Impact of ICT on the Productivity-Compensation Gap

Abstract

Researchers have observed that the growth of hourly compensation in the U.S. has lagged behind the labour productivity growth since 1970 (Fleck, Glaser, & Sprague, 2011). The disparity between productivity and compensation, which is known as the productivity-compensation gap (Mishel & Gee, 2011), suggests that workers do not benefit directly from the increase in the productivity growth. The dynamism between labour productivity and compensation may be influenced by the use of Information and Communication Technology (ICT). By raising labour productivity, ICT saves (labour) costs - in this thesis, the money that is saved due to productivity growth, or freed by productivity growth, is called ‘freed capital’. In principle, the freed capital can in turn be used to expand the production and create new jobs for those whose work is made redundant by ICT. But is this the best possible societal option for the use of the freed capital? While increasing labour productivity, ICT may also reduce work and/or alter work relationships, implying significant shifts in responsibility and hence in remuneration. Following this, two main research questions are formulated: First, what is the impact of ICT on the productivity-compensation gap? Second, what principle that should guide the use of freed capital? In particular, could it be used to counter the impact of ICT on the productivity-compensation gap? Does a theoretical principle exist that would support such use of freed capital? In the end, this thesis finds that the impact of ICT on the productivity-compensation gap is hard to be measured, mainly because the impact of ICT on the hours worked is still inconclusive. Nonetheless, this thesis provides two insights that shows ICT still have influences on works: first, ICT contributes to around $ 1.06 trillion (in constant 2005 US$) of the U.S. value added in period 1970-2005. This means that while, apparently, ICT does not have significant impact on the total hours worked, it still increases labour productivity (output per hour). Secondly, ICT is shown to have a positive correlation with the increase of both high-skill and low-skill works, while it has an opposite effect on the medium-skill works. This means that while ICT is assumed to open up new work opportunities, it may also cause a job polarization, in which the medium-skill workers might end up competing for a lower-skill works. Following this result, this thesis reviews various economic theories to review principles that may guide the freed capital towards activities that may counter the impact of ICT on the productivity-compensation gap. This thesis then argues that the answer for such question will depend on which value that is important from the economic perspective. If utility maximization is accepted as the value that organize economic activities, the freed capital can find its place in the expansion of production, as what neoclassical and Schumpeterian perspective prescribe. However, if human beings are perceived to have a higher capacity than merely satisfaction of utility, then the freed capital should also be used for the development of human capacities and character. Just like the investment in innovation that need a great commitment, the investment in the development of human capacities and character will also need one, even greater.