In my previous blog post, I wrote that inequality is the flipside of the ‘squeezed-out middle’. On the other hand, as is shown by Evert-jan Quak’s article ‘Making globalization work for the European middle class’, the trends affecting the middle class and inequality are inextricably bound up with changes in the labour market, employment relations and job polarization in Europe.
These changes are having a self-perpetuating negative impact. Automation is leading to fewer jobs, while the rising productivity of recent decades is no longer resulting in a comparable increase in wages. Furthermore, as a consequence of the economic crisis, too little is being invested to ensure that productivity continues to grow in the coming years, meaning that the salaries of the lower middle class in particular will lag even further behind. The purchasing power of this group has long been maintained by supplementing their stagnating salaries with credit, for example to buy a house, but that credit bubble burst very abruptly with the onset of the financial crisis in 2008.
It is therefore crucial to reverse these trends and ensure that the middle classes – who account for the majority of Europe’s population – once again have sufficient purchasing power and can thereby kick-start the economy. Because of the same erosive impact of financial globalization, the alternative – a focus on exports to the growing middle classes in emerging countries – will offer only a temporary solution for the European economy.
There is much to be said for focusing employment policy on better-paid middle-class jobs rather than, as is the case in many countries, on creating work at the lower end of the labour market. Throughout Europe, as a consequence of globalization and automation, employment has declined mostly in ‘the middle’. In other words, job polarization has increased strongly in the past 20 years, starting long before the crisis of 2008. Northwest European countries like Germany, France, the Netherlands and Belgium in particular have experienced a squeezing out of middle class jobs.
The article by Evert-jan Quak (see also the article by Jo Michell and the expert opinion by Enrique Fernández-Macías) shows that the deregulation of the labour market from the mid-1990s particularly led to a growth in jobs at the lower end of the labour market. Fewer typical middle-class jobs – for example, office and customer service clerks, plant and machine operators – have been created. And these are jobs that are already under pressure from automation.
This loss of middle-class jobs is also related to a shift away from industries with high productivity levels and high productivity growth, such as the development and production of new and better trains, household appliances or industrial machines. In many countries, especially those with an industrial past, such as Britain, Spain and Italy, the disappearance of the manufacturing sector has meant a parallel break in the link with local suppliers and product development. This has been felt less severely in Germany and the Netherlands but, even in these countries, there is a fear that their position will be eroded by increasing industrial competition in the future, as countries like China and India not only produce what has been developed elsewhere, but also build up their own industries to manufacture high-quality products.
That shift away from high productivity growth is related not only to globalization, but also to financialization of the economy, which discourages investment in the real economy by promising much higher returns on trading in shares, derivates and other financial products. One example is the recent surge on the world’s stock exchanges, which are reaching new record highs. But these high share prices are by no means a reflection of better performances by the companies concerned. On the contrary, they are the consequence of big capital – encouraged by the ‘quantitative easing’ of the European Central Bank, which is pumping 50 billion euros a month into the financial system – looking for quick returns.
The challenge, therefore, is to get this financial globalization under control: the money that is being accumulated by elites worldwide and by large institutional investors like pension funds should be used much more to invest in high productivity sectors of the economy. Governments, too, could steer their contributions to technological innovation more in this direction: rather than strengthening automation to reduce the costs of products in the face of international competition, they should strengthen technologies that create middle-class jobs. This entails regulating the market in such a way that other interests can be served, such as people and the environment.
In our dossier, we quote Dani Rodrik who, in From Welfare State to Innovation State, proposes an innovative idea: why not use the revenues from such investments in technology to redistribute their commercial profits through what Rodrik calls a ‘social innovation’ dividend?
Ideas like this need to be pooled and combined to devise an alternative model for Europe. The Broker is working on a successor to this dossier, in which such suggestions will be brought together. Expert opinions and comments on the articles of the middle class dossier are welcome.
‘Another Perspective’ is The Broker’s new blog. The title reflects The Broker’s ambition to look at globalization issues in different ways. Through this blog, we also keep our followers up to date on matters that concern us.