01/04/2015 11:56 pm ET Updated Mar 06, 2015

The End of the American Middle Class?

Are we destined to be techno-serfs serving a ruling elite of information oligopolies?

In the brave new world envisioned by pundits, we will all be micro-entrepreneurs with personal brands -- each of us controlling our own destiny, selling our services into digitally enabled markets. Traditional employers and wage slavery will be extinct.

Unfortunately, the companies of this new economy aren't philanthropic do-gooders. They are profit-maximizing corporations, with incentives (and increasingly, the market power) to pay their personnel (AKA independent contractors, euphemistically called micro-entrepreneurs) as little as possible. This could lead to a future with a small affluent elite, and the rest of us reduced to techno-serfism.

Economists (see, David Autor and David Dorn (2013); Maarten Goos, Alan Manning, and Anna Salomons (2014)) have noted a long-term hollowing out and polarization of our labor markets due to offshoring and automation. The result is: rapidly increasing demand and productivity for high-skilled "knowledge" workers (e.g., software developers); some increased demand for certain types of low-skilled service workers with jobs difficult to automate or offshore (e.g., home health care workers, waitressing); and collapsing demand for middle-skilled workers with jobs easily automated or offshored (e.g., assembly line workers in manufacturing). All of which helps explain the increasing levels of income inequality we have been experiencing in the U.S. (see, Wojciech Kopczuk, Emmanuel Saez and Jae Song (2010)).

Further, the companies of the Digital Economy (e.g., Airbnb, Amazon, Apple, Google, Facebook, Uber) tend to be oligopolies (which gives them huge negotiating power with smaller businesses, workers and micro-entrepreneurs) due to:

  1. Network effects - Consider Uber, as one example. Uber drivers are micro-entrepreneurs, not employees. Drivers want to sell their services into whichever market has the most people looking to purchase a ride. Riders want to use the market with the most drivers looking to sell their services. This tendency for both parties to flock to the most liquid market, typically results in oligopolies or monopolies.
  2. High fixed costs - Continuing with the Uber example, its business model has very high fixed costs - substantial upfront investment is needed to create the markets, develop the software, and accumulate a critical mass of buyers and sellers. Estimates are that Uber is spending billions to create this infrastructure, and the very size of its investment dissuades competitors.
  3. Low marginal costs - Once a Digital Economy company is up and running, the marginal cost of a transaction is small. The transaction cost incurred by Uber when a passenger takes a ride (exclusive of the driver's fee) is essentially zero. Uber now operates in over 200 markets, so a competitor challenging Uber in one market risks a price war Uber will almost certainly win -- because it can make extra profits in markets where it faces less competition. Further, many Uber users utilize its service in multiple markets. Even if a new competitor enters just one market, a user might not switch because of the convenience of dealing with one company nationally.
  4. Information asymmetry - Companies like Uber, Amazon and Airbnb accumulate information about both their suppliers and users, which they can use to craft optimal pricing strategies (or, to dig up "dirt" on opponents and/or manipulate our emotions). The Amazon Prime service is a good example of a pricing strategy (high volume customers prepay to receive a bundle of services) that locks in customers and dissuades future competitors.

In their pursuit of profit, Digital Economy oligopolies have every incentive to use their increasing power to commodify everyone they buy from -- and, this process will potentially impact more and more of the economy.

For example, Amazon (which now controls about half the U.S. book market) negotiates aggressively with publishers and has used its market power to punish non-cooperative companies (e.g., Hachette books were difficult to buy on Amazon during their dispute).

Amazon has also been criticized for its treatment of its warehouse workers (most of whom aren't Amazon employees, but temps hired via agencies). If Amazon manages to drive all publishers out of business and deals directly with independent writers and editors, Amazon will have the incentive and market power to also turn writers and editors into low paid commodity content providers.

On the consumer side, in a world where Uber is a quasi-monopoly in car service transport (or Amazon has driven most of America's publishers and booksellers out of business), these companies will also have considerable pricing power when dealing with their customers.

So, we have a plausible future where profits, information and political power (the leading companies of the Digital Economy already invest heavily in politics) increasingly accrue to a small group of technology-driven oligopolies. And the rest of us are reduced to commoditized micro-entrepreneurship (i.e., techno-serf) roles, paid the minimum the Amazons of the world calculate as necessary (given our lack of alternative employers) -- but paying the maximum these oligopolistic powerhouses can charge.

Welcome to our potential future -- is wage slavery starting to look good?

Steven Strauss is the John L. Weinberg/Goldman Sachs & Co. Visiting Professor at Princeton University's Woodrow Wilson School and an Adjunct Lecturer in Public Policy at the Harvard Kennedy School.