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Growing income inequality has become a major focus of debate in the United States, Britain and many other advanced economies, with globalisation and the offshoring of manufacturing often blamed for increasing unemployment and downward pressure on wages. Antony Funnell asks whether technology could be the real culprit.

Writing in the Washington Post recently, former US Treasury Secretary and Harvard academic, Lawrence Summers, warned that the United States risked becoming what he called a 'Downton Abbey economy'—book-ended, that is, by the very rich and the very poor.

'A generation ago,' wrote Summers, 'it could have been asserted that the economy's overall growth rate was the dominant determination of growth in middle-class incomes and progress in reducing poverty. This is no longer plausible.'

Many people just assume that the jobs are going to China or somewhere else, and certainly there is some manufacturing going to China, but it turns out that there are fewer manufacturing jobs in China as well ... jobs are leaving both China and the United States in manufacturing and going to robots.

His assessment is given teeth by recent OECD figures highlighting the fact that more than half of the individual income growth generated in the US between 1980 and 2008 went to just one per cent of the population.

For Summers, an obvious first step toward narrowing the income divide is to target the tax loopholes exploited by the very wealthy. 'The ratio of corporate tax collections to the market value of US corporations is near a record low,' he points out.

However, the avoidance or minimisation of tax isn't the whole story, and nor is the United States alone in experiencing an ever-widening gap in income distribution. OECD figures also demonstrate an ongoing erosion in the share of national income flowing to labour across much of the world—developed and developing. As The Economist noted in its November 2013 edition: 'A falling labour share implies that productivity gains no longer translate into broad rises in pay. Instead, an ever larger share of the benefits of growth accrues to owners of capital.'

So how have those 'owners of capital' been so successful at securing so much wealth, so quickly? The answer, according to The Economist, is exponential automation. Cheaper and more sophisticated robotics are revolutionising the modern workplace and allowing more and more companies to downsize their workforce in favour of machines.

'Too many people have misdiagnosed what's going on,' says MIT economist and management specialist Erik Brynjolfsson, the co-author of a new book entitled The Second Machine Age: Work, Progress and Prosperity in a Time of Brilliant Technologies.

'The conversation needs to change. It needs to focus on what the drivers [of inequality] are,' he says. 'The way technology is affecting people at the top, middle and lower end of the income distribution is a big part of the story. There are other parts to it—globalisation and changes in tax policy—but the biggest driver has been the way technology has affected many different occupations.'

That misdiagnosis, Professor Brynjolfsson argues, has been particularly evident in the manufacturing sector.

'There's been a big decline in manufacturing jobs in the United States. It's a smaller share of the economy now than it was back in 1865,' he says. 'Many people just assume that the jobs are going to China or somewhere else, and certainly there is some manufacturing going to China, but it turns out that there are fewer manufacturing jobs in China as well. They are down by 20 million just since the 1990s. So jobs are leaving both China and the United States in manufacturing and going to robots.'

As if to highlight that trend, the giant technology manufacturer Foxconn recently announced it was accelerating toward the full automation of its Chinese factories with plans to eventually deploy over one million new robots onto its vast assembly lines. Similarly, in 2011, in the Chinese city of Tianjin, Great Wall Motors opened a new auto-manufacturing plant boasting a welding assembly line operated entirely by robots—more than 800 of them.

Of course, technology has long been blamed for destroying jobs. People have been raging against machines since the earliest days of the Industrial Revolution in the late 1700s. The difference this time around, according to Professor Brynjolfsson, is the sheer speed and scale of the change. And, blue-collar factory jobs, he warns, are no longer the only ones being affected.

Automation is increasingly eating its way into white-collar occupations and the service industries, thanks to the development of sophisticated computer programmes, coupled with advanced robotics.

