• For my generation of high school graduates, the concept of a career had meaning. During the 1950s in Montana, where I went to high school, many high school graduates started as laborers in the copper mines. Starting wages were good, and one could count on annual raises of two or three percent. There was a skill ladder. Laborers moved up to operating underground trains or other kinds of heavy equipment, learning the necessary skills by working as assistants to the operators. Someone who demonstrated intelligence and judgment could be given responsibility for setting off underground explosions. Each promotion meant higher hourly wages.

When a worker reached his mid-thirties, he could expect to take the last step on the earnings ladder and become a contract miner, who was paid for each foot of tunnel dug rather than by the hour. He was no longer a wage slave. On this career ladder high school graduates could match college graduates in earnings.

But that's all gone now. Those mines were shut down. The thousands of people who worked there were laid off.

• What used to be true only in declining industries — that skills suddenly become valueless — is now true everywhere. Downsizing is a way of life even in good times. In a global economy, if skills are cheaper somewhere else in the world, companies will move there to lower production costs. They aren't tied to any particular set of workers. When new knowledge makes old skills obsolete, firms want to employ workers who already have that knowledge.

• Something is happening in the 1990s that has never happened before, and its part of this knowledge economy. In the past, if a company was going broke, it always laid people off — that's the American way. But we didn't have people laid off and downsized in profitable companies until the 1990s. Today, about 800,000 Americans a year lose their jobs despite the fact that their companies are profitable and they personally are doing good jobs.

"With career ladders in place, the ambitious worker of the 1950s or 1960s could figure out what skills were needed for advancement. But without career ladders, how does anyone rationally plan an educational investment?"

Now that's a brand new world, and it makes it very tough to have a career, because what happens to you when you are laid off at 35, 45 or 55? How do you get back onto some reasonable career ladder?

• Explicitly or implicitly, today's high school graduate is given a message: "You are unlikely to have a lifetime career in any one company. You are going to have to learn to take responsibility for and manage your own career. Regular annual wage increases are a thing of the past. Paternalism is gone." If they are honest, employers themselves deliver the message. But how does anyone follow this advice?

Companies don't tell other companies who their good employees are — even if they have no promotion opportunities to offer those employees. They don't want to lose them. Similarly, they don't tell other companies about their bad employees. They don't want to open themselves up to lawsuits. If asked, and they seldom are, companies are willing to tell other companies just one thing about a worker seeking a new job: Yes, that person did work for us.

In this context a good performance at Company A doesn't matter, because it does not lead to opportunities for training and promotion at Company B. When workers move from one company to another, they simply start over at another entry-level job; there is no progress up a career ladder. The rational strategy is to keep moving until one finds a company that still has internal career ladders. But as such companies become fewer, the number of high school graduates with real career opportunities ahead of them declines to the vanishing point.

• A cross-company career ladder runs into other problems. After age forty-five cross-company career moves are difficult, and after age fifty-five they are impossible. (Those tracking downsized workers find that after age fifty-five they seldom find good jobs with good companies.)

Age-discrimination laws can protect older employees against being unfairly dismissed from their old firms, but they cannot get them a good job at a new company. Employers have the right to hire the best workers available. In a fast-changing world older employees too often bring obsolete experience and out-of-date skills. There are always a lot of young potential employees who look more promising.

With career ladders in place, the ambitious worker of the 1950s or the 1960s could figure out what skills were needed for advancement. He or she knew what to take in night school. But without career ladders, how does anyone rationally plan an educational investment? What skills will pay off? No one wants to waste investment funds on skills that will go unused.

"The system is evolving toward less commitment and less investment in skills just as it should be moving in the opposite direction..."

• The lack of career opportunities is dramatically visible in earnings data. The gains in real annual earnings of high school graduates aged twenty to forty are much smaller than they used to be. There are lots of jobs, and unemployment is low, but opportunities to acquire skills and the higher wages that go with them don't exist. As a result, earnings profiles are flatter. The lack of on-the-job opportunities to acquire new skills is another reason that the wage gap between high school graduates and college graduates has gotten much bigger in recent years.

Real wages have also been falling for most of the labour force. At the same time, wage gains for those in the top 20 percent of the work force have never been larger. The widening disparity in earnings and wealth doesn't create problems for the economy (it simply produces more luxury goods and fewer middle-class goods), but it probably does create long-run political problems in a democracy. How does one preach political equality in an economy of ever-growing inequality?

What replaces it? In economics textbooks workers start to pay employers for the training they used to get free, when they were expected to be lifetime employees, by working for wages below what they could get from an employer who was not providing training. This has not happened. Judging what skills to buy from one's employer is no simpler than judging what skills to buy from an outside institution.

• Paradoxically, just when one would think that firms would be building closer relationships with their key knowledge workers, in order to keep them committed to the firm, they are smashing the implicit social contract with these workers.

Knowledge workers, like other workers, are now fired when not needed or when their skills become obsolete. They, too, see a reduction in their real wages when cheaper alternatives are found elsewhere in the world. Firms invest less in on-the-job training for knowledge workers even when they want them to stay around, because they know that in the future fewer of them will stay around. If workers are laid off when not needed, the smart ones know that they should leave whenever an even marginally better job opportunity presents itself.

• As job uncertainty rises, the numbers of those with a strong interest in the success of their current employers dwindle. Surveys show that although attachment to their occupations has remained constant for American workers over the past two decades, the number of those with a strong attachment to their employers has gone down by a fifth. The system is evolving toward less commitment and less investment in skills just as it should be moving in the opposite direction.

• The basic problem is that every employer wants a free ride in the training system: "You train, I'll hire". Whenever unemployment is low, employers who themselves do no training bitterly complain about the shortage of trained workers. They see nothing strange about their complaints.

As for the employees, without career ladders they cannot intelligently acquire the right skills on their own. Since they will be switching employers frequently, they don't know what skills they will need or how long those skills will be relevant to their earning opportunities. As a result — rationally — they don't invest in skills.

• When it is clear that something must be done but rational individuals and companies won't do it, society has to reorganize itself to make what is individually irrational into something that is individually rational.

There is a simple solution. For example, France levies a training tax of 1.5 percent of payroll. The purpose is not to collect taxes but to make it rational for every employer to train. Employers can deduct their expenditures for training from that 1.5 percent tax. Thus if they spend 1.5 percent of their sales on training their work force, they pay no tax. Since the money will be taken away from them if they don't train, training becomes a free good as far as the firm is concerned.

No one tells employers what skills to teach their workers, but they are effectively being told that they must teach some skills. Such a system aids everyone. It makes employers invest as if there were career ladders even when these have been abolished. If all employers have to invest, no one gets a free ride.

Source — Lester Thurow "Building Wealth —The New Rules for Individuals,
Companies and Nations in a Knowledge-based Economy" as extracted in The Atlantic Monthly June 1999. Full text is available on the Altantic Monthly website at www.theatlantic.com/issues/99Jun/9906thurow.htm .
Also interview with Lester Thurow at www.amazon.com "Economies of Knowledge"