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Inequality in the Digital Era by Zia Qureshi 3

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Inequality in the Digital Era by Zia Qureshi 3 WORK IN THE AGE OF DATA BBVA OPENMIND DATA, IDEAS, AND PROPOSALS ON DIGITAL ECONOMY AND THE WORLD OF WORK BBVAOPENMIND.COM Work in the Age of Data 2 Inequality in the Digital Era by Zia Qureshi 3 We are living in an era of mounting socie- tal discontent and political divisiveness. In many countries, social disaffection with eco- nomic outcomes is up sharply, stoking pop- ulist and nationalist sentiment. Increasing income inequality is one important reason behind this sociopolitical tumult. We are also living in an era of major tech- nological change, led by the digital revolu- tion. Today’s technological changes—ad- vances in computer systems and software, mobile telephony, digital platforms, robotics, cloud computing, artificial intelligence, and cyber-physical systems—are arguably unpar- alleled in their scope and speed. Inequality in Are these two megatrends of our time connected? The answer is yes. Digital tech- nologies are reshaping the world of business the Digital Era and work in profound ways. Policies have been slow in adapting to the new dynam- ics. The interaction between technological change and market conditions as influenced Zia Qureshi by the prevailing policy environment has been a key factor driving income inequality higher. Disruptions caused by technological change have added to business and worker anxieties. A more unequal distribution of income, however, is not an inevitable consequence of a digitizing world. Outcomes that are more inclusive are certainly possible with better, more responsive policies. Rising Income Inequality amid Booming Digital Technologies Income inequality has risen in practically all major advanced economies since the 1980s, a The digital revolution is transforming period of a rising boom in digital technologies (fig. 1). It has risen particularly sharply at the economies. Potential economic gains from top end of the income distribution. Wealth digital technologies are enormous, but with new inequality is still more acute, roughly twice opportunities come new challenges. Within as high as income inequality. The increase in economies, income and wealth inequalities inequality has been especially marked in the have risen as digitization has reshaped markets United States. Over a two-decade period end- and the world of business and work. Inequalities ing in 2015, US disposable income inequality, have increased between firms and between as measured by the broadest measure of in- workers. The distribution of both capital and equality (the Gini Index), increased by more labor income has become more unequal, than 10%. The income share of the richest 1% and income has shifted from labor to capital. has more than doubled since the early 1980s, to around 22%. The share of the top 1% in Technological change, however, is not the sole wealth has risen to around 40%. Those with reason for the rising inequalities. Policy failures middle-class incomes were squeezed and the have been an important part of the story. typical worker saw largely stagnant real wages Policies will need to be more responsive to the over long periods. Higher inequality has been new dynamics of the digital economy to achieve associated with a decline in intergenerational outcomes that are more inclusive. economic mobility (Chetty et al., 2017). Work in the Age of Data 4 This article focuses on advanced econo- full potential to boost productivity (Brook- at the technological frontier. However, it has mies, but the rise in income inequality is not ings Institution and Chumir Foundation, slowed considerably in the vast majority of confined to this group. In emerging econo- 2019). Developments in income distribution other, typically smaller firms, pulling ag- mies, income distribution trends are more and productivity have been linked by shared gregate productivity growth lower. Between mixed but many major emerging economies dynamics. 2001 and 2013, in OECD economies, labor also witnessed a rise in income inequality. productivity among frontier firms rose by In the two largest emerging economies, around 35%; among non-frontier firms, the China and India, inequality has increased Transformations in the World of Business increase was only around 5% (Andrews et appreciably.1 al., 2016).2 Aggregate labor productivity In the cauldron of political debate, much Digital technologies are altering business growth in OECD economies in the decade of the blame for the rise in income inequal- models and how firms compete and grow. to 2015 was only about half of that in the pre- ity and underlying business and job dislo- They are reshaping market structures. ceding two decades. The growing inequality cations is heaped on globalization—often Change affects all markets, from produc- in productivity performance between firms from both ends of the political spectrum. tion and commerce to finance. The manner not only depressed productivity growth, but The backlash against globalization threat- in which the new technologies deploy across also caused income disparities to rise. ens a retreat