'Great Decoupling' of Wages and Productivity Driven by New Technology

05/27/2015 10:23 am ET | Updated May 27, 2016

Erik Brynjolfsson and Andrew McAfee, faculty members at the MIT Sloan School of Management, have a fascinating interview in this month's Harvard Business Review where they admit the upbeat message of their last book, The Second Machine Age, largely ignored the downside of stagnation of the incomes of working families.  And they think that technology itself may be a prime driver of that stagnation and rising economic inequality.  

What they highlight in the graph that accompanies their interview is that worker productivity and GDP has continued to soar over the last few decades, but workers have not seen the fruits of their own growing productivity.  What's notable is how anomalous this "decoupling" of wage growth from productivity is, compared to earlier decades in the postwar period. Their focus on rising inequality and stagnant incomes is hardly new, but their focus on why technology may be a key driver of the problem is newer. They argue that globalization is only a part of the story, citing a study that competition from China explains only a quarter of the decline in manufacturing employment in the U.S.  Instead they focus on how technology has automated lower-skill jobs and increase the rewards to the more educated professionals.

This is not an uncommon theme, but the authors add the worry that digital markets, with their nearly costless production of additional digital goods, makes them prone to winner-take-all control by dominant players.  What this means is that skilled professionals are not just winning out over working class stiffs, but the richest of the top 0.01 percent are winning out over the professional class as a whole.  As Brynjolffson notes:

If the top 1% are stars of a sort, they look up to superstars who have seen even bigger increases...evidence suggests that the divergence in incomes continues to grow with a fractal-like quality, with each subset of superstars watching an even smaller group of uber-superstars pulling away.

They still hold out hope that new technologies will yield new productivity gains that will benefit the broader public: "Recent technological breakthroughs haven't had their full impact on productivity -- yet," argues Brynjolffson.  But other economists are wondering if current technology is delivering anything but profits to the richest sectors, as Paul Krugman argued in "The Big Meh" this week.   That an Apple digital watch is one of the most hyped technologies of the year may be symbolic of the fact that we are getting less of a technological revolution than avatars of progress are admitting.  Argues Krugman: "The whole digital era, spanning more than four decades, is looking like a disappointment."

Krugman, in arguing that technology has been largely a non-event, may be treating the role of technology too benignly, which is where Brynjolfsson and McAfee, for all their residual technological boosterism, may have more insight in seeing the tech as playing a more active role by inherently driving inequality. They focus on the winner-take-all market effects of new technology and that seems to be part of the problem.  But as I argued in "This Time is Different: How Big Data Has Left the Middle Class Behind," what distinguishes new technology is its focus less on automation, however important, than on expanding information controlled by corporate managers.  

Information does not, in fact, want to be free, since then it's merely knowledge. Information almost by definition is a zero-sum game of advantage for those who have it versus those who don't. Consumers and workers lose out as they increasingly bargain with companies that know more about what they want and the price they are willing to pay or the wage they are willing to settle for. The problem is not that consumers were hoping for flying cars and had to settle for a search engine.  Instead, the problem is that Google's search engine, like so much new information tech, is not, in fact, designed to benefit consumers, but instead is designed to extract information to serve corporate marketing strategies.

Henry Ford was a Nazi sympathizer and a brutal employer, but he and his engineers designed his cars to serve regular families.  Today, the best minds of the world are overwhelmingly focused on producing digital services whose paying customer base are other businesses.  The toxic financial engineering of capital markets that drove the financial crisis was just one example of this problem, but when technology is so overwhelmingly focused on the needs of the elite, it's hardly a shock to find that the elite ends up being the main group financially benefiting from its deployment.