You read in the papers about your country’s economy growing at a healthy pace. All your political leaders and business leaders tell you that the year will be great. Your boss at work tells you that there is a lot of work that needs to be done as it will be an exciting but busy year ahead. And so one is filled with lots of optimism for the year. Then one by one we all get reality check after reality check. The pay increase was not that wonderful and even the bonus fell short of the optimism. Then the price of things starts to go up. One starts to feel the financial squeeze earlier in the month and before long, you are hoping for pay day, even though the last pay day just flashed by. A lot of workers out there, the middle and lower classes, feel this way.

We already know the rich are getting richer. This is especially so in a Capitalist economy. Money grows money says the man sitting in the Kopitiam or the Coffee Shop. This common wisdom is not wrong given the capital intensive nature of most businesses today. Capital always brings scale and given how rampant information flows these days, it is easy for bigger companies or wealthier individuals to easily duplicate the business ideas of smaller companies or poorer individuals.

Imagine you have sunk your life savings to produce a truly unique restaurant with some very unique renovation, dining concept as well as great food. You do well so well in your first week that newspapers and internet food sites are buzzing about your restaurant. Some businessman sees the pot of gold and quickly moves to duplicate your business idea.

In terms of renovations and location, he can easily outdo you as he has lots of capital lying around, waiting for viable use. In terms of dining concept, he sends his operational managers to dine in your restaurant to fully understand your setup. And for the last blow, he steals your head chef by offering him two to three times what he is making at your restaurant.

His contractors work day and night to get the renovations done at lightning speed. And so within a month, your restaurant is no longer unique. The crowd is at best divided between your restaurant and his. Worst still, he gets better reviews from the food critics as his décor is better, his food tastes strangely similar and the service level is better. Of course that is because he pays his staff about 20% above what you pay yours.

The nightmare has only just began when you start to see your receipts and customers dropping. You are working overtime to compensate for the loss of your head chef. The final body blow being the fact that you hear that the businessman is planning to open another outlet in a month or two.

This is just a quick example on the power of capital availability. So no matter how innovative the poor man is, he will never be able to out do the rich man. And in short, this means that the rich get richer and the poor should just end up working for the rich.

If you need further evidence to convince yourself about whether the rich are getting richer, I have written the economics explanation to this phenomenon in a previous article. And of course it is important to remember when we talk about rich, it is not just the highly paid workers, there are also many rich businessmen or just rich folks who do not pay much income and thus much income tax.

So what is wrong with being a worker. According to Ronald Coase, a worker is not that badly off as he trades in a smaller reward for his work in exchange for stable and consistent income.

Being a worker means that the worker only focuses on his job and does not have to worry about bigger things like the overall profitability of the company or accountability to shareholders. The boss or business owner will have to fret day and night to ensure that the company is profitable or the shareholders are satisfied.

Of course the reward for the boss or business owner is very different. A worker produces a value in the work that he or she does. This value may or may not be absolutely quantifiable but typically, the worker is only paid about 10 percent to 20 percent of this value that he or she brings to the company.

For support staff this is hard to quantify given the very subjective nature of work contribution. But this is rather clear when you look at remuneration structures of sales staff. A sales person can ask for as high a salary as he or she wants, but he or she knows that the sales quota will be a corresponding multiple of his or her salary.

There is no right and wrong about this form of "exploitation". Slaves in the past work for a meagre amount of pay. But if this pay affords us a comfortable lifestyle, thanks in part to materialism and technology, then perhaps we are better off than slaves in the past.

But the tradeoff between stable and lower income as compared to higher and more volatile income is in principle fair. What tips the scales though is when the pay of the worker tends towards the 10 percent of value mark.

What happens in the mind of the boss is that of the perceived value the worker gives him and what percentage of that value he is paying the worker. This is something the boss is not going to ponder every day or every month unless the balance is terribly off. The review comes annually at salary adjustments or when there is a need to review/control cost.

A rational entrepreneur will always maximise his profits by minimising his costs. His workers pay are a labour costs. If the entrepreneur can maintain the same level of revenue but reduce his costs, then his profitability is increased.

Of course it might be very short term thinking to underpay the staff to enhance profits because they might leave the company. This will then affect long term profitability. But it is common that the boss will not react to increasing the pay of his workers until he knows they are leaving.

So really, unless you are providing huge and increasing value to the company and that you are irreplaceable, it is unlikely that you can expect generous pay increases.

This is of course what distinguishes a normal worker from a knowledge worker.

Even for the knowledge worker, he "suffers" to some extent from this phenomenon. But his job mobility and higher irreplaceability ensure that the boss values him even more.

So what happens is that the rich get richer. But more importantly the poor and the middle class do not improve themselves financially to the same extent. And this very simply results in an increase in income inequality.

And over time, as costs go up, as they always do, this slower gain in income results in a deteriorating standard of living. The rich instead have a higher standard of living and enjoy all the best luxuries in life. The poor languish in a dismal standard of living but depending on their government, they could have some rebates, subsidies or handouts to make life a little less dismal.

Most people have sympathy for the poor but in truth, it is hard for a country to be rid of the poor. Not because of a lack of resources for all, but because it takes a great deal for one to share his wealth with those around him until the point where they are all equally well-off.

So there will always be a certain amount of poor in society. And so we should not overly blame capitalism and rich getting richer for that. The two acerbate the problem, but without both, we still would not be able to eradicate poverty.

The more glaring issue is what I call a middle class crunch. The middle class tend to be a group of more responsible and more gainfully employed folks who are trying to make a decent living. Whether they be workers or small time businessmen, they typically put in an honest shrift.

But if the middle class get drawn into a situation whereby despite their hard work and endeavours to make a living, they end up experiencing a lower standard of living, then I think this deserves more grievous protest.

Imagine your boss asking you to put in more and more hours at work, but telling you that he cannot increase your pay that much for various reasons. One of which being that costs in the company are getting too high and profitability is being affected.

If this middle class crunch is allowed to play itself out to a large extent, then this could possible lead to rather dire social situations. At a certain point, workers cannot work much harder. Work stress will spill over to personal life and cause all sorts of problems, like high divorce rates or neglected kids. Instead of social graces like being charitable or being gracious, folks could end up being rather self-oriented and selfish. And really you cannot blame them for that, because if your income does not cover all your expenses, then you have to start cutting some more ancillary costs.

Given that the majority of any country are usually made up of the middle class or some call the working class, a long term middle class crunch will eventually lead to upheaval in one form of another. Of course when a country has democratic elections, then the need for bloody revolutions is replaced.

As with most if not all things in life, there is no right and wrong. It is all about costs and benefit. In this case, it is not just economic costs and benefits, but more social costs and benefits of which the economic costs and benefits are subsets of.

In a society where the rich get richer, the poor will suffer as all poor do and the middle class will face a crunch. When this spirals out of control over the long run, then something radical will happen.

Any opinions or comments ?