COMPUTERS IN THE WORKPLACE: HOW NEW TECHNOLOGY HAS CAUSED THE DRAMATIC RISE IN INCOME INEQUALITY
The developed world has seen a dramatic rise in income inequality over the last quarter of a century and one of the leading explanations for this growing dispersion of earnings is computerisation in the workplace. But how exactly does this new technology interact with skills and changes in relative pay levels?

Writing in the latest issue of the Economic Journal, Professor Tim Bresnahan of Stanford University offers a powerful new view of the impact of information and communication technology (ICT) on white collar work. He identifies two effects of ICT on the demand for labour: one that explains the fall in demand for low skill labour; the other that explains rising demand for high skill labour.

Bresnahan argues that the fall in demand for low and mid skilled labour is a direct result of the systematic substitution of computers for human decision-making. Much white collar work has been industrialised: software tools permit more and more complex transactional and operational tasks to be carried out by machines. Computers are good at repetitive tasks - and bureaucracies are full of repetitive tasks.

ICT has also changed the composition of workers’ tasks in low skilled areas of bureaucracies. The demand for human social skills, which computers cannot replicate, has risen as cognitive skill demand falls. Yet Bresnahan feels that the extent of ICT’s impact on lower skilled occupations is limited, partly due to ICT’s inability to replicate the ‘people skills’ of the front office staff, and partly due to the productivity gains inherent in ICT, which may well have a positive effect on output, and consequently on the demand for labour.

At the same time, the use of ICT has raised the demand for highly skilled workers. This mechanism does not work through managers and professionals literally using a computer. Instead, ICT changes the organisation of bureaucratic production at the firm, industry and multi-industry level. In all aspects of the firm, the effect of ICT is to make managerial and professional actions highly influential.

In a people-based organisation, the sphere of influence of a new idea is limited by the need to communicate it to all relevant parties. In software-based production, the same idea can be applied to all customers, all suppliers and all transactions by embedding it in the system. This significantly raises the marginal product of the skilled workers’ ideas, even if they never see a computer, therefore raising their relative value to the firm. This process is called Organisational Complementarity, and it is this which Bresnahan argues has had, and will have, the greatest impact on wage inequality.

Professor Bresnahan’s outlook for the future is not optimistic. The shift in labour demand could have led - if supply of the relevant skills had increased - to a movement of low waged workers into more highly rewarded activities, and a subsequent reduction in wage dispersion. Sadly, it did not.

In reality, supply has responded slowly and inequality has increased. Some see this as an indictment of modern economics that may lead to a new ‘anti-growth’ political economy. It has also led to questions regarding the effectiveness of schools, and to the hope that changes in policies towards them will open up the bottlenecks in labour supply.

Note for Editors: ‘Computerisation and Wage Dispersion: An Analytical Reinterpretation’ by Tim Bresnahan is published in the June 1999 issue of the Economic Journal. The author is at Stanford University.

For Further information: contact RES Media Assistant Niall Flynn on 0171-878-2919 (email: nflynn@cepr.org).