The Winner-Take-All Economy

The Winner-Take-All Economy

Recent news has highlighted that employment numbers continue to improve, with the 5.8 percent unemployment rate announced Friday morning—the lowest rate since July 2008, before many of us felt the impact of the Global Financial Crisis. So why don’t we feel better off?

While in the aggregate things are looking up – the U.S. economy grew 3.5 percent in the year ending September, beating forecasts –  the benefits of the economic recovery (and of economic growth in general for the past 20 years) are being felt by a smaller and smaller segment of the population. As Federal Reserve chair Janet Yellen said last month: “Unfortunately, the past several decades of widening inequality has often involved stagnant or falling living standards for many families.” We’ve gone from an economy where everyone benefits from growth to one where the “winners” take all, and the rest of us are left out.

Chart One

Unemployment has broadly improved since it peaked at 10 percent in October 2009.  But while these numbers are looking good, labor participation numbers are not. Unemployment measures how many people who are looking for a job find a job, whereas the labor participation rate measures how many of us in the country as a whole are looking for jobs at all.

Previously, when unemployment has improved after a recession, the labor force participation rate has gone up – as more people find jobs, more people who weren’t looking start to look. You can see this in the first chart: After the last big recession in the early 80s, the red participation line goes up as the blue unemployment line goes down sharply.

This time around, that hasn’t happened. As the unemployment rate has gone down, the labor participation rate has actually continued to go down at a rate faster than before the Great Recession. This means that even though more people looking for jobs are finding jobs, fewer people are looking for jobs than ever before.

And while overall unemployment has been rough during the Great Recession, employment numbers for those without the skills necessary to compete in the modern economy have been even worse.

Chart 1

The unemployment rate of those who haven’t completed high school has been significantly higher than the overall unemployment rate and at the peak was triple the unemployment rate of college graduates. Those without high school diplomas are much more likely to drop out of the workforce entirely, becoming dependent on family and friends and keeping the labor participation rate low.

Chart 2

This comes against a background where income for everyone outside of the upper class (the much disparaged 1 percent, to borrow from Occupy Wall Street) has stagnated over the past 20+ years.

An easy way to measure inequality is an indicator called the Gini Ratio, which measures how “unequal” a society is. At zero, everyone earns the same as everyone else; at 1, no one earns the same amount, and each citizen can be ordered between the richest and poorest members of society. Over the past 20 years, the Gini Ratio in the United States has crept up steadily, indeed almost constantly since the Federal Reserve began tracking it in the early 70s. This is during an era when other countries seen as case studies of inequality – like Brazil or Mexico – have seen their Gini Ratios decline.

Two forces that complement and can substitute for each other have driven this: globalization and automation. Globalization is the transition of manufacturing jobs from the United States to other countries with cheaper wages (such as China) in exchange for cheaper goods here at home. Automation is the transition of jobs from human employees to automated processes and robots. The bottom line of these two forces is that while it feels like it has been tough to find a job for the past 6 years, things have really been getting tougher over the past 20 to 30.

The bad news? It’s getting worse. Automation and offshoring have already hollowed out the American blue collar, but they are now beginning to make the American white collar tradable, and hollowing that out, as well. Previously protected industries such as law and medicine are being pressured by legal services provided by back offices in India and telemedicine from anywhere in the world. And automation is moving up the value chain from factory-line assembly work to algorithms that can replace decision makers in even the most white-collar professions. Deep Knowledge Ventures, a Singapore-based VC firm, has even appointed an algorithm to its board of directors, complete with voting power.

So while we’ve seen it tough for anyone who isn’t the most highly skilled to find jobs since the Great Recession, there is a bigger, longer-term trend showing that gains in the economy have been going to those at the top of the income scale. This combination of a jobless recovery and an economic model shifting benefits away from labor (in the form of jobs and salaries) and towards those who hold the scarcer resources in the economy: capital and innovative ideas. As Fed chair Yellen says, this raises bigger questions: “I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity.” These winners are taking all the gains from our economy, and undermining what makes us great as a nation.

Mike Derham is a partner at Novus Pontis and a Fellow of the Truman National Security Project. Views expressed are his own.

Photo: peoplesworld via Flickr

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