Reserve Bank cautions on two speed tech economy
Widening gap between winners and losers stunts wage growth.
The Reserve Bank of Australia (RBA) has called out an increasing gap between technological leaders and laggards in Australia’s economy as a key reason why wages growth continues to languish at around two percent.
Speaking in Melbourne on Wednesday, RBA Governor Philip Lowe used a speech to the AI Group to flag increasing concerns over the structural effects of how IT was being deployed upon the labour market, cautioning a two-speed scenario has emerged.
The comments from the head of Australia’s central bank are a firm signal to industry and government that the effect of technology is now a core structural issue that needs to be taken account of and will continue to buffet the economy.
The picture of the so-called tech-effect, as the RBA sees it, is a bit of a paradox when compared to the traditional labour supply and demand experience.
Lowe said while there is still spare capacity in the labour market, firms found it harder to get suitable workers; at the same time the shortfall wasn’t increasing wages.
So what gives?
Lowe said an “important part of the story lies in the nature of recent technological progress” and cited two key features.
“One is that it has been heavily focused on software and information technology, rather than installing new and better machines – or on intangible capital rather than physical capital,” Lowe said.
“The second is that the dispersion of technology and productivity between leading and lagging firms has increased, perhaps because of the uneven ability of firms to innovate and use the new technologies.”
Put more simply businesses that tooled-up early and got a technology or disruptive edge are now leaving competitors in their dust.
And the RBA chief frankly observed the pool of winners is still relatively small and it’s not much fun if you’re running second.
"The returns to those who can develop and best use information technology have increased strongly. These returns, though, are often highly concentrated in a few firms and in only certain segments of the labour market," Lowe said.
"At the same time, the firms that are not able to innovate and take advantage of new technologies as quickly are slipping behind and they feel under pressure.
"As a way of remaining competitive, many of these firms are responding by having a very strong focus on cost control. In many cases this translates into a focus on controlling labour costs."
Or, increasingly, hiring bots.
It wasn’t all bad news from the RBA though, which has spent the past few years cattle prodding Australia’s banks and card schemes onto the New Payments Platform to make payments smarter and faster.
Lowe said that over time it was expected that a “diffusion of new technology” will take place – so the spoils will be shared around a bit more evenly.
“I am optimistic that this diffusion will boost aggregate productivity and lift our real wages and incomes,” Lowe said.
“Advances in information technology, in artificial intelligence and in machine learning have the potential to reshape our economies profoundly and lift average living standards in ways that are difficult to envisage today.”
However Lowe cautioned that "the adoption and the diffusion of these new technologies" would be gradual and take time. And it won’t all be plain or pleasant sailing.
"While it is taking place, the benefits of new technologies are accruing unevenly across the community. In my view, this is one of the key structural factors at work."
One of the ways to get things moving quickly was to start hiring on the technology front. Not just coders, but executives and managers who get the digital picture and can work with it.
A lack of investment in "human capital" had real effects, Lowe observed.
"One explanation for the widening gap between leading and laggard firms is the difficulty of employing new technologies. Successfully using these technologies requires both the right management capability and technical skills. Both of these can be difficult to acquire," the RBA chief said.
"It seems reasonable, then, to suggest that investment in human capital can both lift the rate of technical progress and accelerate its diffusion.
"It is therefore an important part of addressing the slow wages growth in many advanced economies, including Australia."
Where those skills will ultimately come from is another question.