into economic nationalism and industries and firms has important impli- A weakening of competition is one im- inward-looking policies. Globalization has, cations for their economic impact and the portant reason for these adverse productiv- indeed, been a factor behind rising inequal- distribution of rewards. ity and distributional dynamics. Barriers to ity. However, a much bigger factor has been competition and related market frictions are technological change. Uneven Diffusion of New Technologies and preventing a broader diffusion of the new Not only is the proverbial economic pie Widening Gaps between Firms technologies and causing a persistent rise in being shared more unequally, it has also been How technological innovation diffuses productivity and profitability gaps between growing more slowly, adding to social dis- within economies and interacts with mar- firms. Evidence for OECD economies shows content. Paradoxically, productivity growth ket conditions matters greatly for both pro- that in industries less exposed to competi- in major economies has slowed rather than ductivity growth and income distribution tion, technological innovation and diffusion accelerated during the boom in digital tech- (Comin and Mestieri, 2018; OECD, 2018a; are weaker, inter-firm productivity diver- nologies. This has slowed overall economic Aghion et al., 2019). The benefits of the gence is wider, and aggregate productivity growth. Research finds that the same inter- new technologies have not been diffusing growth is slower (Cette et al., 2016; Égert, action between technological change and widely across firms. They have been cap- 2016). Studies of the United States and Eu- policy failures that contributed to higher tured for the most part by a relatively small ropean economies also find that lower com- income inequality also explains why the number of larger firms. Productivity growth petitive intensity in markets depressed in- new technologies have not delivered their has been relatively strong in leading firms vestment in new productive capital, as firms 1975 1980 1985 1990 1995 2000 2005 2010 2015 0.38 0.34 0.30 0.26 Gini Index of Disposable Income of Gini Index Year USA Italy United Kingdom Canada Spain France Fig. 1. Rising income inequality: major advanced economies Japan Germany (Source: OECD Income Distribution Database) Australia Inequality in the Digital Era by Zia Qureshi 5 Between 2001 and 2013, wielding increased market power invested more unequal, with a relatively small num- in OECD economies, labor less and made a lot more on existing capi- ber of firms reaping supernormal profits. In productivity among “frontier tal through higher markups and increased the United States, for example, the ninetieth firms” rose by around 35%; stock buybacks (Gutiérrez and Philippon, percentile firm earned a return on invested among other firms, the 2017; Égert, 2018). capital reaching around 100% in 2014, which increase was only around 5% The erosion of competition is reflected was more than five times the return earned in a variety of indicators: rise in market con- by the median firm; this ratio was around 2 centration in industries, higher markups about twenty-five years ago (Furman and showing increased market power, and cor- Orszag, 2018). The uneven distribution of porate ossification with declining business returns on capital was particularly marked dynamism as measured by new firm forma- in technology-intensive industries. There tions. These trends are observable broadly is also evidence of low churning among across advanced economies but have been high-return firms, with a large proportion particularly marked in the United States. of such firms persistently achieving high The share of top four US companies in total rates of return. sales has risen since the 1980s in each of the Markets have shifted toward more mo- major sectors covered by the US Economic nopolistic structures, giving rise to higher Census (Autor et al., 2017). The rise in mar- economic rents (Krugman, 2016; Stiglitz, ket concentration is greater in industries 2016; Summers, 2016). The share of “pure that are more intensive users of digital tech- profits” or rents (profits in excess of those nologies. Markups over marginal cost for US under competitive market conditions) in publicly traded firms have nearly tripled, total income in the US economy rose from with the rise concentrated in high-markup 3% in 1985 to 17% in 2015 (Eggertsson et al., firms gaining market share (De Loecker et 2018). As monopoly profits boosted the mar- al., 2018). The share of young firms (five ket value of corporate stocks and produced years old or less) in the total number of US large capital gains, the share of total US stock Establishments like the legendary firms has declined from about one-half to market value reflecting monopoly power department store Harrods in London, which one-third (Decker et al., 2017). (“monopoly wealth”) rose from negligible had previously replaced small retailers, are now losing market share to online With increased market power, the dis- levels to around 80% over the same period megastores tribution of returns on capital has become (Kurz, 2018).
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