The Politics of Job Polarization

WASHINGTON, DC – A core problem in the United States today – reflected in Donald Trump’s victory in the presidential election earlier this month – is that too many Americans feel helpless and insecure in the face of the job polarization that has resulted from globalization and new technology. While highly educated people at the top of the income distribution are doing better than ever, people with only a high school education face declining incomes, living standards, and prospects for themselves and their children. The middle class is being torn apart.

Trump won largely because he persuaded voters in Pennsylvania, Michigan, Wisconsin, and elsewhere that his policies will yield better outcomes in communities where manufacturing is declining. In fact, his administration, backed by Republican majorities in both houses of the US Congress, will likely only make things worse for hard-pressed Americans.

The underlying problem is new technology, specifically information technology, and the way it has transformed the nature of work. As David Autor and David Dorn have shown, many middle-skill, middle-income, middle-class jobs have disappeared. The new jobs that have emerged are well paid for highly educated people and poorly paid for people who have only a high school education. A leading symptom – but only a symptom – is the disappearance of well-paid factory jobs. Employment in manufacturing fell by more than two million from 2004 to 2014, and now accounts for just over 8% of total employment – continuing a long decline since the 1950s.

This technology-driven trend has been compounded by the effects of decreased transportation and communication costs, making it cheaper to move goods over long distances. Growing networks of sophisticated suppliers make it easier to move manufacturing activity overseas to lower-wage locations. Many US companies have made this a significant part of their business strategy, with the resulting decline of US manufacturing going hand in hand with a decline in unionization. When people lose a relatively high-wage and high-benefit union job, they often are reemployed at a lower wage and without the same level of benefits.

The 2008 financial crisis exacerbated income inequality and economic insecurity in part by accelerating the loss of manufacturing jobs. Arguments that it was necessary, or even “optimal,” to skew financial support from the government toward banks and their executives are not persuasive (at least, not outside Wall Street). Yes, well-off Americans experienced a big plunge in wealth when asset prices tanked. But they have since benefited from robust recovery in stock prices and high-end real estate.

In this environment, with so many people insecure about their economic prospects, the push by President Barack Obama’s administration for the Trans-Pacific Partnership (TPP) was a tone-deaf approach, at best. The administration argued that TPP would create some good jobs – and that people who lost jobs as a result could be “compensated.” But such compensation always proves to be minimal and is widely viewed as meaningless. That’s why Trump racked up large majorities in so many working-class bastions that had previously supported Obama.

Unfortunately, life is about to get worse for these voters. With control of the presidency and Congress, the Republicans are likely to pursue three main economic policies. Lowering personal and corporate taxes will primarily help richer Americans. Repeal of Obama’s signature health-care reform will have a severe impact on many lower-income people as they lose affordable insurance coverage. And financial deregulation will mostly favor large global banks, encourage reckless risk-taking, and set the stage for another large-scale crisis. In addition, the confrontational trade measures that Trump has proposed are likely to make the employment situation worse.

At the same time, the extent of any effective stimulus to the economy is likely to be very small. Overheating the economy – leading to higher inflation and higher interest rates – does not typically help lower-income people (remember the 1970s).

Trump’s main substantive promise has been to bring back middle-class jobs, particularly in manufacturing. But nothing in his policies or the broader Republican program will address the underlying issue of technological change. And the next wave of technology, including driverless vehicles, will have a major negative impact on the incomes and opportunities of everyone who currently delivers goods or transports passengers by car.

Moreover, the rapid advance of artificial intelligence and robotics means that even if manufacturing output in the US stabilizes or ticks upwards, it will not involve anywhere near the number of middle-skill jobs that it did in the past. Likewise, automation will erode the number of currently well-paid jobs in the service sector.

Given the role of technology in displacing workers, protectionism – tearing up trade agreements and imposing tariffs on Chinese and Mexican goods – won’t bring back high-paying manufacturing jobs, and Trump has no plan B. That means the polarization of America that brought Trump to power will only become far more severe.

Simon Johnson is a professor at MIT’s Sloan School of Management and the co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You. 

By Simon Johnson