As the new year has dawned, and 2015 has arrived, I have noticed the news talking a lot about the wealth gap, the death of the middle class and the stagnation of earnings by workers in industrialized nations. In the US, part of this media hand wringing is due to liberals trying to sway public sentiment towards anti-capitalism as we head into a presidential election, but that does not mean there is nothing to these news stories. It's quite the opposite in fact, the middle class is stagnating while the rich get richer on a global scale. But unlike the other articles, which are usually trying to push a political agenda, I'm not here to solely blame policy for this. Instead, the point of this post is to briefly discuss the systemic changes in the global economy that are killing off the middle class.
The first, and really most obvious, reason why the middle class is struggling is because we now truly exist in a global economy. In the annals of history, the middle class was made up of local professionals, shop keepers, doctors and businessmen who served particular communities meeting their needs. As long as there were people living nearby, there were customers for the local businessman to make money from. In the modern era, where the internet makes the world available at a key stroke on your computer, the local community does not need to go to the local business man to do business. Instead, they can order what they need online and get it delivered to their doorstep almost anywhere in the world. Local businesses now have to be cost and convenience competitive with multinational corporations who can spread the cost of doing business over a huge global distribution system. This makes profits for local business slim to non-existent and causes local businesses to fail. As local small businesses are the largest employers in the economy, this puts strong downward pressure on wages (to keep the business competitive) and puts a lot of people out of work. Those people then can't find jobs, since so many small businesses have died or are not hiring, which creates more downward pressure on wages.
The second reason the middle class is stagnating is debt. This is especially true in the USA, where college and graduate school programs are paid by the student out of pocket; or more frequently, with borrowed money. Before the internet and globalization, it was possible for a high school graduate to go out, get a job and support himself and a family on the wages he earned. College was considered a luxury good, reserved for the rich to essentially send their children to professional finishing school before they were brought on to help run the family business. In the modern era, where most of these family businesses have long since gone out of business, in order for a child to compete for higher paying jobs, they need specialty college education. Unfortunately, in the USA, this schooling still comes out of pocket; and with so many people looking to go, prices have shot up at a rate of inflation many, many times the national average. Kids who still want to get an education despite the cost have to take on huge amounts of debt (often 5 or even 6 figures worth of it) in order to get this specialty training needed to compete in the new global economy. The prolonged schooling, delayed entry into the job market and increased competition for these professional level jobs has caused salaries for these jobs to fall and lifetime earnings for those who get them (when adjusted for inflation) to stagnate. This competition and resultant debt have crippled young earners. Unfortunately, as Europe is finding, even when you make education free, it doesn't solve the problem. It helps take care of the debt issue, but it increases the number of people looking for these jobs even more (since now price is not keeping people out of school). The result has been epic youth and young adult unemployment.
Thirdly, because the world is now one large global supply chain, companies can pick and choose where they do business and how they produce the goods or services they sell. This is especially problematic for the first world nations that have long relied on their large economies to drive tax revenues for their governments. Because companies can now pick and choose where they do business, they can weigh factors like local wages, cost of living and tax/regulatory environments in deciding where to put manufacturing centers, R&D facilities and corporate headquarters. First world nations, with their high cost of living, high wages and large tax/regulatory burdens, are suddenly not a desirable place to do anything but sell goods. This further exacerbates the job losses and wage reduction for the middle class.
Lastly, none of this is to say that government isn't playing a roll here. It is the source of the tax and regulatory burdens discussed in the previous paragraph. And while it can make these burdens less onerous, that's not going to cure the larger issue which is globalization. Unfortunately, globalization is not a force that an individual government can fight. Especially not after the fact (since most supply chains are already globalized). At best, governments can work to mitigate the problems that globalization has caused, while benefiting from all the progress globalization has created (namely better, cheaper goods available to a much larger swatch of humanity than ever before). Deciding how we are going to mitigate the problems of globalization is the challenge of the 21st century. But mitigate we must, or our economies will continue to stagnate and our middle classes suffer.
