picture, why do we have serious long-term fiscal problems, there 

are many factors. One of them—the biggest one is rising health 

care costs—but one of them is that economic growth is projected to 

slow in coming decades because of the slowdown in the growth of 

the size of the workforce as the population ages. Another way of 

saying this is every potential worker becomes more important. 

We have a lot of people, a number of people who are poor adults 

who, with more education and with various kinds of supportive 

services to overcome various barriers to employment they now 

have, might be able to become productive workers as part of our 

workforce. We can no longer afford, going forward, to have people 

like that who are not part of the workforce. 

41

Finally, I think it affects the whole social fabric of the country 

when we have significant numbers of people who are not sharing 

when the economy, as a whole, grows. 

So there are a whole variety of reasons here. As you know, when 

he was prime minister, Tony Blair set a goal of cutting child poverty—I forget if it was in half or in whole, the percentage—in 

Great Britain, and while they didn’t fully meet that goal during his 

tenure, they made major reductions in child poverty. I would like 

to see us do the same thing here. 

Ms. WOOLSEY. Where there is a will there is a way. 

Ms. Minow, I am changing the subject a little bit now. Do you 

have any examples for us on golden parachutes versus laying off 

the regular rank and file, and let us—is there anything you can tell 

us about how the two different groups are treated? 

Ms. MINOW. Yes. I think probably the better analogy rather than 

golden parachutes would be other kinds of bonuses, because golden 

parachutes occur usually after a merger. 

Yes, the problem is that, as I said, the pay plans, as structured, 

provide a lot of perverse incentives, and so the more money that 

they can save by—these executives can save by laying off employees or by clamping down on any increase in their benefits, the more 

it rebounds to them through bonuses. And I can give you some specific numbers on that if you will let me amend the record after the 

hearing. 

Ms. WOOLSEY. I would appreciate that. Thank you. 

Mr. Wilson? 

Mr. WILSON. Thank you very much. 

And, Ms. Furchtgott-Roth, I am happy to hear of your South 

Carolina connection. 

As we face the issues discussing the middle class, the definition 

of middle class is something that I would like to know more about. 

And if you could explain how we measure what the middle class 

is, I have had the extraordinary opportunity to visit China, visit 

India. Both countries have phenomenal growth of what is called 

middle class, possibly exceeding the population of the entire United 

States in either country—over 300 million in India, possibly 300 

million in China. And so, how in the world do you define middle 

class? 

Ms. FURCHTGOTT-ROTH. Well, it is an excellent question, because 

it is a very difficult thing to do. You can take average household 

income, which is about $48,000 right now, but that hides the fact 

that a lot of people are moving through different life cycles. 

So we have my interns back here, Steven and Jeff. They are 

right now working for free. I can’t pay them less than minimum 

wage, but I am allowed to employ them as interns for free. But 

when they graduate from Swarthmore and Princeton, they are 

going to be able to make a good introductory salary, and then they 

are going to rise up, and if they marry other people, then they will 

have maybe two incomes and a family, a car, house. Their peak incomes will be around when they are about, you know, in their 50’s 

or 60’s, then they will retire, they won’t have any income at all. 

They will look poor, they will drop into that bottom income quintile, but hopefully they will have saved enough assets to—so they 

will have a comfortable retirement. 

42

So the middle class, at some point they will hit that maybe $48,000, but it will be moving through a life cycle, a life cycle of 

earnings, and most Americans work through a different life cycle 

of earnings depending on their skills and their education qualifications. That is why it is important to make sure we have as important skill base as possible. There are some states where there are 

only 70 percent of high school students that graduate, but that 

needs to be changed. 

I would also like to add that in terms of what Mr. Bernstein was 

saying about unions, right now only seven percent of private-sector 

workers choose to belong to unions. The percent of workers choosing to belong—private-sector workers choosing to belong to unions 

has steadily declined over the past 25 years. At the same time, 

GDP in the United States has been steadily increasing, and our 

country has been getting wealthier. 

The Employee Free Choice Act would take away the rights to a 

secret or a private ballot to vote for unions. It would have a card 

check phenomenon where someone could come up to you and say, 

‘‘Hey, Mr. Wilson,’’—come to you at your home, ‘‘Hey, Mr. Wilson, 

don’t you want to join a union? Here is a card, you check it, and, 

by the way, I know where you live, I know your car, I can slash 

your tires if I want.’’

Mr. BERNSTEIn works for the Economic Policy Institute, which is 

funded by the AFL-CIO, so he has to take that position, but that 

is not an accurate representation of the problem in American living 

standards and inequality. 

Mr. WILSON. Well, in fact, I appreciate—I live in a right-to-work 

state. We are very, very grateful for investments. I have got three 

Michelin plants in the district that I represent. They have had a 

phenomenal impact on increasing wage rates throughout the region. I am also grateful that we have BMW located in South Carolina. In fact, every X5, Z3, Z4 in the world is made in South Carolina, and they have just announced a three-quarter of a billion dollar expansion. And a key part of that has been a labor force which 

is truly emancipated, and it is doing very well. So that would back 

up what you said. 

In your written testimony, you noted that a variety of measures 

are used to determine how equally the income pie is divided. All 

of the measures need a definition of income, and, as you noted, defining income is not as straightforward as it seems. Does that factor explain why researchers have reached vastly differently conclusions concerning the economic state of the middle class? 

Another side issue is, when we try to figure out unemployment 

I was startled to find out that people who work at home, who sell 

on the Internet, aren’t included in the employed. And I know many 

people in very wonderful businesses who work 24 hours a day on 

the Internet. They are not considered employed, so how do we address these different determinations? 

Ms. FURCHTGOTT-ROTH. Right. Yes, yes. Well, it is very difficult 

to do depending on the measures of income you use, whether you 

use before-tax or after-tax. A lot of income grows out of taxes, and 

so depending on whether you use pre-tax or after-tax income, that 

affects the measure of inequality. Whether you include transfer 

payments in income, lower income—many lower income people reVerDate 0ct 09 2002 17:44 Nov 10, 2008 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6602 G:\DOCS\110TH\WP\110-107\43629.TXT HBUD1 PsN: DICK
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ceive Medicare, Medicaid, housing vouchers, food stamps. Whether 

those are included in income also affects measures. 

And also if you look at different households, because the lowest 

fifth of households has a different size than the top fifth of households—1.7 people in it rather than 3.1 people. And so the fact that 

the bottom quintile has often lower incomes that is also a reflection 

of the number of earners and family size in that particular quintile. 

Whether someone is employed is determined in a Labor Department survey. There is a survey called, ‘‘The Household Survey,’’ 

60,000 households every month. They call up and they say, ‘‘Are 

you employed, are you working?’’ So if someone says, ‘‘Well, no, I 

am not working,’’ but they are really selling things on EBay, trading things on the Internet, then they would be counted as not 

working. So that also adds to the definition. 

I think we need to look at what we have around us, I mean, cell 

phones, iPods. I mean, this BlackBerry here was amazing when Al 

Gore used it in 2000, and now a lot of people have BlackBerrys. 

So we have so much increase in technology. People go out to eat 

a lot more than they did before. People have houses that are routinely built with air conditioning and heating and multiple bathrooms. So I think we need to take a look at—around us and see 

what the real picture is. 

Mr. WILSON. Thank you very much. 

Ms. WOOLSEY. Mr. Bishop? 

Mr. BISHOP. Thank you, Madam Chair, and thank you for holding this hearing. 

