Economic trends

Technology is the key to inequality

While inequality has fallen between countries, inequality within countries has risen in recent years

Concern over rising inequality has increased in recent years. While inequality has fallen between countries, as rapid economic growth has helped emerging economies catch up with the developed world, there seems little doubt that inequality within countries has risen for most.

Technology is just one factor at play – along with globalisation, taxation and reduced union power – but its effect on economies is a key to understanding how income gaps evolve over time.

Emerging countries are rightly now focusing on inclusive growth: trying to make the process of growth itself as equal as possible

Around 1750 Europe’s standard of living was little different to China’s. Then Britain adopted new technologies which led to an explosion of economic growth in the West, taking incomes to multiples of those in Asia. As recently as 1990 US citizens enjoyed average incomes 25 times that of the Chinese, measured on a purchasing-power basis.

However, China has made up ground in recent years, narrowing the income gap with the US to five times. This shows that late-developing countries can catch up fast if they get their institutional settings and macro-economic policies right, as Japan did a long time ago and China and many more countries are doing now.

Uneven adoption of technology leads to inequality

For many emerging markets, the rise of inequality within country reflects the uneven adoption of technology. Jobs are created in factories and offices in the cities, but people in the informal sector and rural areas are left behind, at least at first. Emerging countries are rightly now focusing on inclusive growth: trying to make the process of growth itself as equal as possible while developing tools for redistribution.

Meanwhile, in many developed markets, technology is creating new sources of inequality between citizens. Computers and industrial robots have already thinned the ranks of routine jobs such as typists, car assembly workers, sorters, crop pickers, telephone operators, toll-booth operators and bank tellers, putting downward pressure on low and mid-level wages, while those who are able to leverage the power of computers are seeing their incomes rise.

Technology will likely continue to have an effect on income inequality. Get ready for service robots – computers that can move and act autonomously. Robot collection and delivery systems have been in factories and warehouses for some time, and now the Google car suggests the service robot is coming of age.

Industrial robots have long been better than humans at heavy-duty and precision tasks, provided everything is static. Computers are good at logic, arithmetic and finding patterns in data, and human skills in these areas are no longer a guarantee of a good income.

There will still be jobs but they will be different

Imagine what will happen when robots can find their way around and take on a wide range of tasks in unstructured environments, including road-driving; fetching, carrying and working on building sites; acting as a receptionist and doing most of the work in restaurant kitchens.

This does not mean there will be no jobs: machines have been taking over routine tasks, not just for hundreds of years, but for thousands (think of the wheel or the plough). This is the basis of growth and improved living standards. The computer age has been no different, and we should expect the robot age to be the same, at least for the foreseeable future.

To prevent income gaps from widening, we will need to nurture human skills that robots find difficult

Instead, to prevent income gaps from widening, we will need to nurture human skills that robots find difficult, such as situational adaptability, visual and language recognition, in-person interactions, or abstract thinking including problem solving, intuition, persuasion and creativity,  as discussed by Carl Frey and Michael Osborne in their 2013 study, The future of employment: How Susceptible are Jobs to Computerisation?

This is not just an issue for developed countries. In East Asia, the growth model from Japan through to Vietnam has been to create factories full of people doing routine tasks such as sewing or final-assembly, creating goods for export to the developed countries. The clock is ticking on that model as computers and robots improve their capability and become cheaper to adopt.

Liberalised markets are key

Again, this doesn’t mean that low wages in emerging markets will no longer act as a comparative advantage, but it does mean that in exchange for those low wages they will need to be offering more of the skills that robots can’t.

Making technology work for everybody requires, and always has required, liberalised markets. Controls on labour and product markets tend to help one group over society as a whole. Sometimes the gainers are organised workers but more often groups of firms or their owners. Either way most people lose out.

Perhaps technology will eventually give us a perfect way to redistribute, replacing the plethora of taxes and benefits now in use – give everyone a robot at birth, which can be sent out to earn an income. But, of course, that will only succeed if all robots are equal.

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A version of this article first appeared in beyondbrics on 16 July 2014


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