Monday, June 1, 2015

The Great Decoupling

I have blogged earlier about skill-biased technical change and widening inequality. In an HBR interview, Erik Brynjolfsson and Andrew McAfee point to the 'Great Decoupling' since the 1980s between economic abundance (as captured in rising percapita GDP growth and productivity) and worsening income and job prospects for typical workers. 
This trend has paralleled the divergence between wages, which have been declining, and corporate profits, which have been rising.

Brynjolfsson and McAfee blame it on technology - as advances in information and communications technology made plant, machinery, and equipment prices to drop, companies shifted investments away from labor and towards capital. Even as low-skill workers have been replaced by machines or off-shored away, big data, analytics and high-speed communications have enhanced the productivity and value of skilled workers. The consequences of such skill-biased technical change include widening inequality, with all attendant social and political distortions. 

As regards preparing the society for this changing world, they point to the need for fostering an environment that is conducive to innovation, new business formation, and economic growth. In this endeavor, they highlight five focus areas for governments - school education that treaches kids relevant skills, including creativity, inter-personal skills, and problem-solving; world-class infrastructure; more entrepreneurship; more liberal immigration; and investment in basic research (as businesses focus on applied research). Unfortunately, countries like India slip badly on all the aforementioned.

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