And to the witnesses, thank you for your testimony. 

I want to start with a question about the 2001 and the 2003 tax 

cuts. One of the challenges that the next president will have, and, 

certainly, the next Congress will have, will be what to do with 

those tax cuts. 

Mr. Greenstein, you make the case that those tax cuts contribute 

to the income inequality that currently is the case. My own view 

is that only the most committed ideologue, given our recent experience, would be able to cling to the notion that tax cuts pay for 

themselves, that tax cuts generate an incredible amount of business activity and that a rising tide lifts all boats, that if we increase income distribution at the high ends, that people at the low 

ends will benefit. 

So my question to you, Mr. Greenstein, and then to Ms. 

Furchtgott-Roth—I hope I am—I am sorry, I am mangling your 

name—but I am going to guess that your position on this is going 

to be different from Mr. Greenstein’s, so if I could first hear from 

you, sir, on how we should go forward with the 2001 and the 2003 

tax cuts and then from you. 

Mr. GREENSTEIN. Well, I would start by saying that the biggest 

problem with those tax cuts, I think the inequality issue is part of 

it, but it isn’t what I grade first. What I grade first is that making 

those tax cuts permanent without paying for them will cost several 

trillion dollars over the next 10 years. We are on a path toward 

long-term deficits that if not addressed, ultimately, will significantly reduce growth in the economy and cause a debt explosion. 

We simply can’t afford tax cuts of that magnitude. 

44

And most economists, if you look at the work of the Joint Tax 

Committee, the Congressional Budget Office, mainstream economists, the general consensus is that if one made those tax cuts permanent without paying for them, they would be more likely to reduce economic growth over the long-term than to increase it because of the negative effects on growth of the enlarged deficits and 

interest payments on the debt that would result. 

I would also note that the Bush administration’s own Treasury 

Department put out a report a year or so ago, and under its best 

case scenario, with its most optimistic assumptions, the tax cuts 

would produce enough growth, if fully paid for, that 10 percent of 

their costs would be offset by the higher growth, and 90 percent 

would remain. 

Mr. BISHOP. If I may interrupt you, I just—I want to zero in on 

a particular point. The McCain tax plan, as I understand it, would 

call for the permanent—making permanent the 2001 and the 2003 

tax cuts, the permanent elimination of the alternative minimum 

tax and making permanent the 2009 rates for the estate tax. Do 

I have it about right? 

Mr. GREENSTEIN. Yes. I don’t think he makes—yes, I think that 

is right. 

Mr. BISHOP. Okay. So at any rate, in other words, we will do it 

all. We clearly can’t do it all. I mean, that would be spectacularly 

irresponsible in terms of our debt. So of those three, which are, sort 

of, the big three, 2001, 2003 alternative minimum tax, and estate 

tax, which of those three do you think demands the most immediate action on the part of the Congress and the president? 

Mr. GREENSTEIN. The most immediate action, I think, probably 

has to be the estate tax, because you need to deal with it in 2009, 

and I would—this wouldn’t be my—but based on where we are 

today, I would just make the 2009 parameters permanent. 

You, obviously, need to at least temporarily deal with the AMT, 

but all the other issues you clearly need to deal with no later than 

the end of 2010. And they are the fiscal issues involved but, obviously, also these big distributional issues. I mean, it is hard to 

imagine, given the long-term fiscal problems and the unmet needs 

of the country, do the people in the top one percent really need an 

average tax cut of $160,000—people with incomes over $1 million—

need an average tax cut of $160,000 apiece? This really doesn’t 

make sense. 

Mr. BISHOP. Ms. Furchtgott-Roth, could you comment on that? 

Ms. FURCHTGOTT-ROTH. Sure, sure. I am sure that I am one of 

these committed ideologues that you are talking about. 

Mr. BISHOP. Perhaps so. 

Ms. FURCHTGOTT-ROTH. My book, ‘‘Overcoming Barriers to Entrepreneurship in the United States,’’ was just published by Lexington 

Books in March, and part of it addresses taxes and taxes on entrepreneurs. So the current tax rate on entrepreneurs who file under 

the individual tax system their top tax rate now is 35 percent. On 

January 1, 2011, it is scheduled to go up to almost 40 percent—

39.5 percent. This has an effect on entrepreneurs and people who 

create jobs. They are not going to want to create jobs here. There 

are certain investments that they are not going to want to do. Of 

course, a lot of them will just keep growing and keep creating busiVerDate 0ct 09 2002 17:44 Nov 10, 2008 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6602 G:\DOCS\110TH\WP\110-107\43629.TXT HBUD1 PsN: DICK
45

nesses, but some of them won’t. Some of them are going to go other 

places. 

And what is important is, how are we going to generate the most 

wealth in the United States, because that gives us tax revenue and 

enables you to do all these things that you want to pass, the housing bailout bill, foreign aid, different kinds of health benefits, Medicare and—that comes from tax revenue. We want to get as much 

tax revenue as we can. 

And tax revenue from these top percent, the top income earners, 

has been going up since the tax cuts in 2001 to 2003. And so the 

federal government has been getting more of this revenue. It is 

more money to play with, more money to fund everything that we 

want to fund. That is why we need to keep these tax cuts low. 

And in terms of, ‘‘Can we afford it, can we afford these tax cuts,’’ 

it is not a—what we are talking about is making the current rate 

permanent. You are talking about, do we want to raise taxes on 

January 1, 2011, and I would say, no. It is going to drive businesses overseas; it is going to make it less productive for businesses to start here. It is going to make the United States a less 

welcoming place to do business. And in a global economy, entrepreneurs are going to go elsewhere. So I say we cannot afford not 

to leave the taxes as they are, and you can call me a committed 

ideologue if you like, but that is the way I see it. 

Ms. WOOLSEY. Mr. Hare? 

Mr. HARE. Thank you, Madam Chair. 

Ms. Furchtgott-Roth, I know this isn’t the subject of the hearing, 

but as long as you are here, I just wanted to take a minute to express the strong concern that I have with the DOL risk assessment 

regulation that is currently under OMB review that you have written about recently. 

As you know, this regulation was not listed in the regulatory 

agenda, and almost no information was initially sent to OMB, and 

it is clear—in clear violation of the White House chief of staff’s directive that all rules expected to be finalized by the end of this administration must be proposed by June the 1st, except in ‘‘ordinary 

circumstances.’’

It is hard for me to understand why OSHA, who has barely managed to get a single health regulation issued during this entire administration, would have actually protected workers. Suddenly, 

this high support, risk assessment is an extraordinary circumstance and a major Department of Labor policy. So I hope at 

some point we will be able to have you come back and maybe answer some questions about that. 

Let me—with all due respect, you——

Ms. FURCHTGOTT-ROTH. I would be honored to do so. 

I have not seen the rule, because the rule has not been yet published by the Department of Labor. There has been a rule—a 

version of a rule that was leaked to the Washington Post. It was 

put on the Washington Post Web site, but I don’t know if it is the 

final rule or what rule this is. 

Mr. HARE. Let me just take issue with a couple of things. You 

mentioned the organized labor only having seven percent, and it is 

a secret ballot. 

Ms. FURCHTGOTT-ROTH. That is right. 

46

Mr. HARE. We just had the Delta Air Lines people in here yesterday at a hearing, and they were going to go out of their way on 

the flight attendants to do everything that they possibly could to 

keep flight attendants from organizing. They had posters that they 

were sending out and talking to the employees, ‘‘Grip it and rip it,’’ 

on their ballots. 

