Inequality on the Rise

by Natalie Rauscher, M.A.

Today, the United States seems to be more polarized than ever. Not only since Donald Trump took office in the beginning of 2017, has the US moved in a direction that is puzzling for many people around the world. The land of the free is closing its borders to migrants. Huge protest marches are regularly taking over Washington. Neo-Nazis are marching in the streets of Charlottesville, and the president fails to condemn these acts of extreme violence and racism. Many things in the US seem to be at odds right now. Yet, we tend to forget that the US has been a polarized country for a long time, long before Donald Trump became the 45th President of the United States. The last ten years have seen a number of social movements and upheavals such as the Tea Party, Occupy Wall Street, or Black Lives Matter. At the heart of much of this social unrest is one problem: The rise of inequality in the United States.

Concerning income inequality, the US is one of the most unequal countries among the Western powers, and has seemingly done little to fight it through distributive measures like other Western democracies have done. (Bartels 2006) Thomas Piketty has found that inequality in the US today has reached Europe’s pre-WW I levels. About 50% of income goes to the top 10%. (Piketty and Saez 2014) Since the 1970s and 80s, when deindustrialization hit the US economy with a heavy blow, traditionally well-paid, unionized blue collar jobs have been disappearing. Especially the Midwest, where many of the big industries were located, witnessed a stark decline towards what we now call the Rust Belt. The push towards the service industry, as well as increased off-shoring measures, shrank many former powerhouses of the industry. Thousands of jobs disappeared or were replaced with low-wage service jobs. Deregulation of the overall economy, a development towards the shareholder economy, as well as a push towards a financialization of the economy under Reagan led to a growth of overall inequality among Americans. Real wages were stagnant or declined, whereas the compensations of top managers and stock prices increased manifold. (Fligstein 2010) Many jobs in between were additionally replaced by the growth of technology. The computerization of the economy has led to the replacement of many middle-skilled jobs that involved routine work. (Neckerman and Torche 2007) Although productivity has thus grown since the 1970s, wages did not keep pace: “the median American male worker’s wage rose by just 3 percent from 1979 to 2014 (DeNavas-Walt and Proctor 2014). This so-called wage stagnation is not unique to the United States: over the past several decades, wages for middle-income jobs have increased at an anemic pace in developed countries around the globe. Meanwhile, the wages of the highest-skilled and highest-paid individuals have continued to increase steadily. There are growing gaps in wages and employment opportunities between these individuals and those at the middle and bottom of the wage distribution, and there is no reason to think that these labor market trends will be reversed any time soon. “(Kearney, Hershbein, and Boddy 2015)

These developments lay at the core of what we now call the Great Recession of 2008. Deregulation of the US markets, including financial markets, led to speculation and risky behavior. As the housing bubble built up through fraudulent mortgages burst, many big banks were struggling for survival. After the failure of Lehman Brothers, other “too big to fail” banks were rescued and re-financed. Yet, the economy took a nose dive. Many middle-class Americans suddenly witnessed unemployment, the loss of their homes, and the loss of most of their wealth – basically, their entire existence was put at risk.

Since then, inequality has moved into the center of political discourse, on all sides of the political spectrum. Yet, people seem to be fed up with the traditional answers offered by the established parties. The rise of politicians like Bernie Sanders or Donald Trump shows that. As Sanders condemned the top 1% for building up millions and billions of dollars in wealth, while the average American can barely survive on their monthly wage, Donald Trump painted the picture of a barren country, marked by the ruins of a once-great industrial power. (Trump 2017)

But not all of it is just political rhetoric. Inequality among Americans remains high, the middle class in America is losing more and more ground. Indeed, in 2015, more people have defined themselves as lower or upper class than middle-class, a novelty in recent US history. (Kochhar, Fry, and Rohal 2015) Social mobility, once the center and beacon of the American Dream, is in decline. A majority of the middle class declares that it is now much harder to maintain their standard of living than it was ten years ago. A PEW study basically declares a lost decade for the middle class in America. (PEW 2015)) Additionally, the progress in digital technology is posing new challenges to the American labor force. It is questionable if these developments can be reversed by a controversial president like Trump who has vowed to bring back jobs to America, especially to the Rust Belt, where Trump claimed his victory in formerly Democratic states.

