Globalization, the tech revolution and the middle class

September 21, 2012

YALTA, Ukraine — One of the paradoxes of our age is that we are simultaneously living through a time of positive economic innovation and also a time of the painful erosion of the way of life of many middle-class families.

Listening to Yuri Milner, the Russian Internet investor, at a conference in Ukraine a few days ago brought home this contrast. Milner is a billionaire thanks to his Internet investments: He has done well both in his homeland, supporting some of Russia’s most successful start-ups, and, even more spectacularly by venturing abroad, taking pioneering stakes in Facebook, Zynga and Groupon.

When Milner talks about the technology revolution, he paints a dazzling picture of literally unprecedented innovation, bringing tremendous savings and benefits to consumers.

But when you talk to economists about the impact of those same forces on middle-class jobs, you come joltingly down to earth. The revolution Milner describes is part of a sea change in how the economies of Western industrialized nations work – and one that is hollowing out the middle class.

The technology revolution has become so familiar – grandmothers are on Facebook and toddlers navigate YouTube on their parents’ iPads – that it is easy to forget how revolutionary it still is. But Milner, speaking at an annual conference held by the Ukrainian billionaire Victor Pinchuk, argued that it had just begun to radically reshape our lives. (Disclosure: I moderated many of the sessions.)

Milner’s focus is on what he calls the three big “stories” in business innovation: “platform,” “free” and “e-commerce.” By “platform,” Milner is referring to the ability of the breakthrough Internet companies to build their businesses using the work and ideas of others. One example is Milner said that “about 2 million independent merchants are selling on the platform every day. And that adds up to $25 billion of annual sales.” If those merchants were housed in a brick-and-mortar mall, they would occupy a “space equal to the island of Manhattan.”

The second big strand of the Internet revolution that Milner homed in on is “free.” Here, again, Milner argues that something unprecedented is going on: Thanks to the revolutionary impact of “free,” massive global brands can be created almost overnight.

Milner’s final major trend is less abstract: e-commerce. Again, this is hardly a novel phenomenon. But what Milner thinks is new is the impact of e-commerce as it moves from being the sideshow to becoming the main event.

Today, Milner estimates that 6 percent of retail sales is done online. He believes that number will be 20 percent within a decade, and he thinks it will be 50 percent within two decades. That shift, Milner argues, will have a profound and positive impact on the world economy: an 8 percent increase in efficiency. Another predicted consequence is less benign: “a pretty significant job loss in the retail sector to the tune of 40 million jobs in the next 20 years.”

Milner is a winner in all three of his generation’s big revolutions: the collapse of communism, globalization and the technology revolution. So he is inclined to believe the disappearance of retail jobs will have a happy outcome: The vanishing, low-paying retail jobs will be replaced by better-paying technology work.

But economists who have been studying the impact of globalization and the technology revolution on the labor market in Western industrialized economies are less sanguine, at least in the short term.

John van Reenan, professor of economics and director of the Center for Economic Performance at the London School of Economics and Political Science, is one of the foremost students of this transition. He thinks the biggest impact of the e-commerce revolution, and its counterparts in sectors like the law or accounting, won’t be on the number of jobs in the economy; it will be on how well they pay.

“The worry isn’t the quantity of jobs; it is the quality of jobs,” he said in a telephone interview from his base in London. “Other jobs will appear, but they may not be very attractive jobs.”

Van Reenan believes this trend has already begun, with deep social and political consequences. “It is a continuation of the hollowing out of the middle class, which we have seen,” he said. “People will find it harder to support a middle-class family.”

We’ve been in this paradoxical place before. The American economist and politician Henry George described the tumultuous change that his country was undergoing in the 19th century in an 1879 best-seller, whose title says it all: “Progress and Poverty: An Inquiry in the Cause of Industrial Depressions and of Increase of Want With Increase of Wealth The Remedy.”

What makes today’s political economy so hard to come to terms with is that the thrilling innovation and the hollowing out of the middle class – the progress and the poverty – aren’t two inimical trends. They are, instead, opposite faces of the same coin. But that’s something we don’t like to talk about, either in the hot spots where innovation is happening, or in the depressed regions where its malign side-effects are being felt most acutely.

PHOTO: Digital Sky Technologies CEO Yuri Milner attends the eG8 forum in Paris May 25, 2011. The eG8 forum gathers “leaders of the Internet” to consider and discuss the future of the Internet and society.  REUTERS/Gonzalo Fuentes


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The Industrial Revolution was an unprecedented disruption to many people’s live. It was “good” for society, in that production became more efficient over time and “developed countries” enjoyed a progressively improving “standard of living”.

