What Is Hollowing Out?

What Is Hollowing Out?

Let me explain hollowing out directly: it's the deterioration of a country's manufacturing sector when producers choose low-cost facilities overseas. This shift takes away jobs, concentrates wealth among the very wealthy, hollows out the middle class, and increases the number of working-class and lower-class households.

Key Takeaways

You need to know that hollowing out means the disappearance of middle-class manufacturing jobs and spending power as socioeconomic stratification intensifies. This results in more working-class and lower-class households, along with growing wealth concentration among the very wealthy. Economists point to factors like outsourcing jobs, labor-saving technologies, and demographic changes as causes.

Understanding Hollowing Out

Over the past few decades, I've seen how many leading economies have faced hollowing out as manufacturing jobs moved to regions with lower labor costs, such as China or Bangladesh. In the US, manufacturing jobs peaked at over 19 million in 1979 and shrank to fewer than 12 million by 2020. Other advanced economies follow a similar pattern; for instance, in Japan, manufacturing employment dropped from nearly 28% in the 1970s to about 16.6% by 2012, with little change since. This hits cities and rural communities hard, especially those that depended on local plants for jobs.

Not all economists agree that outsourcing and the resulting job hollowing out harms society overall. Some argue it allows the domestic economy to shift toward high-skill, high-wage roles like product design and marketing. They also note that consumers get lower prices from overseas-made products.

Moravec’s Paradox

Robots and other labor-saving technologies are set to cause even more hollowing out of middle-class jobs, and this is captured in Moravec’s paradox. Back in the 1980s, AI experts found that robots handle difficult tasks easily but struggle with simple ones. Hans Moravec put it this way: it's easy for computers to show adult-level performance in intelligence tests or checkers, but hard to give them a one-year-old's skills in perception and mobility.

To make it clear, if you want to beat world chess champion Magnus Carlsen, pick a computer. But if you need to clean the chess pieces afterward, choose a human.

Hollowing Out Data

Income inequality is a rising issue in the US and worldwide, with research showing middle-class disposable incomes declining as the rich get richer. From 1970 to 2018, the Pew Research Center reports that the share of aggregate income for US middle-class households fell from 62% to 43%, while upper-income households rose from 29% to 48%. This shrank the American middle-class population from 61% in 1971 to 51% in 2019.

Keep in mind, while the middle class is hollowing out, it's complex: some families drop to lower-income brackets, others climb to upper ones. The OECD reached similar conclusions globally, finding that from the mid-1980s to mid-2010s, middle incomes in OECD countries grew barely, increasing a third less than the top 10%'s average, amid changing labor markets and skyrocketing living costs.

What Caused the Decline of the Middle Class?

The middle class squeeze gets blamed on outsourcing jobs abroad, labor-saving technologies, and rising costs of education, healthcare, and housing.

How Much Has the Middle Class Shrunk?

Studies on the shrinking middle class vary by country, timeframe, and criteria. In 2020, Pew Research Center stated the share of US adults in middle-income households dropped from 61% in 1971 to 51% in 2019. The OECD, in 2019, noted that across OECD countries, the share in middle-income households—defined as 75% to 200% of median national income—fell from 64% in the mid-1980s to 61% in the mid-2010s.

How Does a Shrinking Middle Class Affect the Economy?

There's good reason to think a shrinking middle class hurts economic growth. This group drives a large part of spending, boosting demand for goods and services and keeping the economy running smoothly.