Social Europe

  • EU Forward Project
  • YouTube
  • Podcast
  • Books
  • Newsletter
  • Membership

Greater Inequality Not Due To New Technology And Free Trade

Sandro Scocco 9th December 2016

Sandro Scocco

Sandro Scocco

A popular narrative today is that low-income groups in the western world have fallen behind owing to jobs lost to new machines and to low-paid jobs overseas. Political populists like Trump or Le Pen have happily exploited this frustration with nostalgic, nationalistic and anti-free trade messages. A new study shows that this narrative has little support in historical trends.

Certainly, large groups have fallen behind in recent decades. But this is true not only of low-income groups but also of large parts of the middle class in many countries. Take, for example, those with higher education in the US; their real incomes have stagnated in the past 15 years. In the whole of the industrialised world median wage growth has fallen markedly behind GDP growth. By contrast, the top 1 percent have increased their income much faster than the rise in GDP and, in some countries, including the US and Sweden, they have more than doubled their income share.

So, there is a clear breeding ground for anger and frustration among broad groups, and not just among low-income earners, but is it really related to technology and trade?

It is easy to make the ”common-sense-argument” that new and better machines (technology) in production and low wage competition (trade) result in jobs being destroyed. Three historical observations can be useful, however, in this context: this process has been going on constantly since the beginning of industrialisation, new jobs are of course also created constantly and this has continued during periods of both reduced and increased inequality. But, in the above narrative, this process has been unusually rapid since 1980, which would explain the increased inequality. This narrative finds surprisingly little historical evidence to back it.

  1. The period from 1980 to 2015 is not characterised by strong technological change in production compared with previous periods. On the contrary, it was unusually slow compared to the period 1950-1980. Brookings Institution suggests that the perception of a technological revolution has grown from a rapid transformation of the private sphere (and not of production) with phenomena such as new social media, Uber and Airbnb. But Uber is from a production point of view still simply a car and a driver and Airbnb just a new way of using an already produced service, housing.
  1. Trade grew, indeed, strongly from the 1990s to 2008 (though since then growth has been unusually weak). In the two countries to first embark on a policy of market liberalization, the UK (-79) and the US (-81), however, inequality grew much faster in the 1980s than in the 1990s, when trade (and technology) picked up.
  1. Previous studies that have looked at shorter periods have indicated that trade and technological change is important for income distribution, but these have examined small variations within short periods generally characterised by slow technological change, strong trade growth and continuously increasing income inequality. When we statistically test the correlation between both technological change and trade growth on income distribution in several OECD countries over a longer period, since 1950, we do not find any measurable long-term effect. For example, both trade and technology changed much faster in the period 1960–1980, when income differences decreased, than in subsequent periods.
  1. Nor is it possible to see any correlation between rapid technological change and trade growth on unemployment in the long term. Developments in recent years can rather be interpreted as high unemployment coinciding with weak technological change and weak trade growth.
  1. By way of contrast, we do find that policy changes related to the labour market since the 1980s have played a part in increasing inequality. For example, the negative correlation between the (weaker) penetration of collective bargaining agreements and increased wage inequality is strong. This result applies to the relationship between the lowest and highest wages, but also between the median wage and the highest wage. Lower trade union density and lower unemployment also increase wage inequality.

As medium- and low-income groups consume most of their income (whereas wealthy groups have high savings), these political decisions have weakened the demand for goods and services. It has been possible to maintain demand temporarily because capital owners have simply lent their higher income share to households. But this situation is unsustainable in the long run since it presupposes a constant increase in household debt. Increased debt instead of higher wages as the basis for household consumption always leads, sooner or later, to a financial crisis.

Engines of growth

Moreover, governments’ fiscal policy has been steered by the incorrect notion, according to both OECD and IMF, that the tightening of government budgets in a recession has a small effect on growth (low fiscal multiplier). This has led to a further reduction in demand and increase in unemployment.

Structurally weakened bargaining power of unions and higher unemployment combined with a marked decrease in redistribution through taxes and transfers: these are much more aligned with historical data as the main explanation why large groups have fallen behind in income since the 1980s. Rapid technological change and trade growth is not – however popular the idea is.



Don't miss out on cutting-edge thinking.


Join tens of thousands of informed readers and stay ahead with our insightful content. It's free.



What we require in the long run is, on the contrary, more rapid technological change and increased trade. This would increase growth without, by itself, impacting negatively on wages and inequality.

In the short run, we need a more expansionary fiscal policy to return to normal unemployment, inflation and growth as the OECD/IMF argue. Positive in this context is that austerity policies in OECD countries are losing their grip, and this creates better conditions for growth and ought to lead to a slight rise in inflation over time.

However, this is not enough. Investment in technology, increased trade and an expansionary fiscal policy must be combined with a policy that strengthens unions´ wage bargaining power structurally. The wage and income development of low- and median-income groups must be able to support stronger GDP growth without rising debt levels.

To sum up: “It´s politics, stupid”, but more mainstream politics will not solve the problem. In that sense, the rejection of Hillary Clinton by some traditional Democrat voters is not that surprising. What is surprising is that they irrationally think a xenophobic New York billionaire with an economic program that is a rerun of Reaganomics, with large tax cuts, decreased social spending and more deregulation, will improve the average Joe´s living conditions.

Sandro Scocco

Sandro Scocco is Chief Economist at the Stockholm-based think tank Arena Idé and has a background as the Chief Economist of the governmental research institute ITPS. He is also a former Director at the Labour Market Board and served during the 1990s as an adviser to several Swedish social democratic ministers.

