Increasing Inequality: Predation or Skill Bias?

Thanks to Mark Thoma I have read a very interesting piece by David Altig on technological change and inequality. Altig weighs in the debate that Bob Gordon started a few months on the possible slowdown of trend productivity in the next decades. Bob’s argument is known, and makes sense: no current innovation, not even the fanciest ones, seems to have the potential to change our life as did railroads, jet planes, or, even more importantly, running water! But it is undeniable that he ventured in uncharted lands (innovation, future inventions, the future), and I am in the end incapable to take sides on the issue. I am just very satisfied that Bob’s argument is taken seriously, even by those opposing it.

I found interesting Altig’s remark that “game-changing technologies have, in history, been initially associated with falling capital prices, rising inequality, and falling productivity“. He ends asking whether these trends, that we are nowadays observing, could be the indicator of yet another major “game changer”. But this is also not what I want to point out.

I was intrigued by Mark Thoma”s conclusion that even assuming that increasing inequality is a sign of major advances to come, this does not mean that nothing should be done about it:

Does it necessarily imply that addressing some of these problems, e.g. reducing wage inequality, would undermine the “dawn” in this “dark-before-the-dawn” story? Does brightening the dark prevent the dawn?

I would like to add to this sensible remark that attributing inequality to skill-biased technical progress, seems less consensual than one would think. The wide increase in inequality in the past three decades has the unprecedented feature that it can be mostly imputed to an increase of  the top 1% share, whereas in the past waves of inequality increase it was the top 10% of the population that became richer (by the way the crisis has made things even worse: the share of the top 1% increased even further).  Said otherwise, it is not the engineers or the high skilled workers who got richer. It is the CEOs, the football players, the top brokers, and so on. Not necessarily skilled, and when skilled, not necessarily with skills that increase productivity.

To say it brutally, the surge in inequality of the past three decades looks a lot more as a consequence of predatory behaviour of a few elite members, than the well-earned reward for skill and entrepreneurship. It is worth reading the interview Jamie Galbraith gave to the Washington Post a few months ago. As he points out, this has important policy consequences. If inequality were due to the skill bias, then the best one could do is invest in education and training. If it is instead rents (mostly linked to the surge of the financial sector as a share of  national product), then the solution is to curb predatory behaviour and implement redistributive policies. And of course, in the latter case, it would be hard to take inequality a the sign of an imminent jump in technology and future well-being.