It was catastrophic for individuals whose limited skills were no longer needed, did not acquire new ones, and never worked again. They were the “collateral damage” of progress.

The ever-increasing effects of inexpensive computers on business are today largely responsible for the present phase of convulsive change. They have made possible an expanding “just in time” efficiency for production, inventory and distribution in food, fuel, chemicals, widgets, etc. that is careening through economies worldwide.

Research is progressing at a rate that is best described as explosive in all fields, perhaps no where greater than in medicine and the ever-increasing miracles there available. Unfortunately, at the same time “we, the people” and our society are seeing equally rapid erosion in the number of “middle class” jobs offering insurance that would give financial access to all these miracles.

When production is precisely and accurately matched with seasonal demand, fewer and fewer huge warehouses necessary. Facilities abandoned or not built translate into people unemployed, designers, engineers, fork lift drivers, order pullers and whole shipping departments, telephone systems and all the white collar managers are “on the street” looking for work in a world that no longer needs them. No one has the foggiest idea how to retrain these people or for what.

Today’s realities force managers that are effective and efficient to structure “jobs” such that they can be “mastered” in a two week period by any literate person with basic math skills. So long as there are more applicants than jobs, these minimum-wage positions offer little, if any possibilities for advancement.

It is obviously less expensive to hire two twenty-hour part timers without “benefits” to do forty hours of work. Inconvenience is halved if one doesn’t show up, and each can put in up to twice as many hours (if and when necessary) without the necessity of paying overtime.

Jobs that can be automated increasingly will be. Computer controlled machines and processes operate up to 24 hours a day, 7 days a week without complaint, raises, “continuing education”, promotions, time off, breaks, sick leave, medical insurance, families, vacations, or retirement.

The elephant in the room is that population growth no longer translates into economic growth. The economic model of “growth” has broken in that the number of “jobs” necessary for society to function is decreasing even as the world’s population is SEVEN BILLION and increasing!

In an agrarian society, more children meant more labor to work more land with greater efficiency. In the city, more children just mean more unproductive mouths to feed that may never leave “home”. Most of the world’s population today is in the world’s cities.

People with no productive place in society are an ever-increasing challenge to educate and employ. As their percentage of a society becomes larger, so does their drag on the economy of which they are part.

No one yet offers a “blueprint for success” in a “new normal” when food, clothing, shelter and transportation are increasingly expensive leaving less and less purchasing power for the “wants” that have made western civilization the envy of the world. Generations of Americans and Europeans raised to expect a “better life” than their parents are not only going to be disappointed. They’re going to be angry!

The same can be said of the rest of the world’s peoples, looking “in the window” of the television at things they don’t have and likely never will. Woe be to any westerner among them when they figure this out!

But you’re right. Opposite sides of the same coin.

Posted by OneOfTheSheep | Report as abusive

Freeland says, “… the thrilling innovation and the hollowing out of the middle class – the progress and the poverty – aren’t two inimical trends. They are, instead, opposite faces of the same coin”, seeming to imply that she considers these to be locked to each other as two aspects of the same thing. But the great innovations in the U.S. in the quarter century after WW II, our country’s period of greatest prosperity ever, also saw the middle class advance in standard of living (wealth).

I would argue that the past three decades’ heavy shift of our tax system toward regressiveness is primarily what has hollowed out the middle class and continues even more strongly to do so. In the 25-year period mentioned, 1945 — 1970, the top marginal tax rate was never under 70 percent and was 91 percent or higher for the first half of that time. Now, with the top marginal rate 35 percent (and lots more loopholes and exclusions tailored to the rich, last year the 400 richest Americans paid 17 percent of income on average, a past Secretary of Labor, Robert Reich, reports.

Posted by bcrawf | Report as abusive

……..won’t just have an impact on middle class jobs……..a lot of middle-tier and small businesses will disappear.

Posted by Robertla | Report as abusive

The effect is not just loss of retail jobs. It reducing cost of exporting for new start ups around the world. It will also make import taxes of small objects impossible to collect.

It can sold on line and then smuggled in. With 1,000 small operators selling a copy of high priced item on line, trade marks will be hard to protect.

