During the Industrial Revolution, there was a change in the way people lived. Income inequality grew and went from a rarity to a common standard. The broad term “Great Divergence” refers to a period of history beginning in the 18th century and ending at the start of the 20th. It is an economic term for the profound changes that happened during this period in history. The Great Divergence is attributed to rapid urbanization, technological developments (manufactured goods like steam engines), improved transportation systems, and increased trade during Europe’s early industrialization (Acemoglu et al., 2005, pp. 550). The Great Divergence occurred when income growth was unable to keep up with productivity gains. As these two separate factors grew further apart, workers found less purchasing power while employers continued to make more money faster than they could spend it. The result was a widening gap between the rich and the poor – and eventually, war. Some of the factors that best explain the Great Divergence include advances in industrial production, globalization, technological advancements, and the decline in unions.
First, advances in industrial production have been credited with increasing productivity while diminishing wages. This is because fewer workers are needed to produce goods since machines or computerized machines such as robots can produce the same amount or better quality goods produced by humans. Some are concerned about this trend because it could lead to mass unemployment where only a few people will be needed to operate all of the machines. However, these concerns have been addressed by many economists who argue that if productivity continues to increase faster than the need for labor, unemployment will decline. They claim that job growth will be necessary for the economy to function properly, and it will also result in more purchasing power for the workers who keep their jobs, thus increasing their incomes (Acemoglu et al., 2005, pp. 550). The decrease in income inequality is also part of this argument. On the contrary, union leaders have been trying to create more jobs for the unemployed. By having more jobs available, union members can get a raise or better working conditions without increasing the prices that consumers pay. The union leaders are trying to save their members from losing wage shares and finding out that machines are cheaper for employers to use than humans. These two viewpoints are opposite, but both end in the same result: a better economy.
Second, globalization is one of the most commonly discussed factors regarding income inequality because it has caused an increase in international trade by making transportation more accessible and faster. This has led to increased imports from countries with lower labor costs than other countries. This decreases competition for domestic producers and allows them to sell their products at higher prices, increasing their profits while lowering wages and employment opportunities for domestic workers who cannot compete with foreign imports. The decrease in wages results from the increased supply of labor and the decline in unions (Wolf, 2010, pp. 352). In contrast, the rich have gotten richer because they can afford to outsource their manufacturing, and they also have more significant amounts of capital that add to their wealth. They can outsource their manufacturing jobs because they have more money to invest in foreign countries.
Third, technological advancements are another factor in income inequality because they increase overall production while lowering or eliminating the need for labor. Many jobs that used to be available to workers who had little education or skill can no longer be filled due to the introduction of new machinery and tools; a discussion of this is found further in this article. However, according to economists, there is a shift occurring where technology has become more sophisticated as time goes on (Eichengreen and Temin, 2000, pp. 190). Jobs that require skill are becoming more critical and higher-paying, while unskilled labor continues its downward trend in wages. On the contrary, unskilled labor is becoming less valuable, as machines are becoming more sophisticated and can perform the same tasks while being made of cheaper materials, thus lowering wages.
Lastly, the decline in unions has resulted in wage stagnation and a decline in the wage share of income. The issue here is that unions supplanted the rise of a global working class based on national grievances with international solidarity; they were a way to finally organize workers around national borders who had been exploited by capitalists across national boundaries or by imperialists who sought to conquer these markets. Moreover, domestic labor laws such as minimum wage laws worked to protect the rights of both capitalists and workers alike (Eichengreen and Temin, 2000, pp. 190). However, the decline in unions has undermined this level playing field for workers, allowing capital to exercise political power over would-be workers, which has reduced their bargaining power. On the other hand, capitalists have not had to yield power over workers to their unions because they can exercise this power independently.
Economists and historians widely debate the Great Divergence and the general public, who hold that other factors than those listed above have caused increasing income inequality. Some say the concentration of human capital has caused it, while some argue that growing monopolies have caused it in the market, which has hurt both consumers and producers alike (Crafts and Faron, 2010, pp. 290). Others say that it is a result of global inequality or the idea that there are people who are rich in all countries, but poor people are only found in some regions of the world. Regardless of the reasons for this debate, the only thing that everybody seems to agree upon is that the Great Divergence is a crucial element in understanding why income inequality exists in contemporary economies today and how to solve it.
Bibliography
Acemoglu, D., Johnson, S. and Robinson, J., 2005. The rise of Europe: Atlantic trade, institutional change, and economic growth. American economic review, 95(3), pp.546-579.
Crafts, N. and Fearon, P., 2010. Lessons from the 1930s great depression. Oxford Review of Economic Policy, 26(3), pp.285-317.
Eichengreen, B. and Temin, P., 2000. The gold standard and the great depression. Contemporary European History, 9(2), pp.183-207.
Wolf, N., 2010. Europe’s great depression: coordination failure after the first world war. Oxford Review of Economic Policy, 26(3), pp.339-369.
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