In 1786, the cloth workers of Leeds, in northern England started a protest against the growing use of “scribbling” machines or mechanization, which they thought would ultimately lead to deterioration of their livelihood. They were called Luddites or machine destroyer. (More about it in New York Times)
However, after the Industrial Revolution, the living standard of Britain and rest of the West improved multiple folds. Because many workers were not hurt due to mechanization and those who were hurt acquired new and valuable skills over the years. New and improved job opportunities were created for many, resulting in vast improvement in their economic wellbeing. However, we cannot say same thing about the unemployment situation today.
The conventional wisdom has been that “education always pays”. Those who are unemployed are basically school dropouts and unskilled. The higher the education level, the higher is the income and lower is the unemployment rate. Higher education is passport to secured job and higher income. This may be true until a decade ago. But now ground reality has changed. The likelihood of unemployment of higher educated and skilled people could be higher than general population. For example in the United States (which is the bell weather of economic trend of the Western world), the growth in unemployment rate of those with university degrees has been marginally higher: 2.76 fold increase during the last decade (from 1.7% in 2000 to 4.7% in 2010). While the national unemployment rate grew by 2.73 fold (from 3% in 2000 to 8.2% in 2010). Latest figures could be even dismal.
Therefore, higher education is not the answer of present day reality and future trend. Schumpeterian “creative destruction” is considered distinctive feature of modern technological world. New technology would create unemployment. Those unemployed and new entrants in work force would pick up new technology and become employed; and this process would continue. But in reality, it would create large disruption and pain to many in the society. Moreover, it is not a guarantee that new technology would always be able to absorb existing unemployed and those who joined the work force recently.
Further, more and more jobs are now shifting towards East (notably to China and India). What started as off shoring low skilled and labour intensive manufacturing jobs a few decades ago, now has crept up to production activities that need high skill and higher education. In fact, even high-end service sectors (like law, accounting, medical technicians, research, and university learning) are no longer immune. These jobs are moving to India and other Asian countries.
More over the education and skill that once used to be developed with years of schooling and experience, can now be learned with a few months of video tutorials by using plethora of soft wares and computers especially in areas like photography, web and book designing. There is no need to go to school for a formal education. As a result, there is a glut of people with required skill and training in many technology based areas, resulting in un- or underemployment and lower pay.
This could also be a blessing in disguise. Those who got unemployed can easily and quickly learn new skill using latest soft wares and computers, but their job and income prospects would not be the same as before. Their employment would not be as secured and pay would be low, because many others are doing the same thing.
So is there a way out?
The fact is that globalization is a reality: there has been quantum progress in technology, mass transport and communication. There has been shrinking of differences in knowledge between the two world with opening of high learning institutions in developing countries, mass usage of computers, soft wares and internet. As a result, the arbitrage or large gap in employment and earnings of people in the West with similar education and skill in the East can no longer be sustained. Those production activities and jobs which were once the monopoly of the West (for which they could charge premium prices), does not hold any more. There is hardly any job that cannot be replicated in the East at the fraction of the cost. Therefore, economic welfare of the general population in the West is at stake, except one group: the owner of capital and industries.
The glaring example is growing gap between masses and the rich in the United States. Globalization and offshoring has become a boon for multinationals. They can move factories in the East, produce most stuff at the fraction of the cost and sell them to masses in the West (because they still possess high purchasing power) at cheap prices, and keep the large difference as profit in their pockets. In the process, they can especially benefit from relaxed corporate taxation regime (because of their decades old lobbying activities in Congress and Senate).
What hope is there for an ordinary citizen in countries like the United States? Not much. We need to be realistic. Technological progress, globalization, outsourcing and off shoring cannot be stopped or reversed, but corporate taxation system and taxes on rich can be reformed by raising rates, closing loopholes, strict regulations and forcing them to pay their due shares. And politicians in Washington can successfully do it, if they have nerve to implement.
When you devise a corporate tax system where companies would be obliged to pay taxes in the jurisdiction where the very income or profit is generated, companies would have not much alternative than to pay. Factories which are located in the East are basically for production activities, not for consumption. People in the East do not have sufficient income to purchase goods produced for the West. Therefore, lion share of profit of the multinationals are generated from goods sold to the people in the West, and now they have to pay taxes if the system is reformed.
If capital owners threat to move their headquarters and financial record keeping, let them do so. What jurisdiction on earth can provide them the opportunity to generate such a high level of aggregate profit and income than the United States?
The collected taxes can then be spent on improving the wellbeing of general population who has been hardly hit with the shift of global economic gravity. Additional funds can be allocated in developing niche areas and innovation in activities that address challenges of new and emerging economic environment. More emphasis can be placed on vocational based training rather than degree based higher learning.
© Mahmood Iqbal and ipotpourri.wordpress.com: 2013