Posted by Samrch | Report as abusive

For example of such great change one must look not just past century but Industrial Revolution and era preceding it – when entire crafts and ways of life suddenly vanished or were pushed to marginality and while states and societe flourished, huge numbers of good, hardworking people lost all.
It began from “sheep ate men” to colonial era, which, frankly, is not over yet
What looms ahead in long term is now only fantasies and theorizing, but in short term…nothing good for most of us – in past centuries world was huge and large enough parts of the world (markets!) were in different eras to sustain change – but still there were revolts and uprisings of “lower classes” pushed to the edge.
Now…well, new _known_ potentially high profit frontiers still exist but initial cost for entering them is such that even large busynesses can only struggle for scraps. And with goverments mostly ear deep in problems to get involved (well, all remember that internet with all it’s current low cost of entering is essentially grandchild of DARPA/CERN and large telcos/electronic industry) this leaves them mostly at mercy of huge corporations – which surelly will create jobs but most of them will be “ok” at best, not “good/fine” – and this IF they will be able to achieve something before apopheosis of current crisis hits…

Posted by chyron | Report as abusive

This article and the comment by OneOfTheSheep remind me of the book titled FUTURE SHOCK by Alvin Toffler.

As jobs are becoming less without turning back for the middle class, they have really no choice but to learn new skills continuously for keeping being employed. Yet there are too many new techniques exploding making the choice difficult.

Similar situation has come to coastal regions of China. In addition to technological progress reducing jobs, lots of manufacturing plants having moved further inland for lower wages put lots of them out of jobs. Most of them don’t want to go back to rural areas where they came from.

Posted by Kailim | Report as abusive

Throughout the history of civilization, population growth has been a cornerstone of economic growth and development. Within a generation, technology will decouple this relationship. More and more of the goods and services consumed by the world will be produced by fewer and fewer individuals. This is not a new idea. We have been hearing about it for decades. The “hollowing out” of the middle class is our first real indication that this rather nasty trend is in play. We are on the edge of a revolution in robotics that will accelerate the phenomenon. Population growth may soon become an anethema. There certainly will be difficult times ahead as we struggle to make the necessary and sometimes unpleasant changes to our way of life.

Posted by gordo53 | Report as abusive

What does Milner mean by “free”? The text says, “Thanks to the revolutionary impact of “free,” massive global brands can be created almost overnight.” Does it simply refer to the fact that use of the internet is (nearly) free? I don’t trust anyone who cannot put his ideas into sentences.

Posted by bcrawf | Report as abusive

What a great article. Why are these things so seldom said in the press?

Bringing forward the writings of Henry George, from his Progress and Poverty, is a great favor to anybody who takes time to read Chrystia Freeland. He is well worth reading, a must even, for anybody interested in economics.

His words ring so true today.

And yes, as Professor John van Reenan says, we will have great numbers of jobs, but the quality of the job will not be good.

This is happening rapidly today on a large scale in the engineering profession in America. The mechanism of destruction is called the H1B Visa program.

The H1B visa program has destroyed the American engineering middle class.

It’s really a simple case of supply and demand. Consider an analogy. Consider, for example, what would happen if H1B were applied to plumbers instead of engineers.

Pick any city, let’s say, Denver, Colorado. Now, bring in 100 busloads of freshly graduated plumbers (4,000 new plumbers), who want to enter into the plumbing business in Denver, and make a living.

The result? Wage rates for plumbers will become depressed. The existing 960 plumbers in Denver, once busy every day, and making a good living, will now have much less work, or no work at all.

Who can compete with improverished hordes of newly trained plumbers from India who will work for any price? India has 1.17 BILLION people, and many of them, literally millions, are coming here, flooding our labor markets.

The H1B visa law was created, written and lobbied for by large American corporations as a means for decreasing their engineering labor costs. Indeed corporate profits have zoomed up, up, up — while the wage rates paid to their American engineers have gone down, down, down.

This is what the H1B visa has done to the American engineering profession. H1B has already brought in over one million foreign engineers to America, thus driving down wages, closing American engineering schools, and discouraging American kids from majoring in engineering.

This was a great article.

Posted by AdamSmith | Report as abusive

According to Nobel Prize-winning economist Joe Stiglitz, we have been suffering through the equivalent of the Great Depression now for four years — back then, it was the transition from Agricultural to Manufacturing economies, now it’s a transition from what, Industrial to Electronic? (“Creative”, someone called it)… It wasn’t the banking industry’s “fault”, not exactly, and we HAVE in fact to some extent recovered from THAT, we’re just back to the same “unhealthy economy” that was “pending” before the collapse in 2008.

Robotics are soon to drive “on-shoring”, but middle-class blue-collar jobs are going to be scarce; as soon as robots can pick up a 130 pound randomly-oriented package HERE and put it over THERE, moving one every three or four seconds, we’re going to see tens of thousands of people who are currently working (for FedEx, UPS, USPS, distribution centers all over the country) get laid off. In the next year or two.

