Income and Wages

Income Inequality And Economic Progress

The growth of productivity has slowed and income inequality has widened several times in modern industrial history, say two economists, and they actually are signs of progress.

Economists Jeremy Greenwood of the University of Rochester and Mehmet Yorukoglu of the University of Chicago argue that the process of adopting new technologies initially causes a decline in productivity and an increase in inequality of incomes.

They say that the spread of computer technologies is the latest example:

  • Labor productivity rose steeply from the mid-1950s to 1974, when it began a modest decline.
  • In 1974, investment in information technology -- such as computers and data processing --began a dramatic increase that continues to this day.

  • And since 1974, there has been a steep decline in the price of information technology.

The economists say that changing to a new technology often causes productivity to decline, because of the cost of learning to use the new machines. This puts a premium on those who quickly learn the new skills, widening the gap between the incomes of the skilled and the unskilled.

For example, this happened after 1770, with the mechanization of manufacturing due to Watt's steam engine and complementary inventions. Thus, the price of spun cotton fell two-thirds by 1841, and the price of wrought iron fell 36 percent between 1801 and 1815 -- even though the general level of prices rose 50 percent between 1770 and 1815. In the United States, the per capita stock of equipment grew just 0.7 percent per year until 1815; then annual growth quadrupled to 2.8 percent between 1815 and 1860.

According to columnist George F. Will, it has been estimated that since the Second World War 60 percent of U.S. economic growth has derived from the introduction of increasingly efficient equipment, the most important of which have been computers.

Along with increased efficiency, the new information technologies reward those talented in using them, encouraging other people to invest time and money in increasing their skills. Although this increases the inequality of incomes, it benefits all of society.

Source: George F. Will, "Healthy Inequality," Newsweek, October 28, 1996.

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