But, look, this whole secret ballot process, to me, with all due respect, is the silliest thing I have ever heard of. If you can decertify 

a union with a petition of 50 percent plus one on signatures, it 

would seem to me the employees could be able to join a union for 

the very same way. So we can boot a union out by 50 percent plus 

one, but we can’t bring a union in. And I have to tell you, quite 

candidly, that I believe that if we get this EFCA passed, you will 

see a tremendous boost in labor—in labor—be able to join labor 

unions. 

Also—and I may be a bit naive—I don’t believe these employers 

get up in the morning and say, ‘‘You know, I feel very benevolent 

today. I think I will work the 40-hour work week, pay overtime, do 

health care and all the things that the workers in this factory deserve, because I just feel like I am a good guy today.’’ They got 

those benefits because ordinary people were willing to stand up 

and, in some instances, have to go out on strike. Some of them lost 

their lives, with all due respect. 

So I think this whole secret ballot thing is the biggest charade 

I have ever seen on the other side, talking about—it is basically to 

prevent people from joining unions, because it is so titled as it is. 

Let me just ask you, Mr. Bernstein, one of the greatest things 

about being American is the feeling that opportunity and upward 

mobility is out there, it is available to everybody. If we work hard 

enough and we are smart, we can attain wealth and success. And 

I was surprised to find out that the statistics you support don’t 

support this belief. 

Opportunity in the U.S. is often predetermined by one’s parent’s 

economic status and intergenerational mobility is no higher in the 

U.S. than in other developed nation. In fact, about 42 percent of 

children born to parents in the bottom fifth are still in the bottom 

fifth, and 39 percent born to parents at the top are still at the top. 

Can you explain this? 

Mr. BERNSTEIN. Yes, I can. The problem that we face is that inequality cannot be discussed separately—the inequality problem 

can’t be discussed separately from the mobility problem. Inequality 

itself is now at such excessive levels that it is precluding opportunity and mobility and in that sense violating a basic economic or 

even a value-based norm in our country. 

One of the figures I have in my testimony looks at college completion by children who are ranked both by their income and by 

their test scores when they were in eighth grade. And what it 

shows is that if you were poor but you had high cognitive skills, 

that is, you had high test scores—think about it as a high IQ poor 

child—your college completion rate is almost exactly the same as 

a low-testing rich kid. That is, controlling for academic ability, income barriers are keeping our children from realizing their educational and, of course, their economic potential. 

47

Now, fascinatingly, we have far less economic mobility in this 

country than we do in European countries with some extent, excepting the U.K., and much more—and the disparities particularly 

start if we compare the U.S. to the Nordic countries. 

Now, I want to respond to a couple of other things that have 

been said in ways my work has been evoked. 

Would that be okay, Madam Chairman? 

Ms. WOOLSEY. We are going to have a second round of questions, 

and I am going to ask all of you to be able to comment just on your 

own——

Mr. BERNSTEIN. Okay. Then let me just close out this comment 

to Mr. Hare. The point is that you can separate, as Diana does in 

her discussion, the notion of inequality and mobility, that you 

can—don’t worry about inequality because mobility offsets it. Mobility does not offset the inequality problem, and, in fact, at this 

point, one can make a very strong and, I believe, compelling causal 

argument that the spillover from the inequality problem is precluding upward mobility. 

Mr. HARE. I yield back. 

Ms. WOOLSEY. Right. 

Ms. Shea-Porter? 

Ms. SHEA-PORTER. Thank you. 

Ms. Furchtgott-Roth, I have a question. Do you think the minimum wage is high enough or too low? 

Ms. FURCHTGOTT-ROTH. I think the minimum wage now is too 

high. 

Ms. SHEA-PORTER. Okay. Do you think——

Ms. FURCHTGOTT-ROTH. It should be lower because a lot of teenagers are having problems finding jobs this summer. So it is something we have got to——

Ms. SHEA-PORTER. But, of course, we do know that a lot of single 

women with children earn that minimum wage. 

Ms. FURCHTGOTT-ROTH. Well, actually, a very small——

Ms. SHEA-PORTER. That is okay. Let’s go on, please, so we can 

get through all this. 

So you think the minimum wage is too high. Do you think that 

everybody is going to be able to go to college and raise their income 

dramatically, that that is the answer for everybody? Just go to college, go to grad school and you will now earn a decent wage? Or 

you think that the decent wage is the minimum wage, right? 

Ms. FURCHTGOTT-ROTH. Only about one million of our 154 million workforce earns minimum wage. 

Ms. SHEA-PORTER. Let’s just stick to what——

Ms. FURCHTGOTT-ROTH. And most of those are part-time workers 

and workers who——

Ms. SHEA-PORTER. Do you—yes, but we have to—I disagree with 

that, but let me follow the questioning, please. 

Do you think that everybody in this country should go to college, 

grad school and raise their own income, that that is the key? 

Ms. FURCHTGOTT-ROTH. No. No. 

Ms. SHEA-PORTER. Okay. 

Ms. FURCHTGOTT-ROTH. I definitely do not think everyone should 

go to college or grad school. There are many jobs in the skill trades 

that have—that are high paying, good paying jobs. 

48

Ms. SHEA-PORTER. Okay. Now, let me ask you, you are talking 

about skilled trades. Do you think that there are certain people in 

this country that we accept are going to be poor, for example, 

housekeepers, because you think that it is okay to earn minimum 

wage? So are you basically accepting that people who work as 

housekeepers or people who work in restaurants or people who 

work as cashiers and serve us and make our daily lives possible, 

is that okay that they earn that minimum wage? 

Because what I am asking you is, if we keep them at that minimum wage, aren’t we guaranteeing that they are going to be part 

of a permanent underclass? If they are not going to college and 

they are not getting skilled jobs, and you know that we need that 

kind of work, are you basically sanctioning the fact that they are 

going to be underpaid or are they already overpaid? 

Ms. FURCHTGOTT-ROTH. BLS data shows that about one million 

people are on minimum wage jobs, and those are usually stepping 

stones to other jobs. So——

Ms. SHEA-PORTER. Okay. Wait. Can I—I am not going to let you 

take me down that path, because you and I both know that that 

is just not so. 

If you work——

Ms. FURCHTGOTT-ROTH. Well——

Ms. SHEA-PORTER. Have you ever worked as a housekeeper, for 

example, in a hotel, changing the sheets and scrubbing the sinks 

and that kind of work, because those people are working very 

hard? We can’t do without them, and they are not making enough 

money, and they go to a second job to—maybe it is 7-11 or whatever. And don’t tell me they don’t exist, because I worked with 

them as I worked my way through college. 

What about them? And you still haven’t addressed that. You said 

they can get Medicaid——

Ms. FURCHTGOTT-ROTH. You haven’t let me address it. 

Ms. SHEA-PORTER. Yes, but you know what? The problem that I 

am having here is that you are just disregarding a certain percentage of the population like you have just written them off, ‘‘It is 

okay, we are not going to discuss them today,’’ and I really want 

to talk about them. 

Ms. FURCHTGOTT-ROTH. Well, that is—I have not written them 

off, but there are jobs in those skilled trades that you——

Ms. SHEA-PORTER. No, but then we talked about the skilled 

trade, because we still have to have people that change the sheets 

and scrub the sinks and peel the potatoes and do the kitchen work. 

What do we do about them? I am asking you to focus on them. 

Don’t talk about the skilled jobs, because if everybody moved into 

a different sector, who would do that work? 

