Buy the book

Shop online at Bookshop.org or Barnes & Noble; and these unionized independent booksellers, Politics & Prose, The Strand, Powell’s, BookPeople, Half-Price Books, and Seminary Co-op.

In The Color of Law (published by Liveright in May 2017), Richard Rothstein argues with exacting precision and fascinating insight how segregation in America—the incessant kind that continues to dog our major cities and has contributed to so much recent social strife—is the byproduct of explicit government policies at the local, state, and federal levels.

Rothstein was a panelist on an EPI webinar, July 9, 2020, discussing his book and Reconstruction 2020: Valuing Black Lives and Economic Opportunities for All. Click here to watch the webinar.

The Color of Law was designated one of ten finalists on the National Book Awards’ long list for the best nonfiction book of 2017.

Highlighted media

• Richard Rothstein discusses The Color of Law on Fresh Air
• Richard Rothstein in conversation with Ta-Nehisi Coates

To scholars and social critics, the racial segregation of our neighborhoods has long been viewed as a manifestation of unscrupulous real estate agents, unethical mortgage lenders, and exclusionary covenants working outside the law. This is what is commonly known as “de facto segregation,” practices that were the outcome of private activity, not law or explicit public policy. Yet, as Rothstein breaks down in case after case, private activity could not have imposed segregation without explicit government policies (de jure segregation) designed to ensure the separation of African Americans from whites.

A former columnist for the New York Times and a research associate at the Economic Policy Institute, as well as a Fellow at the Thurgood Marshall Institute of the NAACP Legal Defense Fund, Rothstein has spent years documenting the evidence that government not merely ignored discriminatory practices in the residential sphere, but promoted them. The impact has been devastating for generations of African-Americans who were denied the right to live where they wanted to live, and raise and school their children where they could flourish most successfully.

While the Fair Housing Act of 1968 provided modest enforcement to prevent future discrimination, it did nothing to reverse or undo a century’s worth of state-sanctioned violations of the Bill of Rights, particularly the Thirteenth Amendment which banned treating former slaves as second-class citizens. So the structural conditions established by 20th century federal policy endure to this day.

At every step of the way, Rothstein demonstrates, the government and our courts upheld racist policies to maintain the separation of whites and blacks—leading to the powder keg that has defined Ferguson, Baltimore, Charleston, and Chicago. The Color of Law is not a tale of Red versus Blue states. It is sadly the story of America in all of its municipalities, large and small, liberal and reactionary.

As William Julius Wilson has stated: “The Color of Law is one of those rare books that will be discussed and debated for many decades.”

NOW AVAILABLE!

What readers of The Color of Law have written:

“Richard Rothstein’s The Color of Law is one of those rare books that will be discussed and debated for many decades. Based on careful analyses of multiple historical documents, Rothstein has presented what I consider to be the most forceful argument ever published on how federal, state and local governments gave rise to and reinforced neighborhood segregation.” (William Julius Wilson, author of The Truly Disadvantaged)

“Richard Rothstein’s The Color of Law offers an original and insightful explanation of how government policy in the United States intentionally promoted and enforced residential racial segregation. The central premise of his argument, which calls for a fundamental reexamination of American constitutional law, is that the Supreme Court has failed for decades to understand the extent to which residential racial segregation in our nation is not the result of private decisions by private individuals, but is the direct product of unconstitutional government action. The implications of his analysis are revolutionary.” (Geoffrey R. Stone, author of Sex and the Constitution)

“A masterful explication of the single most vexing problem facing black America: the concentration of the poor and middle class into segregated neighborhoods. Rothstein documents the deep historical roots and the continuing practices in law and social custom that maintain a profoundly un-American system holding down the nation’s most disadvantaged citizens.” (Thomas B. Edsall, author of The Age of Austerity)

“Through meticulous research and powerful human stories, Richard Rothstein reveals a history of racism hiding in plain sight and compels us to confront the consequences of the intentional, decades-long governmental policies that created a segregated America. The American landscape will never look the same to readers of this important book.” (Sherrilyn A. Ifill, president of the NAACP Legal Defense & Educational Fund)

“Racial segregation does not just happen; it is made. Written with a spatial imagination, this exacting and exigent book traces how public policies across a wide spectrum―including discriminatory zoning, taxation, subsidies, and explicit redlining―have shaped the racial fracturing of America. At once analytical and passionate, The Color of Law discloses why segregation has persisted, even deepened, in the post–civil rights era, and thoughtfully proposes how remedies might be pursued. A must-read.” (Ira Katznelson, author of the Bancroft Prize–winning Fear Itself)

“This wonderful, important book could not be more timely. It shows how federal, state, and local government housing policies made the United States two societies, separate and unequal, and used public power to impose unfair, profoundly damaging injuries on African Americans. The book is filled with history that’s been deliberately buried even as its tragic consequences make headlines in Ferguson, Tulsa, Dallas, Staten Island, Charleston―and throughout the country. With its clarity and breadth, the book is literally a page-turner: once one begins on this journey with Richard Rothstein, one is not likely to stop before the conclusion, with a determination that the injustices described must be redressed fully and immediately.” (Florence Roisman, William F. Harvey Professor of Law, Indiana University)

The State of Working America, an ongoing analysis published since 1988 by EPI, includes a wide variety of data on family incomes, wages, jobs, unemployment, wealth, and poverty that allow for a clear, well-documented, and comprehensive understanding of the economy’s effect on the living standards of working Americans.

The new 12th edition is available online at StateofWorkingAmerica.org. The hardcover ($75) and paperback ($24.95), published by Cornell University Press, can be purchased from the Economic Policy Institute.

Yet, Social Security is the nation’s most successful anti-poverty program and it remains a fundamental pillar of the American economy—one that is critical to the long-term economic security of today’s young people. The new edition of A Young Person’s Guide to Social Security, released by the Economic Policy Institute and the National Academy of Social Insurance, gives young adults the information they need to participate in debates about Social Security’s future. The 60-page guide is written by young authors for students and young workers and explains why Social Security is not in grave danger as oft-reported.

The new edition coincides with the seminar for Washington interns, “Demystifying Social Security,” sponsored by NASI, and reflects the latest official estimates for Social Security in the 2012 Social Security Trustees’ report.

Note on citations: This textbook does not have a bibliography. All citations can be found in the PDF document as URLs inlaid in the text that link to the article or webpage from which the number, fact, or figure was derived.

All program statistics and historical data are from the Social Security Administration Office of the Chief Actuary and the Office of the Chief Actuary’s “2010 Trustees Report.” The most-used source is Appendix A of the report, Table VI.A4.— Operations of the Combined OASI and DI Trust Funds. All data, unless otherwise noted, refer to 2009.

Other sources include the Congressional Budget Office, the Employee Benefits Research Institute, and the Center for Retirement Research.

Event video (July 20, 2011):

Engaging younger generations in Social Security debates (Part 1)

(Part 2)

Executive Summary

The United States, Canada, and Australia have long histories as “immigration nations.” But along with the United Kingdom, which has become an immigration nation in the last 35 years, Canada and Australia have explicit employment-based migration policies that are closely related to other economic and social objectives. In contrast, U.S. employment-based migration policies are chaotic and unconnected to specific national goals. Indeed, despite its importance to the American economy and society, U.S. foreign-worker policy is more implicit than explicit; it falls under the purview of many agencies rather than one single high-level federal agency and it is governed by laws that are not transparent, fair, enforceable, or sensible.

Efforts to reform U.S. immigration laws have much to learn from countries with more coherent, evidence-based, and effective policies. Australia, Canada, and the United Kingdom have developed similar techniques and metrics to better manage employment-based migration. Their systems share the following key characteristics:

• Coherent policies and programs designed to effectively manage and control migration, complement and support value-added economic policies, and minimize wage competition and the displacement of domestic workers.
• High priority for migration policy within the government. In these three countries, migration programs are managed by high-level public officials with strong support from their prime ministers.
• Flexible annual goals or targets for immigration that emphasize economic migration, predominantly employment-based migration. These goals or targets can be altered at any time to reflect changing market conditions.
• Greater emphasis on economic migration and less emphasis on family-based migration. In contrast, the United States has continued to stress family-based immigration over economic migration.
• A two-step immigration system, which first imports temporary workers, then helps them qualify for permanent residency. International students studying in host country postsecondary institutions are particularly valued because they improve higher education, subsidize domestic students, contribute to national economies, and, if they qualify, make valuable permanent residents.
• Admission of foreign workers mainly for vacancies that cannot be filled by domestic workers. Unlike the United States, these countries have laws and regulations requiring employers to limit international recruitment to occupations in short supply or to offer jobs to resident workers before hiring foreign workers.
• Provision to foreign workers of at least the same wages and working conditions received by similar domestic workers. 
• The development of strong migration data and research support processes, both in-house and commissioned. 
• Ongoing labor market research programs to identify and measure skill shortages.
• Points-based systems to give quantitative weights for preferred migrant selection characteristics. These systems are more objective than decisions made by immigration officials, and their flexibility allows the mix of characteristics and total point scores to adjust migration to changing conditions.
• Minimization of the use of temporary low-skilled or “guest worker” programs. Restrictions on these programs recognize the difficulty of preventing the abuse of temporary migrants who are attached, or “indentured,” to particular employers who determine migrants’ wages and working conditions, whether they attain permanent residency, and whether they have the right to return.
• Efforts to integrate migrants into the economy and society. 
• Attention to balancing contending economic forces when crafting migration policies. The evidence from Canada, Australia, and the United Kingdom suggests that opposition to migration usually will rise with unemployment, population density, or sudden uncontrolled surges in migration. Political leaders have worked to prevent resurgent anti-immigrant movements from inciting political and social unrest.

While political, cultural, and institutional differences make it impossible for the United States to precisely copy the employment-based migration policies of these liberal democracies, the country can heed some obvious lessons.

Lesson #1: Adopt a strategic vision for value-added immigration

If the United States wants to maintain and improve incomes, it should avoid low-wage competition in favor of the high-value-added strategies implemented by Australia, Canada, and United Kingdom. Policies to admit foreign workers should seek to improve productivity and innovation and overcome labor shortages, not to depress domestic wages and working conditions, displace domestic workers, or substitute migration for public and private investments in education and training.

Lesson #2: Assign high-level federal responsibility for employment-based migration

Responsibility for employment-based migration should be assigned to a high-level federal official, most logically in the Department of Labor, not scattered throughout the federal government. It would be inappropriate to give this responsibility to the Department of Homeland Security, because employment-based migration is primarily a labor market issue, not a law enforcement or national security issue.

Lesson #3: Appoint a high-level ad hoc commission to recommend measures to improve the efficiency and effectiveness of the employment-based migration system

The present U.S. employment-based migration system is grossly inefficient, primarily because of an inappropriate legislative framework, inflexibility in adjusting migration to labor market needs, poor matches between administrative resources and the magnitude of the problem, and ineffective enforcement of worker protections. From the successes and mistakes of Canada, Australia, and the United Kingdom, the United States can learn how to create smart regulations that enable the responsible agency to assemble the professional personnel, advanced technology, structures, and accountability and incentive systems required for a more effective employment migration system.

