Over the past decade, CaliforniaÕs economy has changed in striking ways that have profound implications for the stateÕs working families. This reportÕs central conclusion is that CaliforniaÕs recent dramatic economic growth has carried with it a hidden and escalating costÑincreasing economic insecurity for most workers at a time when there are fewer tools available to help them adapt. Workers at all income levels are increasingly vulnerable to rapid changes in our volatile, information-based economy; and inequality has not only increased markedly but also is likely to grow further if forceful policies are not adopted to reverse the trend. Given the heightened instability and rapid change inherent in our rapidly growing technology sectors, even many working families who are doing well at the moment face uncertainty about their economic futures.

The causes of these problems are deeply rooted in the nature of our new economy and particularly in the failings of our social and public institutions to adapt to these economic changes. Solving them will require fundamentally rethinking the nature of our social contract. Government, business and labor must develop new institutions and policies that protect the working poor and raise their wages, provide effective bridges from lowpaid to high-paid occupations and industries, and provide lifelong learning opportunities that help people find rewarding work, even in the face of economic volatility.

Economic Transformation
In the early 1990s, California underwent its most severe economic downturn in a generation. Damaging effects of a national recession were compounded by reductions in military expenditures, which hurt the large defense sector of the state economy. There was a net loss of more than a half million jobs between 1990 and 1993.

Since 1993, however, economic growth has been unusually dynamic, both in the scale and the pattern of the recovery. Other recoveries reflected the cyclical rebound of the stateÕs traditional employers, but the current expansion has been led by industries which, in some instances, barely existed 15 years ago. High-tech manufacturing, software development and Internet companiesÑ combined with motion pictures, multimedia and a handful of other information-related industriesÑhave not only led this California recovery but also are transforming the structure of the stateÕs economy. Older industries are also adopting new technologies to enhance their own competitiveness. CaliforniaÕs economy today is significantly different from what it was 20 years ago.

Many analysts argue that this new economy has laid the groundwork for broad growth and prosperity in this state for years to come. Their optimism could be easily understood. CaliforniaÕs economy has flourished in recent years thanks to its new hightech industries and its proximity to overseas markets that were rapidly expanding during most of the decade. Merchandise exports more than tripled from 1987 through 1997 and grew 53% between 1993 and 1997 alone. Jobs have been created in California over the past few years faster than in the rest of the nation, especially in many high-paying technology industries, such as software and Internet companies.

The ÔDonÕt Look DownÕ Economy
While this continuing economic expansion has generated enormous wealth for many firms, it has not significantly increased the income of working families overall. At the same time, the new structure of the stateÕs economy is creating disturbing new trends that threaten these familiesÕ well-being, including:
  • Growing Insecurity and Volatility: Increasingly firms need to innovate constantly, responding rapidly to technological and economic change and taking advantage of new opportunities. This Ôcompetition by innovationÕ creates high-levels of insecurity in employment for large sectors of the workforce, including employees within high-tech industries facing unstable and rapidly changing market conditions. There has been rapid growth in the number of workers employed in temporary, contract, or other forms of contingent employment. Many other workers regularly lose their jobs and have difficulty finding new ones.
  • Divergent Trends in the Employment Structure: A growing gulf is appearing both between certain sectors of the economy and within each sector. First, there is the expanding disparity between high skilled, globally integrated, high-productivity industries and industries that mainly serve local markets and primarily pay low wages. Janitors, home-health care workers, and waitresses are essential parts of our new economy, but they benefit very little from high-technology growth. Second, there is also increasing disparity within economic sectors. Even in the global, high-tech sector, full-time workers at core companies in the new networks of production may have high incomes and relatively secure jobs while workers at sub-contractor firms earn low wages and experience much instability in their employment.
  • Growing Income Inequality: As a result of the factors outlined above, as well as changing demand for education and changing demographic characteristics of the workforce, there is growing inequality in income in California. This expanding income gap is occurring NOT primarily because wages are growing much faster for those at the top of the occupational structure, but instead because wages have declined for workers at the bottom and middle of the labor market. Since this inequality has widened during the strong rebound of the stateÕs economy, clearly economic growth alone cannot be relied on to raise the incomes of those at the bottom of the income distribution or reduce inequality.