Ms. FURCHTGOTT-ROTH. In a dynamic workforce, people change 

jobs all the time, and the people who are changing the sheets are 

not in those jobs, necessarily, permanently. 

Ms. SHEA-PORTER. Well, I would have to disagree with you, but 

let me, again, get back to——

Ms. FURCHTGOTT-ROTH. I mean, you said that——

Ms. SHEA-PORTER [continuing]. Who will take care of them while 

they are in those jobs? What I am asking you is, are you acknowlVerDate 0ct 09 2002 17:44 Nov 10, 2008 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6602 G:\DOCS\110TH\WP\110-107\43629.TXT HBUD1 PsN: DICK
49

edging that we have an underclass in this society, and you 

keep——

Ms. FURCHTGOTT-ROTH. No. No, I am not. I am not. 

Ms. SHEA-PORTER. Okay. Well, that is—that is exactly what I 

thought you were doing. You are not acknowledging they were 

there. Well, I would like to tell you they are there, and, as you 

travel about and if you stop at a grocery store or you stop at your 

drycleaner, ask them how much they earn, ask them how long they 

have worked in those jobs, and ask them if they have a second job, 

because I think you could learn something, frankly, about that 

group of people that you think are overpaid. 

So let me—and I appreciate your comments. 

Okay. Now, I have a couple of minutes left, so Mr. Greenstein, 

would you please——

Ms. FURCHTGOTT-ROTH. I thought you were asking me a question, and you haven’t let me respond. 

Ms. SHEA-PORTER. What I asked you is you thought they were 

overpaid—if you thought the minimum wage was acceptable or if 

they were overpaid. And then I asked you if you thought we had 

created a permanent underclass, and you said, ‘‘No.’’

Ms. FURCHTGOTT-ROTH. Last year, we had about 59—in our 

workforce of 154 million, we had about 59 million new hires and 

about 57 million separations. People are changing jobs all the time. 

People who——

Ms. SHEA-PORTER. You know, the problem I have is that what I 

am hearing you do is hide behind numbers, which aren’t even in 

front of us, okay? So you are talking about numbers, and I am trying to ask you about people, you know, the real people, what their 

lives are like. And what your answer is for those people—because 

our responsibility sitting here in Congress is to make sure that all 

boats do indeed rise with the tide, and you don’t have any plan to 

help them come into the middle class. 

And in order to keep this country’s strengths, we have to have 

a robust middle class, and in order to have that, they have to have 

a livable wage. And you just told me that you think they are paid 

too much. So there is really no other place that we can go in this 

conversation, because we are divided by ideology. 

So I just want you to know that I know they exist and that we 

know they exist, and we get letters from the constituents, and we 

are the ones who hear about their plight, and I didn’t like the idea 

that we were hiding behind numbers instead of talking about what 

do we do with the people when they don’t earn enough to get by. 

Thank you. 

Ms. FURCHTGOTT-ROTH. If you——

Ms. SHEA-PORTER. Sorry, my time is up. Thank you. 

Ms. WOOLSEY. We are going to have a second round, and we are 

going to start right now. 

I would like to ask Mr. Greenstein, Ms. Minow and Mr. Bernstein to respond to anything they have heard this morning. 

Now, I only have five minutes, so do everything you can, please, 

to answer in a minute and a half. 

And we are going to start down here with you, Dr. Bernstein. 

Mr. BERNSTEIN. Yes. With due respect, Ranking Member Wilson, 

you said researchers reach vastly different conclusions regarding 

50

economic inequality. That is absolutely wrong. Researchers reach 

vastly similar conclusions. 

Mr. WILSON. [OFF MIKE] 

Mr. BERNSTEIN. Right. The views that you heard from Diana are 

very distant outliers. The consensus among research, you heard 

Bob Greenstein quote Alan Greenspan. Now, Alan Greenspan is a 

purveyor of conventional wisdom in the economy. He doesn’t make 

statements like that until he reviews research on all sides of the 

issue. Ben Bernanke has said the same thing, by the way, regarding the inequality discussion. 

There is—you know, this notion of ideology has come up—we 

have thrown this word around. In my view, ideology is really described by those who are impenetrable to evidence. And I think the 

evidence is overwhelming on this point. Now, we can have great 

dissent about what we ought to do about it, and there are those, 

for example, Nobel laureate, Gary Becker, who writes, ‘‘Sure, inequality is happening, and it is absolutely the outcome of a 

meritocratic economy, and we shouldn’t do anything about it,’’ and 

that is fine. But to question the fact is not only off point but I think 

destructive to the progress we need to make. 

One small point—I will be very quick here—that work that I 

have done for today comes out of our book, ‘‘The State of Working 

America.’’ None of that work is funded by unions; it is funded by 

philanthropic organizations. And I will say, for the record, that my 

views that I espouse on policy are not influenced by any funder. I 

speak to what I believe are the causes and the solutions for these. 

I simply don’t carry water for any institution. 

Ms. WOOLSEY. Thank you. 

Ms. Minow? 

Ms. MINOW. I would like to respond to Mr. Bishop’s line of questioning, if I may. 

First, I want to say that I am a serial entrepreneur. I started—

helped start three companies, including my current one, which employs 35 people, and I would much rather start a new company 

with a higher tax rate than start one with a higher deficit. And I 

am not going offshore. 

The second point I want to make with regard to the tax issue is, 

as long as I am here to talk about CEOs, I have to say that one 

of the most loathsome aspects of CEO compensation is what is 

called a gross out, which is where they have the shareholders paying their taxes. It is the Leona Helmsley approach where you pay 

your taxes, I pay my taxes, but the CEOs don’t want to pay their 

taxes. If Congress could eliminate that, that would be wonderful. 

Ms. WOOLSEY. Mr. Greenstein? 

Mr. GREENSTEIN. There is certainly disagreement about how 

much of a problem—how much we should be concerned about inequality and what we should do about it. There is not much disagreement among researchers across the political spectrum that inequality has been rising. It is true that the census data on inequality have issues because they don’t take taxes into account—that is 

true—they don’t take benefits at the bottom into account—that is 

true—the bottom quintile is made up disproportionately of elderly 

people,—that is true—but none of those criticisms apply to the 

CBO data, which adjusts for all of those things. And it is the CBO 

51

data, after benefits, after taxes, after adjusting for family size that 

showed the increase since 1979 of six percent at the bottom and average income, 21 percent in the middle, and 228 percent at the 

very top. 

The other comment I would make is about the issue of whether 

we will have a huge destruction of jobs if the tax rates at the top 

return to their levels prior to 2001. Those would have been the levels that prevailed in the 1990s when we created dramatically more 

jobs than during this decade. And those rates would still be far 

below the top rates in the 1950s, 1960s and 1970s, the first two 

decades of those three being big job creation periods. 

Last quick comment has to do with business proprietors. You 

know, this small business thing really needs to be looked at carefully. The number of small business proprietors, mom-and-pop owners, who are—pay the top rate appears to be significantly smaller 

than the number who get the earned income credit. We have to distinguish extremely wealthy individuals who are passive investors 

in businesses from the real small business proprietors. 

For the real small business proprietors, they benefit more from 

an expansion of the earned income credit than from cutting the top 

rate. 

Ms. WOOLSEY. Thank you. 

Mr. Wilson? 

Mr. WILSON. Again, thank all of you for being here. 

