The M-shaped society

We tend to assume that income distribution in developed societies follows a bell-shaped curve, with the majority of the people falling in the middle, and some very rich or very poor people at the ends. It’s natural, given that in probability theory, the normal distribution is also bell-shaped.

While that was true in the good old days, welcome to our new world, where the bell-shaped distribution curve has been replaced by an M-shaped one.

The “M” shape represents the phenomenon whereby the middle class is being hollowed out, with most of its members falling into the lower classes and a lucky few making it to the upper classes.

The idea of the M-shaped society was first coined in the mid 2000s by the noted Japanese management thinker, Kenichi Ohmae, to describe the gradual decline of Japan’s middle class in the post-bubble years.

(Unlike Ohmae's other books, this one hasn't been translated into English.)

Since then, it has become popular in Taiwan and Hong Kong, economies that are facing similar challenges as Japan in the post-boom years—not surprisingly, since they all followed Japan’s export-led growth model.

Japan, Taiwan and Hong Kong were the first foreign movers in China. Whereas each of these countries had the advantage of low-cost labor early in their growth trajectory, with prosperity and rising salaries, they had to seek cheaper manufacturing elsewhere. China, because of a common culture among other reasons, was the natural choice.

As the local manufacturing sector imploded in the nineties, and without a ready-made knowledge economy to take its place, these societies were also among the first developed economies to recognize the negative impact of globalization.

In Taiwan, 2015 figures show the top 20 percent of households earning 6.06 times what the bottom 20 percent made. In Hong Kong, the top 10 percent of households earned 29 times the income of the lowest 10 percent. (Hong Kong’s Gini coefficient is much higher than India’s, to give you a comparison.)

The M-shaped society is distinguished by certain characteristics. Demographically, the population is ageing and family sizes are shrinking, as fewer people can afford to get married and/or have children.

Other telltale signs include stagnant wages, increasing compensation for top management and rising prices. These are accompanied by an increase in sales of luxury goods, including high-end real estate. Products for high-income consumers flood the market, but the average disposable income for the middle and lower classes keeps declining.

Significantly, there is also a fall in the value of higher education degrees, the time-honoured tools of social mobility.

A recent Brookings Institute report on Taiwan cited a 2010 survey showing that only 25 percent of university graduates find employment related to their major.

And according to a study by the Chinese University of Hong Kong, the percentage of young university graduates getting hired as managers, administrators and professionals dropped from 82.5 percent in 2001 to 73.4 percent in 2011. More degree-holders have taken up clerical jobs, up from 11 percent to 18.2 percent during the same time.

At least part of the problem in both societies has been attributed to an oversupply of graduates. But the deeper issue is whether the fundamental meritocratic belief—that if you work hard, you can succeed—holds true anymore.

In light of these developments, it’s no surprise that both Taiwan and Hong Kong have seen the student-led Sunflower and Umbrella protest movements.

Even from a superficial reading, none of these events is unique to this region. If you look at newspaper headlines from the United States and Europe in the past few years, you will see the same issues. Underemployed millennials? Check. Unaffordable real estate? Check. Stagnant wages? Check.

What’s surprising is that given that Ohmae’s M-shape paradigm is so useful to describe what has been happening in the world in recent years, it’s practically unheard of outside East Asia.

Perhaps, if the western intellectual establishment wasn’t so insular, they would have paid attention and started discussing these issues earlier. Instead, it’s come to Trump and Brexit.