Rising inequality cannot be explained or alleviated by technological change alone
It is perhaps not surprising that issues of distribution and inequality have begun to capture political, academic and public attention in a way that they did not prior to the financial crisis. If economies are contracting, or growing at historically low rates, then the issue of how the pie is divided becomes far more central than when it is growing strongly: growing inequality cannot be masked by broadly rising living standards.
For those wishing to remain quietly anonymous within the ‘1%’, targeted by the Occupy movement and analysed historically in Thomas Piketty’s remarkably popular Capital in the Twenty-First Century, it does not help that the group widely perceived to have caused the crisis, the high financiers, remain at the top of the pyramid. However, trying to understand the causes of both high and growing inequality, which began well before the crisis from the 1970s onwards, and trying to predict whether this is likely to be a worsening or self-correcting phenomenon, has generated much debate with little consensus.
What is unquestionable is that distribution is a consequence of income and income, at least within capitalism, derives either from the ownership of economic assets, capital, or the rewards from work. The state is an important component in this equation, able to redistribute within and between these groups, but the starting point of understanding inequality must be the way that income is distributed from economic activity. Much of Piketty’s analysis is concerned with highlighting the possibility of a return to a ‘gilded age’ where the share of the returns on capital that go to capital, and the concentration of ownership of that capital, both continue to increase and become locked into a small dynastic elite. However, as Piketty himself notes, and Paul Krugman comments in his review of the book, income to capital can only account for about a third of the overall rise of inequality in the US, likely less in Europe. The majority of the rise has therefore been due to increasingly unequal returns going to those in work.
Clearly then, the nature of work and its relative rewards, both now and in the future, are inextricably linked with the extent of inequality in developed economies. As Peter Nolan, Director of the University of Leicester’s Centre for Sustainable Work and Employment Futures, put it at its inaugural conference, there are ‘grand narratives and partial truths’.
Economists have been arguing since the 1990s that rising inequality may be largely explained by technological change. In other words, computer technology increases the demand for skilled workers more quickly than those skills can be produced, causing wages toward the top of the distribution to pull away from the rest. More recently the thesis has been modified to suggest that computers increasingly replace repetitive, processing work in the middle of the income distribution causing a ‘hollowing out’ or polarisation of the workforce between lower-level service tasks that cannot currently be automated and ‘thinking’ tasks that are facilitated but not replaced by computers. There is some empirical evidence for this in terms of the types of jobs being created. Recent research by Jason Heyes and myself, has found that growth in youth employment, ages 15-24, across the EU-15 countries since the financial crisis has been concentrated in two occupational groups – professionals and service and retail workers – with growth in the latter dominated by degree-level educated workers in the UK.
While theory may be consistent with the types of work being created, some economists, Piketty included, and scholars from other areas of the social sciences, are doubtful that all of the rise in inequality can be explained by technology and the consequent demand for skills. There are plenty of other social and political factors; including changing government regulation, taxation and institutions, the weakening of trade unions, changing forms of corporate governance and the role of finance, not to mention shifting social and cultural norms. All of these factors suggest labour market outcomes are a consequence of much more complex social and political processes.
Technology, however, retains its allure when it comes to making grand societal claims. As Martin Wolff recently showcased in his radio programme The Future Is Not What It Used To Be, some commentators argue that in a relatively short period of time machines will have replaced the majority of workers, disrupting not just lower skilled but also higher status occupations. Other, more historically minded scholars are more circumspect regarding such predictions, placing the current era in a historical context of repeated technological revolutions.
Whether this age is really different is difficult for anyone to know before it has been lived, but we should not forget that since the Luddites there have been predictions of technology reducing or removing the imperative for people to work for a living. Even J.M. Keynes proved wide of the mark in his prediction that technology would increasingly produce a broad based leisure society.
The highly speculative, usually inaccurate nature of ‘futurology’ should underline the inherently social and political nature of society. Even if every expert could agree on what technology will be capable of over the next few decades, how that translates into a system of production and distribution will certainly not be determined by technology alone. It should be of no surprise that both dystopian and utopian visions are consistent with the same technological story.
Over the last few decades, the developed world has been characterised by an unleashing of forces that have generated increasing inequality, precariousness for many and huge rewards for a few. Whether this continues or is reversed is fundamentally down to our political and institutional choices, irrespective of what unforeseen innovations science may bring.