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Hollowing Out

Updated on April 10, 2024
Article byPriya Choubey
Reviewed byDheeraj Vaidya, CFA, FRM

Hollowing Out Meaning

Hollowing out is a phenomenon whereby a nation’s manufacturing sector or middle-class job opportunities deplete due to the shift of producers and manufacturers towards cheaper alternatives. Hence, middle-class households often convert into working and lower class, or sometimes upper class, while the wealthy class becomes wealthier.

Hollowing Out

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Thus, such a process hinders economic growth and broadens economic inequality in the country. The most common reasons for job polarization are companies replacing human resources with machinery. They do this by adopting labor-saving technology or outsourcing production activities overseas. Another major cause is the change in demographics, such as the cost of living, i.e., healthcare, housing, education, etc.

Key Takeaways

  • Hollowing out refers to the erosion of middle-class or intermediate-level jobs over the period due to changes in manufacturing methods or location.
  • The major causes of job polarization are technological advancement, outsourcing or offshoring of manufacturing operations, globalization, cost inflation, and regional economic disparities.
  • It leads to economic inequality, wealth concentration, income inequality, and intermediate-level job loss. It also leads to an increase in low and high-level jobs and limits economic growth.
  • However, government policies and measures can drive the positives out of hollowing out by ensuring the skill development of the middle class to improve their living standards.

Hollowing Out Explained

Hollowing out effect refers to the decline or loss of certain economic activities or industries within a region or country, subsiding middle-class jobs. This phenomenon is often associated with shifting jobs, capital, and resources from one area to another. It can also be through streamlining the process through automation. Many developed nations and economies like the USA, Japan, and China have faced hollowing out. Even countries like Bangladesh and India have witnessed the same scenario. A significant shrinkage in the US manufacturing jobs was seen in 2020.

Government policies, economic conditions, and the ability to adapt and respond to changes can influence the long-term impact of job polarization on an economy and its communities. Moreover, economists believe that such a process can be channeled toward middle-class workers’ skill development. This could improve their social status and help them secure high-level positions.

Causes

Hollowing out takes place over the years. It results in the contraction of middle-class jobs while expanding high and lower-class job opportunities. This is due to the following reasons:

  1. Technological Change: Rapid technological progress or advancement has revolutionized industries and automated various processes, which has displaced human workers. Industries relying heavily on manual labor are particularly susceptible to job polarization as automation replaces middle-class jobs.
  2. Globalization: Globalization has facilitated the integration of economies worldwide. As a result, industries have been relocating to countries with lower labor costs and more favorable business environments. Companies may opt to move their production facilities or outsource specific tasks to take advantage of cheaper labor. This might lead to the hollowing out of industries in their home countries.
  3. Offshoring and Outsourcing: Companies often shift their operations to nations fostering lower labor costs and fewer regulations or government intervention to reduce costs. This can result in job polarization in industries in their home countries. This is because products and services are relocated to locations where resources are more affordable.
  4. Regional Economic Disparities: Economic disparities between different regions within a country can contribute to the hollowing-out phenomenon. If certain areas experience ongoing economic decline or need more infrastructure and resources to attract businesses, industries may concentrate in more prosperous areas, leaving other regions hollowed out.
  5. Cost Inflation: With the increasing cost of living with a rise in fuel, education, houses, medical care, etc., the middle-class group is slowly hollowing out into the lower class.

Examples

Let us check out these examples to understand the hollowing out effect in economics better:

Example #1: San Francisco Hollowing Out

Amid rising crime post Covid 19, the brutal killing of the Cash App Founder, Bob Lee, has raised concerns for San Francisco entrepreneurs. The city, a top tech hub in Northern California, faces job polarization, with many people becoming homeless and flooding office vacancies. This is because the entrepreneurs are moving out of the city to establish businesses in safer regions.

Example #2: Japanese Industries Hollowing Out

In 2013, Japan witnessed a hollowing out of its industrial sector, taking it to the verge of de-industrialization. The industries operating in the country faced various issues such as uncertain electricity supply, high cost of importing energy, appreciation, and shrinking domestic market. Hence, most of these companies outsourced and offshored their manufacturing operations overseas in search of better business opportunities. 

Effects

Job polarization usually leads to an adverse impact on the economy of a nation. It erodes middle-class jobs creating a disbalance. Following are the various negative consequences of this phenomenon:

  1. Middle-Class Job Losses: As companies move their manufacturing or production operations to another country, middle-class workers may face unemployment or seek new employment opportunities in different sectors, potentially leading to economic hardship and social dislocation.
  2. Conversion to Working and Lower Classes: Loss of jobs means lost earnings for middle-class workers, while the remaining positions may experience stagnant or declining wages, impacting their standard of living and pushing them into the lower and working classes.
  3. Wealth Concentration and Income Inequality: When companies move their facilities to more competent locations or attain production efficiency by replacing humans with machines, their earnings rise tremendously. Hence, the wealthier section of society becomes wealthier while the middle class becomes poorer.
  4. Economic Inequality: With the erosion of middle-class jobs, the gap between the higher-class rich and the lower-class or poor widens, creating economic inequality in the country.
  5. Limits Economic Growth: Hollowing out causes the economic decline of regions or countries that heavily rely on the affected industries. As jobs and investments move away, local economies may experience reduced productivity, lower tax revenues, and a decline in overall economic activity.
  6. Skill Erosion: When key industries hollow out, the loss of jobs and reduced investment can lead to a decline in the pool of skilled workers in the region. This can have long-term consequences, as the loss of specialized knowledge and expertise may hinder future economic development and innovation.

However, some economists emphasize the positive aspects of such a process as they believe job polarization negatively motivates the affected class to improve their skills and develop themselves into valuable resources to secure high-paying jobs and improve their standard of living. Simultaneously, with advanced technology and overseas manufacturing, customers can avail of more competent products or services at lower prices.

Frequently Asked Questions (FAQs)

1. What is the impact of hollowing out on the future of the labor market?

Economies worldwide have witnessed the labor market hollowing out with the automation of the manufacturing process over the last two to three decades. Hence, it resulted in the erosion of middle-level jobs, leaving the market with lower or higher-level positions.

2. What is hollowing out of state?

Hollowing out of state refers to a concept within political science and public administration that characterizes a situation where the government or state institutions decline capacity, authority, and effectiveness. This phenomenon suggests that the state is progressively becoming weaker and less capable of fulfilling its traditional roles and functions.

3. Is hollowing out in economics good or bad?

According to a group of economists, the hollowing out brings labor market efficiency and structural transformation against potential job losses and regional disparities. Governments often aim to mitigate adverse impacts through policies that support retraining, job creation, and regional development, ensuring more balanced and inclusive economic growth.

This article has been a guide to Hollowing Out and its Meaning. Here, we explain the topic in detail, including its effects, examples, and causes. You may also find some useful articles here –

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