Lesson #4: Create a permanent, independent Commission on Foreign Workers

A critical component of an effective employment-based migration system is an independent data, research, evaluation, and advisory body to provide legislators and migration officials with objective, evidence-based, professional advice. An independent commission could establish definitions and measures of such factors as skills shortages, which would inform program design. A commission could also help program administrators ensure that they are collecting data crucial to policymaking, including data on work visa holders and their impact on communities, industries, and the U.S. economy.

Lesson #5: Enact comprehensive immigration reform

The effective management of economic migration requires comprehensive reform of the country’s dysfunctional immigration system. Due to irrational operational control of borders, ineffective work authorization systems, and other failures, the United States has the industrialized world’s largest pool of unauthorized migrants, which undermines legal foreign worker programs. Reforming the system requires a carefully orchestrated combination of carrots and sticks that would enable unauthorized migrants to earn legal status, increase the odds of deportation for ignoring opportunities to earn legal status, and make unauthorized entry into the United States more difficult.

Lesson #6: Reform and improve employment-based migration policies and programs

International experience suggests the following guidelines for an American foreign worker system based on high-value-added principles: (1) admit foreign workers mainly for vacancies that cannot be filled by domestic workers; (2) refuse to allow foreign workers to depress wages and working conditions or displace American workers; (3) refuse to permit the importation of foreign workers to substitute for the education and training of American workers; (4) clarify the enforcement authority for all foreign worker programs; (5) continuously improve the administration of foreign worker programs; and (6) require labor recruiters to be registered and meet minimum qualifications.

Lesson #7: Reform temporary foreign worker programs

Reforming employment-based immigration in the United States includes reforming the country’s existing temporary foreign worker programs. The H-1B, L, H-2, and Exchange Visitor (J visa) temporary worker programs share a common lack of sufficient oversight and do not promote the national interest or protect foreign or domestic workers very well. The H-1B program for foreign workers in “specialty occupations” requiring at least a bachelor’s degree appears to enable employers to pay far below market wages, thus depressing domestic wages. L visas for intra-company transfers are virtually unregulated and used by some corporations to displace American workers and outsource American jobs. Reports of abuses in the H-2 temporary foreign worker programs are widespread, and some categories of the Exchange Visitor Program have become work programs that bear little resemblance to the cultural and educational exchange purposes for which they were designed.

The costs of the status quo call for action

Because the United States has allowed unauthorized migration to become large and deeply entrenched, it is very hard to change. Indeed, many immigrant advocates do not believe unauthorized migrant flows and pools can or should be significantly reduced, arguing that the benefits of such flows far outweigh the costs. But unlawful migration subjects migrants to increasingly serious and often fatal risks; perpetuates marginal, low-wage economic activities; undermines compensation structures and protective labor market institutions; forces migrants and their families to live uncertain and insecure lives outside our polity, social safety nets, and labor laws; generates social conflict that threatens democratic institutions and the rule of law; and will become more intractable the longer we wait to fix it.

The only sensible way to clean up the mess the United States has allowed to spread is to allow unauthorized migrants to earn lawful resident status by registering, taking their place at the end of the legal permanent residents’ line, and paying reasonable taxes and fines. While critics argue that adjusting the status of unauthorized workers would “reward illegal behavior,” this argument would have more credibility if U.S. immigration laws were fair, transparent, enforceable, and sensible. Paying heed to the experiences of three important, industrial nations that have addressed the same challenges more successfully with thoughtfully designed employment-based migration programs seems an obvious step in achieving a sensible migration system in the United States.

Table of Contents

Preface vii
Acknowledgments ix
Executive Summary xi
Acronyms and initialisms used in this book xv

Chapter 1: The Canadian Employment-Based Immigration System 1

• Basic Canadian immigration policies 2
• Evolution of Canadian policies 2
• Canadian multiculturalism 4
• Economic goals of Canadian immigration policy 6
• The legal and administrative framework 7
• Immigration goals and targets 8
• Illegal immigration 13
• Foreign worker programs 14
• The skilled worker selection process for permanent immigrants 14
• The points system 14
• The Canadian Occupational Projection System 18
• From COPS to Priority Occupation Lists 22
• Economic conditions of Canadian immigrants 23
• Emigration 25
• Temporary foreign worker programs 26
• Foreign students 27
• The TFWP process 27
• Pilot projects 28
• The Seasonal Agricultural Workers Program 28
• Problems with the Seasonal Agricultural Workers Program 30
• Addressing the shortcomings in SAWP 33
• Live-in caregivers 35
• The Non-Immigrant Employment Authorization Program 35
• Acceleration of temporary foreign workers and programs 35
• Low-skilled TFWs 36
• The Low-Skilled Pilot Project 37
• Regional lists of occupations under pressure 38
• Critiques of the Temporary Foreign Worker Program 38
• Union criticisms of the TFWP 38
• Academic evaluation 40
• Government responses 42
• Standing Committee on Citizenship and Immigration recommendations 43
• The Auditor General’s report 46
• The Canadian Experience Class Program 47
• Auditor General critiques of other CIC programs 47
• The Auditor General’s conclusions 49
• CIC’s response 50
• Conclusions 51
• Endnotes – Chapter 1 55

Chapter 2: Australia’s Employment-Based Immigration Policies 61

• Historical background 63
• Population diversity 64
• The politics of immigration 66
• Asylum seekers, refugees, and illegal immigration 67
• Public opinion on immigration 70
• The Australian immigration system 71
• International students 71
• The two-step process 75
• Immigration streams 76
• The Australian points system 78
• Skilled visa categories 84
• The new Skilled Occupation List 86
• Employer-sponsored migration 87
• Canada and Australia compared 88
• Conclusions on Australia-Canada comparisons 92
• The 457 visa and other temporary foreign worker programs 93
• Background of the 457 visa 94
• Statistical profile of 457 visa holders, 2009–10 95
• Criticisms of the 457 visa program 96
• The report of the Integrity Review Commission 99
• The government response to the commission’s report 100
• Employer and employee 457 obligations after the reforms 101
• Conclusions on the 457 visa program 103
• Labour Agreements 104
• Seasonal workers 105
• The Australian Pacific Seasonal Worker Pilot Scheme 106
• The TNS Australia interim evaluation 108
• Conclusions on the PSWPS 109
• Conclusions on Australia’s immigration policies 110
• Endnotes – Chapter 2 113

Chapter 3: The Historical Background of Immigration Policies in the United Kingdom 119

• Liberal immigration policy yields to zero-net-migration growth 120
• Political reaction to rising immigration in the 1960s and 1970s 122
• Entry into the European Community  123
• Continuing political importance of immigration 124
• The flow of refugees 124
• Recent immigration trends 125
• Unauthorized immigration 126
• The politics of immigration today 127
• Integration policies 131
• Prime Minister Cameron’s attack on multiculturalism 133
• Conclusions 136
• Endnotes – Chapter 3 137

Chapter 4: The British Employment-Based Immigration System 139

• Structure of the points-based system 139
• The policy context 140
• The Migration Advisory Committee 141
• Structure and mandates 141
• MAC’s methodology 142
• The ‘skilled’ component 143
• Identifying skilled occupations 144
• ‘Shortage’ concepts 145
• Identifying shortages 146
• The ‘sensible’ component 149
• Determining ‘sensible’ 149
• A ‘sensible’ illustration 152
• MAC confirms its methodology 154
• Conclusions on the Migration Advisory Committee 155
• The operations and purposes of Tiers 1 and 2 of the points-based system 155
• Tier 1, highly skilled workers 155
• Tier 2, skilled workers with a job offer 163
• Key features of Tier 2 164
• Prevailing wages under Tier 2 166
• Tier 2 routes 166
• Evaluation of the RLMT 167
• Enforcement of the RLMT 168
• The intra-company transfer route 169
• New ICT subcategories 173
• Evaluation of the shortage occupation route 174
• MAC conclusions on Tier 2 174
• The coalition government’s cap on foreign workers 175
• Conclusions on the British employment-based immigration system 178
• Endnotes – Chapter 4 181

Chapter 5: Summary, Conclusions, and Lessons for the United States 183

• Summary of employment-based migration in Canada, Australia, and the United Kingdom 186
• Lessons for the United States 194
• Conclusions on lessons from Canada, Australia, and the United Kingdom 220
• Endnotes – Chapter 5 223

About the Author 226
About EPI 227
Other EPI publications by Ray Marshall 228

Author video | Table of Contents | Press Release

Buy: EPI Bookstore | Amazon

In Failure by Design, the Economic Policy Institute’s Josh Bivens takes a step back from the acclaimed State of Working America series, building on its wealth of data to relate a compelling narrative of the U.S. economy’s struggle to emerge from the Great Recession of 2008. Bivens explains the causes and impact on working Americans of the most catastrophic economic policy failure since the 1920s.

As outlined clearly here, economic growth since the late 1970s has been slow and inequitably distributed, largely as a result of poor policy choices. These choices only got worse in the 2000s, leading to an anemic economic expansion. What growth we did see in the economy was fueled by staggering increases in private-sector debt and a housing bubble that artificially inflated wealth by trillions of dollars. The bursting of the housing bubble had disastrous consequences for the broader economy, spurring a financial crisis and a rise in joblessness that dwarfed those resulting from any recession since the Great Depression. The fallout from the Great Recession makes it near certain that there will be yet another lost decade of income growth for many families, whose incomes had not been boosted by the previous decade’s sluggish and localized economic expansion.

In its broad narrative of how the economy has failed to deliver for most Americans over much of the past three decades, Failure by Design also offers compelling graphical evidence on jobs, incomes, wages, and other measures of economic well-being most relevant to low- and middle-income workers. Bivens tracks these trends carefully, giving a lesson in economic history that is readable yet rigorous in its analysis. Intended as both a stand-alone volume and a companion to the new State of Working America website that presents all of the data underlying this cogent analysis, Failure by Design will become required reading as a road map to the economic problems that confront working Americans.

Table of Contents

List of Figures

Foreword 

The Great Recession: The damage done and the rot revealed

The Great Recession’s Trigger: Housing bubble leads to jobs crisis
Fallout: the job-market
Fallout: broader measures of economic security, poverty, health insurance, and net wealth

The Policy Response to the Great Recession: What was done, and did it work?
The dynamics of the Great Recession
Recovery Act controversies: what was in it?
Recovery Act controversies: did it work at all?
Recovery Act controversies: why has consumer and not government spending led the recovery?

The Great Recession Ended More Than a Year Ago So, “Mission Accomplished”?
Apathy, not overreach
Exchange rate policy
Monetary policy
Fiscal policy
Clear economics, fuzzy politics

The Cracked Foundation Revealed by the Great Recession
Falling minimum wage
Assault on workers’ right to organize
Global integration for America’s workers and insulation for elites
The rise of finance
Abandoning full employment as a target
You get the economy you choose
Incomes in the 30 years before the Great Recession: growing slower and less equal
Is everybody getting richer but the rich are just getting richer faster?
Why have typical families’ incomes and overall economic growth de-linked?
   The arithmetic of rising inequality: falling wage growth for most American workers
   The economics of rising inequality
Lower wage growth did not buy greater economic security or sustained progress in closing racial gaps
How did American families cope with lower wage-growth and rising insecurity?

