Hollowing Out

A phrase used to describe the loss of large numbers of middle-class, mostly blue-collar, jobs

Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.

Start Free

Written by CFI Team

What is Hollowing Out?

Hollowing out is a phrase used to describe conditions and trends in the economies of developed nations that are the result of many middle-class, blue-collar manufacturing jobs being outsourced to developing countries. The outsourcing, or “offshoring,” of both manufacturing and low-level service jobs, is considered one of the predominant trends in the global economy over the past 20 to 30 years.

Hollowing Out

The term “hollowing out” has also been applied, at least in the United States, and to some extent in other countries such as Japan, the UK, and Germany, to the shrinking middle class. The polarization of income – with more and more people either moving toward earning substantially more money or toward making substantially less money, but with fewer people in the middle between those extremes of rich and poor – has become increasingly evident in recent years among the world’s most developed economies.

Summary

“Hollowing out” is a phrase used to describe the loss of large numbers of middle-class, mostly blue-collar, jobs.
The term is also used by economists to describe the growing phenomenon of income polarization – that more people are moving toward either making well above average incomes or making well below average incomes
Jobs in the United States that provide a middle-class income has seen virtually no net job growth since 1990; new job growth is highest amongst jobs that pay lower than average wages.

Globalization, Automation, and Offshoring

The number of manufacturing jobs in the United States peaked in the late 1970s, and it’s been in decline ever since. Nowhere is the fact more evident than in the remnants of the city of Detroit. For decades in the mid-twentieth century, Michigan was home to American automobile manufacturing, and Detroit, in particular, was home to a large population of well-paid, blue-collar workers in the industry.

But those days are long gone, as are many former residents of Detroit. Large swaths of residential neighborhoods are now nothing but row upon row of unoccupied houses.

It’s a similar picture in many of the Pennsylvania towns that were once the heart of the steel industry, but that now more closely resemble ghost towns of the old west.

Large parts of both the steel industry and automaking, along with many other manufacturing industries, have been outsourced to developing nations, where skilled labor can be acquired much more cheaply. The number of manufacturing jobs available in the U.S. in 2020 is roughly half of what it was in 1980.

However, it’s not just jobs going overseas that have “hollowed out” manufacturing industries in the US and other developed nations. Increasing automation has drastically reduced the number of employees required in manufacturing operations. It’s the robots, more so than cheap labor overseas, who’ve “stolen” the jobs of many people who once thought their union contracts virtually guaranteed them a secure, well-paying job for life.

Because the majority of manufacturing jobs provided their holders with a solid, middle-class income, the loss of those jobs has significantly eroded the middle class.

The Hollowed Out Middle Class

There’s no denying the fact that the middle class in the United States and other developed nations has been shrinking. The argument is over whether this indicates that things are getting better or getting worse. Is everyone just getting richer, or is everyone getting poorer?

The subject of “income inequality” has become a political hot button. The Left screams for the taxman to take more from the rich and give it to the poor. The Right pounds the table with the assertion that the free market assures the overall best possible outcome for the nation’s economy and its people. For example, they point to the way that less expensive manufacturing through outsourcing has led to lower product prices for consumers.

It’s important to grasp the difference between income inequality and income polarization. Income inequality refers to the disparity between what the highest earners in a society make and what the lowest earners make. Income polarization, on the other hand, refers to the amount of movement that occurs from the midpoint of a chart of income distribution toward either of the distribution’s extremes – either the upper end or the lower end.

It’s popular to chant the refrain, “The rich are getting richer, and the poor are getting poorer,” meaning that the small class of people at the top – the “one-percenters” – are faring increasingly well, while all of the rest of us are faring more and more poorly.

The Truth about Rich and Poor

The reality of rich and poor in the United States, as in most other developed nations, is, of course, quite a bit more complex than, “The rich are getting richer, and the poor are getting poorer.”

The Hamilton Project, an economic initiative created at the Brookings Institution in 2006, did an extensive statistical analysis of the U.S. economy, as part of its vision to develop innovative economic policies designed to advance prosperity and economic growth. One of the statistical trends the Project uncovered reveals that a substantially higher proportion of new jobs being created are low-income jobs – jobs that, on average, pay less than $10 an hour.

While other economists stress the importance of a college education as the key to higher-paying employment, the Hamilton Project points out that the overwhelming majority of job growth is not occurring in the area of high-wage jobs for college graduates, but is instead happening in the arena of low-wage, mostly entry-level service jobs that are essentially “unskilled labor” jobs.

Another interesting statistic the Hamilton group discovered is that job opportunities for middle-income jobs – jobs that require some skills and learning, but not necessarily a college degree – have been relatively stagnant since around 1990. Middle-income jobs account for, by far, the lowest percentage of jobs among all available jobs.

Conclusion

Thus, it appears that the bottom line is that the middle class has indeed been hollowed out in recent decades, by the combined forces of outsourcing and automation, and that it is continuing to be hollowed out. There are simply fewer jobs available that offer a middle-class income.

Individuals with a bachelor’s degree or post-graduate degree can hope to earn elevated wages, salaries that fall more into the upper-middle class to “rich” range. But for those who lack higher education or special skills, the trend is toward jobs that pay less than a middle-class income.

To put it another way, the value (as evidenced by wage offered) of the most desirable skill sets among job seekers is rising. However, for all those whose work falls outside of that performed by the small segment of the population with such advanced skills, the value of their work – in terms of wages offered – appears to be declining.

Learn More

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful: