Rising inequality as a result of falling scarcity?

Via Marginal Revolution, there are a number of interesting slides discussing changes in skills, demand for skills, and wage inequality.  Further investigation brings to light a very awesome paper that discusses a standard model that shows wage inequality with different skills, how to estimate it, and where some shortcomings are.

In conjunction with our knowledge of what the data regarding the “top 1%” really means, this adds credence to the view that recent technological advancements that replaced semi-skilled labour has been a primary driver of changes in income distributions around the world.

What do I mean here?  Think of it this way, people are rewarded for their skills based on how relatively scarce the service they are providing is.  Say there are three types of labour service, unskilled, semi-skilled, and skilled.  If technology creates a cheap way of replicating semi-skilled work, and if workers in a certain category have the ability to function in any market below their skill cap, this improvement in technology would reduce demand for semi-skilled workers (due to them being substituted), increase demand for unskilled and skilled workers (due to the improvement in technology increasing “income”), and increase the supply of unskilled workers (as people who are semi-skilled are pushed to move into the unskilled labour market).

As a result, this technological improvement has the immediate impact of increasing relative incomes for the most skilled making wage income inequality greater.

Now these price signals are important, as they give people an idea of what skills to develop, and what industries they should move too.  However, in turn we can make a social argument for what falling scarcity implies that we should have greater income redistribution.

Furthermore, if rising income inequality is the result of improving technology it is far from the “end of the world” type scenario some people are painting – in truth we are all benefiting significantly from improvements in technology and falling scarcity for many goods and services, the benefits of this improvement are just accruing more to some than others.

3 replies
  1. Mike Booker
    Mike Booker says:

    Skills story might explain the 1 percent phenomenon, but what’s going on with the top 0.1 percent who have most of the wealth and clout? Not related to technology.

    • Matt Nolan
      Matt Nolan says:

      Two things with the idea of the top 0.1%.

      1)  That is very much an issue in the US rather than a globalone – at least we don’t have the data at that level to see if it is here, but given we don’t have the same 1% issues I’d assume so.

      2)  This could be completely consistent with technology as well, if the top 0.1% are in areas that are especially sensitive to this technological change.

      Note that technology is one among many explanations for rising inequality – in truth we need to find a way to work out what magnitude of any change is driven by each explanation before we can say anything.  And before doing that, we need to measure inequality properly – by recognising that different groups are facing different changes in prices, and so that our real income figures are biased.

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