Digitization is rapidly changing the dynamics of the US labor market.
Beyond the increase in the number of workplaces that require digital skills and engagement with computers, the diffusion of new technologies has reshaped worker power and the relationship between labor market tightness and growth. salaries. In particular, this has manifested itself in anti-competitive winner-takes-all dynamics and skill-driven technological change, both of which have dampened wage growth. These dynamics have been well documented by economists such as David Autor and Daron Acemoglu. Yet they take on particular significance today as the Federal Reserve raises interest rates. Indeed, there is growing evidence that uneven adoption of digitalization has helped create the macroeconomic conditions – marked by high levels of vulnerability for low- and middle-wage workers – that are manufacturing greater risk of recession today.
To understand how uneven adoption of digitalization prepared the United States for a recession, it is important to situate this story in the larger context of why inequality in the United States has increased since the late 1970s. Changes in tax policy, the decline in the real value of the minimum wage, outsourcing, financialization, and declining unionization have all fostered the growth of economic inequality in the United States. An unequal macroeconomy — one in which 41.4% of Americans are classified as low-income and the top 1% earn 20 times more than the bottom 90% — is not the result of a single policy or from an exogenous shock. Rather, it is the result of a complex amalgamation of forces that have radically restructured the power dynamics that underpin the American economy.
Yet digitization is also part of this story. Fears about the automation of work, due to technologies such as artificial intelligence, and the loss of available jobs in the economy have been widely popularized by public figures such as Elon Musk and Andrew Yang. Yet there is also limited evidence of overall job losses. Instead, digitalization has reshaped the nature of jobs demanded by the economy while reorganizing the employer-employee dynamics that help determine wage growth. And that’s why the larger story of stagnant wage growth and economic inequality in the United States is closely tied to broader trends in digitalization.
First, there has been a marked reduction in labor market competition and worker power. A recent Treasury report tackled this phenomenon, highlighting the impact of win-win dynamics and market concentration on reducing wage growth. These trends have, as NBER Document 2017 shown, has been greatly aided by digitization, which allows large companies to serve people without geographical barriers. Companies like Uber, Google, and Microsoft, for example, have the ability to get their products to people just as easily in Appalachia as they do in Silicon Valley. And the result is market dominance by a small number of technology companies as well as a geographic concentration of economic growth in predominantly coastal urban hubs.
The consequent increase in anti-competitive markets is, moreover, confirmed above all by the number of American districts in which there are too few decent work opportunities. This is partly the result of the concentration enabled by digitization. As the US Treasury report points out, although aggregate labor market numbers indicate tightness and stiff competition, competition is often extremely limited in local US districts that are farther from urban centers of economic growth. The result is more stagnant wage growth for middle- and especially low-wage occupations that dominate these non-urban environments.
The rise of market concentration has further coupled with a perfect storm of other elements to reduce worker power. This includes union crushing practices, labor contracting out and no poaching agreements, where employees are not represented in the pacts. For example, companies may stop hiring janitorial services and outsource work to people who will accept lower pay, fewer benefits, and less bargaining power than full-time employees. Economists Arindrajit Dube and Ethan Kaplan estimate that contracting out janitors and security guards has reduced these respective salaries by 4-24%. The increasingly anti-competitive measures that American companies have taken to keep wages low partly explain the decline in the labor share of income and the stagnation of wage growth, which continues to follow inflation despite markets “tense” work. And the ability of employers to engage in anti-competitive behavior in the labor market is greatly enhanced by market concentration made possible by digitalization.
This weakening of labor market competition, however, only partly explains how digitalization has made the United States vulnerable to stagflation. A second key aspect, also mentioned in the Treasury report, is skill-driven technological change. Rather than completely replacing labor, economists like David Author and David Dorn show that digitalization has “hollowed out” the average wage portion of the US labor market. This results in a growth in the share of high-wage and low-wage occupations, which partly explains the expansion of wage inequality since the 1980s. And the consequence is a very unequal labor market and an economy with a smaller middle class. This dynamic partly explains why some economists worry that the United States is experiencing a sort of master-servant economy, which is not good for long-term growth, let alone a good sign of economic growth. equity or political stability.
Yet why is this growth in labor market inequality important right now, as the Federal Reserve continues to hike rates? Given the current crisis in price growth, many economists have sought comfort in the idea that Americans are holding a glut of savings and the labor market is robust enough to withstand rate hikes without sending the economy in recession. Thus, optimists believe that the United States will be better protected from the stagflation of the 1970s. What a closer examination of the labor market clearly shows, however, is a stark inequality of outcomes and resources, in large partly due to the evolution of work dynamics stimulated by digitization.
To find evidence of how inequality in the labor market makes the United States vulnerable to a recession, therefore, it is worth taking a closer look at the real strength of labor markets and whether Americans have sufficient savings to fall back on in the event of an income shock. On the first point, we have already highlighted how digitalization has contributed to widening wage inequalities, marked by a reduction in worker power and, now in the midst of inflation, a real fall in wage values for low-income people. So, while labor markets are indeed “tight” at some level, such tightness has clearly not manifested in increased worker protection and compensation as optimists imagine today. A MIT study highlighted this phenomenon at the beginning of 2020, showing the strong inequality between savers and debtors in the United States. And the result is a greater proportion of Americans living with high levels of economic precariousness and risk. About 40% of Americans struggle to pay for food, medical care, housing, and other utilities; nearly half have no retirement savings; 63% could not afford an unexpected emergency expense of $500; 70% of university graduates have $15,000 or more in outstanding student debt.
These figures, far from signaling an American working class well prepared to face income shocks, are indicative of a deep vulnerability. And this vulnerability, which has been stoked by an unbalanced adoption of digital technology, offers a powerful example of how wide macroeconomic inequalities can weaken a country’s economic prospects. As the University of Pennsylvania study In 2016, high levels of inequality deepen recessions and make growth harder to sustain. This is also a central conclusion of Thomas Philippon work in The Great Turnaround. The palpable vulnerability of millions of Americans to an income shock provides a case study of how inequality increases economic risk. And that belies the optimistic proclamations of some politicians and economists, who cite aggregate employment, wage and savings figures without a more granular look at the distribution.
I believe that inequality in the United States presents one of the most significant economic risks for the country. Beyond a simple question of fairness, the imminent prospect of a recession shows how decades of anti-inclusive economic growth have made the country more vulnerable. And so, as the Federal Reserve raises interest rates to curb price growth, the United States should seek to protect the livelihoods of Americans who don’t have the savings or the wherewithal to weather a recession. , in addition to the fall in real wages. Given the clear need for economic tightening, the United States should use this moment to crack down on corporate taxes, ensuring businesses pay their fair share while simultaneously providing enhanced transfers and aid. to vulnerable people. Moreover, it should use this moment to justify greater geographic inclusion in its future digital innovation plans. With the Biden administration continue to develop a national AI strategy, working to improve geographically diffused digital innovation, will help distribute the gains of US economic growth to more people.
And in doing so, the United States can offer a correction to the decade since the 2008 financial crisis, which was marked by massive growth in economic inequality on all fronts. The current downside risks offer policymakers a warning about the dangers of letting inequality grow for too long. To safeguard the economic future of the United States, it is crucial to reduce inequality and promote inclusive adoption of digital technology. The post-World War II middle class was a political creation and a diffuse investment in innovation. This economic structure ushered in decades of strong economic growth and provided a buffer against economic shocks. America should now be focused on ushering in a new era of middle-class resilience in the age of digitalization.