Do Productivity Increases Contribute to Social Inequality?

Summing Up: Jim Heskett's readers are divided about whether corporate productivity increases make social inequality worse.
by James Heskett

Summing Up

Does Social Equality Improve Productivity?

Inequality in our society is an important and growing issue. It prompted a debate among respondents to this month's column about the causes, specifically the role played by innovation leading to increased productivity without attendant economic growth. One respondent turned the topic on its head, posing a more interesting question of whether equality fosters productivity.

Several felt that innovation and productivity increases are leading to inequality. As Donald Shaw put it, "Technology development has always displaced some workers while creating new jobs more or less commensurate with the skills of the displaced workers. But things have changed since the technology is now able to think as well as perform tasks… It is not easy to convert today's manual laborers to thinking workers. And … technology has now taken over work that once was considered thinking and will increasingly do so."

Bill Barker agreed, in the process offering his solution: In the past, he wrote, the portion of the working population employed in agriculture dropped from 50 percent to less than 2 percent and was ameliorated by new employment opportunities in industry and services. "It is difficult to imagine how that will continue… there has to be some solution and that solution has to be governmental."

Several were more philosophical about the issue. As Wayne Lingard put it, "Productivity increases do create social unrest, it's a natural state which a country must get to, to move to the next level…" Ken Black commented: "Of course productivity contributes to social inequality, but there are a lot of non-productive people in various positions doing very well financially--so productivity alone is not a good gauge of social inequality." Romuald Kepa added: "The invention of the steam engine and resulting shifts in the society are great providers of insight… Luckily, (the) world did not collapse …"

Others were not so sure that productivity is the primary culprit. Grace Duffy said that: "Long term cultural changes (she cited reduced education, greater dependence on drugs, and entitlement programs) are the basis for many of the disparities in employment. Productivity is necessary where not enough skills are available at the level required within a specific market…" Will Wilkin agreed: "The main reason for the rising inequality is that Free Trade has encouraged/required manufacturing to be offshored and outsourced … If we replaced the Free Trade policies with a Balanced Trade policy, using … (import licences) issued in the same value as our exports, (we'd balance our trade and) directly create millions of new US mfg jobs …"

Mark Clark expressed concerns about the link between inequality and democracy, advancing a proposal that might also address some concerns about productivity and inequality. As he put it, "A foundational step to fortify the health of our democracy may be a requirement of mandatory service-social service, infrastructure construction, teaching/mentoring or military according to individual talents and interests… A couple years contributed in the late teens or early twenties …"

The discussion moved several respondents to pose questions worth thinking about as we go forward. The most interesting was that of Armando del Bosque, who asked, "How about reversing the causality? Does Social Equality Improve Productivity?" Based on his experience with "companies (that) increase equality amongst their employees, their families and the communities they live/work in, (he has observed) dramatic productivity increments … no layoffs, no additional technology, 'just' increased employee engagement." Does he have something here? What do you think?

Original Article

Inequality seemed to have been the byword of the year for 2013. Studies documented increases in the gap (or in a few studies, the opposite view) between rich and poor. Headlines, at least in the United States, typically focused on the share of wealth and income accumulated by the top .1 percent or 1 percent of the population. Attention also focused on the fact that people in the bottom 20 percent were not just in low-paying jobs. Unusually large numbers that wanted jobs had none and hadn't had paying work for months.

Couple that with the following: How many times in the past twelve months have you read or heard the comment by managers in the private and especially the public sectors that, "We need to do more with less?" The underlying assumption, of course, is that greater productivity will cure whatever ails an organization. Something good will come from it, either for an individual organization, a community, or an entire economy. Does that assumption hold?

Increased productivity from whatever source—investments in technology, better methods, or just more effort—without compensating growth will naturally lead to fewer labor inputs (and jobs) per unit produced. For example, in the US employment has increased much more slowly than either improved productivity or growth in the economy. One result may be the structural unemployment associated with long periods without a job and the obsolescence of skills that occurs with increasing rapidity in an information economy.

