Page 1 of 2
THE BEAR'S LAIR
America's disappearing middle class
By Martin Hutchinson

It is already clear that one of the great US election issues of 2008 will be the relative impoverishment of the American middle class, defined in the American rather than the British sense to include well established blue-collar workers with families and mortgages.

Republicans who ignore this problem will find themselves talking only to the winners, the top 1% in the income scale - laughably


inadequate as an electoral base. Democrats who propound the usual socialist nostrums to cure it will find themselves ardent proponents of an economics that doesn’t work. A new intellectual paradigm is required.

The declining share of low and moderate income workers in the American pie is undeniable; the relative share of such workers peaked as long ago as 1973. For those with only high school qualifications or less, their absolute earnings peaked in 1973 and have declined substantially since then. From 1973 to 1995, this appeared to be simply a case of the rewards for skills increasing, with low skilled workers suffering increasingly in terms of earnings and job losses compared to those with a bachelor’s degree or better. Since 2000, however, the paradigm has changed, with all sectors of the workforce losing ground in absolute terms, except for the top 1% who have gained essentially all of the modest gains in employee incomes under the George W Bush administration.

A Center for Economic and Policy Research study released this week shows that the share of “good jobs” in the US economy has fallen substantially during the 2001-07 business cycle, where a “good job” was defined as one that pays at least $17 an hour (the median wage rate in 1979) and offers employer-provided health insurance and a pension. While most of this deterioration has arisen from employers’ increasing failure to provide health care and a pension, the share of “bad jobs” with pay below $17 per hour and neither health care nor a pension has also increased in this business cycle, by 1.6 percentage points.

These statistics are pretty clear, and cannot be ignored, whatever one’s policy disagreements with the left-leaning CEPR. Blue-collar workers lost bargaining power catastrophically following the peak of the 1973 cycle, and since 2000 their failure has been accompanied by a more generalized loss of bargaining power by white-collar workers and all toilers below the level of top management. Employers no longer feel compelled to offer their workforce either a decent wage or the most basic of health care benefits, benefits that were considered sacrosanct in the social contract of 1945-73. The American dream, in which hard work can propel ordinary people into a comfortable even affluent lifestyle, is becoming ever more distant for all but a small fraction of the population.

There appear to have been a number of causes of this. One is technological change, that old chestnut, which has not made production-line workers obsolete, as had been thought would happen, but instead has compelled their children to get jobs in the service sector of the economy, generally lower paid, since fewer of the employee’s skills are used. In the service sector itself, technology has de-skilled a number of routine tasks such as retail-level credit analysis, so that respectably paid lower level bank officers have been replaced with casual-labor clerks.

A second cause is the increasing ease of world trade, and the new possibilities the Internet has brought of outsourcing to Third World countries where labor costs are a small fraction of those in the US. Overall, this has been a thoroughly benign development; it has brought new wealth to a number of poor countries. Equally important, it has demonstrated to poor countries with large populations that the way to new wealth is not through socialism or religious-driven hostility to the outside world but through openness to world trade and investment, in order that their surplus labor can be used to best effect in an increasingly integrated world economy.

Naturally, the increased access to the US economy of a much larger workforce with lower pay scales has had a depressing effect on US wage rates, particularly at the lower skill levels. The doctrine of comparative advantage, beloved by free trading economists as a rationale for opening borders, works much less well when the poorer country through opening to world trade can work itself up the value chain and expand its comparative advantage to an increasing proportion of the richer country’s business. The increasing salience of protectionism among the US electorate and the political classes is not an accident; it is a rational reaction to trends in US labor remuneration that are only dimly understood but are harshly felt.

Another cause of middle-class immiseration is unquestionably high immigration. Business lobbies want high immigration to reduce the bargaining power of their workforce. This puts pressure on workforce remuneration, particularly at the lower skill levels, since the glut of labor in the world economy is most intense at low levels of education and training. In a well ordered society, the workforce’s resistance to this demand would be entirely accepted by the politicians, since there are obvious economic consequences to allowing mass immigration. Even if there are economic gains to allowing in new workers to depress wage rates, they are entirely at the expense of the domestic workforce’s living standards, and responsible politicians would 

                                                                        Continued 1 2