China, technology and the U.S. middle class. By Chrystia Freeland. Reuters, February 15, 2013.
The China Syndrome: Local Labor Market Effects of Import Competition in the United States. By David H. Autor, David Dorn, and Gordon H. Hanson. MIT working paper, November 2012. American Economic Review forthcoming.
Freeland:
President
Barack Obama’s State of the Union speech this week confirmed it: The
pre-eminent political and economic challenge in the industrialized democracies
is how to make capitalism work for the middle class.
There
is nothing mysterious about that. The most important fact about the United
States in this century is that middle-class incomes are stagnating. The
financial crisis has revealed an equally stark structural problem in much of
Europe.
Even
in a relatively prosperous age — for all of today’s woes, we have left behind
the dark, satanic mills and workhouses of the 19th century — this decline of
the middle class is more than an economic issue. It is also a political one.
The main point of democracy is to deliver positive results for the majority.
All
of which is why understanding what is happening to the middle class is urgently
important. There is no better place to start than by talking to David Autor, an
economics professor at the Massachusetts Institute of Technology. Autor is one
of the leading students of the most striking trend bedeviling the middle class:
the polarization of the job market. That is a nice way of saying the economy is
being cleaved into high-paying jobs at the top and low-paying jobs at the
bottom, while the middle-skill and middle-wage jobs that used to form society’s
backbone are being hollowed out.
But
when I asked him this week what had gone wrong for the U.S. middle class, he
gave a different answer: “The main problem is we’ve just had a decade of
incredibly anemic employment growth. All of a sudden, around 2000 and 2001,
things just slowed down.”
Academics
can usually be counted on to have a confident explanation for everything. That
is why I was surprised and impressed by Autor’s answer when I asked him where
the jobs had gone. “No one really understands why that is the case,” he said.
It
was a winningly modest reply. But work by Autor and two colleagues — David
Dorn, a visiting professor at Harvard, and Gordon Hanson of the University of
California, San Diego — is starting to untangle the two forces that both the
conventional wisdom and the academy agree are probably responsible for a lot of
what is happening to the middle class.
Those
forces are technological change and trade. The easy assumption is that the two
go together. After all, trade needs technology — it is hard to imagine
outsourcing without the Internet, sophisticated logistics systems and jet
travel. Technology is dependent on trade, too: The opportunity for global scale
is one reason technological innovation has yielded such outsize rewards.
But
in a careful study of local labor markets in the United States, Autor, Dorn and
Hanson have found that trade and technology had very different consequences for
jobs.
“We
were surprised at how distinct the two were,” Autor said. “We found that the
trade shock had a very measurable impact on the employment rate. Technology led
to job polarization, but its employment effect was minimal.” Trade, at least in
the short term, really did ship jobs overseas. Technology did not kill jobs per
se, but it did hollow out those essential jobs in the middle.
The
big surprise, at least for believers (like me) in the classic liberal economic
view that trade benefits both parties, is the strong and negative impact of
globalization on U.S. workers — Autor estimates it accounts for 15 to 20
percent of jobs lost.
“The
rise of China was such a huge change. It really did matter,” Autor said.
“First, China is such a huge country. Two, China was 40 or 50 years behind in
technology, so it had a lot of catching up to do. Third, it happened so fast.”
What
is striking, and frightening, is the extent to which, at least in the
U.S.-China trade relationship, the knee-jerk, populist fears intellectuals tend
to deride actually turned out to be true.
“U.S.-China
trade is almost a one-way street. This trade relationship doesn’t clearly give
you the benefit that you can sell a lot of stuff to your trade partner,” Dorn
said. “If you talk to someone who is somehow involved in the promotion of free
trade, they may say that maybe the headquarters of Apple (AAPL.O) benefits.
That may be true. But the first-order effect is of job loss.”
The
impact of technology is more familiar. Autor, Dorn and Hanson found that it did
not create fewer jobs overall, but it did hollow out the jobs in the middle.
“Technology
has really changed the distribution of occupation. That doesn’t necessarily go
hand in hand with reduced unemployment, but it creates a more bimodal set of
opportunities,” Autor said. “There is an abundance of work to do in food
service and there is an abundance of work in finance, but there are fewer
middle-wage, middle-income jobs.”
What
is challenging about both of these trends, and what makes the hollowing out of
the middle class a political problem as well as an economic one, is how
different they look depending on whether you own a company or work for one.
Shipping
middle-class jobs to China, or hollowing them out with machines, is a win for
smart managers and their shareholders. We call the result higher productivity.
But, looked at through the lens of middle-class jobs, it is a loss. That
profound difference is why politics in the rich democracies are so polarized
right now. Capitalism and democracy are at cross-purposes, and no one yet has a
clear plan for reconciling them.
