IF THE WORLD is thought to be suffering from both too little innovation and too much at the same time, it may be reasonable to think that the future will look a lot like the past. That strategy offers some room for optimism. Thanks to technological change and the resulting economic growth, many countries are now vastly richer than they were 300 years ago, and rich in ways pre-industrial societies could not have conceived of. Fears of mass unemployment raised by earlier technological leaps never came to pass. Instead, technology allowed people to live longer, fuller lives. Quite possibly this time will be no different. Humans’ greatest advantage over machines has always been their flexibility, which should help them adapt to the new world around them. A generation from now people everywhere will almost certainly be richer and live longer, and most of those looking for work will probably still be able to find it.

Yet history also offers plenty of reason to worry. Humans may be flexible, but their governments typically are not: they act only when forced to do so. In past economic revolutions it took a shift in the balance of political power, sometimes achieved only after violent conflict, to ensure that the gains from growth were broadly shared. The necessary investment in education and infrastructure and the provision of a social safety net proceeded in fits and starts and did not always go right.

Over the past few decades technology has hollowed out workforces, leaving too many people competing for jobs that require minimal skills and offer minimal pay. Rising inequality and stagnant wages are eating away at the legitimacy of existing tax and redistribution systems. Governments’ responses so far have ranged from the uninspiring to the negligent.

Broadly speaking, there are three ways of dealing with the labour imbalance: raising the productivity of less-skilled workers; turning less-skilled workers into more-skilled workers; and providing income support for those who find it hard to earn a living in this new world.

Raising the productivity of less-skilled workers may not be as hard as it sounds, but it requires governments to get their economic policies right. Often they simply need to get out of the way. A prime example is occupational licensing. Between the 1950s and 2008 the share of employment in America covered by occupational regulation rose from roughly 5% to nearly a third. It now includes not only professions like nursing and teaching but jobs in interior design and even in nail salons. Excessive regulation reduces mobility and makes it harder for workers to change careers or earn extra income. In Europe non-transferability of professional qualifications restricts migration. In parts of the emerging world jobs involve so much red tape that many global firms would rather automate than employ more people.

Having workers in the right places is critically important to generating more and better jobs. In both the rich and the emerging world unmet demand for housing is a significant constraint on growth. In developing economies many large cities have outgrown their capacity to house their populations, resulting in sprawling slums that harbour crime and disease. India’s government, for example, tightly restricts land use, making new construction costly and modern housing extremely expensive.

In rich countries restrictions on the supply of housing can be just as pernicious. In economically dynamic places such as New York and London the shortage of housing is a serious constraint on growth in output and highly paid jobs. Inadequate investment in infrastructure exacerbates the problem. As roads and trains become more crowded, residents grow wary of agreeing to new developments, and so it goes on.

Back to school

The best hope for reducing the glut of less-skilled labour is to transform some of it into the more-skilled sort through higher spending on education. In the 19th and 20th centuries it took significant public investment to ensure that newly industrialised economies had a supply of labour with the right qualifications. Something similar is needed today. Rich countries are short of highly skilled workers, and many developing economies lack the basic educational infrastructure to produce a more effective labour force. Immigration from poor countries to rich ones might help adjust that global imbalance, but is too politically contentious to make a big difference. Across the world more effort is needed to improve primary and secondary education.

A good standard of literacy and numeracy across populations in emerging countries will be critical if large numbers of workers there are to take part in trading global services. Governments need not turn every student into a PhD candidate to boost his or her earnings prospects. Demand for skilled tradespeople such as plumbers and electricians remains high. Recent studies of the long-term effect of good teaching indicate that improving the quality of teachers just from poor to middling has a significant effect on the lifetime earnings potential of a typical school class. Long-run analyses of intensive pre-school programmes suggest that they achieve annual social returns on investment (allowing for expected cost savings from reduced crime and welfare spending) of 7-10%.

Politics must craft rules and institutions that harness technology to suit society’s values

But providing better opportunities through education and deregulation may not be enough to ensure that the benefits of technology-based growth are sufficiently widely spread. As in past economic revolutions, the social safety net will also need to be strengthened. That might include measures such as introducing or extending minimum wages. This time, however, governments face a sticky problem. If such policies make workers more expensive, firms will hire fewer of them. If on the other hand wages are kept very low and benefits are reasonably generous, workers may be dissuaded from looking for jobs. And at a time when fiscal demands on taxpayers are rising, governments cannot afford to allow labour-market participation to fall and thus reduce their tax base.

