President Barack Obama's State of the Union speech this week confirmed it: The pre-eminent political and economic challenge in 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, 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. Prof. Autor is one of the leading students of the most striking trend bedevilling 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 what has 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 ... No one really understands why that is the case."
Research by Prof. 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 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 U.S. local labour markets, the three academics have found that trade and technology had very different consequences for jobs. "We were surprised at how distinct the two were," Prof. 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 in the classic liberal economic view that trade benefits both parties, is the strong and negative impact of globalization on U.S. workers. Prof. Autor estimates it accounts for 15 to 20 per cent of jobs lost.
"The rise of China was such a huge change. It really did matter," he said. "First, China is such a huge country. [Second], 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 knee-jerk, populist fears that 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," Prof. 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 benefits. That may be true. But the first-order effect is of job loss."
The impact of technology is more familiar. The three researchers found that it did not create fewer jobs over all, but it did hollow out the jobs in the middle. "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," Prof. Autor noted.
What is challenging about both of these trends 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.