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Home Opinion Mind the gap: Capital and labour in the digital economy
Digital Economy • Capitalism • Labour

Mind the gap: Capital and labour in the digital economy

Florian Ranft - 14 December 2015

If the centre left can craft a vision for the digital economy that mitigates social downsides and manages inequality, it may restore its economic credibility

Since the end of the 1990s, startups and self-employed entrepreneurs are the main creators of new jobs in US and European economies. These often small, creative and service-orientated businesses thrive on innovations, new data sources and skilled labour in metropolitan areas. Despite this startup offspring, among other factors and against the predictions of academics, technology has not decreased levels of inequality. The challenge for the centre left is to develop a reform strategy that unlocks the vast potential of new technologies but mitigates the social downsides and does not exacerbate inequality.

There are profound concerns that the digital economy leads to a greater concentration of wealth in the hands of the ‘owner of robots’. These reservations rest on the notion that startups in the tech sector often rely on venture and private capital. These investments bring unprecedented wealth to a small group of talented individuals who are willing to take the risk.

Yet, it is not only income from capital that makes our societies more unequal. In the US, income inequality has risen to levels last seen in the 1920s. In a digital economy, successful tech firms do not only have a smaller and highly-skilled workforce, but one which is paid significantly better. The example of Google is instructive: valued at $370bn in 2014, it employed 55,000 workers, roughly one tenth the size of AT&T’s workforce in 1960. People working in the Silicon Valley also have a much better income, almost twice the median wage in the US in 2013. In this respect, technological change reflects and amplifies the perception of a ‘winner-takes-all economy’, in particular by those who have not benefited from globalisation.

Wealth inequality in the digital economy raises the question of how progressives can reform tax models. The regulatory taxation framework in Europe dates back to the 19th century, largely reflecting business models of the first industrial revolution. There is a risk that outdated taxation models may stifle innovation while protecting incumbents and preserving established businesses. For instance, present inheritance tax schemes seen in most European countries favour family-owned firms that are passed on from one generation to another. In a digital economy, new innovation and success often demands taking higher financial risks, whereas the priority of family-owned firms was to protect against downside risks. Progressives must recognise that tax models are no longer in line with the ethos necessary to drive innovation within modern economies.

Highly-successful technological firms reflect the crucial role of public funding in the creation of ground-breaking innovations. Apple’s iPhone is not simply a creation of Silicon Valley, but rather an assembled product of government-funded innovations (Internet, GPS, touch screen, Siri). State-sponsored innovations have driven private wealth, but the returns for societies remain limited. A key point in this respect is that government and private sector need to work collectively. The success of the entrepreneurial state offers a starting point for an optimistic progressive narrative in times of economic orthodoxy. Progressives should also promote and discuss alternative ownership models in the tech sector. This would allow the fruits of the digital revolution to be shared more widely.

In regards to labour, the digital economy creates business models that eliminate the need for middle-management and middle-income jobs. This development continues a trend of ‘broken career ladders’ that kicked off in the ‘new economy’ of the 1990s. The prediction of tech pioneers is becoming a reality. Automation and machines are replacing routine work concentrated in manufacturing and clerical industries. As a result of this substitution, and in combination with flexible labour markets, mid-income jobs in the EU are disappearing (see Table 1).

Yet, empirical evidence suggests that substitution does not diminish jobs. A recent study by Guy Michaels and Georg Graetz shows that robots might not drive people out of work. Instead they raise productivity which reduces the prices of goods and services. Lower prices increase demand to which firms react by hiring new workers. Although robots might not destroy jobs overall, there are strong indications that technology profoundly changes the structure of labour markets. Progressives must acknowledge this development and find ways of preventing further labour market polarisation. If this is not achieved, European societies might expose more workers on the bottom of the income scale to job insecurity.

Table 1: Employment shift (in thousands) by employment status and job‑income quintile in EU, 2011–2014.

Source: European Job Monitor (2015:25).

At a time when the economy and the nature of employment are changing at a rapid pace, progressives have to make a stronger case for social safety nets and skills. Tech businesses that are based on the externalisation of risks, such as Uber or AirBnB, must be firmly reminded of their social responsibilities. There must be clear rules, such as the working time directive or minimum wage, that apply to their ‘clickworkers’ and can be reinforced in national courts.

Governments should also substantially improve the individual career paths and mobility of vulnerable workers. Volatility in job markets will make it necessary for workers to readjust their skills set throughout their careers. Individual lifelong learning accounts are one way to strengthen people’s employability throughout their working life. Avoiding the pitfalls of the UK experience they would incentivise employers to directly invest in staff, focus on industries most affected by disruption and target vulnerable workers on the lower end of the income scale. New ideas, such as the Cities of Learning approach outlined in a recent RSA report, could also guide the way to strengthen workers in the digital age. This concept focuses on the creation of local peer-to-peer networks that expand skills and learning throughout their communities. 

For progressives, the digital economy is an opportunity to offer a future-facing vision. It presents challenges regarding the shift of labour and the distribution of income, but it also offers swathes of jobs, growth and rising living standards. They must manage the impact of technology on societies, particularly its ability to create winners and losers. If the centre left succeeds in crafting a vision that mitigates social downsides and manages inequality, it may restore its economic credibility, a weak point in recent elections across Europe, especially in the UK.

Florian Ranft is a researcher at Policy Network

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The Policy Network Observatory promotes critical debate and reflection on progressive politics. It is centre-left orientated but determinedly challenges social democracy. It is pro-European but restlessly questions EU institutions and practices.

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