Whither the middle class?

One of the trends that is hidden when you look at employment/unemployment numbers is the fact that for many Americans, the traditional path to the middle class is disappearing. This is because of the transitioning of America from a manufacturing country to a service industry country.

Starting in the late 19th century and continuing through much of the 20th, we saw tremendous growth in American manufacturing. Industries, such as the Auto Industry, Steel, Aircraft, heavy machinery and many many others needed workers. It coincided with a migration of many rural workers to cities and suburbs. It also provided good wages and benefits and enabled American workers, often starting with few skills and maybe a high school education, to own homes, cars, send their children to college and generally have a standard of living that exceeded that of most of the world.

In the latter stages of the 20th century, the cost of labor in the United States began to become a significant drain on profitability for American industry. Foreign competition started to seriously challenge many of these industries. What we saw happen then and what is still continuing is that these jobs started to disappear, or perhaps more accurately, migrate from high cost areas to lower cost areas. Initially, a lot of this migration was from the Rust Belt to the Sun Belt, but of course ultimately, it is now going overseas to even lower cost areas.

If you consider the garment industry, once a major employer in New York, and then a major employer in some Southern States and now almost universally moved offshore. The International Ladies Garment Workers Union has lost a tremendous number of members and has merged despite that catchy jingle.

There are many examples of other industries, many of them better paying than garment workers where the jobs have left, look at Michigan, and are not coming back. So what happens? Well eventually, other jobs, mostly service industry jobs, get created.

Now there are two types of service industry jobs. One is relatively high paying and generally requires at least a college degree for entry. At the top of this pyramid you have financiers, lawyers, doctors, and other professionals who make very nice salaries when there is work. The other type of service job is best typified by the phrase "do you want fries with that?". Now of course there are only so many fast food jobs, but there are many service jobs that require few skills for entry but also don't pay very well.

So workers who used to get high paying jobs in manufacturing are now lucky if they make half as much in some service industry. Of course many of these folks work multiple jobs and both spouses are now required to work in order to maintain the lifestyle they have come to expect. The problem is that ultimately, on a permanent basis that is not sustainable. First, even many of these jobs are disappearing as we go to self service in service industry after service industry and replace brick and mortar stores with on-line retail. We need fewer and fewer tellers, grocery check out clerks, gas attendants, sales clerks at stores, etc. etc.

So if we have lost the high paying manufacturing jobs and are starting to lose the lower paying service jobs, what is next? Well, one thing you hear discussed is retraining. However, there are clearly limits to that. First, the jobs you retrain people for have to exist, and if you train too many you will create a glut.

Now one area that helped absorb this workforce had been construction. However, with the glut in housing, many, many jobs were lost in that sector and while some will come back it is unlikely they will get back to the bubble numbers. There is money in the stimulus program for public works projects, repairing and replacing infrastructure, but while that is necessary work, it is hard to see how we can absorb enough of the workforce that way on a long term basis.

So is it inevitable that the American worker is destined to see continued deterioration in their standard of living? Well, ultimately, if the trend were to continue long enough it would self correct as it became cheaper to manufacture here and employment would rise, of course at much lower rates than previously. However part of the problem there is that the cost of manufacturing here is not limited to labor costs, but also the cost of taxation and regulation. We need to reduce those burdens, or at least spread them better if we want to preserve and revive manufacturing in this country. We also need to address the cost of health care and how much of that burden is passed on to employers. It is a significant employment cost driver.

It seems unlikely that we will reform the tax system to one that will tax consumption instead of production and ingenuity. Simply if we had a national sales tax instead of the taxes we have now, everyone who sells product in this country would share in the burden of maintaining America. It would also encourage investment, local enterprise and saving, all of which ultimately would increase wealth and prosperity. Unfortunately, we seem determined to pursue policies for political purposes that lead in a different direction.