How Technology Kills Jobs and Drives Income Inequality

The idea that technology destroys jobs, impoverishes people and makes income inequality worse is a hard one to swallow, particularly for Americans. After all, one of our cherished beliefs is that progress will create limitless opportunities for all.

Yet the available evidence shows that this is not happening. Technological progress over the past three decades has made income inequality worse; and killed large numbers of jobs. Figures from the Federal Reserve indicate that America’s production of durable goods hit a record level in 2015; yet the United States lost around five million manufacturing jobs between 2000 and 2015.

To make matters worse income inequality has grown steadily worse over the past two decades. The Pew Research Center found that the wealth in the hands of the American middle class fell by 28% between 2001 and 2013. At the same time, America’s upper class controlled 49% of the aggregate income in the United States, in 2015 – it controlled 29% in 1971.

Technology creates income inequality in two ways. First it destroys jobs by eliminating the need for workers; and second, it enables the owners of companies to capture more of the wealth generated. Instead of paying an employee; the owner of an industrial robot can reinvest more money in the company, or pay dividends to stockholders. This makes the workers poorer and the owners richer.

The Kinds of Technological Unemployment

This process is best described as “technological unemployment” and it takes several forms. In some cases technological unemployment is obvious and easy to see, but in many cases nobody notices – even those who lose their jobs.

The most common forms of technological unemployment are:

  1. Hard automation. The direct replacement of human workers by machines. For example; the use of an industrial robot to take the place of a welder. This process most affects the poorly educated and the working class. It is getting worse as machines increasingly take the place of higher-paid skilled labor.

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  1. Digitalization. The replacement of physical processes by digital information or computer algorithms. A classic example of this is the use of electronic payment instead of mailing a paper check. The mailing of a check creates a number of jobs including the letter carrier, post-office workers, truck drivers and a bank clerk to open and process the check. Electronic payment can all be done by an algorithm. One digital process can eliminate dozens or hundreds of clerical jobs and working class positions such as mail-truck driver. This contributes to income inequality; because such work often served as the gateway to the middle class for many families. Examples of digitalization abound; including the replacement of insurance agents by online insurers such as GEICO. Another is the replacement of video stores with Netflix and Amazon.

 

  1. Increased efficiency. This occurs when a computerized solution makes a process more efficient, and eliminates the need for workers. A good example of this was when Walmart started scanning checks at the cash register; instead of processing them manually. That eliminated a number of back-office functions at both the retailer and the bank. An even more disruptive example of increased efficiency by technology is when Uber replaces the back-office workers, managers and dispatchers at your local cab company with a simple app.

 

  1. Centralization. An effect of technology that is often missed is centralization of an industry or market into a few large hyper-efficient organizations. The classic example of this process was when Walmart Stores Inc. (NYSE: WMT) effectively centralized American retail; by adopting computerized inventory processes that made its distribution system far more efficient than competitors. This allowed Walmart to offer far lower prices; and effectively squeeze out hundreds of competitors ranging from main street stores to giant retailers like Sears. A more recent example of centralization is the disruptive rise of Amazon.com Inc. (NASDAQ: AMZN).

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  1. Amplification. This occurs when one business is able to greatly increase its reach and share of the market by using technology. A great example of amplification is a small bookdealer; who uses Amazon’s ecosystem to sell her products all over the country. Such processes distort the market because a dealer who lives in Texas; where real estate costs and taxes are lower, can effectively compete with a bookstore in Brooklyn. The bookdealer can offer lower prices than her New York competitors, and drive them out of business without setting foot in the Big Apple.

 

  1. Technological underemployment. This occurs when a skilled or highly paid worker has to take lower paying work because of technology. For example; when an unemployed accounts payable person with a college degree, ends up driving for Uber to pay the bills.

 

These processes are all around us and we rarely see them. A major reason being that technological unemployment often makes life better for some people.

Uber drivers might make more money than cab drivers, but the dispatcher, manager and bookkeeper at the cab company end up out of work. The bookdealer in Texas might make a lot more money, but the bookstore in Brooklyn closes; killing several jobs. A digital wallet like PayPal or Apple Pay is faster, cheaper and more efficient than writing checks, but the bank teller loses her job.

How Technology Drives Income Inequality

Income inequality increases because Walmart, the bookdealer and possibly the Uber driver; or Uber’s investors, make a lot more money. A few people enjoy a much better lifestyle; and a larger bank account, while many others get pushed onto the margins of society.

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One of the worst effects of this process is that the jobs eliminated by technology are often likely to those held by working or lower-middle class people; who were already barely making a living. Examples of this include the clerk at the bookstore, bank tellers, secretaries, paralegals, warehouse workers, accounts-payable clerks and cab-company dispatchers.

These people either get forced out of the labor market completely or end up competing for lower-rung jobs. A woman who would have been a paralegal or a secretary a generation ago; now waits tables for a living. That deprives an immigrant; or a woman just out of high school, of an entry-level job with free meals and tip money.

We are going to have to learn to deal with technological unemployment as a nation, a people and a world. If we do not the result will be extremes of wealth and poverty, like those of the 19th Century; accompanied by the kind of class warfare last seen in the United States in the 1890s.

There are potential solutions to technological unemployment including guaranteed income schemes, better education and improved social programs. Such solutions will not be cheap, popular or easy; but they might be the only thing standing between us and all out class warfare.