Bash Brothers: How Globalization and Technology Teamed Up to Crush Middle-Class Workers

Globalizationandtechnology is often referred to like a monolithic thing. A new study shows they're very separate. Globalization increases joblessness. Computers increase inequality.

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Profits have never been higher. Wages have never been lower.

Okay, that sounds like an awfully oversimplified analysis of the frustrating recovery. And it is sort of simplified. It's also sort of true.

Go back to 1960, and corporate profits have never been higher while salary income has never been lower, as a share of GDP. Take a look here (graph via Floyd Norris):

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This isn't a new trend, but something really did change in the last generation. Here's a graph of the growth in corporate profits, labor income, and GDP since 1970. As you can see, corporate profits took off in the 1990s, returned to earth after the tech bubble burst and then, in the 2000s, started jumping around like a bouncy ball dropped from a helicopter. Meanwhile, labor income fell further and further behind overall growth.

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Sky-high corporate profit and stagnant wages aren't juxtaposing stories. They're the same story. And the main characters of that story are the familiar twin forces of globalization and technology, both of which have accelerated since the early 1990s.

In a sentence: Globalization (in particular, increased trade with China) has opened the doors to more consumers and more cheap workers while labor-saving technology has created more efficient ways to serve those consumers. As a result, the businesses are bigger, but the workers' share is getting smaller. Fifty years ago, the four most valuable U.S. companies employed an average of 430,000 people with an average market cap of $180 billion. These days, the largest U.S. companies have about 2X the market cap of their 1964 counterparts with one-fourth of the employees. That's what doing more with less looks like.

In macro explanations of the economy, globalizationandtechnology are often served up together in one big mixture, like another G&T you might know. But they don't have a monolithic effect. These are two distinct forces with distinct implications for distinct cities, according to new research by David Autor, David Dorn, and Gordon Hanson.

You have to define something to measure it, so they isolated hundreds of "commuting zones" (sort of like metro areas) and used the growth of Chinese imports as a proxy of globalization. Technological change they took as the decline in a city area's routine-intensive jobs -- e.g.: bookkeeping -- which are easily replaced by computers.

Here's the bumper sticker version of their conclusion: Globalization increases unemployment; technology increases inequality.

Globalization: The authors found that metros with more exposure to Chinese trade -- mostly concentrated in the swoosh of states extending from Indiana down to the Gulf of Mexico and up through North Carolina -- saw significant job losses, both in manufacturing and overall. For every $1,000 increase in imports per worker, the share of people with jobs declined by 0.7 percentage points -- and more for non-college grads. As manufacturing jobs declined, demand for local services would decline, and thus job losses could extend into areas like retail and hotels.

Technology: The computerization of certain tasks hasn't reduced employment, the authors find. But it has reduced the availability of decent-paying, routine-heavy jobs. Middle-class jobs, like clerks and sales people and administration support, have disappeared as computers gradually learned to perform their routines more efficiently. But as those jobs disappeared, cities saw an increase in both high-skill work and lower-paid service sector work, leading to little overall change in employment.

Back to the top two graphs. With globalization replacing American workers with Chinese labor and computers replacing middle-class workers with software programs, labor costs have fallen for companies while demand has grown all over the world. The result has been higher profits, not just for the finance companies who make up a growing share of domestic corporate earnings, but also for manufacturing companies and other multinational firms. It's a sad, inescapable truth that many international companies are thriving, not despite the incredible shrinking American worker, but because of him.