DILEMMA OF THE SQUEEZED MIDDLE / THE FINANCIAL TIMES EDITORIAL ( A MUST READ )

Editorial

July 1, 2011 7:33 pm

Dilemma of the squeezed middle

For a generation after the second world war, most inhabitants of developed countries could look forward to enjoying materially better living standards than their parents. Over the past 30 years, however, such expectations have been Panglossian. True, the outlook for the rich remains sunny. But those around and below the middle of the income distribution have seen their salaries stagnate. The end of this trend is not in sight.


The causes of the widening gulf in incomes that results from the combination of spiralling wages at the top and stagnant wages below are not hard to find. Technological advances have made human involvement in some skilled but routine tasks superfluous, crimping the supply of middle-income jobs. Yet the number of workers competing for those jobs has risen as hundreds of millions of workers in the developing world join the globalised economy. The impact of their arrival has been especially keenly felt in tradeable sectors, such as manufacturing. At the top end, liberalising reforms have allowed high earners to capture more of the economic spoils – although productivity gains that favour high-skilled activities have also played their part.


Yet while the trends are explicable, they are impossible for individual states to reverse. Indeed, on both sides of the Atlantic, countries have preferred to camouflage the stagnation of the bottom half rather than tackle its causes. In Europe, this largely took the form of deficit spending by states to fund benefits for the squeezed middle; in the US, deregulation allowed consumers to do the borrowing necessary to hide rising income disparities. In both cases, a focus on the symptoms rather than the causes of inequality had catastrophic economic consequences.


As an FT series showed this week, good solutions are elusive. The tax system can mitigate rises in inequality; but it cannot eliminate them, and excessive marginal taxes can make everyone worse off. Indeed, the best hope of restraining wage increases among top earners lies not in the state, but in shareholder activism. But for this to work shareholders need to rediscover their sense of outrage and take action.


The state is better placed to help middle-earners. Equipping the squeezed middle with the wherewithal to do higher-skilled jobs and the flexibility to respond to a changing labour market is the best way to boost its earning power. However, the fruits of such reforms take a long time to ripen.


That is no excuse for governments failing to make the necessary investment in education. The era of plentiful well-paid manufacturing jobs is over. The economies of the future will place an increasing premium on highly skilled workers. Governments in the developed world must do so too.

Copyright The Financial Times Limited 2011.