So being told that we’re due to lose 40 million jobs in the retail sector over the next twenty years — yeah, that sounds about right. If you haven’t sat down with your significant other and/or your teenager(s) and laid out the probable future of employment yet, it is definitely time to cut through any fantasies of “easy street” and “middle-class” ease. If there isn’t some technology in your family’s future, that future is seriously looking pretty bleak. And if you ignore the changes happening right now, “bleak” is going to look good in comparison (except you won’t be able to afford to contemplate the distinctions).

Posted by flared0ne | Report as abusive

“Globalization, the tech revolution and the middle class”? – Yes, very true, including the editors’ jobs:

Yuri Milner puts on his earphones, at home, with the video camera zoomed right in on his face, he quickly shoots off his words, over the Internet, to the whole world… Several people in various parts of the globe in Chrystia’s ranks started speaking into their voice synthesizer, with automatic language translators broadcasted into their ears, articles or commentaries are formed, and instantly posted onto Reuters’ online services. The whole process finishes within minutes after Yuri finishes his speech…you get the picture.

Editors’ jobs (very middle-class) in the media are therefore eradicated, just like yesterday’s papers, literally. Similar changes are taking place in all walks of life. The only real jobs left are for those whose’ brain children are of robots, robots feeding humans lying on their beds with all tubes and wires attached.

The human race is much more sophisticated and smarter than that, I believe.

Posted by watchers710 | Report as abusive

What all these so-called gurus of innovation do not do is to analyse in detail what the history of S&T tells them. In this respect they do not look at the fundamental level and who were the ones whose initial thought started the whole process of creating new technological industries. They all forget the fundamentals. The reason I say this is that the USA and the UK in particular are sat on a creative goldmine but where there is no mechanism in place to release this vital part of all new wealth creation. In this respect the history of S&T tells us that up to 75% of all the major inventions/innovations at the fundamental thought level were not conceived in out Ivy league/Oxbridge universities or advanced corporate centres of R&D but in the minds of creative minds outside these confines.

What they have to discover is that we have a missing level in the ‘innovation chain’ at the vital initial stage that propels new understanding into new global technological industries. The reason I say this is that our universities and corporates have predominantly no sifting system in place that allows the great fundamental ‘outside’ thinking that has changed the world and will do in the future to be released. And where thereafter our world leading universities and corporates can exploit this unique ‘seed’ thinking. For in essence we have the seeds of creation missing within the present thinking. Indeed without this vital incorporation we are basically on a hiding to nowhere other than squandering billions upon billions again into R&D with very little economic return. Unemployment and wealth decline can attest to the fact that our great nations have something missing that we previously had and that is because we have closed the doors.

The USA and Britain if anyone is interested to know has at the fundamental thought level created over 90% of the modern world that we see today, but where currently this latent world changing thinking is locked-in. We simply have to release it.

Don’t believe that our universities and corporates have at the fundamental thinking level the thinking that initially that counts in the global trade world of today, as history says the opposite. In this respect the last quarter of a century has proved this also and where both the USA and the UK have declined at unprecedented rates and where our standard of living is now eroding by the year, giving the high ground to those in the East. We have to stop all this and introduce the creative infrastructure within our great nations where these very special people that will change the future world for us if we allow it, to be identified. These are not entrepreneurs either that piggyback on current knowledge and wealth (99% of wealth that is taken from current wealth through transfer and in reality no ‘new’ wealth is created), but those who initially create something completely new. Bill Gates knows this well and where we are talking about the man who invented MS-DOS, not the man who exploited it (the 2nd stage of ‘new’ wealth creation). Until we understand this we shall literally go nowhere but continue in a down ward spiral of economic decline. Therefore it is imperative that this creative infrastructure at the fundamental level of thinking is introduced and put in place to support our universities, corporates, government and the future wellbeing of our two unique peoples – when it comes to creative thought.

Dr David Hill
Chief Executive
World Innovation Foundation
United Kingdom – USA – Switzerland

Posted by bettysenior | Report as abusive

Milner said: “The vanishing, low-paying retail jobs will be replaced by better-paying technology work.”

This comment is comically ignorant. The USA, but also Europe, is busy outsourcing all call center, manufacturing, software engineering, and telephone technical support jobs to India and China. As anyone who pays attention to the monthly jobs report knows, the only jobs being created are low-paying ones like restaurant and *retail*. And Milner honestly believes that, somehow, millions of tech jobs will be created. When we lose even the low-paid retail jobs, so many Americans will be unemployed that riots are virtually guaranteed.