It's a trend that's becoming all too apparent in our suburbs and our city centres: automation now has a major presence in the banking and finance sectors, while staff in our major airport terminals and supermarkets are gradually being replaced by self-service machines. In fact, automation has even staked a significant foothold on Wall Street, with sophisticated computer algorithms now undertaking much of the day to day trading once reserved for flesh and blood traders.

Ghost in the machine: automation and future employment Listen to Future Tense to hear how complex algorithms and increasingly sophisticated machines are eating their way into the white-collar workforce.

'A certain class of jobs, we call them “routine information processing jobs”, have been especially affected,' says Brynjolfsson, 'and those are very middle-class jobs like tax preparer or travel agent. The data shows that those have been especially hard-hit and that's one of the main reasons that the employment to population ratio is lower now than it was in the 1990s, and that median income is lower now than it was in the '90s.'

Tyler Cowen is another leading US economist who believes we've under-estimated the industrial impact of modern machinery. Cowen, a professor of economics at George Mason University, has a reputation for pulling no punches. He believes the economic and industrial trends of the past decade-and-a-half all point to a far less secure future for the great bulk of workers in advanced western countries like Australia and the United States. He foresees ever growing levels of income inequality.

Cowen's best-selling and influential 2013 work Average is Over sparked public debate in the US over the impact of exponential automation when he predicted that—combined with the continuing effects of globalisation—automation would eventually lead to the hollowing-out of America's middle class. He says the same factors are at work in other Western nations, but more than that, he argues that new digital technologies are helping to reshape the modern workplace into one which is increasingly reliant on metrics and digital surveillance in order to boost worker productivity.

'We are measuring the value of workers much more easily and much more precisely. And the more you measure value, the more you discover that some workers are worth a lot more than you thought and other workers are worth less. And you either fire them or you start paying them less, and that too will boost income inequality,' he says.

'So if you work with a computer or with software there is in fact a record of everything you do. You are much more readily monitored. And also surveillance technologies, for better or worse, they are improving, and I think we are moving to this new world where people actually will be paid what they are worth, which maybe on the surface sounds good but in reality can be fairly oppressive. And a lot of people don't like that. So we will have this odd mix of greater meritocracy, higher inequality, and also a lot of people will be more dispirited.'

Despite the grim forecast, Tyler Cowen argues that western societies won't collapse under the weight of future industrial change, but will eventually adjust to a new phase of ubiquitous automation—the period Brynjolfsson calls the 'Second Machine Age'. However, he warns that evolution will take considerable time to play out.

'If you look at the Industrial Revolution that starts in England say around 1780 and for a long time a lot of jobs do go away, wage gains are very slow, there's a lot of volatility, it's not really until the 1840s that real wages in England are going up significantly,' he says. 'So I think this time around it will actually be a lot like the last time. We will have a transition period of many decades. That will be tough for many people. In the very long run it will be splendid, but along the way it's not always going to feel splendid. I think that is the historical pattern for a lot of these changes.'

Splendid? Maybe, but not, of course, for everyone. Perhaps not even the majority, by Cowen's estimation.

Brynjolfsson admits it's difficult to accurately predict what sort of occupations will be safe from automation in the future, particularly given the way in which computers are now being developed to take on the types of high-level cognitive tasks once thought only capable of being performed by humans. However, he optimistically points to the dawn of the computer age as a recent example of the way in which technological disruption led directly to new forms of employment. Still, he also admits that nothing is guaranteed and that the traditional assumption that technological and industrial change automatically opens up new opportunities for workers may not prove correct this time around.

'That's the way it has been for most of history,' he says. 'For the past 200 years new jobs have been created as fast as the old jobs were automated. But there's no economic law that says that's going to continue. There's nothing in economic theory that says that that is always going to happen. And the data suggests that there has been this decoupling—around the mid 1990s productivity and wealth became decoupled from employment and median income. The former kept growing strongly but median income and employment has stopped growing and really stagnated. So there's something new and different in the economy, and when you drill deeper you see that these changes in technology are a big part of the story.'

Find out more at Future Tense.

