Technology, Innovation and Income Inequality

Income inequality is in the news much, as my Cafe cohort Jim Brennan pointed out in his recent post.  In debating the causes of and best responses to income inequality, it's important to consider the role that technology and innovation are playing in this phenomenon.

In their book The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies, MIT's Erik Brynjolfsson and Andrew McAfee make the case that technological innovation is the primary driver of income inequality, and that effective solutions must be crafted with an appreciation of this truth. 

Digital technologies, they note, are creating winners and losers in the income generation game.  They produce demand for and augment the value of skilled labor, particularly those with the right skills.  But they decrease demand for less skilled laborers, especially those doing repetitive, routine work that is being eliminated by automation or upgraded in the wake of technological innovation.

To illustrate this point, Brynjolfsson and McAfee use the story of Kodak.  A giant in the world of pre-digital photography, Kodak once employed over 145,000, many of whose jobs involved creation of the special chemicals and paper which were critical to photography in the analog age.  Shortly after Kodak filed for bankruptcy, digital photo sharing company Instagram was sold to Facebook. 

There's no question that, as consumers, we have gained much from innovations in digital photography that allow us to create and share an unlimited number of photos at nearly zero cost.  However, one consequence of this progress and its benefits is that thousands of people whose skillset was directly connected with the creation of analog photography are no longer needed and have to find a different way to earn a living - possibly at a lower wage unless they make an investment in upgrading their talents.  It should also be noted that Facebook, including Instagram, employs a fraction of the people Kodak once did. Further, Facebook is on record for producing at least seven billionaires compared to Kodak's one (founder George Eastman).

And so the price we pay for this technological innovation in photography that has delivered such a bounty to us is an income distribution that is now more unequal than before.

Speaking at the recent World Economic Forum in Davos, Google's Eric Schmidt warned that the problem of new technologies substantially changing and replacing jobs will be "the defining one" for the next two or three decades.  Brynjolfsson and McAfee examine the types of decisions that employers will be facing on this front.

When Terry Gou, the founder of Foxconn, purchased thirty thousand robots to work in the company's factories in China, he was substituting capital for labor.  Similarly, when an automated voice-response system usurps some of the functions of human call center operators, the production process has more capital and less labor.  Entrepreneurs and managers are constantly making these types of decisions, weighing the relative costs of each type of input, as well as the effects on the quality, reliability, and variety of output that can be produced.

Our best response to these challenges?  Opinions and disagreements abound. In a recent article titled The Future of Jobs, authors from The Economist referenced massive educational improvements that were made in response to the First Machine Age (aka the Industrial Revolution). New innovations like cheap online education may help spur such pursuits today, the authors note, but only if the counter-incentives do not prove too strong.

Today, because of measures introduced in response to, and to some extent on the proceeds of, industrialisation, people in the developed world are provided with unemployment benefits, disability allowances and other forms of welfare. They are also much more likely than a bygone peasant to have savings. This means that the “reservation wage”—the wage below which a worker will not accept a job—is now high in historical terms. If governments refuse to allow jobless workers to fall too far below the average standard of living, then this reservation wage will rise steadily, and ever more workers may find work unattractive. And the higher it rises, the greater the incentive to invest in capital <technology> that replaces labour.

No quick and simple fixes to this dilemma.  Your thoughts?

 Ann Bares is the Founder and Editor of the Compensation Café,  Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting to a range of client organizations.  Ann serves as President of the Twin Cities Compensation Network (the most awesome local reward network on the planet) and is a member of the Advisory Board of the Compensation & Benefits Review, the leading journal for those who design, implement, evaluate and communicate total rewards.  She earned her M.B.A. at Northwestern University’s Kellogg School, is a foodie and bookhound in her spare time. Follow her on Twitter at @annbares.

Creative Commons image "Technology is a Given" by Scott McLeod

Comments

[Trevor Norcross]

Hi Anna,
I think you are spot on. This issue will continue to be the growing social issue of our time. Innovation in education may be the key. I also agree, raising the "living wage" or providing more public assistance will not solve the problem in the long run.

