The paper presents evidence that the recent test score decline is signaling a significant deterioration in the quality of entering cohorts of workers. The test score decline which began around 1967 was roughly equal to the learning that takes place in 1.25 years of high school. Analysis of PSID data reveals that, if errors in measurement are accounted for, a 1.25 grade level equivalent decline in adult test score lowers wage rates by 7.1 percent when years of schooling are controlled. In addition, studies of the productivity of workers doing the same job find that a fall in academic achievement lowers productivity significantly more than it lowers one's relative wage rate. This deterioration in the quality of the output of the educational system is historically unprecedented. Prior to 1967, student test scores had exhibited almost 50 years of uninterrupted improvement. Between 1942 and 1967 scores on tests given to Iowa high school seniors rose .75 grade level equivalents per decade. The men who fought in WWII scored about 3 grade level equivalents (.73 standard deviations) higher than WWI recruits on the Army Alpha test even though they had on average only two additional years of schooling. Furthermore, scores on I.Q. tests given to random samples of children and adults had been rising 3.1 IQ points per decade. New estimates of the quality of the work force are developed which take into account improvements in the quality as well as the quantity of education. Improvements in the cultural environment and the quality of education contributed .35 percent per year to the growth of labor quality between 1948 and 1973. Their contribution to labor quality growth declined subsequently to .259 percent per year between 1973 and 1980 and .I39 percent per year in the 1980s. If the test scores of high school graduates had continued to grow after 1967 at the rate that prevailed in the previous quarter century, labor quality would now be 4.8 percent higher and GNP 3.2 percent or $142 billion higher. The labor quality shortfall is projected to be 9.1 percent in the year 2000 and 11 percent in 2010. Discounted to 1987 at a real discount rate of 6 percent, the forecasted total cost through the year 2010 of the test score decline is estimated to be $5.24 trillion. Large as these effects are, one cannot blame the slowdown in productivity growth on the test score decline. The timing is wrong. Teenagers play only a minor role in the economy, so a decline in their test scores cannot account for a simultaneous drop in productivity growth. The effects of the test score decline on the economy had to wait until the cohorts affected had become a major share of the work force. Thus it is in the 1980s that the test score decline is having its major impact. The rebound in productivity growth that was forecast for the 1980s has not occurred and the test score decline is in part responsible.
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