The $haring eCONomy

The sharing economy can be considered as both a response, and a possible solution, to rising inequality. The distribution of ownership of assets may be unequal. But the distribution of access can be made more equal. It also allows for new employment opportunities in the form of the micro-entrepreneur. Your Uber driver. Your Airbnb host. Your TaskRabbit handyman. All products of a new economic paradigm.

There is emerging evidence of its positive economic impact. In a global study, Airbnb found that one-half of hosts were of low to moderate income and that hosting enabled them to earn sufficient money to stay in their own homes. In San Francisco, Airbnb guests stayed for approximately 2 days more than hotel guests and spent 25 per cent more on their trip, much of it in areas not typically frequented by tourists. Uber drivers talk about putting themselves through higher education or saving to start a business of their own. In the future, a city full of such drivers might eliminate the need for cars entirely. Abandoned car lots could be turned into much-needed affordable housing or open space in over-populated cities.

In addition, and perhaps more importantly, the sharing economy builds social capital. In an era of growing individualism, these companies are bringing people closer together again, driven by values such as collaboration, trust, empowerment and community.* Companies like Airbnb and Uber have created a platform based on these values. Feedback on performance creates transparency and accountability.** Ties are formed between previously unknown individuals. Consumers are confident enough to enter into financial transactions with people that they may never even meet.

In doing so, traditional marketplaces and ways of thinking are disrupted. This is music to the ears of the "Millennial" generation - those that think power is concentrated in the hands of the few, that existing companies cannot be trusted, who look for job opportunities that may pay less but are rooted in social justice. 

But let's be clear that what we are seeing is the growth of a new type of "big business", based on renting, not sharing. In a recent round of fundraising, Uber secured $1.2 billion of new capital, valuing it at around $17 billion. Power is shifting to those that can harness new marketplaces. This includes existing players. In 2013, Avis Budget, one of the largest car rental firms, bought Zipcar, a car-sharing company. In addition, one-half of Airbnb hosts are not of low to moderate income. These are not the people who have been negatively affected by rising inequality.

Meanwhile, the emergence of the micro-entrepreneur reflects the concurrent increase in young people ill-equipped to join the mainstream workforce. If you are a high-school drop out, your chance of being employed is at its lowest level since records began (in 1970). The likelihood that you are out of the workforce altogether is at its highest level for over a decade.  So the migration to sharing-economy employment makes sense. But employees of such firms do not have access to the standard benefit structure offered by mainstream employers, such as healthcare, pensions and human capital investment. This is designed to improve the well-being and productivity of the workforce, producing private and social gains. In that respect at least, sharing is not caring.

* For a thoughtful discussion of the origins of sharing norms, see Deaton (2013) on hunter-gatherer societies. At that time, individuals had no way of storing leftovers from a hunt. Instead, they shared their spoils with their neighbours, in the hope that next month, their neighbours would reciprocate. "Our current deep-seated concerns with fairness, as well as our outrage when our norms of fairness are violated, are quite possibly rooted in the absence of storage options for prehistoric hunters" (pp76).

** Accountability is a big thing. Uber provides credits almost instantly if something goes wrong with your journey. Airbnb promises to cover any damage caused by unruly guests and guarantees alternative accommodation if you turn up to a castle and it turns out to be a caravan.

Machine Age II: Dawn of the unemployed

US retailers donate excess clothing (made cheaply in Asia and shipped back) to homeless charities to help down-and-out Americans. There is no denying the generosity of such an act. But what is this chain of events telling us? That emerging economies have "taken our jobs"? Or that the US has failed to adapt to a changing world economy and create new job opportunities?

Over the past 20 years, some middle-skilled jobs did migrate to countries that were able to provide labour at a lower cost than at home. At the last count, China accounted for 40 per cent of all clothing imports into the US. Such a shift was unsurprising. Making clothes required some skill but relied on repetition across dozens of lines. A Chinese middle-skilled labourer was in all ways identical to a US labourer except one - cost. Wages paid to Chinese workers were lower than their US counterparts.* In order to increase profits, firms chose to locate production in an area with the cheapest operating costs. Thanks to globalisation, which reduced geographical barriers between countries, it no longer mattered where in the world that was.

