By Chrystia Freeland
NEW YORK Feb 14 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
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
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
"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
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