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.

Should Paris Go East?

Last week I was invited to speak at a conference on the relationship between France and Germany, 50 years after the Elysée Treaty. It was an occasion to look at France’s options for the near future.

I started by highlighting the French weakness in this particular moment:

• France suffers, like all other eurozone countries, from a protracted period of slow growth; it is the effect of the global crisis, and its vicious evolution into a local sovereign debt crisis.
• This problem is compounded by the structural weakness of France, witnessed by its deteriorating external position in the past 15 years. A loss of competitiveness that contrasts  with the increasing strength of Germany.

The commonsensical solution seems therefore to “do like Germany”: structural reforms aimed at lower wages and lower taxes on firms, in order to improve competitiveness (I did not say it, but this of course goes together with a reduced role of the government and a leaner welfare state). Nevertheless, i pointed out  that there are a lot of “buts“, that make the solution less commonsensical than it would appear at first sight:

Wages and Unemployment

The April data on Italian unemployment are out, and they look no good. Not at all. The overall rate (10.2%)  is at its maximum since the beginning of monthly data series (2004), and youth unemployment is  above 35%. The rest of Europe is not doing any better, with more than 17 millions people looking for a job in the eurozone alone.

We already knew. The latest data just add to the bleak picture. We also know (I discussed it) what the consensus diagnosis is: Too many rigidities, excessively high labour costs, both because of wages and of  taxes on labour (the so-called tax wedge). Therefore, let’s have lower wages, and all will be well! Unemployment will disappear, growth will resume. Mario Draghi said it rather nicely:

Policies aimed at enhancing competition in product markets and increasing the wage and employment adjustment capacity of firms will foster innovation, promote job creation and boost longer-term growth prospects. Reforms in these areas are particularly important for countries which have suffered significant losses in cost competitiveness and need to stimulate productivity and improve trade performance.

Unfortunately, things are not that simple. What about looking at a few data? It is simple to download them  from the website of Eurostat.