Steadfast FinancesUS Middle Class is Losing the Labor Competition

The US Middle Class is Losing the Labor Competition with the Middle Class of the World

Filed in Economy 2 comments

A few weeks ago I framed the popular political argument “Do the Rich Hold Back the Middle Class.” My hope was that in summarizing the opposite ends of the argument, I’d show how economic data gets spun into economic narrative and that two opposing views are easily constructed from collected data.

Regular commenter Lucas hit the nail on the head when he wrote:

“The weakest part of your argument is framing it as a choice between two (and only two) sides. I do not blame you. almost every issue is framed as a choice between two sides, and people who favor a deeper analysis are generally looked upon with suspicion as troll-like, or dismissed as fence-sitting wimps. Analysts with the expertise should write with much more nuance, but the average reader cannot sit still for it. Therefore, we continue to frame issues as either-or dichotomies, and then make decisions based on bad framing.”

Lucas is right. The truth is that the popular narrative of rich versus (or not versus) the middle class is too narrow a view of reality. So narrow, there is scarcely truth in either side.

Think of the economy for a moment and all the moving parts. The largest portion of American income might be concentrated with the rich and the largest portion of American labor might be concentrated with the middle class. These two massive economic actors make it easy to frame an economic debate, but since when has the local economy of the US separated itself from the global economy? The US is barely one-twelfth of the world’s population. There are plenty of economic actors that could be impacting the income of the US middle class.

If you’ve ever wanted a more nuanced theory of how the middle class income growth came to a halt, than you should consider the effects of globalization on the middle class.

Income of the World’s Middle Class is Expanding; the US is Stagnant

For much of the history of the world, economies were local and mostly contained by borders. If you wanted someone to balance the accounting books, you hired a bookkeeper to fill a desk in your office. You’d never think to hire a man halfway across the world to do the job. Employers sought labor locally.

The most drastic change in recent decades has been employer willingness to seek labor nearly anywhere in the world. Suddenly, employers were hiring customer service reps, bookkeepers and programmers from India, Brazil and Eastern Europe. Very few jobs today are local-only jobs. Only health care and education seem to have remained untouched by outsourcing and off-shoring. The NY Times does a good job of tracking down some of the leading economists who are making the argument that globalization is a major factor in middle class income stagnation.

Granted, this is job growth and not income. However, the basic laws of supply and demand show that where demand for labor increases, the wage rate also increases. At minimal, it’s a plausible and convincing argument.

Thoughts on US Politics

What does this say for American politics?

Globalization has likely had a huge impact on the economics of the middle class, but neither side of the political aisle are talking about this election season. I suppose it’s easier to talk about narrative than solutions.

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Posted by CJ   @   30 August 2012 2 comments
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Sep 4, 2012
6:54 pm
#1 Don :

Yep It’s Catch 22!

The rich, nor the government hasn’t really been an enabling bridge for globalization. It’s technology that’s the root of the change.

In an article that I wrote called Is Technology a Job Killer I talk about the concerns and the real (at least in my opinion) cause of the middle class decline in the US.

I think it’s time do double back to that post and do an update! Thanks for the motivation!

Sep 10, 2012
12:11 pm

There is another issue at play here, and Don touched on it: technology. And it’s probably a lot more profound than we can see at this juncture.

Jobs, and middle class, as we know it, are fairly recent phenomena in the economic history of mankind. Until about 150 years ago, everyone worked where they lived, and usually worked for themselves. And that’s been true for just about the entire history of the human race.

The industrial revolution created what we take for granted today: capital pools called corporations, which employ labor for a wage. Because the margins are good enough, corporations could pay a higher wage than people could make on their own. More efficient, is how everybody justified this enormous change in society.

That efficiency was created by technology (machines). Communications technology might be undoing that before our very eyes. It is increasingly more efficient for a user/consumer to interact directly with the provider of labor. Example: rather than buying a decorative candle from Target/wholesaler/manufacturer, I can just go to eBay or Amazon and buy direct. The only cost: shipping and the electronic transaction cost.

This is increasingly true in B2B: rather than hire an ad agency to buy traditional TV and print media, corporations transact with individual blogs for personalized and highly trackable internet ads. Big Media is under threat because the source of news and consumer of news don’t need them any more.

Middle class traditionally has consisted of middle managers in large corporations, union labor working for protected wages and small business owners. The first two of those groups are under siege.

Here’s a chart from St. Louis Fed data tracking employment at large vs. small employers.

What do you think?

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