Harvard University Press Advertisement

Social Europe Ad - Promoting European social policies

We need your help.

Support Social Europe for less than €5 per month and help keep our content freely accessible to everyone. Your support empowers independent publishing and drives the conversations that matter. Thank you very much!

Social Europe Membership

Click here to become a member

Most Recent Articles

u4219834dafae1dc3 2 EU’s New Fiscal Rules: Balancing Budgets with Green and Digital AmbitionsPhilipp Heimberger
u42198346d1f0048 1 The Dangerous Metaphor of Unemployment “Scarring”Tom Boland and Ray Griffin
u4219834675 4ff1 998a 404323c89144 1 Why Progressive Governments Keep Failing — And How to Finally Win Back VotersMariana Mazzucato
u42198346ec 111f 473a 80ad b5d0688fffe9 1 A Transatlantic Reckoning: Why Europe Needs a New Pact Beyond Defence SpendingChristophe Sente
u4219834671f 3 Trade Unions Resist EU Bid to Weaken Corporate Sustainability LawsSocial Europe

Most Popular Articles

u4219834647f 0894ae7ca865 3 Europe’s Businesses Face a Quiet Takeover as US Investors CapitaliseTej Gonza and Timothée Duverger
u4219834674930082ba55 0 Portugal’s Political Earthquake: Centrist Grip Crumbles, Right AscendsEmanuel Ferreira
u421983467e58be8 81f2 4326 80f2 d452cfe9031e 1 “The Universities Are the Enemy”: Why Europe Must Act NowBartosz Rydliński
u42198346761805ea24 2 Trump’s ‘Golden Era’ Fades as European Allies Face Harsh New RealityFerenc Németh and Peter Kreko
startupsgovernment e1744799195663 Governments Are Not StartupsMariana Mazzucato
u421986cbef 2549 4e0c b6c4 b5bb01362b52 0 American SuicideJoschka Fischer
u42198346769d6584 1580 41fe 8c7d 3b9398aa5ec5 1 Why Trump Keeps Winning: The Truth No One AdmitsBo Rothstein
u421983467 a350a084 b098 4970 9834 739dc11b73a5 1 America Is About to Become the Next BrexitJ Bradford DeLong
u4219834676ba1b3a2 b4e1 4c79 960b 6770c60533fa 1 The End of the ‘West’ and Europe’s FutureGuillaume Duval
u421983462e c2ec 4dd2 90a4 b9cfb6856465 1 The Transatlantic Alliance Is Dying—What Comes Next for Europe?Frank Hoffer

S&D Group in the European Parliament advertisement

Cohesion Policy

S&D Position Paper on Cohesion Policy post-2027: a resilient future for European territorial equity

Cohesion Policy aims to promote harmonious development and reduce economic, social and territorial disparities between the regions of the Union, and the backwardness of the least favoured regions with a particular focus on rural areas, areas affected by industrial transition and regions suffering from severe and permanent natural or demographic handicaps, such as outermost regions, regions with very low population density, islands, cross-border and mountain regions.

READ THE FULL POSITION PAPER HERE

ETUI advertisement

HESA Magazine Cover

With a comprehensive set of relevant indicators, presented in 85 graphs and tables, the 2025 Benchmarking Working Europe report examines how EU policies can reconcile economic, social and environmental goals to ensure long-term competitiveness. Considered a key reference, this publication is an invaluable resource for supporting European social dialogue.

DOWNLOAD HERE

Eurofound advertisement

Ageing workforce
The evolution of working conditions in Europe

This episode of Eurofound Talks examines the evolving landscape of European working conditions, situated at the nexus of profound technological transformation.

Mary McCaughey speaks with Barbara Gerstenberger, Eurofound's Head of Unit for Working Life, who leverages insights from the 35-year history of the European Working Conditions Survey (EWCS).

Listen to the episode for free. Also make sure to subscribe to Eurofound Talks so you don’t miss an episode!

LISTEN NOW

Foundation for European Progressive Studies Advertisement

Spring Issues

The Summer issue of The Progressive Post is out!


It is time to take action and to forge a path towards a Socialist renewal.


European Socialists struggle to balance their responsibilities with the need to take bold positions and actions in the face of many major crises, while far-right political parties are increasingly gaining ground. Against this background, we offer European progressive forces food for thought on projecting themselves into the future.


Among this issue’s highlights, we discuss the transformative power of European Social Democracy, examine the far right’s efforts to redesign education systems to serve its own political agenda and highlight the growing threat of anti-gender movements to LGBTIQ+ rights – among other pressing topics.

READ THE MAGAZINE

Hans Böckler Stiftung Advertisement

WSI Report

WSI Minimum Wage Report 2025

The trend towards significant nominal minimum wage increases is continuing this year. In view of falling inflation rates, this translates into a sizeable increase in purchasing power for minimum wage earners in most European countries. The background to this is the implementation of the European Minimum Wage Directive, which has led to a reorientation of minimum wage policy in many countries and is thus boosting the dynamics of minimum wages. Most EU countries are now following the reference values for adequate minimum wages enshrined in the directive, which are 60% of the median wage or 50 % of the average wage. However, for Germany, a structural increase is still necessary to make progress towards an adequate minimum wage.

DOWNLOAD HERE

Social Europe

Our Mission

Team

Article Submission

Advertisements

Membership

Social Europe Archives

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Miscellaneous

RSS Feed

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

BlueskyXWhatsApp