Ms. Furchtgott-Roth, I was happy to hear the discussion about 

housekeepers. I represent Hilton Head Island, which has possibly 

some of the highest income people in the world, but 40 miles into 

the state, in Allendale, South Carolina, we have some of the poorest people in North America—in the United States. 

And the best employment, highest and best employment for 

many of the persons from Allendale has been to be a housekeeper, 

to work at the extraordinary resorts that exist at Hilton Head and 

different communities around, and it has been wonderful as an 

entry-level job—clean, positive work environment. Housekeepers, 

by becoming the lead housekeepers, can make up to $40,000 a year. 

And, indeed, this is a phenomenon across the South and particularly in my home state with Myrtle Beach. Again, you have very 

wealthy beach communities, but then you have communities in 

transition, from agriculture to tree farming now. It is just great 

employment. 

And so in defense of the housekeeping profession, I can tell you 

from my experience, and from what I have seen with the ability of 

people who have good, clean employment, they are very proud of 

this. And then they are—it is just an extraordinary opportunity for 

people who wouldn’t have opportunity before. 

So with that background, there has been much discussion about 

the vanishing middle class in the media and many studies on the 

economic state of the middle class. If there is, in fact, a decline in 

the number of families that make up the middle class percentile, 

do you know—how many of those families have moved into different income brackets and to which brackets they have moved 

into? 

52

Ms. FURCHTGOTT-ROTH. Well, it is very difficult to say exactly 

which income brackets they have moved into. We have different 

families in different places on the scale. 

I would like to say, I do have the latest BLS release in front of 

me, and the unemployment rate last June for teenagers was 16 

percent; this June it rose to 18 percent. Increasing the minimum 

wage is one of the consequences of that. And increasing the minimum wage even further would drive some of these hotel workers 

out of work. It is not as though they would get the same job at a 

higher pay. Many of them would lose their jobs. 

The kinds of jobs that are possible from—without a graduate 

school or a college degree, nurses, for example, we have a great 

need for nurses, police officers. These are all—there are many 

kinds of skilled trade jobs—electricians, plumbers—that one can 

have without a college degree. 

I would agree that it is not from the benevolence of the employer 

that people get benefits but because the employer doesn’t want the 

worker to go anywhere else. The employer wakes up thinking, 

‘‘How am I going to keep my workers,’’ and one way to do that is 

to give them benefits. Otherwise, they are going to go to some other 

employer, not at all because the worker—the employer feels at all 

benevolent but because we have competition. 

The secret ballot is something I think Americans are entitled to, 

a private ballot for voting and for other kinds of things. And I 

think that it is very important that people should have the privacy 

and a particular vote when it comes to joining unions. 

Mr. WILSON. And thank you for hitting each one of those issues. 

In fact, related to that are mandates, and as we look at ways to 

increase income for certain wage earners, there are some who will 

say that employer mandates in the areas of pensions, health care 

and wages are necessary. 

Could you elaborate on what increasing employer mandates 

would do for the least skilled and less educated employees? And 

you have touched on this before, but this is a very important matter. 

Ms. FURCHTGOTT-ROTH. Well, increasing the benefits would have 

two potential effects. One is that the actual wages would go down. 

And we have seen that worker compensation has become more oriented toward benefits and less toward wage increases. So if benefits were mandated, then the worker would get less cash take-home 

pay. That is one point. 

Another point is that the worker might not even have a job at 

all. That job might not be created yet. We hear a lot about 

outsourcing and off-shoring and a lot of those jobs might just go 

elsewhere. 

Mr. WILSON. And it seems like that would encourage companies 

to consider movement overseas to Mexico or China or India. 

Ms. FURCHTGOTT-ROTH. Right. Exactly, yes. 

Mr. WILSON. And, finally, again, I just—some of the most heartwarming experiences I have had are to visit with my constituents 

who have—who are housekeepers, who live in rural communities 

where there are zero opportunities. But now they have fulfilling 

lives of where they work in areas 30, 40 miles away, and it is 

53

meant so much to their families. It is just a—they are able to stay 

in their home community but yet have good, clean employment. 

So thank you very much. 

Ms. FURCHTGOTT-ROTH. Sure. Thank you. 

Ms. WOOLSEY. Mr. Bishop? 

Mr. BISHOP. Thank you Madam Chair. Let me say at the outset 

that I would become only slightly less agitated at the discussion of 

intimidation of workers who are being organized to join a union if 

the people who make that case would also, as a corollary, talk 

about intimidation of the workers on the part of management as 

they seek to organize. And I don’t think there can be any reasonable discussion of intimidation in the workplace, irrespective of 

source, without including that. 

Now, let me go back to the issue that I have talked about, which 

is tax cuts, the 2001 and 2003 tax cuts aggregate to about 10—pardon me, about $2 trillion in foregone revenue. It represents, perhaps, the only economic policy of this administration, and here is 

what we have to show for it after seven years: 2.5 million more 

people without jobs, five million more people living in poverty and 

seven million more people who don’t have health insurance. 

So tell me again why this is working so well. Tell me again why 

this ought to be the centerpiece of our economic policy, as we go 

forward. Does anyone want to comment on that? 

Dr. Bernstein? 

Mr. BERNSTEIN. Well, I don’t think you even go far enough in describing the failure of this economic policy, which is typically under 

the rubric of supply side economics, over this business cycle, which 

I now believe has likely come to the end. Certainly, the labor market is in recession, if not the overall economy. 

If you look at job creation over the 2000s, employment grew by 

four percent. Now, the average business cycle employment growth 

is 14 percent, so on the employment side—one of the arguments 

about the entrepreneurial story that Diana and others tell is that 

this will create more employment. Well, that is demonstrably untrue, didn’t happen. 

Secondly, the other part of the story is it will create more investment. These are macro economic indicators. This is evaluating the 

program on its own merits. Investments—outside of residential investment, this is factories investing based on this notion of firms 

and factories—investment has performed extremely poorly over 

this recovery. It has been one of the worst recoveries for investment. 

GDP growth has been moderate at best. And, of course, wages, 

employment and poverty have performed poorly. 

So if the notion is that trickle-down economics, or supply side economics, leads to faster growth and that growth then reaches down 

throughout the income scale, it is wrong on the growth part, and 

it is wrong on the distribution part. Other than that, it is fine. 

Mr. GREENSTEIN. Could I add a quick note? If the tax cuts had 

these big, positive economic benefits, then in a whole array of 

areas, overall economic growth, job growth, investment growth, as 

Jared mentioned, wage and salary growth, this recovery that ended 

in 2007 should have had an average annual rate of growth greater 

than that in prior recoveries when we either didn’t cut taxes or we 

54

raised taxes at the beginning, as in the 1990s. And, in fact, as 

Jared just noted, in every one of those indicators, this recovery had 

lower rates of growth than the average recovery since the end of 

World War II. 

So if the recoveries where we didn’t cut taxes or even raised 

them at the start experienced better rates of growth than this one, 

it is a little hard to make the case that in the absence of these 

kinds of tax changes that the economy would have somehow been 

in the tank. 

Ms. FURCHTGOTT-ROTH. The economy and the labor market are 

not doing nearly as bad as you are portraying. The last month we 

had was June, we are going to get more data tomorrow, but the 

payroll job survey shows that we have 5.17 million more jobs than 

we had in January 2001. According to the household survey, we 

had 8.1 million more workers working since January 2001. We 

have created millions of jobs. The unemployment rate for men is 

5.1 percent, for women it is 4.7 percent. 

