Bryam Guazhambo, Tysne Ruggio, and Raymond Wheeler
Bryam Guazhambo, Tysne Ruggio, and Raymond Wheeler
Introduction
‘The implementation of more efficient production technology has been a major force behind income inequality in recent decades. According to OECD, GDP per hour worked in the U.S. has increased from 49.8 in 1970 to 103.3 in 2010 (OECD.org). Assuming material inputs have remained relatively constant over the same period, it is evident that it is firms’ abilities to use and mix these materials more productively that drives growth. The understanding of how to utilize materials in the most efficient way is generally thought to be a product of technological change, resulting from experimentation and scientific investigation (Romer, S72).
When examining wage growth during the same period, however, it is observed to be noticeably less than productivity growth. In fact, since the early 1970s inflation-adjusted wage growth has only been increasing on average .2% per year, compared with the roughly 2% percent growth in GDP per hour worked (Shambaugh, Dunn, np). The likely cause of such different growth rates is the rise of capital-intensive production. Firms no longer need to invest as heavily into labor as they previously did, as many aspects of production have become more automated. In fact, this is apparent when analyzing labor’s share of income since the mid-1970s, as it has dropped from 65% to 57% by 2017 (Shambaugh, Dunn, np). Such a decrease is surely intentional, to decrease costs through automated production systems by investing heavily in capital and R&D relative to labor. This is critical when examining income inequality because technology advances tend to substitute low-skilled labor while complimenting high-skilled labor. Thus, the demand and wages of low-skilled workers fall, while demand for high-skilled workers is rising, resulting in an increase in wages.
The relationship between technological growth and different skill groups is evident when examining trends in the labor force. Manufacturing jobs in the U.S. are becoming increasingly hard to find, as much of the production is automated, and the remaining portion of production is offshored to lower skilled cheaper labor. In many cases, the portion of production left to U.S. workers requires high human capital, as it requires monitoring and developing high skill-biased technology. On the other hand, many service sector jobs remain unharmed by technological advances and are actually complemented by more productive equipment and processes (Autor, 1077). Overall, the influence of technological growth on labor demand has a clear and negative impact on income inequality as a whole, since firms have an incentive to invest more intensively into capital relative to labor.
Endogeneity of Technology
The decrease in labor’s share of income supports the idea of endogenous technological growth. Endogenous technological growth suggests that technological advances are fueled by profit-maximizing agents, rather than being an outside force affect