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Technology and the shrinking middle class

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. Mr. Milner is a billionaire thanks to his Internet investments: He has done well both in his homeland, supporting some of Russia's most successful startups, and even more spectacularly by venturing abroad, taking pioneering stakes in Facebook, Zynga and Groupon.

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

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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 Mr. 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.

Mr. Milner's focus is on what he calls the three big "stories" in business innovation: "platform," "free" and "e-commerce." By "platform," Mr. 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 Mr. Milner said "about two 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 Mr. Milner homed in on is "free." Here, again, Mr. Milner argues that something unprecedented is going on: Thanks to the revolutionary impact of "free," massive global brands can be created almost overnight.

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

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

Mr. Milner believes 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 technology revolution are less sanguine, at least in the short term.

John van Reenan, professor of economics and director of the Centre 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 law or accounting, won't be on the number of jobs in the economy; it will be on how well they pay.

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"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."

Dr. 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."

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.

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