These concerns are not new. Jeremy Rifkin raised them in 1995 in his book, The End of Work. More recently, Jaron Lanier concluded that job-destroying productivity leading to inequality occurs when all of us contribute information about ourselves gratis on the Internet to a few high-tech entrepreneurs who get paid for the information and accumulate all its monetary value. He cites, as an example, the fact that 140,000 Kodak employees were replaced in large part by startups like Instagram (an Internet-based distributor of photos) a company with just 13 employees that was purchased last year by Facebook for $1 billion.

I've heard no one argue that the solution lies in reduced productivity. Rather the concern appears to be with how the fruits of increased productivity are distributed. Rifkin suggests that a solution lies in fostering what he calls a Third Sector, comprising the civil society. He proposes "Taxing a percentage of the wealth generated by the new Information Age economy and redirecting it into the neighborhoods and communities of the country, and toward the creation of jobs and the rebuilding of the social commons …." Lanier's solution lies in creatively using information technology to produce a blizzard of "nanopayments" to all of us who supply valuable information gratis to Facebook and other information exchanges that have expropriated value from both the employed and unemployed of our society.

Are productivity increases contributing to social inequality? At what point does inequality become a threat to democracy (and the lives of the 1%)? Is this something that market mechanisms can resolve? Or will responses like those Rifkin proposes be the answer? Or are these just 2013's issues of the day? What do you think?

To Read More:

Jaron Lanier, Who Owns the Future?, Simon & Schuster, 2013

Jeremy Rifkin, The End of Work: The Decline of the Global Labor Force and the Dawn of the Post-Market Era, Jeremy P. Tarcher/Penguin, 1995

    • Steve
    • CIO, State Government
    From the public sector perspective, we are always trying to do more with less. We try to maximize the value of every dollar spent. In my state, we know that there are going to be the about the same number of people in the workforce in the next 10-15 years as there are now. But the population is going to grow by about 20%. This will continue to create a productivity gap. We will most certainly need the productivity increases that will be created by technology, automation and greater efficiency.
    • Will Wilkin
    • Co-Owner-Operator, Made In USA Solar LLC
    Of course rising productivity is a good thing, provided it is genuine and not just achieved through intensification of work or off-shoring/outsourcing to avoid the costs of producing in America.

    The main reason for the rising inequality is that Free Trade has encouraged/required manufacturing to be offshored and outsourced, exporting our nation's engines of wealth creation (and our jobs, wages, tax base, and manufacturing capacity & all the multiplier-effect jobs that mfg would have supported).

    This has resulted in historically high windfall profits and executive bonuses enriching the top, while leaving the workforce to compete for lower-paying and lower value-added service jobs. And those jobs have suffered wage stagnation or decline precisely because so many displaced workers now compete for them and because the national pie is truly smaller relative to population as so much manufacturing has been offshored.

    If we replaced the Free Trade policies with a Balanced Trade policy, using Import Certificates (import licenses) issued in the same value as our exports, we'd divert our trade deficits averaging $530 Billion annually into over $500 Billion additional demand for US-produced goods.

    Balancing our trade would directly create millions of new US mfg jobs, and indirectly create millions more jobs in other sectors through the multiplier-effect. It would thus bid up the price of labor, reduce the need for social safety net, grow the tax base and resolve the fiscal crises of national, state and municipal governments.

