Summary: Although denied for years, by now rising inequality is acknowledge even by conservatives — so the debate shifts to its causes and remedies. The “standard” answer points to the “invisible hand” of “market forces”. New cutting edge research shows that this defense, much like the earlier denials, does not match the facts. This post excerpts from a important new paper by Tali Kristal and Yinon Cohen in Socio-Economic Review.We cannot fix what we do not understand.
Tali Kristal and Yinon Cohen, Socio-Economic Review, in press
Excerpt posted with the authors’ generous permission
Many inequality scholars view skill-biased technological change — the computerization of workplaces that favours high-skilled workers — as the main cause of rising wage inequality in America, while institutional factors are generally relegated to a secondary role.
The evidence presented in this article, however, does not support this widely held view. Using direct measures for computers and pay-setting institutions at the industry level, this article provides the first rigorous analysis of the independent effect of technological and institutional factors on rising wage inequality.
Analysing data on 43 US industries between 1968 and 2012, we find that declining unions and the fall in the real value of the minimum wage explain about half of rising inequality, while computerization explains about one-quarter. This suggests that much of rising inequality in the USA is driven by worker disempowerment rather than by market forces — a finding that can resolve the puzzle on the diverging inequality trends in USA and Europe.
Excerpt (references omitted)
The sharp rise in wage inequality in the USA and other countries is usually attributed to two sets of factors. The first, advanced by most economists, consists of technological change. The rise of computer technology in the workplace since the late 1970s, so goes the argument, has increased the productivity of, and demands for, high skilled workers that tend to use computers, thereby raising their wages relative to less-skilled workers who do not use computers. Moreover, at the time of rising demand for skilled workers, there was a slowdown in the growth of college graduates, thereby raising the wages of highly educated Americans even more. This explanation, known as skill-biased technological change (SBTC), implies that the invisible hand of the market is the main mechanism through which computerization increases wage inequality.
Most sociologists and political scientists as well as some economists tend to emphasize institutional factors as driving inequality and question the assumption that the invisible hand of the market is the main explanation for rising inequality. They identify mainly pay-setting institutional changes that have occurred in the US labour market and economy since the 1970s — primarily declining unionization and the fall in the real value of the minimum wage, but also the spread of non-standard employment practices as well as the ascent of financialization and globalization — as being responsible for much of the rise in income inequality during that period.
To be sure, the two types of explanation are not mutually exclusive, and most scholars agree that both technology and institutional factors are responsible for rising wage inequality. There is less agreement, however, on the relative importance of each set of factors.
…This article’s contribution, then, is to provide an empirical answer to this debate over the ‘causes of inequality’. Specifically, based on industry-level data, we provide the first empirical test of the main established explanations for rising wage inequality in the USA since the early 1970s. …
2. Why has wage inequality increased?
2.1 Fading pay-setting institutions
In the past four decades, the US labour market has changed dramatically. Some of these changes, in particular the erosion of pay-setting institutions, are partly responsible for the rise in wage inequality. These include the decline of organized labour, the fall in the real value of the minimum wage, the spread of non-standard employment relations, the growth of finance capitalism and the fall of US trade barriers that led to the importation of goods from less-developed countries. Taken together, these changes, which reflect in part a deeper transformation in the political landscape, are responsible for a substantial, yet unknown, portion of the rise in wage inequality since the late 1970s. …
2.2 Computerization, skills and productivity
The ‘canonical’ or ‘consensual’ (Lemieux, 2008) economic explanation of rising inequality asserts a negative relation between the use of new computer technologies in the workplace and wage equality. By new computer technologies, studies generally refer to developments since the late 1960s in semiconductor technology that have found their broadest applications in computing and communications equipment. Such equipment makes extensive use of microelectronics and programmed instructions or software that is implemented at all stages of the production process. As we elaborate below, this well-known SBTC hypothesis holds that computers have increased the productivity of highly skilled workers, which in turn increases their wages. …
5. Discussion and conclusion
In 1997, Alan Krueger, a leading labour economist and contributor to the inequality literature, asked a non-random group of prominent economists what they think are the main causes of rising inequality. In a recent policy speech, Krueger (2012), then the Chairman of the Council of Economic Advisors to the President, reiterated the consensus among his respondents:
“The most important factor … was skill-biased technical change. … A distant second in this poll was other and unknown factors” (‘other’ did not include institutional factors).
Even Thomas Piketty, whose chapter on labour income inequality (2014, pp. 304–335), sympathizes with institutional explanations, especially the fall in real minimum wage is silent about the effect of union decline on rising wage inequality.
Contrary to that view, we find that the decline of pay-setting institutions is almost twice as important as technology-driven demand for skilled labour in explaining rising inequality within US industries. In fact, the decline of unionization and the real minimum wage explains about 50–60% of rising wage inequality in US private industries between 1969 and 2012, while the spread of computer technology explains 28–29% between 1969 and 1997 and 15–16% between 1988 and 2012, and the slowdown in the supply of educated workers explains 7% between 1988 and 2012.
For reasons we explained earlier, the available US results are different, but similar results showing a larger effect of de-unionization (versus computerization) on inequality were found in Germany, as well as in a study on 22 developed countries.
…One question in the inequality literature is why the US has experienced a sharper increase in wage inequality than European countries, although computer technology, presumably the main cause of rising inequality, diffused about equally across all countries. Our finding that the erosion of pay-setting institutions, in particular labour unions, is the dominant factor which explains rising wage inequality in the USA may help solve this puzzle by pointing to the system of industrial relations as the key factor.
…Evidently, the diffusion of ICT across establishments and industries and the erosion of paysetting institutions are embedded in a larger institutional context that led to an increase in various dimensions of social and economic inequality. In the early post-war accord years, market outcomes were greatly moderated by labour unions, an industrial system of collective bargaining, high minimum wage and progressive taxes. In the past four decades, the social contract between capital, labour and the state has been broken, raising the question whether the sharp increase in earnings inequality has been due to the invisible hand of the market or to what some call the ‘grabbing hand’ of the elite.
Evidence from the current study mainly supports the second possibility, namely that the erosion of pay-setting institutions has enabled business and top earners to grab a disproportionate share of income, leaving most rank and file workers far behind.
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About the authors
Tali Kristal is a Lecturer in Sociology and Anthropology at the University of Haifa. Yinon Cohen is a Professor of Sociology at Columbia. See his website.
For More Information
Moshe Y. Vardi (Prof of Computer Science, Rice U) warns that a phase transition in automation approaches — like water into steam. See his analysis at The Conversation.
If you liked this post, like us on Facebook and follow us on Twitter. See all posts about about inequality & social mobility, those describing how the 3rd industrial revolution has begun, and especially see these…
- The coming big inequality. Was Marx just early?
- The CEO of Boeing enjoys the sight of his workers cowering. It’s our humiliation as well as theirs.
- Connect the dots to see why wages aren’t growing for most Americans.
- Education is not a solution to automation.
- Steps to make the tech revolution boost America, not just the 1%.
See these books to learn about the new industrial revolution now in progress…
- The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies by Erik Brynjolfsson and Andrew McAfee (2014).
- Rise of the Robots: Technology and the Threat of a Jobless Future by Martin Ford (2015).
- The Future of the Professions: How Technology Will Transform the Work of Human Experts by Richard and Daniel Susskind (2016).