Wall Street bankers, yoga instructors and the future of the middle class in rich countries

August 28, 2017
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An excerpt from the book Global Inequality. A New Approach for the Age of Globalization. © 2016 The President and Fellows of Harvard College. Reproduced by kind permission. The Italian translation of the volume will be published in October 2017 by LUISS University Press with the title Ingiustizia globale. Migrazioni, disuguaglianze e il futuro della classe media.

Rich countries’ workers are squeezed between their own countries’ top earners, who will continue to make money out of globalization, and emerging countries’ workers, whose relatively cheap labor makes them more attractive for hiring. The great middle-class squeeze, driven by the forces of automation and globalization, is not at an end. This squeeze will in turn further polarize Western societies into two groups: a very successful and rich class at the top, and a much larger group of people whose jobs will entail servicing the rich class in occupations where human labor cannot be replaced by robots. Education may not have much influence on what happens because many rich societies are already near the upper limit in terms of quantity of education (measured by the number of years of schooling) and possibly even in terms of quality of schooling that can be offered; in addition, many of those employed in ser vice jobs are already overqualified for what they do.

We may have to adjust our thinking to a situation where the difference in skills and abilities between the top class and the service sector workers is small. Chance and family background will play much more of a role than before. A person could become a Wall Street banker rather than a yoga instructor simply because of walking down the right street (and meeting the right person) one evening. Already, among the top 10 percent of wage- earners, we cannot identify differences in observable characteristics (education, experience) that could explain why salaries between the top 1 percent and the remaining 9 percent differ by a factor of ten or more .

The reduced importance of education as an explanans of wages may spread down the wage ladder as educational attainments become more similar. Ironically, Tinbergen may turn out to have been right that the education premium would almost cease to exist in a society where everybody is well- educated, but that would not put a stop to large wage differences. In addition to blind chance, family endowments in wealth and, perhaps more importantly, connections, will matter more. One sees the effect of family money and networks in the United States very clearly in the occupations where lots of power and money accrue. Political dynasties are more common today than they were fi ft y years ago; people whose parents have been fi lm actors or directors are almost ensured of a career in the same industry. The same is true in the financial sector. Are the children of politicians, actors, or stock traders the best qualified to do those jobs in the next generation? As surely not. It is just that previous success in these occupations breeds more success, including success for their off spring. Access to the people who make hiring decisions is crucial, and that access is helped by family background and connections.

The new capitalism, where the contradiction between labor and capital will have been resolved at the top (in a peculiar way, since the richest people will be both the top labor earners and the top capitalists), will be more unequal. Success will depend on the chance of having been born well and having luck in life, more than it did in the past century (which was a century of major political and social upheavals). The new capitalism will resemble a big casino, with one important exception: those who have won a few rounds (often through being born into the right family) will be given much better odds to keep on winning. Those who have lost a few rounds will see the subsequent odds turn increasingly against them. A child who has the luck of being born to the right (rich and educated) parents will benefit from heavy parental involvement and investment in education.

Start with the ultimate objective parents set for their child: to get a good, high- paying job. To get such a job, one needs to go to the best university; to get to the best university, one needs to go to the best high school; to get to the best high school, one needs to go to the best elementary school; to get to the best elementary school, one needs to go to the best kindergarten. So a child’s path is already determined by age five, provided his or her parents have enough knowledge, foresight, and indeed money. Very few poor or less educated parents have the resources or knowledge to make these choices so early on. If their child realizes later in life what is required to succeed, the path for him or her will be much harder.

On the other hand, a child of rich parents is launched onto a path of success from the very beginning and may deviate from it only if he or she is uninterested in it or exhibits serious learning or behavioral problems. It is hard to imagine that a system with such high in equality could be politically stable. But perhaps in e quality will decline, and the problem of instability will dis appear. What happens next depends on (1) the nature of technological progress, which might evolve in a pro- poor way, as by the replacement of people in some occupations that are very well paid now, say, professors, with lower paid workers, and (2) the ability of the “losers” in this system to organize themselves politically.

If the losers remain disorganized and subject to false consciousness, not much will change. If they do organize themselves and find political champions who could tap into their resentment and get their votes, then it might be possible for the rich countries to put into place policies that would set them on the downward path of the second Kuznets wave*. How could this be achieved?
*Kuznets’s wave describes the trend of inequality in relation to the rate of development. In particular, the wave shows that income distribution worsens in the first phase of development, when the “rich” invests capital by further improving its state; In a second stage, however, the wealthiest band of the population is also the most affected by taxation, resulting in a redistributive effect: by the time rich people become less wealthy and poorer poor.