The Rust Belt has been especially hard hit by deindustrialization and job loss. Here, social mobility has declined sharply in recent years, which embodies a real challenge to the American Dream. One key element of the American Dream has always been the idea that the next generation will be better off than the previous one, lifting itself up and working its way up the social ladder towards a better life. Many people from around the world still cherish this idea of America – the land of opportunity, if you are willing to work hard for it. But looking at real wages in recent years, this dream seems to become unattainable. Absolute income mobility is often used to assess the state of economic opportunity in a country. In an article from 2016, Raj Chetty et. al. finds that absolute income mobility in the US has fallen sharply since the 1940s: “the fraction of children earning more than their parents fell from 92% in the 1940 birth cohort to 50% in the 1984 birth cohort. Rates of absolute mobility fell the most for children with parents in the middle class. “(Chetty et al. 2016) The largest declines in income mobility could be found in former industrial centers in the Midwest such as Michigan or Illinois. Reasons for this sharp decline, according to the authors, could be found in lower GDP growth rates since the 1970s and greater inequality in the distribution of growth. (Chetty et al. 2016) The authors also found a close link between the rise of inequality and the decline in absolute mobility. (Chetty et al. 2016) In order to reverse this trend and revive the American Dream, the US does not only need higher GDP rates but “more broadly shared economic growth” across social classes. (Chetty et al. 2016) Thus, not even when the US economy is growing, does this mean positive effects for all Americans. Apparently, the tides do not raise all boats! As economic growth has not been equally distributed among the social classes in past years, it has mainly benefitted the top earners and the top owner of wealth. (Piketty and Saez 2014) Wealth and earnings of the rich are especially sensitive to growth rates as their income is often equity-based, and they are paid for performance. (Rubin and Segal 2015) Most of the wealth that the middle-class accumulated since the 1980s was virtually eliminated through the economic downturn after 2008. (Kochhar, Fry, and Rohal 2015)

Thus, economic growth remains important but cannot be the only solution to inequality. One reliable factor of growth in the US economy in recent years has been the technology sector. Silicon Valley has produced some of the biggest global businesses around, including Google, Facebook or Amazon. More recently, other big players have emerged on the market, the so-called sharing economy platforms. Among the biggest players in the sharing economy are Airbnb, Uber, or Amazon’s Mechanical Turk. Although the tech sector has become an economic powerhouse, worth billions of dollars, it is not really an example of inclusive growth. As most of the tech firms are incorporated, they produce high stock prices, benefitting the shareholders. Yet, most of the tech firms do not employ more than a few thousand workers worldwide, not comparable to the likes of Boeing or GM. Additionally, many jobs are threatened to be replaced by automation in the future. In The Second Machine Age, Brynjolfsson and McAfee comment on that development: “We agree with the end-of-work crowd that computerization is bringing deep changes, but we are not as pessimistic as they are. In fact, some human skills are more valuable than ever, even in an age of incredibly powerful and capable digital technologies. But other skills have become worthless, and people who hold the wrong ones now find that they have little to offer employers. They are losing the race against the machine, a fact reflected in today’s employment statistics. “(Brynjolfsson and McAfee 2012) For the two authors, the future holds the promise of some “superstar” employees who are reaping the benefits of their (technological) skills, while skills of other workers will become completely worthless. They see this as a natural development, as “technological progress does not automatically benefit everyone in a society. In particular, incomes have become more uneven, as have employment opportunities.” (Brynjolfsson and McAfee 2012) Is this any different from other times of economic development? The answer is: Yes. The 21st century (digital) transformation is much faster and more all-encompassing than other transformations such as the steam engine or the internal combustion engine. The pace of digital technologies is much more rapid. (Brynjolfsson and McAfee 2012) Additionally, the new automation is very different from past waves of automation, as many of the new technologies will be intelligent. And even if you are not replaced by a robot in the future, basically every job will require some form of digital skill. (Schwab and Samans 2016) It is questionable whether the American education system is equipped to train workers left behind.

Yet, not even the tech industry is a haven for good jobs. Apart from the knowledge workers, there is a new category of workers enabled through the tech industry: The gigs workers. These workers are not employed by the tech firms but are working through platforms such as TaskRabbit, Amazon’s Mechanical Turk, Uber or Airbnb. They do not enjoy the benefits of the well-paid and groomed knowledge workers working in the Google HQ enjoying health care benefits, insurance, free food, and drinks. They are a new type of workers, working independently as so-called micro-entrepreneurs. They do not enjoy a traditional employer-employee relationship but hunt for the next gig on platforms. They might drive for Uber and Lyft, rent out a spare room, open up an Etsy shop, or fulfill tasks on MTurk online. Maybe all of these apply. Is this what the brave new world of (digital) labor will look like?

