Harvard economist Ken Rogoff predicts that technical change, which has hit unskilled workers hard, will soon lower the relative earnings of highly skilled workers, reducing levels of inequality around the world.
Until now, the relentless march of technology and globalization has played out hugely in favor of high-skilled labor, helping to fuel record-high levels of income and wealth inequality around the world. ….
There is no doubt that income inequality is the single biggest threat to social stability around the world, whether it is in the United States, the European periphery, or China. Yet it is easy to forget that market forces, if allowed to play out, might eventually exert a stabilizing role. Simply put, the greater the premium for highly skilled workers, the greater the incentive to find ways to economize on employing their talents. ….
As skilled labor becomes increasingly expensive relative to unskilled labor, firms and businesses have a greater incentive to find ways to “cheat” by using substitutes for high-price inputs. The shift might take many decades, but it also might come much faster as artificial intelligence fuels the next wave of innovation. ….
Many commentators seem to believe that the growing gap between rich and poor is an inevitable byproduct of increasing globalization and technology. In their view, governments will need to intervene radically in markets to restore social balance.
I disagree. Yes, we need genuinely progressive tax systems, respect for workers’ rights, and generous aid policies on the part of rich countries. But the past is not necessarily prologue: given the remarkable flexibility of market forces, it would be foolish, if not dangerous, to infer rising inequality in relative incomes in the coming decades by extrapolating from recent trends.
Kenneth Rogoff, “Technology and Inequality“, Project Syndicate, 6 July 2011.
Professor Rogoff’s predictions may or may not come true. As Danish Physicist Niels Bohrb famously said, explaining the Heisenberg Uncertainty Principle, “it is exceedingly difficult to make predictions, particularly about the future”.
Nonetheless, technical change has profound effects on labour markets, even if it is difficult to predict these effects. Reliance on the magic of markets is not acceptable, even if the outcome is good for everyone in the long run. Governments should provide generous benefits to displaced workers, perhaps in the form of of wage subsidies (earned income tax credits). I hope that is what Rogoff means when he calls for “genuinely progressive tax systems, respect for workers’ rights, and generous aid policies”. The way it is written, ‘aid’ seems to refer only to transfers from rich to poor countries, excluding the possibility of transfers within a country. In my opinion, both types of transfers are needed.
Kenneth Rogoff (born 1953) was formerly chief economist at the IMF and is co-author with Carmen Reinhart of This Time is Different: Eight Centuries of Financial Folly (Princeton University Press, 2009).
