Globalization and new technologies have deepened the divide between the haves and have-nots in advanced economies. So Olivier Blanchard, the former chief economist at the International Monetary Fund and the Robert Solow Professor of Economics emeritus at MIT, and Dani Rodrik, a professor of political economy at Harvard’s John F. Kennedy School of Government, convened a group of leading economists—many of whom are current or former policymakers—for a conference on inequality in October 2019. When they edited the papers from that conference into the book Combating Inequality: Rethinking Government’s Role, they concluded that we do, in fact, have the tools to reverse the rise of inequality.
Laura D’Andrea Tyson, PhD ’74, a professor at the University of California, Berkeley, Haas School of Business, was one of many MIT alumni and faculty at the conference. The following excerpt is from her chapter on technological change, income inequality, and good jobs.
Almost daily, there are examples of how new technologies are transforming work, triggering changes in the quantity and quality of jobs. Surveys reveal deep concern among workers about the implications of these changes for employment, wages, and living standards. Behind this concern is a fundamental question: Will there be enough jobs in the future?
The history of technological revolutions indicates that the likely answer is yes. Technological change drives productivity growth, and that fuels the demand for labor. There is no evidence of a long-run trade-off between productivity growth and employment growth. Many existing jobs are changed or destroyed by changes in technology, but many new ones are created. In the long run, there is no “technological unemployment.” The productivity benefits of technological change, however, can take decades to arrive, and there is considerable dislocation for workers during the transition from old jobs to new ones, with significant unemployment along the way. For many, the destruction of jobs, industries, and even communities has consequences that can last a lifetime.
History also reveals that technological change tends to increase income inequality, widening the gaps between those whose jobs are displaced and those who assume new ones. During the last half-century, technological change has been both labor-saving and skill-biased, meaning it has tended to produce jobs that require higher-skilled workers. Digital technologies have reduced the demand for middle-skilled workers performing routine tasks. (Most “middle-skill” jobs require at least a high school diploma or its equivalent.) They have also increased the demand for workers with higher skills performing technical and problem-solving tasks. Accordingly, labor markets have become polarized and “hollowed out” in the advanced economies: middle-skill jobs have declined as a share of total employment while both high-skill jobs and, to a smaller extent, low-skill jobs have increased as shares of total employment (see chart). Skill-biased technological change has been a factor behind widening income inequality and the falling share of labor income in total national income. Given the current trajectory of technological progress, these trends are likely to persist.
Job polarization between the mid-1990s and mid-2010s
A major question is not whether there will be enough jobs but whether there will be enough good jobs—jobs that provide middle-class earnings, safe working conditions, legal protections, social protections, and benefits (e.g., unemployment and disability benefits, health benefits, family benefits, pensions). The slow growth of pretax incomes for the bottom 50% of earners has been the main driver of increasing income inequality over the past half-century. Access to good jobs—as well as to education and health care, so people have the knowledge and good health required to work—is key to lifting these incomes and making technology-enabled growth inclusive.
Several types of policies could make good new jobs more likely to be created in the United States. These include taxes on labor and capital that affect business investment decisions; R&D policies that can direct technological change and influence both the pace and extent of new technologies’ adoption by business; training policies that enable workers to gain new skills; direct labor market interventions that provide benefits to temporary and contract workers; and measures that strengthen workers’ voice in business decisions.
Rethink tax policies
Tax policies influence businesses’ decisions to invest in new production technologies. In the United States and other advanced economies, labor is taxed at a much higher rate than the physical capital and knowledge capital required to produce goods, encouraging investments that use capital and save labor. A reduction in payroll and other employment-related taxes would moderate this bias. So would an increase in taxes on capital, including corporate income. Recently, the US corporate tax rate was cut dramatically. Proponents argued that the cut would increase business investment and that this in turn would increase employment and wages. As technology becomes more labor-saving, however, business investment in physical and knowledge capital becomes less likely to create good jobs, and the new US tax law does nothing to offset that effect.
Another issue is that as capital has become more mobile across national borders, many multinational companies have been able to make their profits “stateless” for tax purposes by shifting them to locations where they have little or no real economic activity and pay little or no tax. Stateless corporate income erodes the tax base and reduces the capacity of individual countries to raise revenues for infrastructure and social protection programs. It also exacerbates the tax disadvantage of labor, which is far less mobile than capital. In their recent book The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, Emmanuel Saez and Gabriel Zucman discuss the consequences of stateless capital income for income inequality and suggest national remedies as stopgap measures in the absence of an international agreement to tax such income. In the long run, given the magnitude of cross-border capital flows, such an agreement is essential.
