Why the US Middle Class is in danger of extinction


By Neil Patrick

Current news reports claim the US job market is slowly improving. Is this a return to better days? Sadly no. It’s a transformation for sure, but not back to anything like we all knew 10 years or so ago.

Make no mistake about it, America's middle-class jobs have been destroyed in the wake of the 2007-8 financial collapse. The growth in new jobs reported gleefully by the government have been almost entirely low-wage jobs. And there is little reason to believe this situation can be quickly or easily reversed.

What has caused this? In the next few posts, I want to look at the factors that are behind this tragic state of affairs, dig into what’s happening and what we can do about it.

I believe there is no single cause or culprit. Instead it’s a complex cocktail of seven factors which have collided to create a perfect storm for skilled American workers. In brief these are:
  • Record levels of government and personal debt 
  • The rise of technology leading to ever falling marginal costs 
  • Capital shifts away from labour and into non-human investments 
  • The globalisation of businesses 
  • Government fiscal policies 
  • Demographics and education 
  • Finite global resources 

But I am getting ahead. In this post, I am going to look at:
  • The nature of the alleged jobs “recovery” 
  • Why GDP growth isn’t making people better off
  • The transference of government debt to households.

The substitution of high paid jobs by low paid jobs is beyond doubt

A recent presentation from the Federal Reserve Bank of San Francisco describes the jobs “recovery” in stark terms. The vast majority of job losses during the recession were in middle-income occupations, and they've largely been replaced by low-wage jobs since 2010:



Mid-wage occupations, made up a staggering 60% of the job losses during the recession. But mid-wage jobs have made up just 22% of the jobs gained during the recovery.

By contrast, low-wage occupations have totally dominated the recovery. They represent 58% of the job gains since 2010. "Many middle-class workers have lost their jobs and, if they have been able to secure new employment at all, find themselves earning far lower wages post-recession," the San Francisco Fed says.



Nearly 40% of the jobs gained since the recovery began - about 1.7 million - have come from three low-wage sectors: food services, retail, and employment services.

And four low-wage occupations are now the top four types of employment in the US: retail sales, cashiers, office clerks, and food preparation and servers:



The problem is compounded by the fact that industries which employ mid-wage earners, such as construction, manufacturing, insurance, real estate and IT, have either stagnated or grown too slowly to recover their pre-recession losses.

Worse again, budget cuts to federal and state government have eliminated a vast swathe of mid- and higher-wage jobs. And a separate chunk of middle-wage jobs including carpenters, plumbers, plasterers and electricians are still waiting for the U.S. housing market to recover.

The growth of wealth inequality is a problem for all, not just the poorest

This is creating a polarised workforce in the United States. Over the past decade, both high- and low-wage jobs have been growing. But jobs in the middle continue to shrink. Mid-wage jobs suffered a major drop after 2001, largely stagnated during the 2000s, and have now declined even further in the most recent downturn.

Economists have been debating the causes of this divergence. Harvard’s Lawrence Katz and Claudia Goldin, argue that new technologies and machines are now displacing mid-wage jobs.

I believe this is a correct analysis as I talked about here. But it’s not the full story. Some others, such as Larry Mishel of the Economic Policy Institute, point to political factors, from the decline of labor unions to trade liberalization to the dwindling minimum wage. This is a factor too, but again it’s only an ingredient in the mix, not the full disastrous recipe.

But neither of these arguments discuss the lead weight which is pulling the whole economy down. And that weight is government debt. That debt puts massive upward pressure on tax, demands endless quantitative easing (devaluation of the dollar to you and me) and limits government spending – the type of spending which would create more jobs in the public sector.

It seems logical to me that there’s no single simple explanation of what’s going on. It’s multi-factorial which makes it complex to understand and remedy both at a national and individual level.

But if the trend continues, it will amplify something which is already a big problem in the United Sates: income inequality. Not to mention the destruction of the hopes and aspirations of a huge swathe of American society. And needless to say, that’s a bad thing…

GDP growth and household incomes have become separated

For the first time in US history, economic growth is no longer driving income improvements at the household level.

Traditionally, improvements in GDP have directly resulted in increased income and prosperity for citizens. In the US, this link has broken. US median household income is now at a lower level than it was in 1999. In fact even though US GDP has been on the rise since 2009, household income has been falling since 2008:


Here we see the evidence of how as technology continues to increase productivity and reduce marginal costs, so we have GDP growth but no wealth creation except for those who are in the boardrooms and/or major equity owners.

To look at it in its simplest terms, businesses can create higher returns with less human labour inputs than ever before. The first industrial revolution substituted human muscle power with mechanical devices. The second industrial revolution transformed transport and communications. And the third industrial revolution is replacing human cognitive tasks with artificial intelligence.

So until recently, technological improvements have only really affected those who sold their manual capacity to earn a living. Today’s technology is reducing the workforce needed for tasks which required the application of professional and mental skills too. But there’s another problem; if we are selling our manual labour, we need to do nothing to create our commodity. Our bodies are there to be applied to work whenever we want. Little or no training is needed.

But jobs requiring the application of skill and knowledge are different. The acquisition of these skills can take years. Sometime decades. And if no-one wants them anymore, we have a stark choice – dump them and start again or try and compete for unskilled work.

So we have an American middle class with skills that fewer and fewer people want or need to pay for. The keys to the acquisition of wealth are no longer the sale of our labour and skill. They are the ownership of income generating assets. And thanks to booming stockmarkets, owning assets has made most of the wealthy even wealthier over the last few years.

This is the reality of the polarisation of America’s workforce. Greater wealth acquisition by those at the top, those who own assets, but falling income levels for everyone else… not just the poorest, but the vast majority of Americans.

Needless to say, this is also a bad thing…

The burden of government debt is being passed to households

Despite multiple deficit-reduction deals during the past three years, the US national debt is projected to swell to 100 percent of the economy by 2038, due primarily to the enormous cost of caring for an aging society.

Whilst WW2 exceeded the current peak of government debt, the end of WW2 and the global restructuring that arose from its ashes is a very different scenario to that we face today. Post 1945 saw the US emerge as the dominant global super power. It’s huge manufacturing capacity, abundant natural resources and global markets created the wealthiest society on the planet:


But post 1980 has seen the failure of that economic model as the production of cheaper goods of equivalent or even higher quality started to materialize in low wage economies.

Making matters worse, tax cuts for the vast majority of Americans were made permanent during last year's fiscal cliff showdown. If the tax cuts had been allowed to expire, projections showed the debt dropping to 52 percent of GDP during the next 25 years.

In effect, huge government debts are being allowed to accumulate unchecked. But sooner or later these debts will be passed to individual citizens rich and poor through the giant levers of fiscal policy.

And you guessed it; this is also a bad thing…

So these three points define the problem: 

  • Millions of jobs for skilled workers in the middle income bracket have simply vanished. 
  • Economic growth has become of value only to the asset owning classes. 
  • Government debt will continue to be passed onto citizens. 

This isn’t a problem which can be solved by the traditional tools of government. If you want to place your faith there, that’s your prerogative and I hope you are right. My take is that we all need to come up with our own personal solution. It might just be the biggest test of our lives…

I’ll be back with more on this soon.




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