Social inclusion means prosperity that is widely shared and we’ve noted that large groups in society, because of the forces of history. Cultural exclusion, violence have entered the 21st century in situations that are often extraordinarily difficult and challenging. We know that women in many parts of the world continue to face. Major barriers to their economic participation, their prosperity, their ability to prosper. Young girls have faced the difficulties of achieving and gaining access to the education. The health that they need for their own well-being as future adults and future citizens in their country. We know also that economic forces putting aside for the moment gender and ethnic divisions. Are also playing a role in widening inequality and undermining social inclusion in many parts of the world. I’d like to focus for a few minutes on the economic and political drivers that are causing larger and larger class differentiation within societies.
We have at least three fundamental forces that have been playing a role in widening economic inequalities in the United States, in many European countries, and in many of the emerging economies. Around the world. One is the rising gap between high-skilled and low-skilled workers that has resulted from forces of globalization. A second phenomenon is changing technology that is having a differential effect on different Income groups, different classes within society. And the third force is the political system often amplifying the widening inequalities caused by globalization and by technological change. So. Perhaps the useful starting point to understand these changes is a frequently viewed graph. This case for the United States, but one would find similar though perhaps not as stark conditions like this in other places in the world. This is a graph of the premium in income, the extra income, that is earned by college graduates in the United States, relative to high school graduates. So take the population, the labor force that has a four year college degree or higher, could include those with an advanced degree. Look at the earnings of that group. And then compare it with those that have a high school diploma, but not more. And this is what we observe in the case of the United States, from 1973 until the recent decade. What you observe is that for all of this period, having a higher degree, not surprisingly, means more income.
In 1973, a college grad had a 30% premium relative to a holder of a high school diploma as the top level of educational attainment. That actually dipped. During the 1970s so that that premium fell to under 25%. But then from roughly 1979 onward, we see in this graph, that the college wage premium, as it’s called has soared. And has increased to around 45% wage premium compared with a high school degree holder. It’s interesting that, that increase started around 1979, because that’s also a period when many powerful forces of globalization linking together the high-income world and the emerging economies really started to develop.
So this is a, a puzzle for us. Why did the Gap between those with higher education and those with a high school diploma suddenly widen. What happened? And, I would argue that the three forces that I mentioned, globalization, technological change, and politics have all played an important role. How would globalization work? Well, consider the US suddenly, becoming a trading partner with countries like Mexico or Korea, or Taiwan. Remember those Asian Tigers. Which were the first of the emerging economies in Asia to achieve rapid, economic growth by dint of their export-oriented strategy relative to the U.S. and European market. Or consider the fact that soon after, 1979 China opened its economy to international trade. And opened its border regions in particular to host foreign Companies that would locate in China to produce goods, some of our favorite electronics products for example, to be assembled in China and then reexported to the US and Europe. This kind of globalization is economic integration. Made possible by improvements in technology such as mobile phones, and computer assisted design and manufacturing. Containerization and radically lower transport costs, suddenly put US workers and Chinese workers into the same labor market. Now, the Chinese workers at the time made much less than $1 per hour whereas American workers might have been earning $10 to $20 an hour. And yet suddenly both sets of workers would have the same technologies at their disposal.
The Chinese workers, after all, would be working in factories using the very machinery, the specifications, often literally the same companies, as the American workers. And so suddenly, the relatively low-skilled Chinese workers, may, maybe with a. A high school education would be using machinery to put together electronics products. Or to cut and sew apparel. Or to make plastic objects, extrusion objects and components of vehicles. That American workers had been employed to do up to that point. This joining of the labor market through the internationalization of the production technologies and the role of multinational companies in bridging. Between the high wage US market and the low wage emerging economies, transformed the labor market globally. In the US, there began a quite significant decline of jobs in traditional manufacturing sectors. The apparel sector, for example, was displaced. Whether to Mexico or the Caribbean, or Honduras, or to East Asian low-wage sites. The electronics assembly industry which used to be part of an integrated electronics operation. Was separated from the R&D base or the the production of the semiconductors themselves so that the relatively lower skill part of the work of assembling. The mother boards of electronics, devices, and household appliances. Could be moved to China, or moved to Vietnam, or to places where the wages were a tenth or a twentieth or a fiftieth of those that might prevail in the U.S. Suddenly the downward pressure on the wages, especially of the relatively lower-skilled workers in the United States. With their High School diplomas suddenly facing competition from abroad became intense. And I think that’s why 1979 is this turnaround time. Deng Xiaoping came to power in China in 1978, threw the Chinese economy into openness and market institutions. And while that took a process of three decades subsequently to build China as the great workshop of the world.