As technology becomes more labor-saving, however, business investment in physical and knowledge capital becomes less likely to create good jobs.
In the US, taxes on capital income should also be increased by raising the rate on capital gains (which are now taxed at a lower rate than personal income) and by eliminating the carried-interest loophole. Both the preferential capital gains rate and the carried-interest feature of current tax law have encouraged technology investments favoring capital and profits over labor and wages. They have also fueled the “financialization” of the US economy and increased income inequality.
Reductions in payroll taxes and other direct taxes on labor, even if offset in part by higher taxes on capital, would leave less government revenue available to fund health care, education, and benefits for workers—all key components of good jobs. A national carbon tax should be used to offset this revenue loss. Lower taxes on labor to promote employment, and higher taxes on carbon to discourage carbon use, are a wise recipe for a future of good jobs and a sustainable environment.
Revise R&D policy
Technological change and adoption of new technologies depend largely on the incentives of those who fund R&D and those who invest in and deploy the resulting technologies. Companies, particularly those with substantial market power, have strong market incentives to invest in innovations that generate private returns to capital rather than societal benefits in the form of good jobs. The result is a “tragedy of the commons” bias against investment in job-creating technological innovations.
In the United States and other advanced industrial countries, R&D receives substantial public support through direct government funding and tax policies. Although government (mainly federal) is the major funder of basic R&D in the US, the business sector is both the largest funder (67%) and the largest performer (72%) of overall R&D. Most business R&D focuses on product development for private returns rather than on basic science for social returns. As the time horizons of US companies have shortened, business R&D has become more focused on shorter-term and lower-risk development. While the R&D tax credit, which was introduced in 1981, has been effective in encouraging companies to invest in R&D, most of that credit goes to large companies, many of which also have large amounts of stateless income sheltered around the world. Business R&D is heavily concentrated in five sectors, accounting for 83% of total R&D but less than 11% of employment.
Federal R&D funding for defense has been a major factor in the development of the aviation, computer, and internet industries, and federal funding for health care has been a major factor in the development of the pharmaceutical/biotechnology and medical technology industries. Federal R&D funding and related tax incentives have also played important roles in encouraging businesses to invest in new green technologies. So it’s clear that government funding and tax incentives can influence and “direct” technology trajectories.
New government programs and tax credits should be introduced to nudge R&D toward innovations that complement human skills in sectors with growing demand, such as health care, education, and technology itself. Allocating a share of federal R&D funds to foster labor-augmenting innovations in the health-care system is an option worth considering. Another option is a new federal R&D program to foster investment in “intelligent infrastructure” to adapt to climate change. Such investment would generate good jobs and fund necessary adaptations (e.g., port reconstruction, flood prevention, and fire prevention through the installation of underground electricity grids). At the macro level, we should significantly increase federal funding for R&D and infrastructure, two public foundations of long-term economic growth. The social returns on these investments far exceed the government’s long-term borrowing costs. Government spending in these areas should be treated not as operational expense but rather as investment, and should be included in a separate capital budget. Without a change in budgetary rules, government spending on them will continue to decline relative to the growing needs of the economy.
Policies to develop worker skills
Although labor-saving and skill-biased technologies are destroying middle-skill jobs and occupations, they are increasing higher-skill ones at an equal or faster pace. However, there are considerable gaps between the skills required for the disappearing jobs and those required for the new ones. In response, governments are introducing new education and training programs with a focus on “non-elite” postsecondary educational venues such as community colleges. In the US, community colleges are the most important provider of skills at scale and are particularly important for vocational education and training for first-generation, low-income, and minority students. There are substantial wage and employment benefits to completing a community college degree and lesser but still positive returns from certificate programs. Expanding funding for community college education and making it more affordable for low-income students should be key priorities for states seeking to create good job opportunities for their citizens. As of 2020, 17 states—both Republican and Democrat controlled—have implemented some form of tuition-free community college program, and several other states are working on similar legislation.
Apprenticeships combining classroom and on-the-job learning are another valuable model for skill development. Workers receive a skill-based education that often places them directly in well-paying jobs, and employers benefit by recruiting and retaining a skilled labor force.
