Global Trend

The Middle-Class Jobs Crisis
 
Perhaps the biggest challenge facing the United States in the coming decade is the decline of its traditional middle class. This group, which made up about 60 to 80 percent of the population, was crucial to our global dominance throughout the Mass Production era.

Like few other countries, American culture was defined from the late 19th century by mass media markets, mass consumer markets, and relatively homogenous social values, all personified by the middle class.

For the most part, these people lived in nuclear families and owned homes, automobiles, telephones, and televisions. Most of them watched a few television networks; they mostly attended public schools; most were at least nominally Christian or Jewish; they mostly trusted business and the government; and they felt life would be even better for their children than it was for them.

This perception rested on an economic system that provided a typical high school graduate with an ample opportunity to find a job that paid enough to fund these needs, and even offered many life-long careers with a single employer. When coupled with a growing social safety net for retirees, this middle-class ideal became the "dream" to which immigrants and others around the world aspired.
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Unfortunately, as the Mass Production Revolution matured and gave way to the Digital Revolution, this middle-class ideal began to fray. Now, over forty years from the dawn of the Digital Revolution, that fraying is still driven by a number of intersecting trends.

It manifests itself in The Battered American Dream trend we examined in the February 2015 issue of Trends. The chief outgrowth of that trend is the realization that Americans still seek opportunity, but they have become increasingly demoralized about the likelihood of achieving it.

To understand what lies ahead, its necessary to understand that 20th century America was unique in history and why the future will be different and, quite possibly, even better. Lets start by examining the confluence of factors that made American middle-class affluence in the 20th century the envy of the world.

First, the United States is uniquely blessed in terms of military security, agricultural productivity, and mineral wealth (including iron, coal, and oil) as well as logistical resources like harbors, rivers, and a lack of physical barriers. Because the U.S. seldom needed to worry about foreign invasions or shortages of natural resources, it was free to devote itself to economic development. It imported the technologies and entrepreneurial values that had enabled the first Industrial Revolution in England. In the egalitarian culture of the United States, these flourished and evolved through the Railroad Revolution, and the Steel Revolution set the stage for the Mass Production Era. European immigrants looking for a better life came to the United States and assimilated into it. Coupled with the enormous leap in agriculture productivity, immigration provided an unprecedented wave of semi-skilled labor ready to embrace the Mass Production Paradigm.

Second, the Mass Production Paradigm was ideally suited to the American society that existed at the beginning of the mass production era in 1908. Those Americans had some of the best literacy rates in the world, even though a minority had even a high school diploma. Raw materials were plentiful, railroads and canals provided cheap transportation, economies of scale were important, and the automation of agriculture freed up workers for the new factories. This led to a virtuous, self-reinforcing cycle: An increasing number of workers with medium skills produced ever greater quantities of ever cheaper goods, which were then sold to those workers through ever more efficient distribution channels to fulfill ever-expanding needs that were promoted through ever more influential mass media.

Third, the mass market depended upon several factors: economies of scale in production, standardized tastes, and strong worker productivity growth equaling or lagging the growth in demand. This harmony collapsed during the Great Depression, but came roaring back after World War II. In addition to the defense-driven capital investment, the depression and war years adapted societal institutions to optimally support the Mass Production model; those included consumer finance, effective banking regulations, and a middle-class social safety net, starting with Social Security retirement, then disability insurance, and finally Medicare. More significantly, the destruction of productive capacity in Europe and Asia during the war created an historic window of opportunity for U.S. businesses to create worldwide brand equity, production scale, and distribution channels. Americas middle-class workers rode this unprecedented wave of "economic imperialism," never suspecting that this brief era would not become their "new normal."

