Whatever politicians promise to the contrary, technology and globalization will continue to transform the American workplace. Hand in glove, they will force the economy to abandon simpler, labor-intensive production processes; turn increasingly toward more mechanized, digitized, high-value efforts; and, accordingly, demand an ever better-trained and more skilled workforce. Though such trends should generally create prosperity, they will also bring destructive social frictions in their wake. They already have. Income disparities between rich and poor have widened, as this unfolding reality has enhanced earning opportunities among the wealthy while constraining them among the less skilled. Already little is left of the old, stable middle class, where the semi-skilled could once maintain a home and a car securely in a job for life. Unless the country can better prepare itself and its workers for this evolving environment, such ugly trends will reach extremes sufficient to threaten social cohesion altogether.
A prospect this fearful demands a response. One, popular these days and on display in abundance during this recent election season, would dispense with any planning or preparation on anyone’s part and seek simply to block globalization and otherwise search for ways to force up wages for the less skilled. While entirely understandable, such an approach is nonetheless pointless. Whatever Washington thinks of its powers, it can neither turn back the clock nor repeal economic laws. Trade protections and legislated wage supports will not only fail to protect the vulnerable, they will do so at great cost. Rather than go this route, the nation would do better to accommodate the impact of globalization and technological innovation, refocus the economy accordingly, alter the nature of the workplace, and train and retrain the labor force so that it can meet evolving needs. Only in this way can the country ameliorate social frictions and create a new middle class for the 21st century.
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In many respects, this is an old story. Pressures of these kinds have dogged economies in one way or another since industrial revolution began in the 18th century. Each innovation, each advance in world trade has more thoroughly mechanized production processes and moved them to cheaper, more efficient venues. Each step has demanded more of workers. Even the first spinning machines and power looms required training for people who otherwise had no experience with equipment beyond driving a horse-drawn reaper or operating a hand loom. It must have been a huge step for them. No doubt a search of commentary from the period would reveal considerable anxiety over the fate of workers who either would not or could not learn the new techniques. Such a search surely would also reveal anxieties about a growing income gap between those displaced by the challenges of the time and those who could meet them, not to mention with the managers and owners of the newer, more productive facilities.
Changes along these lines have accelerated since the end of the Second World War. Technological advances, even in the heyday of American manufacturing during the 1950s and 1960s, helped managers cut costs by producing more with fewer workers. They were remarkably successful, too. Industrial output exploded during those two decades, rising almost 4 percent a year on average, but the creation of well-paying jobs lagged, expanding at a mere 0.8 percent annual rate. And it was not only manufacturing that cut costs this way. Rudimentary computerization allowed offices and other service industries to follow a similar path. Meanwhile, Europe and Japan, once they recovered from the destruction of the war, leveraged their then lower wage scales to compete increasingly with American production and American workers.
Though the middle class seemed secure at the time, concerns began to emerge. The 1950s film “The Desk Set” spoke to popular fears of how computerization would erase formerly secure, well-paying office jobs. Though the film ended happily for all, computers in reality did replace employees. Foreign competition, even at this early stage, upset many. By the 1960s, American trade representative Michael Blumenthal warned Detroit that foreign auto sales in the United States had reached levels three times the size of American auto exports to the entire world. President John F. Kennedy, noting the effects of both import competition and automation, warned of the “dark menace of industrial dislocation, increasing unemployment, and deepening poverty.” By the 1970s, AFL-CIO President George Meany complained loudly about the rising market share of imports. Describing free trade as “a joke and a myth,” he called for “tighter restraints on imports.”
By the 1980s, Japanese gains had riveted attention. Lost market share, especially in autos and steel, led to layoffs in Detroit and Pittsburgh. Elsewhere, manufacturing continued to use technological innovations to shed workers. While industrial production rose some 20 percent over the course of that decade, employment in manufacturing actually fell 7.4 percent. In services, computerization and automation advanced to the point where the fears expressed in “The Desk Set” became an everyday reality. Answering machines replaced thousands of operators in offices across the country. Word processing made even greater numbers of typists redundant and prompted management to rethink who really needed administrative assistance. Automatic teller machines put thousands more out of work. Most found alternative employment. The country continued to increase jobs overall during this time, 18 million over the course of the decade. But the alternatives generally paid at lower rates and with less security than the lost positions once seemed to offer.
