What is Hollowing Out?
Hollowing out refers to the significant decline in a country’s manufacturing sector as producers shift operations to low-cost facilities overseas. This phenomenon leads to a concentration of wealth among the wealthy elite, a diminishing middle class, and an increase in working-class and lower-class households.
Key Takeaways
- Hollowing out denotes the disappearance of middle-class manufacturing jobs and the associated spending power due to socioeconomic stratification.
- This results in a greater prevalence of working-class and lower-class households and an accumulation of wealth among the very wealthy.
- Economists attribute this trend to several factors, including job outsourcing, labor-saving technologies, and demographic shifts.
Understanding Hollowing Out
Over recent decades, many of the world’s leading economies have witnessed hollowing out as manufacturing jobs are relocated to countries with lower labor costs, such as China and Bangladesh. The U.S., for example, saw its manufacturing jobs shrink from over 19 million in 1979 to less than 12 million by 2020. Similarly, Japan experienced a drop in manufacturing employment from nearly 28% in the 1970s to 16.6% by 2012. This decline heavily affects cities and rural areas dependent on plant-based employment.
Not all economists view the outsourcing of manufacturing and the resultant hollowing out of jobs as wholly negative. Some argue that it provides an opportunity for the domestic economy to pivot towards high-skill, high-wage jobs like product design and marketing. They also note that consumers benefit from lower prices on products made overseas.
Moravec’s Paradox
Advancements in robots and other labor-saving technologies are likely to exacerbate the hollowing out of middle-class jobs—a concept encapsulated by Moravec’s paradox. In the 1980s, AI specialists discovered that robots excel at tasks humans find difficult but struggle with tasks that seem easy to humans. Hans Moravec highlighted this by noting that while computers can outperform humans in complex tasks like playing chess, they lag behind in basic activities like cleaning chess pieces.
Hollowing Out Data
Income inequality is escalating in the U.S. and globally, with abundant research indicating a decline in middle-class disposable incomes as the rich grow richer. From 1970 to 2018, the share of total income going to middle-class U.S. households fell from 62% to 43%, while upper-income households saw their share rise from 29% to 48%, according to Pew Research Center. Consequently, the American middle class decreased from 61% in 1971 to 51% in 2019.
The Organization for Economic Co-Operation and Development (OECD) came to a similar conclusion. In examining most of the globe, they found that between the mid-1980s and mid-2010s, middle incomes barely grew in OECD countries. Middle-class income growth was notably slower than the average income growth of the wealthiest 10% as labor markets evolved and living costs surged.
What Caused the Decline of the Middle Class?
Several factors are cited for the erosion of the middle class: outsourcing of jobs, the rise of labor-saving technologies, and increasing costs in sectors like education, healthcare, and housing.
How Much Has the Middle Class Shrunk?
The extent of middle-class shrinkage varies by country, timeframe, and study criteria. In 2020, Pew Research Center reported that the proportion of American adults living in middle-income households decreased from 61% in 1971 to 51% in 2019. Similarly, OECD noted that the share of people in middle-income households across its member countries fell from 64% in the mid-1980s to 61% in the mid-2010s.
How Does a Shrinking Middle Class Affect the Economy?
A shrinking middle class poses significant concerns for economic growth. Historically, the middle class has played a crucial role in consumer spending, driving demand for goods and services and keeping the economy vibrant.
Related Terms: outsourcing, income inequality, economic impact, labor-saving technologies
References
- Federal Reserve Bank of St. Louis. “All Employees, Manufacturing”.
- Federal Reserve Bank of St. Louis. “Percent of Employment in Manufacturing in Japan (DISCONTINUED)”.
- Federal Reserve Bank of St. Louis. “Employment by Economic Activity: Manufacturing: All Persons for Japan”.
- Japan Institute for Labour Policy and Training. “Hollowing-Out of the Japanese Manufacturing Industry and Regional Employment Development”.
- IEEE. “Grasping the Performance: Facilitating Replicable Performance Measures via Benchmarking and Standardized Methodologies”.
- Pew Research Center. “Trends in Income and Wealth Inequality”.
- OECD. “Under Pressure: The Squeezed Middle Class: Executive Summary”.