Some research suggests that modest increases in minimum wages can lead to productivity improvements. That may be because they reduce worker turnover, or because they prompt firms to invest in their workers or get them to work harder. Yet although higher minimum wages can be politically appealing, their use will need to remain limited. The easier it becomes to automate basic work, the less of a nudge firms will need to swap workers for machines when wages rise.

One way of squaring that circle would be for governments to provide wage subsidies. Such payments encourage participation in the labour force by making work more worthwhile for low-paid workers without discouraging firms from recruiting. America’s earned-income tax credit and Britain’s working tax credit both use the tax system to help families with low incomes. In America the subsidy available to poor families with children is relatively generous, but the maximum paid to the childless is a miserly $496 a year.

Economists frown on the idea of sharing out work to make it go further, but as a temporary measure it has been used with some success. The best-known example is that of the Kurzarbeit programmes used in Germany during the recession following the 2008 financial crisis. Workers accepted a shorter working week in lieu of lay-offs, and the government helped make up the resulting shortfall in income.

If the dislocating effect of technology turns out to be really severe this time, governments might consider offering a universal basic income, just sufficient to live on, to which all working-age adults would be entitled. A basic income for all is an old idea receiving new attention because of the recent labour-market upsets. Switzerland is getting closest to trying this out: last year campaigners there obtained enough signatures to force a referendum, to take place in the next couple of years, on introducing a basic income of SFr30,000 ($32,000).

The idea of a guaranteed income runs smack against core beliefs regarding the meaning and importance of work. Allowing people to become full-time couch potatoes at public expense is abhorrent to those who reckon that healthy adults should contribute to society in order to benefit from its economic output, as well as to those who see work as a source of personal dignity or a means to maintain mental balance, to say nothing of the majority who would still be working for their living and generating the tax income that would fund such a scheme.

What would you do if you didn’t have to work?

Entitlement to a basic income might be linked to a requirement to seek a regular job, take part in make-work schemes or engage in volunteering. Yet economic liberals might argue that such paternalism is unlikely to make anyone better off. And freedom from want might create scope for other socially benign activities, such as work or self-employment that generates some income, just not enough to live on. Given a basic income, many more budding entrepreneurs might launch businesses doing something they feel passionate about.

Whichever way governments respond, budgets will be tested. Even modest increases in income subsidies imply both a rise in government spending as a share of GDP and a concentration of the tax burden on a smaller share of the population. A higher tax burden will encourage tax avoidance among the very rich and distort economic decisions. In America and Britain the top 1% of earners already contribute 46% and 28% respectively of all tax revenues. If they are squeezed too much, some of them might take their money and move elsewhere. Governments got much bigger after previous technological revolutions. They cannot expand much more without running into serious fiscal constraints.

Tax competition may become an increasingly divisive international issue. Some of the highly mobile rich will be attracted by countries with low-tax, low-spending regimes, whereas the relatively immobile poor will hope for generous state benefits at home. Governments may need to tighten up their residence rules to prevent the rich from pretending to live in a low-tax country to minimise their tax bill, and tax regimes may need to be co-ordinated to discourage avoidance and evasion.

Preventing fiscal disaster may also require comprehensive reforms to make tax systems more efficient, so that a given tax burden is more difficult to dodge and less disruptive to the economy. One way of doing that would be to tax immobile factors such as land more heavily. Land taxes within cities, if combined with a loosening of zoning restrictions, should encourage denser construction, which could help alleviate housing shortages in some of the most expensive places.

Taxing undesirable activities such as emitting carbon and causing pollution would also raise revenues at minimal economic cost. Shifting the brunt of taxation from income to consumption in America could help the country resolve its fiscal and inequality problems at the same time—provided the money is used to boost sagging incomes. In Europe the use of value-added taxes has allowed governments to maintain high public expenditure at relatively low economic cost. America, which currently has a progressive tax system but spends less on helping the poor, might need to review its system.

The first two industrial revolutions fundamentally changed the relationship between the individual and the state. The digital revolution now in progress will inevitably bring about yet another such change. Governments may need to develop new economic approaches, giving technology freer rein to transform production while providing workers with more of a cushion against the painful effects of that creative destruction. Some might instead tolerate the emergence of a growing underclass that is hard to escape from while continuing to search for a technological solution to underemployment. Governments themselves might be transformed by new political movements emerging in response to the dissatisfaction generated by technological change: in benign ways, through political reform and realignment, or in uglier fashion.

Technologies are tools without an agenda of their own, but their influence on society is never neutral. They blindly sweep aside the livelihoods of some people and enrich others. Politics must craft rules and institutions that harness technology to suit society’s values and vision of itself.