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Today’s still more intense pressures became increasingly apparent as the century approached its close. The rise of new, emerging economies, mostly in Asia, presented more powerful wage competition than ever. People there work for 1/100th– 1/50th of their American counterparts, a much greater gap than ever existed with Europe and Japan. Because these economies have had to focus their production on simpler, labor-intensive processes, where their relatively low literacy rates and skill levels matter less, this heavy competitive hammer has fallen especially hard on semi-skilled and unskilled American workers. Sectors on which they once depend heavily for employment — textiles, clothing, shoes, the assembly of retail electronics, retail call centers, and the like — have all but disappeared from the domestic economy. According to Labor Department data, the share of total domestic U.S. employment in these simpler, labor-intensive industries has fallen by almost half during the last 20-some years. Those who have found alternative employment have, according to scholarship in this area, suffered wage declines of between 15 and 40 percent.
Something new has entered the equation during this time, something that has redoubled the social frictions that were already becoming evident. Previously, the owners and mangers of domestic firms lost out with their workers when confronted with imports from low-wage counties. But as advances in communications technologies have given American headquarters ways to manage overseas operations more directly and effectively, managements have found ways to take advantage of cheap foreign labor by simply shipping jobs overseas. Call center have closed in Indiana and opened overnight in India. The same brands that had employed tens of thousands in recognizable regions of the country have remained on the market and reaped tremendous profits because increasingly production occurs overseas. In the meantime, the domestic workers in the old production regions have suffered devastating rates of unemployment. No longer could workers kid themselves that management was suffering from foreign competition along with them. Workers who kept their jobs have worried enough about the trend to restrain their wage demands. A sense of betrayal has come to exacerbate all the other burdens of trade competition.
Meanwhile, technology, as in the past, has continued to have its powerful, independent effect on the incomes and employment prospects of the less skilled. While the computer revolution, especially the ability to send documents electronically, continued to displace thousands of office and retail clerical positions, it has also sent messenger and delivery people in search of alternative employment. By enabling easy ways to monitor inventories and just in time inventory management, computerization has eliminated other staffing needs in retail and wholesale operations. Robots, long used in auto assembly and other heavy manufacturing to eliminate thousands of assembly-line jobs for the semi-skilled, have begun to threaten jobs in other industries as well, including retailing. And this is just a small sample of the effects. All has enabled business to do more with fewer workers. Since 1990, the economy as a whole has increased its production of real goods and services some 85 percent but has seen overall jobs growth of only 31 percent. Many have gained from the productivity advance, but it has hardly helped those less-skilled workers displaced in the process.
More recent trends have exacerbated social frictions still more by offering enhanced benefits to those at the top of the income distribution. As in the past, productivity advances from labor-saving innovations have accrued to this class, those remaining workers with the training to run the new systems and equipment as well as mangers and shareholders who control ever-more efficient and more profitable operations. But in addition to this well-established pattern, technology and globalization more recently have offered the added boon of easier access to global markets as well as command of greater productive resources, natural, capital, and labor, especially overseas. Instead of dividing revenues with relatively expensive American labor, those at the top can now accrue a huge surplus from producing in the cheapest place and selling to the world.
National income and tax statistics capture the cumulative effect. The richest 10 percent of the population, according to the Commerce Department, has seen its incomes grow 5 times faster during the last 20-some years than the bottom fifth. The earnings of the top 5 percent of the income distribution during this time have grown some 9 percent a year, while the bottom 5 percent has suffered a 2.5 percent rate of decline. The top quarter of earners has from commanding 10 times the pay of the bottom quarter in the 1970s to some 15 times today. The Internal Revenue Service (IRS) notes that the wealthiest 1.0 percent of income-tax payers commands some 22 percent of the total income subject to tax, while the bottom 50 percent commands less than 13 percent, both at greater extremes than ever recorded.
