The Fallacy of the SKILLS Gap.

• Author: GALBRAITH, JAMES K.

`Today's income gap is largely a skills gap.'

--President Bill Clinton, State of the Union, 1999

Two decades ago, income inequality rarely came up in public policy discussions. In 1982, as Executive Director of the Joint Economic Committee of the United States Congress, I organized hearings on the issue at the behest of the chairman of the committee, Representative Henry S. Reuss, Democrat of Wisconsin. Our hearings emphasized the effects of unemployment, changing family structure, and rising capital income. We warned that the policies of the new Reagan Administration would make things worse. And they did, ushering in the largest increases in inequality in fifty years.

Many, like President Clinton, attribute this to a "skills gap." It is true that the pay of those with more education rose, relative to those with less, during the 1980s. But the issues are: What caused this event, and what is the cure?

The prevailing view, and certainly that espoused by the President on many occasions, is that technology caused the "skills gap"--and that education can cure it.

Technology affects incomes, in this argument, by enhancing worker productivity and altering the supply of, and demand for, certain skills; those with the skills appropriate to the high-tech age are rewarded with rising wages. This theory affirms the power and the wisdom of the market mechanism. And while the rise in inequality may be regrettable, no uncomfortable questions about its necessity need be raised. Each worker bears an ultimate responsibility to prepare for the high-tech job world, and if you don't, too bad. It is no surprise that this explanation has proved popular with political leaders: It completely excuses them from blame and largely from responsibility for remedial action.

But as it turns out, the cause-and-effect case is weak. Partly, this is a measurement problem. There is no variable labeled "technological change" in the national income and product statistics. The closest is a measure of the growth of productivity, but the problem is that the connection between productivity growth and income inequality is not at all what the theory predicts.

The technology-drives-inequality idea suggests that faster productivity growth should produce more unequal wages. This is not what happened: Productivity growth fell after 1970, and income distribution was more stable before that date, when productivity growth was high, than it was later on. There is an odd contradiction between the belief that we have just been through a period of especially rapid technological change and the slowdown in measured productivity growth--from 3 percent in the 1960s to about 1 percent through the 1980s--that actually occurred.

Many economists have wrestled with this problem. Most, in...