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Rising Entry Barriers for the Middle Class - Outside View by Nitin Gregory

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Rising Entry Barriers for the Middle Class
May 26, 2016

Globalization and free trade have added a large number of people to the global work force. China and India alone have added a billion productive people. These changes are causing concerns in developed countries, where we are seeing the rise of 'nationalism' (Trump, Le Pen, BNP, etc).

Market forces have moved some jobs to lower cost destinations. 'Outsourcing' is the new bogey-man. However, there has been a transformation that has a similar if not more significant impact - technology. Technology is growing leaps and bounds, and the resultant increase in productivity is the essence of growth.

Even without globalization, technological advancement would change the nature of jobs. As discussed previously, technology 'displaces' jobs. For example, the mechanization of industrial manufacturing has steadily reduced blue collar jobs and increased demand for jobs like software coding, engineering design, data analytics etc.

In the 1950s, a high school education in the US was all you needed for a manufacturing job, which could provide a middle class life. But these jobs have been slowly eliminated. And over the last four decades, the skills required to live a middle class life have increased. This is the impact of technology. Increases in productivity improve in living standards - provided you increase your personal productivity. I call this the 'rising entry barrier' to qualify as a middle income person.

If you do cannot increase your personal productivity, then the share of the economy that you can buy reduces. It is like in school when there is a new subject to study. If you don't pick it up, you will be left behind.

Technological advancement is not exclusive to developed countries. This trend is now rising in the developing world. I previously wrote about the popularity of robots in China and promised to explore the impact of this technological change in China and on rest of the world.

Impact on Emerging Economies

Many countries are using investment and exports to turbocharge their economies. China is a prime example. It has used cheap labor to boost manufacturing and exports.

But for late entrants like India, the skills required will be higher. In an age of robots, to compete on a global scale, you need operators who have some level of technical education as these workers will be working alongside robots.

The 'rising entry barrier' also applies to emerging economies on the path to 'catch-up growth'.

Impact on China

What does the robotic revolution mean for China? In the short term, it means 'displaced' factory workers. This has already started to happen. It's a social problem and has to be dealt with by providing social security net and educational programs.

The larger problem relates to the current generation of educated and dynamic Chinese workers. They have invested in skills to become a part of the middle class. The Chinese economy has to generate enough jobs for this new workforce.

A small portion of these jobs will come from traditional manufacturing. But most new jobs will be associated with the maintenance and handling of robots on the manufacturing line. The rest will have to come from China's transition to a more consumer-led economy. This internal rebalancing will take time. As consumption becomes a larger portion of GDP, the services sector will grow and provide value-added jobs to the economy.

The transition will not be easy. It will require policy actions like increasing real interest rates, social safety nets, and consumer financing options. But more on this later...

This column is authored by Nitin Gregory. Nitin, who graduated from IIM-Calcutta, is currently pursuing a finance role with an automotive major. He has a deep interest in Macroeconomics and pens a blog at Gregonomics.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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