The Case for Inclusive Innovation
Digitization and automation are rapidly disrupting industries and occupations and transform the way we live and work. While not especially recent phenomena, the adoption of automation and digital technology solutions has accelerated during the recent COVID-19 pandemic. Some studies suggest that it vaulted several years forward in the span of just a few months.
From an economic standpoint, this is generally good news. Innovation enables us to produce more with less, increases efficiency and productivity which, in turn, raises the standard of living. Additionally, a move away from a carbon-based economy will require innovative solutions – for example with regard to clean technologies.
How are the gains distributed?
While innovation, increased efficiency and higher productivity are worthwhile goals to pursue, they are not merely ends in themselves. Rather, the ultimate goal should be improvements in human well-being – which goes beyond an increase in GDP per capita and includes positive health and environmental outcomes.
This poses the question of how the gains from innovation are distributed. Taking a longer-term view, data shows that between 1982 and 2015 roughly 80 percent of economic gains went to the top 1 percent of the income distribution. The top 10 percent received almost 90% whereas taxpayers in the 50 to 89 percent of the income distribution gained a mere 1 percent. What is more, the bottom 50 percent actually suffered real income losses during that time period.
How Technology Affects Inequality
Granted, technology innovation is not the sole driver of income inequality. Other factors affecting income distribution include institutional factors, the decline in unionization rates (especially in the private sector) and international trade. That said, studies show that technology impacts inequality mainly via 3 channels:
• Skill-biased Technological Change
• The effect of digital platforms on labour
• Market concentration
Skill-biased technological change, in essence, means that advances in new technologies mainly benefit relatively higher skilled employees. This is due to the fact that the tasks these technologies replace are mainly so-called routine tasks – for instance the reporting of sports results etc. In contrast, tasks that involve abstract or critical thinking are harder to automate. As a consequence people in jobs that mainly use tasks that are harder to automate end up working with technology, whereas people in jobs that mainly use routine tasks end up getting replaced by it.
A good illustration is a 2015 study on broadband adoption in Norway. As the graphs below show, this technology adoption made skilled workers more productive and thus increasing their wages. Lower skilled workers, in contrast, ended up being substituted by this new technology.
Source: Akerman et al. 2015. The Skill Complementarity of Broadband Internet
The second channel through which innovation affects inequality is increased market concentration. Studies find that industries that produce more patents – one indicator of innovation – show a higher market concentration. In addition, the rise of so-called ‘superstar firms’ contributes to higher market concentration and lower levels of competition. As the Internet allows consumers to compare prices more easily, for example, firms that enter the market early benefit from these network effects. As they grow, they tend to then buy potential rivals who entered the market at a later stage.
Finally, digital platforms gave rise to the so-called ‘gig economy’. Especially for lower skilled workers, this led to increased competition, less workplace safety, a lack of social security contributions and relatively low pay.
Why Should We Care About Inequality and Inclusive Innovation?
Given current trends in inequality and the role of innovation within it, one might ask whether this is a point of concern or merely the result of market outcomes that need to be accepted.
In my view, there are at least 4 issues that pose cause for concern – these are:
• Lost Innovation Talent
• Disenfranchised Population
• Health and Well-being
• Concentration of Power
Recent research shows that children of parents in the top 1 percent of the income distribution are 4 times more likely to become innovators themselves, compared to children of parents in the bottom half of the income distribution. In the US, this ratio is even worse. There, the children of parents in the top 1 percent are 9 times more likely to become innovators compared to children of parents in the bottom half of the income distribution. Similarly, a recent study in the US showed that 38 colleges in – including 5 in the Ivy League – had more students from the top 1 percent of the income scale than from the entire bottom 60 percent. In other words, higher income inequality appears to negatively impact social mobility and equal opportunities. This, in turn, deprives societies of the talent and potential from people in the lower segments of the income distribution.
Increasing income inequality also contributes to a feeling of disenfranchisement among those that do not participant in the gains from innovation. You only have to think back to the debates and backlash globalization caused in many parts of the world. Similar to globalization, innovation is to be welcomed as a force that can raise living standards. Yet, every disruption produces winners and losers and if the losers are not adequately compensated backlash can ensue. Research on globalization, for example, shows that the rise in populism in the US can at least in part be explained by the feeling of disenfranchisement and powerlessness that those people felt who were negatively impacted by it. Given how important innovation is going to be for countries moving forward, we should not repeat the same mistakes and ensure that the benefits from innovation will be distributed more evenly.
Higher inequality is also connected to poorer health outcomes and status anxiety. As such, it directly impacts people’s well-being. Research on longevity also finds a positive correlation between life expectancy and income cohort. A Canadian study, for example, found that men in the highest earnings group can expect to live 8 years longer than men in the lowest income cohort. For women this gap is about 3 years.
Finally, increasing income inequality can lead to a higher concentration of power. As explained earlier, there is a higher concentration of market power – impeding competition and allowing firms to take a larger share of the gains. In addition, economic power can translate into political power with negative effects for the broader population. Using data for 136 countries between 1981 and 2011, a recent study found that income inequality is detrimental to political and civil equality. As rising wealth confers political power, those at the top of the income distribution can increasingly influence important decisions (e.g. on tax cuts or regulations) in their favour, impeding the participation and voices of the rest of society.
