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The Smile Curve and the Future of the Middle Class

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smile-curveThe smile curve is an idea came from the computer industry, but it applies broadly. It’s a recognition, in graph form, that there is good money to be made (or more value to be added) in research and development, and, at the other end, in marketing and retailing.

It’s also a recognition that there is almost no profit to be made, except in high volumes, in the middle areas of manufacturing (assembly or shipping). This has hurt the American middle class because we used to be a manufacturing nation. Yet today, even where manufacturing is strong, it does not usually pay well.

It’s one reason so much factory work has gone overseas (especially textiles and assembly). In the early stages of a product, there is good money in the middle, but when it becomes common to make a car or a computer or a vacuum cleaner, then the value of manufacturing goes down, as we all know.

For example, Vera Bradley, maker of colorful quilted handbags and luggage, recently announced that it would close its plant in New Haven, Ind., putting about 250 employees out of work last May. The company has global sales of $509 million and has plans to grow to one billion in sales by 2019. Yet workers in assembly and manufacturing are the low point on the value curve, which means that if you can get it done cheaper, you will. Assembly can be cheap.

Vera Bradley claims that its U.S. assembly operation costs 90% more than factories in China and other nations (Fort Wayne Business Weekly). Those in the middle of the smile curve are paid poorly because they are so easily replaced. Imagine if a lawn service wants to cut your lawn for $40, but there is another service that will do it for $35. Then the neighbor kid comes to your door and offers to mow it for $20. And the next week, four more neighbor kids come to your door offering to cut it for $20.

Who do you pick? For Vera Bradley and other American companies, all those “neighbor kids” live overseas.

It has 2,700 specialty retailers that carry its brand, plus they opened 27 new stores of their own. Are there any Vera Bradley jobs left in America? Not any assembly jobs, but there are still about 600 workers in Fort Wayne that run the company. They had profit of $38.4 million last year, and shifting the assembly overseas will save the company about $12 million annually. There was controversy in 2008 when Vera Bradley decided to end its relationship with area job shops that employed about 540 people. The tax abatement that they were granted was based on the idea that they would employ 500 in Fort Wayne. Vera Bradley cut 100 in late 2014 and is eliminating the reaming 247. 

All of this is simply to remind us that as we move ever closer to a knowledge economy, we will see middle-class jobs will move to both ends of the curve. As we seek to align our future efforts and creativity with the needs of those around us and the economy at large, it raises a series of questions that we ought to be prepared to answer.

Needless to say, if your granddaughter is designing purses for Vera Bradley, it’s probably still a very good job. If she’s making their handbags and luggage, however, she’s probably on her way out.

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John Teevan After growing up in Chicago and graduating from Princeton (economics) where he became a Christian, John Teevan focused on ministry for 35 years. His interests in social action developed through that era, and now he leads in starting urban college sites, including one in Detroit, for Grace College. He also is the executive director of and has taught in Grace's Indiana Correctional Education program. Grace has contracts to provide education in the northern region of Indiana's state prisons. Fairly well-traveled because of his mission interests, he and Jane live in Winona Lake, Indiana. Their three grown son have lived and worked around the world.

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