To be sure, many analyses have called into question the exact extent of these differences. Some point out how such figures fail to account for much more generous public benefits now than existed 20 years ago. The picture painted by these date also fails to consider mobility, for those at the bottom seldom stay there but instead often rise through the income distribution over time. Some argue that such comparisons are pointless, that what matters is less how much richer the wealthy are than whether most people are better off than they were. All these contrary points are valid and warrant attention. Still, they cannot change the picture of a much less equal workplace and one in which the old middle class, with its once large component of semi-skilled workers, seems closer than ever to extinction.
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Especially since these trends promise to continue, a huge constituency has formed to block them. Displaced workers have naturally clubbed together to demand, usually of government, an end to the pain. Merchants and local governments in the regions most affected have joined the outcry as they have lost business and tax revenues to factory closures and layoffs. Their representatives in Washington have tallied the votes in favor of relief and joined the call, as has the media, which seems to have an insatiable hunger for stories that involve tears. Most of this backlash has focused on only one source of the pain, globalization. Perhaps Americans culturally have trouble criticizing technological progress, perhaps it just seems less resistible, or perhaps it is a little of both. Whatever the cause, tech has largely received a pass, though of late the new robotics has produced some fear and hostility.
Accordingly, politicians have found it difficult to resist anti-globalization, pro-protection poses. The recent election campaign was replete with such positioning. Donald Trump was most explicit. He promised to protect American jobs and incomes with an average 20 percent duty on all imported goods and a 45 percent duty on Chinese imports. He would also place a 35 percent duty on any goods entering the county from the Mexican operations of U.S.-based firms. He, however, was far from alone in his resistance to imports. Most Republican contenders for the nomination spoke out against free trade. On the Democratic side, Bernie Sanders bragged that he voted against every major trade agreement since he entered Congress and promised to resist any efforts at trade promotion. Hillary Clinton turned against the two pending trade agreements, the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade an Investment Partnership (TTIP). She also reprised her positions from her 2008 run for the Democratic nomination, when she violently criticized the North American Free Trade Agreement (NAFTA) with Canada and Mexico and otherwise called for a “time out” on deals to promote trade.
Other efforts to stop the pain have focused more on symptoms than on presumed causes. The widening use of food stamps, for instance, aims to restore a living standard that so many less-skilled workers can no longer support with their paycheck. Renewed efforts to increase minimum wages, would, its advocates claim, use government edict to enhance pay across the lower reaches of the income distribution and so presumably redress general pressures on the less skilled. Alternatively, government has tried to protect jobs and push up incomes artificially through the use of subsidies to struggling industries. Direct cash transfers are less popular in the United States than in Europe. Here, both federal and state governments prefer special tax breaks to accomplish the same thing.
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All of these efforts, however well intentioned and emotionally understandable, nonetheless constitute a cure that is worse than the disease. Certainly, minimum wage hikes can do little to bolster the otherwise beleaguered middle class. Politicians and even some policy makers might believe that ordering management to pay a regulated wage will raise incomes, but no business, large or small, can pay people more than they produce, at least not for long. Complying with such laws would force marginal firms out of business, in which case their workers would lose all their incomes. Others would defray the increased wage cost by installing robots and other labor-saving devices. The few workers left to manage the equipment would do better, while most others would lose out entirely.