Where to from Here?

Bibliography

Buy: EPI Bookstore | Amazon

Purchase this book from EPI

Read press release

Review audio and other materials from this book’s release event

Table of Contents

Introduction by Sean P. Corcoran and Joydeep Roy

PART I: TEACHER PAY-FOR-PERFORMANCE: A framework for program design
1.1 Introduction
1.2 Teacher Compensation: An Overview
1.3 Pay-for-Performance: A Framework of Approaches
1.4 Pay-for-Performance in Practice
1.5 Conclusion
Endnotes
Bibliography

PART II: PAY AND CAREER DEVELOPMENT: A proposal for a new generation of teachers
2.1 Introduction
2.2 Setting the Stage
2.3 The Tiered Pay-and-Career Structure
2.4 Learning and Development Fund
2.5 Local Incentives and Awards
2.6 Implementing the Plan
2.7 Conclusion
Bibliography

Introduction

by Sean P. Corcoran and Joydeep Roy

School reform efforts in the United States have increasingly come to focus on the identification, recruitment, motivation, and retention of highly effective teachers. This renewed emphasis on teaching and the teaching profession came to national awareness when, in 2009, the Bill and Melinda Gates Foundation announced it was phasing out its large investment in small high schools, and instead turning its attention toward teacher quality.¹ President Obama has also indicated a strong desire to improve teacher quality in the public schools, mostly through reforming teacher compensation. In a March 10, 2009 speech, for example, he stated: “It’s time to start rewarding good teachers, [and] stop making excuses for bad ones” (New York Daily News 2009). On July 24, 2009 he went further, adding that rewards should be based on test scores: “Success should be measured by results,,,That’s why any state that makes it unlawful to link student progress to teacher evaluations will have to change its ways.”²

School districts have long paid teachers according to the “single salary” schedule, a fixed pay schedule based primarily on education and years of experience. A new conventional wisdom among education reformers has emerged suggesting that this system is outmoded (Hassel 2002; Solmon 2005; Vigdor 2008). The traditional system, reformers argue, fails to attract our best college graduates into teaching and provides practicing teachers no incentives to produce results. In response, a number of states and school districts have begun experimenting with “pay-for-performance” plans, where teachers are compensated at least in part for their contribution to students’ standardized test scores.

The EPI series on Alternative Teacher Compensation Systems is aimed at informing the different stakeholders in education—policy makers, school officials, teachers, parents, and the general public—of the nature and consequences of instituting pay-for-performance in education. The series brings together experts from education and the social sciences to analyze key aspects of these policies.

The first report in this series (Adams, Heywood, and Rothstein 2009), published earlier this year, looked at the use of performance-based compensation and evaluation outside of education. In that report, economists Scott Adams and John Heywood argued that performance-based pay tied to narrow measures of job performance are not nearly as ubiquitous as common wisdom suggests. Formulaic rewards based on narrow quantitative indicators—like the ones often proposed by education reformers—are important in only a small fraction of professional occupations and are concentrated in real estate, sales, and especially the financial sector (which in retrospect has not worked out so well). Richard Rothstein highlighted pervasive evidence of distortions and gaming behaviors in other sectors of the economy, both public and private, that have relied on strict quantity indicators for pay-for-performance to improve outcomes. Rothstein concluded that such problems are particularly severe in sectors like education, where output is difficult to measure and collaboration is essential.

This volume—the second in our series—consists of two studies by Susan Moore Johnson and John Papay, both of the Harvard Graduate School of Education. In this volume, Johnson and Papay provide a simple framework for comparing, designing, and evaluating pay-for-performance plans in education. This framework, motivated by research in economics and psychology on the impact of incentives on worker behavior, is applied to several well-known performance pay plans currently used in large urban school districts in the United States. It is frequently hard to discuss issues around pay-for-performance because there is no common language for understanding the various types of plans. We believe that Johnson and Papay have advanced the discussion by bringing some analytic clarity to current practices. They also offer their own novel proposal for reforming teacher compensation. This proposal—while a significant departure from the single salary schedule—avoids many of the problems raised by Adams, Heywood, and Rothstein that arise in plans singly focused on test scores. On the contrary, Johnson and Papay take a much longer-run view, offering a career-based plan that is uniquely aimed at improving human capital in the teaching profession.

The latest teacher pay reforms go by many names—differentiated pay, pay-for-performance, professional compensation, merit pay, and performance-based pay. In the first study, “Teacher Pay for Performance: A Framework for Program Design,” Johnson and Papay tackle “pay-for-performance,” the class of pay reforms that offer bonuses for effective teaching performance as evidenced by formal evaluations or student test scores. These programs differentiate pay for teachers based on their success in the classroom, rather than for their knowledge and skills, their roles, or assignment.

Johnson and Papay provide a simple, yet rich analytical framework that allows one to clearly identify the dimensions on which pay-for-performance plans differ. Their framework centers on the three most important questions districts must answer when designing such a plan: (1) which measures will be used in assessing performance— standardized tests, professional evaluation, or a combination of both; (2) whether to identify top performers using relative rankings or a fixed standard; and (3) whether to provide awards at the individual or group (e.g., school) level. Each of these critical decisions affects teacher incentives in unique, often conflicting, ways. Building upon these three dimensions, Johnson and Papay classify 12 main “types” of pay-for-performance programs, each with its own
strengths and weaknesses.

Although the design elements of a pay-for-performance scheme play a vital role in its success, a variety of other factors, and in particular the local context and process of implementation, also matter a great deal. Johnson and Papay complement their theoretical discussion with illustrative examples of pay-for-performance programs in four large, urban districts—Houston, Texas; Minneapolis, Minnesota; Charlotte-Mecklenburg, North Carolina; and Hillsborough County, Florida—all of which provide substantial awards for teacher performance. These four districts have all been at the forefront of teacher pay reform, and have committed substantial amounts of money to performance bonuses. Notably, none of their plans is focused on a single measure of student performance. Rather, each district incorporates several complementary programs in their overall compensation strategy. Each district also includes components from broader state incentive programs, but their implementation is very much tailored to local needs.

The wide variation in current pay-for-performance programs suggests that successful design and implementation depends in large part on the local context. Diversification can help make a program politically feasible by satisfying multiple stakeholders, and can also reward teachers for undertaking a wide range of important behaviors, lessening incentives to focus on narrow (but rewarded) tasks. On the other hand, too many overlapping programs can obscure the educational goals of the district. Johnson and Papay note that, for the most part, too many districts have simply appended performance pay components to their current pay system. They suggest that performance-based pay should instead be part of a well-conceived human capital strategy for developing teachers through all stages of their career.

This volume’s second study, “Pay and Career Development: A Proposal for a New Generation of Teachers,” is an example of such a strategy. In this section, Johnson and Papay propose to replace the single salary scale with a career-oriented compensation system that is aligned with school districts’ strategies for developing human capital. This system, dubbed the “Tiered Pay-and-Career Structure,” is designed to attract strong candidates to teaching, to support them in developing instructional skills throughout their career, and to provide substantially higher pay to those who perform well and assume broader responsibility for improving instruction beyond their classroom.

This new proposal is motivated by the needs of students and schools today, particularly those in low-income communities. It would not only attract and retain effective individuals as classroom teachers and administrators, but go beyond these goals to increase the instructional capacity of the schools themselves. With a focus on increasing the all-around success of students, it encourages and rewards teachers for effective instruction, ongoing learning, successful leadership, and sustained commitment.

Johnson and Papay’s proposed system has at its core a tiered pay and career structure designed to improve the instructional capacity and performance of all teachers. This central core is supplemented by a novel Learning and Development Fund, created through the diversion of resources from the lanes of the existing single salary schedule. The Learning and Development Fund ensures that funds are available to finance learning opportunities and new roles for teacher leaders. Districts can also use the Learning and Development Fund to address immediate needs by offering stipends for special staffing assignments, or they can initiate specific programs to capitalize on outside funding opportunities, such as performance awards for schools.

Districts that implement the Tiered Pay-and-Career Structure and Learning and Development Fund will fundamentally change how they recruit, compensate, assess, and develop teachers. As a result, their schools should attract better and more motivated teachers, achieve greater stability in its workforce, and witness improved student performance. Importantly, the plan avoids isolated bonuses for one-time successes and instead builds an integrated strategy for advancing a wide range of human capital goals. These goals include recruiting skilled teachers as well as teachers in hard-to-staff fields; ensuring that all schools and students benefit from effective teachers; promoting ongoing professional growth that is aligned with the schools’ goals; and retaining and developing teacher leaders. As districts implement and build on this plan, teachers and the public can assess the results and better understand how a comprehensive pay system can support school improvement.

It is increasingly clear that the single-salary schedule must be re-designed for a new generation of teachers. Experimentation with performance-based pay is now widespread, with plans in place in Texas, Minnesota, Florida, Alaska, Iowa, North Carolina, Missouri, Kentucky, and other states. President Obama has announced his intention to significantly expand performance-based pay through the federal Teacher Incentive Fund, which would, under his proposal, increase in size from $97 to $483 million (Washington Post 2009).

Our understanding of the short- and long-run implications of these pay schemes is, however, quite incomplete. With most teacher pay reforms only a few years old, it is still too early to empirically evaluate their effects on achievement and the labor market for teachers. The two studies in this volume go a long way toward identifying the dimensions of pay-for-performance that deserve greater attention from researchers and policy makers. Johnson and Papay’s new framework for teacher compensation constitutes a bold departure from the single-salary schedule that nevertheless builds on its strengths. They propose a system that is much more than a narrow formula linking pay to student outcomes, in which teachers themselves are relatively interchangeable. On the contrary, Johnson and Papay envision a comprehensive and integrated human capital system in which instructional goals are carefully aligned with teacher recruitment, development, and retention. The authors are acutely aware of the many professional opportunities facing our most talented college graduates, and have structured a career-oriented plan capable of competing with these opportunities.

The next volume in this series will analyze ways to improve the quality of the teaching force in this country, with a focus to using compensation policy to achieve this goal.

Endnotes
1. 2009 Annual Letter from Bill Gates, U.S. Education: http://www.gatesfoundation.org/ annual-letter/Pages/2009-united-states-education.aspx [last accessed July 8, 2009].

2. Remarks by the President on Education, July 24, 2009, http://www.whitehouse.gov/the_ press_office/Remarks-by-the-President-at-the-Department-of-Education/ [last accessed July 28, 2009].

Bibliography
Adams, S., J. Heywood, and R. Rothstein. 2009. Teachers, Performance Pay, and Accountability: What Education Should Learn From Other Sectors. Washington, D.C.: EPI.

Hassel, B. 2002. Better Pay for Better Teaching. Progressive Policy Institute. Washington, D.C.: PPI.