The dynamics of an integrated global market began to really play a powerful role at that point. And we know in the United States that. The US just about time of 1979 had the peak of its employment in the manufacturing sector, around 19 million workers. And from 1979 onward there has been a significant decline. Of manufacturing sector employment. A loss of jobs. Partly a displacement to lower wage economies. For those low wage economies, a huge benefit. A key part of the rapid economic growth that is lifting people from abject poverty. By no means a bad thing. But with a real impact, in the high wage labor markets, putting downward pressure on the wages of the relatively lower skilled workers. Now even if it weren’t for globalization, another force certainly is at play. And that is the information revolution, and all that it signifies. Meaning a progressive automation of many production processes, another force leading to higher productivity, but fewer jobs of the traditional sort. In many key sectors. So put China out of mind from the US perspective for a moment. And just think about how technological change has re-made the shop floor of major manufacturing sectors. Automobiles probably being among the most dramatic. I’ve toured many automobile factories. Some absolutely stunning and amazing. One in Japan of Toyota where we entered a very, very large assembly line completely clean. Completely quiet. And almost no workers around. Vehicles were going their merry way until you looked closely, no drivers. Because the vehicles were being directed automatically to deliver components from one place to another. And the whole assembly line all the way down this large cavernous hall. Robots. Very clever. Very sophisticated seemingly tireless robots with the great precision. Reaching into a basket, taking a component, putting it just where it should be on the automobile chassis coming down the assembly line. Next automobile, often of a different make, and the robot knowing through, of course, its programming. To put that component in a somewhat different place on the chassis of a somewhat different vehicle. All remarkably automated. The robotics are one of the most visible, remarkable aspects of the information technology revolution and the computerization revolution. That we are enjoying in the 21st century. It’s raising productivity dramatically it is of course lowering the costs of many, many goods and services. That kind of automation even when it’s not literally a robot handling a physical product. But is simply a computer making massive payrolls or processing orders that thousands of clerks might have done in an earlier day, is part of a modern high productivity economy. But, just like the off-shoring of jobs. It’s taking a toll on workers who used to do exactly that kind of labor. And so technology also drives income differences across countries. And we are seeing the combination of globalization and technological change, in an intertwined way, putting a special pressure on lower skilled workers. We can’t even separate these two phenomena with any precision, though you can image economists have written hundreds of articles, I’ve added a few myself. To the debates how much is globalization, how much is technological change. Well since globalization itself is enabled by the same technological change making a clear difference between the two is not possible analytically. But what is discernible is the fact that this rising wage premium has absolutely come from both of these phenomena. Now, I’ve stressed that there is a third factor that is part of this story, and that is politics. And this is extremely important for us to understand.
