Digitalisation is rapidly changing US labour market dynamics

Why technology is worsening economic inequality

The number of workplaces that require digital skills and engagement with computers is increasing. This spread of new technologies has reshaped the relationship between worker power and labour market tightness, manifesting in anti-competitive, winner-take-all dynamics and skill-biased technological change – all of which has suppressed wage growth.

There is mounting evidence that an unequal embrace of digitalisation has helped create these macroeconomic conditions. Marked by high levels of vulnerability for low- and middle-wage workers, this only worsens economic inequality in the US.

Why has US inequality has grown since the late 1970s?

Changes in tax policy, drops in the real value of the minimum wage, outsourcing, financialisation and a decline in unionisation have all abetted the growth of US economic inequality. An unequal macroeconomy – one in which 41.4% of Americans are classified as low-income and the top 1% of earners make 20 times more than the bottom 90% – is not the consequence of a singular policy or exogenous shock. Rather, it is a result of a complex amalgam of forces that have radically restructured the power dynamics that underlie the US economy.

Digitalisation – including artificial intelligence – is also a part of this story. Fears about labour automation and the loss of available jobs in the economy have been widely purported by public figures such as Elon Musk and Andrew Yang. Yet there is limited evidence of aggregate job losses. Instead, digitalisation has reshaped the nature of jobs that the economy demands while also rejigging the employer-employee dynamics that help determine wage growth.

There has been a clear reduction in labour market competition and worker power. A 2022 Treasury report highlighted the impact of winner-take-all dynamics and market concentration on reducing wage growth. These trends have been heavily aided by digitalisation, which allows large corporations to serve people without geographic barriers. The result is market domination by a small number of technology companies as well as a geographic concentration of economic growth in primarily coastal urban hubs.

The consequent rise of anti-competitive markets is mostly borne out of the number of US districts in which there are too few opportunities for decent work. This is partly a result of digitalisation-enabled concentration. As the US Treasury report highlights, although aggregate labour market figures indicate tightness and high competition, there is often extremely limited competition in local US districts that are more removed from urban centres of economic growth. The result is more stagnant wage growth for the middle- and especially low-wage occupations that dominate these non-urban environments.

The rise of market concentration has been coupled with a perfect storm of other elements to reduce worker power. These include union-squashing practices, contracting out labour and non-poach agreements where employees are not represented as part of pacts. For example, companies may no longer hire janitorial services and instead contract out the work to individuals that will accept lower pay, fewer benefits and less bargaining power than full-time employees. Economists Arindrajit Dube and Ethan Kaplan estimate that the contracting out of janitors and security guards reduced those respective wages by between 4% and 24%.

This weakening of labour market competition only partly explains the story of how digitalisation has made the US vulnerable to stagflation. A second key aspect is skill-biased technological change. Rather than replacing work altogether, economists like David Autor and David Dorn show that digitalisation has ‘hollowed out’ the middle wage portion of the US labour market. The result is growth in the share of high wage and low wage occupations, which partly explains the expansion of wage inequality since the 1980s.

What follows is a highly unequal labour market and an economy with a smaller middle class. These dynamics partly explain why some economists worry the US is experiencing a kind of master-servant economy. As it stands, this structure is not good for long-term growth, let alone an auspicious signal of fairness or political stability.

Why does this growth in labour market inequality matter right now?

Given the ongoing crisis of price growth, which may be slightly abetting, many economists have sought comfort in the notion that Americans hold a glut of savings and that the labour market is robust enough to be able to endure rate hikes without sending the economy into recession. What a closer look at the labour market shows, however, is a stark inequality of outcome and resource, in large part, borne out of the changing labour dynamics spurred by digitalisation.

A 2020 Massachusetts Institute of Technology study showed the stark inequality between savers and debtors in the US. Roughly 40% of Americans have trouble paying for food, medical care, housing and other utilities; nearly half have no retirement savings; 63% could not afford an unexpected $500 emergency expense; 70% of college graduates have $15,000 or more in outstanding student loan debt.

US inequality presents one of the most crucial economic hazards to the country. Beyond just a matter of fairness, it highlights how decades of anti-inclusive economic growth have made the country more vulnerable. The US should look to protect the livelihoods of Americans who do not have the savings or means to withstand a recession, on top of falling real wages.

Following a period of economic tightening, the US should use this moment to crack down on corporate taxes, ensuring that companies are paying their fair share while simultaneously providing improved transfers and aid to vulnerable individuals. Moreover, it should use this moment to provide a rationale for greater geographic inclusion in its plans for digital innovation. With the Biden administration continuing to develop a national AI strategy, working to improve geographically diffuse digital innovation will help distribute the gains of US economic growth to a greater number of people.

To read more, a longer version of this article was published by the Brookings Institution here.

Julian Jacobs is Senior Economist at OMFIF.

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