New York Daily News. 2009. President Obama education plan calls for performance-based pay, firing poor performing teachers. March 11. http://www.nydailynews.com/news/ politics/2009/03/10/2009-03-10_president_obama_education_plan_calls_for-1.html

Solmon, L. C. 2005. Recognizing differences. Education Next. Vol. 5, No. 1, pp. 16-20.

Vigdor, J. 2008. Scrap the sacrosanct salary schedule. Education Next. Vol. 8, No. 4, pp. 36-
42.

Washington Post. 2009. Best in class. July 1. http://www.washingtonpost.com/wp-dyn/content/ article/2009/06/30/AR2009063003183.html. Last accessed: July 8, 2009.

Sean P. Corcoran is an assistant professor of educational economics at New York University’s Steinhardt School of Culture, Education, and Human Development.

Joydeep Roy is an economist at the Economic Policy Institute. His areas of focus include economics of education, education policy, and public and labor economics.

About the Authors

Susan Moore Johnson is the Pforzheimer Professor of Teaching and Learning at the Harvard Graduate School of Education, where she served as the academic dean from 1993 to 1999. As director of the Project on the Next Generation of Teachers, Johnson studies teachers’ work and careers. She has published her research in books and journals, including Educational Evaluation and Policy Analysis, American Educational Research Journal, and Teachers College Record. Johnson is a member of the National Academy of Education.

John P. Papay is an advanced doctoral student in the Quantitative Policy Analysis in Education concentration at the Harvard Graduate School of Education and a research assistant with the Project on the Next Generation of Teachers. A former high school history teacher, his research interests include teacher policy, the effects of educational policies, teacher labor markets, and teachers unions.

Acknowledgements
EPI appreciates the Ford Foundation—and Fred Frelow in particular—for supporting the research in the Economic Policy Institute’s Series on Alternative Teacher Compensation Systems.

All of the authors of this volume want to express their gratitude to the Economic Policy Institute’s publications staff—department director Joseph Procopio, editor Ellen Levy, and designer Sylvia Saab—for their dedication and hard work in the launching of this new EPI book series.

We are indebted to the district officials and teachers union representatives who spoke with us about current pay-for-performance initiatives in Houston, Hillsborough County, Charlotte-Mecklenburg, and Minneapolis. Their willingness to describe their programs in detail and to comment on the history and development of pay for performance in their district provided important insights for our analysis. We are grateful to Lawrence Mishel, who conceived of this project and invited us to participate. We also thank Sean Corcoran and Joydeep Roy for their ongoing assistance and helpful comments on earlier drafts. In addition, we benefited from the thoughtful critique and suggestions of several anonymous reviewers.

Our work is informed by our colleagues at the Project on the Next Generation of Teachers and the past efforts of policy makers, administrators, and teachers to align the incentives of pay systems with the goals of schooling. We have learned a great deal from the research and analysis of many others, including Dan Lortie, Edward Lawler, Daniel Koretz, Richard Murnane, David Cohen, Allan Odden, and Carolyn Kelley. Finally, we thank the teachers union leaders, district officials, teachers, and school principals who participated in two recent studies we conducted at the Project on the Next Generation of Teachers—the first about teachers union presidents and the second about Peer Assistance and Review. Their accounts and comments about teacher compensation and the career of teaching helped us to ground our proposals for reform in the current needs and realities of schools, districts, and teachers’ work.

Copyright © 2009 Economic Policy Institute
ISBN: 1-932066-40-3
Manufactured in the United States of America

Purchase this book from EPI

Read press release

Review audio and other materials from this book’s release event

Read full text of this book in PDF format

Read press release

Purchase this book from EPI

$14.50
ISBN: 1-932066-38-1
Printed on acid-free paper
Manufactured in the United States of America

‡

Table of Contents

Preface by Daniel Koretz

Introduction by Sean P. Corcoran and Joydeep Roy

Part I: Performance Pay In the U.S. Private Sector: Concepts, Measurement, and Trends
1.1 Introduction
1.2 Types of Performance Pay
1.3 Potential and Pitfalls for Performance Pay
1.4 measuring Performance Pay: U.S. Incidence and Trends
1.5 Performance Pay as a Share of Compensation
1.6 Conclusion
Endnotes
Bibliography

Part II: The Perils of Quantitative Performance Accountability
2.1 Introduction
2.2 Accountability by the Numbers
2.3 Conclusion
Endnotes
Bibliography
Acknowledgements
About the Authors
About EPI

‡

Preface

by Daniel Koretz

Accountability for students’ test scores has become the cornerstone of education policy in the United States. State policies that rewarded or punished schools and their staffs for test scores became commonplace in the 1990s. The No Child Left Behind (NCLB) act federalized this approach and made it in some respects more draconian. There is now growing interest in pay for performance plans that would reward or punish individual teachers rather than entire schools. This volume is important reading for anyone interested in that debate.

The rationale for this approach is deceptively simple. Teachers are supposed to increase students’ knowledge and skills. Proponents argue that if we manage schools as if they were private firms and reward and punish teachers on the basis of how much students learn, teachers will do better and students will learn more. This straightforward rationale has led to similarly simple policies in which scores on standardized tests of a few subjects dominate accountability systems, to the near exclusion of all other evidence of performance.

It has become increasingly clear that this model is overly simplistic, and that we will need to develop more sophisticated accountability systems. However, much of the debate—for example, arguments about the reauthorization of NCLB—continues as if the current approach were at its core reasonable and that the system needs only relatively minor tinkering. To put this debate on a sensible footing requires that we confront three issues directly.

The first of these critically important issues, addressed in the first section of this volume by Scott Adams and John Heywood, is that the rationale for the current approach misrepresents common practice in the private sector. Pay for performance based on numerical measures actually plays a relatively minor role in the private sector. There are good reasons for this. Economists working on incentives have pointed out for some time that for many occupations (particularly, professionals with complex roles), the available objective measures are seriously incomplete indicators of value to firms, and therefore, other measures, including subjective evaluations, have to be added to the mix.

And that points to the second issue, known as Campbell’s Law in the social sciences and Goodhart’s Law in economics. In large part because available numerical measures are necessarily incomplete, holding workers accountable for them—without countervailing measures of other kinds—often leads to serious distortions. Workers will often strive to produce what is measured at the expense of what is not, even if what is not measured is highly valuable to the firm. One also often finds that employees “game” the system in various ways that corrupt the performance measures, so that they overstate production even with respect to the goals that are measured. Richard Rothstein’s section in this volume shows the ubiquity of this problem and illustrates many of the diverse and even inventive forms it can take. Some distortions are inevitable, even when an accountability system has net positive effects that make it worth retaining. However, the net effects can be negative, and the distortions are often serious enough that they need to be addressed regardless. To disregard this is to pay a great disservice to the nation’s children.

The third essential issue is score inflation—increases in scores larger than the improvements in learning warrant—which is the primary form Campbell’s Law takes in test-based accountability systems. Many educators and policy makers insist that this is not a serious problem. They are wrong: score inflation is real, common, and sometimes very large.

Three basic mechanisms generate score inflation. The first is gaming that increases aggregate scores by changing the group of students tested—for example, removing students from testing by being lax about truancy or assigning students to special education. The second, which is a consequence of our ill-advised and unnecessary focus on a single cut score (the “proficient” standard), is what many teachers call “the bubble kids problem.” Some teachers focus undue effort on students near the cut while reducing their focus on other students well below or above it, because only the ones near the cut score offer the hope of improvement in the numbers that count.

The third mechanism is preparing students for tests in ways that inflates individual students’ scores. This mechanism is the least well understood and most controversial, but it can be the most important of the three, creating very large biases in scores. One often hears the argument: “our test is aligned with standards, and it measures important knowledge and skills, so what can be wrong with teaching to it?” This argument is baseless and shows a misunderstanding of both testing and score inflation. Score inflation does not require that the test contain unimportant material. It arises because tests are necessarily small samples of very large domains of achievement. In building a test, one has to sample not only content, but task formats, criteria for scoring, and so on. When this sampling is somewhat predicable—as it almost always is—teachers can emphasize the material most likely to recur, at the expense of other material that is less likely to be tested but that is nonetheless important. The result is scores that overstate mastery of the domain. The evidence is clear that this problem can be very large. There is no space here to discuss this further, but if you are not persuaded, I strongly urge you to read Measuring Up: What Educational Testing Really Tells Us, where I explain the basic mechanisms by which this happens and show some of
the evidence of the severity of the problem.

My experience as a public school teacher, my years as an educational researcher, and my time as a parent of students in public schools have all persuaded me that we need better accountability in schools. We won’t achieve that goal, however, by hiding our heads in the sand. This volume will make an important contribution to sensible debate about more effective approaches.

Daniel Koretz is the Henry Lee Shattuck Professor of Education at the Harvard Graduate School of Education, Harvard University, and is a member of the National Academy of Education.

‡

Introduction

by Sean P. Corcoran and Joydeep Roy

With recent research in K-12 education highlighting teacher quality as one of the most important school inputs in educational production, performance-based pay for teachers has been embraced by policy makers across the political spectrum. In the 2008 presidential campaign, for example, both Barack Obama and John McCain touted teacher pay reform as a necessary lever for raising student achievement and closing the achievement gap (Klein 2008; Hoff 2008b).

The use of performance pay in education is not new (Murnane and Cohen 1986). But this latest surge of interest differs from earlier waves in several key respects. First, we have much greater scientific support for investments in teacher quality. Recent research has found that teachers represent the most significant resource schools contribute to academic achievement, a finding that has sharpened policy makers’ focus on teacher effectiveness (Hanushek and Rivkin 2006). Second, today’s school administrators possess a wealth of achievement measures that can be easily linked to individual teachers. While initially intended for public reporting, these measures have quickly found their way into teacher evaluation and compensation systems. Finally, new and sophisticated statistical models of teacher “value added” have emerged that many believe can be used to accurately estimate teacher effectiveness (Gordon, Kane, and Staiger 2006; Harris 2008).

Proponents of performance pay in education frequently point to the private sector as a model. Where the traditional salary schedule fails to reward excellence in the classroom, it is argued, performance pay is a ubiquitous and powerful tool in the private sector. (Eli Broad recently asserted that he “could not think of any other profession that does not have any rewards for excellence” (Hoff 2008a)). Were schools to explicitly link pay to student achievement (measured through standardized testing), teachers would be incentivized to focus on results, and quality would rise in the long run as high-productivity teachers gravitate into the profession (Hoxby and Leigh 2004).

To be sure, private industry has a longer and richer history of pay-for-performance than public schooling. Not-for-profit and governmental organizations have also experimented with performance accountability systems for decades. But discussions of these experiences are notably absent in the current debate over performance-based pay in education. Is performance pay really ubiquitous among professional workers in the private sector? To what extent are private sector workers compensated based on individual or group measures of productivity? How should performance pay systems be designed? In what types of industries are performance pay systems most effective? How have past performance accountability systems fared in the public sector?

