Technology, Productivity, Income Distribution

Technology, Productivity, Income Distribution

Technological Advances, Slow Growth and Income Inequality

Mission

Technology advances are productive and, in many cases, accelerating, aggregate productivity and output growth are slowing, while wealth and income disparity is increasing. The Chumir Foundation and the Brookings Institution have undertaken a joint research and analysis project to help identify the causes and promote informed dialogue about appropriate policy responses. The issues are examined both within and between countries.

The fact that the same dynamics adversely affect output and produce inequitable income distribution should commend this issue for attention by people in every walk of life in pursuit of optimum growth, social stability and fairness – avoiding anxiety of displacement, social divisiveness and resistance to technological change and beneficial trade.

Scope and Agenda

A “Great Paradox” is becoming more and more apparent: a huge wave of technological innovation is well on its way, in areas ranging from communications to medicine, from transport to energy, and from manufacturing to education; yet, not only is aggregate total factor productivity growth as well as labor productivity slowing down, but also suboptimal output is less equally shared. This paradox is leading to the “Great Policy Challenge” of our times: how to manage the process of disruptive technological change and a third wave of globalization so that they lead to rapid and more shared growth.[1] Perhaps it would be better to say “rapid growth and shared well-being,” as GDP growth is a very imperfect measure of progress.

Only very partial and tentative answers are being offered by scholars or policy analysts. To address this need, the Global Economy and Development program at the Brookings Institution and the Chumir Foundation for Ethics in Leadership undertook a work program to improve the understanding of these big challenges facing policymakers around the world. As a crucial ingredient to understanding the new century, this effort seeks to bridge the gap of perception, analysis, and measurement between the techno-optimists and the more sobering economic analysis. Technological advances can produce different results depending on market conditions. Different technologies can have varying impacts.

At stake is not only inherent economic performance/growth, but also how policymakers and other actors might address social and political issues – including technological change that in the first instance displaces workers – to avoid the loss of productivity and growth by virtue of political resistance to the immediate consequences of new technologies. Technology is also becoming the focus of geo-political rivalry among the major powers, with some, like cyber capability inherently bordering on hostile confrontations.

Are we on the verge of fantastic human progress, confirming Keynes’ optimistic forecasts of 85 years ago[2], or will human progress be disrupted, perhaps for a considerable period, by our inability to cooperate and manage technological, economic and social change so as to produce a fair and productive result?

The results of this collaborative research and analytical effort to support informed dialogue are reported in the soon to be released book:  Productive Equity: Technology and the Twin Challenges of Reviving Productivity and Reducing Inequality.

In recent decades, across major economies, productivity growth has slowed while income inequality has increased, feeding the social discontent evident in much of the world today. The paradox of slowing productivity growth despite booming new technologies is real, not illusory. Our research confirms our hypothesis that lagging productivity and growing inequality are, in fact, linked by common causes and call for common solutions. Chief among these causes is the interplay between technology, market conditions and policies. Consider the variables and linkages:

Type and control over technology: Particular new technologies - by far the principal source of improved productivity - are affected by:

  • the focus of R&D investment,
  • the random timing of discoveries,
  • their inherent productivity enhancement,
  • their dissemination or containment by competitive conditions,
  • legal provisions (i.e. anti-trust enforcement and intellectual property rules and practices impact market power, domestic and international, increasingly affected by global firms controlling dissemination); and
  • government-supported more basic research (declining in relative importance) versus private sector product/service development emphasis all influence the affects of technology.

Overall productivity growth, its timing and the distribution of the gains are all impacted by these variables.

Demand, deployment and market concentration: The source of demand for technology, the type of development and differences in deployment affect aggregate productivity:

  • military/less cost constrained, versus medical, versus environmental, versus consumer;
  • narrow applicability, leading/dominant firm advantage, quasi-monopoly bias, versus wider industrial and/or consumer sector access, usage; the timing of wider availability;
  • full versus low incremental cost allocation of publicly funded R&D; locus of ownership and distribution of gains;
  • deployment for cost-saving versus product enhancement;
  • market conditions of competitive stimulus and rapid dissemination, versus high concentration of power and slow dispersion of innovation – greatly impact overall productivity and distribution of gains of technological developments.

Again, these dynamics impact productivity, growth and income distribution given any technology setting and pace of development.

Observed results: Increasingly concentrated market power slows competitively-driven investment levels and locations and, as a result, retards the investment that would disseminate innovation, slowing aggregate productivity and output. Differentials in company performance and employee compensation emerge between the leading/dominant and follower firms, exacerbating disparities. Concentrated income reduces overall demand/growth by virtue of a lower propensity of high earners to spend as much of their incomes as those who need to use their entire incomes to live. Supply/demand conditions for workers, educational opportunities, and self-perpetuating advantages of the privileged, all affect the capital/labor splits.

The objective of policy is to motivate innovation, capture the optimal gains of both productivity and globalization and achieve socially important equitable distribution. The potential benefits of technological change, and accompanying accelerated globalization, have not been harnessed effectively to foster more robust and more inclusive economic growth. The two impacts - low growth and inequitable income distribution - and common causes,¬¬¬¬ most importantly, market power, skills and governmental technology policy, mean that people in all walks of life have an interest; and if the corrective policies can add enough productivity and output, any costs to the winners to offset the impacts on the losers from technological or globalization – if, indeed, there is any net loss once replacement activity and increased income-generated demand work through the system (which may take more time in a digital technology world where retraining the displaced for new jobs may take longer, and for some, not be possible and require more adjustment assistance, but worth the cost). To date, replacement employment and higher value opportunities have dominated the aggregate and average data; and the array of impacts includes some faultless losers that calls for policy offsets for overall societal benefit. Reviving productivity growth and reducing inequality are not necessarily competing objectives for policy.

[1] The ‘economic growth’ objective is not intended to overlook the aim of environmentally and socially sustainable growth.

[2] See John Maynard Keynes’ “The Economic Possibilities for our Grandchildren” (1930), http://www.econ.yale.edu/smith/econ116a/keynes1.pdf 

This project is a partnership with
the Brookings Institution

Brookings Institution

Related Pages

Status

  • The book is scheduled to be published in the near future.
  • A program of expert dialogue, private discussion with policy makers and public conferencing is being planned in New York for Fall of 2018.

Productivity and Wage Dispersion: OECD Countries,
2001-2013

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Productivity and wage dispersion: OECD countries, 2001-2013

Source: OECD 2017(b)

Note: Frontier firms are the top 5 percent firms with the highest labor productivity within each 2-digit industry. Non-frontier firms cover all the other firms. Data cover firms in 24 OECD countries, operating in manufacturing and business services (excluding financial services) and employing 20 or more workers.

Growth at Frontier vs
Laggard Firms

Manufacturing Sector

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Manufacturing Sector

Business Sector

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Business Sector

Source: Andrews, Criscuolo, and Gal (2016)

Technology, Productivity, Growth and Disparity: Causes and Effects

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Technology, Productivity, Growth and Disparity: Causes and Effects

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