Pearls and Irritations

Advances in technology have resulted in employment and wage dislocations that are polarising society and undermining trust in political institutions.

Technological progress has been the key driver of the enormous improvement in living standards in all the advanced economies since the Industrial Revolution. No wonder governments have welcomed technological progress and sought to foster it.

Furthermore, it is typically assumed that everybody benefits from technological progress and benefits pretty much equally. For example, the standard (neo-classical) economic growth model, which the Treasury and Reserve Bank use, effectively assumes that technological progress is always neutral. That means these key authorities ignore any possibility that technological progress might:

• be biased in favour of capital or alternatively labour saving;
• change the distribution of jobs between higher and lower skills, with consequences for the distribution of earnings and consumer demand.

Both possibilities are likely to have consequences for the economy, and thus impact our society and politics.

This article summarises how technological progress, starting with the Industrial Revolution, has actually impacted the structure of jobs, and the economic and political consequences of those departures from the present assumption that technological progress will always be neutral and not impact the distribution of incomes.

Perhaps not surprisingly, what we find is that through time different technologies have had different impacts, sometimes improving the equality of living standards and our sense of community, and sometimes the reverse.

We can and should learn from this past experience to better understand the challenges that technological change presents today, and the breadth of changes needed to successfully adapt to it.

Much of my argument is drawn from Carles Boix’s book Democratic Capitalism At The Crossroads: Technological Change and the Future of Politics, but I also draw on Stephen Bell’s and my book Fair Share.

Technological progress and the distribution of jobs

Boix identifies three major waves of technological change that have impacted the structure of jobs since the Industrial Revolution, each with major but different consequences for our economy, society, and politics.

The first of these three waves of technological progress was the Industrial Revolution itself. Before then, production had taken place in small artisanal workshops. In contrast, the revolution reorganised the manufacturing process as a sequence of routinised tasks, mechanising them with large numbers of machines brought together in large factories. As a result, the pre-industrial skilled craftsmen, who often made an entire product by hand, were replaced with unskilled individuals who were limited to a single specific action in the chain of production. The consequent increasing inequality between labour and the owners of capital led to protracted economic and political conflict.

The workers brought together in large factories and crowded into new industrial towns demanded the right to vote. But the property classes resisted and even John Stuart Mill warned that “equal and universal suffrage” was a “violent remedy” because it implied “disenfranchising the higher and middle classes… who comprise the majority of the most intellectual in the kingdom”. On the other side of politics, the growing socialist movement rejected any form of “bourgeois democracy”.

As Boix puts it: “Full democracy, with its strictly egalitarian one-man-one-vote rule, looked incompatible with the philosophy of economic laissez-faire that defined 19th century liberalism and the inequalities generated by the first industrial revolution.”

In short, the Industrial Revolution gave birth to what was then known as the class struggle.

The second wave of technological progress was characterised by assembly lines, first developed by Henry Ford, which depended on electric rather than steam power.

Most importantly, labour markets changed in two fundamental ways:

• The unskilled workers, whose brawn had fed the first wave of industrialisation, were increasingly replaced in this second wave by individuals capable of reading the operating instructions of machines as well as installing, repairing, and improving them.
• A fall in transport and communication costs due to the invention of the telegraph and improvements to railways and the naval steam engine led to the rise in global markets and large corporations that needed layers of white-collar jobs to manage those firms.

Boix argues that these semi-skilled and skilled workers became central to the production process, and as they replaced unskilled workers wages grew across the board. “Accordingly, the distribution of earnings became more equal” and “inequality declined everywhere throughout the middle decades of the 20th century.” In addition, living standards generally were increasing almost twice as fast as in the previous century.

In these circumstances, the mass political parties founded at the end of the 19th century turned themselves into “catch-all” parties that strove to attract a wide spectrum of voters. This in turn led to a shift in politics towards the centre, where the main parties agreed on much more than they disagreed.