In the first of a series of reports intended to inform the debate over the use of performance-based pay in America’s public schools, we compile here two timely and informative papers on performance compensation and evaluation outside of education. In the first, Scott Adams and John Heywood conduct one of the first systematic analyses of the pay-for-performance practices in the private sector. Guided by a simple taxonomy of performance-based pay systems, Adams and Heywood draw upon several large surveys of workers and firms to estimate the overall incidence of performance-based pay in private industry. While they find that periodic “bonus” payments are relatively common (and growing) in the private sector, they represent a very small share of overall compensation and are generally not explicitly tied to simple measures of output. Formulaic payments based on individual productivity measures are rare, particularly among professionals.

In their analysis, Adams and Heywood draw upon several large surveys of workers and firms, including the National Compensation Survey (NCS), National Longitudinal Survey of Youth (NLSY), Panel Study of Income Dynamics (PSID), and National Study of the Changing Workforce (NSCW). While none of these data sources are ideally suited for this task, the conclusions that emerge from their combined analysis are remarkably consistent:

1. Pay tied directly to explicit measures of employee or group output is surprisingly rare in the private sector. For example, in the 2005 NCS, only 6% of private sector workers were awarded regular output-based payments. The incidence is even lower among professionals.

2. “Non production” bonuses, which are less explicitly tied to worker productivity, are common, and their use has grown over time. However, these bonuses represent only a very small share of overall compensation (the median share in the NCS and NLSY ranges from 2% to 3% of overall pay).

3. The incidence and growth of bonus pay is disproportionately concentrated in the finance, insurance, and real estate industries (true in the NCS, NLSY, and NSCW).

Additionally, male and non-unionized workers are much more likely to receive performance-based pay.

The low incidence of base or bonus pay tied to individual output does not, of course, imply that private sector compensation is unrelated to job performance. It may be that career trajectories—movements into, within, and between firms, for example—are what track worker productivity in the private sector. To the extent this is true, these private sector “career ladders” should be an important consideration for those designing competitive teacher pay systems.

Unfortunately, Adams and Heywood are unable to measure the relationship between private sector career trajectories and individual productivity in their data. But what they do convincingly show is that few professionals are compensated based on formulaic functions of measured output. While many private sector workers earn bonuses, these bonuses represent only a small share of total compensation, and are not necessarily tied to explicit measures of worker output. This result is not surprising. After all, most modern professional work is complex, multi-faceted, and not easily summarized by simple quantitative measures.

In the second part, Richard Rothstein reviews a long history of performance accountability systems in the public and private arena. He begins by recounting the work of social scientists Herbert Simon and Donald Campbell who long ago warned of the problems inherent in measuring public service quality and evaluating complex work with simple quantitative indicators. Through a series of historical examples he highlights countless examples of goal distortion, gaming, and measure corruption in the use of performance evaluation systems. Rothstein concludes that the pitfalls associated with rewarding narrow indicators have led many organizations—including prominent corporations like Wal-Mart and McDonalds—to combine quantitative indicators with broader, more-subjective measures of quality and service.

Rothstein argues that the challenges inherent in devising
an adequate system of performance pay in education—appropriately defining and measuring outputs and inputs, for example—surprise many education policy makers, who often blame its failure on the inadequacy of public educators. In fact, corruption and gaming of performance pay systems is not peculiar to public education. The existence of such unintended practices and consequences has been extensively documented in other fields by economists, management theorists, sociologists, and historians. Rothstein’s study undertakes the important task of introducing this literature from other fields to scholars of performance incentive systems in education. It reviews evidence from medical care, job training, policing and other human services and shows that overly narrow definitions of inputs and outputs have been pervasive in these sectors’ performance measurement systems, often resulting in goal distortion, gaming, or other unintended behaviors. Rothstein also discusses how these problems limit the use of performance incentives in the private sector, and concludes by showing that performance incentives run the risk of subverting the intrinsic motivation of agents in service professions like teaching.

Together, these authors’ work provide important context for the implementation of pay-for-performance in education: the incidence of performance pay in the private sector and the experience of performance measurement in both the private and public sectors. These studies offer lessons which will be crucial in the debate over whether performance pay is suited to education, and how we think about designing and implementing such a system. Later papers in this series will review the history and experiments with performance pay systems in U.S. education, critically analyze some of the most important merit pay systems currently in use by school districts across the country, suggest alternative frameworks for teacher compensation, and discuss how teachers themselves feel about pay-for-performance.

Bibliography

Gordon, Robert, Thomas J. Kane, and Douglas O. Staiger. 2006. Identifying Effective Teachers Using Performance on the Job. Policy Report, The Hamilton Project. Washington, D.C.: Brookings Institution.

Hanushek, Eric A., and Steven G. Rivkin. 2006. “Teacher Quality,” in E. A. Hanushek, and

F. Welch, eds., Handbook of the Economics of Education. Elsevier, 2006, pp. 1051-1078.

Harris, Douglas N. 2008. “The Policy Uses and ‘Policy Validity’ of Value-Added and Other Teacher Quality Measures,” in D. H. Gitomer, ed., Measurement Issues and the Assessment of Teacher Quality. Thousand Oaks, Calif.: SAGE Publications.

Hoff, David J. 2008a.Teacher-pay issue is hot in DNC discussions. Education Week. August 25.

Hoff, David J. 2008b. McCain and Obama tussle on education. Education Week. October 22.

Hoxby, Caroline M., and Andrew Leigh. 2004. Pulled away or pushed out? Explaining the decline of teacher aptitude in the United States. American Economic Review. Vol. 94, pp. 236-40.

Sean P. Corcoran is an assistant professor at New York University Steinhardt School of Culture, Education, and Human Development.

Joydeep Roy is an economist at the Economic Policy Institute. His areas of focus include economics of education, education policy, and public and labor economics.

‡

Acknowledgements

EPI appreciates the Ford Foundation—and Fred Frelow in particular—for supporting the research in the Economic Policy Institute’s Series on Alternative Teacher Compensation Systems.

All of the authors of this volume want to express their gratitude to the Economic Policy Institute’s publications staff—department director Joseph Procopio, editor Ellen Levy, and designer Sylvia Saab—for their dedication and hard work in the launching of this new EPI book series.

Part I: Performance Pay in the U.S. Private Sector

The authors thank Daniel Parent for his helpful conversations and for sharing his estimates from the PSID. They also thank Patrick O’Halloran for assistance with the NLSY97. Anthony Barkume and Al Schenk deserve thanks for their efforts in explaining the BLS Employment Cost Index and for preparing several special tabulations used in this report. We acknowledge that those special tabulations have not passed the usual BLS procedures for guaranteeing quality and reliability. Heywood thanks both Michelle Brown and Uwe Jirjahn for histories of fruitful joint work on performance pay. Both authors also thank the readers of various drafts of their study, particularly Matt Wiswall, Marigee Bacolod, and Jason Faberman for their helpful reviews. None of those mentioned are responsible for the results or opinions expressed here.

Part II: The Perils of Quantitative Performance Accountability

Part of this study was prepared for presentation at the conference, “Performance Incentives: Their Growing Impact on American K-12 Education,” sponsored by the National Center on Performance Incentives at Peabody College, Vanderbilt University, February 27-29, 2008. Support for this research was also provided by the Campaign for Educational Equity, Teachers College, Columbia University. The views expressed in this chapter are those of the author alone, and do not necessarily represent the views of the Economic Policy Institute, the Campaign for Educational Equity, Teachers College, Columbia University, or the National Center on Performance Incentives, Peabody College, or Vanderbilt University.

I am heavily indebted to Daniel Koretz, who has been concerned for many years with how “high stakes” can render test results unrepresentative of the achievement they purport to measure, and who noticed long ago that similar problems arose in other fields. Discussions with Professor Koretz, as I embarked on this project, were invaluable. I am also indebted to Professor Koretz for sharing his file of newspaper clippings on this topic and for inviting me to attend a seminar he organized, the “Eric M. Mindich Conference on Experimental Social Science: Biases from Behavioral Responses to Measurement: Perspectives from Theoretical Economics, Health Care, Education, and Social Services,” in Cambridge, Massachusetts, May 4, 2007. Several participants in that seminar, particularly George Baker of the Harvard Business School, Carolyn Heinrich of the Lafollette School of Public Affairs at the University of Wisconsin, and Meredith Rosenthal of the Harvard School of Public Health were generous in introducing me to the literatures in their respective fields, answering my follow-up questions, and referring me to other experts. Much of this chapter results from following sources initially identified by these experts.

Access to literature from many academic and policy fields, within and outside education, was enhanced with extraordinary help of Janet Pierce and her fellow-librarians at the Gottesman Libraries of Teachers College, Columbia University.

Others have previously surveyed this field. Stecher and Kirby (2004), like the present effort, did so to gain insights relating to public education. But their survey has attracted insufficient attention in discussions of education accountability, so another effort is called for. Haney and Raczek (1994), in a paper for the U.S. Office of Technology Assessment, warned of problems similar to those analyzed here that would arise if quantitative accountability systems were developed for education. Two surveys, Kelman and Friedman (20
07), and Adams and Heywood (this volume) were published or became available to me while I was researching this chapter and summarized some of the same issues in a fashion which this chapter, in many respects, duplicates. Susan Moore Johnson reminded me about debates in the early 1980s about whether teachers’ intrinsic motivation might be undermined by an extrinsic reward-for-performance system.

A forthcoming Columbia University Ph.D. dissertation in sociology, contrasting “risk adjustment” in medical accountability systems with the absence of such adjustment in school accountability, should make an important contribution (Booher-Jennings, forthcoming).

This chapter cites studies from the business, management, health, and human capital literatures, as well as previous surveys of those literatures, in particular Baker (1992), Holmstrom and Milgrom (1991), Mullen (1985), and Blalock and Barnow (2001). I am hopeful, however, that this chapter organizes the evidence in a way that may be uniquely useful to education policy makers grappling with problems of performance incentives in education.

This chapter has benefited from criticisms and suggestions of readers of a preliminary draft. I am solely responsible for remaining errors and misinterpretations, including those that result from my failure to follow these readers’ advice. For very helpful suggestions, I am grateful to Marcia Angell, Julie Berry Cullen, Carolyn Heinrich, Jeffrey Henig, Rebecca Jacobsen, Trent Kaufman, Ellen Condliffe Lagemann, Lawrence Mishel, Howard Nelson, Bella Rosenberg, Joydeep Roy, Brian Stecher, and Tamara Wilder.

‡

About the Authors

Scott J. Adams is Associate Professor of Economics and faculty member in the Graduate Program in Human Resources and Labor Relations at the University of Wisconsin-Milwaukee. He has previously worked as a Robert Wood Johnson Fellow in Health Policy Research at the University of Michigan. He worked at the President’s Council of Economic Advisers as senior economist responsible for education and labor. His research on labor issues has been published in the Journal of Human Resources, Journal of Public Economics, Economics of Education Review, and the Journal of Urban Economics.

John S. Heywood is Distinguished Professor of Economics and Director of the Graduate Program in Human Resources and Labor Relations at the University of Wisconsin-Milwaukee. He holds a concurrent position with the School of Business at the University of Birmingham in the United Kingdom. His research on performance pay has been widely published including in the Journal of Political Economy, Journal of Human Resources, and Economica. He also co-edited the recent text Paying for Performance: An International Comparison.

