By: Edward Conard
Some advocates of income redistribution concede that incentives matter, that the successful predominantly earned their increased success, and that there is no shortage of investment opportunities. Rather than prosecuting these charges, they have instead insisted that success and the progress it creates hurt middle- and working-class wages, whether by destroying their jobs, degrading their values, or competing against them for scarce resources, namely college educations.
The most frequently repeated accusation claims technology hollows out the middle class.1 Technology, so the argument goes, simplifies semi-skilled jobs while increasing the demand for the most sophisticated skills. Middle-class workers who can do higher-skilled work earn more, but the rest of the workers are pushed into lower paying jobs. Digital photography, for example, displaced 140,000 Kodak employees, but Instagram had only thirteen employees when Facebook acquired it.2
The hollowing-out argument takes other forms. One version of the technology-hollows-out-the-middle-class argument admonishes that robots will eventually replace the middle and working classes.3 In Thomas Piketty’s version, investors collude to keep the return on capital high without restricting the supply of capital—the opposite of how oligopolies operate. He fears high returns—higher than the economy growth rate—will allow capital to accumulate faster than GDP grows, whether or not the capital is needed. Normally, the return on capital exceeds the growth rate only if the economy benefits from more capital, as it has in the past. Otherwise, returns fall to the growth rate, and the amount of capital relative to GDP stabilizes. Rather than making workers richer as the accumulation of capital has in the past, like robots, Piketty fears capital will substitute for labor, eliminate their jobs, and leave them increasingly impoverished.4
Liberal economist Brad DeLong complains that Piketty lacks a theory for explaining how returns on capital could remain high independent of the need for capital without restricting the supply.5 Larry Summers just dismisses Piketty’s theory as a “misreading of the literature.”6
For two hundred years, Luddites have insisted that machinery and technology will reduce employment and wages despite both continuing to grow. Tractors didn’t leave starving farmers in their wake. Quite the contrary—the now-lower cost of food made other unfilled jobs more valuable, so valuable that today a Fortune 500 company makes money brewing coffee one cup at time.
Perhaps robots will finally displace workers rather than increasing worker’s prosperity as technology and capital investment has in the past. It’s hard to know what will happen when armies of robots build more armies of robots at near-zero cost. One may surmise that even the poor will be rich when the cost of goods is near zero. And so far, wave after wave of robot-like innovation has already rolled in—the agricultural revolution, industrial automation, computerization, and offshoring—with no result other than growing standards of living for everyone.
In another version of the hollowing-out argument, sociologists blame rising income inequality for increasing the unproductive behavior of the working class. For example, the greater uncertainty of employment allegedly makes working-class men less marriageable.7 Their lower workforce participation allegedly leads to a decline in marriage and a corresponding rise in out-of-wedlock births. The children of single parents are more prone to unruly behavior.8
Alternatively, an increase in assortative mating—people with similar levels of education, income, and capability marrying each other— heightens the difference between the children of the haves and the have-nots. The haves devote extra resources—whether money, time, or attention—which allows their children to compete more successfully for an alleged shortage of educational and employment opportunities.9
Some sociologists also allege that growing segregation between the haves and the have-nots prevents the have-nots from benefiting from the positive peer pressure of the haves.10 Ironically, while one school of thought blames the separation of the successful for failing to provide good examples to the middle and working classes, another camp claims that the success of the 1 percent drove an envious middle class to borrow against the rising value of their homes in order to consume too much.11
Yet despite these concerns, wages have risen with little change in the shape of their distribution. There has been no discernible hollowing out of the middle class. A closer look at the evidence reveals that wages are growing faster than they appear to be, faster still when we account for shifts in relevant demographics, such as increased immigration and retirement, and that educational opportunities have expanded for minorities and children from lower socioeconomic families.
Adapted from The Upside of Inequality: How Good Intentions Undermine the Middle Class by Edward Conard with permission of Portfolio, an imprint of Penguin Publishing Group, a division of Penguin Random House LLC. Copyright © Coherent Research Group, Inc., 2016.