Economic Inequality, Part 2: Where We’re Going and Why It Matters
For a discussion of how economic inequality has increased over the years, please see "Economic Inequality, Part 1: Where We Are and Why."
What the Future May Bring
The changes in economic inequality have already happened, but in The Second Machine Age, Brynjolfsson and McAfee make a compelling case that we are in the second machine age and at the beginning of tremendous increases in technology associated with artificial intelligence and robots. This will bring incredible bounty, but also great changes in the number of workers required and the skills needed.
The amount of labor it takes to generate revenue and profit has decreased significantly. In 1979, GM had a profit of nearly $14 billion and employed 840,000 people, while in 2012, Google generated a profit of nearly $14 billion and employed less than 38,000 people. In 2007, the five biggest global companies had a total market cap of $2.3 trillion, while in 2017, the five largest global companies (none of which were among 2007’s five largest) had a 39 percent larger market cap but employed 44 percent fewer workers.
No one knows with any degree of certainty what the future may hold, but some are predicting that with the coming of artificial intelligence and robots, many jobs will disappear, a majority of which are held by people in low- or mid-level income brackets. Bain claimed in a February 2018 study that automation may eliminate 20 percent to 25 percent of jobs in the United States by 2030. A U.K. study put the estimate much higher: It predicted that as many as 47 percent of current U.S. jobs could be made redundant or irrelevant in a short timeframe. And a December 2017 McKinsey Global Report suggested that by 2030, as many as 375 million workers around the world may need to switch occupational categories — that’s a full 14 percent of the global workforce.
If these predictions are correct, many people may lose their jobs temporarily or permanently. It is not unrealistic to believe that those in the top 10 percent might account for 60 to 70 percent of all U.S. income. The average income level for the bottom 90 percent might actually decrease to $16,000, and the average for the top 10 percent might be in the $500,000 range. Such change could well be catastrophic for the economy and the American people.
Of course, others believe the situation is not so dire. New jobs may be created that require specialized skills and will command good compensation.
What Are the Consequences and Why Should Business Care?
Opportunity inequality and economic inequality may be two sides of the same coin.
Studies show that absolute income mobility has decreased dramatically. For example, 92 percent of those born in 1940 are in households that have income higher than their parents (adjusted for inflation), whereas only 50 percent of those born in 1984 will have income higher than their parents did.
Relative income mobility in the United States is lower than most developed countries. For example, a child born into a U.S. household in the bottom quintile of income has only a 7.8 percent chance of making into the highest quintile income level, whereas in Canada, his or her chances are 13.5 percent.
Intuitively, income and wealth inequality contribute to opportunity inequality, and studies have borne this out. The American dream — that hard work and persistence would allow anyone to live a productive and comfortable life — may be lost for many. A loss of hope for significant portions of the population is alarming.
The rising economic inequality and loss of opportunity equality has reinforcing loops, leading to geographic segregation, assortative mating, higher returns for education, and gaps in family structure and parenting.
Rising economic inequality creates more financially fragile households; as those lower on the economic spectrum spend more of their income, saving is difficult, putting families in serious jeopardy if any crisis such a job loss, illness or death occurs.
There is a correlation between economic inequality and a number of health and societal harms such as life expectancy, infant mortality, imprisonment, teenage births, obesity, mental illness, drug and alcohol addiction, and trust.
There is concern that those at the high end of the economic scale — the “economic elite” — may exert more influence and control over government policies and ultimately jeopardize democracy. There is evidence that countries with high economic inequality tend to have unhealthy political systems.
The potential negative consequences for business are also substantial. A big challenge might be a loss of talent and of workers with the requisite skills to innovate and address the increasing need for technical skills. There certainly is no lack of societal problems, and creativity and innovation are needed to establish viable business models to address these problems.
Consumer spending fuels much of the growth in the U.S. economy; it makes up about 70 percent of GDP. Those below the higher income classes are responsible for much of this spending — so increased income inequality could ultimately reduce consumer spending, which could reduce revenues and operating profits.
For the final installment of this three-part series, which offers examples of how to address these challenges, please see "Economic Inequality, Part 3: What Can Business Do About It?"