Subsidies to affected industries would fail at even greater cost. Whether done through direct money transfers or tax breaks, they would burden taxpayers, who would either have to fund the amount handed over or make up for the taxes not paid by those given breaks. Such burdens would then impede general economic progress by short changing other worthy government projects, such as infrastructure improvements or bringing displaced workers back to work through re-training or by using a general tax cut to promote economic dynamism and encourage hiring overall. Such subsidies, however delivered, would hold back the economy still more by excusing recipients from any effort to adjust to the new reality. Worse, by making others pay, subsidies would hamstring their ability to make needed adjustments. And for all this cost, history shows that the subsidies seldom protect jobs or worker incomes. The industries receiving them seldom pass the benefit on to their employees and often replace them with labor-saving technologies anyway. It is the politically favored managements who gather the benefits of such policies.
Anti-globalization measures would have nothing short of a devastating economic impact. The protected firms might benefit along with their workers, but consumers, having lost access to cheaper imports, would suffer a rise in their living costs and, accordingly, a drop in their living standards. Firms denied access to inexpensive imported inputs would suffer a drop in profitability that would lead to production cutbacks and layoffs. If these firms instead were to pass through the increased cost of inputs, consumers would see their living expenses rise in yet another way and their living standards fall still further. The amounts are significant. Price comparisons between imports and domestically produced goods and services during the last 20 years show that were it not for relatively free trade, the cost of living in the United States would have risen half again faster than it has. The Peter G. Peterson Institute for International Economics estimates that trade’s positive effect on living costs over this time has cumulatively given every man, woman, and child in the country as much as $3,300 a year in additional buying power. All this benefit would reverse under a protectionist regime.
Actions of both firms and unions show that both are well aware of these burdens. All would love subsidies and protection from foreign competition, but none seem willing to pay the price for others to receive them. Two brief anecdotes illustrate. When some years ago the AFL-CIO advocated trade restraint, the Carpenters and Teamsters dissented. As much as they were happy to relieve others from foreign competition, they were unwilling, they made clear, to force increased living costs on their members. When in 2002 President George W. Bush placed tariffs on imported steel, he immediately faced opposition from domestic steel users, the makers of machinery, for instance, appliances, autos, and the like. All objected strenuously to the need to pay more for a vital input. Even the United Auto Workers filed a complaint. It could see the threat to its members’ jobs. The president bowed to this pressure long before foreign steel producers could have their objections heard at the World Trade Organization (WTO).
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If fighting these trends is a costly fool’s errand, the nation nonetheless has options. Its choice is far from binary. To avoid these onerous costs, it need not ignore the plight of displaced workers, passively watch the destruction of the middle class, or suffer the resulting social instability. On the contrary, with will and thought, the economy can adjust to prosper in this evolving environment and build a new middle class by retooling the skills and orientation of its workforce.
The first step in such a response would recognize that old, simple, labor-intensive industries, those on which the old lower-middle class once depended, will not return. Wage competition from emerging economies, wherever they are located, is simply too intense for domestic operations to compete in textiles, shoes, toys, certain call centers, and the like, at least not in the old ways. Robotics and other technological applications may render domestic operations in these areas viable again, as they have the production of other goods and services once thought forever banished from the domestic economy. But in that case, as in the case of other returned industries, the technology will have dispensed with the old jobs. The middle class, at least as it once was, would not gain.
This new economy needs instead to turn increasingly toward digitized, mechanized processes and focus more on the production of sophisticated, high value-added products. Only these can support wage scales acceptable to Americans and sufficient to finance a middle-class lifestyle. The transition should emerge naturally for the United States, which has what economists call a comparative advantage in these areas, certainly in contrast to emerging economies and even to alternative applications in domestic production. The average American worker, for instance, has 20-times the productive equipment and computing power at his or her disposal than does the average worker in China and more still compared to India, Brazil, Vietnam, or Indonesia. Meanwhile, American workers, if not entirely up to the skill levels they will ultimately need, have a big lead on others. Adult literacy in the United States exceeds 99 percent, compared with 91 percent in China, 90 percent in Indonesia and Vietnam, 89 percent in Brazil, and only 61 percent in India. For all the impressive engineers and other professionals coming out of China, India, and elsewhere in the emerging world, the average worker in China has only 6.4 years of formal education, India 5.1 years, and Brazil only 4.9 years. The average worker in the United States now has 13 years of formal education.
