Professor Laura Tyson: Is economic growth increasing inequality?

After attending a session on the major issues arising out of WEF this year, Alec managed to grab a few minutes of U.C. Berkeley Professor Laura Tyson’s time to have a chat about economic growth. Tyson mentioned that most discussion that she has witnessed taking place surrounding growth at Davos this year has been more a focus of how it can be expanded, as opposed to who it should include. She notes that increased growth can up the disparity between rich and poor, depending on its focus. She brings into this the global state of labour income, with particular reference to the US, and how these positions have been transformed, but not necessarily bettered by technological advances. Not all doom and gloom however, Alec and Laura end on a positive, discussing the acceptance of gender inequality as a real issue by the status quo, not to mention how we could be using the recent oil bonus to good effect in that respect. – CH

ALEC HOGG:  Professor Laura Tyson is with us from U.C. Berkeley.  We’ve just been in a very interesting session, talking about the major issues that have come out of Davos and the inequality of incomes as an area that you did touch on, towards the end.

PROFESSOR LAURA TYSON:  Yes.  Well, we didn’t spend enough time on it.  One of the interesting things to me, in this Davos is that most of the discussions on growth that I was in did not talk about inclusive growth.  That word wasn’t really used.  It was ‘how can we get the growth rate up’ with the view that this would benefit everyone, including the disadvantaged.  We know for example, in the U.S. when there was much stronger growth and strong productivity growth; we were not seeing that translate into median wage increases.  We were not seeing that translate into reduced inequality, but rather increasing inequality.  Of course, many economists are thinking two things about inequality now.  1.  The relationship between inequality and growth might be faster growth without reduced inequality.  It might actually increase it.  That would be the picket point of view. 2, Income inequality itself might actually be a deterrent to economic growth. The whole issue of the relationship between growth and inequality has become a very important issue, not just politically but economically as well.  The truth is that in most of the conversations this time around in Davos, there was much more focus on growth and how to increase it, and less conversation about how we make growth more inclusive.  The overwhelming view as I said in the conversation of rooms I was in when people were asked ‘do you think inequality is going to increase’, most people thought that within countries and particularly within the developed countries, inequality would continue to increase regardless of the growth outlook.  There was disagreement about whether income inequality measured among countries, which has been coming down, would start to rise or stagnate.  I think we don’t know.

ALEC HOGG:  But you also mentioned that after the global financial crisis, there’s been progress in certain areas, but not on this one.  Why is that?

PROFESSOR LAURA TYSON:  I wish I could give you the simple answer to that.  One of the things that’s true is that with very slow growth, it is harder to absorb new entrants to the labour force.  We’ve heard a lot in the conversation here and around the Forum about the problem of youth unemployment.  We’ve heard about outsiders – people who are in the system in some fundamental way, who can’t be absorbed in because the economy isn’t growing fast enough so you do have diminished opportunities for income generation.  Most people in the world earn their income from labour.  We have had stagnant labour markets.  Therefore, people cannot get a job and when they get a job, they don’t get a high-paying job.  I think the fundamental reason has been that labour income has been held back significantly and the income that has been generated in the recovery has disproportionately gotten to people who earn their income, and not from labour.

The other thing that was not mentioned here at all – and very important I think, in this inequality – is the long-term structural effect of technological change and inequality, which I believe (certainly, in the U.S.) is increasing income inequality.  It’s absolutely, increasing it because it creates very high incomes for a very small number of people at the very top, who either are inventing the technology or are using the technology with their skills to develop global markets.

ALEC HOGG:  But doesn’t that open up the market for people who don’t have opportunities?

PROFESSOR LAURA TYSON:  It opens up the market for people who don’t have opportunities for part-time low-income jobs.  Think about the Uber driver.  Do we have more Uber drivers in the world?  Yes, sir.  We wouldn’t have any a few years ago.  We have to look at the income level here.  I think that the labour market is being transformed by technology.  There are certain skills, which are going to be finding themselves in demand with very high income.  There are certain skills, by means of which many middle jobs can be significantly displaced by the technology that pushes people into the lower income parts of employment.  For example, hotel services, retail services, security services that are kind of low-end security services, and healthcare services that are home health…  If you look at where the job growth projection is right now in the U.S., it is all in low wage sectors – low wage jobs/occupations.

ALEC HOGG:  Maybe we can end on a positive note.  Gender inequality has been on the agenda here as well.  It’s something close to your heart.

PROFESSOR LAURA TYSON:  Yes.  I actually think we can end on a positive note here because 1) even though I was involved in conversations where inclusive growth didn’t come up, I was involved in every conversation about the importance of moving towards gender parity to enhance the economic growth.  That’s become…the evidence has been accepted.  The Christine Lagarde argument, which they’ve been making for the past several years, is ‘if you move towards greater parity, and employment/educational/pay/productivity opportunities for women – that’s a supply side boost to the economic growth.  I think that has largely, become absorbed by the business community here, and the politicians here at the World Economic Forum and that’s great.

ALEC HOGG:  Christine Lagarde also made mention of using the oil bonus to good effect.

PROFESSOR LAURA TYSON:  Right.  It’s certainly the case that there is a bonus that could go into consumption or investment.  There’s a bonus to oil importing countries around the world and to the world as a whole, from much lower commodity prices.  How does the world use that bonus?  The way we’re set up right now, it’s basically going to be used as…  For example, in the U.S. it’s probably the single greatest boost to middle-family incomes.  Absolutely.  You take the money and you spend it.  You might spend it on education.  You might spend it on your kids’ education.  She was suggesting that…  Shouldn’t the world think about maybe setting up a fund that would actually dedicate some of this bonus we have, to education and particularly for girls’ education?  If you think about the problem of youth unemployment in the Middle East, a significant amount of that could be reduced or the opportunities could at least be improved by real skill development.

I was in a session where we talked about building entrepreneurial skills, providing a little financial capital to our budding entrepreneurs in the region, enhancing the stem skills, developing pathways between a young adult coming out of a vocational training program – a pathway for them to a job – and apprenticeships.  Those things all costs money and I agree completely with the notion ‘what should we invest this unexpected surplus in’.  Education.

ALEC HOGG:  Professor Laura Tyson.

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