Market forces alone would widen inequalities. The wage premium is a real phenomenon coming from the combination of globalization and technological change. What you see in this picture of the income levels by a more detailed classification of educational attainment. Showing that those with an advanced degree have had the biggest gains of earnings. Those with the bachelor degree next. Those with some college, high school, and no diploma basically flat, or even declining income levels, but something more has been at play. When that market inequality starts, starts to rise, politics then enters the scene. In some political systems, government forces would lean against this by saying, well lower skilled workers are facing a problem. They need some extra help. Maybe some new job training. Maybe a cut in their taxes. Maybe added family benefits. High-skilled workers are receiving a bonanza, both because of technological change and because of globalization. And maybe they should receive fewer benefits or pay higher taxes. And in that way, government would, as we say, lean against the wind. If market forces are tending to widen inequality, political forces would tend to narrow it. But in some places, and my own country, the United States is definitely one, political forces amplified the market forces, took a widening inequality, and made it even more. Of a steeply widening inequality as a result of politics, rather than helping the poor and perhaps taxing the rich to do so. In the Unites States, the poor lost even more of their social support as government cut back. And the rich gained government support as their taxes were reduced. Rather extraordinary. And one can even date this, I’ve argued, though some disagree with me, to a specific political event and that starts in my opinion on January 20th, 1981. When Ronald Reagan became President of the United States. And came into office reflecting various political forces which said, that they should implement the libertarian philosophy. Get government out of things. And reduce taxes, reduce social support. The libertarian view does not agree with the basic needs philosophy that everybody’s needs should be represented. The libertarian philosophy more takes the point of view that government should not play a role, that taxes should be cut. That’s argued both on a philosophical base that freedom and liberty are the number one goal. It’s argued on a pragmatic base that, that will free up the dynamism of the entrepreneurs in society and through a kind of trickle-down effect, make everybody better off. But whatever it’s argued in the US, starting in 1981, and really continuing since that time, the rich and powerful have had advantages of politics. Their taxes have been cut. Their even as their wealth has soared they have faced a diminishing share of their income being paid in taxes. Various restraints on their behavior, whether it’s cultural norms that say don’t take so much money or whether it’s practical limitations of how companies operate, have been relaxed. Deregulation in the financial markets for example, enabling the top management of the financial system to pay itself mega bonuses and massive compensation. And so in addition to the market forces suddenly in the United States as well starting in the 1980’s, the incomes, the total compensation package of the. Top management of the big companies, and especially on Wall Street and in the financial companies, began to soar. And so the United States faced not only downward pressures on the low-wage workers, but upward pressures at the very top, what became known in the American. Political parlance as the top 1%, though sometimes it’s even a fraction of that top 1%. The income levels soared, and this is illustrated in a graph showing the ratio of compensation of Chief Executive Officers, CEOs in American companies to average workers. What you see is that that ratio was maybe 10 or 20 times higher in the 1970s, but suddenly, the compensation packages went out of sight. The regulatory constraints, the cultural norms were, went in the direction of saying pay the top everything, let them take huge amounts. And suddenly, these CEOs were earning hundreds of times the income of the workers. And the result is shown in a curve that illustrates the income share taken by the top 1%. Of America’s richest households, the blue curve. And what you see is over the course of a century, the income share was between 15 and 20% up to the time of 1929 when the great depression started. The new deal era of the United States came in, government cracked down on a lot of abuses in the financial sector, for example. And the income share at the top went down sharply. Tax rates faced by the top went up sharply. The income share of the top 1% was around 10% of total income between 1940 and the late 1970s. Still pretty good. 1% of the households taking 10% of the total household income. But then the curve starts straight up and it’s not just market forces doing that because this isn’t observed in this extreme way in almost any other country in the world. It’s politics amplifying the market forces. Reducing the taxes paid at the top as President Reagan did. And as was subsequently confirmed by later administrations. Reducing the political constraints and the regulatory constraints on top managers to take home big take home pay. Suddenly the top income share in the US, the top 1% were taking home 20% of the total household income. And whats quite remarkable is the top of the top of the top, the top 1% of the 1% that is the top .01 % of US households around 12,000 in total because they are, are around a 120 million households. So 1% of those is about 1.2 million households, and 1% of that is about 12,000 households. They are now taking home 5% of the total income of American households, and so the inequality at the top, aided by the political process, also soared. And, in this sense we could say that the challenge of social inclusion is very well illustrated in the US context, though the story up until today is not a very satisfactory one for many, many Americans. On the one hand, market forces have amplified the inequalities. On the other hand, the political system not only did not come to the rescue of the poor, but reacted in a quite stark way. Coming to the backing of the rich. Pulling away some of the social support of the poor. Taking the libertarian view that the Government’s not going to address the issues of inequality. Making it harder rather than easier for society to meet its basic needs. Setting up an even bigger challenge for social inclusion as one of the key pillars of sustainable development. We will look at what can be done in this context because there are ways to reestablish social mobility and social inclusion. But the the political system has to participate in that if those methods of achieving social inclusion are to be effective.