Fourth, middle-class values like thrift, marital fidelity, and honesty created a relatively homogenous society, in which everyone aspired to the middle-class practices and appearances presented on network television. And it was this standardized ideal that encouraged consumption of the kind of goods and services that could most readily be mass-produced.
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However, that model began to reach its limits in the late 1960s and early ‘70s. The ‘70s saw the Mass Production Revolution plateau. Coincidently, we witnessed the birth of the Digital Revolution. But, even as the ‘80s and ‘90s saw the takeoff of the personal computer and the Internet, the institutions of the Mass Production Revolution stayed in place. Just as Americas middle-class workforce benefited from the extraordinary situation in the ‘50s, ‘60s and even ‘70s, it has suffered increasingly from the mismatch between our economic institutions and the demands of the Digital Revolution.
 
The clearest example is the ever-growing polarization in the workforce. The increase in the proportion of high-skill and low-skill jobs relative to the middle-skilled became evident about two decades ago. The U.S. labor market did not experience much polarization in the 1980s: Low-skill jobs were replaced by high-skill jobs, while the number of middle-skill jobs remained largely unchanged. Instead, polarization began about 25 years ago in the early 1990s, and intensified in the last decade.

In a recent report from the Dallas Fed, economist Anton Cheremukhin examined how the evolution of the economy drove this polarization.1 As Cheremukhin shows:

"Employment in the United States is becoming increasingly polarized, growing evermore concentrated in the highest-paying and lowest-paying occupations. Market changes involving middle-skill jobs in the U.S. are hastening labor market polarization. The distribution of jobs by skill level has shifted dramatically since 1980. The number of jobs requiring medium levels of skill has shrunk, while the number at both ends of the distribution - those requiring high and low skill levels - has expanded.
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"This declining prominence of middle-skill jobs is not driven by changes in labor market institutions, such as declining unionization. Rather, an increase in automation of routine tasks, a relative scarcity of skilled workers and to a lesser extent, relocation of jobs outside the country have led to the relative expansion of two kinds of jobs in the U.S. The number of people performing low-skill, low-pay, manual labor tasks has grown along with the number undertaking high-skill, high-pay, nonroutine, principally problem-solving jobs.

"These changes have been relatively abrupt, with losses in routine employment concentrated in the recessions of 1990-91, 2001, and especially 2008-09. Unlike with earlier downturns, middle-skill jobs were not recovered in the expansions that followed these contractions."
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To understand whats really happening, you have to look at the underlying nature of the jobs that people do. When the government collects data on jobs, occupations are classified into four categories:2

1. Cognitive nonroutine jobs are usually high-skill jobs that require performing abstract tasks, such as problem-solving, intuition, and persuasion. These typically require a college degree.

2. Manual nonroutine jobs are mostly low-skill jobs that involve manual tasks and require personal traits such as situational adaptability, visual/language recognition, and in-person interaction. These usually do not require a high school diploma.

3. Cognitive routine jobs are middle-skill jobs that require the ability to follow precise, well-understood procedures, which can be carried out by a computer. Often, middle-skill jobs require a high school diploma or even a higher level of education.

4. Manual routine jobs are lower-skill jobs that require the ability to follow well-understood procedures, which cant easily be carried out by a computer. These jobs often dont require a high school education.

Routine jobs declined from 58 percent of U.S. employment in 1981 to 44 percent in 2011, while both types of nonroutine jobs have expanded. Out of the overall routine job decline of 14 percent, 10 percent were replaced by higher-paying high-skill (nonroutine cognitive) jobs - the remaining 4 percent were downgraded to lower-paying low-skill (nonroutine manual) jobs.

The biggest declines in cognitive routine jobs were concentrated in such occupations as administrative support and sales. Examples of rapidly declining jobs are clerks, tellers, cashiers, telemarketers, title examiners, bookkeepers, insurance underwriters, travel agents, and technicians. Among the manual routine jobs on the decline are mail carriers, drivers, cooks, and engravers.

So what is behind this shift and how does it relate to the misfit between the characteristics of institutions optimized for the Mass Production Era and the characteristics needed for the Digital Era?

First, organized labor was a major institution defining the labor markets of the Mass Production Era. Its in heavily unionized sectors, such as manufacturing and government, where the United States has lost its competitive edge.