Mr. BISHOP. Can I interrupt you for a second? My understanding 

is that average job growth over the last eight years has been about 

57,000 jobs per month and that that number is less than half of 

the number necessary to keep pace with the growth in workforce. 

Is that or is that not correct, what I just said? 

Ms. FURCHTGOTT-ROTH. I don’t have the right number off the top 

of my head. 

Mr. BISHOP. Mr. Greenstein? 

Ms. FURCHTGOTT-ROTH. I have the total since January 2001. 

Mr. BISHOP. I don’t know if that number is right, but what I do 

know is in the 1990s, after taxes were increased in 1990 and 1993, 

there were over 20 million new jobs created. The five million that 

was just mentioned is a very poor performance for a full economic 

recovery. 

I am sorry, I interrupted you. 

Ms. WOOLSEY. Well——

Mr. BISHOP. I am out of time. 

Ms. WOOLSEY [continuing]. You are out of time. 

Mr. Hare? 

Mr. HARE. Thank you, Madam Chair. 

I am hearing a lot of numbers thrown out. I just find it—and 

maybe I am not the sharpest knife in the box up here, but when 

we have CEOs making more in four hours than their employees 

make in one year, I think the question has to be asked, how much 

is too much for some of these folks? 

Listen, I am a card-carrying capitalist, I want to see people make 

money, but, for heaven sakes, I mean, how far are we going to go 

here? 

I don’t know how many more dollars Warren Buffet and other 

people at the top one percent in this country need. They have been 

having it their way for six years. 

It would seem to me that you lead by example. I had the—I lost 

1,600 jobs that my friend from South Carolina talks about—and 

maybe I should visit there, and I would invite him to visit Galesburg, Illinois where the CEO of Maytag, who put 1,600 people out 

of work, said to me, ‘‘I don’t care about your houses, your educational benefits, the town, I am here to make money for my shareVerDate 0ct 09 2002 17:44 Nov 10, 2008 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6602 G:\DOCS\110TH\WP\110-107\43629.TXT HBUD1 PsN: DICK
55

holders.’’ And after my state gave—and we are talking about 

money and figures—$9 million for this company, and the workers 

gave not one but two wage concessions, they bolt and go to 

Reynosa, Mexico. 

And this guy, I don’t know what he is making, but I have to tell 

you, after what he did to that town and to those people, if he is 

making 50 cents an hour, he is making too much from this congressman’s perspective, because he turned on his back on people 

who really thought that this guy and this corporation was going to 

have corporate responsibility. And the sad part about it is we have 

laws in this country that actually pay for companies to be able to 

outsource their jobs. 

Now, I would just like to ask maybe the panel, in general, how 

much is too much for these folks, and are they ever going to get 

to the day where we have some fairness here? Look, I don’t mind 

them making a good dollar. They have every right. They have a 

tremendous amount of responsibility. But we have heard numbers 

today, you know, about, well, we are doing—the numbers I have 

seen, unless I am getting them fed incorrectly by the Department 

of Labor, show for the last six months we have had a steady loss 

every single month of jobs. So we are not growing this economy. 

And one last comment, and then maybe just open this up as to 

the question of how much is too much or where do you think this 

Congress ought to go, but I just have to tell you, there are a lot 

of people that I know in my district that are on minimum wage. 

They work—they are single moms. Their husbands have left, they 

can’t make it, they are doing the best that they possibly can. This 

whole attitude that the more you raise the minimum wage, the job 

losses—I am seeing it in my district. As a matter of fact, these are 

people, particularly with the fuel prices at $4 plus per gallon, are 

having a hard time even getting to work at their minimum wage 

job. 

So my—with all due respect, I think the minimum wage, first of 

all, is too low, and it ought to be indexed for inflation. I don’t think 

we ought to have to wait, as a Congress, 8 or 10 years to have to 

revisit whether or not people making $8 an hour, while a man 

comes before the—from the oil company comes before the Senate 

and says he is saddened—or I forget what it was—but he is only 

making $14 million a year. Get my Kleenex out. 

My point here is that this is a responsibility, I think, that corporations have, and we don’t have any corporate responsibility, it 

seems to me. The workers are the last to really be taken a look at 

here. And when this guy tells me from Maytag, to be honest, that 

all he cares about is making money for his shareholders and 

doesn’t care about that community and the educational system, I 

say shame on him and shame on that corporation for having that 

guy as a CEO. 

How much is too much for these people? 

Ms. MINOW. I would like to respond to that. First of all, I would 

like to point out that Warren Buffet is one of the lowest paid CEOs 

in the country. He has got an exemplary pay package. His money 

is made by his investments. And I think—and I—we agree that we 

want them to be paid a lot of money because they earn a lot of 

money. We just don’t want to create the risk incentives. The tragic 

56

thing—I am from Illinois myself, by the way, and the tragic thing 

about the Galesburg situation is that those shareholders that he is 

making money for, who are they? They are the pension funds. They 

are the pension funds of the—you know, it is like we have—as—

said, ‘‘We have met the enemy, and he is us.’’

If we had some kind of ability for the pension funds of the police 

and the firemen and the workers at Maytag themselves to send 

some kind of feedback to create a real market system, we wouldn’t 

have this outrage. I track CEO pay data, and I will provide you 

with the data on——

Mr. HARE. I would love to have that. 

Ms. MINOW [continuing]. The pay package at Maytag. 

Mr. HARE. If you could send that to me, I would love to have 

that. Thank you. 

Ms. MINOW. I will definitely do that. 

But that answer is that we don’t—Bill Gates created a tremendous company and we are happy that he made the money that he 

made. The problem is, the former CEO of Exxon made $400 million 

when he left, and that is——

Mr. HARE. Maybe he could buy us dinner. 

Ms. MINOW. That is an outrage. That is just appalling. You 

know, he benefited because of the price of oil that had nothing to 

do with his performance. We have to tie that pay to performance. 

Ms. FURCHTGOTT-ROTH. Well, I——

Ms. WOOLSEY. Well, I am sorry, we are through. His time is up. 

He knows that, he leaned back. 

I was going to tell you, you had one minute to divide up among 

all of them, and then that was—so Mr. Wilson is going to give his 

closing remarks, and then I will, and then you will all be free. 

Mr. WILSON. And thank you, Madam Chairwoman, and I was 

happy Mr. Hare referenced the district I represent. Indeed, I am 

really grateful that in many of the communities I represent 95 percent of the persons there are transplants from the Midwest and 

Northeast. And from the suburbs of Columbia to Hilton Head, 

Bluffton, Sun City, Hardeeville, 95 percent. We welcome transplants, and many years from now, when Mr. Hare contemplates retirement, we will still have a condo left, so please come on down. 

And, indeed, Madam Chair, as I conclude, I would like to request 

unanimous consent to include in the hearing record a column by 

Diana Furchtgott-Roth in yesterday’s New York Sun regarding, 

‘‘The Battleground For Sound Science.’’ This information follows up 

the question that we previously had. And at this time, again, make 

such a motion. 

Ms. WOOLSEY. Without objection. 

[The information follows:]

[From the New York Sun, July 30, 2008]

Battleground for Sound Science

By DIANA FURCHTGOTT-ROTH

Congress is in favor of protecting employees from dangerous working conditions, 

right? Yet a new draft rule to protect employees from hazardous substances by requiring more rigorous scientific analysis by the Labor Department is facing opposition from leaders of the two congressional committees with jurisdiction. 

