How the internet led to greater wage inequality

THE GREAT detective has summoned everyone to the library. “I was asked to identify the culprit behind the growing wave of wage inequality” he says. “I can reveal that the offender is there.” And the assembled suspects gasp as he points, not at a human, but at the computer in the corner.

In real life, few would be too be surprised at that verdict. Economists have long pointed to “skill-biased technological change” as one of the driving forces behind inequality. But demonstrating the influence of technology is important in an era when politicians routinely blame immigration or cut-price competition from imports instead. And the evidence that technology is indeed the perpetrator is getting stronger as academics look at its impact on inequality within individual firms, as well as across the broader economy.

A new working paper* by Christopher Poliquin of the University of California, Los Angeles, examined the effect on wages at Brazilian firms that adopted broadband between 2000 and 2009. The average employee experienced a 2.3% cumulative gain in real wages, relative to workers at firms without broadband. But managers at the firm gained 8-9% while executive directors enjoyed an 18-19% boost. Mr Poliquin thinks that the internet allowed skilled workers to be much more productive than before.

His suggestion chimes with a previous study** of Norwegian companies which found that the arrival of broadband improved the relative position of skilled employees. That study found that the internet made it easier for them to do “non-routine abstract tasks” such as problem-solving, while allowing the company to automate routine tasks and replace unskilled workers.

What happens inside firms is only part of the story, however. Research*** published in the Quarterly Journal of Economics suggests that around two-thirds of the rise in inequality is the result of wage differentials between firms, rather than within them. Workers are being “sorted” into two groups; those who work for high-wage firms in sectors like technology and those who work for low-wage businesses in sectors like retailing. Outsourcing may also be playing a part, with large firms spinning off low-wage activities like cleaning and catering, thus constraining the level of in-firm inequality.

The pay gap may be related to education and training. A survey of OECD countries in 2016 found that, on average, more than half of adults could, at best, carry out no more than the simplest digital tasks, such as writing an email. Only a third had the kind of “advanced cognitive skills” that would allow them to flourish.

However, this seems a little odd. On the one hand, a moral panic has swept nations over adults glued to smartphones and teenagers obsessed with digital games or online make-up tips from the Kardashian clan. At the same time, people are apparently unable to use digital technology to boost their careers.

This suggests that neither schools nor employers are striving hard enough to translate consumers’ familiarity with using technology for leisure into workers’ or students’ ability to use it in the office or classroom. More inventive ways of teaching skills, perhaps with virtual reality or video games, may be in order.

For the corporate sector, this ought to be a win-win proposition. A more productive workforce means bigger profits and faster growth, and thus higher earnings for managers as well as employees.

Maybe executives fear that money spent on training will be wasted, as workers take their newly honed skills to companies offering higher pay. But like sweeping statements about tech illiteracy, the claim that millennials (those born after 1982) are particularly disloyal to employers also turns out to be something of a myth. Figures from America’s Bureau of Labour Statistics show that the average job tenure for American workers in January 2018 was 4.2 years, compared with 4.1 years in January 2008. A higher proportion of thirty-somethings had worked for the same employer for a decade in 2018 than had been the case ten years earlier. Technology may be to blame for the historic rise in inequality. But with the right training for users, it could yet redeem its reputation.

* The Effect of the Internet on Wages
**The Skill Complementarity of Broadband Internet by Anders Akerman, Ingvil Gaarder and Magne Mogstad, The Quarterly Journal of Economics, 2015
*** Firming Up Inequality, February 2019

This post was originally posted at https://www.economist.com/business/2019/03/16/how-the-internet-led-to-greater-wage-inequality.

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