Because of this fundamental transformation of the stateÕs economy and the dramatic growth in information technology industries, most Californians now must walk a lifelong tightrope Ñone that is poorly anchored in stressful and unstable employment. At the same time, people face serious potential risks if they slip on this tightrope or the rope fails. Economic vibrancy and volatility seem to be two sides of the same coin. While CaliforniaÕs emerging economy carries the promise of continued growth and added prosperity, most families will not share in this potential if the great divisions and imbalances of the new economy are not addressed.

The Social Contract, Old and New
TodayÕs level and forms of insecurity and inequality are quite new. In the three decades after World War II, the United States experienced a period of remarkable economic stability, accompanied by rising wages and improved standards of living for the vast majority of Americans. These Òwonder yearsÓ of the American economy, however, did not rise simply from market dynamics. Instead, they were made possible by a series of national policies that created a broad social contract. These policiesÑranging from the unemployment insurance and social security systems to the minimum wage and our system of labor relationsÑcreated an institutional and economic system that was beneficial to nearly everyone. Business flourished because of a growing consumer middle class. Productivity gains were passed on to workers in the form of higher wages. Government programs helped limit the severity of economic downturns and redistributed the fruits of prosperity to the less fortunate.

These policies, however, were developed for an industrial economy when employment was relatively stable and firms retained long-term ties with their employees. Since the early 1970s, such policies have been eroded and are no longer serving the function of stabilizing the economy by broadening access to its benefits. In todayÕs economy, with greater volatility and more tenuous ties now typical of the relations between employers and employees, the policies of the post-war years are largely inadequate to provide support for most workers.

A new social contract is needed to guarantee that prosperity both continues to grow and is equitably shared in the new economy. Public policies must be designed to support the economic flexibility that firms need to be competitive while also minimizing insecurity and ensuring that the risks and rewards of the new economy are divided more broadly.

Because the economic changes which have occurred are fundamentalÑcreating entirely new industries and dramatically restructuring both competition and production systems in older industriesÑthe new social contract must be comprehensively redesigned. Piecemeal reforms of existing programs and institutions will likely be ineffective. As the old system breaks up, we also have an opportunity to build institutions that are more inclusive than in the past, creating a new social contract that truly realizes the ideals of a democratic system with opportunity for all to fulfill their potential.

Developing such comprehensive reforms will not be easy. During the era of industrial mass production in this country, it took a major depression to provide the stimulus to create policies and institutions appropriate to the new structures of employment. Californians today should learn from mistakes of the past and implement a comprehensive new social contract at all levelsÑ local, state, national and globalÑbefore the costs of inaction escalate.

The purpose of this report is to present a framework for a new social contract. Finding the most effective policies and institutions will require refinement through research, discussion, and experimentation in the community, the state and the nation. Any new social contract, however, will have to address four social needs:

  • Increase WorkersÕ Earnings and Financial Assets: Most workersÑnot just those earning very low wagesÑneed higher incomes. They especially need policies that increase their earnings over their entire work lives and that help them accumulate a variety of financial assets. In addition to providing a more secure livelihood, expanding workersÕ financial assets can help them deal with layoffs or displacement.
  • Reduce Insecurity and Minimize the Harm of Dislocation: Dislocated workers need more support during periods of economic pressure and more assistance in finding new jobs which provide adequate incomes.
  • Provide Lifelong Education for Work and the Development of Careers: To find and keep good jobs in the new economy, workers need access to education throughout their work lives and organizational help in developing careers and networks of support.
  • Promote the High Road to Economic Development and Block the Low Road: Economic development programs and public subsidies should reward only employers who pursue high-road strategies to counter competition and grow. In addition, public policy should cut off assistance to firms that try to compete by avoiding regulations, cutting wages and benefits, increasing insecurity, or excessively eliminating jobs.

In order to ensure the effectiveness of these approaches, public authorities need better systems to identify and document insecurity. Additional data will both help officials locate the particular industries, occupations or regions where earnings fluctuations are more frequent and understand the impacts of instability on families, thereby facilitating development of targeted assistance and retraining programs.

Ultimately, with such a comprehensive approach, appropriate public policies can support economic flexibility and minimize the problems of insecurity, while also ensuring broadly shared prosperity. In this win-win-win scenario, a new social contract could make the new economy work for everyone.

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