Welcome to Tipping Points, a new feature for Quartz members about the financial and economic risks we face. Each week, Quartz’s Allison Schrager, a trained economist, will examine how a different event, trend, or condition may reach the point where it impacts our lives (for good or bad). Allison will highlight risks that have been hiding in plain sight, but have the potential to upend entire economies.
We can’t predict the future, but we can better prepare for it. This week, she’s looking at the rural/urban divide.
The division between rural and urban areas in North America, Europe, and Asia is one of the most destabilizing forces currently facing policy makers and their citizens. Educated workers in cities are surging ahead, enjoying income growth and higher standards of living. Meanwhile, life is stagnating in rural districts, which tend to be older and less educated. It’s not just a source of political division and populism, leading to once unthinkable election outcomes. It also threatens to strain economies, leading to lower growth and increased inequality.
Conflicts between rural and urban populations are erupting all over the world. The gilet jaunes (yellow vest) protests of France began with rural workers forced to drive long distances for work, couldn’t afford a fuel price hike, and were generally frustrated by the policies they believed benefited urban elites at their expense. The IMF warned that a growing gap between rural peasants and upwardly mobile city-dwellers in China poses a serious risk to its long term stability. In the US, the economic divide continues to widen: In 1980 the per capita income of the 10 richest metro areas was 1.4 times greater than income in the 10 poorest, by 2014 it was 1.7 times bigger. In 2016, 35% of 25- to 54-year-old men in Flint, Michigan did not have a job—only 5% didn’t in Alexandria, Virginia.
Why it’s happening
To a large extent, the rural/urban divide is a result of the new technologies and globalization transforming the economy. Economic change often benefits the better educated and adaptable first. The industrial revolution brought Dickensian squalor along with tremendous wealth creation for the Vanderbilts and the Astors, and this time is no different.
The inequality of the 19th century eventually gave way to a more prosperous, equitable economy because of advances in education, redistributive policies, unions, and just the natural innovative cycle (pdf) playing itself out. Innovation can increase the value of both capital and labor, but sometimes labor is not rewarded right away, either because the market takes time to adjust or workers must learn new skills. Between 1880 and 1980, America experienced a rapid convergence in per-capita income levels and profits were more equally shared. Factories moved from urban centers to more remote locations because they needed cheaper land and labor, and offered prosperity to the masses.
Now we are in a new innovative cycle, transforming developed markets from industrial to knowledge economies. Rural citizens are left behind because innovation and wealth creation doesn’t happen there, for many reasons. There is less of a premium on physical space—a computer and a desk takes up less room than the production line—so firms have less need to be where land is cheap. Globalization means firms have less need for domestic manufacturing labor.
Technology also favors the educated who prefer living and working in bigger cities. Previously, the aspiring upwardly mobile might come to a city to be educated, work a few years, and then move to a smaller city or suburb. Now they are more likely to stay in the city and raise families there. Urban studies theorist Richard Florida calls city dwellers a “creative class,” drawn to cities because of the opportunities they offer. Current technology requires a constant relearning of skills and networks of connected acquaintances that can help you find new jobs and keep you up to date on the latest skills. In order to attract top talent, the most innovative and profitable companies must be located in creative clusters.
Why it matters to the economy
People who live and work in cities are benefitting from the fruits of globalization and innovation, while lower skill workers in the countryside are falling farther behind, hardening economic divisions. Cities will offer better education and connections, while children in rural counties will have fewer opportunities from birth, undermining economic mobility and furthering resentment and division.
Simply moving to the city is not enough to share in the wealth; education is necessary, too. This explains in part new research from economist David Autor that suggests middle skill jobs—like administrative and clerical work—are disappearing in cities for uneducated Americans. Once, a woman with only a high school degree could move to the city and make a good living working as a secretary. Now those jobs are disappearing because of automation and outsourcing. With only low-wage jobs available, it makes more sense for her to remain in a rural county, where she’ll earn a similar wage but pay lower rent.
The impact of the economic divide can already be felt politically, with the election of US president Donald Trump, the UK’s vote on Brexit, and riots in France. Rural voters favor politicians whom they believe represent their needs, and often the positions of these politicians are distasteful to educated urbanites, which adds to their disdain, and divisions deepen further. Political instability is bad for the economy, as it creates uncertainty and harmful populist economic policies such as restraints on trade or punitive taxes on business. Class resentment can undermine the population’s tolerance for redistribution, reinforcing a vicious cycle where the poor stay that way.
The split may be particularly harmful to a still-emerging China, leading to an under-investment in education and infrastructure in rural areas or causing instability that threatens reforms to liberalize the economy and society.
There are other direct economic threats. Inequality isn’t just unfair, it’s inefficient. People in rural areas could become an untapped economic resource, under-utilized and under-educated. If the next Steve Jobs (who was born in the Bay Area) is born in rural Arkansas, he has a much lower chance of becoming the next Steve Jobs.
Societies overcame the divisions created by industrialization through a combination of policies that established a welfare state, better access to education, and market solutions. Odds are a new, better equilibrium will be reached for the tech economy too. But the process could be painful.