Richard Rothsten is a research associate of the Economic Policy Institute. From 1999 to 2002 he was the national education columnist of The New York Times. He was a member of the national task force that drafted the statement, “A Broader, Bolder Approach to Education” (www.boldapproach.org). He is also the author of Class and Schools: Using Social, Economic, and Educational Reform to Close the Black-White Achievement Gap (EPI & Teachers College 2004) and The Way We Were? Myths and Realities of America’s Student Achievement (1998). Rothstein was a co-author of the books The Charter School Dust-Up: Examining the Evidence on Enrollment and Achievement (2005) and All Else Equal: Are Public and Private Schools Different? (2003). A full listing of Rothstein’s publications on education and other economic policy issues, including links, can be found at epi.org/people/richard-rothstein/.

‡

Read full text of this book in PDF format

Purchase this book from EPI

Top of page

Download full PDF of Immigration for Shared Prosperity

Jump to: Table of Contents | Executive Summary | About the Author | Purchase

Table of Contents

Executive Summary

Chapter 1: Getting Immigration Reform Right

Chapter 2: Proposals to Fix the System

Chapter 3: The Components of a Comprehensive Framework for the Reform of Employment-Based Immigration

Chapter 4: Where Do We Go From Here?

Appendix A: Data Tables

Appendix B: Labor Movement’s Principles for Immigration Reform

Executive Summary

The American economy has become very dependent on foreign labor. Indeed, most of our workforce growth since 1990 has come from immigration, a trend that is expected to continue for at least the next 20 years. How these workers are employed, therefore, will have important implications for American economic health, as well as for national unity and social stability.This report addresses employment-based immigration, a small (15% of the total) but important and contentious part of immigration policy.

The problem

America’s employment-based immigration system is broken. The programs for admitting foreign workers for temporary and permanent jobs are rigid, cumbersome, and inefficient; do too little to protect the wages and working conditions of workers (foreign or domestic); do not respond very well to employers’ needs; and give almost no attention to adapting the number and characteristics of foreign workers to domestic labor shortages.

The last major immigration reform effort, the Immigration Reform and Control Act of 1986 (IRCA), was a failure. Since its passage, the number of unauthorized immigrants residing in the United States increased dramatically and now totals about 12 million, including about 7 million workers.

Illegal immigration has the advantage of being more responsive to employers’ requirements, but has the disadvantages of being beyond the reach of either labor or immigration laws; subjecting foreign workers to grave risks, exploitation, and uncertain futures in the United States; and depressing wages and working conditions for all workers. Moreover, unauthorized immigration is unfair to immigrants waiting (sometimes for years) to gain legal entry, undermines the rule of law, and strengthens the conviction that the federal government is powerless to solve important national problems.

Effective employment-based immigration policy requires reforms to correct IRCA’s defects, the most important of which are: (1) failing to develop a secure identifier which, in turn, is essential for effective border and internal controls, a work authorization system, and adjustment of status for millions of unauthorized immigrants; (2) making employers responsible for checking a variety of easily counterfeited identifiers, which companies lack the means (and often the will) to accomplish; and (3) accelerating unauthorized immigration because of ineffective controls and the failure to allow amnesty recipients to bring in their families.

Although our immigration reform framework focuses on the employment aspects of immigration, we fully support family reunification, which accounts for two-thirds of all immigrants and is the dominant purpose of U.S. immigration policy. Family reunification is in the national interest because families are our most basic learning and support systems and therefore greatly facilitate the assimilation of immigrants into American life.

The framework

Our comprehensive immigration reform framework has five interrelated components: (1) the creation of an independent, highly professional commission—the Foreign Worker Adjustment Commission (FWAC)—to measure labor shortages and recommend the numbers and characteristics of employment-based temporary and permanent immigrants to fill those shortages; (2) a rational, operational control of our borders and effective internal tracking systems; (3) a fair and efficient worker authorization system complemented by more effective labor law enforcement; (4) a humane and practical system to adjust the status of unauthorized immigrants; and (5) the improvement, but not expansion, of our temporary indentured worker programs.

1. The FWAC is needed because our employment-based immigration system is far too rigid, political, and detached from the real needs of the American economy. An independent agency is needed to develop much better measures of labor market shortages, assessment methodologies, and processes to efficiently adjust foreign labor flows to employers’ needs while protecting domestic and foreign labor standards. In order to give it time to prepare for its very important functions, we recommend that this commission be established in two stages: (1) create the structure and develop and refine methodologies, measures, and procedures to be recommended to Congress and (2) fully implement the system.

2. Border controls and internal tracking processes are necessary parts of an overall immigration control system. Border control alone is not likely to be sufficient—at best, no more than about 40% of unauthorized border crossers are apprehended. Increasing border resources has not done much to raise the number of apprehensions, but has pushed these migrants into ever more hazardous terrain and apparently has caused a larger proportion to settle in the United States with their families. But even completely successful border controls would not stop illegal immigration because an estimated 40 to 45% of these immigrants have overstayed visas—and this proportion undoubtedly would rise with more stringent border controls. Therefore, it is important to complement border controls with a much more effective internal tracking system. We have made progress with an entry identification system, but not with an effective way to determine whether or how many of the over 30 million authorized foreign visitors each year leave the country. The Department of Homeland Security (DHS) has proposed that the cost of an exit identification system be shifted to ocean and air carriers.

3. Since most unauthorized immigrants enter the United States to work or join family members who are working, an effective work authorization process is an essential component of a comprehensive immigration system. Efforts to overcome IRCA’s authorization defects have been largely ineffective. For example, the E-Verify system to determine if workers’ Social Security numbers are valid has many known and unknown identity and document error problems, as well as privacy and due process concerns. The basic problems are: the absence of a secure identifier (which the social security card definitely is not and was not intended to be); the lack of a secure database; the absence of due process and privacy protections; employer control of the verification system; and discrimination against naturalized citizens and authorized workers.

One promising approach to overcome these problems would be to have a federal agency give workers a secure identifier with biometric data and a unique work authorization number for each new job based on individual PIN numbers issued by the federal authorizing agency. Employees would present the work authorization numbers and identifiers to their employers, whose sole obligation would be to verify the number with the authorizing agency. This system would give workers control of their persona
l information and give trained federal professionals, not employers, the responsibility for verification. The administrative burden of introducing this system could be reduced by phasing it in for new hires, job changers, and foreign workers authorized to work in the United States.

It would be better to design a new, fairer, and more effective system instead of expanding E-Verify, but that system has gained a fair amount of momentum and political support. If we cannot substitute a better system we must at least overcome E-Verify’s serious deficits, especially to provide better due process, anti-discrimination, and privacy protections.

An important complement to a work authorization system would be much more effective labor law enforcement to protect labor standards. The present massive noncompliance with labor laws and the weakness of workers’ collective bargaining rights make it very hard for employees to protect themselves, a necessary precondition for effective labor law enforcement. And immigration authorities should be prohibited from entering work places where labor disputes are in progress.

4. Adjusting the status of unauthorized immigrants is the most controversial and complex of our framework components. It is controversial because a vocal minority of Americans believe allowing unauthorized immigrants to remain in the United States would be rewarding lawbreakers. These critics would be on firmer ground if we had a good immigration law that was fair, transparent, and enforceable, none of which applies to IRCA. For many years before 9/11 unauthorized immigrants were justified in believing that if they got into the United States with a visa or crossed the border illegally—which was not hard to do—got a job, worked hard and stayed out of serious legal trouble, they would be able to settle in the United States. Indeed, the unauthorized immigrants’ networks had a lot of official and unofficial support. It was not until after 9/11 that the United States became serious about immigration enforcement and then it proceeded in an unfair, disruptive, and often unconstitutional manner.

Adjustment of status nevertheless is a very complex process, requiring a carefully orchestrated combination of carrots and sticks. The carrot is to encourage people to register to adjust their status with the promise of a path to permanent legal residence and citizenship. The stick for failure to register would be the high probability of deportation or being relegated to underground jobs. It is not in our national interest to drive more unauthorized immigrants deeper into the underground economy.

Adjustment of status is also tricky because in order to deter future illegal entry, the process must send a clear signal that there will be no future large-scale status adjustments.

Adjustment of status clearly is not likely to work very well without more effective border, internal tracking, and work authorization systems, all of which require a secure identifier. On the other hand, an effective adjustment-of-status process would strengthen the effectiveness of these other components by reducing the magnitude of the unauthorized population.

There are thus four reasons to adjust the status of unauthorized immigrants: (1) we do not have good immigration laws; (2) it would raise labor standards; (3) a roundup and deportation not only would violate American values of fairness and due process, but also would be impractical; and (4) it will be very hard to gain political support for or implement comprehensive immigration reform without it.

5. We should improve, but not expand, temporary indentured foreign worker programs. Although “guest worker” programs have a superficial appeal as a way to reduce temporary labor shortages, study commissions and labor market research tend to reject these programs the more they examine them—their long-run social, economic, and political costs far outweigh their short-run economic advantages. Experience also shows that these programs are very hard to discontinue, as we found with the bracero agreements to bring in Mexican farm (and some railroad) workers during World War II. This “temporary” program could not be discontinued until 1964—19 years after World War II ended. In fact, the bracero program helped establish the networks that subsequently accelerated the flow of unauthorized immigrants into the United States. Indeed, the bracero program complemented immigration enforcement: in the 1950s unauthorized immigrants were rounded up as part of “Operation Wetback” and “deported” into the bracero program.

It is not hard to understand why these programs are so popular with employers, even though they complain about the excessive bureaucracy, much of which is designed to prevent the programs from suppressing labor standards. These programs rarely prevent the suppression of wages and other labor standards because indentured workers are attached to particular employers, weakening their ability to defend their rights. If individual workers are fired they can be deported. Sometimes, the indenture is reinforced by heavy indebtedness and the seizure of travel documents.

The abuses of indentured workers are well documented. Real labor market tests to certify labor shortages and the unavailability of domestic workers are rare. The workers’ powerlessness is exacerbated by federal authorities’ inability to audit employers to determine their compliance with either the law or the indenture agreements. Investigations by the GAO and other federal agencies have discovered heavy incidences of fraud.

Public support for indentured foreign worker programs often comes from employers’ unsubstantiated claims of labor shortages. The proof commonly proffered by employers of indentured H-1B computer and other technical workers is the exhaustion of the available visas for the year on the first day they become available. This clearly is not evidence of a labor shortage, but of a strong demand for indentured workers who can be paid well below prevailing wages. While employers often argue that these indentured worker programs strengthen the competitiveness of American industry, it is well documented that both the H-1B and L-1 programs frequently are used by outsourcing firms learning U.S. industry techniques in order to send the work to other countries.

Our recommendations are designed to prevent these abuses, limit the period of indenture, and restrict the use of these workers to occupations the FWAC certifies have real, temporary labor shortages and there have been good-faith efforts to recruit domestic workers. Our recommendations also are designed to prevent the use of indentured workers for non-temporary jobs or to suppress wages and other working conditions and decimate labor market institutions. We also recommend ways to enable the indentured workers to protect themselves, as well as how to improve the administration of these programs through such means as adequate administrative resources and enabling unions and joint union-management committees to sponsor foreign workers.

