I was reading an interview of Kenneth Rogoff in this very website and was particularly struck by the response he gave to the following question:
What new responses are required by business and society around the world to seize the opportunities and challenges presented by the emergence of China and India?
“What concerns me the most is the impact Asia is having on income distribution in the rest of the world, particularly the declining share of labour in overall income. If this trend continues, it will fray the social consensus for free markets and free trade.”
I think the concern he stated goes to the heart of the issue of why we are concerned about “Job Creation” and not simply about increasing overall “Economic Growth”. The increase productivity of capital and labor of a selected group of workers is driving economic growth which is consistent with the realtively fast increase in inequality in the past few years.
Why should we care about rising inequality and decreasing share of labour in GDP?
My take on it, very briefly: A rise in the inequality shows an increase in “winners and losers”, some loser will se their wages stagnate but many will see their jobs disappear and find it increasingly difficult to find a new one. A look back in history can help us see why the problem today is of a different and more complex nature.
The world has already seen a very similar rapid rise in productivity and income inequality (and unemployment or sub-employment) combined with rampant globalization in the late 19th and early 20th Century in Western Europe. At that time, the problem was resolved via migration. Migration allowed for the unskilled labor and excess capital to migrate to a “less developed” New World where labor was scarcer and return on capital was higher.
The problem we face now is that on the one hand, there is not clear what country could play the role of “New World”. Or is there? The spread of technology and capital is much faster than it was then; at the same time migration is today much more restricted than it was at that time and actually skewed to favor “skilled labor force migration” and not the opposite.
Do we need to look back to history and reexamine the way we see migration, capital flows and investment? Should we reevaluate our approach to liberal policies or global redistribution?