The keys to inclusive growth
One of the most important economic lessons from the Covid-19 pandemic is that innovation and inclusion don’t have to be mutually exclusive.
Phillips Aghion and Aymann Mhammedi. Illustration: SCT
Phillips Aghion and Aymann Mhammedi. Illustration: SCT
An alternative explanation, which one of us (Aghion) developed with Antonin Bergeaud, Timo Boppart, Peter J. Klenow and Huiyu Li, also presents insufficient competition, but centered on the computer revolution. In summary, rapid technological advancements have allowed superstar companies – those that have built up social capital and know-how that are hard to emulate, and / or that have developed strong networks – to control a greater share of economic sectors. This explains the acceleration of productivity growth in the United States between 1995 and 2005, particularly in sectors related to information technology.
But in the longer term, superstar firms will discourage innovation from non-superstar firms in all of the product lines they control. Indeed, the challengers who try to dethrone a superstar company must drastically reduce their prices and therefore their innovation rents. Thus, the computer revolution, by allowing superstar companies to grow rapidly and control more and more sectors, ends up reducing market entry, innovation and growth in the global economy.
This explanation implies that to maximize the growth potential of the computer revolution, competition policy must be reformed to better reflect the effect of mergers and acquisitions on future innovation and market entry. Such an approach should both foster innovation-based growth and make it more inclusive by allowing new innovative players to enter the market. This innovation, particularly on the part of new entrants, should also promote greater social mobility.
Flexicurity programs, on the other hand, can help address deep-rooted labor market issues, including in the United States. In a 2017 article, Anne Case and Angus Deaton showed that after a long period of decline, mortality among middle-aged people (45-54 years), the non-Hispanic white population in the United States began to decline. increase in the early 2000s, and accelerated. strongly after 2011-12. Their most striking finding was the rapid increase in what they called “deaths of despair”, resulting from suicide or drug addiction, mainly among low-skilled workers. This phenomenon has no contemporary equivalent in other developed countries.
In a 2017 article, Anne Case and Angus Deaton showed that after a long period of decline, mortality among middle-aged people (45-54 years), the non-Hispanic white population in the United States began to decline. increase in the early 2000s, and accelerated. strongly after 2011-12. Their most striking finding was the rapid increase in what they called “deaths of despair”, resulting from suicide or drug addiction, mainly among low-skilled workers.
Deaton and Case attributed this reversal in mortality among America’s non-Hispanic white population to growing job insecurity associated with creative destruction, which often results in increased instability in family households. More generally, we have moved from a world where many people could expect to spend their entire careers in the same firm, with a probability of evolution, to a world where frequent disruptions have become the norm.
Is it possible to design a system that makes creative destruction more acceptable by allowing individuals to navigate periods of unemployment with more peace of mind and in a way that benefits the economy as a whole? A major 2017 study by Alexandra Roulet suggests that Denmark, which introduced a flexicurity system in 1993, may have found the right formula.
The Danish system is based on two pillars. It makes the labor market more flexible by simplifying the dismissal procedures of companies. But, to protect laid-off workers, the government is offering generous unemployment benefits, as well as a substantial investment in vocational training to give people the skills they need to re-enter the workforce.
Roulet compared the health of Danish workers whose workplace closed between 2001 and 2006 with that of workers of the same profile (including age, experience and skills) whose employer did not close. His findings are striking: Business closures do not affect some important individual health indicators, including the use of antidepressants or the likelihood of seeing a general practitioner. Closing a business has also not affected the death rate of its workers.
By establishing its flexicurity system, Denmark has achieved two goals simultaneously. First, it has fostered innovative growth by making creative destruction easier to implement and also more effective (thanks to the accompanying public investment in vocational training). Second, the program made innovation-based growth more protective and inclusive by providing income support to facilitate the re-integration of laid-off workers into the labor market.
One of the many economic lessons from the Covid-19 pandemic is that innovation and inclusion don’t have to be mutually exclusive. By pursuing the right policies, Western governments can promote both and thus contribute to a dynamic and equitable recovery.
Philippe Aghion, professor at the Collège de France and at the London School of Economics and Political Science, is a member of the Econometric Society and of the American Academy of Arts and Sciences.
Aymann Mhammedi is a research assistant at the Collège de France.
Disclaimer: This article first appeared on Project Syndicate and is published by Special Syndication Agreement.