About the Author

Ray Marshall was Secretary of Labor in the Carter administration. He is Professor Emeritus and holder of the Audre and Bernard Rapoport Centennial Chair in Economics and Public Affairs of the LBJ School of Public Affairs at the University of Texas. He is author of more than 30 books and monographs, including Thinking for a Living: Education and the Wealth of Nations (Basic Books 1993) and The Case for Collaborative School Reform (EPI 2008). Marshall is one of the founders of the Economic Policy Institute, where he currently serves on its board.

About EPI

The Economic Policy Institute was founded in 1986 to widen the debate about policies to achieve healthy economic growth, prosperity, and opportunity. Today, despite rapid growth in the U.S. economy in the latter part of the 1990s, inequality in wealth, wages, and income remains historically
high. Expanding global competition, changes in the nature of work, and rapid technological advances are altering economic reality. Yet many of our policies, attitudes, and institutions are based on assumptions that no longer reflect real world conditions.

With the support of leaders from labor, business, and the foundation world, the Institute has sponsored research and public discussion of a wide variety of topics: globalization; fiscal policy; trends in wages, incomes, and prices; education; the causes of the productivity slowdown; labor market problems; rural and urban policies; inflation; state-level economic development strategies; comparative international economic performance; and studies of the overall health of the U.S. manufacturing sector and of specific key industries.

The Institute works with a growing network of innovative economists and other social-science researchers in universities and research centers all over the country who are willing to go beyond the conventional wisdom in considering strategies for public policy. Founding scholars of the Institute include Jeff Faux, former EPI president; Lester Thurow, Sloan School of Management, MIT; Ray Marshall, former U.S. secretary of labor, professor at the LBJ School of Public Affairs, University of Texas; Barry Bluestone, Northeastern University; Robert Reich, former U.S. secretary of labor; and Robert Kuttner, author, editor of The American Prospect, and columnist for Business Week and the Washington Post Writers Group.

For additional information about the Institute, contact EPI at 1333 H St. NW, Suite 300, Washington, D.C. 20005, (202) 775-8810, or visit www.epi.org.

The Agenda for Shared Prosperity

The American people want and need an economic agenda that will spur growth, reduce insecurity, and provide broadly shared prosperity. The Economic Policy Institute’s Agenda for Shared Prosperity initiative was born out of a belief that poor economic outcomesfor average Americans are not inevitable, and that a change in policy direction is needed to ensure that everyone can benefit from a growing economy. Collaborating with some of the nation’s top progressive thinkers, EPI researchers have been exploring and refining solutions for the better part of two years. EPI has compiled the best of these proposals into a small, easy-to-read Policy Handbook called A Plan to Revive the American Economy.

A copy of the Plan can be downloaded at www.sharedprosperity.org.

Purchase this book

Price: $9.95 (+$4.00 for shipping); ISBN 1-932066-39-5; 64 pages.

We are currently upgrading our online purchasing system, and are unable to process orders over the Web at this time. We can, however, continue to take orders by telephone, email, and postal mail. To order this book, call 1-800-EPI-4844 (in D.C. area, 202-331-5510), or send email to publications@epi.org.

Top of page

At a time when the nation is grappling with economic problems ranging from structural unemployment to skills shortages, stagnant wages, declining health care coverage, dwindling pension plans, and the competitiveness of U.S. companies in the global economy, one lesson emerges from Organizing Prosperity: unions can be part of the solution.

Read full text of this book [PDF]

Order this book from EPI by calling 1-800-EPI-4844 (in D.C. area, 202-331-5510), or by emailing publications@epi.org.

Paperback, $14.50, 148 pages, 6″ x 9″
Published by the Economic Policy Institute (November, 2008)

Read table of contents

Read executive summary

Read introduction

Read news release

Purchase this book

Table of Contents

Executive Summary
Introduction

Chapter 1. There’s globalization and there’s inequality
Chapter 2. The hard to measure, hard to deny, threat effect
Chapter 3. Theory and practice: predicting and estimating trade’s effect on wages
Chapter 4. The offshoring of service-sector jobs: more of the same, but more so
Chapter 5. Benchmarking the costs of globalization

Conclusion
Appendix
Endnotes
References

Executive Summary

A wide gulf exists today in American politics. On one side are voters anxious about globalization and its impact on their ability to make a good living. On the other are economists, policy makers, and pundits who maintain that trade is good for the economy and that the only problem it raises is that its large benefits are too broadly diffused throughout the population for any single voter to notice.

And so these policy makers and opinion leaders have taken it upon themselves to educate the American public about the benefits of the globalization status quo, resting their effort heavily on the suggestion that “all economists believe” globalization is good for American workers.

The problem for this approach is that those worried about what the integration of a rich U.S. economy and a much poorer global economy means for their living standards have a better grasp of the underlying economics. Open the international trade textbook and one will find two key predictions about this global integration: it can indeed harm the majority of American workers, and it actually does have a natural constituency—the most economically privileged Americans. Not for nothing is economics called the dismal science.

Given these textbook predictions, it should come as no surprise that the two starkest economic developments of the past 30 years—rising inequality and the increasing integration of the United States into a poorer global economy—are causally connected. The debate among researchers who have delved into this topic is generally not a disagreement about the predicted direction of trade’s influence but rather an empirical argument about the size of its contribution to the historic run-up in inequality seen over the past several decades. Some economists think trade explains a major portion of the rise in inequality; others believe that it explains very little. A large majority pegs the contribution somewhere between 10% and 40% of the total rise in inequality in the 1980s and early 1990s. This book shows that its influence has only become stronger since.

To date, the redistributive effect of trade has largely been a response to global integration of the manufacturing sector. The impact of the rise of trade in services, a sector once thought to be largely insulated from global competition, is starting to come into focus. Offshoring of service work potentially gives globalization a much larger lever with which to affect domestic labor market outcomes, and it could have huge implications for the future shape of earnings for American workers.

A key contribution of this book is simply to translate the costs of globalization for workers on the losing end into easily understandable terms: dollars per worker (or household). Using the best practices identified in the earlier trade andwages debate, this book finds that the annual losses to a full-time median-wage earner in 2006 total approximately $1,400. For a typical household with two earners, the loss is more than $2,500. These losses are as high or higher than other economic costs commonly presented as much more damaging to American families, such as the cost of health care, spikes in gasoline and fuel oil prices, the cost of a child’s four-year college education, or the funds needed to remedy a possible shortfall in the future of Social Security.

To deal with a harm as large and widespread as that imposed by globalization, we need to think much more ambitiously about public policy that re-links aggregate and individual prosperity, a policy that uses all the levers available: social insurance, public investment, fairer economic rules, and redistribution when other tools fail to provide egalitarian outcomes. Further, despite much protestation to the contrary, the globalization status quo is at least as stingy to the poor trading partners of the United States as it is to American workers. There is no real danger to progressive goals in calling for its complete upending.

So far we have been content to allow globalization without compensation to proceed apace. This complacency has already hurt us, and the damage will only grow in the future.

Introduction

Globalization and the new economic insecurity

It was 1995, in the middle of Bill Clinton’s first administration, and Robert Rubin, his new Treasury secretary, was pondering the lessons of his first big political fight. The Mexican government had been on the brink of default, but initial strong support in Congress for his rescue effort had deteriorated day by day. In the end he had had to put aside congressional approval and act on his own by tapping $20 billion in discretionary Treasury Department funds. In the future, he concluded, the key to political support would be public support:

At some point during the second term, Secretary of State Madeleine Albright and I discussed holding joint public meetings around the country to try to improve how public understanding of global issues…affect people’s lives. Regrettably we never did this, but some kind of ongoing public education campaign is badly needed to change the politics around all these concerns….On trade, for example, dislocations are very specific and keenly felt—and lead to strong political action—but the benefits of both exports and imports are widely dispersed and not recognized as trade-related, and thus haven’t developed
the level of political support they require. (Rubin and Weisberg 2003, 37-38)

It is regrettable that Secretary Rubin never mounted his public education campaign,
but not because American workers, from waitresses and office assistants and auto workers to software engineers, lawyers, and stock brokers, were deprived of an economics lesson. It is regrettable because he may have missed a chance to learn that the misinformed people in need of enlightening actually understand textbook trade economics just fine.

Take one particularly prominent skeptic of the idea that globalization must be good for all American workers:

Last December…I was being driven to the Stockholm airport. Along the road we passed many of Sweden’s best
factories. They seemed to the tourist’s eye to have lost some of their bright glitter and busy-ness.…Now there is nothing that these factories can do which cannot be done almost as well in the Pacific Basin—and often with Asian labor at real wage rates only half that prevailing in Sweden. And surely much the same can be said about factories in Turin, Brussels, Birmingham, and Chicago.…Of course, the most resourceful Swedish and American operations can survive at some positive level. But all of us cannot be above average. As the billions of people who live in East Asia and Latin America qualify for good, modern jobs, the half billion European and North Americans who used to tower over the rest of the world will find their upward progress in living standards encountering tough resistance. (Bhagwati and Dehejia 1994)

This particular skeptic, however, probably wouldn’t benefit much from an educational campaign: he’s already won a Nobel Prize and essentially founded the modern discipline of economics. Paul Samuelson wrote these words after attending a Nobel jubilee in 1992, and they are a good summary of the textbook predictions of what happens to most workers living in a rich country when its economy integrates with a much poorer global economy.

While this integration generally makes both countries a bit richer, it has much more powerful effects on the distribution of income within each economy. For the United States, this redistribution swamps the efficiency gains for most workers, making them worse off not just compared to globalization’s winners, but in absolute terms.

Secretary Rubin’s focus on the national advantages of trade over its contribution to economic inequality is hardly unique. It’s almost impossible to find a mainstream politician or policy maker, or newspaper editorial board or reporter or TV commentator—of any ideological stripe—who doesn’t aver that trade is an all-around good thing; “win-win” is the most common formulation. But if you raise the point that trade redistributes income and creates some winners but many losers, a point predicted by standard economic theory and proven in empirical studies—you’re made to feel somewhat unseemly, that you and those people you’re concerned about should have stayed in school longer or have studied something different or just been smarter. In other words, when trade makes software engineers richer, that’s economics. When it makes Americans without a four-year college degree (the large majority of workers) poorer, that’s their own failure to adapt to the New Economy. And when trade agreements prohibit a country from copying the technology it buys, that’s good business. But if agreements required that each country protect the most basic rights afforded to its workers, that would be protectionism.

The economics of international trade are actually quite straightforward, and the first aim of this book is to introduce readers to the economic theory and studies that show us clearly that the trade story is not win-win but rather good news-bad news: good news for national incomes, bad news for many if not most individuals
and families, because their income is redistributed away from them and up the income ladder. The big unanswered question regarding globalization is what to do about the winners and losers—who gets what, when, how, and whether. That is, we need a real political debate about globalization.