    In sum, we need to grow the pie by putting our citizens back to work in high value-added jobs, and manufacturing must be the center of that revival.
    • Romuald Kepa
    • Executive coach, Self-employed
    The invention of the steam engine and resulting shifts in the society are great providers of insight.
    Electronics, telecommunication, software are 21-st century steam engines destroying old industries.
    Luckily, worl did not collapse in 19-th century :-)
    • Rob Houck
    • Partner, Eaton & Van Winkle
    I lived in Pittsburgh in the 1970's. Dresser Industries planned a steel plant for construction in the Soviet Union, but the plans were rejected. How come? The plant did not employ enough people. We all thought that was silly.
    • Grace Duffy
    • President, Management & Performance Systems
    Increased productivity has moved what and where skills are needed. Automation has removed the lower skilled jobs and increased the number of jobs in higher decision making areas. At the same time, the US population appears to be embracing a culture of reduced education, greater dependence on drugs, and use of entitlement programs that seek to replace wages. Legalizing medical marijuana and the increased use of mood altering medications, although laudable, threaten to reduce the individual's reasoning capacity and, thus, their employability. Loss of the traditional family unit creates an additional hurdle for the single parent to work outside the home without having to pay for childcare.

    These trends do not account for all the unemployed in the US, by any means, although the number of unemployables is increasing at the same time the requirement for advanced skills to fill new positions is also increasing. Long term cultural changes are the basis for many of the disparities in employment. Productivity is necessary where not enough skills are available at the level required within a specific market. When the demand is in the market, cash flows will support jobs.
    • Wayne Lingard
    • CEO, Process Way Consulting Ltd
    Interesting debate, article and comments. My answer to the question is yes. Productivity increases do create social unrest, its a natural state which a contry must get to, to move to the next level. The nature of the system that presently exists is for the 1% to make it all and have it all. However as like smoking we are starting to change our views and beliefs that it is socially unacceptable for that behaviour to continue. The great question as posed in this article is when does that threaten democracy and the 1%. I am sorry Mr Heskett but when has the 1% ever been the democratic number to continue to do something ? Never ! Democracy is not about the 1% its about the ALL, and if society starts to find that behaviour socially unacceptable it will change it, that's what innovation and progress is all about. This may be the beginning of the end for the 1%. All society needs is the knowledge of what system and how to change! watch this space!
    • Nick Chipman
    • Partner, PwC-Australia
    Productivity for whom? From who's perspective? It may be this topic needs some greater definition and perhaps the framing and answering of the question can be done by reference to "multi-factor productivity".

    We could easily fall into the trap of focusing just on labour productivity and miss factors such as capital productivity, leadership and decision productivity, and in the context of this question social productivity which might address things like social cohesion and inclusion,for example. How does squeezing one part of the water filled balloon(if we assume it is a closed system),impact other parts of that balloon? What does business owe the community in terms of social cohesion,inclusion and accountability for the consequences of wealth creation? How many business cases for reforming labour, assets, decisions,etc., include a social impact and consequence component--other than when it is regulated? Does this become a question of how the VALUES of our enterprises are set--do we care about who else we impact and, if so, how do we explain what we consider to be fair? What is fair then? Worth reading, "Animal Spirits" by Akerlof and Shiller (chapter 2 espec.)
    • Peter McCann
    • Consultant, McCann Corporate Consulting Associates
    Increased inequality leads to increased risk of social unrest. One can see this in the UK in the 20th Century - and in the US in the 1880s to 1940s. When inequality reaches a level that exceeds a society's adhesions, then ruptures will occur. We see this now in Egypt, Ukraine and, possibly, Greece.

    And the US? The US has huge social adhesions through social networks such as churches and service clubs and unifying myths such as 'work hard and get rich'. So, social unrest in the US is unlikely until economic polarization frays myths. Most likely, I suspect, is that markets are well-gamed now, inequality will increase and at some point the electoral swing will be towards a more activist and interventionist role for government.