But other middle-skilled jobs have disappeared because of technological progress - particularly in IT - that automates tasks and renders the job obsolete. Sales assistants at grocery stores have been replaced by self-checkout kiosks. Secretarial pools have been replaced by computers. The speed of such change feels rapid. The US Bureau of Labor Statistics predicts that it will continue to be so - some of the fastest falls in occupations between now and 2020 will be in middle-skilled occupations.

Source: Tuzemen and Willis (2013)

The gap left behind in the US labour market has not been filled by equivalent jobs. Instead, there has been a rise in the share of high-skilled jobs - professional and managerial roles - that computers cannot yet perform because of the cognitive and non-cognitive skills they require. This is known as skills-bias technical change** because securing these jobs requires advanced qualifications and so favours those who have - or can obtain - such skills. Between 1983 and 2012, the share of high-skilled jobs in the US labour market increased from 26 per cent to 37 per cent (Figure 1). These skills earn a premium in the form of higher wages.

There has also been an increase in the share of low-skilled jobs (Figure 1). These tasks are manual and service orientated (think cleaners, waiters, security staff) and today cannot be automated or relocated offshore. But because these jobs require fewer skills, they are open to more people, including those who would have previously taken on middle-skilled jobs. Competition has increased, reducing the wage premium (see last week's blog for a discussion of trends in low wages). Inevitably, this will lead to some people being out of work. Worse, it might lead to people dropping out of the workforce altogether. Indeed, the participation rate - the fraction of people aged 16 and over actively looking for work - fell to 63 per cent in May from a high of 66 per cent prior to the last recession.  

Looking ahead, some think that the speed with which the US economy could be upended by technological change might be even faster than in previous years. The dawning of the so-called "second machine age" would eliminate the need for many more occupations, perhaps even some low-skilled ones. The idea that everyday tasks will be completed by a robot may be a bit far-fetched today. But 20 years ago, it would have seemed strange to think that we wouldn't talk to a cashier while they scanned our groceries or dictated a letter to a secretary to print, sign and send by post.

To keep pace with such change, and to prepare our future workforce, we must adapt our learning environment today. This includes investing in K-12 and higher education. But it also means embracing new forms of online learning, like mass open online courses, that open up high-quality education to the whole population. This will enable the future generation to have the right skills to participate in the "second machine age". Not doing so risks leaving an increasing share of the population behind. Who knows where their clothes will be made.

* Though given a rising middle class in China, labour costs are creeping up, which is leading to shifts in production to other parts of Asia.
** Link to earlier publicly-available version.

Inequality: seed of the crisis, thorn in the recovery

The US economic recovery is being built on fragile foundations. The average consumer might be spending more but the extra money isn't coming from substantial wage growth. Consumption is being financed by running down savings and building up debt. Savings ratios are back to levels last seen on the eve of the 2008 financial crisis. The consumer debt ratio - debt payments (excluding housing) as a proportion of disposable income - is on the rise (Figure 1).

Source:  Federal Reserve Board

This pattern is not new or sustainable. In the years prior to the financial crisis, wages of low-income households in the US failed to keep up with rising living costs. In order to maintain spending, these households took on more debt. Meanwhile, incomes at the top grew rapidly. Rising income inequality created political pressure to encourage borrowing (particularly in housing) to maintain demand in the economy. Such action built on the underlying "fault line" that inequality represented rather than resolving it (Rajan, 2010).  

Borrowers bet on higher wages being just around the corner, which would allow them to continue to service their debt. In 1989, the US household debt-to-income ratio was around 60 per cent for the top 10 per cent and around 80 per cent for all other groups. In 2007, the ratio was around 80 per cent for the top 10 per cent and 250 per cent for the bottom fifth. But wages failed to keep up with growing debt burdens. Default rates picked up, the inequality fault line was exposed and the financial crisis ensued.    