Market forces have already begun to transform the economy along these lines. The American chemical industry, for instance, has moved the production of standardized products overseas but has kept more complex, high-value, and customized activities at home. IBM decided as early as 2004 that the production of personal computers had become too standardized to command its former high-value status and sold that division to the Chinese producer, Lenovo. In the press release announcing the sale, it mentioned a domestic emphasis on sophisticated consulting services. General Electric has divided its massive power equipment division, sending its routine, low-value assembly and parts manufacturing to various emerging economies while reserving for its more expensive but better-trained American operations the more demanding areas of power plant design, construction, and installation. Even clothing and textiles, while sending conventional woolen and cotton spinning, weaving, cutting, and the assembly to emerging economies, still makes high-priced, specialty products in the United States, where it also continues to operate the highly mechanized production of synthetic industrial fabrics.
Other examples abound, while the nature of the workplace has also begun to reflect the needed change. The emphasis on higher-value product has begun to shift management’s focus from standardized mass production to quality control, planning, and design. Because so much high-value product is customized, at least to a degree, business has begun to value communication skills more than previously, both internally and with customers. The growing preponderance of better-trained workers, with responsibilities for sophisticated equipment, systems, and client communication has begun to create different management styles from those of the past. Hierarchies have become less rigid. The changes already show in Labor Department surveys of how firms apportion functions for their employees. The proportion of positions in straight supervision has dropped 5.5 percent during the past ten years or so, while the proportion of those involved in planning, design, quality control, and related areas has risen some 22 percent. The change is widespread across industries, too. The record shows these kinds of shifts in even such seemingly traditional industries as paper, fabricated metals, autos, aircraft, even railroad equipment.
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To enable a new middle class to coalesce around these ongoing accommodations, the nation clearly will need to create a workforce trained to meet their needs. Education at the university level will have a role in the effort, as it always has. But the crucial emphasis in making this a new middle class will lie with vocational training to upgrade the skill set of both the young entering employment for the first time and those displaced from old industries and old ways of doing things. In an economy where more jobs will require higher skill levels, training of this sort is the only way to get workers jobs that command middle-class incomes.
So far Washington, particularly President Obama, has missed the point. He and the bureaucracy have kept their emphasis almost exclusively on higher education, particularly the study of science, technology, engineering, and mathematics, the so-called STEM subjects. Highly educated people in STEM subjects will undoubtedly play a big role in the economy’s efforts to meet future needs. But they will have little to do with rebuilding the middle class. For that, Washington needs to broaden its current obsession with whether folks can get their PhD to include equally earnest efforts on behalf of those who want to become machinists, robot-repair technicians, installation specialists, client liaison mangers, and the like. Help to these aspirants would surely constitute a better use of the $50 billion a year the country presently spends on benefits to displaced workers, mostly to warehouse them.
If the federal government has chosen to ignore middle-class needs, others have shown a more enlightened attention to them. American workers have recognized the demands for training implicit in the evolving workplace and have upgraded on their own. Today’s average of 13 years formal education is up by almost a third from the 10 years averaged in the 1980s. Workers can also sense what National Bureau of Economic Research (NBER) has documented, that in this otherwise insecure job market those with desirable educational and training attainments are no less secure than workers were 40 years ago. The Association of Manufacturers has also recognized these future demands and repeatedly stressed the need to upgrade training schools. It has gone so far as to try to standardize curriculums at community colleges. Meanwhile, the community colleges themselves have made strides reorienting their curriculums from their original aim of feeding four-year colleges toward the now more important emphasis on vocational training.
Other encouraging signs have emerged. In North Carolina, especially in counties devastated by the loss of the textile industry, community colleges have reached out to firms across the country and around the world, promising them, if they relocate nearby, that they can write the school’s curriculum. These efforts have met with a remarkably positive response. Michigan has had success retraining displaced auto workers, while South Carolina’s retraining program reports a significant rise in the ultimate earning power of its participants. These are only a few examples and only a beginning at that. The creation of a new middle class depends on many more such efforts, including training partnerships between government, community colleges, business, and private vocational schools. Perhaps Germany’s successful apprentice program, which begins active vocational training in high school, can serve as an effective model.
