Hello
As someone with 0 economics knowledge but keen interest I keep hearing this term “middle class trap” and how it is bad for countries long term economy and its people. What does it mean and why is it harmful for a country’s long term prospects ?
Thank you
In: 467
Sometimes a poor country will become attractive to companies looking for low-cost workers. (I say *become* attractive, because companies don’t simply look for the poorest country and build there; the country also has to develop a combination of enough infrastructure, enough education, low enough crime, enough long-term political stability, etc. to be worth the risk of building there.)
When this happens, the poor country will have companies investing in manufacturing plants, etc. and creating jobs. Those jobs won’t pay well compared to minimum-wage in rich countries, but the wages will be decent-to-good for the country they are in, and in particular they will be a more consistent and dependable paycheck than a lot of other jobs (like seasonal farming work, etc.) in the country.
If this business does well, other businesses may decide to also build facilities there and create more jobs. The effect of this is that more and more people make a decent-to-good dependable paycheck and a “middle class” begins to develop.
However, this process can’t continue forever. If everyone has one of these middle-class jobs, then some company building a new factory has to have higher-wages to get workers to work at *their* factory. This wage competition is good for the workers, and many companies may find that the labor costs are still better here than elsewhere even if they have to compete on wages, but it does mean that labor costs increase – possibly to a level where it isn’t as attractive as it used to be so fewer new companies will decide to invest. This also means less new companies will be competing for workers, and so wage growth will eventually stagnate.
That is the “trap”. The country can’t simply rely on that economic growth continuing on forever – eventually it will hit a plateau.
Overcoming the “trap” is hard because the country essentially has to find a way to develop more higher-paying jobs… which it can’t do by simply continuing to be one-of-many “cheap labor” countries. It has to develop some way to do more high-value-add work. That may involve investing in education, infrastructure, or something, but they somehow have to develop enough capability to compete with already-developed countries on *something* important enough to gain those new jobs. And even then, it’s tricky because, even if they develop enough to keep-pace with the gradual advances in various kinds of manufacturing… they’ll still be keeping pace decades behind the cutting-edge stuff of the highly-developed countries… leaving them stuck in a “middle class” kind of development rather than ever competing at the cutting-edge of any industry.
Furthermore, investing in a way to actually compete at the cutting-edge is a much harder hurdle to surmount – both in terms of total investment costs as well as the difficulty of predicting the future of various industries well enough to anticipate future in-demand skills and infrastructure necessities.
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