    When government does intervene, as it will, then the Rifkin answer or the Tobin tax or other innovations will be considered, but the simplest intervention will be recalibration of tax rates, spending on physical and social infrastructure and a post-industrial labor market adjustment.
    • Bill Barker
    • Retired, Retired
    I think that permanent unemployment comes from various factors, but particularly replacement of human effort by employees with forms of automation such as computer software, is the largest problem facing our economy. How are these displaced people to be supported, and more, given meaningful lives? I don't like problems which do not have solutions, and I cannot offer any practical and meaningful proposal to solve this problem. Having the government support them and tax those who do work is not an acceptable long term solution.
    • Ken Black
    • VP Sales, Orwellian Tomorrow Corporation
    Of couse productivity contributes to social inequality, but there are a lot of non-productive people in various positions doing very well financially - so productivity alone is not a good guage of social inequality. The only reason it has been in the national discourse recently, from the president, his political party and adoring media is because it is a strategy that is working to get votes and advance the ideology of their party. Unlike in previous generations, there aren't credible voices sharing an opposing viewpoint on a regular basis - like the great economist Milton Friedman talking with Phil Donahue...and it's sad.
    • Kapil Sopory
    • Company Secretary, SMEC(India) Private Limited
    Productivity increase of essential items of daily use by all and sundry does not lead to social inequality. This is in fact necessary as it leads to reduction of cost by virtue of more supply in the market.
    As regards luxury goods, these are on demand by the higher strata - the rich class- and increased production thereof leads to social inequality as the poor are unable to go for these. The standard of living of the rich goes on increasing while the poor stagnate and hence the growing rich-poor gap.
    • Armando Del Bosque
    • CEO, His Way At Work
    Dear Professor Heskett, thank you for an insightful article. How about reversing the causality? Does Social Equality Improve Productivity?, and (more importantly) what is the limit? At the non-profit I work for we help companies increase equality amongst their employees, their families and the communities they live/work in. The result?, dramatic productivity increments....., no layoffs, no additional technology, "just" increased employee engagement. Everybody wins. Caveat is: those CEO's who decide to embrace this philosophy do so not for the productivity gains as the driver, but because "it is simply the right thing to do...". The first reaction from CEO's can be "we are going to go bankrupt if we do that", but they are only looking at the "cost" side of the equation, the benefits as we have seen them, are far greater than the costs.
    • J.D.Bailey
    • Retired, Home
    Do Productivity Increases Contribute to Social Inequality? No. When personal "Social Inequality" [AKA: Egotist Greed] evolves to "Social Iniquity" [delusional hubris] where the humbled majority is treated as excess chattel that must be ignored, sold, or slaughtered. How close are the 1% and their minions (+5%...10%) to "Social Iniquity?" I suspect, 10 or more years, a great reduction of excess production units (people) will need to occur. Automation, robotics, and a small cadre of personal-services units [AKA: Slaves] is all the 1% and their minions (+5%...10%) really need for long happy lives. Well, that all depends on maintenance of the present "Social Inequality" economic model.

    What comes after this supply and demand "Social Inequality" economic model? The present "Social Inequality" economic model is inadequate for future human development IMO. How do we take the teat a/o candy from the babies and get them to eat healthy, before they kill US?

    Democracy does not exist in a republic. A republic is governed by a plutocracy of special-interest (religious, relations, race, privilege ...). The Civil War South was a confederacy of slave republics, not democracies. Presently IMO, the USA is a Republic for wealthy elitist ruling of a (close to illiterate) dogma affected public. A real democracy economy can be governed and changed by the majority, never threatened by a few.
    • Bill Barker
    • Retired lawyer and businessman, Retired from Dow Chemical
    This is the most serious problem facing our society. As time passes greater and greater percentage of the working population for one reason or another, principally automation of tasks formerly done by people, are not only unemployed but unemployable. In the past phenomena such as the portion of the working population employed in agriculture dropping from 50% to less than 2% in the 2oth century were ameliorated by new employment opportunities in industry and services coming available. It is difficult to imagine how that will continue. I have no solution to offer as to how to support these displaced people and give them meaningful lives, except that there has to be some solution and that solution has to be governmental.
    • Donald E. Shaw
    • President, Donald E. Shaw, P.E.
    Technology development has always displaced some workers while creating new jobs more or less commensurate with the skills of the displaced workers. But things have changed since the technology is now able to think as well as perform tasks. The Economist article "The Onrushing Wave" elaborates much more fully than possible with a comment. It should be read by all who are interested in this topic if they have not do so.