Look at Apple. A relatively small number of engineering jobs were created in the USA, but the vast majority were created in China. And we all have seen how well Apple, and its evil partner Foxconn, treat their Chinese employees.

Too bad Freeland did not force Milner to explain where these mythical tech jobs will come from.

Reenan was dead on when he said “People will find it harder to support a middle-class family.”

Or even lower-middle class.

Posted by baroque-quest | Report as abusive

Ok, the working class spending is 70% of the economy. Wages(our standard of living) has been forced down(in real money)since the sixties(experts agree). Now lets extrapolate from these widely reported figures and facts. The economy in the tank because the 1% sent it there by lowering wages to compete in the world economy. i.e. replacing the American spender with emerging country spender.
Where would the entitlement programs be today if we had a modest pay increase per yr. across the last 50 yrs. if the gov. had been able to collect the taxes on those loss wages?
So my point is, this is all orchestrated, this whole problem was brought about by programs to to lower the standard of living in America.

Posted by riversouth | Report as abusive

The openness of economies is what is driving the destruction of all developed countries middle classes. Homogenisation of a complex adaptive system does not increase total productivity, it decreases it which is happening economically globally now. Obviously increased productivity goes some who actively promote the wonders of the current system, but as far as the developed world is we are losing & losing fast.

Posted by MarkRB | Report as abusive

I remember twenty years ago my uncle predicting this day would come when machines did all the work. It was before internet and he was really talking about factory automation. What would people do for work, I asked him? “As there will be no work to do we will all become philosophers” he said. What he never said is what sort of philosphers we would become. The possibility is if the trend continues we will all become exact same sort of philosphers that became Anders Breivik (or Adolf Hitler to go back in time). Angry, violent, destructive, retrogressive. Unless we can find a new way to work we are heading for an economic war that pits country against country down to individual against individual. Perhaps the myth of the ‘War of All Against All at the end of time’ is not so far fetched as it seems.

Posted by BidnisMan | Report as abusive

Dr. Hill,
you are so right, but the way things are being shaped by “outside” financial influence of our political process, your point will be ignored. they like Americans to be docile and ignorant.

Posted by rikfre | Report as abusive

The one thing I never hear anybody discuss is how will the “buyers” buy without jobs that pay better than what it costs to live in their communities.

I’m one of those high tech people with decades of experience, and I can’t buy an interview, let alone a piece of used toilet paper.

Trust me, I’m not alone.

For instance, I found this article yesterday that shows what has happened to the high paying technology jobs and for those that doubt what the author says, trust me, been there, done that, living the destitute life with items I would like to purchase from amazon and no money to do it with, not any chances of a job in any direction that I can see.

As Joseph Stiglitz says in his latest book.

I have been forcibly retired, without one smidgen of income.

Virgil Bierschwale
Keep America At Work
Keep The World At Work

Posted by vbierschwale | Report as abusive

This is why those that oppose welfare don’t bother me. If you follow progress to its logical conclusion, then eventually we will be populated enough to require a radical change in societal structure. Farm land and living quarters alike will need to be planned out. When machines and electronics do all the work, it should be considered innovative support and a benefit, not welfare. We should reach a point where everyone is provided for by the technology of all humanity collectively. Isn’t that the end result of mankind’s endeavors? To ease pain and labor?

If, decades from now all we need is 1 out of 100 people working to support all life on this planet then great. Technology increase should decrease the welfare concept and eventually the idea of wages should disappear entirely. But surely the 1 person out of 100 would feel as though the other 99 were getting their undue reward from his efforts. Fine, this just introduces another question, and somewhat sheds light on why the rich are getting richer.

When I say that only 1 out of 100 has to work to support mankind, most people instantly think of 1 person working a 10 hour day and making the wages equivalent to the needs of the 100, which is what is happening now in society. But when you even suggest that all 100 people work only 6 minutes a day and receive their full wage (because machines provide the rest of the days labor equivalent) you get looked at as though you just spoke a foreign language.

The comments above about the impact of the Industrial Revolution and H1B visa’s are excellent also.

The question used to be “Someone gets the surplus wealth that labor produces and does not consume. Who is the somebody?” This was the labor question of the late 19th century. Today’s labor question is really no different except that it’s not direct extortion, it has become indirect through machinery and electronic replacement of labor. The wealth required to purchase the machinery and electronics was accumulated by the work provided by the laborer it replaced. Again, the machine shouldn’t have replaced the laborer, each laborer should have just had the benefit of the same pay for less work. Instead, we have heard a 40 year suction sound of wealth to the already wealthy, making them filthy rich and us dirt poor.

Posted by LysanderTucker | Report as abusive