TECHNOLOGY AT WORK

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76 Citi GPS: Global Perspectives & Solutions February 2015 Australia. In contrast, the United Kingdom and Japan have seen wages at the bottom and top of the skill distribution rise roughly in tandem, consistent with the job polarisation story. In other advanced economies such as Spain and France, wages at the bottom of the skill distribution have actually accelerated more quickly than at the top. The wage data for emerging markets tell a similar country-specific story (Figure 59). The large degree of heterogeneity of low- versus high-skilled wage trends across countries points toward institutional differences that may be playing a role. In particular, improving worker productivity from new technology is not the only force driving wage trends, especially at the bottom of the skill distribution where politicaleconomy factors such as union participation and the generosity of unemployment compensation also likely play a determinant role. Figure 58. Ratio of real high-skilled average hourly wage rate to real low-skilled average hourly wage rate Figure 59. Ratio of real high-skilled average hourly wage rate to real low-skilled average hourly wage rate 1.3 1.2 1.1 Index, 1995=1 1.6 1.5 1.4 1.3 1.2 Index, 1995=1 Brazil Hungary Mexico Poland Russia Turkey 1.0 1.1 0.9 0.8 Canada Spain Japan Germany United Kingdom United States 0.7 1995 1997 1999 2001 2003 2005 2007 2009 Note: The wage data comes from the WIOD Socio-economic Accounts, in which skills are defined on the basis of educational attainment. The hourly wage rate is calculated as total labor compensation divided by total hours worked. The wage data are deflated using national consumer price data. Source: WIOD Socio-economic Accounts, Citi Research 1.0 0.9 0.8 0.7 0.6 1995 1997 1999 2001 2003 2005 2007 2009 Note: The wage data comes from the WIOD Socio-economic Accounts, in which skills are defined on the basis of educational attainment. The hourly wage rate is calculated as total labor compensation divided by total hours worked. The wage data are deflated using national consumer price data. Source: WIOD Socio-economic Accounts, Citi Research There is some evidence that wage inequality between high- and low-skilled workers is rising in some countries because of increasing automation The bottom line is that there is some evidence that wage inequality between highand low-skilled workers is rising in some countries, likely driven in part by increasing automation in the workplace. Whether this translates into persistent output gaps and chronically depressed policy rates is still an open question. It is interesting to note, however, that financial markets, which are forward looking, have to some extent priced in low interest rates well into the future. Indeed, stock prices seem high in many advanced economies (Figure 60), but not if there has been a sizeable change in the discount rate due to lower expected policy rates. Home prices, which are also sensitive to forward-looking assumptions about policy rates, are also high in some countries (Figure 61), though home price movements have been more disparate than stock price movements since the 2008 financial crisis. © 2015 Citigroup
February 2015 Citi GPS: Global Perspectives & Solutions 77 Figure 60. Real values of advanced economy stock market indices Figure 61. Advanced economy real home prices 160 140 Jan 2000=100 US Japan Canada Euro Area UK 225 200 Q1 2000=100 US Japan Canada Germany UK 120 175 100 150 80 125 60 100 40 75 20 2000 2002 2004 2006 2008 2010 2012 2014 Note: US = DJIA, EA = STOXX, Japan = Nikkei 225, Canada is S&P/TSX Composite. Each is deflated by the respective national consumer price index. Source: Haver Analytics, Citi Research 50 2000 2002 2004 2006 2008 2010 2012 2014 Source: Dallas Fed, Citi Research Even if output gaps are widening and price pressure is weakening because of technological change, these consequences will not go unaddressed by policymakers How policymakers deal with the consequences of the digital revolution will be crucial We conclude by stressing that even if technological change has macroeconomic consequences in the form of widening output gaps and weaker price pressure, those consequences will not go unaddressed by policymakers. Central bankers may rely on additional programs of quantitative easing to boost effective demand, or they may eventually take even bolder steps such as increasing inflation targets above the roughly 2% target that most central banks currently adhere to. On the fiscal side, we are likely to see an increased effort by policymakers to deal with the large swath of workers who will inevitably be displaced by automation. Public job guarantees for those displaced could boost effective demand; and in the event that supply continues to outpace demand due to technological change, policymakers may take deliberate steps to reduce supply by implementing more work-sharing policies to spread job tasks across a broader pool of available workers. 118 In short, technological change never occurs in a vacuum. How policymakers deal with the consequences brought on by the digital revolution is likely to be a crucial factor influencing valuations in financial markets for years to come. 118 For a detailed reading of the various ways in which policymakers could respond to increasing inequality from technological change, see Meyer (2014). © 2015 Citigroup
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