[David Scott]

I recently engaged in a debate with two individuals that are from my generation (early-mid 20's) that are in favor of the $15/hour wage for fast food workers. There are a lot of issues I see in this logic. If a fast food worker is given a 100% increase, the costs of the goods and services that they are producing will inevitably increase dramatically. For the person that was already making $15.00/hour, things just got a lot more expensive. Their employer would need to offer them a large increase to be able to maintain the same standard of living. That company's goods and services would then become more expenses. This cycle goes around and around. Now, with everything having inflated in cost, that $15/hour no longer carries the same spending power. This brings us back to square one.

They were obviously in one of these jobs. I suggested that they attend a local university or trade school to earn a degree or certificate, but primarily to focus on gaining a specialized skill or knowledge that not everyone has. It's simply a matter of supply and demand. When your most valuable skill is held by all but the most severely handicapped, you're (unfortunately) fairly replaceable.

I worked a retail job to pay for my education. Success is all about hard work, desire, and hustle. IMHO, the mentalities of "Everyone gets a trophy!" and "Life is fair." are unfortunate ideals that have coddled many of the younger generation.

[Ann Bares]

Trevor and David,

Thanks for your thoughtful comments. This is a tough topic with no easy answers, but I thought that the technology/innovation angle might provide additional and helpful context for consideration.

The intent of the post isn't to simply knock down one proposed solution - the minimum wage hike - but to help us understand the complexity of the challenge. As Isaac Newton taught us - and as most of us in rewards have learned the hard way - every action has an equal and opposite reaction. The world in which income inequality is happening is a complex one, and any single intervention will likely have both positive and potentially negative consequences, short-term effects and longer-term ones. Those who insist otherwise are being disingenuous and/or trying to sell us something.

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Thank you so much Ann for your calmly presented and unbiased post. Agree there are no right answers now and if anyone thinks there is s/he doesn't understand the complexity of this issue.

I would suggest a book for reading: "The End of Work" by Jeremy Rifkin. When it was written in 1995 I thought the author was smoking funny cigarettes. I re-read it recently and was blown away at how accurate his predictions were.

In addition he has/had some very "odd" recommendations on how to deal with the issue of job loss to technology. I have read similar recommendations made in the past couple of years so he/they may be on to something.

I'm one of "those" that think that continued strides in technology to not going to be great enough to employee all the people that will be out of jobs.

I would also encourage you to read articles by Michael Spence who has written quite a bit about the impact of globalization on all jobs in the U.S. not just manufacturing ---- in addition the impact of global demographics on consumption.

Enough ---- this one is a definite keeper Ann.

[Dan Walter]

Ironically it was tech firms that first promoted the concept of equity compensation, ostensibly as a way to help involve everyone more equally in their contribution to the growth of a company. 20 years ago large amounts of overhang and flatter equity sharing meant less billionaires and more millionaires.

Today the first 20 get the lions share. If the company does well they often get the hyena's share, the jackal's share, the vulture's share and gnaw on the bones. Very few are part of that food chain.

There are so many factors that play into this: Greed; short-sightedness on the part of founders, investors and markets; narcissism, overvalue of self-worth and undervalue of team dynamics, a general misunderstanding of the reason equity compensation was created as a board-based tool and many other things.

Technology is the great equalizer when utilized and distributed broadly, it is the great differentiator when taken advantage of.

[Ann Bares]

Jacque:

You are the second person to recommend Jeremy Rifkin's book to me - I will have to check it out ... thanks.

I'm familiar with Michael Spence's work - one of his core points being, as I understand it, that the world is increasingly becoming a single market, so if a worker in China (or other developing country) can do the same work as an American, then the market will work to equalize their wages. Good news for the Chinese worker (and for market efficiency); not so much for the American.

Interestingly, Brynjolfsson and McAfee challenge Spence's conclusions and claim that data do not bear out his predictions about globalization. They claim that automation will ultimately impact developing countries more than the developed world. B & A state:

"In the long run, the biggest effect of automation is likely to be on workers not in America and other developed nations, but rather in developing nations that currently rely on low-cost labor for their competitive advantage."

As Spence's conclusions had always seemed logical to me, am still trying to get my head around the above.

Interesting, is it not?

Appreciate your comments!

[Ann Bares]

Dan:

Very interesting perspective on the history and changes in equity - and the role it has and is playing in this development.

So many levers, so many variables.

Thanks for weighing in.