Thanos Fragkandreas, Goethe University of Frankfurt and Centre for Innovation Management Research shared his research into the relationship between innovation and inequality at our latest Debate in Public Policy.
Our global capitalist system is becoming more and more innovative, but is this innovation coming at the cost of equality? In the Silicon Valley region for example, where innovation is abundant, a quarter of citizens suffer from food insecurities and hunger.
For Thanos Fragkandreas, Goethe University of Frankfurt and speaker at this CIMR Debate in Public Policy, the time has come for a more holistic approach to examine the link between innovation and income inequality, an issue which has been neglected so far in innovation studies.
Why is inequality rising in OECD economies?
In the 1980s, the richest 10% of people in OECD economics earned seven times more than the poorest 10%. In the 2010s, that number had grown to ten times richer (OECD, 2015). What are the reasons for this increase in inequality? Thanos cites a number of contributing factors, such as declining union membership, rising innovation and the retrenchment of the welfare state.
While the literature on some of these contributing factors differs, there is a general consensus that innovation drives inequality in modern societies. Thanos identifies three key theoretical perspectives on this phenomenon:
- Innovation leads to inequality through the skill premium
- In the field of Labour Economics, scholars argue that innovation benefits the productivity of skilled labour and creates higher demand, which raises skilled labour wages. Implicit in this account is that formal skills or education are necessary to develop or use innovation.
- Creative class externalities/contradictions
- Inequality is rising in cities, which attract a lot of creatives. According to Florida (2007), as innovation becomes more creative and knowledge intensive, the jobs go to people who possess these skills, who tend to live in cities. Rising inequality is therefore an externality of two main classes: the creative employees and the service class, who are paid relatively less than the creative class.
- Risks-Reward Nexus
- Innovation is a collective and risky process and allows certain actors, such as venture capitalists and investors, to acquire substantial portions of the rewards that innovation generates. This mechanism leads to inequality.
When innovation induces inequality is it because of skills, robots, bohemians or risks and rewards?
This question, brought about in light of the theories listed above, was the motivation for a research project undertaken by Thanos which explored one of the most innovative regions in Europe: the region of Braunschweig, Germany.
While Braunschweig is a comparatively small region, it outperforms London, Berlin and Paris in terms of innovation, which led Thanos to the hypothesis that there must be a regional innovation system behind it – certain actors interacting regularly, producing more innovative products and services than elsewhere in many others regions of Germany.
The purpose of the project, which collected data from interviews with people in business and policy makers, was to find out how the innovation system in Braunschweig affects the distribution of income.
The results of the project suggest that the existing literature neglects several mechanisms that lead to inequality:
- Competence concentration: innovation in Braunschweig is concentrated in three large cities. This emerged through interaction between the main actors – universities, firms and policymakers – which led to rising inequalities among other cities over time.
- Innovative activity benefits and is benefited by large firms: in this case, large firms are heavily involved in the regional innovation system, and without such firms innovation is not possible.
- Precarious employment: the adoption of innovative technologies leads to technological unemployment. The new jobs that firms introduce to compensate are low paid and part-time.
- Old age technological unemployment: especially low-skilled men who have no alternative career possibilities once new technologies are implemented.
- Skill premium: firms promise employment but disproportionately hire young graduates from the three main universities in order to catch up with digitalisation. Large firms pay a premium to attract these graduates away from competing cities such as Berlin and Hamburg.
Alongside these five inequality-inducing mechanisms, Thanos identified two mechanisms that support equality:
- When skills shortages are combatted through gender inclusive skill building, we see a decline in the gender income gap.
- When technological unemployment meets gender inclusive employment strategies, there is a decline in the gender income gap.
Having identified these seven causal mechanisms of income inequality or equality, Thanos notes that we do not have knowledge of how all seven mechanisms coexist or counteract each other, and that statistical analysis cannot always detect how these mechanisms operate on the ground.
In considering the cause of innovation induced income inequality, the answer is therefore neither skills, robots, bohemians nor risks and rewards, but rather a complex of competing and complementary causal mechanisms formed through organisational strategies.
What are the policy implications?
Thanos argues that each of the theoretical perspectives outlined in this talk can be addressed through policy:
- The skill bias can be tackled by addressing shortages of skilled labour and market intermediation.
- The creative class externalities require voluntary action from the creative class and unionisation from the service sector.
- The risks/reward nexus requires resource allocation, taxation and a distinction between productive and unproductive risks.
Alongside all of these, strategy synergies and coalitions must be found among actors from across these areas to address the seven mechanisms which induce income inequality.
Thanos’ presentation was followed by discussion from Dr Manto Gotsi, Senior Lecturer in Marketing, who highlighted the importance of this research in terms of the Academy of Management’s Grand Challenges, which look to focus on alleviating poverty and enhancing inequality.
The Q&A, led by Ayse Kaptaner, PhD student in the CIMR, raised questions of how innovation policy can be shaped to facilitate inclusion and why we should continue to pursue innovation in light of the inequality it appears to create.
We would like to thank Thanos for sharing his fascinating and impactful research and the speakers and attendees who made this event a success.
A recording of this event is available to watch on YouTube.