Globalization’s place in modern American politics was secured in the furious debate over the North American Free Trade Agreement (NAFTA) in 1993. More recently, the growing gap between the very rich and the rest and the fragility of middle-class living standards have become part of the political conversation as well. Although inequality and insecurity are not all that new—numerous academic studies have demonstrated forcefully that they have been rising for roughly 30 years—what is new is their elevation as issues of prime political importance.

Help wanted: straighter talk on globalization

While economic theory argues that global integration leads to lower wages for the majority of American workers, at each stage in the trade debate policy makers, opinion leaders, and even progressive economists have often minimized these costs of globalization. Instead of, say, trying to inform the public that the real action of globalization in affecting U.S. workers is slower wage growth, not fewer jobs in the economy, they have chosen instead to say simply that “trade doesn’t affect jobs” and then let the silence afterward imply that fears about globalization are groundless. Why this group would misrepresent the true implications of globalization for American living standards is a tough question (the sociology of the economics profession and just flat ignorance on the part of many about the economics of international trade both surely play a role). But how these misrepresentations are expressed is easier to pinpoint. Watch for them.

The first how is conflating national income and national welfare. As global integration generally raises national income (gross domestic product, or GDP), many economists rest arguments for it there. If pressed, they often argue that concern about how this national income is distributed post-integration is just not their business—that’s politics, not economics. This is a dodge, pure and simple. Economists expressing a preference for global integration are, in fact, expressing a purely political or ethical preference, not a scientific judgment. Nothing in the discipline of economics tells us that a policy that raises national income but leaves some individuals better off and some worse off is one that raises national welfare.

The only criterion by which economists can make firm, value-free judgments about economic policies and trends is what is called the Pareto principle. Pareto optimality
results only when an economic change makes one person better off without harming anybody else. Clearly, the outcomes of globalization in the U.S. economy are not Pareto optimal.

A weaker criterion sometimes put forward by economists is compensated Pareto improvement. This criterion argues that if the outcome of an economic policy or trend even makes it possible to make everybody better off, then it should be embraced. Given that there are net national gains from global integration, compensated Pareto improvement says that they must be grabbed. But this is absolutely a judgment rooted in politics and values, not just economic logic. Unless one is willing to argue that taking a dollar from an apparel worker to give a dollar and change to Donald Trump is good for America, we can make no inference about the impact of global integration on national welfare until compensation for its costs actually happens.

In any case, compensated Pareto improvement as a guide to assessing economic policy is routinely violated. If professional economists were polled as to whether the Bush tax cuts should be financed with across-the-board cuts in government spending, a majority (or at least a strong plurality) would probably say no. Yet, judged from strict compensated Pareto improvement, this policy could be a clear winner: tax cuts financed by spending cuts should (trivially) boost overall national income. It’s time the profession started asking itself more seriously why compensated Pareto improvement applies so forcefully only to globalization.

Another key strategy for minimizing the costs of globalization is to scale them against inappropriate benchmarks. The most common comparison weighs the upward redistribution caused by globalization against the total redistribution that has occurred in recent decades. The problem with this comparison is that this overall rise in inequality has been so huge that even a non-majority part of it translates into thousands of dollars of losses for workers on the losing end, losses which repeat (and grow, as trade flows grow), year after year. Globalization might be a minority player behind the rise in inequality, but it’s not a minor one.

Lastly, there is a common distortion of the globalization debate in the United States that is rooted, at least, in a sound progressive concern: access to the U.S. market creates opportunity for the world’s poorest workers and must be safeguarded on these grounds. The concern is real and ethical, but it is not necessarily one well-served by obfuscation regarding globalization’s impact on American workers. Further, it’s a concern not at all well-served by the globalization status quo. While those expressing angst about globalization are frequently tarred as protectionists who want to choke off access to the U.S. market for exports from poor nations, the truth is that the globalization status quo provides this access only at a heavy price. This price is generally a radical reduction in the policy-making autonomy of U.S. trading partners, a reduction demanded in the treaties routinely mislabeled “free trade agreements.” These agreements generally make liberal access to the U.S. market contingent upon the adoption of a range of policies that are not necessarily trade-related but that are amenable to the global corporate class. Today’s warriors for the globalization status quo have little reason to preen about what they’ve delivered to the poor nations of the world, and progressives shouldn’t be at all queasy about calling for a fundamental re-thinking of the global trading system.

Compensation: How much, and how delivered?

There is an enormous chasm between the income losses felt by American workers on the wrong end of global integration and the solutions that are generally prescribed
to compensate them for their troubles. Ironically, even those advocating for workers harmed by globalization often end up demanding weaker medicine than the economics warrant.

An utterly appropriate demand in trade policy is that all trade agreements establish the adoption and enforcement of labor standards protecting workers’ rights as a precondition to favorable access to the U.S. consumer market. This is good economics and good politics, for a number of reasons. What it is not, however, is particularly protective of American living standards in the face of global integration.

Another appropriate reform of globalization as currently practiced concerns the utterly non-trade-related clutter (generally originating in demands from the corporate sector) that finds its way into almost all trade agreements, including agreements for membership in the World Trade Organization. Commitments to enforce U.S.-style intellectual property laws, the restructuring of financial sector regulations, and detailed protections of investor rights against expropriation (defined liberally at times to include any government policy that hurts profits) constitute the lion’s share of these agreements. Many advocates insist that the overweighing of corporate interests over all others has resulted in trade agreements that harm U.S. workers by straying too far from simple and clean trade liberalization. They also rightfully point out the irony: if you want free trade, why do you need all these agreements and protections?

Like the push for worker protections, the campaign against corporate clutter in trade agreements is good economics and good politics, but not particularly protective of American living standards in the immediate future. The first-order threat to the living standards of U.S. workers posed by integration of the United States and global economies stems from the very fact of this integration, not its terms. The terms of integration can lead to marginal improvements in outcomes for American workers (maybe more substantial improvements over a long time horizon). More important, these terms have great influence on the effect of global integration on less-developed countries. For these reasons, it is vital to get these terms right. Even when we do, however, the very fact that a comparatively rich and labor-scarce U.S. economy is merging with a poor and labor-abundant global economy will put pressure on the living standards of U.S. workers for decades to come.

If crafting fairer international rules of the game isn’t the answer, what is? Go back to what economics teaches about trade: it increases national income while simultaneously
redistributing it. We’d like to keep the increase while making sure the redistribution doesn’t leave large swaths of Americans worse off. The way to do this is through compensation, and the political and ethical case for this compensation is crystal clear. Global integration is driven by conscious policy decisions made by the government, and its utterly predictable outcome is reduced growth in living standards for many, even most. Just as when a homeowner has his or her house claimed by the government to make way for a public highway, ethical politics demands that compensation be paid to those who have their individual circumstances damaged in the name of the collective good.

Many in the globalization debate have accepted this premise in principle, but the specific compensation measures they endorse are insufficient to meet thescale of the redistribution. Trade Adjustment Assistance (TAA), perhaps the best known program for aiding workers damaged by globalization, provides expanded unemployment benefits and payments for training to workers directly displaced by imports. An oft-recommended supplement to TAA is wage insurance, which would pay import-displaced workers some fraction of the difference between the wage they received at their old job and the wage at new employment.¹ TAA and wage insurance are premised on the belief that the costs of globalization are both small and concentrated, consisting only of the adjustment period when workers displaced by imports have to find new jobs.

This book documents just how much larger the costs of globalization actually are to workers on the losing end. These costs consist not just of jobs displaced by imports but also of the reduced wages for workers subsequently competing with the displaced. The pull of globalization on living standards will get even stronger in the future. The service sector, once thought to be largely insulated from global competition, is beginning to see more and more of its output traded across national borders (accounting services and software programming, say).² This offshoring of service work gives globalization a much longer lever with which to affect the U.S. economy, and it has huge potential implications for American workers. The scale of the coming costs from globalization for workers on the losing end requires much more serious thought about the scale of policy responses.

Thinking big

The years following World War II saw an embrace of Keynesian macroeconomics. The enduring lesson of this age was that allowing business cycles to run their course was wasteful, not palliative, and that responsible governments should use policy tools to fight downturns. In the first three decades of the postwar era, macroeconomic policy alone was able to smooth out much of the risk and volatility faced by American households. Hard times in this period generally came to them all at once, in the form of recessions, and good times were shared equally across the distribution of income and earnings.

The commitment to full employment provided much of the insurance against economic hardship that most households needed, both through high and rising wages and employer-based social insurance programs. While this coverage of social benefits and family-sustaining employment was never universal (nor in any way doled out fairly), for decades after World War II the trajectory at least was right and a larger number of workers enjoyed them as time passed.

In recent decades, however, the pursuit of full employment has faltered, and individual outcomes no longer correlate so tightly with the ups and downs of the broader economy as in the past. The breakdown of institutions that shared risk and benefits (unions and minimum wage floors) has conspired with globalization to erode the commonality of economic experience in America.

What the American economy needs today is a policy commitment as big as the embrace of Keynesian macroeconomic policy, a commitment driven by the recognition that there is no one American economy anymore. Instead, American households face vastly divergent struggles to carve out a secure economic future for themselves, and they are buffeted by arbitrary events outside their control.

To deal with a harm as large and widespread as globalization has wrought (and has the potential to inflict in coming decades), we need to think more broadly about public policy that re-links aggregate and individual prosperity, a policy that uses all the levers available to a government genuinely concerned about economic security for its citizens: social insurance, public investment, fairer economic rules, and redistribution when other tools fail to provide egalitarian outcomes.

This is not a new idea. The imperatives of globalization have been a primary force for creating and sustaining expansions of the welfare state and social democratic policies across much of the developed world. Perhaps because of chance or because of differences in our politics, this hasn’t happened in the United States, and instead we have been content to allow globalization without compensation to proceed apace. This book aims to show just how much this complacency has already hurt us and to spur action to keep the damage from growing.

The first chapter provides a birds-eye view of trends in globalization and inequality in the U.S. economy over the past 30 years. Greater flows of international goods, investment, and people have been accompanied by greater gaps a mong income levels. The growing gaps are not just the result of the rich getting richer faster, which they have; it’s also the result of the middle and the bottom falling.

The numbers tell the story, and these are detailed in Chapter 3, which explains the economic theories underlying the effect of trade flows on wages and examines and updates recent studies that have quantified the magnitude of the effect. But before getting into the hard-nosed economics, Chapter 2 looks at the phenomenon that is hard to quantify but theoretically important: the “threat effect,” or the impact on a worker’s bargaining position of the possibility of having his or her job displaced by imports.

Chapter 4 looks ahead to the potential impact of the relatively new practice of offshoring. Economics has yet to fully examine this phenomenon, but offshoring has the potential to intensify downward pressure on U.S. wages and, by turning comparative advantage on its head, even make the nation as a whole poorer.

Chapter 5 estimates in dollars the cost of globalization for the individuals and households adversely affected by it and provides a number of economic benchmarks (the cost of health care, college education, rising energy prices, Social Security reform) to put these costs in perspective. The final chapter sums up and makes policy recommendations.

Endnotes

1. A small wage insurance pilot program now exists under TAA.
2. See Delong and Cohen (2005) and Blinder (2007).