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Stanford Report, August 9, 2000

Technology widens racial wage divide, social scientist finds

BY BARBARA BUELL

"Technology is not a rising tide that has lifted all boats," says Business School social scientist Roberto Fernandez, who has devoted a good part of his career to the study of hiring, wages and inequality. "Wages have gotten worse at the bottom and better at the top. Racial inequality in wages has increased too." In his most recent and exhaustive study, Fernandez adds to the debate by exploring how technological change affects employment and finds that technology has indeed exacerbated wage inequality.

During the past 20 years, there has been a widening of the wage gap despite increased investments in education. Economists have hypothesized that an abrupt change in the economy brought on by technology suddenly revalued people's skills.

The higher skills needed to meet new demands increased racial inequality because those at the bottom of the pay scale were often minorities who did not have access to adequate education. Now that old factories have converted to assembly lines that are humming along on programmable circuits, technology has driven the lowest salaries even lower. At least, that was the theory.

To prove the point in real terms with real people, Fernandez, who is a professor of organizational behavior, studied a Midwestern food processing company that moved its plant from city to suburbs and retooled. The factory proved to be a conservative test, because in an effort to ease the transition, the company pledged to keep the same workers rather than lay off people. It also gave workers a wage guarantee: A worker assigned to a new job that paid less would receive the difference in pay between the new job and the old. (New hires, however, did not enjoy that cushion.) By comparing groups of workers from before the move (1991) and after (1994), Fernandez was able to see what happened to the wage structure as workers were reassigned to new jobs. Wages below the $10-an-hour median fell. Wages above the median went up. "This tracks national trends," says Fernandez. "But never before had it been seen in data within a firm. In this respect, this work is basic science."

Wanting to know how the wage gap had enlarged, Fernandez probed more deeply. First, he assessed what people actually do on the job by measuring 22 different skills. He also coded the complexity of jobs before and after the retooling. To collect indicators of literacy, Fernandez examined the forms employees had to fill out on the job. The average job had roughly three forms attached to it in 1991. With the introduction of computers, that more than tripled to 10 in 1994. The forms also became more complicated -- requiring workers to read a graph, for example. The study clearly showed that skill requirements were way up. But did technology dumb down the lowest skilled jobs? No. "Skill demands increased across the board," Fernandez says.

Second, when he looked at all production workers at the factory, regardless of ethnicity, he discovered that the pay gap between those in the 25th percentile of wage distribution and those in the 75th percentile nearly doubled after the retooling.

The wage picture became more dramatic when Fernandez examined the impact on minorities. He found that the wage differential between all minority and nonminority workers -- including both the leavers/replacements and the stayers -- went up 48 percent between 1991 and 1994.

But when he compared only the wages of workers who left during the retooling and their replacements, the wage gap between minorities and nonminorities was a far greater 95.6 percent. Why? The top-end hires turned out to be highly paid skilled electricians and mechanics, who tended to be white males. "That is due to the new technology," says Fernandez. "You have to hire more technical people. The skills have really gone up and the price has gone up. Technology exacerbated the wage gap."

New minority workers hired at the low end of the wage scale earned even less than their predecessors had. A similar process was at work for women, who were ghettoized in packing jobs -- the lowest paying position in the factory.

Fernandez concludes that the wage gap can be tempered with good management. In the case of the food processor, low-end wages drifted down rather than plummeted, Fernandez says. Decisions taken at the company level can have a significant impact. Low-end workers who stayed through retooling did better, thanks to the way the company handled the transition. SR