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Sorry, Neoliberals: Inequality Is Driven by Greed, Not Technology

A new study shows low wages are really caused by low minimum wage, weakened unions and the effects of globalization.

Photo Credit: aastock


Inequality may be the greatest economic challenge of our generation. Yet despite extensive academic debate, there is still no consensus as to its causes. Earlier this year, Tyler Cowen sparked a debate on the subject with his book “Average is Over,” in which he argues that inequality is driven by new developments in technology that give some workers who can capably use the technology a wage premium over those who can’t. Future innovations in technology, he argues, will contribute to hyper-meritocracy and further inequality.

His argument echoes the conventional wisdom in economics, formulated by Lawrence Katz and Claudia Goldin, that skill-biased technological change can explain most of the increase in inequality. The premise is that technological developments have favored college-educated workers over unskilled labor, thereby increasing inequality. Since it was formulated, SBTC has drawn criticism. A  2002 paper by David Card first drew attention to potential holes in the explanation: a short period of stabilization in wage inequality in the 1990s during a technological boom and the failure to explain wage gaps between men and women as well as blacks and whites. A 2012 paper by Daron Acemoglu and David Autor  noted other failures in the theory, namely that it could not explain the divergence in incomes that had occurred among skilled workers and why the real median wages could decline during a period of increasing productivity.

Now, Lawrence Mishel, Heidi Shierholz and John Schmitt  have released a new study that questions SBTC as an explanation for increasing wage inequality. Mishel et al. argue that “job polarization,” the premise that more jobs have been created in low-wage sectors and high-wage sectors, thus driving wage inequality, doesn’t actually explain the problem. On the one hand, high-wage occupations have not significantly expanded their share of the workforce since 2000. On the other, low-wage jobs have not increased as a total share of employment since 1979.

They find that changes in the occupation structure do not affect the wage structure, so if technology causes a shift from manufacturing to retail, this doesn’t necessarily entail a shift in the wage structure. They find that inequality is increasing within occupations, not between occupations as the SBTC narrative would predict. The SBTC narrative relies on the idea of an “education premium,” i.e., people with higher education reap the benefits of technological progress. But Mishel et al. find that wage inequality has grown strongly since the mid-’90s while the education wage premium  grew little. Wages for college graduates have flattened over the last 10 years,  even among science, technology, engineering and mathematics (STEM) and business occupations.

The implications of the different visions are profoundly different. Cowen envisions, according to  The Economist, a future largely stripped of middling jobs and broad prosperity. An elite 10-15% of Americans will have the brains and self-discipline to master tomorrow’s technology and extract profit from it, he speculates. They will enjoy great wealth and stimulating lives. Others will endure stagnant or even falling wages, as employers measure their output with “oppressive precision.” Some will thrive as service providers to the rich. A few will claw their way into the elite (cheap online education will be a great leveler), bolstering the idea of a “hyper-meritocracy” at work: this “will make it easier to ignore those left behind.”

Mishel is more hopeful. After all, if inequality is the inevitable product of technological change, the only way to prevent higher inequality is to slow innovation. But Mishel is no Luddite. His  State of Working America 2012 report (co-written with Josh Bivens, Elise Gould and Heidi Shierholz) argues that it is economic policy, not changing technology, that drives wage inequality. The decreasing value of the minimum wage, the weakness of unions and the impacts of globalization have all coalesced to keep down wages.

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