Senate Health, Education, Labor, and Pensions Chairman Edward Kennedy of 

Massachusetts and House Education and Labor Chairman George Miller of CaliVerDate 0ct 09 2002 17:44 Nov 10, 2008 Jkt 000000 PO 00000 Frm 00060 Fmt 6633 Sfmt 6621 G:\DOCS\110TH\WP\110-107\43629.TXT HBUD1 PsN: DICK
57

fornia asked the Labor Department to withdraw a so-called ‘‘secret regulation’’ even 

before the two Democrats had seen its contents. 

According to their July 23 letter to Labor Secretary Elaine Chao, ‘‘We are deeply 

disappointed that the Department of Labor is working to slip through a rule that 

may have a profound negative impact on the health and safety of American employees. It is equally disturbing, according to today’s Washington Post, that the Department is moving this proposal over the objections of career staff in the relevant 

health and safety agencies. ‘‘

An examination of the alleged draft proposal published by the Washington Post 

shows that the letter from Mr. Kennedy and Mr. Miller was premature and incorrect. The draft rule would set higher standards for assessing dangers to employees 

of substances in the workplace, increasing their protection. 

The Labor Department would get more public feedback and use peer reviewed 

studies; provide more information and calculations in reports; and make industryspecific calculations. This would be more precise than current Labor Department 

procedures. 

For instance, the Labor Department is in the process of regulating two substances, beryllium and silica. If the new rule were in place, workers would have access to all the scientific studies on these compounds, different industries would have 

sent in information on worker exposure, and the public would be able to see detailed 

comments from unions and businesses. 

Instead, in June 2007, the federal District Court for New Jersey had to order the 

Department’s Occupational Safety and Health Administration to provide documents 

on toxic exposures of its own workplace inspectors, because it refused to do so. This 

followed a suit by University of Medicine and Dentistry of New Jersey Professor 

Adam Finkel, a former chief regulator and regional administrator at OSHA. 

Although I served as chief economist of the Labor Department between 2003 and 

2005, I did not work on this proposed rule. Between September 2007 and January 

2008, however, the Hudson Institute, where I work now, was part of a team of outside economists under contract to the Labor Department to evaluate risk assessment procedures in federal agencies. So, I know a lot about the problem. 

The new rule would follow the pattern of transparency in regulation adopted by 

Ms. Chao with union financial disclosure regulations. It would give the public and 

Congress more input into future decisions about how to regulate harmful substances. 

Government officials would have to demonstrate, using peer-reviewed scientific 

studies, that substances were harmful. This helps employees by making sure that 

OSHA regulates real hazards and uses real science, not junk science and bogus 

risks. 

When determining the consequences of exposure to potentially harmful substances, OSHA now estimates how long employees will be exposed. The proposed 

rule improves these estimates by requiring realistic estimates of time worked by employees who spend their entire lives in one industry. Now, the Labor Department 

assumes that employees work at the same job for 45 years, and work for 40 hours 

a week, 50 weeks a year. 

This does not accord with reality. Employees tend to work fewer total years for 

one industry and have more vacation days. Yet, with overtime becoming increasingly common, they spend far more than 40 hours a week on the job. Workers may 

need more protection, because exposure to a carcinogen 55 hours a week for 10 

years could potentially be more harmful than exposure for 40 hours a week for 45 

years. 

Critics complain that these requirements for sound science are too sweeping and 

may prevent OHSA from regulating hazardous substances. 

In particular, some OSHA career staff have opposed the proposal, taking their 

case to the Washington Post as frequently happens in Washington. A rule based on 

sound science would diminish the power and discretion of government staffers, because the burden of proof would be on the scientific evidence rather than on their 

decisions. 

Yet disclosure of competing interpretations and gaps in the data are elements of 

intellectual honesty. 

The proposed rule would give the public—including unions and employers—an 

earlier voice in the regulatory process. An Advance Notice of Proposed Rulemaking 

would be required for every health rule, and scientific studies on the potential hazards would have to be posted by the Labor Department within seven days of a rulemaking announcement. 

The congressional Democratic critics are probably unaware that the Labor Department is following the recommendations of a 1997 report by President Clinton’s Commission on Risk Assessment and Risk Management. 

58

The mystery is not why the Labor Department moves so fast, but why Congress 

wants it to move even more slowly.

Ms. Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is 

a senior fellow at the Hudson Institute. 

Mr. WILSON. And at this time, thank all of you for being here 

today. 

And thank you, Madam Chairwoman, for a very interesting hearing. 

Ms. WOOLSEY. Well, thank you all for attending this hearing, 

and, again, happy birthday, Mr. Wilson. 

Mr. WILSON. Thank you. Thank you. 

Ms. WOOLSEY. I want to thank our witnesses for being available 

to testify. This is a very exciting, interesting subject, and you were 

great, every one of you. 

What we have heard today makes it clear that the current income gap is unsustainable. It threatens the stability of the middle 

class, it hurts the economy, it hurts our society, and excessive executive compensation is a major contributor to the problem, which 

must be addressed. 

The problem of income inequality will not go away on its own. 

We need a national policy or a set of policies devoted to reducing 

the gap, to preventing a permanent underclass in the United 

States of America. This includes finding ways to protect our workers by passing the Employee Free Choice Act to strengthen unions 

and increase workers’ bargaining powers. And this also includes a 

renewed commitment to training. We need to devote more resources to training, and we need to use these resources wisely on 

programs that work. 

I have named only a few of the solutions that our witnesses have 

outlined today. I thank you for that. We need to use all the tools 

at our disposal to turn things around. 

So, again, I thank you all for coming to today’s hearing. 

As previously ordered, members will have 14 days to submit additional materials for the hearing record. Any member who wishes 

to submit follow-up questions in writing to the witnesses should coordinate the majority—with the majority staff within 14 days. 

Without objection, this hearing is adjourned. 

[Additional submissions by Mr. Wilson follow:]

[From the New York Sun, August 6, 2008]

A Desirable Option

By DAVID FISCHER

School reform has been a top priority for the Bloomberg administration ever since 

the mayor took office. But it wasn’t until this year that Mayor Bloomberg and Chancellor Klein took aim at one of the most overlooked and underfunded parts of the 

school system—vocational education, now known as career and technical education 

or CTE. 

A task force convened by the mayor earlier this year just released its final report 

on July 30, calling on the city to transform CTE into ‘‘a desirable, respected, and 

accessible option’’ for city students. 

In an era when ‘‘college for all’’ has become the universal goal and high-stakes 

standardized testing has taken hold as the measure of success or failure, CTE might 

not seem to have a place in the public high school of the 21st century. 

But the numbers don’t lie: a May 2008 report I authored for the Center for an 

Urban Future showed that 64% of New York City’s CTE students in 2002—students 

who began high school that September—had graduated by October 2007, compared 

to 50% of the non-CTE high school students in the five boroughs who graduated. 

59

Over the same period, the dropout rate among CTE students in the city was 5%; 

for non-CTE students it was 20%. 

These vocational schools produce superior outcomes in spite of drawing disproportionately at-risk students, and groom young people for decent-paying jobs in occupations that are now in high demand, from automotive technicians to opticians. 

The secret to CTE’s success is that the courses engage students to a much greater 

extent than typical classroom fare. Research has shown that a large portion of those 

who drop out from high school do so because their classes seem boring and meaningless. At its best, CTE not only holds their interest, but also furnishes them with 

real world, in demand skills for which employers will pay well. 

