IMF blames technology advances for increased inequality

11 Apr 17

Technology, not global trade, is the key reason workers have not benefited from economic growth, the International Monetary Fund has said.


In a report published today the fund concluded that, globally, about half of the total decline in wages as a share of countries’ national income can be attributed to the impact of technology, with the effect being most pronounced in advanced economies.

This has served to increase inequality for two reasons, the IMF continued: lower- and middle-skill workers have borne the brunt of job and income losses; and because capital, which reaps larger returns as technology becomes more productive than workers, is mostly owned by wealthier individuals.

“Technological progress, embodied in faster productivity growth in the capital goods sector relative to the rest of the economy, lowers the price of investment goods and thus induces firms to substitute capital for labour,” the report explained.

As technologies become cheaper and more effective, it makes more sense for firms to increasingly invest in them than a workforce.

The fund said this is more prevalent in richer economies for two reasons: the decline in the price of technologies, particularly information and communications technology, is “by and large an advanced economy phenomenon”; and advanced economy workers were more exposed to the routine tasks which have been displaced.

Meanwhile, ICTs have less weight in emerging market economies, which are more commodity intense.

The fund said globalisation has in fact played a much larger role in reducing wages as a share of national income in emerging markets, however this trend has at the same time been accompanied with rising labour and employment.

As a result, the fund said the effect of globalisation in this case can be “interpreted as benign”.

A separate chapter of the IMF’s report noted that emerging and developing economies have become increasingly critical to the global economy, accounting for more than 75% of global growth – double the share of two decades ago.

However it warned that they may “face a less supportive global environment” in future than they have since the turn of the millennium, with a number already experiencing tapering or standstill growth, and in some cases even growth reversals.

Closing the remaining gap with advanced economies may not be “automatic”, it continued, with more difficult global conditions threatening to weigh on potential.

Advanced economies seem unable to break out of a period of sluggishness, while growth is slowing in economies like China and the world’s commodity-based economies have been hit by a collapse in prices.

“Together with a risk of protectionism and tighter financial conditions as US monetary policy normalises, these changes make for a more challenging environment,” it said.

“Nevertheless, these economies can still get the most out of a weaker growth impulse from external conditions by strengthening institutional frameworks, protecting trade integration, permitting exchange rate flexibility and containing vulnerabilities from high current account deficits and external borrowing, as well as large public debt.” 

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