Today, foreign automakers supply the U.S. market from non-unionized plants in the United States. Grudgingly, American unions have eased work rules to enable the shrunken domestic manufacturers to compete. More commonly, unionized companies have turned increasingly to off-shoring for routine work.

Second, women were hit much harder than men by the disappearance of middle-skill jobs, especially the routine cognitive occupations. However, they have also been more willing to upgrade their skills and find better-paying jobs.

By comparison, more than half of men who lost middle-skill jobs, largely of the nonroutine manual type, had to settle for lower-paying occupations. Womens higher rates of education attainment in recent decades is a major reason for this difference.
 
Third, that raises perhaps the biggest disconnect between mass production institutions and those needed to support a workforce that can create and fill middle-skilled middle-class jobs. The mass production model required a vast pool of nonroutine manual workers and routine cognitive workers. But both categories of jobs are rapidly being automated away.

Today, cognitive nonroutine jobs require a college degree or even graduate school. Since too few people have been coming out of high school prepared to pursue vocationally valuable degrees, the rate of increase in the ratio of workers with a college degree relative to those with a high school diploma flattened in the early 1980s.

The result has been a steep rise in the "college earnings premium," which rose from just 10 percent in 1982 to 100 percent in 2008. One reason why so many men were unable to find higher-paying jobs and settled for lower-paying occupations is their relatively lower level of education.
 
Fourth, a final factor leading to the decline of the middle class has been that those middle-skilled workers whove lost their jobs have often had to enter routine manual occupations with stagnant or declining wages.

As the trend titled The Great Immigration Job Grab in our August 2014 issue clearly showed, immigrants have filled every net new job created since 2000.

In the case of the PhD from India or China, this fills an important shortfall in terms of nonroutine cognitive talent. However, the gardener from Mexico or the waiter from Nicaragua all too often serves to depress the wages of those formerly middle-class Americans.

Given this trend, we offer the following forecasts for your consideration:

First, organized labor will become largely irrelevant within the next ten years, eliminating barriers to education reform as well as optimum work rules.

While private-sector unions are already irrelevant in most sectors and geographies, public-sector unions still represent the largest impediment to education and regulatory reform. However, both public opinion and political momentum have recently shifted against them. Historic bastions of organized labor, such as Ohio, Indiana, Michigan, Wisconsin, and even Illinois are taking actions to weaken public-sector unions.

Second, the North American Energy Revolution, as well as the emerging "manufacturing renaissance," will create a significant number of manual nonroutine jobs over the next decade.

Despite the recent turmoil in the oil markets, the energy boom is here to stay. Between exploration, transportation, and refining, a whole host of new American jobs is being created. Similarly, manufacturing is returning to the United States as our costs are becoming highly competitive once more.

Third, the Deployment Phase of the Digital Techno-Economic Revolution will create a wave of new cognitive nonroutine jobs.

Breaking the grip of public-sector unions as previously discussed will enable us to redesign both K-12 and tertiary education with a clear focus on nonroutine manual and cognitive vocational skills.

Fourth, as soon as 2018, the United States will revamp its immigration policy to benefit the American worker.

Todays immigration policy is not well suited to meeting the needs of employees or employers. A future policy will proactively recruit the best minds from around the world to come to the U.S. as researchers and entrepreneurs. At the same time, it will rigorously close our borders, identify those living here illegally, and only permit companies to hire those needed by the economy. Thirty years ago, this would have been prohibitively expensive; but with todays technology, its merely a political decision.

References
1. Economic Letter, May 2014, "Middle-Skill Jobs Lost in U.S. Labor Market Polarization," by Anton Cheremukhin. ⓒ 2014 Federal Reserve Bank of Dallas. All rights reserved.

http://www.dallasfed.org/assets/documents/research/eclett/2014/el1405.pdf

2. American Economic Review, May 2013, "The Growth of Low-Skill Service Jobs and the Polarization of the U.S. Labor Market," by David Autor and David Dorn. ⓒ 2013 American Economic Association. All rights reserved.

http://economics.mit.edu/files/8152