Hollowing Out
Used to characterize conditions and trends in industrialized countries' economies due to the widespread outsourcing of middle-class, blue-collar manufacturing jobs to emerging nations.
What is Hollowing Out?
The term "hollowing out" is used to characterize conditions and trends in industrialized countries' economies due to the widespread outsourcing of middle-class, blue-collar manufacturing jobs to emerging nations.
When manufacturers choose low-cost facilities elsewhere, a nation's manufacturing sector suffers from "hollowing out."
The elimination of these employees has aided in the wealth concentration among the super-wealthy, the polarizing of the middle class, and the growth of working-class and lower-class households.
One of the significant developments in the global economy over the past 20 to 30 years has been the outsourcing, or "offshoring," of both low-level manufacturing jobs and service positions.
The declining middle class has also been referred to as "hollowing out," at least in the United States and, to some extent, in other nations, including Japan, the UK, and Germany.
When carving jack-o-lanterns, we must first cut out the top of the pumpkin, scoop out the insides, and place them somewhere else. As the term suggests, this stage involves polarizing the pumpkin.
When manufacturing jobs are scooped out and deposited in another nation, an economy is said to be "hollowed out."
Key Takeaways
- The loss of numerous middle-class employment, primarily in the blue-collar sector, is referred to as "hollowing out."
- Economists also use the word to refer to the growing phenomenon of income polarization, which is the trend of an increasing number of people heading toward either having earnings that are much above or below average.
- Since 1990, there hasn't been much of a net increase in the number of middle-class occupations in the United States; the jobs with the lowest earnings have seen the most growth.
- This causes a rise in working-class and lower-class households and wealth concentration among the very rich.
- Economists have attributed this phenomenon to several interrelated variables, such as employment outsourcing, labor-saving technologies, and demographic changes.
- In conclusion, it would seem that the forces of outsourcing and automation have conspired to hollow out the middle class over the past few decades and are still doing so.
Understanding Hollowing Out
Many industrialized nations have observed this to occur within their borders: as labor and production costs rise, manufacturing companies are forced to close their doors and relocate to countries with lower labor costs, such as Mexico, India, or Cambodia.
Between 1970 and 2014, the share of middle-income households in all U.S. households fell by 11 percent (from 58 to 47 percent). In other words, as middle-income families become more prosperous or poorer, the U.S. income distribution has been polarizing or hollowing out.
Being in a lower-income group impacts households, especially since actual average salaries have mostly stagnated. Since the fundamental driver of U.S. growth is consumption, this polarization has hurt the economy recently.
Reduced consumption in the biggest economy in the world harms its trading partners and numerous other nations that are indirectly linked to the U.S. economy via international supply and financial chains.
Similar trends have been observed in other advanced economies. For instance, since peaking at over 28 percent in the 1970s, manufacturing employment in Japan has drastically decreased.
There were 16.6% of people working in the sector in 2012, and not much has changed.
Although there is a shortage of data on developing market economies, the World Bank periodically produces the polarization index for many nations, which often shows greater polarization over time.
For instance, the IMF (2006) reported that polarization increased from the mid-1990s to the mid-2000s in all but one of nine Asian countries, based on data from the World Bank.
Sri Lanka experienced the smallest increase in polarization, while China experienced the biggest. During this time, there was just a drop in Thailand.
However, not all economists agree that outsourcing manufacturing and the ensuing loss of jobs harm society.
Some contend that it offers the domestic economy a chance to shift in favor of highly skilled, high-paying jobs like product design and marketing. In addition, they claim that customers gain from the things they purchase being manufactured elsewhere because it results in lower prices.
The Hollowed Out Middle Class
Robust consumption and investment are essential for a healthy economy. However, low-income households are unable to save much money or consume much. On the other hand, high-income households save a lot but use too little money compared to their earnings.
A society's consumption and savings can be balanced with the help of middle-class households. For example, the middle class in the United States provides most of its human capital and controls most of its physical money, including its homes and automobiles.
Undoubtedly, the middle class has been getting smaller in the United States and other affluent countries. Whether this implies that circumstances are improving or deteriorating is the subject of debate.
The shrinkage in middle-class numbers has been attributed to several issues, such as the exportation of jobs, the introduction of labor-saving technologies, and the rising prices of housing, healthcare, and education.
An income group's relative weight in the economy is represented by its income share. The middle class is disappearing simultaneously because its contribution to the overall national revenue is decreasing.
From roughly 47% of total U.S. income in 1970 to about 35% in 2014, middle-income households' income share decreased. Due to the rise in the income share earned by high-income households, middle-income households' income has decreased.
Economic Impacts of Income Hollowing Out
There may be unfavorable social and political effects when households move disproportionately toward the bottom end of the income distribution, as has been the case recently. But, on the other hand, this decreasing trend may also be perceived as unfair, and typically with good reason.
The broader economy may suffer from polarization's adverse effects. Since 1998, middle-class households have tended to polarize more than low-income ones. This negative trend has decreased revenue for the entire economy and lowered consumption.
Between 1999 and 2013, consumption growth is predicted to have decreased by nearly half a year due to polarization, losing a total of 13.5 percentage points during that time.
One hundred thirty-four percentage points, or an additional half-year of consumption growth, have been calculated as the total consumption lost between 1999 and 2013 due to a slower response to income increases.
We can only speculate what has led to the alarming rise in polarization and its effects on the economy.
Some of it might be a result of tax or immigration laws. Recessions, technological advancements, and a decline in unionization may all be factors.
Researched and authored by Rishav Toshniwal | LinkedIn
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