This article explores the dynamics of industrial revolutions, focusing on two critical features – knowledge transfers between leading and lagging firms, and the shifting distribution of income between capital and labor.
Industrial revolutions involve large-scale investment and depreciation of tangible and intangible capital embodying both legacy and emerging technologies. New products, business models and services are launched through creative destruction across organizations, workers and governments.
In early stages of each revolution, leading firms effectively absorb knowledge and find novel applications for new technologies. This results in market share gains, increased industry concentration, and reduced labor costs as a percent of revenue. These high productivity firms are labeled “superstars”. Their success implies the existence of less productive “laggards”.
The article examines determinants of firm-level productivity, which remains unsettled. One factor receiving insufficient attention, especially in services, is worker engagement and satisfaction. Evidence shows worker effort contributes directly to productivity growth under certain conditions where capital augments, rather than automates, labor.
During installation periods, income skews toward capital owners as superstars capture early benefits of new technologies. In deployment periods, as knowledge diffuses more widely, creative destruction and investment become widespread, benefiting labor.
The article explores knowledge diffusion between superstars and laggards. Leaders like Facebook and Google see experience transferred to new and lagging firms. In the 1980-2010 installation period of the Fourth Revolution, knowledge diffusion slowed, increasing industry concentration as superstars thrived with fewer workers.
Slower diffusion raises barriers to absorption for laggards lacking management expertise and motivation to transform. Yet history suggests they eventually do. Delayed transformation may stem from failure to recognize changed conditions.
With slowing investment growth since the late 1960s, incomes continued growing, especially for high earners. The income share of the top 1% marched steadily upward as growth slowed and wages stagnated. Today’s income distribution resembles the 1920s.
The article examines labor’s falling income share, a major feature of recent decades. Concentrated and innovative industries see larger labor share declines, as productivity leaders capture more sales. Reallocation of output to low labor share firms depresses the aggregate share.
Rapid postwar growth saw labor complement deployment of capital. Since the 1980s, an acceleration of automation displaced workers while lagging introduction of reinstating technologies failed to counterbalance the effects.
However, as revolutions move from installation to deployment periods, the relationship between capital and labor switches from substitution back to complementarity. When conditions are ripe, new labor demand and task creation can reverse inequality trends.
The existence of superstars implies laggards with lower productivity. While they represent a minority of output, productivity gains from catching up to leaders could be substantial. Improving typical survivors offers greater potential than reallocation.
With services dominating value added, productivity depends on service firms. Leaders here far outpace laggards. Below-average firms emphasize agility, resilience, speed, productivity and sustainability to gain advantage. Critically, they invest in workforce skills, engagement and satisfaction.
Substantial evidence shows the link between worker engagement, customer loyalty and profitability. Happier employees work more effectively and productively. Unexpected wage gifts elicited reciprocity and higher productivity in an Indian factory. Companies investing more in human capital perform better financially.
Increasingly, capital investment and technology complement rather than substitute for human effort. As focus shifts from automation to augmentation, the relationship between capital and labor changes, impacting income distribution. With new demand and tasks, worker reinstatement can reverse inequality.
