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IT, YouTube and the wealth gap

February 09, 2007

Google has reported, in a financial filing, that YouTube founders Chad Hurley and Steve Chen each pulled down about a third of a billion dollars in selling their video-sharing company to the search giant. That's not a bad payday for a year-old, 60-person firm operating out of an office above a pizza joint. Running a digital sharecropping operation - I mean, a social-production community - can be pretty lucrative.

Hurley and Chen came by their windfall fair and square. They built a better mousetrap. But there's a bigger picture here, too. It's worth keeping the YouTube phenomenon in mind when reading a speech that Fed Chairman Ben Bernanke gave earlier this week in Omaha. The speech, called The Level and Distribution of Economic Well-Being, examined the ever widening gulf between America's rich and everyone else, a worrying trend that Bernanke's predecessor, Alan Greenspan, also frequently addressed. Bernanke noted that

rising inequality is not a recent development but has been evident for at least three decades, if not longer. The data on the real weekly earnings of full-time wage and salary workers illustrate this pattern. In real terms, the earnings at the 50th percentile of the distribution (which I will refer to as the median wage) rose about 11-1/2 percent between 1979 and 2006. Over the same period, the wage at the 10th percentile, near the bottom of the wage distribution, rose just 4 percent, while the wage at the 90th percentile, close to the top of the distribution, rose 34 percent ... The long-term trend toward greater inequality seen in real wages is also evident in broader measures of financial well-being, such as real household income.

If Bernanke had provided data on the 99th percentile of wage earners, the rising inequality would have looked even more pronounced.

The increasing polarization of wealth has long been attributed to "globalization." More recently, though, economists like Jagdish Bhagwati have begun to argue that the biggest driver of the trend is information technology, which tends to displace lower-skilled jobs and push economic rewards to higher-skilled workers. Bernanke picked up on that theme:

Economists have hypothesized that technological advances, such as improvements in information and communications technologies, have raised the productivity of high-skilled workers much more than that of low-skilled workers. High-skilled workers may have enjoyed this advantage because, for example, they may have been better able to make more effective use of computer applications, to operate sophisticated machinery, or to adapt to changes in workplace organization driven by new technologies. If new technologies tend to increase the productivity of highly skilled workers relatively more than that of less-skilled workers - a phenomenon that economists have dubbed "skill-biased technical change" - then market forces will tend to cause the real wages of skilled workers to increase relatively faster. Considerable evidence supports the view that worker skills and advanced technology are complementary. For example, economists have found that industries and firms that spend more on research and development or invest more in information technologies hire relatively more high-skilled workers and spend a relatively larger share of their payrolls on them.

Bernanke also noted some anomalies that economists are still struggling to figure out:

Although skill-biased technical change appears to be an important cause of the rise in earnings inequality, it does not provide a complete explanation for that trend. The hypothesis cannot explain, for example, why the sharp rise in investment in information technology in the 1990s was not accompanied by a higher rate of increase in wage inequality. Nor can it explain why the wages of workers in the middle of the distribution have grown more slowly in recent years than those of workers at the lower end of the distribution, even though, of the two groups, workers in the middle of the distribution are typically the better educated.

Another challenge for the hypothesis of skill-biased technical change, at least in its basic formulation, is to explain the especially large wage gains seen at the top of the distribution. A possible link between technological change and the substantial increases in the wages of the best-paid workers is that some advances, such as those that have swept the communications industry, may have contributed to the rise of so-called "superstars" - a small number of the most-gifted individuals in each field who are now better able to apply their talents in what has increasingly become a global marketplace.

Bernanke, like Bhagwati, focuses on the displacement of relatively low-skilled jobs by information technology. But if you look at more recent trends, you see that software is becoming increasingly more adept at taking over work that has traditionally required relatively high skills - or even, in YouTube's case, enabling the creation of sophisticated goods through the large-scale and automated harvesting of free labor. The next wave of "superstars" may be algorithms - and the small number of people that control them.

Comments

Bernanke gives a good analysis. Re "although skill-biased technical change appears to be an important cause of the rise in earnings inequality, it does not provide a complete explanation for that trend", I'd suggest that part of the missing piece is that low-skilled workers often see the changes happening in higher-paying positions as out of their reach and simply give up, settling for low-paying jobs by default. Without demand, there's no reason for these jobs to pay more.

And re "Nor can it explain why the wages of workers in the middle of the distribution have grown more slowly in recent years than those of workers at the lower end of the distribution, even though, of the two groups, workers in the middle of the distribution are typically the better educated", I'd suggest that corporations, seeing the increases in wages demanded by (and paid ot) skilled IT and related workers in the 1990s, actively searched for and found ways to move these jobs to parts of the world and parts of our own labor force that demanded lower wages.

Posted by: blackshards [TypeKey Profile Page] at February 9, 2007 09:47 AM

Yes indeed.

Note this is all part and parcel of a trend which is not IT-specific - for example, the enormous increase in CEO salaries. Or the repeat of the estate tax, which further concentrates wealth.

We've been here before, for example, the 1950's and "automation".

When you say "The next wave of "superstars" may be algorithms - and the small number of people that control them.", I think in fact that's just slightly off. There's businesses which can be made based on algorithms. And these indeed lend themselves to digital sharecropping. But the there's a lot more to how businesses are structured than algorithms.

Posted by: Seth Finkelstein [TypeKey Profile Page] at February 9, 2007 11:26 AM

The world has mostly been controlled by the elite. That is the conclusion here as well. YouTube was not just a few average joes in the garage. Chad's father-in-law is Jim Clark (of Netscape fame). Investors in YouTUbe and Google are the same. Oh and the small issue of YouTube getting sued out of existence, just before the buy-out, that's interesting.

Most VCs say if you don't know how to get to them by people they know, you don't deserve any funding. How will that equalize anything in the world?

Posted by: cypherpunk [TypeKey Profile Page] at February 9, 2007 12:19 PM

Nick,
The Austrian School of economics (aka libertarian school) considers the growing inequality to be driven by the financialization of the economy, which itself is the outcome of Federal Reserve monetary policy. A short summary is that loose credit gets distributed in an uneven fashion, and those who have preferential access to easy credit (for example hedge funds or currently hot corporations and the like) use various forms of carry trade with leverage to make "easy money". It also rains down on the executive class in terms of stock options and the like.

A lot of the "income" at the 90-th percentile is coming from financial activity, directly or indirectly (benefiting from an overvalued share price is a concrete example).

Sridhar

Posted by: Sridhar Vembu [TypeKey Profile Page] at February 9, 2007 12:51 PM

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