The Black Donut Hole

Recently, there has been renewed attention to the work of Corrado Gini. An Italian Facist, he published in 1012 the Gini coefficient, a measurement of income equality among a nation’s citizens. As happens in the media, one publication picked up on this measurement of a shrinking middle class in America, and others are happily piling on the bandwagon.

One problem. They’ve got it wrong, or at least they only have it partly right. The standard media story angle is that this recession has decimated the middle class. Until we can reestablish our middle income workforce, we will continue to struggle in returning to the consumer-driven, services-oriented economy that made us all so successful.

In reality, the middle class has been shrinking since 1993, and it has happened in ALL of the economically developed world. Computers are killing the middle class. It isn’t coming back, or at least not in the same way.

The Gini scale divides jobs into three tranches. Lower income/lower skill jobs are those that can’t be replaced by technology, usually because they require physical manipulation of something. A PC can’t flip a burger, nail a shingle, or scrub a toilet.

The highest tranche are those well paid, highly skilled positions requiring substantial education, training or experience. Computers are notoriously poor at making complicated decisions, dealing with multiple variables, or establishing trust relationships.

In the middle, where the jobs have been disappearing for almost 20 years, are the workers who made a comfortable living doing a comfortable job. The salesman, secretaries, store managers, bookkeepers, truck drivers, repairmen, assembly line workers, and file clerks have disappeared in droves. Those were the jobs where you didn’t need much in the way of education, and could expect a secure living sufficient to eventually buy a home and retire at 65.

What happened to the typing pool? When carbon paper once limited every letter to three copies, now an email gives you unlimited recipients of a document (and it gets filed automatically.) Welders have been replaced by robots. The cost of common appliances has fallen, due to automation, to the point where it is often cheaper to buy a new one than fix the old one.

A frequent question I hear from business owners is whether to reduce automobile allowances for their salespeople, since they now contact so many more customers without driving to see them. They also have telephone capability 24/7, so don’t need to be at a desk to “catch up on phone calls,” and can respond to questions from their computers at home.

Small businesses have seen the same trend. How often have we decried the disappearance of the mom and pop store? Wal-Mart isn’t merely big, they are an advanced technology company, driving the cost out of distribution to the point where small businesses can no longer compete. Those small business owners were also part of the middle class. For a century they identified a very local need, opened a store front that addressed it, and worked for decades without much change.

What would your reaction be if a friend told you he was opening a television repair store? A place where people could carry their 63 inch behemoths in to be diagnosed and fixed? How about a hardware store? Clothing? A bookkeeping service? A small grocery?

Even the manufacturing jobs that have moved to Asia are technology-driven. How much would an Asian factory sell if the orders, specifications and changes were only sent on paper via mail? Who would buy from them unless they could guarantee a consistent product, with computer-controlled quality?

Technology has given us fantastic capabilities to do a lot with a little. Unfortunately, such increased productivity comes with a price. Some of the media pundits use the trend to point to the greedy rich. The concentration of wealth at the top of society is a matter of economies of scale. Technology allows the highly educated and trained to control more, manage more, and do it more effectively than ever.

As a business owner, you need to take a reality check both inwardly and outwardly. Many owners balk at spending on technology, preferring to let semi-skilled people continue in their jobs. The cold fact is that a $20,000 technology improvement that saves you one minimum wage employee pays for itself in a year. You can do the math on higher levels of skill replacement.

In your external environment, how does technology make you different or irreplaceable? Black holes by their nature suck in everything near them. If you are on the edge of the disappearing middle class, you won’t be there for very long.

Categories: Economic Trends, John's Opinions, Strategy and Planning, Technology... Bookmark this post.

Leave a Reply

Your email address will not be published. Required fields are marked *