America’s Vanishing Middle Class: A Tale of Two Economies

From The Harvard Business Review: http://blogs.hbr.org/cs/2011/05/americas_vanishing_middle_clas.html

by Jeff Stibel
May 27, 2011

The US economy today borders on schizophrenic. To be sure, we are seeing signs of positive momentum. The last three months have delivered almost 250,000 new jobs per month on average. Great news, but at the same time, unemployment is growing and now exceeds nine percent. Both consumer confidence and small business confidence is higher than where they were last year. But confidence has been falling rapidly for the past few months.

Were Charles Dickens to show up as a commentator on the evening news, he would have a ready vocabulary to describe our current economic situation: This recovery is very much A Tale of Two Cities. After years of record low interest rates, multiple stimulus packages, and the expansion of tax cuts and credits, we are in the midst of a very real recovery, but it is a recovery characterized by asymmetry. Banks and major corporations are flush with capital — large businesses are recording record profits — but job growth is tepid, unemployment remains high and small businesses are struggling.

At first glance, the combination of record corporate profits alongside anemic job growth seems contrary, but the two are directly connected. The primary reason corporate profits are at record highs is that large companies learned to be lean and highly productive during the worst years of the recession. The profits generated through a reduced but more productive headcount has induced many large companies to continue this lean approach even as we emerge from recession. The result: record profits despite weak revenue growth, which leads to a lack of hiring.

The job growth problem is even more nuanced than that. It turns out that the hiring we are seeing is at the extreme ends of the spectrum. To ensure strong profits, corporations are cutting out the middle layers of management — the middle-class. In their place, they are hiring at the very low end and promoting at the high end. Senior management compensation is up nearly 25% this year ($9M for the average S&P 500 CEO), to levels higher than in pre-recession days, according to executive compensation research firm Equilar.

Continue reading at:  http://blogs.hbr.org/cs/2011/05/americas_vanishing_middle_clas.html

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