The Wider Picture: Technology & Inequality 

05

October, 2018

 

  • Statistics show that income inequality in developed economies has risen in parallel with technological advances in recent decades.
  • Is growing income inequality an inevitable consequence of the fourth industrial revolution? Or, are other social and macroeconomic factors at play?
  • The tech revolution is already making many jobs obsolete. Some solutions include reskilling the workforce and implementing policies for greater wealth distribution.

‘Technological advances have lifted millions out of poverty, but they have also created huge disparities of wealth in the world’s most developed economies.’

Most significant economic change creates winners and losers. Technology is no exception. Technological advances have lifted millions out of poverty, but they have also created huge disparities of wealth in the world’s most developed economies. The coming wave of automation, artificial intelligence (AI) and robotics will transform our lives and, in many ways, make them better and more convenient. It has the potential to free humanity of many of life’s mundane tasks and give us greater freedom to pursue more interesting and fulfilling work. However, it could also present several challenges, such as job losses and a further rise in wealth inequality.

A study by McKinsey found that the rate of this technological revolution, often dubbed the ‘fourth industrial revolution’, is happening ten times faster and on three hundred times the scale of the first industrial revolution. The pace of change raises important questions about the future. For instance, will it be possible to raise the standard of living for everyone whilst wealth inequality grows? Will technology destroy jobs faster than it creates them? And will the workforce be able to adapt to the demand for different skills?

Technology is accelerating the rich-poor gap

The technology revolution has contributed to an increasing concentration of wealth in the top 1% in the most technologically advanced countries of the world. This is partly because a technology-driven economy greatly favours a minority of highly skilled individuals by amplifying their talent and dramatically increasing their rewards (i.e. income).

In the US, where technology is most advanced, the gap between the top 1% and everyone else has been growing rapidly. According to a study by the MIT Technology Review, in 2010, the richest 1% of the population had 34% of the accumulated wealth. The top 0.1% had some 15%. A similar trend has been occurring in the UK. Since 1980, the share of total income received by the top 1% of British earners almost doubled to about 13% by 2011.

 

Source: Economic Policy Institute, 2015

Silicon Valley best demonstrates the growing gap between the poor and the super-rich.  There, technology is evolving faster than anywhere in the world and yet income inequality and poverty are high. California has the world’s eighth largest economy but has the highest poverty rate of any US state. This is because the wealth is concentrated in the 20-25% who work in high-tech.

Rising wealth inequality is worrying for a number of reasons. It can undermine the fairness of political institutions by giving the wealthy unfair access to lawmakers. It can hinder equality of opportunity and lead to a decline in economic mobility. Exaggerated wealth inequality can also fuel division in society; research suggests that there is a close link between wealth inequality and the polarisation of politics.

The fear of automation

A big fear about the future of technology is how it is reducing the need for human labour. Machines are substituting for more types of human labour than ever before. A study by Frey and Osborne at Oxford University predicts that 35% of jobs will be automated in 10-20 years. They also note that the impact of automation greatly varies depending on the profession; jobs that pay under £30,000 are 5 times more likely to be automated than jobs that pay above £100,000.

Technologies such as the Web, AI, big data, and improved analytics are already automating many routine tasks. Several white-collar jobs, such as in the post office and in customer services, have become obsolete. Meanwhile, the demand for low-skilled jobs that cannot be automated (e.g. cleaning and waitressing) has increased. This is often referred to as job polarisation; when several middle-class jobs are disappearing, job opportunities in both low-skill and high-skill occupations are expanding. Throughout the 2000s, the growing demand for low-skilled, low-paid jobs led to a decline in wages and therefore a worsening of income inequality in the US.

 

Source: Economic Policy Institute, 2015

Is technology destroying jobs faster than creating them?

There is a contentious debate about whether advances in technology will create enough new jobs and whether the workforce will be skilled enough for these new professions. Eric Brynjolfsson & Andrew McAfee contend that technological advances are destroying jobs faster than creating them, contributing to median income stagnation and growing inequality in the US and other advanced economies. ‘People are falling behind because technology is advancing so fast and our skills and organizations aren’t keeping up.’

However, many labour economists are sceptical. Several other plausible explanations, including events related to global trade and the financial crises of the early and late 2000s, could account for the lacklustre job growth in the West since the turn of the century. Richard Freeman, an economist at Harvard University, says ‘no one really knows’ if technology, or other macroeconomic effects, are to blame.

Furthermore, some economists believe that technological advances are leading to higher employment levels. A recent report by Deloitte found that between 2000 and 2015, while the UK experienced more than 800,000 job losses, almost 3.5 million new jobs were created. In these new jobs, the average annual pay was £10,000 more.

Where do we go from here?

The big fear is that all income growth will end up with employers and employees in the high-tech sector, leading to an even more unequal society. How can we mitigate this? There are many possible ways forward. These include implementing policies for greater wealth distribution, such as a universal basic income whereby citizens would be guaranteed a regular sum of money from the state. Others recommend government-led initiatives for upskilling and reskilling the workforce to fill the demand for new skills.

However, as MIT Professor David Autor argues, getting a good education is ‘the most powerful thing you can do to affect your lifetime earnings’. This is true more so today than ever before. In the US, the gap between median earnings for people with a high school diploma and those with a college degree was $17,411 for men and $12,887 for women in 1979; by 2012, it had almost doubled to $34,969 and $23,280. As we get better at automating routine tasks, the people who benefit most are those with the expertise and creativity to use these advances.

The evidence suggests that advances in technology are exacerbating wealth inequalities and that they will continue to do so in the decades to come. However, if you have the skills or have had a good education, the chances are that you will thrive in the new industrial age.

 

Written by Tanya Kekic. Edited by Abdi Buwe. 

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