Squaring the Circle: Growth, Employment and Inequality

I need to confess to the reader that I have problems, but not solutions.

Specifically, there are three problems. First, the rate of growth is decreasing in several countries: certainly in Europe, but also in Japan (my generation can still recall the years of the Japanese “miracle”), in the U.S. (what today is considered growth would have been completely insufficient several years ago), in China (forget the rate of 10% from a few years back), and in many other countries.

Some countries continue to boast high rates.  However, this is because they are still in the initial stage in which growth is taking off, where it is easy to grow fast taking advantage of a wealth of natural resources or cheap labor, plus external capital and technology.

A reduction in the rate of growth is of course not news; we have been experiencing this phenomenon since the beginning of time.  The traditional path to growth, through labor and capital, becomes depleted due to the law of diminishing returns.  In other words, short of a miracle, every subsequent euro or every new worker produces inferior returns.   The “miracle” is also known as technological progress.  Therefore, those countries that are losing growth capability know that they will no longer be able to enjoy the same high rate of growth.  Yet they do hope that the “miracle” will at least allow them to maintain a decent rate.


And here is where the second problem comes in:  It turns out that technological progress is not likely to create employment, or at least not the secure , life-long employment with high, increasing salaries that we are used to (at least those of us in Western countries who are by now going  grey).

And here we behold the third problem:  There are people who are very high earners and others who barely scrape by because their job is now in Vietnam, or because a computer has taken it over (there are algorithms that can easily take over a financial analyst’s responsibilities). And those jobs aren’t coming back.

So, what are we to do?  If the cause of all of this is a temporary recession, the best thing to do is to sit tight and wait for the cycle to run its course.  But I am afraid that what we have before us is not a temporary problem; it is probable that, once we begin to grow again, it will be at a lower growth rate than before and that employment generation will be more limited .  And we cannot really count on technology to resolve the problems, as I pointed out earlier.  Nor can we count on education, which is often sought out as the panacea for every single labor problem.

Of course you could cut-off your local labor market from outside competition and technological progress.  But that would mean closing yourself off from the rest of the world and losing competitiveness; the cost of this approach would be excessive in the short-run.  The decline of labor unions is proof enough.  When our competitors are in the town next door, unions are effective.  Yet when competitors are in Indonesia or are lurking inside a computer, and our companies compete with others all over the world, protectionism fails.

What is left is redistributing income: higher minimum wage, a progressive tax and a more developed welfare state.  Fine, but the numbers still don’t add up.  It reminds me of a comic strip I read a few years ago.  In a country in the midst of turmoil (probably Spain in the 1930s), a group of people shows up at a rich landowner’s home demanding that he redistribute his wealth.  The landowner agrees: “I have so many millions, and in this country there are X amount of people, therefore it would come out to this much per capita.  Alright, here is what each of you would get.  Good day.”

Redistributing income is only a lasting solution when that income is increasing .  However, as I pointed out earlier, there is plenty of reason to be skeptical about income increasing in the future.  A few years ago, some economists on the left proposed to implement the necessary reforms so that the GDP could grow and then redistribute wealth accordingly.  But of course, please do not touch the goose that lays the eggs, especially the golden ones, i.e., do so without slowing down growth.  Doesn’t work, sorry.

OK, so I already confessed that I don’t have any solutions.  But outlining the problems well is still necessary.

About Antonio Argandoña

Antonio Argandoña is Emeritus Professor of Economics and holder of the "la Caixa" Chair of Corporate Social Responsibility and Corporate Governance at IESE. He teaches mainly in the areas of macroeconomics, monetary economics and international economics, and publishes research on business ethics, corporate social responsibility and organizational governance.