Even with the best efforts, however, the formation of a new middle class could falter on those who either cannot or will not make the effort to get needed training. Too many workers displaced from old industries or old techniques seem unable to make the necessary effort on their own. Perhaps despondent or bitter or both, they often remain on government relief and make little or no effort to seek the training they need to re-enter the job market at adequate pay levels. Older workers especially have trouble moving to new regions to find work. Otherwise disadvantaged people may not even recognize the need. In motivating these groups, the United States might learn from experiences elsewhere. Again Germany can offer guidance. That country, to do the same for displaced workers as its apprentice programs have famously done to train young workers, has in recent years implemented what it calls the Hartz reforms.
These have established a number of training schemes but importantly have also taken on the task of motivating all involved. To push the bureaucrats to place the unemployed, the scheme holds them to quantitative goals. It helps them meet their targets by actually authorizing unemployment offices to serve as temporary work agencies. The reforms further pressure bureaucrats by stipulating that if the unemployment office fails to place a person within six weeks, it must give him or her a voucher to pay the fees of a private placement agency. The reforms aim to motivate the unemployed as well. The new program limits the duration of unemployment benefits to the first 6 to 12 months, depending on the worker’s age and how long that person held his or her previous position. After exhausting unemployment relief, those who still fail to find work see benefits decline to those of the nation’s means-tested welfare system. It also charges case workers to determine which among the unemployed can benefit from a training program. The public bears the cost, but workers who refuse the training lose some of their benefits as they do if they refuse to take “suitable work,” even if it is in another city.
Not all such provisions could easily transfer to the United States. Still, Germany’s success in bringing displaced workers back to well-paying jobs deserves attention. After all, the Hartz reforms have received much credit for taking Germany from what The Economist magazine in the late 1990s called “the sick man of Europe” to the dynamic, economic power it is today. But even if the United States could build training and re-training programs that surpass Germany’s, another problem would remain. The nation would still have to make arrangements for those cognitively or emotionally incapable of the task.
Since required skill levels will continue to ratchet up, they will likely outstrip the capability of a growing part of the population, absolutely and proportionally. For these, there is no way to look for incomes that approach middle class standards. In some cases, technologies can substitute for individual inadequacies, as super market scanners, for instance, have reduced the numerate skills required of checkout clerks. Some in this group will find work in these or other remaining low-skilled positions. Perhaps, as the economy and some of its members grow richer, more opportunities for the less skilled will open in service positions. Their pay scales may fall short of a middle class standard, but they will nonetheless offer these people the dignity of self-support. If these positions are still too few, society will have to see to the natural needs of this unfortunate group. Rather than a handout, however, the answer would do well to connect such payments to work of some kind. If not viable in a strict economic sense, their work could nonetheless serve a public need and importantly give these people a sense of self-worth that a handout could not provide.
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The adjustment is unavoidable. It will occur one way or another. The question is not whether the country will make the changes but whether it can do so with a minimum of pain and social stress. Even at its smoothest, the effort will have to overcome a great deal, require a lot of experiment, tolerance for failure, and attention to the experiences of others. Still, there is reason for optimism in that firms, people, and even governments have begun the process, that they seem set to continue, and in time will become more effective. If Washington could observe and listen to some besides itself, it could help a lot. Even with this beginning, it would be foolish to assume a complacent attitude about the country’s ability to meet the challenges of work in the 21st century smoothly and effectively, shrink the widening income gap and create a new middle class. At the same time, the evidence argues strongly against despair.
This piece was published in an edited version by the Manhattan Institute under the title “Globalization Can Be good for American Workers” in a special edition of its City Journal, “The Shape of Work to Come.”