An explanation for the middle class squeeze?
There is a lot of talk, especially in the U.S., of the middle-class squeeze. I wonder if it could be explained by increased unpredictability. It is said that the middle class is doing worse and worse, and that the differences within the middle class is growing too: Between the upper crust of it and the rest.
Nicholas Nassim Taleb talks about Mediocristan and Extremistan, two imaginary places where in one case your income is predictable and proportional to the amount of work you put in, while in Extremistan rags and riches are decided much more by chance. An example of a Mediocristan job that Taleb gives is a dentist.
Examples of Extremistan jobs could be I guess anything connected with speculation: Building an app for the Iphone app store, making bets on the stock market, relasing a video game, developing a new pharmaceutical and so on. If you do ten, or even a hundred of these projects it is not clear which one will make money, if any. At the same time there may be huge profits, somewhere, sometime.
Let's assume that the world has moved in the direction of Extremistan, and that the actual financial gain from work is much harder to predict. Let's then simplify a lot and say we can divide people into three groups, let's call them
- Squeezed middle class
- Upper middle class
- Upper class
The squeezed middle class are people who toil away in projects where it is unclear if they will give any profit and in that case how much. Because of this there is a risk premium associated with each project, and this is reflected in the salaries paid. The squeezed middle class are doing just as good work as a couple of decades ago, but it is much harder to predicted the actual value of their work, so salaries get depressed as a risk premium.
The upper middle class in this simplified model are then people that simply got lucky by doing a couple of successful projects.
The upper class has enough money to spread the risks and reap the rewards of a high risk/high reward environment