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Technology, globalization benefit rich, hinder poor
By Stephen Boyle |
February 22, 2012, Wednesday
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AMERICA'S per capita gross domestic product grew by 55 percent between 1987 and 2007. That should have made the typical American considerably better off. It didn't.
The income of middle-income households rose 10 percent to an average US$53,000 in those 20 years, while higher-income households - those in the top 5 percent - had incomes increase by 25 percent. By contrast, the incomes of the very richest - in a crowd of one million people, these would be the 100 top earners - increased fourfold.
Rising inequality has been most acute in the US, but it has happened elsewhere, too - from the UK to China, from Finland to India, from Germany to Mauritius. Economies grew, but the best off captured the lion's share of the gains.
Computers have replaced people in tasks that can be broken into repeatable chunks, like making cars. Job markets in rich countries increasingly resemble an hourglass. The middle is squeezed, with a growing share of jobs at the top and bottom ends of pay and skill levels.
Globalization is one reason why wages at the bottom have stagnated. Large numbers of low-skilled people, from places like China and India, have become part of the world's labor supply and global trade.
Although technology and globalization explain the general rise in inequality, why have the very richest become so very much richer? "Superstar" pay provides part of the explanation. In the US, in particular, company leaders have joined the ranks of movie and sporting superstars. In the 20 years after 1987, when Average Joe's wages rose by 10 percent, Forbes Magazine reckons the top 100 corporate leaders enjoyed pay increase of up to 500 percent.
Rising inequality
Does any of this matter? Many people feel uneasy about rising inequality, which probably underpins growing social strains in some countries. Others argue that the opportunity to succeed is an essential ingredient of a free society.
My question is narrower: Does it matter to the economic prospects? There are two arguments that it might - one bad, one good.
The bad argument goes back to Karl Marx. If you give a rich person and a poor person each US$100, the rich person saves a higher share of it than the poor one. So, as the rich take a higher share of a country's income, demand in the economy gets weaker. More inequality means slower growth. The problem with this argument is that even if the rich save a bigger proportion of any extra income, their savings will be recycled across the economy through banks and investors.
The good argument is that when income growth slowed in rich countries, politicians and their electors came to an unspoken agreement: People could borrow more to fund rising consumption.
Can the trend in inequality be reversed? Unlikely. Technological advances are a genie that can't be forced back into the bottle, and the benefits of globalization have been substantial.
Stephen Boyle is the head of Group Economics at Royal Bank of Scotland.
The income of middle-income households rose 10 percent to an average US$53,000 in those 20 years, while higher-income households - those in the top 5 percent - had incomes increase by 25 percent. By contrast, the incomes of the very richest - in a crowd of one million people, these would be the 100 top earners - increased fourfold.
Rising inequality has been most acute in the US, but it has happened elsewhere, too - from the UK to China, from Finland to India, from Germany to Mauritius. Economies grew, but the best off captured the lion's share of the gains.
Computers have replaced people in tasks that can be broken into repeatable chunks, like making cars. Job markets in rich countries increasingly resemble an hourglass. The middle is squeezed, with a growing share of jobs at the top and bottom ends of pay and skill levels.
Globalization is one reason why wages at the bottom have stagnated. Large numbers of low-skilled people, from places like China and India, have become part of the world's labor supply and global trade.
Although technology and globalization explain the general rise in inequality, why have the very richest become so very much richer? "Superstar" pay provides part of the explanation. In the US, in particular, company leaders have joined the ranks of movie and sporting superstars. In the 20 years after 1987, when Average Joe's wages rose by 10 percent, Forbes Magazine reckons the top 100 corporate leaders enjoyed pay increase of up to 500 percent.
Rising inequality
Does any of this matter? Many people feel uneasy about rising inequality, which probably underpins growing social strains in some countries. Others argue that the opportunity to succeed is an essential ingredient of a free society.
My question is narrower: Does it matter to the economic prospects? There are two arguments that it might - one bad, one good.
The bad argument goes back to Karl Marx. If you give a rich person and a poor person each US$100, the rich person saves a higher share of it than the poor one. So, as the rich take a higher share of a country's income, demand in the economy gets weaker. More inequality means slower growth. The problem with this argument is that even if the rich save a bigger proportion of any extra income, their savings will be recycled across the economy through banks and investors.
The good argument is that when income growth slowed in rich countries, politicians and their electors came to an unspoken agreement: People could borrow more to fund rising consumption.
Can the trend in inequality be reversed? Unlikely. Technological advances are a genie that can't be forced back into the bottle, and the benefits of globalization have been substantial.
Stephen Boyle is the head of Group Economics at Royal Bank of Scotland.
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