    It is fairly easy to adapt the manual work of farming to the manual work of shoveling sand which was the poster boy of Frederick Taylor's Scientific Management published around 1911. It is not easy to convert today's manual laborers to thinking workers. And, as the Economist article discusses, technology has now taken over work that once was considered thinking and will increasingly do so. All that remains then is basically highly knowledgeable and skilled work requiring advanced degrees and highly abstract thinking capabilities. Given the educational state of most high school graduates today as demonstrated by our sad standing in international testing, it is doubtful produce many advanced degree workers very quickly if at all. Thus, it would seem the future looks bleak for most workers with an outcome something like Kurt Vonnegut's "Player Piano."
    • Mark Clark
    • CFO, marketing production company
    I'm not an economist but believe it is fairly clear that productivity is contributing to social inequality and eventually may threaten our democracy. A solution must involve greater consciousness and involvement in that democracy. Too many expect too much without awareness of community needs or an obligation to "give something back". A foundational step to fortify the health of our democracy may be a requirement of mandatory service - social service, infrastructure construction, teaching/mentoring or military according to individual talents and interests. A couple years contributed in late teens or early twenties would improve maturity, change attitudes and I would think foster commitment to address the challenges an increased economic inequality causes. One must first appreciate a democracy to breathe life into it.
    • Dennis Nelson
    • ICO, RM and IM, SFS
    The decisions surrounding productivity increases may contribute to social inequality or those decisions may help to reduce social inequality. Increased agriculture productivity led to the destruction of produce. Inequality becomes a threat to democracy (or any establishment) when those suffering from the inequality lose hope their suffering can be diminished through the existing structure, democracy or not.
    • Hap Burnham
    • Mostly-Retired Entrepreneur and Lawyer, self
    Notwithstanding the ignorant and simplistic jargon of many politicians, mass-media spokespeople and even academicians who should know better, there really is no such system of national government anywhere on this planet as "democracy", including the United States of America [which is a constitutional republic]. Further, there is no threat to representative governance institutions from inequality of wealth or income when there is enough of that well-distributed among the citizenry to sustain a reasonable standard of living and wide-spread genuine hope of self-improvement exists. Equality itself is mythical. It doesn't exist now, never has in any practical sense and never will be [except as a result of dictatorially imposed misery].

    In my opinion, motivation is the key to human performance. Economic and social motivations can combine to increase output, income and wealth creation. Believe that such motivation depends upon relatively equal and open opportunity for achieving desired results.

    Agree with reasonable distribution of income and wealth among all citizens - but not "equality". Desirability of income and / or wealth "equality" among citizens is almost completely bogus. View that idea as evil because it has been so frequently used as a pretext to justify its claimed application [in places as diverse as Bulgaria, China, Czechoslovakia, East Germany, Hungary, Kampuchea, Poland, North Korea, North Vietnam, Russia and Ukraine]. Such vile application has resulted in terrible excesses of government-sponsored killing, property confiscation, deprivation of liberty, indoctrination of youth, limitations of opportunity, loss of freedom of speech, state-controlled media, single-party politics and imposition of tyrannical police-state measures] against those perceived as unfairly wealthy. Externally imposed equality of results, regardless of other factors, deprives every person subject to it of motivation to achieve and earn individual rewards, lowers
    productivity and diminishes [instead of increases] total benefits.

    What's really important is the relationship between individual and family income and wealth and self-perceived needs. The magnitude of income and wealth of people such as Andrew Carnegie, George Baker, George Soros, J. Pierpont Morgan, John D. Rockefeller, Bill Gates [whom I don't admire] and the like has little to no effect upon me. Bravo for economic success - though not to unfair methods of wealth acquisition, which are rightly condemned.