Today, for expenditure to be affordable, wages need to rise in line with living costs. One way to do this is to mandate for above-inflation increases in the minimum wage, so that low-paid workers can catch up. In February, President Obama signed an Executive Order increasing the minimum wage for federal contract employees to $10.10 an hour. He also called on Congress to pass a similar proposition for all Americans (the current federal minimum wage is $7.25). Some jurisdictions have implemented or announced their own above-average increases, for example, San Francisco ($10.74) and Seattle ($15). The Center for Economic Policy and Research has demonstrated that if the minimum wage had kept up with labour productivity since 1960, then it would have reached $21.72 by 2012.* 

A reasonable increase in the minimum wage would have a positive impact on the individual and economy. According to the Congressional Budget Office (CBO), an increase in the federal minimum wage to $10.10 by 2016 would lift 900,000 individuals out of poverty. But it is not just those in poverty that benefit. All low-income, and some middle-income, households stand to gain. The CBO reports that the cost of expected job losses that would arise from a higher minimum wage to $10.10 would be more than offset by overall gains.** An increase in consumption that follows from a rise in wages would stimulate business investment. An increase in tax contributions from better-paid workers would improve the state and federal balance sheet.   

But in the medium-term, increasing the wage packet of low-income households does not fully tackle the problem. As a result of technological progress and cheaper labour overseas, many middle-skilled jobs in the US have been eliminated (see "An earthquake on inequality is coming").  What remains are low-skilled and high-skilled jobs.  This makes it very difficult for those at the bottom to progress up the income ladder. What is required to bridge this gap is investment into training and job creation. This would enable low-income individuals to secure decent progression, pay and improve job quality. In turn, this would make it more likely that they are able to participate in the recovery, and not be left behind... again.

* This isn't necessarily an argument for increasing the minimum wage to $21.72. But it does demonstrate nicely that much of the gain produced by ordinary workers in recent years has been channeled away, towards senior executives and capital-owners, contributing to rising income inequality.

** Seattle has agreed to raise its minimum wage gradually to $15 by 2021.  As the population of low-paid workers is fairly small in the city, the benefits may outweigh costs arising from unemployment and higher operating expenses.  But further evidence is required before coming to a definitive conclusion.

This post was updated on 12 June, to clarify developments in low, middle and high-skilled jobs in the US.

I want YOU for the U.S. dream

The beauty of the American Dream is that the accident of birth does not determine a child's life chances. Those born into a poor family can become rich. Those raised by parents without education can go to college. Those growing up in rented homes can become homeowners. The future is in one's own hands.

Source:  The Pew Charitable Trusts (2012)

But there is strong evidence that the American dream is, well, just that, a dream. Social mobility is low. Children born into the poorest quintile are more likely to earn below average incomes (Figure 1, left, shows that 70 per cent of Americans born into the bottom quintile will remain below the middle in adulthood). They are less likely to go on to higher education. They are less likely to own their own home.

How then do we tackle a problem that appears to be ingrained in our society? One excellent suggestion is for Congress to create an Office for Opportunity. Establishing such a Federal institution would protect social mobility from the waxing and waning of political attention. The Office would define and target a single measure or set of measures. These could cover early childhood development, K-12 and college results, labour market participation and / or family circumstances, to track progress over a lifetime. It would also publish commentary on how well the USA was doing against these measures.

But this might not be enough. The UK government has set up a similar body, the Social Mobility and Child Poverty Commission. The Commission sets out targets for, and reports on progress against, a set of indicators. The trouble is that the general public have little awareness of its existence and so do not protest when goals are not met. Few know that the UK government has also committed in legislation to eradicate child poverty by 2020. Fewer still know that because of severe cuts to social security, the number of children in poverty could rise to 5 million by that time. For this reason, Save the Children UK recently launched its campaign, "A Fair Start for Every Child", asking for specific measures to ensure that a child's birth does not determine its chance in life. (Disclosure:  I was the lead author on their report).

What is required is a society-wide strategy to hold governments to account on their commitments. Such an approach was taken with the Millennium Development Goals (MDGs), which were publicly agreed by participating members. Armed with the knowledge of what their government had promised, developing country citizens were empowered to push leaders to deliver on specific promises. Learning from this, the US government should publicly commit to a set of SMDGs (Social Mobility Development Goals). It should undertake an extensive public awareness campaign to garner action by civil society. This would also ensure that ruling parties are held to account by the public. Only by doing so can we get America moving and have a decent shot of turning the American dream into a reality.