Income inequality is increasing. According to economist David Dorn, this is causing wider demographic groups to turn their back on the established system – most notably in the US, but also elsewhere. We talk to Dorn about redistribution of salaries, temporary protective tariffs and the future of work.

This report by Roger Nickl was originally published in UZH Magazin 4/22 in German. Translated by Astrid Freuler and adapted for layout purposes by the UBS Center.

UZH Magazin: David Dorn, you are co-director of the University Research Priority Program Equality of Opportunity at UZH and the focus of your work as an economist is on issues of inequality. What draws you to the subject?

David Dorn: For many years, economic sciences have primarily concerned themselves with aggregate figures and averages – for instance by examining and predicting changes in GDP per capita. But over recent decades, we’ve seen a considerable increase in income disparity in Western countries. This has played a significant role in making economic and social inequalities core subjects in economics. I was personally drawn to this field during a period of residence at the Public Policy School of Chicago University. The school is home to outstanding researchers from different fields who are engaged in the study of social issues such as poverty, inequality and discrimination. Their work goes beyond abstract concepts and looks at the concrete challenges – that greatly inspired me.

What is causing the growing disparity of income?

The most commonly cited reason for the growing inequality is technological transformation. The demand for highly qualified workers has increased, but for less highly trained employees it has declined. An additional factor is that trade unions have lost considerable influence, which has impacted negatively on low-paid workers. In the US, the increase in income disparity has been particularly dramatic. The distribution of income in Switzerland, by comparison, has remained relatively stable over recent decades – apart from the very top wages, which have seen a massive rise.

Why is Switzerland less affected by this development?

That hasn’t been conclusively answered yet. One of the projects in our University Research Priority Program Equality of Opportunity examines precisely this question. Switzerland has probably benefited from several factors. On the one hand, the Swiss workforce has included only a small number of low qualified factory workers over recent decades – that means fewer people who might have lost their jobs due to automation or globalization. On the other hand, sectors such as the Swiss pharmaceutical industry have massively benefited from globalization. And perhaps companies have also realized that it isn’t in their interest to cut wages to an absolute minimum.

What are the consequences of this growing inequality, especially in the US?

Compared to the decades following the Second World War, three factors have developed in an unfavorable direction. Firstly, we have less economic growth per capita relative to the 1950s and 1960s. Secondly, we are seeing that in many countries worker’s wages are making up an ever-smaller proportion of overall economic performance, while equity owners are responsible for a growing share. The third point is that the wage sum has become distributed less evenly among employees. The combination of these three factors means that in countries such as the US, people in the lowest income brackets have suffered a drop in earnings over the past few decades. So, although there has been economic growth overall, the spending power has only increased at the top, at the bottom it has in fact declined. This has an enormous impact on people’s level of contentment – economically, but also in political terms. In the US, we can clearly see that wider demographic groups are turning their back on the established system and are denying its legitimacy.

And these demographic groups are drawn to right-wing ideologies?

Yes. My research has clearly shown that in the US, voters in areas that have seen a strong decline in industrial production tend to vote for right-wing politicians and ultimately also for Donald Trump. For many of these voters, the current system isn’t working. So they hope that an entirely different form of politics will improve their situation.

Do you have any sympathy for that point of view?

To a certain extent, yes, especially as those parties address the problems and fears of social decline and promise solutions. Donald Trump, for instance, pledged to bring industrial production back into the US and to give people back their old jobs. We now know that this wasn’t actually accomplished. But voters often cling on to the hope. This development can also be observed in European countries, for instance in Italy – a country that has been regressing for some time and in which voters are pinning their hopes on a continuous string of new leaders.

What can be done to prevent social decline among workers?

At the start of the last century, the Swiss economic structure was also very different compared to its present form. Back then, many people worked in agriculture, a sector that employs very few these days. But other sectors recorded strong growth and some entirely new ones came into being, especially in the service industries. Such immense industry shifts are a completely normal part of economic development and shouldn’t be viewed as negative per se. The problem is that in some countries, the wave of globalization that occurred in the 2000s led to a dramatically fast downfall of the industrial sector. In the US and in Britain, 20 to 30 percent of all industrial jobs were lost within a decade. In hindsight it would have been beneficial to intervene in this process of transformation and slow it down.

How do you believe this could be achieved?

Through the regulation of trade, for instance. When imports rapidly increase and the domestic industry simultaneously shrinks very fast, the WTO permits temporary protective tariffs to be put in place. I see that as an emergency stop, to prevent mass unemployment and the associated social hardships. Another possibility for intervention is to help those who have lost their jobs. The aim is to lessen the severity of financial crises and to support people in their search for new employment through further education and advice. Such support services are significantly better developed in European countries than in the US. It is important, however, to bear in mind that all measures aimed at preserving existing economic structures come with a trade-off. While decelerating structural change protects the jobs of specific workers, it also reduces the advantages that globalization or automation can bring, such as consumers’ access to cheaper products.

As you’ve already touched on, your research has also shown that company profits are increasingly handed over to the shareholders, while employees benefit less and less by comparison. How can profits be distributed more fairly?

The most important mechanism for redistribution is taxation and state benefits. This raises the question of whether high earners should pay more tax and those on low wages should be better supported. Many economists are in favor of taxing very large inheritances. This would certainly be less painful than other forms of taxation, and wouldn’t greatly impact the economy.

Digitalization is currently the biggest driver for structural change – how will it change our future working lives?

In addition to the repetitive jobs in industrial manufacturing that have been taken over by machines and robots, certain office tasks – such as bookkeeping and data management – are also increasingly being carried out with the help of software. This is leading to a polarization of the labor market: we are seeing growth among the highest and lowest paid occupations, while office and factory jobs with mid-range pay are declining by comparison. Looking to the future, there is a great debate on whether artificial intelligence will fundamentally change this development. Some researchers predict that even tasks that have so far been considered highly complex will be taken over by machines.

What’s your view on this?

So far, research has clearly shown that artificial intelligence hasn’t yet led to any significant displacement in the job market. There are still many tasks that people carry out intuitively, while for machines they are difficult. Driverless cars are a good example – developing the technology has proven much more challenging than was initially assumed. And the data clearly indicates this too: for many office jobs, employment is stagnating. Yet there is no indication that jobs for university graduates are disappearing. We’re a long way from a situation where doctors have to fear for their jobs due to medical robots. The relative strengths of people over machines are their creativity and the ability to solve problems and interact with other people. These functions pose a challenge for machines because they operate according to fixed protocols and can’t think “out of the box”.

Social and economic inequality is growing. How can research such as that carried out at the URPP Equality of Opportunity contribute to achieving an egalitarian society?

The URPP comprises three modules that delve into this issue: We are analyzing how economic inequality arises and which factors further promote inequality. We’re seeking to understand how the perception of inequality in society is changing and what political demands result from this. And we’re exploring concrete possibilities for improving equality of opportunity – through changes in the judicial framework such as anti-discrimination laws or through reform of the fiscal and education systems, to help lessen the extent to which inequality is passed on across the generations.