Germany and Switzerland are well known for their successful apprenticeship programs, and the idea is gaining attention in the United States. The US Department of Labor recently introduced a website and programs to encourage apprenticeships through information sharing, technical support, and small grants to employers, individuals, and educators. Several states are also introducing apprenticeship initiatives. Colorado has launched apprenticeship programs based on the Swiss model in several industries. Now 28 states have joined Colorado in the Skillful network to develop training approaches that combine classroom learning with workplace experience. Programs take a variety of forms—apprenticeships, targeted certification programs, technology “boot camps,” and on-the-job classes—and aim to develop new skills in the 70% of the US workforce without college degrees.
Other countries are experimenting with different approaches to lifelong learning. Singapore has made a SkillsFuture Credit of S$500 available to individuals over the age of 25 for continued education. The Federal Ministry of Labour and Social Affairs in Germany is studying “individual learning accounts” modeled on Singapore’s approach. An option for the United States would be tax-advantaged “lifelong learning and training accounts,” funded by individual contributions matched in part by government funds. Government funding for individual learning accounts should be limited to programs that are certified for quality and designed with employer input; they should yield recognized credentials and provide portable skills.
Protecting “precarious” workers
The social protections associated with standard full-time employment are essential features of “good jobs.” Many of these protections are absent for workers in various types of so-called “precarious” employment, including self-employment and work that is part time, temporary, on call, and/or done for multiple clients or businesses and through platforms. Even in Europe, where workers in standard full-time employment have legally mandated access to generous social protections that are not required for full-time workers in the US, many workers in precarious and gig jobs have little or no coverage. The same is true for the growing number (an estimated 57 million) of gig workers in the US.
In Europe, several countries have created new intermediate categories of employment that extend some social protection rights to gig workers. In 2019 legislation, the state of California took a different approach, making it difficult for businesses to classify workers as independent contractors rather than employees. The latter are covered by protections and benefits mandated by federal and state laws (including minimum wages), while the former are not. Providing gig workers previously classified as independent contractors with these benefits is likely to increase labor costs between 20% and 30%.
Individual security accounts (ISAs) that move with workers from job to job are a promising policy to extend benefits to workers with multiple precarious employment relationships. An ISA would be established for each worker, and each business hiring that worker would be required to contribute an amount for his or her benefits prorated for the number of hours worked. Workers would be able to accrue benefits even when moving among multiple employers and projects. They would also be able to make tax-advantaged contributions to their accounts. Several states are now designing portable benefit systems, and to head off other regulations, some platform companies are supporting this approach.
Worker voice and worker interests
The share of workers who belong to unions or are otherwise covered by collective bargaining agreements has declined significantly in the US and other advanced industrial countries. At the same time, in many industries, product market competition has eroded, concentration has increased, and there is growing evidence of monopsony power. Under these noncompetitive conditions, individual companies can dictate the wages and other terms of employment for their workers. In such cases, unions can provide an important counterweight to employer power, resulting in higher wages and more employment.
The US system of labor relations and corporate governance is out of balance, with too much power for employers and too little power for workers. US labor law needs to be changed so that workers are more free to organize by company, by industry, and by region and so that companies can experiment with work councils and other institutions to give workers a voice in company decisions. In a 2019 statement by the Business Roundtable, the CEOs of many of America’s top companies explicitly identify their employees as stakeholders and commit to compensating them fairly in pay and benefits and offering them training and education for new skills. The statement is silent, however, on unions and worker voice. Strengthening both is essential for an economy in which more Americans can find good jobs and a foothold in the middle class.
During the last 50 years, unions have atrophied in the US for several reasons. States and companies have taken many steps to discourage unionization, including misclassifying employees as independent contractors. Under US federal law, independent contractors cannot form unions—a position recently affirmed by the National Labor Relations Board. Current US law also prevents the formation of work councils or other organizations to represent worker interests in nonunionized firms, and it hinders new forms of worker advocacy at the industry and company levels.
Excerpted from Laura D’Andrea Tyson’s chapter “Technological Change, Income Inequality, and Good Jobs” in Combating Inequality: Rethinking Government’s Role, edited by Olivier Blanchard and Dani Rodrik. Reprinted with permission from The MIT Press. Copyright © 2021.
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