Why has income inequality been rising in advanced economies — it’s not just the US, people — over the past few decades? The economic consensus mostly explains the phenomenon as a race between accelerating technological change and expanding education. And the rise of inequality shows, as JPMorgan economist Mike Feroli puts it in a new report, that the “pace of technological advance has outstripped the ability of the educational system to supply the human capital skills needed to utilize this technology, leading to out-sized earnings gains for those who have such skills (the so-called college wage premium).”
It was technology versus education, and technology won.
But that balance could be shifting, according to Feroli. First, there has been a rise in college enrollment rates, and it doesn’t appear to merely be a case of young people avoiding a bad job market by heading to university.
Second, the pace of technological change appears to be slowing if you measure innovation by the relative prices of capital equipment. Feroli devastating data point: “In the second half of the 1990s, the real price of computer equipment declined at a 24% annual rate, indicating an extremely rapid pace of increase in computing power. Over the last five years those prices have fallen at only a 6% annual pace, consistent with progress occurring at a much slower rate.”
Feroli thinks the tide has already turned in the race between education and technology, but the deep recession and weak recovery have masked it. He finds a linkage between the Gini coefficient — a measure of household income inequality — and the gap between the actual unemployment rate and the economy’s natural, full-employment rate.
As the economy hopefully moves back toward full employment, this alone should reduce inequality. Furthermore, if the leading explanation of inequality is correct, and recent trends in education and technological advance continue, we could see a further compression of wages.
Now here’s the other side of the trade:
1. Maybe the rising cost of education will cause college attendance to slip.
2. Maybe computer equipment prices are a poor shorthand for technological progress and productivity. There is also a strong case to be made that innovation is accelerating, which I have written about frequently.
3. Maybe the tech-education explanation for inequality has less explanatory power than commonly believed.
Feroli acknowledges all of the above, but still concludes “that the next few years have the best chance in a generation to witness a narrowing in income inequality.” Now the reason that might be a good thing is that American society, particularly on the lower-income end, has been buffeted by globalization and technology. Perhaps it could stands for a brief pause. Let education and the safety net catch up. Then again, I would rather deal with the technology-education race — which I really think is an automation versus education-entrepreneurship race— on the fly by making workers smarter and helping entrepreneurs to invent new ways of “combining technology and people to create new industries and innovations,” in the words of techno-optimist Erik Brynjolfsson. Reducing inequality via less growth and less innovation and less opportunity — through a “great stagnation” — seems like a lousy bargain.
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