The technology aspect of the income inequality problem

Over the years, there have been quite a few posts on this blog regarding the festering problem of income inequality. As the share of national income going to the top 10% has increased, pay has stagnated or declined for most other workers. As the national income share going to capital has increased, labor’s share has declined. Some analysts think the shift in income is partly due to the wave of economic disruption set in motion by developments in computing, information and communications technology.

In America, economic output per person grew at an average of 2.7% a year between 1939 and 2000. From 2000 onward, the annual gain in productivity was less than 1% a year. The decline appears to have occurred about the same time the advances in digital technology began to affect the economy. Economists are not sure at this time if the digital revolution will create enough new jobs to make up for the job losses it has caused. A recent study of over 700 occupations in the U.S. indicates that over 47% of employment in America is at some risk of being automated out of existence during the next 20 years.

The spread of income inequality worldwide has many implications. Slightly less than one percent of the world’s adult population owns wealth exceeding $1 million in value. This small group controls 44% of the planet’s wealth. Slightly over 29% of the planet’s adult population has wealth ranging in size from $10,000 to $1 million. This population segment controls a little over 53% of worldwide wealth. At the bottom, with less than $10,000 in wealth, is the remaining 70% of the adult population. They hold slightly less than 3% of world wealth.

In the U.S and other industrialized nations, the share of income earned by the top 10% has been steadily increasing. Around the world, the workers without highly specialized skills have been on the losing end. The changes brought by new technology have continually expanded the range of work that can be automated, lessening the need for workers.

A growing number of analysts believe that as cheaper capital goods continue to automate jobs, the income level of most workers will continue to decline. They fear that 85-90% of workers could be facing stagnant or declining incomes as more jobs are automated out of existence. As the falling costs of robots makes automation more attractive in developing nations, what will replace the process of industrialization that created new opportunities in the past?

Thomas Piketty, a leading authority on inequality, thinks economic policymakers should be refocusing on income distribution programs. Although he acknowledges that the great fortunes of today are mostly in the hands of the working rich and not the idle gentry of earlier times, the developing income distribution problem is similar in nature to the earlier one. Other economists are not so certain. They think that the problem is too little innovation rather than too much. As they see it, a lag in employment usually follows big economic change. The lag is then generally followed by growth in employment. They believe the revolution in technology will still create large numbers of new jobs, jobs of the type nobody has envisioned at the present time.

The fear of job-destroying technology has always accompanied the process of industrialization. In the past, the process has created new jobs in new fields as old jobs disappeared. In 1900, 40% of Americans worked in agriculture and slightly over 40% of a household budget went to pay for food costs. Over a 100 year period, agricultural employment fell to less than 5%, food costs declined and a host of jobs in new areas were created.

There are reasons to worry because governments have been slow to react when faced with disruptive economic change. The needed investments in education, infrastructure and social safety nets have been slow to get implemented. Both government and the private sector need to face the fact that retraining less-skilled workers in a rapidly changing economic environment is a complicated task.

Technologies do not have agendas as they destroy the jobs of some people while making others rich. The problems generated by the current wave of technological change will require governments to mitigate the downside effects. Although it is rarely mentioned in current political discussions, the role of technology in fostering income inequality is going to be a factor in political decision-making for years to come.