So far, the sharing economy is still relatively small, and for many workers, gigging in the sharing economy remains a side job. Yet, a PEW study showed that, in 2016, about 24% of Americans have already earned some money over the platforms. (Smith and Page 2016) The industry itself is also very confident about the growth rates that this branch of the economy has to offer. The Internet Association, a lobbying group for the Internet economy, estimates that by 2020, about 7.6 million people could provide services through the sharing economy. (Internet Association 2015) They see this as a great opportunity to supplement the income of middle-class Americans. Similarly, JP Morgan and Airbnb published studies showing that activity through sharing economy platforms offers middle-class families a way to balance their budgets and income volatility. (Sperling 2015, Farrel 2016) There are high hopes for the potential of the sharing economy as the engine of further growth in the future. Some people like Rachel Botsman or Lisa Gansky even see it as a move towards a totally new form of consumption, collaborative consumption, which is supposed to be the answer to today’s hyper-consumption, environmental problems, and vanishing resources. (Botsman 2014, Gansky 2011) And indeed, there are some local efforts of true ‘sharing.’ For example, time banks or food swaps. (Schor et al. 2016) Moreover, there are entirely new forms of value creation on platforms today. Examples include the YouTube producer or Etsy shop owner. (Kenney and Zysman 2016) Without the infrastructure of the platforms, these individuals would not have the means to pursue their endeavor professionally.

On the other hand, there are rather pessimistic views that the sharing economy will not live up to the great expectations of sustainable and collaborative growth. Some fear that it will evolve into the ‘share-the-scraps’ economy (Robert Reich), in which a vulnerable workforce is further stripped of basic benefits such as healthcare, unemployment benefits or pensions without the security of a stable job, in favor of a highly flexible and inexpensive workforce that can be hired on-demand. An article in the New Yorker in 2017 even titled: The Gig Economy celebrates working yourself to death. Is that where the sharing economy is heading? Probably something in between is right. There are indeed opportunities for growth and new forms of value creation in the sharing economy that offer a flexible and easy access to work, something that many workers value. Yet, the gig workers need to be protected as well, especially when their number is continuing to grow. Insecurity cannot be the price for flexibility.

Yet, for places like the Rust Belt, many of the new technologies are not even available, meaning that it is also not possible to ‘gig’ if you wanted to. Many services of the sharing economy are based on local networks, such as Uber, and remain an urban phenomenon. What remains are tasks that can be fulfilled online on crowd-working sites like Amazon’s Mechanical Turk. But these micro gigs only pay micro wages, sometimes only a few cents each. And the problems do not end there. The Rust Belt also suffers from another development of the digital age: Online shopping. In fact, a recent article in The New York Times describes how more and more service jobs that had been a new opportunity for former factory workers, are now also disappearing. Smaller communities are now closing their individual shops as more and more people buy online. Yet, e-commerce does not offer many new jobs to fall back on in these areas. Most of the e-commerce and warehouses are located around bigger metropolitan areas. (Abrams and Robert 2017)

The Rust Belt, as the entire US, is undergoing tremendous transformations. Not only is it already plagued by high levels of inequality and stagnant social mobility, the US is also experiencing a continued transformation of work, again threatening places that have already been hard hit by deindustrialization. Many unionized blue-collar jobs disappeared due to automation or off-shoring. The quick development of industrial robotics and Artificial Intelligence is only going to intensify this trend. Service jobs have often replaced the old jobs, with a fraction of the wage. Now, technology has the power to once again replace jobs in the service industry, more specifically in retail, as online shopping becomes the norm. New platform technologies offer unprecedented means of flexible work and easy access, but the price is job insecurity and a lack of basic benefits associated with traditional employment. Additionally, these jobs demand some form of technical skills and the means to use it, such as a data plan and a smartphone. Rural areas do not only lack the sufficient Internet access but often the new digital technologies are only available in localized, mostly urban areas. Thus, the prospect of inclusive growth through the sharing economy platforms seems to be dubious for the Rust Belt area, in fact for several regions in the US. The platforms have yet to prove that they can live up to the promise of growth, sustainability, and empowerment for the growing crowd of micro-entrepreneurs and freelancers across the United States that are the backbone of their success. Regions such as the Rust Belt have shown that social classes affected or threatened by the rise of inequality can become receptive to populist and extreme political views. At the core is the fear that inequality is threatening their existence and the future of the next generation. In order to revitalize the American Dream for these Americans, a lot needs to be done to finally fight inequality and to lead the way towards more inclusive growth.

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