Winners And Losers In The Digital Economy

Rising Productivity, Shrinking Employment

As we continue our rebound from "The Great Recession," unemployment rates remain high and median incomes are stagnant -– if not shrinking.

"Productivity and innovation have never been higher," said Erik Brynjolfsson, MIT professor and director of the MIT Center for Digital Business, in a presentation at UBM's COMDEXvirtual show Wednesday. "GDP is at an all-time high, profits are at an all-time high, investment is at an all-time high. That's all good news.

"However, on the labor side, we're not doing nearly as well," he said. "The labor participation rate, the share of workers that are in the workforce out of the total population, has fallen off a cliff."

Rapid Digitization Creating Haves, Have Nots

As IT capabilities quickly improve and IT costs decrease, machines do more work; productivity and wealth grow, but employment levels and median incomes stagnate and fall, said Brynjolfsson, who co-authored the book "Race Against the Machine" with Andrew McAfee.

"Digital Technology has changed very rapidly, but organizations and [worker] skills simply aren't keeping pace. As a result, millions of people are being left behind. Their incomes and jobs are being destroyed, leaving them worse off than they were before the digital revolution," he said.

"There's no economic law that says technology has to help everybody. Tech progress has been helping parts of the company, but not other parts of the economy."

The Top 1 Percent

So who is winning? Sixty-five percent of the increased wealth in the last decade has gone to 1 percent of the population, according to Brynjolfsson. The income of the top 1 percent has increased by 270 percent in that time period, whereas income growth for those earning the median income "has been pretty close to zero."

In just the last two years since the recession officially ended, 93 percent of wealth increases has gone to the top 1 percent, Brynjolfsson said, citing MIT research. "There you have a case of the pie getting bigger, but not everybody getting a bigger slice."

Those With Skills And Those Without

Up until the 1970s, the U.S. was able to provide work for people with all skill levels, from high school dropouts to those with advanced college degrees, according to Brynjolfsson. But in recent decades, incomes for those with high school educations (or who dropped out) have been falling, and incomes for those with some college education have been flat. But, people with college degrees "have actually done quite well," he said.

"There's been a divergence, which economists call a 'skill-biased technical change,'" he said. The result: People with limited skills have difficulty finding employment while businesses have trouble filling jobs -- such as in high-tech manufacturing -- that require higher skill levels.

Economic Superstars

The digitized economy highly rewards those who can best leverage the new technologies, whether it be a performer like Lady Gaga who uses today's media to reach millions of fans, or an entrepreneur technologist like Intuit co-founder Scott Cook who developed the TurboTax application. Brynjolfsson called such people the "Superstars" of the new economy.

The losers? Workers whose jobs become obsolete, often because of the Superstars' efforts. Cook's TurboTax, for example, eliminated the need for thousands of tax preparers at companies like H&R Block.

"A small number of superstars in many industries are getting outsized rewards while other people are having their jobs automated away," Brynjolfsson said. "This pattern is happening, to some degree, all across the economy."

The Return On Capital Vs. Labor

The return businesses have earned on capital (such as IT systems and manufacturing equipment) and labor has remained fairly steady for decades. But, that's been changing in the past 10 years with returns on capital reaching record levels (both in absolute terms and as a percentage of GDP) while returns on labor have dropped "precipitously," according to Brynjolfsson.

Rapid improvements in IT are a major driver of that trend that's proving to be a disincentive for businesses to hire more workers.

Technology Change Accelerates In The Next 10 Years

Brynjolfsson cited two cases to illustrate how quickly technology is advancing. One is Google's self-driving car technology, which the MIT professor recently experienced in a drive down Highway 101 in the San Francisco Bay Area. The other is IBM's Watson computer (pictured) that defeated longtime Jeopardy champion Ken Jennings in a famous man vs. machine competition.

The Google technology could make obsolete thousands of jobs, from cab drivers to long-haul truckers. And Brynjolfsson said the Watson technology is being applied to call centers, financial processing tasks and even medical diagnostics -- jobs that once only people could do.

Confronting The Digital Economy Paradox

"The truth is, technology has always been destroying jobs, technology has always been creating jobs," Brynjolfsson said. But with advances in technology coming faster than ever, that equation is out of balance.

"We're going to see this trend accelerate in the next 10 years," he said of machines taking over tasks that have been exclusively the province of humans. "The consequences of this are very profound.

"Addressing this paradox is the grand challenge for our generation."