The Hindu Business Line : Skill-biased tech widens wage divide

To survive in globalised markets, firms have no option but to use global technologies. Being skill-biased, the new technologies have bred increased wage inequalities between the skilled and the unskilled.

One option to bridge the wage divide is to increase the supply of skilled workers by raising the general educational standards.

Arindam Banik
Pradip K. Bhaumik

The geographical contours of global production of goods and services have seen significant shifts in recent times. This has been caused as much by forces of globalisation as by technological changes. In fact, the interaction of the two have caused an impact which in magnitude is greater than that of either alone.

While globalisation has made almost all product and factor markets global, technological change is bringing equally massive upheavals in its wake — all of which is still not fully understood.

In the midst of such massive changes, the immobility of labour will perhaps continue and all our policy decisions will have to be based on this feature in the foreseeable future though even fewer services will need to be produced locally.

Skill and tech adoption

Most newer technologies entering the market through newer products and processes are skill-biased in the sense that they use skilled workers more intensively than the older technology. Economists have found that adoption of new technology is affected by the relative supply of skilled workers in the region — regions having a higher supply are likely to be quicker in new technology adoption.

Also, while the real wages of skilled workers are expected to increase as new skill-biased technology is adopted, the wages of unskilled workers may either remain unaffected or even fall. The issue of supply of skilled labour has, therefore, become an area of immense interest largely because of the rising inequality in the relative wages of skilled and unskilled labour.

Global technologies

At the firm or even at the economy level, new technology can be developed endogenously through innovation. New technology can also be developed exogenously and adopted later in a local firm. The market for technology is slowly emerging as a global one and newer technologies are improving product quality and productivity and, in many cases, have superior capabilities.

To survive in globalised markets, firms have no option but to use global technologies. Being skill-biased, the new technologies have bred increased wage inequalities both at the household and regional levels in the Indian context.

Widening Wage divide

It is observed that new technology accompanies certain forms of inward investment, which also brings new ideas and processes into a country. But at the initial stage it benefits the relatively skilled and, consequently, the relatively well-off. Hence, the higher-skilled gain by way of better jobs and wages at the expense of the lower-skilled.

The adoption of new technology, therefore, furthers the wage divide between the skilled and the unskilled.

Interestingly, the removal of trade barriers has reduced inequality of different kinds, including skill inequality. Incidentally, with foreign direct investment (FDI), the increasing income inequality among various skill levels is emerging as a source of concern.

Aggravating inequality

For rich economies, the net outflows of FDI tend to reduce the relative wages of lower skilled workers, while in poor economies inflows of FDI benefit the highly-skilled. This is also prevalent in the Indian context. For example, a company shifting a call centre from a developed economy to India aggravates inequality in both the economies.

The anti-globalisation lobby will then jump into recommending the policy prescription through protectionism. Such policies may be harmful for both the countries. The developed country firms prohibited from pursuing FDI cannot guarantee long-term employment to uncompetitive workers and, in fact, may endanger their own survival, the consumers of their product or services will have reduced purchasing power as they buy the same product or service at higher than global prices.

Similarly, the relatively poor country stopped from receiving the FDI would have lost the chance of receiving investment and creating in the process output and employment. So suppressing FDI or technological change may not be an ideal case and other options to reduce the wage divide may be called for.

Investing in education

One such option would be to increase the supply of skilled workers and a prerequisite for this would be to raise the general educational standard. In general, the level is below the performance required to integrate entrants to the labour force. Productivity levels in India are generally low, partly explained by ineffective education.

The fact that the poor have low levels of education in India highlights the need to address educational issues. Let us not forget that primary education generates the highest rates of return; secondary level has lower returns while the tertiary level has returns higher than that of the secondary level.

Experts argue that skill-biased technological change is responsible for increasing inequality within the top levels of the income distribution.

Evidently, most of the growth in inequality between the highest and lowest earners is due to poor educational performance of the unskilled. At the household level, ample evidence reveals that the poor face credit constraints, which prevent them from investing sufficiently in their children’s education. But this is only part of the story.

Poor quality education

On the supply side, the government is equally to be blamed. In the Indian context, government educational institutions are largely responsible for providing education, right from basic to higher levels.

Generally, the standards of these institutions are poor. At the school level, the difference between government schools and the private ones is too glaring to be emphasised.

Similarly, although there are private institutions offering tertiary education, the regulating bodies are all government controlled. As for research and publications, the performance of the teachers is abysmally poor even in leading engineering and management institutes.

It is hard to find Indian educational institutes among the top 250 in the world. In future, the country must compete through the quality of its human capital, innovation and research and development. Quality educational institutions are, therefore, essential for meeting the challenges of skill-biased technologies.

At the primary level the story is even more pathetic. It is not just at the top of the ladder that the rungs are missing — a significant number of schools lack the most basic infrastructure, let alone access to the Internet.

In addition non-availability of quality staff aggravates the situation. If we do not quickly upgrade our educational institutions, the demographic advantage that we proclaim so loudly may suddenly appear to be a burden.

(The authors are Professors at the International Management Institute, New Delhi.)

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