The impending fall of the Western middle-class (part I)

The-Global-Auction coverMiddle-class people in rich Western countries like to tell a story about globalization, which goes something like this. Globalization means that some menial jobs are off-shored or outsourced, but new jobs are created in their wake – setting us on the path to a fulfilling and high-income ‘knowledge economy’. There are some transitional costs as low-qualified people lose their old livelihoods and need to re-train (or perhaps even retire, to be replaced by new cohorts doing different jobs), but overall globalization leads to better jobs and a higher quality of living. And it certainly isn’t a problem for the highly-educated, knowledge-working middle-class in the US and Europe – people like me, and maybe people like you too.

OK, so this is something of a straw man – but it does genuinely capture the way that many people in high places think about globalization. Which is why Phil Brown, Hugh Lauder and David Ashton’s (very) new book, The Global Auction, is making waves.  They argue that more-and-more of the Western middle-classes will see their jobs disappear to highly-educated workers in lower-income countries, leaving behind worse incomes, worse jobs, and ‘broken promises’.  Over the course of two posts I summarise the four forces they see as driving this and the consequences for inequality – and end with three questions I will put to Phil Brown in further Inequalities posts.

The education explosion

The first force pressing us towards a price competition for expertise is the ‘education explosion’ – the rising number of college-educated workers available globally.  You can see from the chart below that there has been a rise in university enrolments in the UK and US (and in other high-income countries; see p31), but its the sheer pace of change in India, Brazil and China that is most striking.

What is more, the focus of degrees in lower-income countries is not in media studies or sociology, but rather in those areas that are likely to make most difference to the economy.  In the UK and US, around 5-7% of students are studying engineering.  In Germany the figure is 22%, but in China it is as much as 37% of current students (p38). This is no accident, but rather is a deliberate attempt to improve national productivity, and at least in China comes alongside joint ventures – including in universities – that are designed as learning opportunities for the transfer of knowledge and expertise (p40).

Single track: Beyond the ‘high road’ and the ‘low road’

Credentials may be going through the roof, then, but does this really mean that middle-class jobs can be done as effectively in Mumbai or Shanghai as New York or London?  The Global Auction argues that the increased supply of highly-educated workers has been complemented by an increased ability to use them. In their terms, it has become increasingly profitable to move off-shore due to the ‘quality-cost revolution’ – a less snappy phrase than others in the book, but no less important .

By ‘quality-cost revolution’, Brown et al mean that firms are no longer choosing between low-cost vs. high-quality strategies (the distinction between ‘high road’ and ‘low road’ approaches discussed by Ewart Keep, Ken Mayhew and others). “Today, competition is based on quality and cost, increasing competitive pressures to improve quality and reduce labor costs at the same time” (p50). This is partly driven by technology, as companies develop new ways of outsourcing and offshoring highly-skilled jobs to cheaper locations, while integrating them globally. As a result, the second wave of offshoring is ‘moving up the value chain’ and includes highly-skilled work (p108).

The limits of outsourcing

That said, there may be limits to the number of jobs that are likely to leave the high-income countries:

  • Many low-income countries are unable to compete on the basis of quality+cost; India and China are in many ways special cases, but special cases that are large enough to have global consequences (p62).
  • The wage gap for highly-skilled workers between the West and the rest will be eroded over time – but this is a long time off; one Indian CIO argued it will be 2022 before Indian IT salaries touch US levels (p59).
  • One estimate by McKinsey’s have argued that only 13% of graduates from low-income countries were suitable for jobs in US and American firms, due to ‘poor team-working skills, too much emphasis on theory, lack of cultural fit, and poor grasp of English’ (p46) – although this will again be less of a factor over time as non-Anglo-American firms partly displace the current cultural norms.
  • Outsourcing can cause problems, as a firm loses oversight over critical aspects of the business (p103).
  • According to Alan Blinder’s index of offshorability that divides between personally- and impersonally-delivered jobs, only 20-30% of US service sector jobs could be offshored without losing much quality (p109), at least in the traditional sense.
  • In the following post I describe certain jobs that are not being offshored, or at least, not yet.

The story continues…

Nevertheless, the big picture is that there are ever-more highly-qualified workers in low- and middle-income countries, then, and an increased ability for companies to use them. In the 2nd part of this post (which I’ll put up next Tuesday), I turn to the divide that is being created between the top, most creative and highly-rewarded knowledge workers, and the rest of the knowledge workforce who make up the bulk of the middle-class – who have already been falling behind in pay, and will see their working conditions deteriorate under ‘Digital Taylorism’. The picture from this post may be bleak compared  to the rose-tinted view of the knowledge economy, but Brown et al argue that it is even bleaker than this.

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