How changing technology has affected inequality since 1980

See Superstars in the age of information: Lower communication costs enable high-skill workers, firms, and cities to grow richer, leaving others behind by Douglas Clement of the Federal Reserve Bank of Minneapolis.

Technology is one of the factors I discuss in class on why inequality has increased since 1980. Excerpts:

"New research from the Opportunity & Inclusive Growth Institute suggests that “service industries that are highly skill-intensive and widely traded internationally [are] key to understanding these changes.” The researchers, Fabian Eckert, Sharat Ganapati, and Conor Walsh, refer to these as “skilled tradable services”—industries devoted to information-based functions that rely heavily on communication.

Skilled tradable services (STS) include management consulting, finance, information technology and services, and company management, and they have assumed an outsized importance in the country’s earnings distribution, with faster wage growth than all other sectors despite relatively slow employment growth.

Skills and stars

That highly skilled workers would earn high wages is unsurprising to economists, who are well-versed in the theory of skill-biased technological change (SBTC) as the source of rising incomes for college-educated individuals. SBTC is the idea that technological change during the 20th and 21st centuries has increased demand for educated workers, while reducing demand for those with less schooling. The rising college pay premium since the 1980s in the aggregate U.S. economy is well-documented.

But elaborating on an idea developed in an earlier paper on inequality, local labor markets, and “spatial fragmentation” of production processes, Eckert, an Institute visiting scholar, worked with Ganapati and Walsh to add another element: declining communication costs. Inspired by economist Sherwin Rosen’s landmark 1981 article, “The Economics of Superstars,” the three economists suggest that STS workers have become earnings superstars because, as Rosen showed, individuals with great talent can gain access to larger markets and incomes as communication costs drop. Competitors in that same market whose talent is just slightly less (or less popular) will lose market share to the star. Lower-skilled rivals make much less money than superstars like Serena Williams and Beyoncé, whose talents are shared instantly across world stages.

Alfred Marshall anticipated the idea in the 1890s, noting that the telegraph enabled leading entrepreneurs to eclipse rivals. They “amass a large fortune with a rapidity hitherto unknown … [due to] the development of new facilities for communication by which, [having] once attained a commanding position, [they] are enabled to apply their constructive or speculative genius to undertakings vaster, and extending over a wider area, than ever before.”

Workers in STS specialize in services that are nonrival: The ideas behind them can be used by an infinite number of people without diminishing their value to any user—a recipe, an algorithm, a technological innovation. As communication costs drop—particularly because of the internet—workers with valuable information skills can gain access to wider markets just as YouTube enables divas to reach huge audiences instantly. “Swedish nightingale” Jenny Lind, a renowned opera star, couldn’t do that in 1860, but Renée Fleming can today.

By marrying these ideas—skill bias and declining communication costs—the economists find an explanation for growing inequality of several types. “Payroll has been reallocated to the most productive workers, labor markets, and firms, while employment—consistent with superstar theories of wage growth—has not,” they write. At the heart of it: less communication friction that limits knowledge transmission. “We argue that new information technologies have drastically reduced these frictions, allowing the most productive workers, regions, and firms to expand their reach and earn disproportionate returns.”"

"a highly skilled, highly paid worker in one location can instruct less-skilled, lower-paid workers in multiple locations in application of a company’s service or manufacture of its product. As communication costs decline, the skilled worker’s market expands and, with superstar dynamics, small productive advantages become huge earnings advantages. “The key insight,” write the economists, “is that declining communication costs across regions … amplify the non-rivalry of knowledge work.”"

"STS wage growth can account . . . for 30 percent of the overall increase in wage inequality between the top 10 percent and the median wage earner."