Author : Soumya Bhowmick

Expert Speak Digital Frontiers
Published on Dec 23, 2020

The coming decade requires an urgent effort toward the establishment of mechanisms that ensures an egalitarian re-distribution of the tech-revolution benefits.

Inequality 4.0: Digital resurgence widening income gaps?

This article is part of the series — Post-Pandemic Development Priorities.


Joseph Schumpeter in his 1942 treatise Capitalism, Socialism and Democracy remarked that Creative Destruction is an “essential fact about capitalism” —referring to the incessant product and process innovation mechanism by which new production units replace outdated ones to drive economic progress. This process of Schumpeterian restructuring is reflected in economic fluctuations, structural transformations and, most importantly, in the functioning of labour markets, where it usually leads to the destruction of old jobs and creation of new ones. However, the daunting task of balancing job conservation and technological progress has kept policy makers and academics engaged since the first Industrial Revolution to rising speculations regarding the post-COVID world. More so because the outcome of the restructuring is inextricably linked to the balance of power in society and the expected distributional impacts of the technological innovation on individual incomes.

In this ebb and flow of innovations, Industrialisation 4.0 is the most recent form of disruption that the global economy is experiencing. As the pandemic-induced working spaces are characterised by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres, it is necessary to ensure that its adverse impacts on income and inequality, and overall socio-economic development, are avoided or at the least addressed. Although there is no doubt that digital technologies have been crucial in transforming economies across the world, nevertheless, their benefits have been predominantly skewed. Changes in technology alongside policy failures are responsible for the increasingly unequal distribution of income between capital and labour, with the former usually gaining at the expense of the latter. ILO estimates that labour income has dropped by 10.7 percent (or US$ 3.5 trillion) globally, only in the first three quarters of 2020 in comparison with the same period in 2019, and these losses are highest in the middle-income countries. Furthermore, in 2017, for example, Apple had a market capitalisation which was forty times of the largest US firm in 1962 — AT&T — but Apple's total employment was only one-fifth of AT&T.

The job market will begin to resemble a bar-bell like figure, as most jobs are available at the low and high ends of the skill spectrum as a result of the loss of mid-level skill jobs to automation.

Highlighting wage inequality, Carl Frey and Michael Osborne observed in their study of the US labour market that automation is expected to take away 47 percent of all jobs. Most of these being in the low and mid-skill levels. Subsequently, the job market will begin to resemble a bar-bell like figure, as most jobs are available at the low and high ends of the skill spectrum as a result of the loss of mid-level skill jobs to automation. The mis-match between the demand and supply of the new skills introduced by technological innovation is the primary reason behind this. Supply of high skilled workers is a function of education, which in turn is influenced by various other socio-economic factors. As the number of people with the new skills required are relatively less than its demand, they are paid a higher wage for their effort. At the same time, the supply of low-skilled or semi-skilled workers increases as several workers move from the mid-skill level jobs — that were lost to automation — to the low-skill sector. This inevitably pushes their wages down and the wage inequality only widens along with unemployment. That such unequal distribution has adverse impacts on the society can be observed at the epicenter of technological evolution itself — the Silicon Valley in California!

With only a decade left to meet the UN Sustainable Development Goals (SDGs), addressing the problem of income inequality (categorised under SDG 10: Reduced Inequalities) will be of paramount importance. Its relevance is further underpinned by the multiple linkages between income inequality and other socio-economic development parameters such as education, poverty, and good health and well-being, amongst others. Major challenges remain towards the achievement of SDG 10 in large parts of Asia, Africa and Latin America.

In the wake of the COVID-19 pandemic, there has been a significant uptick in the digital economy. Online platforms and services have become omnipresent across daily economic activities — ranging from tele-medicine to online education. As we proceed towards a global economic slump that indicates high chances of companies going bust and people losing their jobs, Schumpeter's assertion that “after some time of depression, new entrepreneurs would emerge. And then there would be a new ‘swarm’ of entrepreneurs. A wave of prosperity would start up and the whole cycle would roll on” is likely to prevail and inspire the next wave of ‘creative destruction.’ In the digitally overwhelmed post-pandemic world this will, undoubtedly, be hinged upon the digital economy, thereby, intensifying the rate of Industrialisation 4.0, and leaving semi-skilled people, in developed and developing countries, trapped in a vicious cycle of unemployment and low incomes. At a global scale, the gross geographical imbalance in the digital revolution — with China and the US leading various domains of technology — will further induce large-scale economic inequality between countries in varying proportions.

The only way to reduce the digital inequality with the technology giants in the world is to tango with them for win-win solutions.

In order to ameliorate the digitisation-induced income gaps, the primary concern of governments should be focused on methods to create digital jobs locally. This can be carried out by stimulating the startup economy, mobilising disruptive technologies in the public and private sectors, digital skilling of the labour pool, etc. The only way to reduce the digital inequality with the technology giants in the world is to tango with them for win-win solutions. Most governments that do not have enough money to independently create robust digital ecosystems must rely on the technology titans (in digitally advanced nations) to create market solutions that provide the key ingredients for digital ecosystems. As the ‘big tech’ firms are earning staggering profits, they are also competing to capture the same profit pools (for example the growing markets in South and Southeast Asia). Emerging economies can catalyse this fierce competition by attracting these companies with the help of tax incentives, capital and labour availability and other enabling business conditions.

Although technology is ‘skill-biased,’ it must not be blamed for the consequent income inequality. In order to ensure that income inequality doesn’t worsen further, the coming decade requires an urgent effort toward the establishment of mechanisms that ensures an egalitarian re-distribution of the tech-revolution benefits. As the world leaps towards the digital era, the time is ripe to learn a lesson or two in reducing income divergences within and across nations — keeping in mind that inclusive development lays at the heart of sustainable progress.

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Author

Soumya Bhowmick

Soumya Bhowmick

Soumya Bhowmick is an Associate Fellow at the Centre for New Economic Diplomacy at the Observer Research Foundation. His research focuses on sustainable development and ...

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Contributor

Roshan Saha

Roshan Saha

Roshan Saha was a Junior Fellow at Observer Research Foundation Kolkata under the Economy and Growth programme. His primary interest is in international and development ...

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