Thus, as Boix puts it: “Over time, the institutional arrangements of democratic capitalism – that is, free markets, full democracy and a generous welfare state – took root everywhere.” But as he also emphasises: “The roots of that new political order, which implied the successful conciliation of the demands of democracy and the logic of capitalism, were economic.”

The modern era and third wave dates from the late 1970s and early 1980s when information and communication technologies (ICT) began to reshape the structure of employment, reversing the positive effects of the previous wave of technology on labour markets.

The new ICT most impacted routine jobs composed of tasks that follow well-defined procedures that can be reproduced by machines fed with appropriate rules and algorithms.

This change has resulted in the number of factory workers in developed economies falling by around 40 per cent since 1980 even though manufacturing output is higher. But many white-collar jobs that can also be routinised have also disappeared. The counterpart is that in the US and western Europe, the share of high-skilled occupations (managers and professionals) in total employment has grown from around 28 per cent of employment in 1980 to 39 per cent in 2010.

In Australia too the labour market has been hollowed out with a loss of many tradie and semi-skilled jobs in the middle of the earnings range. Thus, male blue-collar workers comprised as much as 58 per cent of total male employment in 1971 but only 46 per cent in 2015, while the share of male managers and professionals doubled from 17 per cent to 35 per cent. Similarly, the share of females in clerical and administrative jobs fell from 32 per cent of total female employment in 1971 to 22.6 per cent in 2015, and female managers and professionals increased their share from 16 per cent to 37 per cent.

But the ICT revolution not only changed the distribution of jobs and skills in the labour market, it also globalised the production of goods and services from the late 1970s onwards. Recent estimates (cited by Boix) attribute about one-third of all employment losses in the last few decades to this relocation of production abroad.

Together these changes in the structure of employment have translated into a more unequal distribution of earnings. In the last 50 years median earnings in the US have not increased at all, and in other OECD countries they have risen much less than the overall economy.

The implications for politics today

Over time this rising inequality and the associated loss of status for many workers has shaken the social and political consensus of the post-war period. Mistrust in political institutions and the political establishment has increased across all countries but is concentrated among those people most hurt by economic change.

Their political disaffection has morphed into political disengagement and in many countries politics has become more polarised than before. Those who have lost out also seek a scapegoat — often foreigners and especially migrants.

As Boix puts it: “Democratic capitalism could find itself at a major political crossroads – one where our societies could be torn apart between the employment and wage dislocations brought about by technological progress and the equalising tendencies and demands inherent to a democratic system.”

But we do start with certain advantages in tackling this critical problem. Most importantly we are a rich society. Average incomes in the advanced democracies are about 10 to 15 times higher (in constant dollars) than 150 years ago.

It should be possible to use this massive build-up in wealth to smooth the present technological transformations and to guarantee relatively equal life chances to all. First, everyone should be provided with the kinds of capabilities and skills that are complementary to the new technologies; and second, those individuals who may be underemployed or unemployable at present should be compensated and protected.

Contrary to the apostles of small government, governments can and do make a difference in how these key issues are handled. For example, the rising cost of education in the US has meant that the supply of skilled labour has not met the rising demand and the wage premium for a college degree has doubled compared to the 1970s. On the other hand, in Australia over the same period, relative wage rates have remained remarkably stable and inequality has risen much less than in the US, principally because the education opportunities expanded much more rapidly in Australia than in the US.

Nevertheless, the advocates of small government will no doubt object that the size of government intervention in pursuit of traditional equality of incomes and opportunities cannot be afforded. The present inequalities of income and wealth are, however, way more than capitalism ever needed in the past. And it is in the interests of the wealthy to preserve a harmonious society.

Capitalism cannot survive without support for the rule of law and that requires democracy. But democracy in turn requires considerable common agreement based on not too great disparities among its citizen members. We can see what is happening in America when democracy and the rule of law breaks down – and that is not helping the US economy.

In Australia these issues are so important that they should be at the centre of debate in the forthcoming election, along with climate change, but I expect they won’t be. Instead we will continue to drift, with the risk of becoming a more polarised and partisan society.