Winner takes all in our world

Robot arms assemble cars inside Hyundai's plant in India. Photo by Reuters.
Robot arms assemble cars inside Hyundai's plant in India. Photo by Reuters.
Prosperity generated by the IT revolution is not being equally shared, writes Peter Lyons.

I always book in at the counter when I catch a flight.

The attendants sometimes query why I don't use the automatic check-in. I tell them I am partially sighted but the truth is I am also a secret Luddite. At the start of the Industrial Revolution in England, the followers of Ned Ludd sought to destroy machines such as power looms that were driving the huge growth in output particularly in textiles. They feared losing their jobs. They became known as Luddites, which is a term now applied to those who resist technological change. It turns out they may have had a point.

Technological changes often create unemployment. Economists have long argued that the improvements in productivity and economic growth outweigh the loss of jobs in sectors adversely affected. Overall, society is better off, because more goods and services are being produced and increased productivity raises average incomes.

This is true in theory, but the theory says little about how the gains from technological progress are distributed. A large sector of a society may be shut out of the gains due to unemployment and a lack of retraining opportunities. The result is that social inequalities can magnify dramatically. A small sector of society experiences the bulk of the gains while the rest receive the crumbs. The IT revolution's effects on employment and income distribution are starting to become pronounced. Jobs such as checkout operators, retail assistants, process workers, clerical staff, secretaries, even pilots and commercial drivers, are likely to disappear through automation in the next few decades.

A recent book called Race Against the Machine by Eric Brynjolfsson and Andrew McFee, explores some implications of technological change on employment and income distribution in Western societies. The authors suggest that the link between economic growth and increased employment appears to have broken down. The term ''jobless recovery'' has entered the lexicon of economic jargon. Firms are using machines and computers to leverage more from less staff.

Unlike the early stages of the industrial revolution, driven by steam power, then electricity and internal combustion engines, the IT revolution does not generate widespread well-paid employment for the masses. Compare employment and incomes generated by car factories, household appliances, meat works, road and railway construction versus software firms, web page designers and laying fibre-optic cables. The authors point to key implications of the technology revolution on employment and incomes. It favours high-skilled workers over low-skilled. Relevant skills-based education becomes vital to earning a decent living. It creates mega-winners, such as CEOs and sports and entertainment stars.

Economist Robert Frank called this the ''winner takes all'' effect, where the skills and talents of these individuals can be broadcast to a far wider audience or client base due to improvements in IT. As a result, the pay rates of this elite have rocketed, compared to others. Finally, the technology revolution favours capital over labour. Firms can easily relocate to cheaper labour sources. They can also replace labour with machines, therefore reducing the bargaining power of workers. In most Western economies the share of national income earned as profits, rather than wages, has risen in recent decades.

The implications for policy makers are numerous. It is very unhealthy to have a large portion of a society shut out of the benefits of increased prosperity. Education systems need to be flexible and relevant. Unfortunately, in many countries, including New Zealand, education institutions and practices are notoriously resistant to change and accountability. There is a political stalemate between politicians, providers and unions that restricts constructive changes.

Another implication is that tax systems should favour investment in human capital in the form of training and education. Tax systems should also treat income from capital in the same manner as earned income by workers. In this brave new world, the truly wealthy make their money from gains in asset values, rather than income from their labour. IT advances offer exciting opportunities for improved prosperity, including massive environmental benefits. E books save trees. The advances benefit society in total but the problem is how these benefits are to be shared.

• Peter Lyons teaches economics at Saint Peters College in Epsom and has authored several economics texts.