Talent & Education

Inequality and the future of work

March 29, 2016

Europe

March 29, 2016

Europe
Diane Coyle

Professor of Economics

Diane Coyle is a Professor of Economics at the University of Manchester and founder of the consultancy Enlightenment Economics. She was a BBC Trustee for over eight years, and was formerly a member of the Migration Advisory Committee and the Competition Commission. She specialises in the economics of new technologies, markets and competition, and public policy, and has worked extensively on the impacts of mobile telephony in developing countries. Her books include most recently GDP: A Brief but Affectionate History, The Economics of Enough: How to run the economy as if the future matters, and The Soulful Science (all Princeton University Press). She was previously Economics Editor of The Independent and before that worked at the Treasury and in the private sector as an economist. She has a PhD from Harvard. Diane was awarded the OBE in January 2009.

A new world of work is upon us, and families at the bottom of the income scale could be the least prepared to adjust to it, according to Diane Coyle, Professor of Economics at the University of Manchester.

Does inequality matter? In the rich OECD economies, including the UK, the inequality of income and of wealth has been rising for more than a quarter of a century.

Yet it is only in the past two or three years — with the Occupy movement and the success of economist Thomas Piketty’s Capital in the Twenty-First Century — that anybody has paid much attention to it. Nuggets of information, such as the fact that chief executives are paid 183 times more than the average worker, zip around social media or win headlines, causing outrage.(1)

There are forms of inequality that do not seem to cause any concern at all. People who undergo a long training, such as doctors, earn much more than others. So do those with an innate talent, such as actors or footballers, whose earnings are more likely to prompt others to want to copy them than cause envy or anger.

There are also irreversible trends partly driving the increase in inequality. Economists believe that information and communication technologies are the main explanation. Automation has hollowed out the jobs market in the OECD economies because routine skills formerly used in the middle of the income distribution scale are no longer needed, while people with high levels of cognitive skills are in demand to work with computers.

Meanwhile, demand for people to fill low-paid jobs not (yet) easy to automate, such as caring or cleaning, has grown. Globalisation has played a part too, with some types of work relocated to low labour-cost countries. So at the global level, income inequality has decreased.

Over time, the skills of workers will change in order to match the skills needed to work alongside the digital technologies, but this kind of supply-side adjustment can take many years. Until it happens, the highly skilled are likely to continue enjoying a large wage premium.

For those able to reach a global market thanks to the technologies, the potential income is enormous — hence the superstar salaries for Premier League footballers or Hollywood/Bollywood stars, or for that matter the top corporate lawyers or authors such as JK Rowling or Stephen King.

It is not clear that much can be done about the technological trends other than speed up the reskilling of the workforce in the UK and other OECD economies and ensure the social safety networks for those whose living standards have been badly hit.

However, there are more damaging drivers of inequality. These come about because some groups are able to leverage their existing economic power into changes in policies or regulations that embed their advantages. The rich have better access to political decision-makers and officials through their well-funded lobbying efforts and campaign contributions. The success of the financial sector in resisting tougher post-crisis regulation is one obvious example. In the US, the financial sector has spent an estimated US$470 million-500 million each year on lobbying since 2009.(2) Corporations also aim to limit competition and new entry into their sectors.

Not surprisingly, many people regard this ability to alter the rules of the economic game to increase profits, share prices and consequently executive pay or bonuses as deeply unfair. It is one of the main reasons for popular anger about corporate greed, not least because high profits and executive pay often sit alongside poor customer service and low pay and insecure working conditions. Trust in big corporations has declined — big business is one of the least trusted of institutions in both the US and the UK.(3)

This matters for society and as well as the economy. Both social and political order depend on the belief that we are all part of the same civic community despite our differences. This sense is dissipating; there is a chasm between the experiences and activities of the rich and the rest. Thanks to seven years of declining real disposable incomes for most households since the global financial crisis, the majority have seen none of the benefits of economic recovery. A vibrant economy will require companies which are more dynamic, inclusive, and community-minded.

The income of the median UK household (adjusted for inflation) in 2014 was still 2.4% below its 2009 level, while the share of the top 1% on the income scale has been increasing since 1990.(4)Although the increase in income inequality has slowed almost to a halt since the financial crisis, the gap between rich and poor is as high as it has been in terms of life expectancy, health and educational attainment, as well as incomes and the ability to buy goods and services. For example, the life expectancy gap between the poorest and richest men has risen from 5.6 to 6.7 years in the past three decades, and for women from 3.8 to 5.3 years.

These inequalities are likely to be self-reinforcing. When parents have low attainment levels at school, ill health and low incomes and the family lives in poor-quality housing, their children are likely to have worse attendance records and results, be less well-nourished and less healthy than their better-off peers. They have a mountain to climb if they are to move up the income ladder themselves. The political or civic cost of embedded and increasing inequality is a reduced sense of belonging, which contributes to the phenomena of falling turnout in elections, political polarisation and distrust of “the elite” or “the establishment”. Polls show that levels of trust in many kinds of institution, from government and politics to big business and journalists, have been on a downward trend.

This matters for the economy because the modern complex, global and increasingly intangible economy depends on high levels of trust. Businesses are linked into global supply chains and a network of relationships with people from different cultures and legal contexts.

About 70% of the economy consists of services, which are inherently harder to monitor than manufactured products and deeply dependent on mutual trust. Companies’ value is largely “goodwill”, which experience shows can evaporate overnight. A trust-based economy in an untrusting society is fragile.(5)

The further economic cost of embedded inequality is that over the next 10-20 years the “rent-seeking” activities of the privileged will reduce the economy’s potential. The UK’s weak productivity performance may already be reflecting this.

Research into the sectoral pattern of productivity performance in recent years shows financial services to be one of the most disappointing performers. The sector has faced a heavier regulatory burden, which may have played a part. However, it is also under scrutiny for paying high bonuses despite poor performance and a lack of competition resulting in a failure to innovate for the benefit of customers.

Similarly, the corporate sector as a whole has widened the gap between executive pay and the rest of the workforce, without an obvious justification in terms of performance for customers or the economy as a whole. Tougher competition policy, suitable regulation and restraining corporate excess through company law will all be necessary to restore potential growth. Competition — making new entry into markets easier — is vital to improving productivity growth.

Finally, to address the long-term technological challenge, we need a rethink of the education system so that it offers greater opportunity for everyone — especially those trapped in poor social circumstances — to carve out a better future for themselves. The chasms between the outcomes in terms of jobs and incomes for private and state-school pupils, and between vocational and academic routes in tertiary education, are reinforcing the UK’s economic inequalities. The UK has a longstanding weakness in the status and funding of non-university education, and the status gap has been widened by the ever-growing emphasis on grades and league tables.

It is impossible to predict what kinds of jobs there will be in 10 or 20 years’ time, given the likely pace of automation across the economy. But thinking about what computers are good at (routine activities, acquiring information and calculation) and the skills humans will need to develop instead (creativity, empathy, communication), today’s emphasis on traditional routine learning is not going to help young people when they enter the workforce.

It is the families at the bottom end of the income scale who will turn out to be least prepared for the new world of work, if we are not careful.

 

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.


 

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(5) For more on trust, see

 

 

 

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