The Shrinking Middle

• Author: Ekkehard Ernst
• Position: Chief of the Job-friendly Macroeconomic Policy Team at the International Labour Organization.

Wage earners across the globe seem to be trapped in the doldrums. Global unemployment remains high, especially in some advanced economies, and every year many more workers enter the job market. More than 600 million jobs must be created over the coming decade to provide work opportunities for the more than 201 million people currently unemployed and those who will begin looking for work (ILO, 2015).

Even though some countries, such as the United States, have recently shown significant improvement in their unemployment rates, many more struggle to find new sources of jobs and incomes. And the large number of job seekers has held down wages even as productivity (output per worker) has grown, worsening inequality in many countries.

But things are changing. Longer-term shifts—such as declining middle-class jobs, a continued fallout from the global financial crisis, but also a shrinking global workforce—are shaping labor markets worldwide. Whereas the problem today seems to be a glut of workers, in coming years the global labor force will shrink. These shifts could constrain growth, but they should also help correct some of the current labor market imbalances that have prevented workers from sharing in productivity gains. The beneficiaries, however, will mainly be high-skilled workers. The prospects for lower-skilled workers are less hopeful, which is bad news not only for them, but for efforts to reduce inequality.

Inequality may worsen

Continued worsening in income inequality over the past three decades has attracted substantial attention and has been a focus of global policy debate since the publication in 2014 of Capital in the Twenty-First Century (Piketty). To be fair, the rising share of wealth and income going to the top 1 percent of the population and the fall in the labor income share had not previously gone unnoticed. But these developments were often attributed to a decline in unionization and the increased competition fostered by globalization—both of which were perceived as conducive to further and faster global growth and were expected to lift the boat for all (for example, Jaumotte and Tytell, 2007).

This view has been called into question, however, since the global financial crisis that began in 2008, because large deviations in income distribution from historical averages came at a time of highly volatile economic growth. That led some observers to argue that reducing income inequality would boost macroeconomic stability—adding an economic rationale to a purely moral imperative for a more equal distribution of riches. The current policy debate focuses on changes in taxation to address inequality but with little regard for the potential harm of increases in income or property taxes on job creation, innovation, and growth (see “Back to Basics: Taxes in Practice” in this issue of F&D). More important, this policy debate does not adequately take into account the longer-term forces shaping trends toward inequality.

A careful analysis of labor market trends reveals an ongoing shift in employment from traditional middle-class jobs in manufacturing and services toward both high- and low-skill occupations. This shift underlies much of the observed dynamics in inequality. Indeed, computers and robots seem to have finally...