    Doesn't each of us appreciate improvements in our individual and family lot? I certainly do. It's particularly noteworthy and beneficial for all of humanity when extraordinary circumstances of applied creativity, ingenuity and productivity lift individual and family income, wealth and well-being - without stealing results of others' success. Applaud and encourage that.

    Hap Burnham, HBS MBA and JD University of Denver
    Golden, Colorado, U.S.A.
    • Anonymous
    To where and to whom will Rifkin's nano payments be made? The 1% plays a rigged game politically and financially, and assuming that further inequity will be relieved by bleeding off moneys is fantasy. We have already seen the 1% rewarded for catastrophic management of financial assets, so productivity doesn't apply in that reward system. We witness a Congress and Senate that is elected by people unable to address inequality at any level, so our democracy is a non-starter. Accountants have not effectively addressed valuation to account for technologies and free access to our identities and information. This may be simpler than it looks. The 1% cannot lose. The 99% cannot win. Access and reward is one way to the 1%, at all levels, same paradigm. Reverse the access, reverse the reward. Free information flow, wikileaks is a minimal start, levels the playing field. Backdrive the megadata, flush the 1% iron grip on our information into our har
    d drives, make us all inside players and suddenly the 1% are standing in soup kitchens. The only real disparity is information. Once it is concentrated at the top, the top has power. Once it is distributed to the 99%, the curtain lifts. The Target exploit should ring a bell somewhere. If all the money in the world is just bits and bytes, the 1% is one exploit away from the breadlines like the rest of us. Welcome the the Revolution, I guess would be a binary cry, if bits had voices. Identity theft works both ways, perhaps.
    • Peter Lee
    • Mg Consultant, Remuneration Data Specialists Pte Ltd
    Now that work and business have become so dominant in peoples' lives, the real issue is not just productivity but sustainability. People, business owners, customers and the environment are all interdependent symbiotic members of our whole societal ecosystem and as such narrow & one-sided measures like productivity if maximised will destabilise the whole ecosystem.

    Obviously, if inequality gets seriously worse, we are reminded of Marie-Antoinette's exhortation to let the peasants eat cake if they cant afford bread.

    Our planners, politicians & thinkers have to, as they say, reinvent the concept of how we live our lives.
    • Dennis Nelson
    • ICO, RM and IM, SFS
    Social inequality results from a too narrow and too shallow education and experience level for both individuals and society as a whole, and the accompanying misperceptions of self and society by both. It is an historical issue since too few individuals are focused in a way and for the time needed to accumulate the necessary education and experience to address social inequality within a sustainable framework that would span more than limited geographic and time parameters. Rather than a redistribution of resources, social equality is about the recognition of and most effective and efficient application of resources to ensure social sustainability as far into the future as imaginable. Social inequality leads to the dissolution of societies, nations and even empires within one or over several generations.
    • CEO, CJC
    I feel its pretty sure that technology and jobs are in inverse proportionality relation
    • Monfred
    There is no doubt that improved productivity kills inefficient jobs. That's a bad news for the laid out worker. But from a global perspective this is a good news, since now all these laid out workers, having endured a (hopefully short) period of stressful job search, will find better ways to contribute to the society. That is, if the worker manages to find the job in the end, as opposed to being stuck in the safety net programs for life, which is arguably worse than having no progress.

    There is no perfect solution to the stress problem, because it is precisely the process of searching for a new occupation that generates new ideas and moves the society forward. As a society providing the safety nets we need to keep the right balance between easing the pain of the job seekers and compelling the individual to keep searching. Our current programs are already built with this idea in mind, even though they are somewhat distorted toward welfare by recent political forces.

    Trying to hold the progress to save the jobs is a wrong idea, it is a direct way to become obsolete and to lose competition with other countries out there. There is no right to work in our constitution, and that is partially what makes our society so resilient.