The city is home to a number of standout CTE schools, such as Aviation High 

School and Thomas Edison High School, both in Queens, and Manhattan’s High 

School of Fashion Industries and Food and Finance High School. But the quality 

of New York’s 21 CTE high schools is far from uniform, and CTE enrollment overall 

has dipped in recent years. 

Programs have suffered from years of inattention and indifference on the part of 

city education officials, who have failed to provide schools with sufficient resources 

to pay for up-to-date equipment and training tools. 

Commendably, the report released last week by the mayor’s task force grapples 

with most of the major problems facing the city’s CTE schools. In particular, it highlights lingering—and false—negative perceptions around ‘‘voc ed’’ as a lesser academic track for students who can’t handle demanding schoolwork. The report also 

identifies the absence of integrated curricula to inculcate both core academic competencies and career-related skills, and the ‘‘disjointed’’ nature of engagement with 

the private sector—a vital partner in any successful CTE effort. 

The report also is clear about how New York City and State must work together 

around defining new competencies, adjusting requirements for the amount of time 

spent in class, and other key areas of collaboration. 

Unfortunately, the task force is more powerful in its diagnosis than in its prescriptions. Perhaps the biggest shortcoming is a lack of candor and detail about 

what it will cost to implement the suggested reforms. As just one example, the report urges the city’s Department of Education to ‘‘[support] principals and teachers 

to redesign and create new courses and adapt new teaching methods * * * [and provide] appropriate, ongoing and embedded professional development * * * .’’ But 

none of that is free, and the Department has not shown great facility in delivering 

this support in the past. This is a goal, not a plan. 

With few exceptions, such as the calls to develop ‘‘an inventory of existing partnerships linked to CTE schools * * * to provide a baseline from which to gauge the 

effectiveness of new efforts,’’ and for ‘‘defin[ing] quantifiable targets for internship 

development across schools/programs,’’ this absence of specifics characterizes the report. Moreover, there is little sense of how city officials and other stakeholders will 

know if reforms are working. In part, the problem is that this effort comes so late 

in the Bloomberg administration: the report calls for a five-year CTE Strategic Plan, 

but the last four of those years will unfold with a new mayor and, presumably, a 

new chancellor in charge. 

Given the high profile of the effort—the task force was co-chaired by a former 

New York mayor, David Dinkins, and the chief executive officer of New York Life, 

Sy Sternberg—and commitments from business leaders, CUNY, the state Board of 

Regents, and other key players, the stars seem aligned for a needed overhaul of 

CTE. The risk is that with no strong follow-up plan and too little detail on what 

is to be done, a failed effort at reform will ensure many more years of underperforming programs.

Mr. Fischer, project director for workforce development at the Center for an Urban 

Future, is the author of the May 2008 study about New York’s CTE programs, 

‘‘Schools that Work.’’

[From the New York Sun, August 6, 2008]

Teenagers’ Right to Work

By DIANA FURCHTGOTT-ROTH

Teenagers, if you couldn’t find a job this summer, call your senator or representative, because Congress wants to make it even harder next year. Tell Congress to 

stop pricing you out of a job. 

Next July, New York’s minimum wage will rise to $7.25 from its current level of 

$7.15 to match the new federal rate. This will be the third in a series of increases 

in the federal minimum wage, following increases to $6.55 last month and $5.85 in 

60

July 2007. All this represents a significant increase from the $5.15 rate that had 

prevailed for a decade. 

With the increase in teenage unemployment rates, Congress should rethink next 

year’s minimum wage hike. 

Last week’s July employment data showed that teenagers are paying the price of 

Congress’s generosity. The overall unemployment rate rose to 5.7% in July from 

5.5% in June, but teen unemployment rate rose faster, to 20.3% from 18.1%. 

It’s even worse compared to last year. The overall unemployment rate has increased by one full percentage point, to 5.7% from 4.7%, yet teenage unemployment 

has risen five full percentage points, to 20.3% from 15.3%. This is an unprecedented 

historical increase for an economy that is still growing. Prior increases of this size 

have only occurred during recessions, and, press hype to the contrary, America is 

not in a recession. 

Teenagers are particularly vulnerable to minimum wage increases due to their 

relatively low levels of experience and job-learned skills. 

Congressional representatives, notably Democrats Carol Shea-Porter of New 

Hampshire and Phil Hare of Illinois, who assert that the minimum wage doesn’t affect employment, as they did in last week’s House Committee on Education and 

Labor hearing, aren’t thinking about teenagers and low-skill workers. According to 

Ms. Shea-Porter, those who oppose a higher minimum wage favor ‘‘a permanent 

underclass.’’

New Hampshire and Illinois have minimum wage laws that exceed the federal 

one, so their residents aren’t affected by the new law. So do California and Massachusetts, homes to House Speaker Nancy Pelosi, House Education and Labor Committee Chairman George Miller, and Senate Health, Education, Labor and Pensions 

Chairman Edward Kennedy, who led the charge for the higher federal minimum 

wage. 

Yet the workforce in California, Massachusetts, and Illinois is declining, with residents migrating to fast-growing states without state minimum wage laws such as 

South Carolina and Alabama. Increasing the federal minimum wage is the latest 

in the blue state vs. red state battles, with the congressional leadership spreading 

the pain and reducing the growth of states with more sensible policies. 

Minimum wage workers are overwhelmingly young, part-time, and work in the 

food service industries. Workers under the age of 25 make up roughly half of the 

1.7 million minimum wage workers. Employed teenagers are almost five times more 

likely to be among the minimum wage earners than workers older than 25. 

Members of Congress assume that if the minimum wage were raised, all workers would retain their jobs. But, according to my calculations, an increase to $7.25 an 

hour, plus the mandatory employer’s share of social security, unemployment insurance, and workers’ compensation taxes, brings the hourly employer cost close to $8, 

even without any benefits. 

Teenagers already are feeling the unemployment pinch: next year, those whose productivity is worth less than $8.00 an hour to their employer won’t be employed. 

It sounds compassionate to alleviate poverty by mandating that employers give 

away their money. But employers won’t necessarily cooperate. Instead, they will 

only employ workers who can produce $8.00 an hour of goods or services. That will 

be fewer people, especially teenagers, than they employ today. Employers can 

change technologies or hire more skilled workers to keep their firms in business. Denying work opportunities to those whose skills and output don’t add up to $8.00 

per hour is not compassionate, it’s manifestly unfair. The federal government essentially would be mandating that workers below a given level of skill have no right 

to work. 

Much of Europe keeps a quarter of its youth unemployed, not with minimum 

wages, but with generous benefit packages (also proposed by Congress) that discourage work. The predictable effect is high unemployment rates with a substantial percentage out of work for more than a year, leading to deteriorating skills and a permanent underclass. This is not a good route for America. 

Most American employers have to pay more than minimum wage just to attract 

and hold the workers they need. More than 140 million workers now earn above 

minimum wage, not because of federal or state law, but because that is the only 

way that firms can attract and keep employees with skills. 

Rather than increasing the minimum wage in 2009 and taking away teenagers’ 

right to work, Congress should focus on increasing their skills and growing our 

economy. Then, next summer, the unemployment rate might go down instead of up.

This column was featured in The New York Sun edition of August 6, 2008. 

Diana Furchtgott-Roth is a senior fellow and director of Hudson Institute’s Center 

for Employment Policy. She is the former chief economist at the U.S. Department of 

Labor. 

61

[Whereupon, at 11:36 a.m., the subcommittee was adjourned.]

Æ