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Will digital erase the middle class?

by Eric Hazan

“Middle class” is hard to define. Economists and sociologists debate whether income, professional status or education define it.

I recently came across a subjective definition of middle class in a book about poor and working-class white people in post-industrial America. In Hillbilly Elegy: A Memoir of Family and Culture in Crisis, author J.D. Vance describes the economic insecurity in the post-industrial Rust Belt community he escaped, and the corresponding culture of moral and social decay.

Referring to that decay and people’s ability to get out of poverty, Vance writes, “If you believe that hard work pays off, then you work hard.”

To me, that “hard work” ideal best defines the middle class. No matter the economic markers we use to describe the middle class, the belief that hard work will get you into it has been universal.

But Vance goes on: “If you think it’s hard to get ahead even when you try, then why try at all?” This, he writes, is the mindset of the poor and working-class white people in the area where he grew up.

I find this quote haunting.

If “middle class” is a culture rooted in the mindset that a person can get ahead through education and hard work, we need to understand that this narrative is broken in some parts of the Western world, where the ability to advance economically is declining.

And we need to fix it fast, because the opportunity for advancement is integral to the stability of democratic society. Without it, what happens?

A tale of two middle classes

So what is happening to the middle class? The McKinsey Global Institute has analyzed key trends in the global economy for 25 years now to document the effects of globalization and technology on incomes in major economies.

If you look at the statistics through a global lens, the middle class is booming. But if you focus in on the developed Western countries, the middle class is struggling.

Obviously, one needs more than a subjective definition of “middle class” to assess these assertions. The McKinsey Global Institute considers households with a significant part of their income available for discretionary spending beyond basic needs to be middle class. In terms of income, it starts at $13,500 a year (lower middle class) and ends at $113,000 a year (upper middle class). Of course, this bracket is adjusted at country level, when you convert it to local currencies to account for purchasing-power parity.

Again, with this definition of middle class, it is very clear that globalization is spurring the rise of the world middle class. As such, it is reducing inequalities between countries.

China is an obvious example. By 2030, the McKinsey Global Institute expects around 46 percent of Chinese urban households to move into the upper middle class or above. Those are households that can afford laptops, cars, luxury goods, and travel. And their number is still going to grow by 100 million in less than 15 years. Similar trends can be observed in India, Southeast Asia or Latin America.

The trend might be less pronounced in Africa, but still, we have seen household consumption grow more than 5% a year since 2000, and it is set to continue. An African middle class is clearly emerging. McKinsey Global Institute projects it will make up 15 percent of Africa’s population by 2025.

I don’t mean to downplay the concerns of the Western middle class, but I think it is important to keep the rest of the world in mind. At an aggregate level, globalization is a powerful force to create more prosperity. Now, if we focus on the Western middle class, the trends are more complex. There has been a lot of research on income and wealth that shows economic gains have gone disproportionately to top earners since the 1980s. The McKinsey Global Institute recently focused on one aspect of that, which is the proportion of households in 25 advanced economies whose incomes have not increased.

This research found that 65 to 70 percent of households in 25 advanced economies saw their real market incomes fall between 2005 and 2014. That’s about 540 million to 580 million people.

Market incomes are both wages and incomes from capital. Even after adjusting for public transfers and tax policies, 20 to 25 percent of household segments still had flat or lower disposable income in 2014 than in 2005. In the previous decade, between 1993 and 2005, that proportion was ten times less—around 2 percent. So, yes, a large proportion of Western middle-class people might be justified in thinking, “It’s hard to get ahead even when you try,” as Vance would put it.

Is technology guilty?

When you look at root causes of this decline of the middle class in certain Western areas, the 2008 recession and slow recovery clearly played a role, yet only to a certain extent.

Long-term demographic trends factor in too: aging and shrinking household size decrease the average number of workers in households, and the average income.

Labor-market shifts also have significant effects. The share of GDP that goes to wages has fallen. This results from negligible income gains or declines for low- and medium-skill workers, and a growing share of part-time and temporary work, which is often less well paid proportionate to permanent or full-time work.

Accelerating technological change is often invoked to explain this job-market polarization. And doomsayers repeatedly predict that the worst is still to come. This level of anxiety about technology might have reached excessive levels. Personally, I would rather lean toward the “cautiously optimistic” side.

The research McKinsey Global Institute did on disruptive technology clearly shows there is a major challenge ahead. The potential for job automation is huge: about 60 percent of all jobs have at least 30 percent of activities that are technically automatable, based on technologies available today.

But those figures should not be misinterpreted. They don’t mean millions of jobs will disappear overnight. This will be partial automation. Machines will carry out some tasks, but at the same time the jobs for humans will evolve toward more interaction, care and creativity.

It is too early to predict the net effect on employment of this trend. But there are some indications that suggest a positive impact. If you take paralegals for instance (the researchers who work to prepare cases for lawyers), automation in this field actually increased demand and we see now more paralegal employees than ever in the United States. But for sure, new skills are now required: paralegals need to master basic data analytics tools and be digitally literate.

In the end, whether technological advance translates into economic and social gains for the middle class very much depends on the way we design education and institutions.

Mitigating risks for the middle class

In the digital economy, capital and talent are disproportionately rewarded, while low-skilled workers also benefit from new opportunities to join the labor market, notably due to expanding digital platforms. Between the two, the middle class must not be forgotten.

Primary education and, even more important, reskilling people will be key. One example: in Greece, the “Alliance for Digital Employability” is offering coding boot camps to unemployed people in the information and communications technology field. It is a coalition of several educational institutions and private employers, which aims at reskilling 1.500 people each year over the next 10 years.

Digital takes us through a profound transformation. We don’t know where we will end up, but what we know is that we need to rewire our systems and switch mindsets to adapt permanently. The times of life-long guaranteed jobs are gone for good. Instead, we need a system where people will retrain frequently, so we will have to design the safety nets and incentives that make it happen.

We need also to rediscover the virtues of planned regional development policies. Right now, we have too many lost territories—communities where people have lost faith and the economic pulse is flat. These include the Rust Belt in the United States, Northern England’s deindustrialized areas, and peripheral” France, as author and geographer Christophe Guilluy refers to it. More investment in professional training and infrastructure and more public support are required to include those territories in the new economy.

In addition to that, however, hard work has to pay off, and people have to believe it. To restore this trust among the middle class, evidence that it won’t be left behind will need to be much more visible.

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This post is adapted from my speech at OECD’s seminar on “The squeezed middle class in OECD and emerging countries – Myth and reality

Eric Hazan is a senior partner based in our Paris office.